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January 30, 2012

Supreme Court Enforces "Right to Sue" Arbitration Agreement

The U.S. Supreme Court recently held that the Credit Repair Organizations Act (CROA), which requires credit-repair organizations to inform consumers that they have the “right to sue” for violations of that statute, does not prevent credit-repair organizations from requiring consumers to arbitrate their claims. Compushare Credit Corp. v. Greenwood, No. 10-946 (Jan.10, 2012). Justice Scalia wrote the opinion, Justice Ginsberg was the lone dissenter, and Justice Sotomayor authored a concurrence joined by Justice Kagan.

The CROA requires a credit-repair organization to inform its customers in writing that they “have a right to sue a credit repair organization that violates [CROA].” The plaintiffs argued that under this language, mandatory arbitration provisions for CROA claims are not enforceable and a plaintiff must have the right to proceed in court. The district court for the Northern District of California and the Ninth Circuit agreed. The Supreme Court did not.

The Court held that “because the CROA is silent on whether claims under the Act can proceed in an arbitral forum, the [Federal Arbitration Act] requires the arbitration agreement to be enforced according to its terms.” The Court ruled that any congressional exclusion of particular classes of contracts from arbitration must be clear. According to Justice Scalia, the “right to sue” language in the CROA does not clearly provide consumers “with a right to bring an action in court.” Instead, “it imposes an obligation on credit repair organizations to supply consumers with a specific statement (in quotation marks) in the statute.” The Court noted that it “repeatedly recognized that contractually required arbitration of claims satisfies the statutory prescription of liability in court.”

In her dissent, Justice Ginsberg disagreed with Justice Scalia’s interpretation of the CROA. In her opinion, the statute provides a consumer with a non-waivable right to sue in court. Justice Sotomayor, in her concurrence, stated that although she disagrees that Congress must explicitly state that a particular type of statutory claim is excluded from arbitration, in this case, nothing in the CROA’s legislative history or its purpose indicates that claims cannot be arbitrated.

Keywords: Credit Repair Organization, Right to Sue

—Alison Talbert Schwartz, Novack and Macey, Chicago, IL

January 25, 2012

Arbitration Agreement Prohibiting Employment Class Actions Invalid

The National Labor Relations Board recently held that it is a violation of federal law to require employees to sign arbitration agreements that prevent them from pursuing joint, class, or collective claims in an arbitration proceeding, or in court. D.R. Horton, Inc., 357 NLRB No. 184 (Jan. 3, 2012).  

As a condition to employment, D.R. Horton required employees to sign a contract agreeing to arbitrate all employment claims, and to waive all rights to pursue class or collective claims in any forum. D.R. Horton asserted the contract as a defense to a class-wide arbitration proceeding brought against it under the Fair Labor Standards Act.

The board found that D.R. Horton’s agreement unlawfully restricts employees from participating in “concerted activity,” a right expressly protected by section 7 of the National Labor Relations Act (NLRA). According to the board, requiring an employee to sign the agreement as a condition to employment constitutes an unfair labor practice because it precludes employees from pursuing class or joint actions in any forum. Thus, it “clearly and expressly bars employees from exercising substantive rights that have long been held protected by Section 7 of the NLRA.”

The board also held that its decision does not conflict with the Federal Arbitration Act (FAA), which generally allows employment-related arbitration agreements. The board relied on section 2 of the FAA, which provides that arbitration agreements may be invalidated upon any “grounds as exist in law or equity for the revocation of any contract.” The board also relied on Supreme Court precedent holding that the FAA protects the rights of parties to resolve statutory claims through arbitration as long as “a party does not forgo the substantive rights afforded by [a] statute.” The board, however, found that the agreement’s “categorical prohibition of joint, class or collective federal state or employment law claims in any forum directly violates the substantive rights vested in employees under Section 7 of the NLRA.”

The board noted that its ruling is narrow in that it applies only to agreements barring protected, concerted activity for “employees,” as defined in the NLRA. It also stated that an agreement would be enforceable if it allows an employee to pursue class or collective claims in a judicial forum, but requires that individual claims be resolved through arbitration.

The board’s decision may be challenged on the grounds that it conflicts with the Supreme Court’s decision in AT&T Mobility v. Concepcion, 131 S. Ct. 1740 (2011). In Concepcion, the Court held that a California law prohibiting class-action waivers in consumer arbitration agreements was preempted by the FAA. Therefore, under Concepcion, class-action waivers in consumer agreements are enforceable. It remains to be seen whether the board’s decision conflicts with Concepcion.

Keywords: NLRA, FAA, employment-related agreements, AT&T Mobility

—Alison Talbert Schwartz, Novack and Macey, Chicago, IL

January 13, 2012

Supreme Court Invites Piecemeal Litigation and Procedural Gamesmanship

Investors in Madoff feeder funds sued the outside auditor of the entities that had managed the funds (KPMG) for negligent misrepresentation, violation of the Florida Deceptive and Unfair Trade Practices Act (FDUTPA), professional negligence, and aiding and abetting a breach of fiduciary duty. Plaintiffs' basic theory was that KPMG had failed to use proper auditing standards with respect to the financial statements it had prepared for the managing entities and that those improper audits led to misrepresentations about the health of the funds and resulted in plaintiffs' investment losses.

KPMG moved to compel arbitration of the investors’ claims based on the audit services agreement it had with the firms that had managed the subject funds. The agreement provided that "[a]ny dispute or claim arising out of or relating to . . . the services provided [by KPMG] . . . (including any dispute or claim involving any person or entity for whose benefit the services in question are or were provided) shall be resolved" either by mediation or arbitration. Petition for Writ of Certiorari, app. G, at 63a, KPMG LLP v. Cocchi, No. 10-1521 (2011). The trial court denied KPMG's motion and the Florida Court of Appeal affirmed, noting that "[n]one of the plaintiffs . . . expressly assented in any fashion to [the audit services agreement] or the arbitration provision." KPMG LLP v. Cocchi, 51 So. 3d 1165, 1168 (Fla. Dist. Ct. App. 2010). Thus, the Court of Appeal found that the arbitration clause could only be enforced against the plaintiff investors if their claims were derivative and arose from the services KPMG had provided to the managing entities. Applying Delaware law, which both sides agreed was applicable, the Court of Appeal concluded that the negligent misrepresentation and FDUTPA claims were direct claims and thus not arbitrable. Based on that finding, the Court of Appeal refused to compel arbitration of any of the claims stated in the complaint.

In a per curiam opinion, the U.S. Supreme Court reversed the decision by the Florida Court of Appeal. KPMG LLP v. Cocchi, 132 S. Ct. 23 (Nov. 7, 2011). The Court held that when a complaint contains multiple claims, the court must address the arbitrability of each claim and that arbitrable claims must be sent to arbitration even if such a ruling leads to piecemeal litigation. Quoting its decision in Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213 (1985), the Court explained that the Federal Arbitration Act "leaves no place for the exercise of discretion" and requires courts to compel arbitration of pendent arbitrable claims "even when the result would be the possibly inefficient maintenance of separate proceedings in different forums." 132 S. Ct. at 217.

