Alternative Dispute Resolution: Evolving Ethics |
Los Angeles Daily Journal, October 27, 1999by Lawrence C. Waddington |
| Arbitration practice, legislatively
conceived as an alternative to litigation, initially utilized the
knowledge and skills of those employed in a particular trade or industry
to resolve contractual disputes between two or more private parties. These
arbitrators, readily familiar with customs and usages of a particular
business, and often personally acquainted with the parties themselves,
could understand idiosyncratic or indigenous industry practices without
extensive explanation necessary for a court or jury. This practical
experience was adapted to labor union/management disputes as legislated in
the Labor Management Relations Act (LMRA) which authorizes arbitrators to
resolve labor grievances. Unlike resolution of commercial contract
disputes often associated with non performance, disagreements over
quantity and quality of goods or billing errors, workplace disputes
required interpretation of a collective bargaining agreement, i.e., an
employment contract. Labor arbitrators need not necessarily understand the
intricacies of a particular industry, instead they must interpret the
provisions of a broadly applicable general contract to the details of a
particular labor related grievance. Commercial and labor arbitrators, each
working in their respective spheres, often resolved fact bound conflicts
rather than grappling with legal concepts. Arbitration in Securities One
industry, the National Association of Security Dealers (NASD), established
arbitration panels to resolve disputes among clients, brokers and
employees. NASD appointed these panels from the ranks of members who
worked in the securities world, intuiting that the specialized nature of
finance requires an expertise among those whose daily contact with stocks
and bonds enabled them to understand the ramifications of financial
transactions. For many years, this venerable institutional forum required
employees to submit to arbitration as a condition of employment. In a
sense, these arbitration panels resembled commercial panel members
selected on the basis of their experience and expertise. When securities
industry disputes shifted from complaints by shareholders against brokers
to employment related issues involving, race, gender or age
discrimination, the commercial dimension of arbitration which relied on
expertise mutated into resolution of federal civil rights legislation.
And, unlike labor arbitration, the employee could not seek refuge under
the protection of a collective bargaining agreement in the absence of
union membership. Arbitration in Entertainment Industry In the
entertainment industry, differing from commercial arbitration but governed
under the aegis of the LMRA, members uniformly select arbitrators from a
panel of those working as writers or directors. Artistic work, often
subjective and controversial, lends itself to resolution of disputes among
those who understand the unique nature of the process. Writers and
directors are members of a union, although not principally concerned with
working conditions, but their arbitrators were selected similarly to
commercial arbitrators, i.e., those familiar with the practices of the
industry. Expanded use of Arbitration With the expansion of arbitration,
in many cases outside the context of an industry, labor, securities or
entertainment dispute, lawyers sought an arbitrator legally competent,
devoid of undisclosed prior personal or financial relationship with the
parties, experienced as a lawyer or judge, and who had earned a reputation
for evenhanded decisions. Extensive knowledge of a specific industry
practice was not as critical nor were disputes cabined by a collective
bargaining agreement. For lawyers, selecting an arbitrator unknown to the
parties, as distinct from commercial arbitration, or not involving a
grievance issue in labor arbitration, the background and reputation of the
arbitrator emerged as a crucial issue. The turning point in judicial
review of the arbitration process, heretofore limited, emerged in
employment litigation. Arbitration of Employment Disputes The
"chemistry" of employment disputes does not parallel other forms
of arbitration. The United States Congress and the California Legislature
have enacted extensive statutory protection against discrimination of
employees on racial, gender, age and disability grounds. These statutes
impose penalties on employers and provide remedies for employees in event
of a violation. Because other non statutory arbitration formats required
no floor for remedies or guidelines for disposition, courts began to
reassess the right of an arbitrator to adhere to the law in the decision
making process. Unlike commercial arbitration, an employee is usually
unaware of the reputation or background of proposed arbitrators. Nor is
employment arbitration comparable to labor arbitration in the absence of
union participation. And obviously an employer could not unilaterally
select the membership of an arbitration panel similar to the process in
securities and entertainment industries. It is in this context that the
California Legislature passed extensive statutory disclosure requirements
for arbitrators, albeit without reference to the specific kind of dispute.
In federal courts, judges increasingly scrutinized arbitrator disclosure
of prior personal and business relationships with parties to the
arbitration and, at least in the employment context, some Circuits
mandated vindication of federal statutory rights by requiring arbitrators
to apply remedies authorized by Congress for litigated cases.
