In the early 1990s, BG Group PLC (BG), a British company, made a major investment in Argentina’s natural gas industry. Later, in the midst of an economic crisis, Argentina enacted an emergency law that required investors to collect tariff revenues in Argentinian pesos at a rate of one peso per dollar. Given the weak international peso-to-dollar exchange rate, these changes made it difficult for BG to see a return on its investment. Simultaneously, Argentina adopted legislation that stayed all lawsuits arising from these emergency measures. BG sought recourse under a bilateral investment treaty (Treaty) between the United Kingdom and Argentina. The Treaty required that BG first attempt to resolve its dispute before a “competent tribunal” in Argentina for at least eighteen months. Instead, BG bypassed the Argentinian courts and submitted its dispute directly to an arbitral tribunal. The arbitral panel, seated in Washington, D.C., held that Argentina’s changes to its judicial system excused the eighteen-month precondition to arbitration and awarded BG over $185 million in damages.
Argentina petitioned the district court to vacate the award under the Federal Arbitration Act by arguing that the arbitral panel exceeded its powers. The court denied the petition. In Republic of Argentina v. BG Group PLC, the U.S. Court of Appeals, District of Columbia Circuit reversed and held that, because of the litigation precondition to arbitration, the determination of whether BG could submit its dispute directly to arbitration must be made by a court, not the arbitral tribunal. BG appealed the D.C. Circuit’s decision and the Supreme Court of the United States granted certiorari.
Various individuals and organizations filed amicus briefs with the Supreme Court. One such organization was the AAA. The AAA sides with BG group and asks the Court to overturn the D.C. Circuit’s decision.
In its amicus brief, the AAA provided three arguments. Namely, the AAA argues: (1) the D.C. Circuit’s decision invites inefficiencies in the arbitral process through increased judicial intervention; (2) the D.C. Circuit’s ruling that arbitral rules do not apply until conditions precedent creates uncertainty for arbitration users; and (3) the D.C. Circuit’s decision puts the United States at odds with the international arbitration community and threatens its standing as a seat for international arbitration.
In my opinion, the argument that the D.C. Circuit’s ruling that arbitral rules do not apply until conditions precedent creates uncertainty for arbitration users is the most interesting argument advanced by the AAA.
In brief summation, the AAA argues that the parties in the instant case agreed to arbitrate under ICDR’s rules, and under ICDR’s rules, questions of arbitrability are to be determined by the arbitrators. The AAA argues that this conclusively establishes that all issues of arbitrability were to be determined by the arbitrators.
The AAA notes that the D.C. Circuit acknowledged this fact, but, nonetheless, held that the arbitrability of this particular dispute was to be decided by a court. As stated above, the D.C. Circuit reasoned that this was due to the fact that, as a precondition to arbitration, the parties were to first proceed in court. As such, the precondition expressed a clear and unmistakable intent for a court to determine issues of arbitrability in the first instance.
This is a tough issue. However, I have to agree with the D.C. Circuit’s interpretation of the parties’ arbitration agreement. Where a precondition to arbitration mandates first proceeding in a judicial forum, to allow one party to unilaterally bypass that agreed to precondition and have arbitrators determine whether such a bypass affects arbitrability would pervert the parties’ agreement. The D.C. Circuit’s interpretation appears to be the only interpretation that gives pre-perversion effect to the parties’ agreement.
What are your thoughts? Did the D.C. Circuit get it right?
Friday, November 22, 2013
Friday, November 15, 2013
And I thought it Couldn't Get Any Worse
After reading the Supreme Court’s decision in AT&T Mobility v. Concepcion, I found it hard to believe the Court could do a worse job. Boy was I wrong.
To briefly summarize American Express Co. v. Italian Colors Restaurant, several merchants, including Italian Colors Restaurant, brought individual lawsuits against American Express, claiming that the American Express’ Card Acceptance Agreement violated U.S. antitrust laws. The United States District Court for the Southern District of New York consolidated the cases and American Express moved to dismiss in order to force the merchants to arbitrate. The district court enforced the arbitration clause and dismissed the case. The merchants appealed and the United States Court of Appeals for the Second Circuit held that the arbitration clause, in particular the class action waiver, is unenforceable because it would essentially protect American Express from antitrust suits. American Express further appealed and the United States Supreme Court granted certiorari. The Court vacated the ruling and remanded for further proceedings in light of its decision in Stolt-Nielsen v. Animalfeeds International. The appellate court reevaluated its decision and still found the class action waiver to be unenforceable. The Supreme Court granted certiorari again to resolve this issue.
The Court held that the prohibitively high cost of arbitration is not a sufficient reason for a court to overrule an arbitration clause that forbids class action suits. The Court reasoned that federal law does not guarantee that a claim will be resolved affordably. In fact, the fact that it can be more expensive to litigate individual arbitrations than they are worth does not negate the right to pursue a statutory remedy. Therefore, no exception to the Federal Arbitration Act (FAA) can be applied.
After reading American Express Co. v. Italian Colors Restaurant, I refused to believe that a state court would decline to comment on the Court’s holding. After shepardizing American Express Co. v. Italian Colors Restaurant, I was able to locate a case from the Massachusettes Supreme Judicial Court that criticizes the Court’s holding. An excerpt from that case is provided below.
In Feeney II, supra, we were asked to interpret and apply Concepcion, which held that the FAA preempted a California rule that "classif[ied] most collective-arbitration waivers in consumer contracts as unconscionable" because it stood "as an obstacle to the accomplishment and execution of the full purposes and objectives of [the FAA]" to ensure the enforcement of agreements to arbitrate according to their terms. Id. at 1746, 1753. Our holding in Feeney II derived, at least in part, from our belief that Concepcion, while severely constraining the grounds on which a court could invalidate a class waiver in an arbitration agreement as unconscionable or against public policy, permitted the invalidation of a class waiver where that waiver "operate[s] in practice to deny a willing plaintiff any and all practical means of pursuing a claim against a defendant." Feeney II, supra at 491. After all, we observed, Concepcion went "to great length to demonstrate the overall fairness of [the parties' arbitration agreement] and the Court's belief that a consumer could successfully pursue a remedy under the regime it established." Feeney II, supra at 495, citing Concepcion, supra at 1753.
In Amex, the Supreme Court explicitly rejected our reading of Concepcion. As we observed in Feeney II (based on an earlier decision of the United States Court of Appeals for the Second Circuit in the Amex case), apart from the fact the plaintiffs in Amex asserted Federal statutory rights, the one critical difference between Amex and Concepcion was that the plaintiffs in Amex had actually demonstrated that "the cost of . . . individually arbitrating their dispute with Amex would be prohibitive, effectively depriving [them] of the statutory protections of the antitrust laws." Feeney II, supra at 500, quoting In re Am. Express Merchants' Litig., 634 F.3d 187, 197-198 (2d Cir. 2011), aff'd en banc, 667 F.3d 204 (2d Cir. 2012), rev'd sub nom. Amex, supra. Yet when Amex reached the Supreme Court, the Court remarked: "Truth to tell, our decision in [Concepcion] all but resolves this case. . . . We specifically rejected the argument that class arbitration was necessary to prosecute claims 'that might otherwise slip through the legal system.'" Amex, supra at 2312, quoting Concepcion, supra at 1753. The Court went on to state that Concepcion "established . . . that the FAA's command to enforce arbitration agreements trumps any interest in ensuring the prosecution of low-value claims." Amex, supra at 2312 n.5. "Accordingly, the FAA . . . favor[s] the absence of litigation when that is the consequence of a class-action waiver, since its 'principal purpose' is the enforcement of arbitration agreements according to their terms." Id., quoting Concepcion, supra at 1748.
Rejecting the Amex plaintiffs' argument that the class action waiver in question must be invalidated because, when combined with other terms of the arbitration agreement, it required an individual plaintiff to spend "between several hundred thousand and one million dollars" to recover at most, $38,000 in damages, id. at 2316 (Kagan, J., dissenting), the Court stated that "the fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy" (emphases in original). Id. at 2311. In doing so, the Court essentially held that as long as an arbitration agreement does not expressly "forbid[] the assertion of certain [Federal] statutory rights" or "perhaps" require the payment of "filing and administrative fees attached to arbitration that are so high as to make access to the forum impracticable," a plaintiff is not deprived of his or her right to pursue statutory remedies. Id. at 2310-2311.5 The Court went so far as to characterize as "dictum" its statement in Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 637, 105 S. Ct. 3346, 87 L. Ed. 2d 444 (1985), that "so long as the prospective litigant effectively may vindicate its statutory cause of action in the arbitral forum, the statute will continue to serve both its remedial and deterrent function."6 Amex, supra at 2310. The Court thus made clear that its discussion in Concepcion of the likelihood that those plaintiffs' claims could be resolved in individual arbitration did not contribute to its holding in that case, and in doing so, thwarted our reliance in Feeney II on that discussion.
Ultimately, in Amex, the Supreme Court makes clear both that Concepcion is not entitled to the reading we afforded it in Feeney II and that the analysis the Court set forth in Concepcion (and reinforced in Amex) applies without regard to whether the claim sought to be vindicated arises under Federal or State law. See Amex, supra at 2312 & n.5. Although we regard as untenable the Supreme Court's view that "the FAA's command to enforce arbitration agreements trumps any interest in ensuring the prosecution of low-value claims," id. at 2312 n.5, we are bound to accept that view as a controlling statement of Federal law.
As the foregoing excerpt proclaims, it is indeed a shame that the Court ruled that “the FAA’s command to enforce arbitration agreements trumps any interest in ensuring the prosecution of law-value claims.” Maybe it’s time to call your Congressman.
Which side do you support? Do you think the Supreme Judicial Court of Massachusetts’ reading of Concepcion was fair?
