Wed Jul 30, 2008
Initiating Arbitration & Arbitrability
Initiating Arbitration
Despite efforts by the Supreme Court to analytically separate the arbitration clause from the terms of the contract, determining who resolves what issue remains. The Ninth Circuit decided waiver of the right to arbitrate, and the right to determine whether a party initiated arbitration, remain a judicial function.
To access the text, all cases are now compiled and edited on www.ArbitrationAdr.com
See, Text, Ch. IV-F-1-b: Objections to Arbitrability
Mon Apr 28, 2008
Recent Cases on Arbitration
Three Cal.App. cases on: arbitrator disclosure; choice of law; illegal contracts.
See, www.ArbitrationAdr.com for review and inclusion in Text.
Mon Mar 24, 2008
Clarifying Arbitration Jurisprudence: Preston v. Ferrer
Preston v. Ferrer, 2008 WL 440670 (U.S.) aroused little interest among arbitrators, presumably on the ground the case only confirmed Supreme Court jurisprudence invalidating attempts by state courts to subvert the FAA administratively rather than legislatively or by judicial decision. According to the Court, the issue in Preston “is not whether the FAA preempts [a state statute] wholesale, the question is simply who decides whether [defendant] petitioner . . . violated the contract].”
The Court disposed of this question summarily, repeating the familiar rule that only a challenge to the arbitration clause per se is subject to judicial scrutiny, i.e. whether the “making of the agreement” is enforceable or revocable “on grounds as exist at law or in equity for the revocation of any contract;" 9 U.S.C. 2. The arbitration clause is “seperable” from contractual terms, and the merits of the dispute are subject to arbitration. The question becomes: why did the Court take this case?
The possible answer: dicta to clarify earlier Supreme Court arbitration jurisprudence.
The Court discusses Volt Information Sciences, Inc. v. Bd. of Trustees of Leland Stanford Jr. Univ. 489 U.S. 468 (1989), a case unrelated to the issue of whether the court or arbitrator decides resolution of a contractual dispute in arbitration or litigation. Volt allowed the trial court to stay arbitration and permit litigation under a forum selection and state choice of law clause in the contract designating California as the venue and applicability of its state procedural law. When resolution of arbitration and litigation would potentially produce different results, CCP 1282.2 (c) permits the court to stay arbitration. Unlike the two parties in Preston, the Court noted that when Volt demanded arbitration, Stanford sued Volt and two non signatory third parties. Volt is a procedural law case, not a determination of an arbitral forum selection clause of arbitrator or judge as in Preston.
The Court then discusses its rule in Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52 (1995). In Mastrobuono, a case unrelated to arbitral forum selection in Preston or civil procedure in Volt, the Court confronted a state choice of law clause law prohibiting an arbitrator from awarding punitive damages conflicting with NASD rules permitting an arbitrator to award punitive damages. The Court “harmonized” the two clauses by applying New York state substantive principles to the arbitration but prohibiting limitations on the authority of arbitrators. The contract in Preston contained a boilerplate arbitration clause stating AAA Rules applied to any dispute relating to the terms of the contract or the “breach, validity or legality thereof.” This provision overrides the choice of California law diverting arbitration administratively.
Sun Feb 17, 2008
Arbitration Awards
(2/16/2008)
Strike 1: Two sophisticated business entities contract with each other and include an arbitration clause containing a choice of law provision mandating the arbitrator to "strictly apply [state] law." The arbitrator conducts the arbitration pursuant to FAA rules, identifies the prevailing party, and writes an award expressing his view of the case without any reference to state statutory or decisional law.
The non prevailing party appeals, citing none of the grounds for vacatur listed in 9 U.S.C.10. Not an adhesive contract; no argument on substantive or procedural arbitrability; no duress; no fraud; no nondisclosure; no manifest disregard; no corruption in the process or the arbitrators.
In writing its decision on appeal, the 7th Circuit panel in muses about the absence of appealable grounds; wonders how a court would resolve a case if the arbitrator wrote nothing at all; agrees we all know a court cannot set aside the award of an arbitrator (potentially confirmed in a judgment) who mistakes the law or facts, but presumably "there must be some boundaries ...[limiting] the extent to which the arbitrator could indulge his fancy..."