The Cocchi decision sends a clear message to state and federal courts that they must enforce valid agreements to arbitrate and that "[t]he failure to do so is subject to immediate review." Southland Corp. v. Keating, 465 U.S. 1, 6–7 (1984). Because the lower court had not addressed the arbitrability of the plaintiffs’ professional negligence and breach of fiduciary duty claims, the Court found that it had "failed to give effect to the plain meaning of the Act" and its requirement that arbitrable disputes be sent to arbitration. The Court thus remanded the case with instructions to "examine the remaining claims to determine whether either requires arbitration."

The Cocchi decision may be the correct result in terms of the law as it relates to arbitrability and the healthy regard that is to be given to the federal policy favoring arbitration. Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 631 (1985); Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24–25 (1983). But the decision is at odds with the cornerstones of arbitration: namely, to provide dispute resolution that offers finality, efficiency, and economy. Piecemeal litigation offers anything but the foregoing. Moreover, requiring non-signatories to pursue their claims in both a judicial and arbitral forum because they sue defendants who may have a contract relationship that includes an arbitration clause will undoubtedly have a limiting effect on how such plaintiffs plead their cases and who they choose to name (or dismiss) as defendants, and will most likely invite procedural gamesmanship.

Keywords: arbitrability, Federal Arbitration Act (FAA), motion to compel, non-signatory, pendent claims

—Rebecca Callahan, Callahan Dispute Resolution, Newport Beach, CA

January 12, 2012

California Class Action Survives under the Unconscionability Doctrine

After the U.S. Supreme Court's ruling in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (Apr. 27, 2011), federal district courts around the country used its authority to enforce arbitration agreements with class action waivers. In November, the California Court of Appeal breathed some life into the class action suit when it affirmed a trial court order striking down an arbitration clause that included a class action waiver, in Sanchez v. Valencia Holding Co., LLC, No. B228027 (Cal. Ct. App. 2d Dist. Nov. 23, 2011), a consumer class action against a defendant car dealer.

In Sanchez, the car dealer moved to compel arbitration under an arbitration clause hidden in the sales contract between the dealer  and the plaintiff, Sanchez, who had previously purchased a car from the dealer. Besides a class action waiver, the arbitration clause in the sales contract included a "poison pill" provision that would have rendered the entire arbitration clause ineffective if the class action waiver were found unenforceable.

Both the trial court and the California Court of Appeal ruled that the class action waiver was unenforceable, but they based their decisions on different grounds. Relying on section 1281 of California's Code of Civil Procedure, the trial court concluded that the class action waiver was unenforceable because consumers are statutorily entitled to bring class action suits under the state's Consumers Legal Remedies Act, Cal. Civ. Code § 1750. On these grounds, the trial court invalidated the entire arbitration clause, consistent with the sales contract’s severance provision.

The Court of Appeal agreed that the entire arbitration clause was unenforceable but based its decision on the unconscionability doctrine instead, recognizing that generally applicable contract defenses such as unconscionablity may also be used to invalidate arbitration agreements. Outlining the presence of both the procedural and substantive elements of unconscionability in the sales contract’s arbitration clause, the Court of Appeal found the necessary authority to strike it down.

This ruling does not conflict with Concepcion. The Court of Appeal pointed out that California's unconscionability doctrine could still be used to invalidate entire arbitration provisions, which the U.S. Supreme Court did not address in Concepcion, a decision that affected only class action waivers in conflict with arbitration provisions and the Federal Arbitration Act, 9 U.S.C. § 1.

Keywords: unconscionability doctrine, class action, waiver, arbitration clause, poison pill

—Jacqueline A. Chamberlain, Esq. Miami, FL

January 11, 2012

The Ten Paces: Guaranteed Arbitration Award in Six Months

There was a time when dispute resolution was fairly simple. Think David and Goliath, Hamilton and Burr. More recently, it might have been on a dusty main street at high noon in Arizona or Texas. Ten paces, turn and shoot.

My how slow and taxing the U.S. dispute resolution process has become. Whether it is litigation or arbitration, the complaints are the same—slow and costly. See “International Arbitration Loses Its Grip” (“expense and time are not perceived as advantages [of arbitration]; indeed, they were the two most commonly cited disadvantages of the process.”)

While 10 paces, turn and shoot certainly has a finality that is attractive (assuming you win), the dispute resolution process should be a reasoned process that allows for due process. First, that is likely what clients want. Second, these concepts are required if the courts are needed for the recognition and enforcement of arbitration awards.

So drawing on my experience in dispute resolution (both in the United States and abroad), I have come up with 10 paces that, if parties agree to, guarantees an arbitration award in six months.

The following are key to the success of this approach: (1) the arbitrator must commit to the schedule, because fixed fee (as opposed to hourly) has no incentive to prolong arbitration; (2) key issues are collectively identified early on; (3) U.S.-style discovery is curtailed; and (4) borrowing from our civil friends, the concept of witness statements to make the process even more focused and efficient.

Keywords: dispute resolution, arbitration award, schedule

—J. Chad Mitchell, Summit Law Group, PLLC

December 20, 2011

How Reasoned Must a "Reasoned Award" Be?

The Eleventh Circuit decided that the arbitral panel that resolved a dispute over the construction of a yacht provided a sufficiently "reasoned award" as agreed to by the parties and did not exceed their powers under the arbitration agreement under Section 10(a)(4) of the Federal Arbitration Act (FAA). Cat Charter, LLC v. Schurternberger, No. 10-11674 (11th Cir. July 13, 2011).

After the preliminary hearing in this dispute, the panel issued a report and scheduling order, which provided in part that the parties would agree on the form of the ultimate award. The parties informed the panel of their desire for a "reasoned award." The panel then issued their award in favor of the claimants.

In the six paragraph of the award, the panel stated as follows: (1) claimants had proven two of their claims (for violation of the Florida Deceptive and Unfair Trade Practices Act and breach of contract) "by the greater weight of the evidence"; (2) all other claims and counterclaims were denied; (3) claimants were entitled to attorney fees, arbitration expenses, and costs; and (4) on claimants' civil theft claim, there were sufficient factual issues "relating to missing resin and the cost of the skiff" to warrant a denial of attorney's fees to respondents on that claim, even though the panel denied the underlying claim by claimants.

Claimants moved the district court to confirm the award, and respondents moved to vacate the award, arguing that the panel exceeded its authority by not issuing a "reasoned award" as the parties had agreed upon. The district court agreed with the respondents, and vacated the award. Cat Charter LLC v. Schurtenberger, 691 F. Supp. 2d 1339, 1344–45 (S.D. Fla. 2010).