Sources:
AT&T Mobility v. Concepcion
30 Hofstra Lab. & Emp. L.J. 355, 383
Feeney v. Dell Inc.
To briefly summarize American Express Co. v. Italian Colors Restaurant, several merchants, including Italian Colors Restaurant, brought individual lawsuits against American Express, claiming that the American Express’ Card Acceptance Agreement violated U.S. antitrust laws. The United States District Court for the Southern District of New York consolidated the cases and American Express moved to dismiss in order to force the merchants to arbitrate. The district court enforced the arbitration clause and dismissed the case. The merchants appealed and the United States Court of Appeals for the Second Circuit held that the arbitration clause, in particular the class action waiver, is unenforceable because it would essentially protect American Express from antitrust suits. American Express further appealed and the United States Supreme Court granted certiorari. The Court vacated the ruling and remanded for further proceedings in light of its decision in Stolt-Nielsen v. Animalfeeds International. The appellate court reevaluated its decision and still found the class action waiver to be unenforceable. The Supreme Court granted certiorari again to resolve this issue.
The Court held that the prohibitively high cost of arbitration is not a sufficient reason for a court to overrule an arbitration clause that forbids class action suits. The Court reasoned that federal law does not guarantee that a claim will be resolved affordably. In fact, the fact that it can be more expensive to litigate individual arbitrations than they are worth does not negate the right to pursue a statutory remedy. Therefore, no exception to the Federal Arbitration Act (FAA) can be applied.
After reading American Express Co. v. Italian Colors Restaurant, I refused to believe that a state court would decline to comment on the Court’s holding. After shepardizing American Express Co. v. Italian Colors Restaurant, I was able to locate a case from the Massachusettes Supreme Judicial Court that criticizes the Court’s holding. An excerpt from that case is provided below.
In Feeney II, supra, we were asked to interpret and apply Concepcion, which held that the FAA preempted a California rule that "classif[ied] most collective-arbitration waivers in consumer contracts as unconscionable" because it stood "as an obstacle to the accomplishment and execution of the full purposes and objectives of [the FAA]" to ensure the enforcement of agreements to arbitrate according to their terms. Id. at 1746, 1753. Our holding in Feeney II derived, at least in part, from our belief that Concepcion, while severely constraining the grounds on which a court could invalidate a class waiver in an arbitration agreement as unconscionable or against public policy, permitted the invalidation of a class waiver where that waiver "operate[s] in practice to deny a willing plaintiff any and all practical means of pursuing a claim against a defendant." Feeney II, supra at 491. After all, we observed, Concepcion went "to great length to demonstrate the overall fairness of [the parties' arbitration agreement] and the Court's belief that a consumer could successfully pursue a remedy under the regime it established." Feeney II, supra at 495, citing Concepcion, supra at 1753.
In Amex, the Supreme Court explicitly rejected our reading of Concepcion. As we observed in Feeney II (based on an earlier decision of the United States Court of Appeals for the Second Circuit in the Amex case), apart from the fact the plaintiffs in Amex asserted Federal statutory rights, the one critical difference between Amex and Concepcion was that the plaintiffs in Amex had actually demonstrated that "the cost of . . . individually arbitrating their dispute with Amex would be prohibitive, effectively depriving [them] of the statutory protections of the antitrust laws." Feeney II, supra at 500, quoting In re Am. Express Merchants' Litig., 634 F.3d 187, 197-198 (2d Cir. 2011), aff'd en banc, 667 F.3d 204 (2d Cir. 2012), rev'd sub nom. Amex, supra. Yet when Amex reached the Supreme Court, the Court remarked: "Truth to tell, our decision in [Concepcion] all but resolves this case. . . . We specifically rejected the argument that class arbitration was necessary to prosecute claims 'that might otherwise slip through the legal system.'" Amex, supra at 2312, quoting Concepcion, supra at 1753. The Court went on to state that Concepcion "established . . . that the FAA's command to enforce arbitration agreements trumps any interest in ensuring the prosecution of low-value claims." Amex, supra at 2312 n.5. "Accordingly, the FAA . . . favor[s] the absence of litigation when that is the consequence of a class-action waiver, since its 'principal purpose' is the enforcement of arbitration agreements according to their terms." Id., quoting Concepcion, supra at 1748.
Rejecting the Amex plaintiffs' argument that the class action waiver in question must be invalidated because, when combined with other terms of the arbitration agreement, it required an individual plaintiff to spend "between several hundred thousand and one million dollars" to recover at most, $38,000 in damages, id. at 2316 (Kagan, J., dissenting), the Court stated that "the fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy" (emphases in original). Id. at 2311. In doing so, the Court essentially held that as long as an arbitration agreement does not expressly "forbid[] the assertion of certain [Federal] statutory rights" or "perhaps" require the payment of "filing and administrative fees attached to arbitration that are so high as to make access to the forum impracticable," a plaintiff is not deprived of his or her right to pursue statutory remedies. Id. at 2310-2311.5 The Court went so far as to characterize as "dictum" its statement in Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 637, 105 S. Ct. 3346, 87 L. Ed. 2d 444 (1985), that "so long as the prospective litigant effectively may vindicate its statutory cause of action in the arbitral forum, the statute will continue to serve both its remedial and deterrent function."6 Amex, supra at 2310. The Court thus made clear that its discussion in Concepcion of the likelihood that those plaintiffs' claims could be resolved in individual arbitration did not contribute to its holding in that case, and in doing so, thwarted our reliance in Feeney II on that discussion.
Ultimately, in Amex, the Supreme Court makes clear both that Concepcion is not entitled to the reading we afforded it in Feeney II and that the analysis the Court set forth in Concepcion (and reinforced in Amex) applies without regard to whether the claim sought to be vindicated arises under Federal or State law. See Amex, supra at 2312 & n.5. Although we regard as untenable the Supreme Court's view that "the FAA's command to enforce arbitration agreements trumps any interest in ensuring the prosecution of low-value claims," id. at 2312 n.5, we are bound to accept that view as a controlling statement of Federal law.
As the foregoing excerpt proclaims, it is indeed a shame that the Court ruled that “the FAA’s command to enforce arbitration agreements trumps any interest in ensuring the prosecution of law-value claims.” Maybe it’s time to call your Congressman.
Which side do you support? Do you think the Supreme Judicial Court of Massachusetts’ reading of Concepcion was fair?
Sources:
AT&T Mobility v. Concepcion
30 Hofstra Lab. & Emp. L.J. 355, 383
Feeney v. Dell Inc.
Friday, November 8, 2013
Concepcion: Who Got it Right?
The main thrust of AT& T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011) is that when state law prohibits the arbitration of a particular type of claim, the conflicting state law is preempted and displaced by the FAA.
In AT&T, Vincent and Liza Concepcion (the “Concepcions”) purchased cell phones from AT&T Mobility LCC (“AT&T”)and the contract of adhesion that they Concepcions signed provided for arbitration of all disputes between the parties. A&T had advertised that the phones were free, but nonetheless charged the Concepcions $ 30.22 in taxes. The Concepcions' suit was consolidated with similar claims in a class action suit filed in federal court alleging that AT&T had engaged in false advertising and fraud by charging sales tax on cell phones it advertised were free.
AT&T moved to compel arbitration under the terms of its contract with the Concepcions---the terms of the contract disallowed class arbitration. However, both the federal district court and the Ninth Circuit refused to grant AT&T’s motion to compel. Both courts reasoned that the arbitration provision at issue was unconscionable under California's Discover Bank rule, which provided that class-action waivers in consumer contracts of adhesion were unconscionable in cases where a party with superior bargaining power was alleged to have cheated large numbers of consumers out of individually small sums of money.
However, in the end, as stated above, the Court held that the Federal Arbitration Act of 1925 preempted state laws that prohibited contracts from disallowing class-wide arbitration, such as the Discover Bank rule. As its main pillar of reasoning, the Court portrayed the central policy of the FAA as enforcing arbitration agreements as they are written. As such, the FAA preempted any state law or policy, whether announced by legislatures or courts, that aimed specifically to limit the enforceability of arbitration agreements, or "that derive[ed] their meaning from the fact that an agreement to arbitrate is at issue." Such "discriminatory" laws and policies, or so the Court stated, were not the kinds of grounds "at law or in equity for the revocation of any contract" that were permissible defenses to arbitration agreements under § 2 of the FAA. California's Discover Bank rule, the Court concluded, operated to bar or limit arbitration provisions in a discrete manner, as opposed to putting arbitration agreements "on the exact same footing" as other species of contract. And consequently, the Discover Bank rule was preempted by the FAA.
The dissenting opinion found no grounds for FAA preemption of California law that described grounds for refusing to enforce "class action waivers." According to the dissent, the California Court's interpretation of general statutory requirements as making certain class-action waivers in consumer contracts exculpatory and unconscionable under California law represented "application of a more general [unconscionability] principle" to specific circumstances. Because the rule "applie[d] equally to class action litigation waivers in contracts without arbitration agreements as it d[id] to class arbitration waivers in contracts with such agreements," it put arbitration agreements on the same footing with some other contracts and "[could not] fairly be characterized as a targeted attack on arbitration."