Arbitrator Error in California Courts The California Legislature had originally provided limited safeguards for judicial review of arbitration awards, focusing on the integrity of the arbitration process itself or an abuse of arbitrator authority. CCP 1286.2 permitted a court to vacate an award if ...(a) procured by corruption, fraud or other undue means; (b) corruption [occurred] in any of the arbitrators; (c) the arbitrator committed prejudicial misconduct; (d) the arbitrators exceeded their powers; (e) the arbitrator refused to postpone the hearing, declined to hear material evidence or engaged in other statutorily prohibited conduct. California case law vacating awards on these grounds was sparse, attributable to the unequivocal statement of the California Supreme Court in Moncharsh v. Heily & Blase, 3 Cal.4th 1, 28 (1997) : "It is well settled that arbitrators do not exceed their powers [CCP 1282.6 (d)] merely because they assign an erroneous reason for their decision". Even if legal or factual errors cause substantial injustice, judicial review is unavailable; Creative Plastering Inc. v. Hedley Builders, 19 Cal. App. 4th 1662 (1993); accord, Siegal v. Prudential Ins. Co. of America, 67 Cal.App.4th 1270 (1999). According to the court in Moncharsh and the subsequent decision in Advanced Micro Devices, Inc. v. Intel Corp., 9 Cal.4th 362 (1994), erroneous arbitrator decisions, awards, and remedies, heavily insulated from judicial review, are the price paid for avoiding litigation and selecting arbitration. Arbitrator Disclosure Given California Supreme Court endorsement of arbitration, and the narrow grounds upon which counsel could challenge an arbitration award for arbitrator legal error, emphasis on pre arbitration disclosure took on added importance. When a party challenges an award on the grounds that the arbitrator failed to disclose relevant information, the focus shifts from the decision to decision-maker. The court in Britz v. Alfa-Laval Food & Dairy Co., 34 Cal.App. 4th 1085 (1993) held that such non disclosure may create a reasonable impression of possible bias. In Roitz v. Coldwell Banker etc., 62 Cal.App.4th 716 (1998) the court construed CCP 1286.2 to hold that ..."an award may be vacated if the record reveals failure of the arbitrator to disclose important personal or professional background to the parties which might create an impression of possible bias in the eyes of a hypothetical, reasonable person (citation)." Actual or apparent bias is not the test, or even if the result would have been the same when decided impartially, said the court. A new hearing is required. Although Roitz was decided before amended statutory disclosure requirements took effect, infra, the decision clearly embodies the philosophy of full disclosure. See also, Ceriale v. Amco Ins. Co., 48 Cal.App.4th 500 (1996) The California Legislature responded to the legitimate concerns of participants in the arbitration process by requiring an arbitrator, particularly if unknown to the parties, to disclose any previous relevant personal or financial background or information prior to the arbitration. Enacted in 1994 (effective January, 1995) and amended in 1997, CCP 1281.9 requires an arbitrator to also disclose previous roles as a party arbitrator, prior cases with the instant parties, attorney-client relationships, and significant personal relationships with a party to the arbitration. CCP 1281.9 (e) equates the grounds for disqualification of an arbitrator with the statutory basis disqualifying a judge for cause (CCP 170.1). Non compliance with disclosure provisions constitutes grounds for disqualification of the arbitrator and serves as a basis to vacate the award; CCP 1282.6 (f). Although the statutory grounds of CCP 1281.9 apply to binding contractual arbitration, comparable disclosure provisions apply to judicially ordered arbitration (CCP 1141.18 [d] and CRC 1606[c]) and Referee disclosure (CRC 244.2[c]). A more specific statute applicable to residential construction or improvement contracts in excess of $3000.00 also requires disclosure ( other requirements are also listed). Arbitrator Error in Federal Courts In adopting arbitration, the California Legislature patterned its arbitration act on the Federal Arbitration Act (FAA) enacted by Congress in 1925. Title 9 U.S.C. 10 (a) lists statutory grounds for challenging an arbitration award in federal court on grounds it was: (1) procured by corruption or fraud; (2) the product of evident partiality or corruption of the arbitrator(s); (3) a refusal by the arbitrator(s) to postpone the hearing, a failure to hear relevant evidence, or infected with arbitrator prejudicial misbehavior; or, (4) the arbitrator(s)exceeded their powers. Challenging an award for legal or factual error in federal