The Eleventh Circuit reversed the district court. First, the Eleventh Circuit addressed the question of what constitutes a "reasoned award." Noting that the FAA, the arbitration rules, and the parties' contract do not define the term, the court analyzed the nature of arbitral awards in general. On one end of the spectrum lies the standard award, in which the arbitrator simply announces the result, and on the other end lies the award in which the arbitrator makes "findings of fact and conclusions of law." United Steelworkers v. Enterprise Wheel & Car Co., 363 U.S. 593, 598, 80 S. Ct. 1358, 1361, 4 L. Ed. 2d 1424 (1960); ARCH Dev. Corp. v. Biomet, Inc., No. 02 C 9013, 2003 WL 21697742, at *4 (N.D. Ill. July 30, 2003). The court held that a "reasoned award" therefore was "something short of findings and conclusions but more than a simple result." Sarofim v. Trust Co. of the W., 440 F.3d 213, 215 n.1 (5th Cir. 2006). The court then also looked at the dictionary definition of "reasoned" and concluded that for something to be reasoned, it would be "marked by a detailed listing or mention of reasons." Webster's Third New Int'l Dictionary: Unabridged (1993).

Armed with this definition, the court held that the panel's award survived scrutiny under Section 10(a)(4) of the FAA. While it could have had more detail, the court held that a "reasoned award" should be interpreted broadly and flexibly so that the parties ultimately receive what they bargained for—a speedy, fair resolution of their dispute.

Although the decision offers some insight as to what a "reasoned award" means, the flexibility inherent in the Eleventh Circuit's analysis will no doubt invite parties to act more strategically and prospectively at the contractual drafting stage to make it abundantly clear that if they want a full-fledged award with findings of fact and conclusions of law, they should not assume that a request for a "reasoned award" will suffice.

Keywords: reasoned, award, vacated

—Manjit Gill, Tenex Health, Inc., Miami, FL

December 7, 2011

Changes and Potential Impact on ICC's Revised Rules

This September, the International Chamber of Commerce (ICC) published revisions to its arbitration rules. Unless otherwise agreed to by the parties, the revised rules will apply to any ICC proceedings beginning on or after January 1, 2012. The revised rules enhance the roles of the various ICC bodies (the ICC court and the secretariat, for example), but do not essentially alter their roles in case administration under ICC rules. Intended to increase transparency, clarity, and efficiency (both in regards to cost and time) in the arbitral process, the revisions affect most of the 41 rules and include both procedural and substantive changes. The revised rules respond to the current practices in international arbitration (they were last revised in 1998) while at the same time reaffirming and clarifying the ICC's sole authority in administering arbitration under the ICC rules. This can be seen clearly in the new language of Article 1(2) rejecting "hybrid" arbitration clauses in which the parties agree to arbitration under ICC rules but to administration by an arbitral institution other than the ICC. 

Considering the potential impact these revisions will have on future cases under the ICC, some of the other more significant revisions include the following:

It should also be noted that the revised rules, like the 1998 rules, allow parties to opt out of some provisions while others remain mandatory and binding on parties. These opt-out provisions include those concerning multiple contracts, amiable compositeur, confidentiality, conservatory and interim measures, evidence, and the availability of an emergency arbitrator. The impacts of some of these revisions on future cases are inevitable, such as that rejecting hybrid clauses and the inclusion of investor-state disputes, while the effects of other revisions remain less foreseeable.

Keywords: international litigation, treaties, opt-out provisions

—Jacqueline A. Chamberlain, Esq. Miami, FL

December 2, 2011

Court Rules Against Some Nursing Home Lawsuits Limits

In a pair of rulings this month, the Florida Supreme Court rejected certain crucial parts of arbitration agreements between nursing homes and their residents that would have limited legal damages (punitive and pain-and-suffering) against nursing homes and waived residents' rights to court resolution. Gessa v. Manor Care of Florida, Inc.and Shotts v. OP Winter Haven, Inc. Reasoning that these parts were against public policy, the rulings do not prohibit the use of arbitration agreements but do place limitations on the way these agreements can be used. 

These rulings were decided in the midst of statewide controversy in the nursing-home industry over whether such arbitration agreements are even valid. While the dissenting opinion in one of these rulings supports the nursing home industry's view that arbitration agreements help to cut legal costs and allow for quick resolution of disputes, the majority not only emphasized that judges—not arbitrators—should decide whether these arbitration agreements are valid, but also that arbitration agreements could not remain effective by simply severing its parts that violate public policy.

Keywords: arbitration, pain and suffering, damage limits

—Jacqueline A. Chamberlain, Esq. Miami, FL

November 22, 2011

Court Cannot Enforce Arbitration Subpoenas Outside Its District

An Illinois district court recently held that a district court lacks authority to enforce an arbitration subpoena that requires a witness to appear outside its district. Alliance Healthcare Services, Inc. v. Argonaut Private Equity, LLC, --- F.Supp.2d --- 2011 WL 3489807 (N.D. Ill. Aug. 9, 2011).

Alliance Healthcare Services, Inc. (Alliance) initiated arbitration arising from its purchase of a limited partnership. The arbitration was conducted in Chicago before a panel of three arbitrators.

Alliance hired Grant Thornton LP (GT) to conduct due diligence for the purchase. GT is headquartered in Chicago, but the GT employee overseeing the due diligence lived in San Francisco. Respondents obtained arbitration subpoenas from the arbitrators directing GT and its employee to testify and produce documents at a preliminary hearing before one of the three arbitrators in San Francisco. Respondents chose San Francisco for the GT employee's convenience. GT did not comply with the subpoenas, and respondents moved the Illinois district court to enforce them.

The subpoenas were issued under Section 7 of the Federal Arbitration Act (FAA), which empowers arbitrators to "summon in writing any person to attend before them . . . as a witness" and to order such person to bring "any book record, document, or paper which may be deemed material as evidence in the case." Under Section 7, if a person does not obey the summons, "the U.S. district court for the district in which such arbitrators, or a majority of them, are sitting may compel the attendance of such person or persons . . . in the same manner provided by law for securing the attendance of witnesses . . . in the courts of the United States."

The district court held that it lacked authority to enforce the arbitration subpoenas. The court noted that, under Section 7, its ability to enforce arbitration subpoenas is restricted by the territorial limits of Rule 45 of the Federal Rules of Civil Procedure. The arbitration subpoenas were unenforceable under Rule 45 for two reasons. First, in violation of Rule 45(a)(2), the subpoenas were not issued from the district court where the arbitration hearing was being held. Instead, they were issued by the Northern District of Illinois for a hearing to be held in the Northern District of California. Second, the subpoenas were served more than 100 miles away from the Northern District of Illinois, and, thus, outside the territory of the Illinois court.

The respondents argued that the court's refusal to enforce the subpoenas created a "gap" in the FAA and prevented the enforcement of all arbitration subpoenas that compel a witness to appear out of state. On the one hand, Section 7 requires that arbitration subpoenas be enforced in the district court where the arbitrators are located. On the other hand, a federal court's power is limited by Rule 45, and it cannot enforce subpoenas that compel witnesses to appear for hearings outside its district. Relying on the Second Circuit's opinion in Dynegy Midstream Services, LP v. Trammochem, 451 F.3d 89 (2d Cir. 2006), the district court agreed with respondents that the FAA, indeed, contains a "gap," but that it is up to Congress, not a court, to "fill such gaps." Thus, the court refused to enforce the subpoenas in their current form.