As one article noted:
The lynchpin of Scalia's rationale is that under the FAA neither unconscionability nor any state law regulating exculpatory contract provisions can operate in a way that relies "on the uniqueness of an agreement to arbitrate." Yet the suggestion that the Discover Bank rule is discriminatory in its operation in the context of arbitration provisions is belied by the fact that in deciding Discover Bank, the California Court relied heavily on America Online, Inc. v. Superior Court, a decision denying enforcement to a contractual waiver of class action in a consumer contract without an arbitration clause. The case involved a subscription agreement that included Virginia forum-selection and choice-of-law clauses. However, because Virginia does not permit consumer class actions, the court reasoned that the provisions were the "functional equivalent of a contractual waiver" of the right to bring a class action. The court concluded that the effective denial of class-wide remedies would "substantially diminish the rights of California residents" and denied enforcement to the "waiver," thereby paving the way for a class-action suit in court. Analogous decisions involving nonarbitration contexts have been reached by a number of courts, and Discover Bank has itself been relied upon as a precedent in decisions striking down class-action waivers in contracts without arbitration clauses. As the Washington Supreme Court explained, in circumstances such as these, "[t]he arbitration clause is irrelevant to the unconscionability"; exculpatory clauses "do not change their character merely because they are found within a clause labeled 'Arbitration.'"
As far as the diverging opinions concerning whether the Discover Bank rule discriminated against arbitration are concerned, I have to agree with the dissent’s opinion. Just because the application of a rule has been primarily argued and applied in one context, it does not follow that the rule discriminates against that particular context. At best, arbitration was discriminated against through practice, not by the rule itself. Perhaps this was enough for the majority.
Who do you agree with on this point? The majority or the dissent?
In AT&T, Vincent and Liza Concepcion (the “Concepcions”) purchased cell phones from AT&T Mobility LCC (“AT&T”)and the contract of adhesion that they Concepcions signed provided for arbitration of all disputes between the parties. A&T had advertised that the phones were free, but nonetheless charged the Concepcions $ 30.22 in taxes. The Concepcions' suit was consolidated with similar claims in a class action suit filed in federal court alleging that AT&T had engaged in false advertising and fraud by charging sales tax on cell phones it advertised were free.
AT&T moved to compel arbitration under the terms of its contract with the Concepcions---the terms of the contract disallowed class arbitration. However, both the federal district court and the Ninth Circuit refused to grant AT&T’s motion to compel. Both courts reasoned that the arbitration provision at issue was unconscionable under California's Discover Bank rule, which provided that class-action waivers in consumer contracts of adhesion were unconscionable in cases where a party with superior bargaining power was alleged to have cheated large numbers of consumers out of individually small sums of money.
However, in the end, as stated above, the Court held that the Federal Arbitration Act of 1925 preempted state laws that prohibited contracts from disallowing class-wide arbitration, such as the Discover Bank rule. As its main pillar of reasoning, the Court portrayed the central policy of the FAA as enforcing arbitration agreements as they are written. As such, the FAA preempted any state law or policy, whether announced by legislatures or courts, that aimed specifically to limit the enforceability of arbitration agreements, or "that derive[ed] their meaning from the fact that an agreement to arbitrate is at issue." Such "discriminatory" laws and policies, or so the Court stated, were not the kinds of grounds "at law or in equity for the revocation of any contract" that were permissible defenses to arbitration agreements under § 2 of the FAA. California's Discover Bank rule, the Court concluded, operated to bar or limit arbitration provisions in a discrete manner, as opposed to putting arbitration agreements "on the exact same footing" as other species of contract. And consequently, the Discover Bank rule was preempted by the FAA.
The dissenting opinion found no grounds for FAA preemption of California law that described grounds for refusing to enforce "class action waivers." According to the dissent, the California Court's interpretation of general statutory requirements as making certain class-action waivers in consumer contracts exculpatory and unconscionable under California law represented "application of a more general [unconscionability] principle" to specific circumstances. Because the rule "applie[d] equally to class action litigation waivers in contracts without arbitration agreements as it d[id] to class arbitration waivers in contracts with such agreements," it put arbitration agreements on the same footing with some other contracts and "[could not] fairly be characterized as a targeted attack on arbitration."
As one article noted:
The lynchpin of Scalia's rationale is that under the FAA neither unconscionability nor any state law regulating exculpatory contract provisions can operate in a way that relies "on the uniqueness of an agreement to arbitrate." Yet the suggestion that the Discover Bank rule is discriminatory in its operation in the context of arbitration provisions is belied by the fact that in deciding Discover Bank, the California Court relied heavily on America Online, Inc. v. Superior Court, a decision denying enforcement to a contractual waiver of class action in a consumer contract without an arbitration clause. The case involved a subscription agreement that included Virginia forum-selection and choice-of-law clauses. However, because Virginia does not permit consumer class actions, the court reasoned that the provisions were the "functional equivalent of a contractual waiver" of the right to bring a class action. The court concluded that the effective denial of class-wide remedies would "substantially diminish the rights of California residents" and denied enforcement to the "waiver," thereby paving the way for a class-action suit in court. Analogous decisions involving nonarbitration contexts have been reached by a number of courts, and Discover Bank has itself been relied upon as a precedent in decisions striking down class-action waivers in contracts without arbitration clauses. As the Washington Supreme Court explained, in circumstances such as these, "[t]he arbitration clause is irrelevant to the unconscionability"; exculpatory clauses "do not change their character merely because they are found within a clause labeled 'Arbitration.'"
As far as the diverging opinions concerning whether the Discover Bank rule discriminated against arbitration are concerned, I have to agree with the dissent’s opinion. Just because the application of a rule has been primarily argued and applied in one context, it does not follow that the rule discriminates against that particular context. At best, arbitration was discriminated against through practice, not by the rule itself. Perhaps this was enough for the majority.
Who do you agree with on this point? The majority or the dissent?
Friday, November 1, 2013
Engalla and Revisiting the Doctrine of Separability
This week’s reading discussed “Judicial Policing of Arbitration Agreements in Consumer and Employment Contracts”. More specifically, this week’s reading discussed various ways in which courts have dealt with “unfair” arbitration agreements.
The week’s reading began with Engalla v. Permanente Medical Group, Inc. In Engalla, an employee, Engalla, brought a medical malpractice suit. The suit was submitted to arbitration, pursuant to the employee’s policy. “Engalla died before an arbitral hearing could be held. After his death, his family initiated a medical malpractice action in superior court.” Defendant HMO, Kaiser, brought a petition to compel arbitration.
Plaintiffs claimed that defendant HMO's self-administered arbitration system was unfair---the system was allegedly biased, and defendant HMO allegedly engaged in a course of dilatory conduct to postpone the employee's arbitration hearing until after his death. The trial court found for plaintiffs. The appellate court reversed. Plaintiffs appealed.
The Supreme Court of California reversed and remanded, finding that there was evidence to support the trial court's initial findings that defendant HMO engaged in fraudulent conduct justifying a denial of its petition to compel arbitration. The court did not find, however, that defendant HMO's arbitration program was unconscionable upon its face where it did not lack minimum levels of integrity.
This decision suggests that, while the courts will not circumvent arbitration agreements, the fairness of the arbitration process will be subject to court review. David Rand, attorney for the plaintiff in the suit against Kaiser, stated that the ruling "sends a clear message that plans can't manipulate arbitration to protect their interests."
After reading Engalla, I took a moment to reflect on prior reading assignments.
Throughout the course of the semester, we have discussed the doctrine of separability in great detail. As we have discussed, an agreement to arbitrate is "separate" or "separable" from the underlying contract, such that a contract is essentially viewed as containing two separate agreements, the agreement to arbitrate and the underlying contract. As such, the invalidity of the underlying contract does not necessarily invalidate an agreement to arbitrate and does not deprive an arbitrator of authority to decide on the validity of the underlying contract.
We first encountered the doctrine of separability in Prima Paint v. Flood & Conklin Mfg. Co. In Prima Paint, SCOTUS held that questions as to the validity of an underlying contract are for an arbitrator to decide and courts are confined to only determine challenges to an arbitration clause itself.
Later, in Buckeye Check Cashing v. Cardegna, SCOTUS reaffirmed Prima Paint's holding and held that a challenge to the validity of an underlying contract is for an arbitrator to decide, not only where a contract is claimed to be voidable, but also where it is claimed to be void.
Engalla provides a good example of arguing against the validity of an arbitration clause itself (for reasons other than the arbitrability of certain claims and public policy rationale). In Engalla, the Supreme Court of California held that since the challenge was to the arbitration agreement itself, the matter was for the court to decide not the arbitrator.
Do you agree with the doctrine of separability? Do you agree with the fact that arbitration agreements are enforceable in an otherwise void contract?
Sources: the Book; 18 Am. Rev. Int'l Arb. 455; 29 J.L. Med. & Ethics 203
The week’s reading began with Engalla v. Permanente Medical Group, Inc. In Engalla, an employee, Engalla, brought a medical malpractice suit. The suit was submitted to arbitration, pursuant to the employee’s policy. “Engalla died before an arbitral hearing could be held. After his death, his family initiated a medical malpractice action in superior court.” Defendant HMO, Kaiser, brought a petition to compel arbitration.
Plaintiffs claimed that defendant HMO's self-administered arbitration system was unfair---the system was allegedly biased, and defendant HMO allegedly engaged in a course of dilatory conduct to postpone the employee's arbitration hearing until after his death. The trial court found for plaintiffs. The appellate court reversed. Plaintiffs appealed.
The Supreme Court of California reversed and remanded, finding that there was evidence to support the trial court's initial findings that defendant HMO engaged in fraudulent conduct justifying a denial of its petition to compel arbitration. The court did not find, however, that defendant HMO's arbitration program was unconscionable upon its face where it did not lack minimum levels of integrity.
This decision suggests that, while the courts will not circumvent arbitration agreements, the fairness of the arbitration process will be subject to court review. David Rand, attorney for the plaintiff in the suit against Kaiser, stated that the ruling "sends a clear message that plans can't manipulate arbitration to protect their interests."
After reading Engalla, I took a moment to reflect on prior reading assignments.