court met the same judicial resistance as in California, but in Wilko v. Swan, 346 U.S. 427 (1953), and reaffirmed in First Options of Chicago v. Kaplan, 514 U.S. 938 (1995), the United States Supreme Court appeared to suggest that if arbitrators decided issues in "manifest disregard" of the law, the court would vacate the award. Despite any statutory mandate for this rule, several Circuit Courts adopted its language to review the merits of an award; Montes v. Shearson Lehman Bros., 128 F.3d 1456 (11th Cir. 1997). The Ninth Circuit has written that this phrase is the appropriate test (Barnes v. Logan, 122 F.3d 820 [9th Cir.1997]) but "manifest disregard" constitutes more than erroneous misunderstanding of the law. The arbitrator must have known of a guiding legal principle and refused to apply it, or ignored it; Halligan v. Piper Jaffray, Inc., 148 F.3d 197 (2d Cir.1998) Yet under conventional arbitration law, arbitrators are not required to decide according to case law or statute and can do "substantial justice;" Commonwealth Castings Corp. v. Continental Casualty Co., 393 U.S. 145, 149 (1968). In contrast, labor arbitrators must derive their awards from the "essence of the CBA"; United Steelworkers of America v. Wheel & Car Corp., 363 U.S. 593 (1960). Confronted with strict California judicial limitations imposed on vacating awards for arbitrator legal or factual error in state court, counsel sought refuge in the federal law, arguing that the Federal Arbitration Act (FAA) pre empted California law and warranted use of the "manifest disregard" test. In Siegal v. Prudential Ins. Co. of America, supra, the California Court of Appeals refused to apply the federal test, characterizing it as a species of federal common law applicable only in federal courts. If a state court case is removed to federal court on grounds of diversity of citizenship, the District Court should arguably apply California decisional law on vacating awards for legal error; Rosenthal v. Great Western Financial Services Corp., 14 Cal.4th 394 (1996). Unless federal common law applies. Arbitrator Disclosure As noted, the FAA mirrors California law but adds an additional ground not included in the State arbitration act for judicial vacatur of awards: "evident partiality" of the arbitrator(s). In Commonwealth Castings Corp. v. Continental Casualty Co., supra, a divided United States Supreme Court held that an arbitrator who failed to disclose a significant relationship with one of the parties creates an appearance of "evident partiality" even if not actually biased. Several federal Circuit Courts have construed these words to include a failure of the arbitrator to disclose relevant information, although mere non disclosure alone is an insufficient ground to vacate an award; ALR Coal Co. v. Gogentrix etc., 173 F.3d 493 (4th Cir.1999) The court in ALR Coal Co. noted that in the context of commercial arbitration, the parties prefer a tribunal with expertise regarding the particular subject matter of their dispute; ALR Coal Co. @ 499. Assuming the parties identified a single arbitrator in the context of commercial arbitration, or in many cases each selected a representative who jointly agreed on a third party, the background and experience of the nominee(s) was presumably known. But in Schmitz v. Zilveti III, 20 F.3d 1043 (9th Cir. 1994), an NASD case, the court invoked the "evident partiality" test and held that the arbitrator should have disclosed "constructive knowledge" of certain facts by an investigation, i.e. the arbitrator had a duty to investigate. Citing Commonwealth Casting Co., the Schmitz court said that the parties, not the arbitrator or the courts, should judge the issue of partiality; Schmitz @1048. Other Circuits have rejected this judicially imposed duty; Gianelli Purchase Plan & Trust v. ADM Investor Services, Inc., 146 F.3d 1309 (11th Cir. 1998; Al-Harbi v. Citibank, 85 F.3d 680 (D.C. Cir. 1996). The test for "evident partiality" in the Ninth Circuit is whether there is, objectively, a "reasonable impression of bias." Not a bright line under any circumstances and the formula is undoubtedly fact specific contingent on the nature of the relationship; Apusento Garden Inc. v. Sup.Ct. of Guam, 94 F.3d 1346 (9th Cir. 1996). In commercial, labor, entertainment and NASD arbitration (the latter apparently no longer mandated by NASD), the courts will presumably limit the grounds strictly for vacating an award. In international law the Court has enforced arbitration over objections that foreign courts will not honor American anti trust law; Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985). More controversially, in Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991), the United States Supreme Court approved arbitration of a federal statutory