Michael Goff opened a credit card account with USAA Savings Bank, which included an arbitration clause. After USAA closed Goff's account, Goff initiated arbitration seeking actual and punitive damages, alleging a violation of the Equal Credit Opportunity Act for failing to provide adequate notice. The arbitrator found that while Goff suffered no actual damages, USAA was liable for $10,000 in punitive damages. The parties' agreement explicitly stated that before any punitive damages decision became final, the arbitrator must conduct a post-award review using judicial standards and provide a written reasoned explanation. The arbitrator issued a final award without conducting this review, claiming the American Arbitration Association rules prevented her from re-determining the merits. USAA moved to vacate the award in federal district court, arguing the arbitrator exceeded her authority by skipping the required review. The district court confirmed the award, reasoning that the arbitrator's error did not warrant vacatur because the award still drew from the essence of the agreement. USAA appealed, and Goff moved for sanctions.
The Seventh Circuit applied the Federal Arbitration Act, which allows vacatur when an arbitrator exceeds their powers. The court distinguished between an arbitrator misinterpreting a contract, which is generally unreviewable, and an arbitrator ignoring the contract's language entirely, which constitutes an excess of authority. The court emphasized that the arbitration agreement contained clear, unambiguous terms mandating a post-award review of punitive damages before a decision becomes final. By refusing to conduct this review and claiming the AAA rules prevented it, the arbitrator disregarded the express terms of the agreement. The court noted that while the agreement incorporated AAA rules, those rules yield when they conflict with the agreement's specific terms. Because there was no possible interpretive route that allowed the arbitrator to ignore the mandatory review clause, the award was not final, and the arbitrator had exceeded her authority. The court rejected the argument that the arbitrator was merely interpreting the agreement, stating that she effectively dispensed her own brand of industrial justice by ignoring the contractual limitations.
The district court's judgment confirming the arbitration award is reversed. The case is remanded to the district court with instructions to further remand the matter to the original arbitrator. The arbitrator must now conduct the required post-award review of the punitive damages, allowing the parties the same procedural rights and using standards applicable in the state where the arbitration is located, and must issue a written ruling with a reasoned explanation. The parties are free to agree on specific procedures for this review, but the arbitrator retains discretion to determine the process if no agreement is reached.