Throughout the course of the semester, we have discussed the doctrine of separability in great detail. As we have discussed, an agreement to arbitrate is "separate" or "separable" from the underlying contract, such that a contract is essentially viewed as containing two separate agreements, the agreement to arbitrate and the underlying contract. As such, the invalidity of the underlying contract does not necessarily invalidate an agreement to arbitrate and does not deprive an arbitrator of authority to decide on the validity of the underlying contract.
We first encountered the doctrine of separability in Prima Paint v. Flood & Conklin Mfg. Co. In Prima Paint, SCOTUS held that questions as to the validity of an underlying contract are for an arbitrator to decide and courts are confined to only determine challenges to an arbitration clause itself.
Later, in Buckeye Check Cashing v. Cardegna, SCOTUS reaffirmed Prima Paint's holding and held that a challenge to the validity of an underlying contract is for an arbitrator to decide, not only where a contract is claimed to be voidable, but also where it is claimed to be void.
Engalla provides a good example of arguing against the validity of an arbitration clause itself (for reasons other than the arbitrability of certain claims and public policy rationale). In Engalla, the Supreme Court of California held that since the challenge was to the arbitration agreement itself, the matter was for the court to decide not the arbitrator.
Do you agree with the doctrine of separability? Do you agree with the fact that arbitration agreements are enforceable in an otherwise void contract?
Sources: the Book; 18 Am. Rev. Int'l Arb. 455; 29 J.L. Med. & Ethics 203
Friday, October 25, 2013
State Lemon Laws & Arbitration
This week’s reading discussed the use of arbitration in state lemon laws. As such, in this week’s blog entry, I discuss Massachusetts’ lemon law in greater detail and compare it with Texas’ lemon law in a few specific areas.
I found it interesting that Massachusetts’ lemon law allows consumers such a great deal of discretion.
As the reading states, under Massachusetts’ lemon law, an aggrieved consumer has the right to either proceed to arbitration or proceed to court. However, if the consumer elects to proceed to arbitration, he or she is not prevented from later proceeding to court.
However, under Texas’ lemon law, unlike Massachusetts’, an aggrieved consumer must first proceed to arbitration. Nonetheless, the consumer is not prevented from later proceeding to court.
In my opinion, both of the above options make sense and favor consumers, however, it appears that the option employed by Texas’ lemon law is fairer to manufacturers than is the option employed by Massachusetts’ lemon law. Throughout the course of the semester, we have made much of arbitration’s benefits to businesses—e.g., efficiency, privacy, etc. Because Texas requires an aggrieved consumer to first proceed with arbitration, in a case where an arbitration award is rendered in favor of a consumer, a manufacturer (that does not desire an appeal) will at least have received the benefit of an efficient and private dispute resolution. In Massachusetts, however, this will not always be the case; aggrieved consumers are able to bypass arbitration altogether.
I also found the arbitration proceeding provided for under Massachusetts’ lemon law interesting.
The arbitration proceeding provided for under Massachusetts’ lemon law is "all or nothing." If an arbitrator determines that an aggrieved consumer’s vehicle meets the standards of the lemon law, the manufacturer must refund the purchase price of or replace the car. However, if the arbitrator decides that his or her vehicle is not a lemon, there will be no award.
Similarly, the arbitration proceeding provided for under Texas’ lemon law is “all or nothing,” with two deviations from the arbitration proceeding provided for under Massachusetts’ lemon law. Specifically, in Texas, if an arbitrator determines that an aggrieved consumer’s vehicle meets the standards of the lemon law, the manufacturer must refund the purchase price of, replace, or repair the car. Also, in Texas, unlike Massachusetts, a manufacturer does not get to choose a remedy—the arbitration award will dictate an award of either a refund, replacement, or repair.
In my opinion, as before, both of the above options make sense, however, it appears that in this context, the option employed by Massachusetts’ lemon law is fairer to manufacturers than is the option employed by Texas’ lemon law. In Massachusetts, as previously stated, a manufacturer found liable in arbitration is given the choice of either refunding the purchase price of or replacing the prevailing consumer’s car. However, in Texas, as previously stated, the arbitration award will dictate an award of either a refund, replacement, or repair. Stating the obvious, Massachusetts’ lemon law is fairer to manufacturers because it allows for choice. Texas’ lemon law, on the other hand, does not allow for choice.
What do you think about lemon laws? As a consumer, which law would you prefer, Massachusetts’ or Texas’? As a manufacturer?
Sources: The Book; http://www.mass.gov/ocabr/business/autos-transportation/lemon-law-used.html; http://www.bbb.org/us/Storage/16/Documents/BBBAutoLine/TX-LLaddinfo.pdf; ftp://ftp.dot.state.tx.us/pub/txdot-info/mvd/lemon/2004lemonlaw.pdf.
I found it interesting that Massachusetts’ lemon law allows consumers such a great deal of discretion.
As the reading states, under Massachusetts’ lemon law, an aggrieved consumer has the right to either proceed to arbitration or proceed to court. However, if the consumer elects to proceed to arbitration, he or she is not prevented from later proceeding to court.
However, under Texas’ lemon law, unlike Massachusetts’, an aggrieved consumer must first proceed to arbitration. Nonetheless, the consumer is not prevented from later proceeding to court.
In my opinion, both of the above options make sense and favor consumers, however, it appears that the option employed by Texas’ lemon law is fairer to manufacturers than is the option employed by Massachusetts’ lemon law. Throughout the course of the semester, we have made much of arbitration’s benefits to businesses—e.g., efficiency, privacy, etc. Because Texas requires an aggrieved consumer to first proceed with arbitration, in a case where an arbitration award is rendered in favor of a consumer, a manufacturer (that does not desire an appeal) will at least have received the benefit of an efficient and private dispute resolution. In Massachusetts, however, this will not always be the case; aggrieved consumers are able to bypass arbitration altogether.
I also found the arbitration proceeding provided for under Massachusetts’ lemon law interesting.
The arbitration proceeding provided for under Massachusetts’ lemon law is "all or nothing." If an arbitrator determines that an aggrieved consumer’s vehicle meets the standards of the lemon law, the manufacturer must refund the purchase price of or replace the car. However, if the arbitrator decides that his or her vehicle is not a lemon, there will be no award.
Similarly, the arbitration proceeding provided for under Texas’ lemon law is “all or nothing,” with two deviations from the arbitration proceeding provided for under Massachusetts’ lemon law. Specifically, in Texas, if an arbitrator determines that an aggrieved consumer’s vehicle meets the standards of the lemon law, the manufacturer must refund the purchase price of, replace, or repair the car. Also, in Texas, unlike Massachusetts, a manufacturer does not get to choose a remedy—the arbitration award will dictate an award of either a refund, replacement, or repair.
In my opinion, as before, both of the above options make sense, however, it appears that in this context, the option employed by Massachusetts’ lemon law is fairer to manufacturers than is the option employed by Texas’ lemon law. In Massachusetts, as previously stated, a manufacturer found liable in arbitration is given the choice of either refunding the purchase price of or replacing the prevailing consumer’s car. However, in Texas, as previously stated, the arbitration award will dictate an award of either a refund, replacement, or repair. Stating the obvious, Massachusetts’ lemon law is fairer to manufacturers because it allows for choice. Texas’ lemon law, on the other hand, does not allow for choice.
What do you think about lemon laws? As a consumer, which law would you prefer, Massachusetts’ or Texas’? As a manufacturer?
Sources: The Book; http://www.mass.gov/ocabr/business/autos-transportation/lemon-law-used.html; http://www.bbb.org/us/Storage/16/Documents/BBBAutoLine/TX-LLaddinfo.pdf; ftp://ftp.dot.state.tx.us/pub/txdot-info/mvd/lemon/2004lemonlaw.pdf.
Friday, October 18, 2013
FINRA: A Critique and Defense
According to its website, “FINRA is not part of the government. [It’s] an independent, not-for-profit organization authorized by Congress to protect America’s investors by making sure the securities industry operates fairly and honestly.”
As part of its operations, FINRA provides a forum for arbitration. The FINRA website provides a thorough account of what cases are eligible for, or require, arbitration in FINRA’s forum. This account is reproduced below.
Eligible Cases
Arbitration cases are eligible to be heard in FINRA's forum if the following criteria are met:
• For disputes with investors:
o The cases involve an investor and an individual or entity registered with FINRA, such as cases between investors and brokers, between investors and brokerage firms, and between investors and brokers and brokerage firms; and
o The claim is filed within 6 years from the time the events giving rise to the dispute occurred.
• For disputes involving industry parties only:
o The cases involve an individual or entity registered with FINRA, such as cases between brokerage firms, between brokers, and between or among brokerage firms and brokers; and
o The claim is filed within 6 years from the time the events giving rise to the dispute occurred.
Required Investor Arbitration
An investor must arbitrate at FINRA if:
• The arbitration is required by written agreement;
• The dispute is with a member of FINRA, which could be a broker and/or brokerage firm; and
• The dispute involves the securities business of the broker and/or brokerage firm.
Required Industry Arbitration
A broker or a brokerage firm must arbitrate at FINRA if:
• The dispute arises out of the securities business activities of a broker and/or a brokerage firm; and
• The dispute is between or among the following members of FINRA: brokerage firms, brokerage firms and brokers, or brokers.
If an investor requests arbitration, a broker or a brokerage firm must arbitrate at FINRA.
Exception to required industry arbitration:
If you are a broker and your dispute involves an issue of employment discrimination, including sexual harassment, the dispute is not required to be arbitrated unless the parties agreed to arbitrate it, either before or after the issue arose.
Despite FINRA’s self-described independence and self-stated mandate of protecting America’s investors, FINRA has been harshly criticized on both fronts.
Earlier this year, on March 21, 2013, an op-ed/editorial entitled “FINRA’s Win is Your Loss” was published in U.S. NEWS & WORLD REPORT. According to the op-ed/editorial, FINRA “touts itself as an independent regulator governing the conduct of all securities firms doing business in the U.S.” However, or so the op-ed/editorial argues, “[g]iven the predatory conduct of the securities industry, it’s obvious that FINRA is falling far short of its mandate.”