The district court noted that the respondents had one remedy, albeit a partial one. GT was headquartered in Chicago, the situs of the arbitration. Respondents could issue a subpoena compelling GT to produce documents in Chicago. That subpoena would be enforceable in the Northern District of Illinois. Indeed, "if a court has jurisdiction over a person or entity—as it does with respect to GT—Rule 45 permits the court to require that person or entity to produce records pursuant to a subpoena even if they are not physically located in the District in which Rule 45 permits the subpoena to be served." Thus, even though respondents could not obtain the employee's testimony given his residence, the FAA still allowed them to obtain GT's due diligence records, even though they were located in San Francisco.

—Alison Talbert Schwartz, Novack and Macey, Chicago, IL

November 22, 2011

Delaware Chancery Court Arbitration Program Sued

The case is styled Delaware Coalition for Open Government v. The Honorable Leo E. Streine, Jr., and was filed in federal district court in Delaware on October 25, 2011. Plaintiff, the Delaware Coalition for Open Government (DCOG), alleges that the chancery judges have instituted closed-door judicial proceedings that violate the presumptive right of access to judicial proceedings and records in civil and criminal cases—rights guaranteed by the Constitution's first and fourteenth amendments. It asks that the program be struck down and that all proceedings to date be unsealed.

As background, the Delaware legislature several years ago passed a law permitting the chancery court to conduct private arbitrations. "Arbitration Proceedings for Business Disputes" (10-349). The Delaware Supreme Court then adopted implementing rules. The program is voluntary. The chancery court charges $12,000 for filing a petition through its arbitration program and $6,000 for each day of the hearing. All fees are equally divided by the parties and are believed to be significantly lower than private arbitration options.

The controversial feature, according to the lawsuit, is the proceeding’s confidentiality under auspices of the state: "Arbitration proceedings shall be considered confidential and not of public record." (By rule, only judges and state-employed judicial masters can act as arbitrators under the statute.) Confidentiality for all proceedings is broken, however, as soon as a losing party appeals an arbitration decision to the state supreme court.

Are Private Arbitrations in the Public Interest?
Critics of the private arbitration program claim that the judges who moonlight as arbitrators do so in direct opposition to the public interest. The judges, says John Flaherty, president of the DCOG, "[a]re giving up their role as public officials and somehow becoming quasi-private arbitrators in order to create a cash cow for the Chancery Court." DCOG states that if the chancery is poorly funded, the judges should be duty-bound to report this publicly instead of finding other means of remuneration. The judges' dual role as private arbitrators and public officials places additional burdens on the already strained court system since there are only four judges on the chancery court. Moreover, the private proceedings are in conflict with the chancery court's own policies of openness and public legal precedent. According to Charles Elson, a professor at the University of Delaware, "these arbitrations have no precedential value."

Benefits of the Private Arbitration Program
Supporters point to lower costs, speedier resolutions, and limited discovery. Confidentiality has also been touted as of critical importance. Chancery court rule 97(a)(4) requires that while the initial petition must be logged into the public docketing system, all other supporting documents are off the record. Rule 98(b) requires that all hearings are private, attended only by the arbitrating parties and their representatives. Chief Judge Leo Streine responded to the allegations by the DCOG in a public statement, saying that "[n]ot all aspects of the judicial process are subject to public access . . . and the courts . . . can only do so effectively if the confidentiality of the process is respected." Though as noted, aggrieved parties can appeal these arbitrations to the Delaware Supreme Court, which automatically opens the arbitration records to public scrutiny.

Outlook
Despite concerns expressed over this mercantile judicial system, the protocol has been used only a few times. For example, between February 2010 and June 2011, the arbitration program heard only one case. Since June, however, four sets of additional parties have petitioned to have their cases resolved in the Delaware court via the private arbitration program.

For more details on the suit and its policy implications, go to Professor Art Hinshaw's section of the ADR Prof Blog.

Notably, Alternative Dispute Resolution Committee member Charles Miller submitted a proposal recently to the New York State Bar Association urging use of court-annexed arbitrators in select settings involving governmental decisions, such as decisions by the USPTO—but not as a closed, private process.  See an early draft of this proposal (which is now in revision to accommodate the America Invents Act).

—Patrick Soon, Whittier Law School, Costa Mesa, CA and  Charles Miller, Esq., Dickstein Shapiro LLP, New York, NY

October 25, 2011

Manifest Disregard Is Not a Basis for Vacating an Award

The Seventh Circuit recently held that an arbitration panel's "manifest disregard of the law" is not grounds to vacate an arbitration award under the Federal Arbitration Act (FAA). Affymax, Inc. v. Ortho-McNeil-Janssen Pharmaceuticals, Inc., -- F.3d. --, No. 11-2070, 2011 WL 4634222 (7th Cir. Oct. 3, 2011).

Affymax and Ortho-McNeil entered into a joint venture where they agreed that patented inventions created jointly would be jointly owned but patented inventions created by a single party would be owned only by that party. The agreement contained an arbitration clause.

In 2004, Affymax sued in the Northern District of Illinois, seeking a declaration that it owns two patent families generated through the joint venture: the '940 patents and the '078 patents. The district court ordered arbitration. After a 35-day arbitration hearing, the panel ruled that the parties jointly owned the '940 patents and that Ortho owned the '078 patents.

The district court vacated the portion of the award holding that Ortho owned the foreign patents corresponding with the ‘078 domestic patents. The court held that the panel "manifestly disregarded the law" by failing to determine ownership of foreign patents separately from domestic ones. Affymax, Inc. v. Johnson & Johnson, No. 04 C 6216, 2011 WL 1050006 (N.D.Ill. Mar. 21, 2011). Ortho appealed, and the Seventh Circuit reversed.

On appeal, Judge Easterbook noted that the Section 10(a) of FAA authorizes a court to vacate an award for four reasons.

Relying on Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576, 584–89 (2008), Judge Easterbook stated that those four grounds are "exclusive; neither judges nor contracting parties can expand [them]" and that "disregard of the law is not on the statutory list." The court held that "the district judge's conclusion that the arbitrators disregarded the law by failing to discuss the foreign patents separately from the domestic patents therefore [did] not justify vacating the award."

The Seventh Circuit also commented that the arbitrators did not have to explain their ruling. Thus, the panel's silence on whether it considered foreign patents separately from domestic ones was of no moment. The court stated that the arbitrators' silence should not be construed to mean that they performed their tasks improperly.

The Seventh Circuit also addressed some related issues. It noted that its prior decisions, including George Watts & Son, Inc. v. Tiffany & Co., 248 F.3d 577 (7th Cir. 2001), allowed a court to set aside an award that directed parties to violate the legal rights of third persons who did not consent to arbitration. The court explained that an award "directing the parties to form a cartel" or "fix prices or output" could be vacated as violating the Sherman Act, even if the FAA did not authorize its vacatur. In the instant case, however, the award did not require Ortho to violate any law and, thus, could not be subject to this challenge.

The Seventh Circuit also stated that if the district court vacated the award because the arbitrators "exceeded their powers" under Section 10(a) (4) of the FAA, that ruling would be incorrect. "Disregard of the law" comes within the FAA only if such disregard results in the arbitrators exceeding the authority granted in the arbitration agreement. The arbitration provision in question granted the arbitrators authority to determine who invented the technology and who owned each patent. That, according to the court, is exactly what the panel did. Moreover, in their arbitration briefs, the parties told the panel to determine patent ownership collectively within a single family, including foreign ones. The Seventh Circuit held that the award reflected that agreement.

