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Dialysis Access Center, LLC v. RMS Lifeline, Inc.

United States Court of Appeals, First Circuit

August 1, 2019

RMS LIFELINE, INC., Defendant, Appellee.


          Bámily López-Ortiz, with whom López Toro and Lizabel M. Negrón-Vargas were on brief, for appellants.

          José Luis González-Castañer, with whom Roberto Ariel Fernández-Quiles and González Castañer, PSC were on brief, for appellee.

          Before Howard, Chief Judge, Torruella and Thompson, Circuit Judges.


         Before us once again are Dialysis Access Center (a Puerto Rico LLC) ("DAC"), [1] and RMS Lifeline, Inc. (a Delaware corporation) ("RMS"), the central players in a years-long and much-papered dispute.[2] Having previously been sent by this court to arbitrate their disputes, Dialysis Access Ctr., LLC v. RMS Lifeline, Inc., 638 F.3d 367, 371 (1st Cir. 2011) (Dialysis I), DAC and RMS are back -- this time with DAC contesting soup-to-nuts the arbitrator's decision in RMS's favor and the district court's refusal to vacate it. Finding no error, we conclude that the district court was correct in rebuffing DAC's challenge, so we affirm.


         We lay out the basics pertinent to the latest installment of this arbitration-fueled litigation. DAC is a Puerto Rico-based company that focuses on providing vascular intervention and access services to dialysis and kidney failure patients, and RMS specializes in managing and operating centers like DAC. In 2007, DAC and RMS entered into a management services agreement (the "MSA") for the development, building, management, and operation of a vascular access center in Mayagüez, Puerto Rico.

         The MSA's provisions most relevant to this appeal are these: section 12.1, "Termination by Either Party for Cause" (laying out the procedure for terminating the MSA, specifically, notice of a breach, an opportunity to cure the breach, and, ultimately, termination of the MSA by the non-breaching party if cure could not be effected within sixty days of notice given); section 13.3, "Governing Law" (the choice-of-law provision instructing that the Commonwealth of Puerto Rico's substantive laws would apply to the MSA); and section 13.9, "Dispute Resolution/Arbitration" (requiring the parties' exhibition of good faith in the resolution of any dispute arising under the agreement, and, if no agreed upon resolution could be reached, submission to binding arbitration under the rules of the American Health Lawyers Association (the "AHLA")).

         During the term of the MSA, the relationship between the parties apparently soured, and numerous imbroglios arose between DAC and RMS about their respective obligations under the agreement. Those disputes set into motion this multi-year litigation about, among other things, the parameters of the arbitration requirement.

         Indeed, that question brought these parties before this court nearly a decade ago (in 2010). Dialysis I, 638 F.3d at 373-74. In that first go-round, we, like the district court, found the disputes arbitrable and directed the parties to arbitrate their beef before the AHLA. Id. at 383-84.

         Once there, claims, counterclaims, and crossclaims abounded. Everything from fraud in the inducement to fraud in the performance to the ultimate breach of the MSA was put before the arbitrator.[3] After months of intermittent arbitration sessions, in July of 2013, the arbitrator issued a final decision in favor of RMS awarding it a grand total of $1, 969, 068.68, which covered damages, extra liability for dolo exhibited by DAC, [4] prejudgment interest, costs, attorneys' fees (from the arbitration and the pre-arbitration litigation), as well as credits for the settlements by the other two doctors. We'll discuss the award more in due course as its many contested aspects come up in the course of the parties' appellate contentions.

         DAC next turned to the federal district court in Puerto Rico, where it filed a complaint (treated by the lower court as a motion -- "[DAC] now move[s] the Court") seeking to vacate or modify the arbitration award, primarily arguing that the arbitrator exceeded his powers, misapplied the law on parol evidence, engaged in misconduct in evaluating the evidence (with respect to dolo in contract formation, novation, and breach), and disregarded Puerto Rico's law regarding damages. RMS opposed what it deemed a "groundless" contestation of the arbitrator's award in a motion and supporting brief requesting enforcement of the award.

         The magistrate judge who handled the matter analyzed the parties' claims under the Federal Arbitration Act (the "FAA"), and found that not only did DAC fail to demonstrate why the award should be vacated, but also, that the arbitrator's thorough decision was both supportable and well-reasoned. Therefore, with DAC not having evinced any misconduct or manifest disregard of the law by the arbitrator, or that his handling of the case exceeded his powers, the magistrate judge recommended that DAC's complaint be denied.

         DAC filed timely objections to the magistrate judge's report and recommendation, taking a three-pronged aim at what DAC says was error: her failure to hold a hearing as required by the Puerto Rico Arbitration Act (the "PRAA"), her use of the wrong standard of review, and her failure to consider all of DAC's evidence and arguments. RMS, unsurprisingly, opposed those objections. After reviewing the written submissions, the district court sided with the magistrate judge and rejected DAC's arguments -- no hearing was required; the FAA applied to the controversy; and the magistrate judge did, in fact, examine and evaluate each of DAC's contentions. Therefore, concluding that the magistrate judge's findings and conclusion were well supported, the district court adopted the magistrate judge's report and recommendation in full, dismissed the complaint to vacate and/or modify the arbitration award, and confirmed the award.

         The saga now continues as DAC asks us to upend the district court's refusal to vacate the arbitrator's award.