To support the op-ed/editorial’s basic premise, “that FINRA is falling short of its mandate”, the op-ed/editorial posits that FINRA’s “running [of a] mandatory arbitration system that adjudicates disputes between investors and [] brokers” is insidious. The op-ed/editorial qualifies this statement by arguing that such a system requires investors to “give up their constitutional right[s] to [] jury trial[s]” for a proceeding where they will be judged by arbitrators that are neither fair nor impartial.
Moreover, the op-ed editorial appears to take special exception to the fact that FINRA does not “permit access to its database so that academics can conduct an analysis of the overall process.” The op-ed/editorial insists “[e]verything about a process that affects the retirement goals of millions of Americans should be in the public domain.”
“FINRA’s Win is Your Loss” did not go unnoticed. George Friedman, the previous Director of FINRA’s Arbitration, wrote a letter to U.S. NEWS & WORLD REPORT to rebut “FINRA’s Win is Your Loss.”
The theme of this letter is aptly displayed in the following excerpt:
To characterize the arbitration system as unfair and a threat to retirement plans is ridiculous. In fact, the FINRA arbitration program is an exemplar of fairness in consumer arbitration. This isn’t my opinion; it’s fact.
Mr. Friedman argues “FINRA has spent years amending the rules to ensure a level playing field. “ And furthermore, “FINRA’s rules must be approved by the SEC after being published in the Federal Register and after a public comment period.” Even more, the “SEC periodically inspects the arbitration program and responds to individual complaints.”
Finally, Mr. Friedman cites favorable words from the “Consumer Federation’s Director of Investor Protection” and “a leading authority in the arbitration field” as support for FINRA’s fairness and impartiality.
In my opinion, Mr. Friedman’s arguments are superior to “FINRA’s Win is Your Loss”’s. “FINRA’s Win is Your Loss” appears to oppose arbitration generally, not just FINRA’s arbitration procedures individually. “FINRA’s Win is Your Loss” implies that the inherent privacy of arbitration proceedings alone suggests corruption and impartiality. While I sympathize with “FINRA’s Win is Your Loss”’s disdain for “take-it-or-leave-it, binding-arbitration” clauses, these clauses are hardly confined to the context of FINRA’s arbitration procedures.
What are your thoughts? Do you agree with “FINRA’s Win is Your Loss” or Mr. Friedman?
Sources:
FINRA’s website
http://www.indisputably.org/?p=4524
http://money.usnews.com/money/blogs/On-Retirement/2013/03/21/finras-win-is-your-loss
As part of its operations, FINRA provides a forum for arbitration. The FINRA website provides a thorough account of what cases are eligible for, or require, arbitration in FINRA’s forum. This account is reproduced below.
Eligible Cases
Arbitration cases are eligible to be heard in FINRA's forum if the following criteria are met:
• For disputes with investors:
o The cases involve an investor and an individual or entity registered with FINRA, such as cases between investors and brokers, between investors and brokerage firms, and between investors and brokers and brokerage firms; and
o The claim is filed within 6 years from the time the events giving rise to the dispute occurred.
• For disputes involving industry parties only:
o The cases involve an individual or entity registered with FINRA, such as cases between brokerage firms, between brokers, and between or among brokerage firms and brokers; and
o The claim is filed within 6 years from the time the events giving rise to the dispute occurred.
Required Investor Arbitration
An investor must arbitrate at FINRA if:
• The arbitration is required by written agreement;
• The dispute is with a member of FINRA, which could be a broker and/or brokerage firm; and
• The dispute involves the securities business of the broker and/or brokerage firm.
Required Industry Arbitration
A broker or a brokerage firm must arbitrate at FINRA if:
• The dispute arises out of the securities business activities of a broker and/or a brokerage firm; and
• The dispute is between or among the following members of FINRA: brokerage firms, brokerage firms and brokers, or brokers.
If an investor requests arbitration, a broker or a brokerage firm must arbitrate at FINRA.
Exception to required industry arbitration:
If you are a broker and your dispute involves an issue of employment discrimination, including sexual harassment, the dispute is not required to be arbitrated unless the parties agreed to arbitrate it, either before or after the issue arose.
Despite FINRA’s self-described independence and self-stated mandate of protecting America’s investors, FINRA has been harshly criticized on both fronts.
Earlier this year, on March 21, 2013, an op-ed/editorial entitled “FINRA’s Win is Your Loss” was published in U.S. NEWS & WORLD REPORT. According to the op-ed/editorial, FINRA “touts itself as an independent regulator governing the conduct of all securities firms doing business in the U.S.” However, or so the op-ed/editorial argues, “[g]iven the predatory conduct of the securities industry, it’s obvious that FINRA is falling far short of its mandate.”
To support the op-ed/editorial’s basic premise, “that FINRA is falling short of its mandate”, the op-ed/editorial posits that FINRA’s “running [of a] mandatory arbitration system that adjudicates disputes between investors and [] brokers” is insidious. The op-ed/editorial qualifies this statement by arguing that such a system requires investors to “give up their constitutional right[s] to [] jury trial[s]” for a proceeding where they will be judged by arbitrators that are neither fair nor impartial.
Moreover, the op-ed editorial appears to take special exception to the fact that FINRA does not “permit access to its database so that academics can conduct an analysis of the overall process.” The op-ed/editorial insists “[e]verything about a process that affects the retirement goals of millions of Americans should be in the public domain.”
“FINRA’s Win is Your Loss” did not go unnoticed. George Friedman, the previous Director of FINRA’s Arbitration, wrote a letter to U.S. NEWS & WORLD REPORT to rebut “FINRA’s Win is Your Loss.”
The theme of this letter is aptly displayed in the following excerpt:
To characterize the arbitration system as unfair and a threat to retirement plans is ridiculous. In fact, the FINRA arbitration program is an exemplar of fairness in consumer arbitration. This isn’t my opinion; it’s fact.
Mr. Friedman argues “FINRA has spent years amending the rules to ensure a level playing field. “ And furthermore, “FINRA’s rules must be approved by the SEC after being published in the Federal Register and after a public comment period.” Even more, the “SEC periodically inspects the arbitration program and responds to individual complaints.”
Finally, Mr. Friedman cites favorable words from the “Consumer Federation’s Director of Investor Protection” and “a leading authority in the arbitration field” as support for FINRA’s fairness and impartiality.
In my opinion, Mr. Friedman’s arguments are superior to “FINRA’s Win is Your Loss”’s. “FINRA’s Win is Your Loss” appears to oppose arbitration generally, not just FINRA’s arbitration procedures individually. “FINRA’s Win is Your Loss” implies that the inherent privacy of arbitration proceedings alone suggests corruption and impartiality. While I sympathize with “FINRA’s Win is Your Loss”’s disdain for “take-it-or-leave-it, binding-arbitration” clauses, these clauses are hardly confined to the context of FINRA’s arbitration procedures.
What are your thoughts? Do you agree with “FINRA’s Win is Your Loss” or Mr. Friedman?
Sources:
FINRA’s website
http://www.indisputably.org/?p=4524
http://money.usnews.com/money/blogs/On-Retirement/2013/03/21/finras-win-is-your-loss
Friday, October 4, 2013
Efficiency and Legal Malpractice
This week’s reading begins by discussing the current similarities between arbitration and litigation. It continues by generally arguing that all parties involved in business-to-business arbitration proceedings must take proactive roles in ensuring arbitration is markedly different from litigation.
I found it interesting that this week’s reading seems to regard extensive discovery as a pestilence to arbitration proceedings. Moreover, it appears to take the position, by quoting certain in-house lawyers, that the goals of fairness, efficiency, and certainty carry equal weight in business-to-business arbitration proceedings.
I personally question the idea that fairness, efficiency, and certainty should carry equal weight in business-to-business arbitration proceedings. It appears facially problematic that fairness is not elevated above all other objectives; after all, what would the founders of our modern-day justice system think of such a sentiment? With the adoption of Lady Justice as the embodiment of the United States’ justice system, it does not appear likely that they would agree with it. After all, if efficiency and certainty are indeed so important, why does Lady Justice not wear a clock around her neck, or hold a rock in her hand? Jeers aside, Lady Justice wears a blindfold and carries a balanced scale. Both the blindfold and balanced scale symbolize principles of justice, or fairness. Symbols of efficiency and certainty are all but missing from Lady Justice’s composition. Nonethless, businesses are free to emphasize whatever objectives they so choose within their own arbitration provisions.
However, as this week’s reading briefly mentions, because of the threat of legal malpractice, some attorneys are weary of deviating from extensive discovery procedures, for the sake of efficiency. In my opinion this is a valid concern.
In Texas, to recover on a claim for legal malpractice, a plaintiff must prove the following: (1) the attorney owed the plaintiff a duty; (2) the attorney’s negligent act or omission breached that duty; (3) the breach proximately caused the plaintiff’s injury; and (4) the plaintiff suffered damages. Akin, Gump, Strauss, Hauer & Feld, L.L.P. v. National Dev. & Research Corp., 299 S.W.3d106, 112 (Tex. 2009).
In regard to the first element, an attorney owes his or her clients a duty. An attorney is held to the standard of care that would be exercised by a reasonably prudent attorney. Cosgrove v. Grimes, 774 S.W.2d 662, 664 (Tex. 1989).
In regard to the second element, a business burned in arbitration, because of an arbitration provision that provides for scant discovery procedures, may argue that the attorney that drafted the arbitration provision breached the aforementioned standard of care---e.g., that the attorney did not act with the diligence required under the standard of care and/or lacked the minimum degree of skill, prudence, and knowledge in regard to drafting its arbitration provision.