—Alison Talbert Schwartz, Novack and Macey, Chicago, IL

October 13, 2011

$22 Million Award Vacated Due to Arbitrator's Nondisclosures

Vacating a $22 million JAMS arbitration award, the Texas Court of Appeals held that a purportedly neutral arbitrator with a 13-year history of social and business encounters with a party's attorney should have disclosed, at a bare minimum, the general nature of the friendship and thus permit the parties to further investigate the relationship before proceeding with the hearing. Kariseng v. Cooke, 286 S.W.3d 51 (Tex. App. – Dallas 2009, no pet. (Karseng I) and Karseng v. Cooke, ---S.W.3d---, 2011 WL 2536504 (Tex. App. – Dallas June 28, 2011, no pet. (Karlseng II).

The party-selected arbitrator had completed a disclosure form in which he generally disclosed that, in the previous five years, he had served as a neutral arbitrator and mediator with one of the attorneys for a party. Four days later, another attorney from the same firm was added as the party's lead counsel. The arbitrator did not supplement his disclosure to disclose his prior contact with the lead counsel, notwithstanding his receipt of wine, sports tickets, and expensive meals from the attorney.

The court acknowledged that there is always a competitive market for an experienced arbitrator whose livelihood depends upon reputation and skill, such that business and social relationships between arbitrators and attorneys are to be expected. At the same time, however, the court pointed out that disclosure of these relationships is essential to the fair and impartial nature of the arbitration process. Such disclosure, the court held, is crucial because of the enormous power, responsibility, and discretion vested in the arbitrator and the limited judicial review of the arbitrator's decisions.

Texas courts adhere to the generally accepted principle that an arbitration award should be vacated when the arbitrator shows "evident partiality." The test is an objective one and asks whether an observer would develop a reasonable impression of partiality from the facts as stated. In this case, the arbitrator's friendship with the attorney dated back to the attorney's clerkship for a district court judge while the arbitrator served as a magistrate for the same judge. Through nearly 10 years leading up to the arbitration, both the attorney and the arbitrator hosted expensive social events and private dinners for each other, and their spouses actively participated in their socializing.

Because "evident partiality" is established objectively by the nondisclosure itself rather than the subjective standard of whether partiality actually exists, arbitrators should always err in favor of disclosure. As the Karlseng court held, "Parties can gauge the neutrality of an arbitrator only if they have access to all the information that could reasonably affect the arbitrator's partiality."

The simple solution is for an arbitrator to disclose any facts that the parties would want to consider, and to understand that this obligation continues throughout the arbitration.

—David T. Lopez, David T. Lopez & Assoc., Houston, TX

October 3, 2011

Class Arbitration Is Not Considered a Class Action under CAFA

In a case concerning the application of the Class Action Fairness Act (CAFA), the Fifth Circuit ruled recently that a case that presents class claims in arbitration is not a class action. In Williams v. Homeland Ins. Co. of New York, ___ F.3d ___ (5th Cir., No. 11-30646, decided Sep. 19, 2011), the court held that a previous class arbitration filing did not preclude application of the local controversy exception to the CAFA.

Plaintiff filed this class action in Louisiana state court on behalf of a group of medical providers seeking redress from several insurers regarding PPO reimbursements. One of the defendants removed the case to federal court. In a remand proceeding, plaintiff alleged that the class satisfied all the elements of the CAFA exception: Two-thirds of the class members were Louisiana citizens, there was a significant Louisiana defendant, the principal alleged injuries occurred in Louisiana, and no other class actions had been filed within three years. Defendant attacked each element in turn, including that a class arbitration had been commenced by a class member within the prohibited three years, applying "rules that mimic Rule 23 [on class actions]." The district court found for the plaintiff class and remanded the matter. This appeal followed.

In reaching its conclusion, the district court distinguished an arbitration, defined as a form of resolution outside of court, from a class action, a form of a lawsuit. The court of appeals agreed, relying on the definition of a class action in CAFA as any civil action filed under Rule 23 of the Federal Rules of Civil Procedure or similar state statute or procedural rule: "We hold that a class arbitration is not a class action, and consequently, a prior class arbitration does not frustrate the CAFA exception."

—David T. Lopez, David T. Lopez & Assoc., Houston, TX

September 27, 2011

Does Federal Jurisdiction Exist over a Petition to Compel Arbitration?

In Community State Bank, et. al v. Strong, 2011 U.S. App. LEXIS 17767 (11th Cir. Aug. 25, 2011), the Eleventh Circuit held that federal jurisdiction existed over the bank's petition to compel the arbitration of loan dispute because the dispute involved claims that could have arisen under federal law.

The dispute began after Strong obtained a one-month $200 loan from Community State Bank, a storefront bank located in Georgia. Strong sued the bank and several related persons claiming that the loan was usurious under Georgia law because it carried a finance charge of 36 percent, which was the equivalent of an annual interest rate of 253 percent. The bank argued that the loan was perfectly legal, because federal law permits community state banks to charge interest rates without regard to state law. The only issue on appeal was whether the federal district court had jurisdiction over the bank’s petition to compel arbitration pursuant to §4 of the Federal Arbitration Act (FAA), 8 U.S.C., §4.

In resolving this question, the Eleventh Circuit had the opportunity to apply the recent decision of the United States Supreme Court in Vaden v. Discover Bank, 556 U.S. 49, 129 S.Ct. 1262 (2009).In Vaden, the Supreme Court held that "a federal court may look through a §4 petition and order arbitration if, 'save for the [arbitration] agreement,' the court would have jurisdiction over 'the [substantive] controversy between the parties.'" Specifically, the Supreme Court held that a district court entertaining a §4 petition must decide for itself "what 'a suit' arising out of the allegedly arbitrable controversy would look like"; that is, whether such a suit would involve claims over which there would be federal jurisdiction.

Applying Vaden, the Eleventh Circuit found that Strong's allegations raised potential RICO claims that would be non-frivolous and that would provide a basis for federal jurisdiction. The court then remanded the case to the district court to consider the merits of the Bank’s petition to compel arbitration.

In an interesting corollary issue, the court affirmed the district court's decision to dismiss the claims against the bank's affiliates who were defendants in a parallel lawsuit Strong had brought in state court. Previously, the state court had struck petitioners' arbitration defense, as a sanction for their willful and deliberate discovery abuses. The state court judgment, which was upheld on appeal and had become final, collaterally estopped the bank’s affiliates from re-litigating whether the arbitration clause was enforceable.