The court continues: "The arbitrator seems not to have interpreted [the law] at all but merely ignored it which was inconsistent with the directive that he strictly apply [state] law..." In conclusion the court writes...the arbitrator must render an award with an "interpretative path'' between the claims alleged and the award.
The court sends the case back to the arbitrator (if available) with instructions to hold an evidentiary hearing on the facts as applicable to state law.
In California terms, the California Supreme Court has said the award must reflect a "nexus" between the facts and the award; a "rational relationship;" Advanced Micro Devices, Inc. v. Intel Corp., Cal.4th 362 (1994).
Comment: This decision is arguably an isolated case but the 7th Circuit is possibly sending a subtle message recommending that arbitrators specifically connect submitted claims to the award-despite the court's concession that arbitrators need not write an award and mistakes of law or fact are not grounds for reversal on appeal.
Strike 2: In addition, a different 7th Circuit panel writes that "[a]n arbitral order that does not adhere to the legal principles specified by the arbitration agreement [choice of law provision] is one of two scenarios that warrants vacatur ... pursuant to the FAA; [9 U.S.C. 10 (a) (4)]. Ignoring a choice of law provision in an arbitration agreement exceeds the arbitrator's power since the arbitrator's power is borne from that arbitration agreement."
The court denied the motion to vacate on other grounds. Is this case dicta or precedent?
See, Text, ArbitrationAdr.com, Ch. V, Vacating Awards
Wed Feb 06, 2008
Summary Judgments in Arbitration
The FAA does not provide extensive guidance to arbitrators in resolving procedural issues common in litigation. No statute provides for motion practice, presumably on the ground arbitration replaces litigation and eliminates pre trial discovery other than subpoenaing a witness to bring documents to a hearing; 9 U.S.C. 7. In practice, parties agree to discovery and motion cut-off among themselves or abide by relevant state statutes.
The Third Circuit has confirmed the right of an arbitrator to issue summary judgment on issues of undisputed fact absent a provision in the arbitration agreement prohibiting this practice. Invoking AAA Rules, the court said the arbitrator has “wide latitude” in fashioning an appropriate remedy. The arbitrator retains “flexibility and discretion” in decision making and the inherent power to “grant any legal and equitable relief.”
The court, in responding to a motion to vacate an award on grounds the arbitrator engaged in misconduct (9 U.S.C.10 (a) (3) by granting a motion for summary judgment, also concludes an evidentiary hearing is not required “just to find out whether real issues surface in a case.”
California is in accord with the summary judgment rule but the court imposes significant cautionary instructions to assure that motions for summary disposition are not abused; Schlessinger v. Rosenfeld, Meyer & Susman, 40 Cal.App.4th 1096 (1995). The court notes the arbitrator should observe several safeguards, i.e., the nature of claims and defenses, provisions of the arbitration agreement, arbitration rules, availability and conduct of discovery . . .“[W]hile the arbitration lacks an explicit procedure for dispositive motions, courts must ensure that the party opposing such a motion is afforded a fair opportunity to present its position.”
Schlessinger is more detailed in its ruling than thd Third Circuit, and limits its discussion to summary disposition (adjudication of issues) as distinct from summary judgment, but both courts seek assurance that motions for summary disposition do not deprive a party of a fair hearing and the opportunity to be heard.
Motions for summary disposition are potentially available, but whether arbitrators elect to entertain this option in an arbitration absent the benefit of pleadings and motion practice in litigation is questionable.
See, www.ArbitrationAdr.com; Ch. III-B-12-c-3). Author: Judge Lawrence Waddington
Mon Feb 04, 2008
Arbitrators & Collateral Estoppel/Res Judicata
As lawyers continue to flood the courts with motions to confirm awards into judgments, the prospect of challenges to their application in subsequent arbitration and litigation increases. The most common emerging issues are collateral estoppel and res judicata. Both doctrines are applicable whether asserted by the parties in employment, consumer or commercial cases.
In Collins v. D.R. Horton, Inc., 505 F.3d 874 (9th Cir. 2007) two plaintiffs filed separate diversity actions against the same defendant alleging breach of their employment contract, fraud and failure to pay wages. The trial court, after denying a motion to consolidate the parties, denied defendant’s motion to compel arbitration as to one plaintiff but granted the motion as to the other plaintiff (a decision caused by a previous Ninth Circuit ruling subsequently reversed in the Supreme Court).
