## Facts

- The Virginia Department of Corrections hired MCI to implement an inmate collect-calling system.
- MCI subcontracted with Gateway to furnish, install, and maintain the automated collect-calling equipment and technology; MCI was to secure local access lines.
- The subcontract stated the parties were independent contractors, not partners, joint venturers, or agents.
- The subcontract required good-faith negotiation of disputes and, if negotiations failed, binding arbitration “except that errors of law shall be subject to appeal.”
- After deployment, MCI complained Gateway’s system improperly completed many collect calls and integrated its own system to bypass Gateway.
- MCI declared Gateway in default, took steps the arbitrator found prevented Gateway from curing, and terminated the subcontract.
- In arbitration applying Virginia law, the arbitrator found MCI breached the duty to negotiate in good faith and breached the subcontract, awarding Gateway attorneys’ fees labeled as actual damages and $2,000,000 in punitive damages.
- The district court confirmed the award in full; MCI appealed.

## Issues

1. Whether the arbitration clause permitting appeal of “errors of law” required de novo judicial review of legal questions in the arbitration award.
2. Whether punitive damages were available under Virginia law for the conduct found by the arbitrator absent an independent willful tort separate from breach of contract.
3. Whether the arbitrator’s award of attorneys’ fees as “actual damages” should be vacated.

## Decision

- The Fifth Circuit held the parties’ clause authorized de novo judicial review of alleged legal errors in the arbitration award.
- The court vacated the $2,000,000 punitive-damages award as inconsistent with Virginia law because no independent tort duty separate from the contract was established.
- The court otherwise affirmed the arbitration award, including the attorneys’ fees component.
- The case was resolved by vacating punitive damages only and affirming all remaining relief.

## Legal Principles

- Parties may contract for expanded judicial review of arbitral legal determinations; a clause allowing appeal for “errors of law” can require de novo review of legal questions.
- Contractual expansion of review for legal error does not convert arbitral fact-finding into de novo fact review; factual determinations remain subject to the limited vacatur grounds under the Federal Arbitration Act.
- Under Virginia law, punitive damages are generally unavailable for breach of contract and require an independent, willful tort and a tort duty distinct from the contract.
- An express independent-contractor clause weighs against finding fiduciary status or a special relationship that could supply an independent tort duty.
- Challenges to components of an arbitration award may be forfeited or weakened by failure to timely and properly raise them in the arbitral forum, supporting confirmation of the remaining award.

## Conclusion

The Fifth Circuit enforced the parties’ agreement to permit de novo appellate review of arbitral legal errors, used that review to vacate punitive damages barred by Virginia’s independent-tort requirement, and otherwise affirmed confirmation of the arbitration award, including attorneys’ fees treated as actual damages.


Gateway Techs., Inc. v. MCI Telecomms. Corp., 64 F.3d 993 (5th Cir. 1995)