—Courtney Henry, J.D. candidate, Pepperdine University School of Law

September 2, 2011

FINRA Regulatory Notice 11-17 Revises the Discovery Guide for Arbitration Proceedings

The Financial Industry Regulatory Authority, Inc. (FINRA) has issued Regulatory Notice 11-17, entitled Revised Discovery Guide and Document Production Lists for Customer Arbitration Proceedings; Effective Date: May 16, 2011 (Notice 11-17). Notice 11-17 discusses revisions to the parties' document production obligations under the FINRA Code of Arbitration Procedure for Customer Disputes (Customer Code). Rule 12506(a) of the Customer Code explains that documents included on the document production lists established by FINRA "are presumed to be discoverable in all arbitrations between a customer and a [FINRA] member or associated person." As set forth in Notice 11-17, FINRA has consolidated the document production lists from fourteen lists to two lists, one for production by the FINRA member firm/associated person and the other for production by the customer. The revised document production lists apply to all customer arbitration proceedings filed on or after May 16, 2011.

Before the consolidation of document production lists from fourteen to two, the earlier lists were comprised of two general lists and twelve separate lists for particular types of claims. Having now consolidated the lists, FINRA—besides presumptively requiring the production of additional document categories that were not required before the consolidation—has included in the new List 1 ("Documents the Firm/Associated Persons Shall Produce in all Customer Cases") several document categories that apply only to certain types of claims. For example, one item in List 1 applies only to claims alleging unauthorized trading, another applies to claims raising allegations concerning an insurance product that includes a death benefit, and so forth. For its part, List 2 ("Documents the Customer Parties Shall Produce in All Customer Cases") also includes an item that applies only if the Statement of Claim includes an insurance product that provides a death benefit.

Notice 11-17 further elaborates that the introduction to the FINRA Discovery Guide, which serves as a supplement to the discovery rules of the Customer Code, has been revised to "expand its guidance to parties and arbitrators on the discovery process generally, and to clarify how arbitrators should apply the Guide in arbitration proceedings." The document production lists are part of the Discovery Guide. Areas addressed in the revised Discovery Guide introduction include: (1) Flexibility—arbitrators can require the production of documents not included on the document production lists or, alternatively, order that parties do not have to produce certain documents on the Lists; (2) Confidentiality—when deciding contested matters of confidentiality, arbitrators should consider various issues, including whether disclosure would constitute an unwarranted invasion of personal privacy, or whether the information contains proprietary confidential business plans and procedures or trade secrets; and (3) Affirmations—if a party responds that there are no responsive documents in that party's possession, custody, or control, the party (and in the case of the brokerage firm, the appropriate person in the firm who has knowledge) must, upon the request of the party seeking the documents, state in writing that the responding party completed a good faith search for the requested documents, describe the extent of that search, and state that based on the search, there are no responsive documents in the responding party's possession, custody, or control.

The foregoing revisions, which are discussed in further detail in Notice 11-17 and the revised Discovery Guide and Customer Code, represent important changes in discovery practice that deserve careful review and consideration by all who are engaged in representing clients in Customer Cases before FINRA.

—Hal M. Lucas P.A., Miami, FL

August 29, 2011

FAA Preempts State Law Classifying Collective Arbitration Waivers as Unconscionable

The U.S. Court of Appeals for the Eleventh Circuit refused to stray from the Supreme Court's decision in AT&T Mobility, LLC  v. Concepcion, 131 S.Ct. 1740 (2011), holding that the Federal Arbitration Act (FAA) preempts state law classifying collective arbitration waivers as unconscionable. Cruz v. Cingular Wireless LLC No. 08-16080, 2011 WL 3505016, (11th Cir., Aug. 11, 2011). Customers of AT&T Mobility, LLC (ATTM), formerly Cingular Wireless LLC, brought a putative class action against the phone company claiming it violated the Florida Deceptive and Unfair Trade Practices Act (FDUPTA) by charging them $2.99 a month for a service they never elected. The service agreement included a mandatory arbitration provision specifically precluding participation in class actions.

Plaintiffs appealed the district court decision granting ATTM's motion to dismiss, arguing that the provision was invalid because it is against Florida public policy and hindered rights provided by FDUTPA. Plaintiffs argued that no lawyer would take their case on an individual basis, and many potential plaintiffs would not know of their potential claims. The plaintiffs argued that Concepcion was limited to preemption of state laws that invalidate class waiver provisions without requiring evidentiary proof of whether the parties could vindicate their statutory rights in arbitration. In affirming the dismissal, the Eleventh Circuit held that Concepcion controlled because the plaintiffs' evidentiary proof—in the form of attorney affidavits stating they it would not be financially beneficial to represent individual consumers' claims and statistical evidence of the "infinitesimal" percentage (0.000007 percent) of customers that initiated arbitration against ATTM. Such evidence only substantiated the same public policy arguments that the Supreme Court expressly rejected in Concepcion. The Court acknowledged that the arbitration clause did not deprive the customers of their individual causes of action or other substantive rights under FDUTPA. The arbitration provision allowed recovery of attorney fees and costs and did not contain a confidentiality provision. The court concluded that the arbitration clause is valid and FDUTPA is preempted by the FAA. Notably, the Court left open the issue of whether some other set of facts may result in the invalidation of an arbitration provision on public policy grounds where the claimant is effectively prevented from vindicating his or her statutory cause of action.

—Justin Garcia and Michael V. Pepe, Garcia and Milas, P.C., New Haven, CT

August 10, 2011

Employer Is Barred from Enforcing Arbitration Clause in Title VII Action

A New York federal district court recently held that an employee can be a named plaintiff in a Title VII lawsuit alleging that her employer engaged in a pattern and practice of gender discrimination even though her employment agreement contained an arbitration clause. Chen-Oster v. Goldman Sachs & Co., No. 10 Civ. 6950, 2011 WL 2671813, at *1 (S.D.N.Y. July 7, 2011).

The plaintiff, Lisa Parisi, and two other female employees sued Goldman Sachs last year, claiming that it engaged in a pattern and practice of paying men more than women and promoting male employees more frequently than equally qualified females. Goldman Sachs moved to compel arbitration of Parisi's individual claims pursuant to the arbitration clause in her employment agreement. On April 28, 2011, Judge James Francis IV denied Goldman Sach’s motion to compel arbitration, holding that Parisi could bring her pattern and practice claims in federal court. Goldman Sachs urged the court to reconsider its ruling in light of the Supreme Court’s decision in AT&T Mobility v. Concepcion, 131 S. Ct. 1740 (2011), which was issued the day before Judge Francis’s opinion but was not cited in his ruling. Concepcion holds that the Federal Arbitration Act and its policy of upholding arbitration agreements preempts California’s common-law rule that certain arbitration clauses containing class action waivers are unconscionable.

Judge Francis denied Goldman Sach's motion to reconsider. He ruled that Concepcion did not apply to Parisi's case. In Concepcion, the issue was whether the Federal Arbitration Act preempted state law. Parisi's case, however, involved two competing federal laws: the FAA and Title VII. Judge Francis held that a plaintiff's right to bring a pattern and practice claim under Title VII—which canonly be brought on a class-wide basis—trumped the FAA. He also noted that "right at the center of [Parisi's] case is not the right to proceed on a class basis but rather the right to vindicate a claim that an employer has engaged in a pattern or practice of discrimination. Under the law as it currently stands, the plaintiff may not do so individually." Parisi, thus, could not be compelled to arbitrate her claims on an individual basis because, under Second Circuit precedent, "an arbitration provision which precludes plaintiffs from enforcing their statutory rights is unenforceable." Judge Francis also emphasized that Parisi's case is markedly different from Concepcion because the arbitration clause at issue in Concepcion did not preclude the plaintiff from litigating a statutory right; it just required it to do so in an arbitral, rather than judicial, forum.