The plaintiff in the litigated case obtained a judgment in its favor against the defendant. In the arbitration subsequently conducted between the second plaintiff and the same defendant, the arbitrators rendered an award confirmed in a [partial] judgment for the defendant. On appeal from that judgment, the second plaintiff contended the prior judgment against the defendant entered in litigation was subject to collateral estoppel in the arbitration.
In Collins, the Ninth Circuit held . . . “where the prerequisites for collateral estoppel are satisfied, arbitrators must give preclusive effect to prior federal judgments”. . . Arbitrators are not free to ignore the preclusive effect of prior judgments under the doctrines of collateral estoppel and res judicata.” But the court explains there is a difference between offensive non mutual collateral estoppel and defensive non mutual collateral estoppel.
According to the court, offensive non mutual collateral estoppel occurs when the plaintiff seeks to estop a defendant from relitigating an issue the defendant had previously litigated and lost against another plaintiff. Defensive collateral estoppel is a motion by the defendant to estop a plaintiff who had litigated and lost against another defendant. Noting the unfairness of offensive non mutual collateral estoppel when multiple plaintiffs repeatedly file litigation against the same defendant alleging the same issue, the Ninth Circuit panel criticized its use except in unusual cases.
Not only must arbitrators consider application of collateral estoppel and res judicata, the Collins court also held that determination of whether these twin doctrines initially apply are an arbitrable issue-not judicial.
The Collins court cites Sixth and Seventh Circuit court cases as precedent for their decision, in part, but notes caveats in its holding. And, as noted by other courts, the absence of pleadings and records of the arbitration hearing impose a serious obstacle to applying collateral estoppel and res judicata to a previous judgment confirming an award. The Collins court also indirectly expresses a concern about the difference between a judgment entered in litigation and an award confirmed in a judgment as mandated by 9 U.S.C. 13 (c).
ArbitrationAdr.com; Text: Ch. IV-J
.
Tue Nov 13, 2007
Vacating Awards
Vacating Awards: 11/12/2007
The recent Second Circuit case vacating an arbitration award on the federal non-statutory ground of “manifest disregard” is likely to result in no immediate effect on arbitrators but may harbor seeds of the future in writing awards. The case involved an NASD arbitration. The appellate court, recounting the NASD arbitration award and limited record of the proceedings between the parties, recites the intransigence of the arbitrators in refusing to apply “settled law.” Under Second Circuit case law, this conduct qualified as “manifest disregard”of the law.
Although this case is arguably an exception to the general rule of appellate deference to arbitrators and to the federal statute limiting grounds for appeal, challenges to an award under the FAA continue; 9 U.S.C. 16. The Supreme Court has granted cert. in a Ninth Circuit case and will hear argument on whether the FAA forecloses the right of parties to expand the right to appeal an award on grounds the parties lack authority to confer jurisdiction on the courts (See, Arbitration Alert, www.ArbitrationAdr.com
Challenges to awards suggest that arbitrators write awards with an eye to 9 U.S.C. 16 or comparable state statute. The most common argument to the trial or appellate court reviewing a petition to confirm an award alleges the arbitrators “exceeded their powers” under either federal or state law; (9 U.S.C. 10 (a) (4).
In a recent California Court of Appeal case, the arbitration clause read: “Scope of Power: [T]he arbitrators shall not have the power to change, modify or alter any expressed condition, term or provision of this [C]ontract . . . and the scope of their authority is so limited.” The warranty in the underlying contract, disclaiming any responsibility for injury, loss, or lack of merchantability from use of the seller's product, was obviously suspect.
The parties submitted their commercial dispute directly to the arbitrator who subsequently found the warranty unconscionable and unenforceable, a decision clearly violating the directions in the arbitration clause and the warranty not to alter any terms and conditions. The Court of Appeal reminds counsel that “. . . courts look both to the contract and to the scope of the submission to determine the arbitrator’s authority; Shoenduve Corp. v. Lucent Techs., Inc., 442 F.3d 727 (9th Cir. 2006); Executone Information Systems, Inc. v. Davis, 26 F.3d 1314 (5th Cir.1994). Although counsel for the manufacturer reminded the arbitrator of the “terms and limitations” contained in the contract, the court said that at no time in its briefing or argument did counsel contend the issue of “unconscionability” exceeded the arbitrator’s authority.
