American Zurich Insurance Company v. Sun Holdings , Inc .

In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 23-3134
A MERICAN Z URICH I NSURANCE C OMPANY ,
Plaintiff-Appellee,
v.
S UN HOLDINGS , I NC .,
Defendant-Appellant.
____________________
Appeal from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 23 C 1243 — Matthew F. Kennelly, Judge.
____________________
A RGUED M AY 24, 2024 — DECIDED J UNE 3, 2024
____________________
Before EASTERBROOK, K IRSCH , and LEE, Circuit Judges.
EASTERBROOK, Circuit Judge. Sun Holdings purchased a
workers’-compensation policy from American Zurich Insur-
ance. The policy made American Zurich responsible for pay-
ing all approved claims in full. It also required Sun to reim-
burse American Zurich for the first $250,000 of each claim.
American Zurich kept its part of this arrangement, but Sun
did not. When Sun received bills, it ignored them. Sun didn’t
explain or try to justify nonpayment.

-- 1 of 5 --

2 No. 23-3134
American Zurich invoked the policy’s dispute-resolution
clause, which calls for arbitration in Illinois under the sub-
stantive law of New York and the commercial rules of the
American Arbitration Association. During the arbitration,
Sun offered one feeble excuse after another; as soon as each
had been dispatched, Sun presented a new one. The arbitra-
tors deemed this whac-a-mole approach to be a waste of eve-
ryone’s time. They ordered Sun to pay what American Zurich
claimed (approximately $1.1 million plus 9% interest from the
time each bill had been due) and added almost $175,000 in
attorneys’ fees as a sanction for defending frivolously.
True to form, Sun did not pay. American Zurich applied
to a federal district court for enforcement. (Jurisdiction comes
from 28 U.S.C. §1332.) No longer contesting its duty to pay
the bills (plus interest), Sun argued that the arbitrators had
exceeded their authority by directing it to pay the insurer’s
legal fees. Sun relied on two sentences in the contract. One
says: “Each party shall pay its own costs of counsel and wit-
nesses.” The other reads: “The arbitrators shall not limit, ex-
pand or modify the terms of this Agreement nor award dam-
ages in excess of compensatory damages under this Agree-
ment.” According to Sun, the $175,000 sanction produces
damages in excess of the compensatory amount and violates
the rule that each side bears its own attorneys’ fees. The dis-
trict court disagreed and ordered Sun to pay the award in full.
2023 U.S. Dist. LEXIS 177969 (N.D. Ill. Oct. 3, 2023).
Sun seems to think that the $175,000 is a form of punitive
damages, but it is not. This is a compensatory award, de-
signed to put American Zurich in the position it would have
occupied had Sun refrained from frivolous tactics. The con-
tract allows compensatory awards. As for the rule that each

-- 2 of 5 --

No. 23-3134 3
party bears its legal fees: the arbitrators found this to be a re-
statement of the American Rule on legal fees, under which
each side pays its own lawyers. But the American Rule is not
understood to forbid sanctions for frivolous litigation. Both
New York law, see ReliaStar Life Insurance Co. v. EMC National
Life Co., 564 F.3d 81, 86–89 (2d Cir. 2009) (New York law), and
the AAA’s rules, see Rule 49(d)(ii), allow awards of legal fees
as sanctions even when the American Rule governs.
According to Sun, the statement that “[e]ach party shall
pay its own costs of counsel and witnesses” is broader than
the American Rule and prohibits all sanctions measured by
the adversary’s legal expenses—though on this view the arbi-
trators would have had the authority to levy a sanction using
some other yardstick. Perhaps so—but the word “perhaps” is
vital. An arbitration clause delegates interpretive power to the
arbitrators. We do not ask whether they read the contractual
language correctly; it is enough that they tried to apply the
contract that the parties signed. We put it this way in one
opinion that has been quoted and re-quoted in the intervening
years:
As we have said too many times to want to repeat again, the ques-
tion for decision by a federal court asked to set aside an arbitration
award … is not whether the arbitrator or arbitrators erred in in-
terpreting the contract; it is not whether they clearly erred in in-
terpreting the contract; it is not whether they grossly erred in in-
terpreting the contract; it is whether they interpreted the contract.
If they did, their interpretation is conclusive. By making a contract
with an arbitration clause the parties agree to be bound by the ar-
bitrators’ interpretation of the contract. A party can complain if
the arbitrators don’t interpret the contract—that is, if they disre-
gard the contract and implement their own notions of what is rea-
sonable or fair. A party can complain if the arbitrators’ decision is
infected by fraud or other corruption, or if it orders an illegal act.
But a party will not be heard to complain merely because the

-- 3 of 5 --

4 No. 23-3134
arbitrators’ interpretation is a misinterpretation. Granted, the
grosser the apparent misinterpretation, the likelier it is that the
arbitrators weren’t interpreting the contract at all. But once the
court is satisfied that they were interpreting the contract, judicial
review is at an end, provided there is no fraud or corruption and
the arbitrators haven’t ordered anyone to do an illegal act.
Hill v. Norfolk & Western Ry., 814 F.2d 1192, 1194–95 (7th Cir.
1987) (citations omitted). The Supreme Court has said the
same thing. See, e.g., Major League Baseball Players Association
v. Garvey, 532 U.S. 504, 509–10 (2001); Oxford Health Plans, LLC
v. Sutter, 569 U.S. 564, 571–73 (2013).
Like the district court, we are satisfied that the arbitrators
interpreted this contract when they concluded that its refer-
ence to legal fees did no more than adopt the American Rule.
Whether the arbitrators were right or wrong is none of our
business.
Sun has followed up a frivolous defense during the arbi-
tration with a frivolous strategy in court. Instead of acknowl-
edging Hill and similar decisions, Sun proceeds as if the only
possible meaning of the contract is the one it espouses. Sun
wants us to ignore the fact that the arbitrators took the lan-
guage seriously and interpreted it in a way different from the
reading Sun prefers. And, as if to highlight the fact that it dis-
dains the limits on judicial review of arbitral awards, Sun
wants us to reexamine the arbitrators’ conclusion that it en-
gaged in frivolous conduct (it was “just putting on a defense,”
Sun insists) and wants us to say that the arbitrators overesti-
mated the amount of excess fees that American Zurich was
compelled to incur. These arguments are unrelated to contrac-
tual meaning. They are unabashed requests to contradict the
arbitrators’ findings, something the Federal Arbitration Act
forbids. See 9 U.S.C. §9. (Sections 10 and 11 give conditions

-- 4 of 5 --

No. 23-3134 5
under which a court will not enforce an award, but neither of
these sections allows a federal court to disagree with arbitra-
tors’ findings of fact or legal conclusions. Section 11(a) allows
review of “an evident material miscalculation of figures”, but
Sun does not maintain that the arbitrators got their sums
wrong.)
Hill and many other decisions in this circuit hold that woe-
begone contests to arbitrators’ awards are sanctionable. “An-
ything less makes a mockery of arbitration’s promise to expe-
dite and cut the costs of resolving disputes.” Production &
Maintenance Employees’ Union v. Roadmaster Corp., 916 F.2d
1161, 1163 (7th Cir. 1990). Arbitration cannot expedite and re-
duce the cost of dispute resolution if the parties must litigate
once before the arbitrators and again in court. We therefore
give Sun 14 days to show cause why sanctions, including but
not limited to an award of attorneys’ fees, should not be im-
posed for this frivolous appeal. See Fed. R. App. P. 38.
AFFIRMED; O RDER TO S HOW C AUSE I SSUED

-- 5 of 5 --