—Alison T. Schwartz, Novack and Macey LLP, Chicago, IL

August 8, 2011

Dues Checkoff Arbitrability Survives Expiration of Contract

The Court of Appeals for the Second Circuit has held that a dues checkoff agreement between a union and the employer is subject to arbitration despite the collective bargaining agreement having expired. Newspaper Guild/CWA of Albany v. Hearst Corp., ___ F.3d ___ , No. 10-2402-CV (2nd Cir., May 17, 2011).  Dues checkoff is an agreement by which the employer deducts union dues from paychecks and remits the dues to the union.

The appeals court upheld a district court decision favoring arbitration. On appeal, the court held that in the union contract the employer had agreed to the dues deduction in accordance with an employee's voluntary assignment, effective in accordance to the terms of the assignment. The assignment provided it would be in effect until revoked. Because there was no provision for the employer to revoke the agreement, according to the court, the obligation survived "under normal principles of contract interpretation," and the obligation was subject to arbitration.

—David T. Lopez, David T. Lopez & Assoc., Houston, TX

June 27, 2011

Petition Clause Claims Limited

Government employees asserting rights under the First Amendment may not rely on the Petition Clause to assert a claim that challenges action taken against an employee individually or in the capacity of an employee, the U.S. Supreme Court has held. The right to assert such claims on matters of interest to the community as a whole was retained.

The opinion in Borough of Duryea v. Guarnieri, issued June 20, 2011, matches First Amendment protection to the same considerations as those pertaining to claims under the Free Speech Clause. That a claim of interference with a government employee's free speech rights is available only to protect speech on matters of public concern has long been established.

In the Guarnieri opinion, Justice Kennedy recognized the public interest served by the Petition Clause in its history, traceable to the Magna Carta. He commented that when a public employee petitions the government to redress a grievance that involves other citizens, the public employee enjoys the same rights as a private citizen. When a grievance involves individual work-place grievances, however, the employee’s rights must be balanced against the substantial governmental interest in efficient and effective operations. "Restraints are justified by the consensual nature of the employment relationship and by the unique nature of the government's interest."

—David T. Lopez, David T. Lopez & Assoc., Houston, TX

June 27, 2011

Employment Arbitration Class Claims Reconsidered

The National Labor Relations Board (NLRB) appears to be reconsidering prior advice by its General Counsel that waivers of class or collective claims is permissible in policies providing for mandatory arbitration of employment disputes.

In a presently pending case, D. R. Horton, Inc., No. 12-CA-25764, the Board requested amici briefs on the issue of whether an employer violates Section 8(a)(1) of the National Labor Relations Act by requiring as a condition of employment that employees agree to submit all employment disputes to individual arbitration in which an arbitrator will have no authority to consolidate claims or fashion an arbitration as a class or collective action.  Responses to briefs filed in June are due in early August.

Section 8(a)(1) of the NLRA makes it an unfair labor practice for an employer to interfere with, restrain or coerce employees in the exercise of their rights to organize and bargain collectively.

In June, 2010, General Counsel Ronald Meisburg issued a guideline memorandum regarding unfair labor charges pertaining to employers’ mandatory arbitration policies.  The memorandum stated that such policies could require waiver of the right to assert class or collective claims without provoking a per se violation of the Act.

In AT&T Mobility v. Concepcion, the U.S. Supreme Court decided in April, 2011, that the use of class arbitration waivers is permissible in consumer contracts, regardless of state law provisions to the contrary.

—David T. Lopez, David T. Lopez & Assoc., Houston, TX

May 10, 2011

Supreme Court Upholds Arbitration Anti-Class Provisions

Surprising class-action attorneys, consumer activists, and possibly even the defense bar, the U.S. Supreme Court issued its ruling on Wednesday, April 27, in AT&T Mobility v. Concepcion in favor of the defendants. In a 5–4 decision, split perfectly along party-appointment lines (five Republican appointees versus four Democrat appointees), the Court gave a swift karate chop at the knees of consumer class-action cases and may have paved the way for corporations to nail the coffin closed on consumer class actions. The majority held in favor of enforcing arbitration clauses contained in corporate "contracts of adhesion" issued to consumers, which include so-called anti-class provisions preventing arbitrations on a class-wide basis; the Court relied on the Federal Arbitration Act (FAA) to preempt state-court decisions finding such provisions unconscionable toward consumers. Undoubtedly following this decision, anti-class provisions are sure to be the gold-star standard for consumer contracts.

Specifically, in AT&T Mobility, the plaintiffs contracted with AT&T for cellular phone service, and ended up in a $30 dispute with the behemoth. After the plaintiffs filed a lawsuit, AT&T moved to compel arbitration under its contract provision, which not only mandated arbitration, but further prohibited consumers from pursuing arbitration claims on a class-wide basis (a right they would have had in court). The plaintiffs argued against arbitration, contending that under California law the anti-class provision was unconscionable because it was a consumer low-value dispute involving a contract of adhesion. Both the district court and the 9th Circuit agreed with the plaintiffs, finding that this anti-class provision was unconscionable, but the Supreme Court accepted review.

The Supreme Court's narrow majority, led by Justice Antonin Scalia, disagreed with the 9th Circuit, and in so doing reached its arm into California and preempted Discover Bank v. Superior Court, a decision by the state’s supreme court holding that anti-class clauses in consumer arbitration agreements that are small-dollar-amount claims in contracts of adhesion are unconscionable. The court's majority held that state-court cases preventing enforcement of arbitration agreements are inconsistent with the FAA.

Taking AT&T Mobility and the Supreme Court's 2010 decision in Stolt-Nielsen S.A. v. AnimalFeeds Int'l Corp. together (Stolt held that if an arbitration agreement was silent on permissibility of class-wide arbitration, it would not be permitted), the Court’s intention to quell consumer, and likely employment, class actions is clear.

Timothy Blood, nationally known class-action attorney and founding partner at Blood, Hurst & O'Reardon, managing class actions nationwide from their San Diego office, expresses frustration with the decision:

William L. Stern, a partner at Morrison & Foerster, LLP, in San Francisco who specializes in the defense of class actions, disagrees. "Concepcion is a momentum changer, to be sure." But he believes

As a result of Concepcion, he predicted, every company that engages in consumer transactions—industries as diverse as financial institutions, wireless communications, cable television, and consumer electronics—will want to review their contracts and assess whether to include arbitration and class-action waivers. The same is true for employment agreements, because in Mr. Stern's view the Supreme Court's decision casts doubt on the continuing validity of the California Supreme Court decision restricting arbitration in the employment context. Cf., Armendariz v. Found. Health Psychcare Servs. , 24 Cal. 4th 83, 113 (2000).

Stay tuned for further case development, possible congressional legislation amending the FAA, and expansion of arbitration provisions in more contract settings.