         Before us, DAC advances a variety of arguments to support its position that the arbitrator's award should be vacated.[5]Regrettably, DAC's briefing is -- shall we say -- not exactly a beacon of clarity. But, as best we can distill, its arguments, as we understand them, fall chiefly into two main baskets: (1) the PRAA, not the FAA alone, should have governed the district court's standard of review of the arbitration decision; and (2) three errors compel the vacating of the award, specifically (a) the arbitrator engaged in misconduct when he refused to consider, or even allow certain evidence; (b) the arbitrator exceeded his powers in his awards of attorneys' fees and prejudgment interest, as well as in how he calculated damages; and (c) the arbitrator manifestly disregarded the law on dolo.[6] RMS disagrees and we will lay out RMS's responses to DAC's arguments section by section as necessary.

         We review the district court's decision to confirm or vacate an arbitration award de novo, Ortiz-Espinosa v. BBVA Sec. of P.R., Inc., 852 F.3d 36, 47 (1st Cir. 2017) (citing Cytyc Corp. v. DEKA Prods. Ltd. P'ship, 439 F.3d 27, 32 (1st Cir. 2006)), but in undertaking that review, we are cognizant that "[a] federal court's authority to defenestrate an arbitration award is extremely limited," Mt. Valley Prop., Inc. v. Applied Risk Servs., Inc., 863 F.3d 90, 93 (1st Cir. 2017) (quoting First State Ins. Co. v. Nat'l Cas. Co., 781 F.3d 7, 11 (1st Cir. 2015)).

         1. The PRAA and the FAA

         We begin with the first issue DAC presents: whether the lower court erred in applying only the FAA's more limited standard of judicial review to this dispute. We note that the FAA applies to "a contract evidencing a transaction involving [interstate] commerce," Ortiz-Espinosa, 852 F.3d at 42 (quoting 9 U.S.C. § 2), and neither DAC nor RMS dispute that theirs was such a transaction. That said, parties are free to contract around the application of the FAA in favor of state arbitration law, Hall St. Assocs. v. Mattel, Inc., 552 U.S. 576, 590 (2008), such as the PRAA, which we've described as providing a "more searching" standard of review, see P.R. Tel. Co. v. U.S. Phone Mfg. Corp., 427 F.3d 21, 29 (1st Cir. 2005), abrogated on other grounds by Hall St., 552 U.S. at 583 n.5, 584. Indeed, the Hall Street Court explained that "[t]he FAA is not the only way into court for parties wanting review of arbitration awards: they may contemplate enforcement under state statutory or common law, for example, where judicial review of different scope is arguable." 552 U.S. at 590. "Parties are generally free to structure their arbitration agreements as they see fit," and "[j]ust as they may limit by contract the issues which they will arbitrate, so too may they specify by contract the rules under which that arbitration will be conducted." Volt Info. Scis., Inc. v. Bd. of Tr., 489 U.S. 468, 479 (1989) (citing Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 626 (1985)); see also Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 57-58 (1995). However, in order to effectuate FAA displacement, our circuit has been clear that such can occur "only if the parties have so agreed explicitly." Ortiz-Espinosa, 852 F.3d at 42 (citing Hall St., 552 U.S. at 590).

         Before this court, DAC says that's precisely what happened here. As DAC sees things, "the parties expressly agreed" in the MSA that Puerto Rico law would control by including a choice-of-law provision (section 13.3) which specifies the MSA is to "be construed in accordance with the internal substantive laws of the Commonwealth of Puerto Rico." Therefore, according to DAC, this provision makes applicable the PRAA's enforcement standards. DAC insists, then, that the district court should have conducted its review of the arbitrator's decision in the same way the Puerto Rico Supreme Court allegedly would have done. Specifically, and citing to Constructora Estelar v. Autoridad de Edificios Publicos, 183 D.P.R. 1 (2011), DAC says the district court should have undertaken a review more akin to a judicial review of an administrative agency decision, which permits some greater scrutiny of the merits of the award. Because that did not happen, DAC contends that the district court committed legal error.

         RMS sees things differently. For one thing, because DAC advanced this argument for the first time only after the magistrate judge issued her report and recommendation, RMS says the argument is waived.[7] Even if waiver could be surmounted, RMS posits that DAC should be judicially estopped from making this PRAA argument because DAC previously argued before this court in Dialysis I that the FAA governed the case. And, in any event, RMS contends that the parties never explicitly agreed to have the PRAA apply to the proceedings.

         Because we can dispose of DAC's challenge based on our case law, we need not get into RMS's waiver and judicial estoppel arguments, instead assuming favorably to DAC that its asseverations are properly before us. We find that the FAA correctly was applied here. To prevail, DAC needed to show that the parties explicitly agreed to have the PRAA displace the FAA. See Ortiz-Espinosa, 852 F.3d at 42 (applying the FAA when claimants failed to demonstrate that the parties had explicitly contemplated enforcement under the PRAA). But as was the case in Ortiz-Espinosa, that showing has not been made. Although DAC tries to win this argument by pointing to the MSA's choice-of-law provision, we have clearly instructed that such a general, contractual provision is not enough. In Puerto Rico Telephone Co., we framed the question before the court like this: "At issue is whether and how parties can contract for standards of judicial review of arbitration awards other than those set forth in the Federal Arbitration Act . . . ." 427 F.3d at 23. And our answer:

[T]he mere inclusion of a generic choice-of-law clause within the arbitration agreement is not sufficient to require the application of state law concerning the scope of review, since there is a strong federal policy requiring limited review . . . [A] generic choice-of-law clause, standing alone, is insufficient to support a finding that contracting ...

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