7th Circuit affirms arbitration award

The 7th Circuit Court of Appeals affirmed a District Court's confirmation of an arbitration award, but it denied the plaintiff recovery of attorney fees and costs because he will be reimbursed those under the terms of the arbitration agreement.

In Peter A. Prostyakov v. Masco Corporation, No. 06-3928, Prostyakov asked the federal appellate court to affirm his arbitration award against his former employer, Michigan-based Masco Corp. Masco appealed to vacate the award.

In 1992, Masco joined an Indiana and Moscow trade consortium founded after the fall of the Soviet Union. The building, plumbing, and cabinetry company wanted to develop a sales and distribution network in Russia. Masco hired Prostyakov, who was later appointed managing director and agent for the Moscow office.

Masco and Prostyakov's business relationship soured, which the appellate opinion does not detail, and Masco's president issued a company directive in April removing Prostyakov from his position. The two parties entered a settlement agreement which stated the following: both mutually agreed to release all claims either party could bring on acts that occurred before the agreement took effect; Indiana law would govern the interpretation of the agreement; future disputes would be settled by "private" arbitration; the rules of the American Arbitration Association (AAA) would apply and govern the conduct of the arbitration; and neither party would seek to enforce the agreement through legal action.

In addition, the parties agreed to communicate to third parties that the business relationship end was amicable.

Prostyakov sought employment with a bank in Moscow after his termination, but was not hired because of problems with his labor book. In Russia, as a holdover from communist times, labor law requires every citizen entering the workforce to have one. This book records employment and explains why the worker is no longer at his or her former job and is given to the next employer upon hiring. When a worker is terminated or leaves a job, the labor book is to be returned to the worker.

Prostyakov was delayed in receiving his labor book back from Masco. When he received it, he noticed the company had falsified his termination date and stated he was fired, which was not what the two parties agreed to report in the settlement agreement.

Prostyakov tried to resolve the issue through arbitration, but Masco made no moves on the issue, so Prostyakov went through the Russian judicial system. In 2002, the Russian court determined Masco violated the country's labor code by falsifying the labor book entry. With that judgment, Prostyakov filed a claim for arbitration. The parties agreed on Indianapolis attorney Max J. Hittle Jr. – who was affiliated with the AAA – to arbitrate the claim. Hittle issued awards to both parties: Masco won on its counterclaim, determining under Indiana law that Prostyakov breached the settlement agreement by going to Russian court instead of arbitration; Hittle awarded in Prostyakov's favor by finding the delayed return and falsification of the labor book hurt Prostyakov's ability for employment. Because Indiana's conflict-of-law provisions required Hittle to apply the Russian labor code for an award, he ordered Masco to correct the labor book entry and awarded Prostyakov $780,000. Prostyakov petitioned to the District Court to affirm the arbitration, which it did.

The 7th Circuit agreed with the District Court's decision, finding Masco's claims on appeal to be without merit. Masco argued Hittle lacked proper authority to serve as arbitrator because he was affiliated with the AAA; the labor book was not arbitratable because it fell outside the scope of the settlement agreement; and Hittle fashioned improper monetary and equitable awards.

The settlement only released claims stemming from pre-existing acts at the time of the settlement agreement; the falsifying of the labor book came after the agreement, wrote Judge Michael Kanne.

Finally, Hittle abided by the Indiana choice-of-law provision and interpreted the agreement in good faith. Also, nothing in the settlement limited Hittle's authority to fashion the equitable award to Prostyakov.

Prostyakov wanted the 7th Circuit to award him attorney fees and costs regarding the appeal because he claimed Masco took this appeal only to delay the enforcement of the District Court judgment. Because the settlement agreement states the breaching party will be responsible for the other party's attorney fees and costs in claims, there is no need to award them to Prostyakov. Judge Kanne wrote the court trusts Masco will promptly pay Prostyakov what he is owed.