In regard to the third element, a business burned in arbitration, because of an arbitration provision that provides for scant discovery procedures, may argue that the foregoing breach proximately caused its injuries. In order to prove proximate cause, a plaintiff must prove both cause-in-fact and foreseeability. Rodriguez v. Klein, 960 S.W.2d 179, 184 (Tex. App.---Corpus Christi 1997, no pet.). Cause-in-fact means that the attorney’s act or omission was a substantial factor in bringing about an injury that otherwise would not have occurred. Hall v. Stephenson, 919 S.W.2d 454, 466 (Tex. App.---Fort Worth 1996, writ denied). Foreseeability means that the attorney should have anticipated the dangers his or her negligent act created. Hall, 919 S.W.2d at 466. In regard to cause-in-fact, a business burned in arbitration, because of an arbitration provision that provides for scant discovery procedures, may argue that the attorney’s drafting of such an arbitration provision was a substantial factor in bringing about the business’s loss in the arbitration proceeding. In regard to foreseeability, such a business would also argue that the attorney should have anticipated that drafting such an arbitration provision would adversely affect its interests.
In regard to the fourth element, a business burned in arbitration, because of an arbitration provision that provides for scant discovery procedures, would argue that, as a result of the drafting attorney’s negligence, it suffered damages---e.g., if an award was rendered against the business, the amount of the award.
In my opinion, the first, second, and fourth elements of a claim for legal malpractice are not too difficult to satisfy. However, the third element appears to rein in liability. As such, a claim for legal malpractice may be difficult to prove int he aforementioned scenario, but it is not impossible.
Moreover, a business burned in arbitration, because of an arbitration provision that provides for scant discovery procedures, may allege that the drafting attorney violated the Texas Disciplinary Rules of Professional Conduct. Specifically, Rule 1.01 which requires competent and diligent representation.
As an attorney, because of the threat of liability, when drafting an arbitration provision that provides for scant discovery procedures, it is highly advisable to carefully document your business client’s desire for such a clause.
I found it interesting that this week’s reading seems to regard extensive discovery as a pestilence to arbitration proceedings. Moreover, it appears to take the position, by quoting certain in-house lawyers, that the goals of fairness, efficiency, and certainty carry equal weight in business-to-business arbitration proceedings.
I personally question the idea that fairness, efficiency, and certainty should carry equal weight in business-to-business arbitration proceedings. It appears facially problematic that fairness is not elevated above all other objectives; after all, what would the founders of our modern-day justice system think of such a sentiment? With the adoption of Lady Justice as the embodiment of the United States’ justice system, it does not appear likely that they would agree with it. After all, if efficiency and certainty are indeed so important, why does Lady Justice not wear a clock around her neck, or hold a rock in her hand? Jeers aside, Lady Justice wears a blindfold and carries a balanced scale. Both the blindfold and balanced scale symbolize principles of justice, or fairness. Symbols of efficiency and certainty are all but missing from Lady Justice’s composition. Nonethless, businesses are free to emphasize whatever objectives they so choose within their own arbitration provisions.
However, as this week’s reading briefly mentions, because of the threat of legal malpractice, some attorneys are weary of deviating from extensive discovery procedures, for the sake of efficiency. In my opinion this is a valid concern.
In Texas, to recover on a claim for legal malpractice, a plaintiff must prove the following: (1) the attorney owed the plaintiff a duty; (2) the attorney’s negligent act or omission breached that duty; (3) the breach proximately caused the plaintiff’s injury; and (4) the plaintiff suffered damages. Akin, Gump, Strauss, Hauer & Feld, L.L.P. v. National Dev. & Research Corp., 299 S.W.3d106, 112 (Tex. 2009).
In regard to the first element, an attorney owes his or her clients a duty. An attorney is held to the standard of care that would be exercised by a reasonably prudent attorney. Cosgrove v. Grimes, 774 S.W.2d 662, 664 (Tex. 1989).
In regard to the second element, a business burned in arbitration, because of an arbitration provision that provides for scant discovery procedures, may argue that the attorney that drafted the arbitration provision breached the aforementioned standard of care---e.g., that the attorney did not act with the diligence required under the standard of care and/or lacked the minimum degree of skill, prudence, and knowledge in regard to drafting its arbitration provision.
In regard to the third element, a business burned in arbitration, because of an arbitration provision that provides for scant discovery procedures, may argue that the foregoing breach proximately caused its injuries. In order to prove proximate cause, a plaintiff must prove both cause-in-fact and foreseeability. Rodriguez v. Klein, 960 S.W.2d 179, 184 (Tex. App.---Corpus Christi 1997, no pet.). Cause-in-fact means that the attorney’s act or omission was a substantial factor in bringing about an injury that otherwise would not have occurred. Hall v. Stephenson, 919 S.W.2d 454, 466 (Tex. App.---Fort Worth 1996, writ denied). Foreseeability means that the attorney should have anticipated the dangers his or her negligent act created. Hall, 919 S.W.2d at 466. In regard to cause-in-fact, a business burned in arbitration, because of an arbitration provision that provides for scant discovery procedures, may argue that the attorney’s drafting of such an arbitration provision was a substantial factor in bringing about the business’s loss in the arbitration proceeding. In regard to foreseeability, such a business would also argue that the attorney should have anticipated that drafting such an arbitration provision would adversely affect its interests.
In regard to the fourth element, a business burned in arbitration, because of an arbitration provision that provides for scant discovery procedures, would argue that, as a result of the drafting attorney’s negligence, it suffered damages---e.g., if an award was rendered against the business, the amount of the award.
In my opinion, the first, second, and fourth elements of a claim for legal malpractice are not too difficult to satisfy. However, the third element appears to rein in liability. As such, a claim for legal malpractice may be difficult to prove int he aforementioned scenario, but it is not impossible.
Moreover, a business burned in arbitration, because of an arbitration provision that provides for scant discovery procedures, may allege that the drafting attorney violated the Texas Disciplinary Rules of Professional Conduct. Specifically, Rule 1.01 which requires competent and diligent representation.
As an attorney, because of the threat of liability, when drafting an arbitration provision that provides for scant discovery procedures, it is highly advisable to carefully document your business client’s desire for such a clause.
Friday, September 27, 2013
Evident Partiality
In this week’s reading, Section 10 of the FAA was discussed in depth. In particular, through Positive Software Solutions, Inc. v. New Century Mortgage Corp.,the standard for “evident partiality” was discussed.
In New Century, Plaintiff licensor moved to vacate an arbitration award, alleging the arbitrator had "evident partiality" under 9 U.S.C.S. § 10(a)(2) (Section 10 of the FAA) in that both he and counsel for defendant licensee had represented an unrelated client in an unrelated matter and no disclosure was made. A panel of the United States District Court for the Fifth Circuit affirmed the district court's vacatur of the award. The licensee's petition for rehearing en banc was granted.
The judgment of the district court was ultimately reversed and the case was remanded. The panel had acknowledged a lack of any actual bias but it substituted a reasonable impression of partiality standard for "evident" partiality in cases of an arbitrator's nondisclosure. The majority held that the better standard was that in nondisclosure cases, an award could not be vacated because of a trivial or insubstantial prior relationship between the arbitrator and the parties. In the instant case, the arbitrator and counsel for the licensee represented an unrelated client in protracted patent litigation that lasted for six years. They each signed the same ten pleadings, but they never met or spoke to each other before the arbitration and had never attended or participated in any meetings, telephone calls, hearings, depositions, or trials together. They were two of 34 lawyers, and from two of seven firms, that represented the unrelated client during the lawsuit, which ended at least seven years before the instant arbitration. The arbitrator's failure to disclose a trivial former business relationship did not require vacatur of the award.
However, New Century was not devoid of dissents. In one dissent, a judge made much of the AAA’s disclosure requirements. In the problems following New Century, the following questions were posed:
What was the standard of the disclosure required of Arbitrator Shurn under the AAA Commercial Arbitration Rules? Should the particular disclosure standard applicable under the parties’ arbitration agreement have an impact on a judicial finding of “evident partiality.” Why or why not?
In regard to the first question, according the dissent:
When Shurn was being considered to arbitrate this dispute, he was told the names of counsel and told of the importance of disclosing any relationship with them. He signed a disclosure for the American Arbitration Association saying that he had nothing to disclose of past relationship with the parties or their counsel, "direct or indirect, whether financial, professional, social or of any other kind." He was further instructed: "If any relationship arises during the course of the arbitration, or if there is any change . . . it must also be disclosed." When Shurn was appointed he was asked: "Have you had any professional or social relationship with counsel for any party in this proceeding or the firms for which they work?" He checked: "I have nothing to disclose." And he signed an oath that he would act in accord with the rules of the American Arbitration Association.
In regard to the second question, I think the particular disclosure standard applicable under the parties' arbitration agreement should have an impact on a judicial finding of "evident partiality." While I do not think such standards should be conclusive, I think they nonetheless add color to claims of “evident partiality.” In my opinion, if ignored, the particular disclosure standard applicable under the parties' arbitration agreement displays the extent of the arbitrator’s failure to disclose and, in some instances, if the extent is large enough, such failure may call impartiality into question.