A thin judicial resolution of the right of parties to compel the arbitrator to write an award within the terms of the agreement, but the court was unwilling to enforce a clearly unconscionable arbitration clause. Probably a “public policy” argument would have been more effective. One party cannot contract away the other party’s statutory protection against injury from defective products.
See, www.ArbitrationAdr.com Text, Ch. V-D-4: Vacating Awards
Consumer Remedies & Mortgages: 11/12/2007
Most federal and state courts have recognized the doctrine of "unconscionable" arbitration clauses in contracts. Further judicial refinement includes "procedural" unconscionability and "substantive" unconscionability" Both these subjects in federal and state courts are discussed in the Text; Ch. IV-G-2-a; XVII-B.
The courts have held that consumer contracts, employment contracts, franchise contracts, and some residential real estate arbitration clauses unconscionable & unenforceable attributable to disproportionate bargaining power between the parties; hidden clauses; absence of mutuality. But the Third Circuit reviewed an arbitration clause in a lender-borrower residential real estate contract allocating to the former a variety of legal,equitable, and provisional remedies not available to the borrower.
The court said "...[T]here is a facially apparent business justification for [these remedies] as the safeguards thereby preserved assure regularity and consistency for the benefit of both lender and borrower, and accordingly, there are sound pragmatic and policy reasons why foreclosure proceedings should be pursued in a court of law."
The court warned, however, that the borrower could pursue the merits of his allegations of predatory and deceptive lending practices in arbitration.
See, www.ArbitrationAdr.com Text, Ch. IV-G-2-a: Unconscionable Clauses (Federal Courts)
Fri Nov 09, 2007
Non-Signatories & Arbitration
Non-Signatories & Arbitration 11/9/2007
Although the courts have repeatedly enforced the right of parties to compel arbitration pursuant to a dispute resolution provision included in their written contract, that policy does not warrant including third parties who have not signed the agreement; Boys Club of San Fernando Valley, Inc. v. Fidelity & Deposit Co., 6 Cal.App.4th 1266 (1992). Nonetheless exceptions exist, as discussed by the Court of Appeal in a recent case involving a deceased actor See, www.ArbitrationAdr.com: Text.
All non-signatories in cases compelled by the courts to arbitrate are grounded on the basis of whether the signatories conferred a benefit on them as a result of the contract, or a “pre existing relationship between the signatory and non-signatory exists making it equitable to compel the non-signatory to be bound by the arbitration agreement;” Co. of Contra Costa v. Kaiser Foundation Health Plan, Inc., 47 Cal.App.4th 237 (1996); NORCAL Mutual Ins. Co. v. Newton, 84 Cal.App. 4th 64 (2000). In most cases this “benefit” or “relationship” includes agents, third party beneficiaries, fiduciaries, and partners.
Third party beneficiary status is determined by interpreting the language of CC 1559. And assignees who received benefits from the assignor qualify as a third party beneficiary; Recorded Picture Co. Ltd. v. Nelson Entertainment, Inc., 53 Cal.App.4th 350 (1997).
The court also notes that determination of whether an arbitration clause is operative against a non-signatory is a question of “substantive arbitrability” and an issue for the court, citing Boys Club.
The Court of Appeal cites several categories of cases involving non-signatories and is a valuable resource for counsel.
See, www.ArbitrationAdr.com, Text, Ch. XVI-F-5-f;g: Non-Signatories & Signatories
For the case on Non-Signatories under the FAA, See, Text, Ch. IV-F-2-a.
Party Arbitrators
Party Arbitrators 11/9/2007
Non-neutral arbitrators are not subject to vacating an award under FAA 10 (a) (2).
In some cases, parties select non-neutral arbitrators aligned with their side in the arbitration. Typically, these arbitrators select a third party neutral arbitrator. The Eighth Circuit confirmed the right of parties to select a method of resolution that incorporates that provision. The non- prevailing party in an arbitration cannot move to vacate an award under FAA 10 (a) (2) on grounds of "evident partiality" of the party arbitrator.
There is no requirement that party arbitrators submit disclosures and any citation to the leading Supreme Court case on disclosure is inapposite. Commonwealth Coatings Corp. v. Continental Cas. Co., 393 U.S. 145 (1968) involves non-disclosure of a neutral arbitrator.
See, www.ArbitrationAdr.com, Text, Ch. III-B-10-b; Party Arbitrators
| NEXT page |