right (ADEA) in the context of an employment dispute as long as the alternative forum of arbitration vindicates the Congressional purpose of protecting employees; Montes, supra. Except for the Ninth Circuit decision in Duffield v. Robertson Stephens & Co., 144 F.3d 1182 (9th Cir.1998), federal circuit courts have upheld arbitration of federal civil rights statutes, as long as the arbitration process is procedurally fair and affordable by employees; Cole v. Burns Int. Sec. Services, 105 F.3d 1465( D.C. Cir. 1997). But the advent of "manifest disregard" of the law and more stringent requirements of arbitrator disclosure signal increasing judicial scrutiny of arbitration awards. The Ethical Dimension The ethical implications for arbitrators in a maturing California and Federal law are apparent, whether masked in judicial language of "manifest disregard" or in explicit legislative demands for arbitrator disclosure. Despite the continuing viability of the Moncharsh rule in California foreclosing judicial review for arbitrator error of law or fact, judicial signs indicate that in some instances basic procedural fairness may translate into substantive fairness; California Teachers Assn. v. Sup. Ct., 20 Cal.4th 327(1999). As the courts continue to expand and refine the use of arbitration, the judiciary may demand of arbitrators an increased knowledge of statutory, Constitutional and decisional law. In the context of specific categories of disputes, i.e, employment, arbitrators must understand and apply relevant substantive and procedural law to ensure a fair and impartial forum which respects the rights of all parties. And most importantly, arbitrator disclosure in conformity with CCP 1286.2 and federal case law will avoid challenges to the impartiality of the arbitrator or the process. The Ethical Future of Arbitration Achieving balance between the goal of a simplified dispute resolution process coupled with limited judicial intervention, and an assurance of a fair arbitration tribunal, has caused conflicting results not only between state and federal courts but among federal circuit courts as well. Court decisions, written in the judicial language of appellate decisions, fact bound and in hindsight, are not an ideal forum for drafting ethical principles. In recognition of federal and state statutes and decisional law, JAMS/ENDISPUTE and the American Arbitration Association have incorporated ethical guidelines that track maturing federal and state law. These guidelines not only require arbitrator disclosure but assure a legally competent neutral. In a recent decision by the Court of Appeal, Justice Ed Wallin summed up the promise of arbitration: "In the final analysis no dispute resolution method, whether in court or out, will be accepted by litigants unless it is (and is perceived to be) fair, prompt and economical;" Maciejewski v. Alpha Systems Lab, 1999 D.A.R. 8045, 8047 (Review granted). Cases decided after article written Evident partiality: 166 F3d 308 Precis of JAMS/ENDISPUTE Rules 1. Institutional rules have been established for particular kinds of disputes. The court will not necessarily incorporate these rules in reviewing an award but will advert to their provisions particularly in determining appropriate disclosure. 2. The purpose of arbitration is a fair resolution of disputes. Although the rules of evidence do not necessarily apply, and arbitrators need not strictly apply legal principles nor are they required to furnish reasons for the award, if counsel has argued that the arbitrator should disregard well known principles of law, and the arbitrator agrees, an opinion explaining that decision is highly desirable to avoid allegations of "manifest disregard' of the law. 3. A fair arbitration includes a decision by an arbitrator competent to arbitrate and knowledgeable of relevant procedural and substantive law. The parties are entitled to a summary of arbitrator experience, references, and familiarity with the relevant legal principles in the arbitration;. 4. Confidentiality is a key ingredient of arbitration expected by all the parties. Failure to honor that commitment breaches expectations of the parties and tarnishes the institution and arbitrator. 5. As discussed above, the arbitrator must disclose known conflicts of interest. 6. An evenhanded and unbiased process is the hallmark of an arbitration. Arbitrators cannot entertain ex parte communications from any party, counsel or witness whether oral or written. Arbitrators should assure all parties of their opportunity to be heard. 7. Binding arbitration, by its very nature, inevitably determines a prevailing party. Although written awards are not required, a summary of the reasons for the decision is desirable. Reprinted, Los Angeles Daily Journal, October, 1999 *** |