In Delta Mine Holding Co. v. AFC Coal Props., the court provided the following excerpt on the particular disclosure standard applicable under the parties' arbitration agreement:
It is well-settled that only the statutory grounds in § 10(a) of the Act justify vacating an award; arbitration rules and ethical codes "do not have the force of law." Merit Ins. Co. v. Leatherby Ins. Co., 714 F.2d 673, 680 (7th Cir.), cert. denied, 464 U.S. 1009, 78 L. Ed. 2d 711, 104 S. Ct. 529 (1983); see Commonwealth Coatings Corp. v. Continental Cas. Co., 393 U.S. 145, 149, 21 L. Ed. 2d 301, 89 S. Ct. 337 (1968); Montez v. Prudential Sec., Inc., 260 F.3d 980, 984 (8th Cir. 2001). Thus, the district court erred in placing primary emphasis on whether party arbitrator Stagg violated various provisions of the Code of Ethics. "Unless there is a specific [statutory] ground for vacating an award, it must be confirmed." IDS Life Ins., 266 F.3d at 650; see ANR Coal Co., Inc. v. Cogentrix of N. C., 173 F.3d 493, 499 [13] (4th Cir.), cert. denied, 528 U.S. 877, 145 L. Ed. 2d 156, 120 S. Ct. 186 (1999). We therefore focus exclusively on those statutory grounds.
In the foregoing excerpt, the court firmly states that the violation of the particular disclosure standard applicable under the parties' arbitration agreement does not in itself provide a ground for vacatur. However, the court does not foreclose the idea that such a violation can serve as evidence of “evident partiality.”
What are your thoughts? Do you think the particular disclosure standard applicable under the parties’ arbitration agreement have an impact on a judicial finding of “evident partiality?”
Sources: the book, New Century, and Delta.
In New Century, Plaintiff licensor moved to vacate an arbitration award, alleging the arbitrator had "evident partiality" under 9 U.S.C.S. § 10(a)(2) (Section 10 of the FAA) in that both he and counsel for defendant licensee had represented an unrelated client in an unrelated matter and no disclosure was made. A panel of the United States District Court for the Fifth Circuit affirmed the district court's vacatur of the award. The licensee's petition for rehearing en banc was granted.
The judgment of the district court was ultimately reversed and the case was remanded. The panel had acknowledged a lack of any actual bias but it substituted a reasonable impression of partiality standard for "evident" partiality in cases of an arbitrator's nondisclosure. The majority held that the better standard was that in nondisclosure cases, an award could not be vacated because of a trivial or insubstantial prior relationship between the arbitrator and the parties. In the instant case, the arbitrator and counsel for the licensee represented an unrelated client in protracted patent litigation that lasted for six years. They each signed the same ten pleadings, but they never met or spoke to each other before the arbitration and had never attended or participated in any meetings, telephone calls, hearings, depositions, or trials together. They were two of 34 lawyers, and from two of seven firms, that represented the unrelated client during the lawsuit, which ended at least seven years before the instant arbitration. The arbitrator's failure to disclose a trivial former business relationship did not require vacatur of the award.
However, New Century was not devoid of dissents. In one dissent, a judge made much of the AAA’s disclosure requirements. In the problems following New Century, the following questions were posed:
What was the standard of the disclosure required of Arbitrator Shurn under the AAA Commercial Arbitration Rules? Should the particular disclosure standard applicable under the parties’ arbitration agreement have an impact on a judicial finding of “evident partiality.” Why or why not?
In regard to the first question, according the dissent:
When Shurn was being considered to arbitrate this dispute, he was told the names of counsel and told of the importance of disclosing any relationship with them. He signed a disclosure for the American Arbitration Association saying that he had nothing to disclose of past relationship with the parties or their counsel, "direct or indirect, whether financial, professional, social or of any other kind." He was further instructed: "If any relationship arises during the course of the arbitration, or if there is any change . . . it must also be disclosed." When Shurn was appointed he was asked: "Have you had any professional or social relationship with counsel for any party in this proceeding or the firms for which they work?" He checked: "I have nothing to disclose." And he signed an oath that he would act in accord with the rules of the American Arbitration Association.
In regard to the second question, I think the particular disclosure standard applicable under the parties' arbitration agreement should have an impact on a judicial finding of "evident partiality." While I do not think such standards should be conclusive, I think they nonetheless add color to claims of “evident partiality.” In my opinion, if ignored, the particular disclosure standard applicable under the parties' arbitration agreement displays the extent of the arbitrator’s failure to disclose and, in some instances, if the extent is large enough, such failure may call impartiality into question.
In Delta Mine Holding Co. v. AFC Coal Props., the court provided the following excerpt on the particular disclosure standard applicable under the parties' arbitration agreement:
It is well-settled that only the statutory grounds in § 10(a) of the Act justify vacating an award; arbitration rules and ethical codes "do not have the force of law." Merit Ins. Co. v. Leatherby Ins. Co., 714 F.2d 673, 680 (7th Cir.), cert. denied, 464 U.S. 1009, 78 L. Ed. 2d 711, 104 S. Ct. 529 (1983); see Commonwealth Coatings Corp. v. Continental Cas. Co., 393 U.S. 145, 149, 21 L. Ed. 2d 301, 89 S. Ct. 337 (1968); Montez v. Prudential Sec., Inc., 260 F.3d 980, 984 (8th Cir. 2001). Thus, the district court erred in placing primary emphasis on whether party arbitrator Stagg violated various provisions of the Code of Ethics. "Unless there is a specific [statutory] ground for vacating an award, it must be confirmed." IDS Life Ins., 266 F.3d at 650; see ANR Coal Co., Inc. v. Cogentrix of N. C., 173 F.3d 493, 499 [13] (4th Cir.), cert. denied, 528 U.S. 877, 145 L. Ed. 2d 156, 120 S. Ct. 186 (1999). We therefore focus exclusively on those statutory grounds.
In the foregoing excerpt, the court firmly states that the violation of the particular disclosure standard applicable under the parties' arbitration agreement does not in itself provide a ground for vacatur. However, the court does not foreclose the idea that such a violation can serve as evidence of “evident partiality.”
What are your thoughts? Do you think the particular disclosure standard applicable under the parties’ arbitration agreement have an impact on a judicial finding of “evident partiality?”
Sources: the book, New Century, and Delta.
Thursday, September 19, 2013
Buckeye and Progeny
In Buckeye Check
Cashing, Inc. v. Cardegna (Buckeye),
this week’s reading addressed whether “the doctrine of Prima Paint extend[s] to a scenario where a contract is allegedly
void because it is illegal --- even criminal --- under state law.” For purposes of recap, Prima Paint's doctrine is that an arbitrator must
decide a challenge to the enforceability of a contract when the contract has an
arbitration clause, unless the challenge is to the arbitration clause
itself.
In Buckeye, John
Cardegna signed a contract for a loan from Buckeye Check Cashing. The contract contained a clause in which
Cardegna agreed to resolve any controversies concerning the loan through
arbitration. Sometime later, Cardegna
sued Buckeye, claiming that the conditions for the loan stipulated by the
contract were illegal; specifically, that the loan rates involved in the
contract were usurious. Buckeye filed a
motion to compel to have the case
resolved by arbitration, as required by the contract. Cardegna countered that the contract as a
whole was illegal and that the arbitration clause was therefore not
enforceable. The court agreed and ruled
for Cardegna.
On appeal, the state appeals court reversed, holding that
the FAA, as interpreted by the Supreme Court, allows arbitration clauses
to be enforced even if they are part of otherwise invalid contracts. The appeals court relied on the U.S. Supreme
Court's decision in Prima Paint. The Florida Supreme Court disagreed with the
appeals court's use of Prima Paint,
however, because the contract in that case had been merely voidable, while the
contract in Cardegna's case was actually illegal, or void. The Florida Supreme Court therefore reversed,
ruling in favor of Cardegna.
The Supreme Court granted certiorari. On appeal, the
Court decided whether, under the FAA, a party may avoid arbitration by arguing
that the contract in which the arbitration clause is contained is illegal?
The Court ruled that challenges
to the legality of a contract as a whole must be argued before the arbitrator
rather than a court. The opinion
explained "unless the challenge is to the arbitration clause itself, the issue
of the contract's validity is considered by the arbitrator in the first
instance." The Court held that the
Florida Supreme Court had been wrong to rely on a distinction between void and
merely voidable contracts, because the word "contract" in the FAA
includes contracts later found to be void.
In the notes and questions section following the Buckeye opinion, this week’s reading
provides the following background information and asks the following question:
A contract between Ferrer, who appears on television as
“Judge Alex,” and Preston, an entertainment lawyer, required arbitration of
“any dispute . . . relating to the [contract] terms . . . of the breach,
validity, or legality thereof . . . in accordance with the [AAA] Rules.” When Preston demanded arbitration, seeking
fees allegedly due under the contract, Ferrer petitioned the California Labor
Commissioner for a determination that the contract was invalid and
unenforceable under the California Talent Agencies Act because Preston had
failed to acquire a license as a talent agent.
Should a court enforce the arbitration agreement or direct the parties
to proceed before the Labor Commissioner?
Before addressing the foregoing question, it is interesting to note that “Judge Alex” is not actually a judge,
but is rather an arbitrator. In 1995, he
became an Associate Administrative Judge in the Criminal Division of the
Eleventh Judicial Circuit, where he spent ten years presiding over criminal
cases. He also presided as an appellate
judge over appeals from the Miami-Dade County Court, County Commission, and
numerous other governmental bodies. In
1999, he was elected to serve as District Representative to the Executive Committee of the Conference of
Circuit Court Judges, a position he held until 2001. He is a member of the Florida Bar and the
District of Columbia Bar Association. He
has been an adjunct professor at Florida
International University, and teaches media relations to other
judges at The New Judges College and The College of Advanced Judicial Studies,
as well as at various national conferences.
With Buckeye’s
holding in mind, before reading the case, I surmise that the answer to the
above question is that a court should enforce the arbitration
agreement. After all, in Buckeye, the court stated: "unless the challenge is to the
arbitration clause itself, the issue of the contract's validity is considered
by the arbitrator in the first instance."
The foregoing excerpt does not appear to provide a loophole for the fact
pattern presented above; rather, it very broad.
As expected, the court ruled that the answer to the above question is that a court should enforce the arbitration agreement.
It is interesting to note that Buckeye was decided while Preston's appeal was pending. Therefore, not surprisingly,
Preston argued that under Buckeye the trial court had erred in enjoining
the arbitration, because the arbitrator, not the Labor Commissioner, should
decide the validity of the contract. The
state appellate court disagreed, distinguishing Buckeye on the ground
that it did not apply to decisions of administrative agencies.
The Supreme Court granted certiorari and
reversed. The Court said that the key
question was “who decides whether Preston acted as personal manager” (in which
case the contract would be valid) “or as talent agent” (in which case the
contract would be void). Preston argued
that, under Buckeye, that was a question for the arbitrator; Ferrer
insisted that the Labor Commissioner should get first crack at it. The Supreme Court agreed with Preston.
Do you buy the holding of Buckeye and its progeny? Should voidable and void contracts be treated differently? Reflect on a phrase from the reading: “to enforce an agreement to arbitrate in a
contract challenged as unlawful[, or void,] ‘could breathe life into a contract
that not only violate state law, but also is criminal in nature . . . .’”
Sources:
The Book;
http://en.wikipedia.org/wiki/Alex_Ferrer
Buckeye
Preston
Thursday, September 12, 2013
The FAA and the RUAA
This
week’s reading discusses both the FAA and the RUAA. In this blog entry, the FAA and the RUAA will
be compared and contrasted. First, brief
introductions of both the FAA and the RUAA are warranted.
The FAA is described as “relatively brief” and applies where
the parties in arbitration engage in interstate commerce. “The FAA is aimed at regulating the interface
between the private forum of arbitration and the courts, with primary emphasis
on the judicial enforcement of agreements to arbitrate and of resulting
arbitration awards. It promotes the
autonomy of parties by enforcing their agreements to arbitrate. It also serves channeling, evidentiary, and
cautionary functions by judicially enforcing only those agreements evidenced by
a writing or record, and against which no valid defense can be asserted. Finally, it establishes supplementary or
default terms for different aspects of arbitration processes.”
On the other hand, the RUAA, a model arbitration act adopted
by "[t]he overwhelming majority of states,” is described as “a much lengthier,
more detailed, and more prescriptive statutory framework for arbitration. These include a number of provisions setting
forth default procedural elements---some of which are non-waivable by parties."
With the above introductions in mind, we can already compare
and contrast the FAA and the RUAA on a few points. Both the FAA and the RUAA are sources of
arbitration law. The FAA is relatively
brief, while the RUAA is more detailed.
The FAA is federal law, while the RUAA is state law (for states that
have adopted it); the FAA doesn’t apply where the parties in arbitration do not
engage in interstate commerce.
Ok, so we can identify basic similarities and differences
between the FAA and the RUAA, what about specific statutory similarities and
differences? In order to identify these
similarities and differences, arbitrability under the FAA will be compared and
contrasted with arbitrability under the RUAA as adopted by Utah.
First, Section 78-31a-107(1) of the Utah RUAA restates a
central proposition: that agreements to
arbitrate are "enforceable ... except upon a ground that exists at law or
in equity for the revocation of contract."
This is also a central to the FAA; it’s expressed in Section 2 of the
FAA.
Second, Section 78-31a-107(2) and (3) defines who decides the
important issue of arbitrability when the parties themselves have not decided. Matters of substantive arbitrability; i.e.,
"whether an agreement to arbitrate exists or a controversy is subject to
an agreement to arbitrate," are for the courts to decide. Matters of procedural arbitrability; i.e.,
"whether a condition precedent to arbitrability has been fulfilled,"
are for the arbitrator to decide. While
not expressly announced in the FAA’s statutory framework, this dichotomy about
who determines substantive and procedural arbitrability follows the approach
under the FAA; this is shown in First
Options of Chicago, Inc. c. Kaplan, as reproduced in the book.
Third, although the general rule in section 78-31a-107(2) is
that the court decides substantive arbitrability, the parties may agree that
the arbitrator shall make this determination. Arbitration organizations, such as the
American Arbitration Association and the International Chamber of Commerce,
provide that arbitrators rather than courts make the initial determination of
substantive arbitrability. Again, this
does not differ from the FAA; this is again shown in First Options of Chicago, Inc. c. Kaplan, as reproduced in the
book.
Fourth, Utah Code Ann. subsection 78-31a-127(1) defines
jurisdiction to enforce arbitration agreements.
Section 78-31a-127(1) grants power to enforce an arbitration agreement
in Utah courts with personal and subject matter jurisdiction over the
controversy. This provision appears more
detailed than the FAA; the FAA does not attempt to define a court’s jurisdiction,
rather it generally speaks of the enforceability of an arbitration agreement in
Section 2. However, decisions under the
FAA have made “agreements to arbitrate fully enforceable in both federal and
state courts.”
Fifth, Section 78-31a-127(2) deals with jurisdiction to enter
judgment on an arbitration award. It
provides that an agreement providing for arbitration in a particular state
confers "exclusive jurisdiction" on the courts of that state to enter
judgment. Section 78-31a-123 allows a
party to file a motion with to the court to confirm an award. The FAA also speaks of jurisdiction to enter
judgment on an arbitration award; however, the FAA only does so if the parties
agree to entry.
As shown above, the RUAA is certainty more detailed than
the FAA, but it does not appear to conflict with the FAA at any point; it
appears to merely codify judicial decisions and enact rules that expand upon,
but don’t otherwise disagree with, the FAA. This
is not surprising with preemption concerns looming over head: Why would the drafters of a model act, weary
of preemption, roll the dice in drafting an act that conflicts with the
FAA? It wouldn’t (at least intentionally). Or as the Pennsylvania
Bar Associations puts it, “[t]he RUA continues the goal . . . to provide
uniformity in law as it aligns state law with federal law in order to decrease
the potential for litigation on preemption grounds.”
Which do you prefer, the FAA or the RUAA? A bare-bones statutory framework, or a more
detailed statutory framework? What are
the pros and cons of each?
Sources:
The
Book;
The
FAA;
http://le.utah.gov/~2002/bills/sbillenr/sb0171.htm;
http://webster.utahbar.org/barjournal/2003/12/utahs_revised_uniform_arbitrat.html; and http://www.pabar.org/public/committees/dispreso/PA%20should%20adopt%20the%20RUAA.pdf
Thursday, September 5, 2013
Avoiding Judicial Intrusion or Fairness?
According
to this week’s reading, “[t]he form of [an arbitration] award will vary
depending on the parties’ agreement and applicable rules; there may or may not
be a published rationale or opinion along with the [arbitration] award. The issuance of a ‘bare’ [arbitration] award,
limited to a straightforward declaration of the panel’s grant or denial of
relief, has long been viewed as a bulwark against judicial intrusion into the
realm of arbitration.”
While
a straightforward declaration of a panel’s grant or denial of relief may
provide a bulwark against judicial intrusion, it appears the lack of a
published rationale or opinion along with an arbitration reward implicates
fairness concerns. After all, in
courtroom proceedings, a well-reasoned, detailed opinion is a
required hallmark of fairness.
Arbitrators are not infallible. PMA Capital Ins. Co. v. Platinum Underwrites
Bermuda, Ltd. provides an example of an unfair arbitration award.
PMA Capital
Insurance Company (“PMA”) and Platinum Underwriters Bermuda, Ltd. (“Platinum”)
entered into a reinsurance agreement that contained, among other things, a
“deficit carry forward” provision. A
dispute arose between the parties concerning the validity and scope of this
provision, which was submitted to arbitration. After a full hearing on the merits, a panel of
arbitrators issued a one-page award in favor of Platinum, which stated that the
“deficit carry forward” provision was “eliminated” from the reinsurance
agreement, and ordered PMA to pay $6 million pursuant to that provision. The arbitrator’s award did not state any
reason or explanation for its decision.
PMA moved to
vacate or, in the alternative, modify the award on the grounds that the
arbitrators’ decision was contrary to both the relief sought by the parties in
the arbitration and the plain language of the reinsurance agreement.
The U.S. District
Court for the Eastern District of Pennsylvania granted PMA’s motion to vacate
on two bases. First, the Court found
that the award was not rationally derived from the reinsurance agreement,
because the arbitrators “wrote out” a key provision in that agreement without
any explanation. The Court noted that
the “honorable engagement clause” in the reinsurance agreement, though
providing the arbitrators with broad discretion to order certain remedies they
deemed appropriate, and allowing it to abstain from following the strict rules
of law, did not give the arbitrators authority to re-write the contract. Second, the Court found that the award could
not be rationally derived from the parties’ submissions, because neither party
asked for the arbitrators to eliminate the “deficit carry forward” provision,
or argued that any money was currently due under that provision.
Accordingly, applying the standard set forth
by Section 10(a)(4) of the Federal Arbitration Act, the Court held that the award
was “completely irrational” and should be vacated.
This week’s reading
enumerated the following non-statutory grounds for vacatur: “’manifest disregard of the law,’
‘irrationality,’ ‘arbitrariness and capriciousness,’ [and] ‘public policy.’ In my opinion, if the foregoing grounds are
present, vacatur is certainly warranted. W
With
the preceding paragraphs in mind, it is unsurprising that this week’s reading
explained while,“[t]traditionally, arbitration awards have tended to be issued
without an accompanying rationale or explanation[,]” “[t]oday, commercial
arbitration agreements often call for arbitrators to reveal their reasoning.”
What’s more important to you, avoiding judicial intrusion or
fairness?
PMA Capital Ins. Co. v. Platinum
Underwriters Bermuda, Ltd., 659 F. Supp. 2d 631 (E.D. Pa. 2009) aff'd,
400 F. App'x 654 (3d Cir. 2010)
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