—Jobi Halper, ADR Services, Inc., San Diego, CA

Keywords: arbitration class action, AT&T Mobility, Wal-Mart

October 26, 2010

District Court Stays Consumer Arbitration Matter Pending Supreme Court Decision

In Homa v. American Express Company, U.S. Dist. Ct., (Arpert, U.S.D.J.), the U.S. District Court for the District of New Jersey joined the ranks of those anxiously awaiting a decision of the Supreme Court in AT&T Mobility v. Concepcion, 2010 WL 303962, 09-893 (May 24, 2010), staying a consumer fraud case because the key issue over whether an arbitration anti-class action provision contained a consumer contract can be enforced awaits the decision of the U.S. Supreme Court.  

Parties on both sides of consumer claims involving arbitration provisions are anxiously awaiting this important decision, which may put to rest whether, in the consumer context, a corporation can include anti-class provisions in its sales and service contracts, often referred to as "contracts of adhesion."

The Homa case involves American Express's purported misrepresentation of its awards program and failure to provide cash back as promised. American Express succeeded in the trial court to compel arbitration with its customers on an individualbasis, based on an anti-class action provision included in arbitration requirements of its contracts, and the case was dismissed for court. Plaintiffs appealed to the Third Circuit, who reversed and remanded, allowing discovery to proceed on the limited question of whether the claims were of sufficiently low value to otherwise preclude relief if arbitration could not proceed class-wide, relying on Muhammad v. County Bank of Rehoboth Beach, Delaware, 912 A.2d 88 (NJ 2006), and Laster v. AT&T Mobility LLC, 584 F.3d 849, 856 (9th Cir. 2009).

On American Express's motion, the district court stopped the case from proceeding altogether, finding that proceeding while the issue presented "is squarely before the Supreme Court may be an exercise in futility" (Id. at 14.). Because the argument AT&T Mobility v. Concepcion is scheduled for November 9 and a decision is expected in 2011, the court held no appreciable harm to the plaintiffs would occur.

It appears that courts, in a rare move, intend to hold up expensive class actions and let the Supreme Court speak first on this one.

In anticipation of the Supreme Court’s argument, the merits briefing of the parties is available at Petitioner AT&T Mobility's Brief and Respondent Concepcion's Brief.

—Jobi Halper, ADR Services, Inc., San Diego, CA

Keywords: Homa, Class Action, Arbitration, AT&T Mobility, Concepcion

Agreements Must Be Decided by a Court, Not an Arbitrator

The United States Court of Appeals for the Third Circuit recently held that judges, not arbitrators, should decide the enforceability of a class action waiver in an arbitration agreement. Puleo v. Chase Bank, N.A., No. 08-3837, 2010 WL 1838762 (3rd Cir. May 10, 2010). The issue was heard en banc and decided 6 to 4 with a dissenting opinion.

In Puleo, plaintiffs filed a putative class action against Chase Bank in federal court challenging a retroactive interest rate increase on their Chase credit cards. The Chase cardmember agreement contained a mandatory arbitration provision that barred class actions. The Puleos filed suit in federal court and argued that the class action waiver was unconscionable. The district court disagreed and ordered the Puleos to arbitrate their claims individually. On appeal, the Puleos argued that the district court should have allowed the issue of unconscionability to be decided by an arbitrator. The Third Circuit disagreed.

The Third Circuit stated that “whether the parties submitted a particular dispute to arbitration, i.e., the question of arbitrability, is an issue for judicial determination unless the parties clearly and unmistakably provide otherwise” (quoting Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83 (2002)). The court noted that “a question of arbitrability arises only in two circumstances”: (a) when there is a “threshold dispute” over whether the parties have a valid arbitration agreement; and (b) when the parties dispute whether a “concededly binding” arbitration agreement applies to a particular controversy (citing Green Tree Fin. Corp. v. Bazzle, 539 U.S. 444, 452 (2003)).

The court held that by contending that the class action waiver was unconscionable, the Puleos raised an issue of arbitrability—whether the arbitration agreement applied to their particular dispute. Furthermore, because their agreement did not “clearly and unmistakably” authorize the arbitrator to decide issues of arbitrability, this question was properly decided by the court. The Third Circuit ultimately held that the class action waiver was not unconscionable and affirmed the district court’s decision to compel the parties to arbitrate their claims on an individual basis.

The dissenting opinion asserted that the validity of the class action waiver did not present an issue of arbitrability, because the parties had already agreed that the case should go to arbitration. The dissent stated that the only issue presented was “how the case will go forward—whether as a class action or as an individual suit.” According to the dissent, the question of “what kind of arbitration proceeding the parties agreed to” should be decided by the arbitrator, not the court.

The First, Second and Eleventh Circuits have also held that the enforceability of a class action waiver is a question of arbitrability.

—Alison Schwartz, Novack and Macey LLP, Chicago, IL

Ninth Circuit Reaffirms Narrow Scope of Review of Arbitration Awards

The United States Court of Appeals for the Ninth Circuit recently held that the district court should have confirmed a $6,400,000 arbitration award—including $4,000,000 in punitive damages and $1,500,000 in emotional distress damages—in a case for breach of a disability insurance policy. Lagstein, M.D. v. Certain Underwriters at Lloyd’s, London, No. 07-16094, 2010 WL 2303317 (9th Cir. June 10, 2010). The court held that (a) the award was not in manifest disregard of law or completely irrational; (b) the arbitration panel’s determination that it had jurisdiction to award punitive damages more than 30 days after the hearing was supported by a plausible interpretation of the applicable American Arbitration Association (AAA) rules; and (c) one arbitrator’s failure to disclose that he was subject to an ethics investigation more than ten years earlier was not a basis to vacate the award.

Plaintiff Zev Lagstein was a physician who purchased a disability insurance policy at Lloyd’s, London (Lloyd’s). In 2001, Lagstein developed heart disease and other problems and submitted a claim under the policy. As of 2003, Lagstein still had not received a decision on his claim and filed a lawsuit against Lloyd’s, which was stayed pending arbitration. The arbitration panel entered an initial award on August 31, 2006, granting Lagstein the full value of his policy ($900,000) and $1,500,000 for emotional distress damages. Subsequently, after a second hearing in November 2006, the panel awarded Lagstein an additional $4,000,000 in punitive damages. The district court vacated the award, holding that the award was excessive and in manifest disregard of the law.

On appeal, the Ninth Circuit held that the award should have been confirmed. First, Lloyd’s argued that the award was excessive because (a) the panel failed to recognize “firmly established facts” and therefore manifestly disregarded the law; (b) the decision was “completely irrational” in light of the facts; (c) one ground for the panel’s decision was based on an erroneous interpretation of the policy; and (d) the panel incorrectly concluded that Lloyd’s violated the policy. The court held that none of the foregoing arguments provided a basis to vacate the award under section 10 of the Federal Arbitration Act (FAA), emphasizing that it could not second guess the panel’s factual determinations. Lloyd’s argued that the arbitration panel lacked jurisdiction to enter the punitive damages award because the AAA rules required the panel to make a decision within 30 days of the close of the hearing, but the panel did not award the punitive damages until much later.

The court held that the timing of the decision was a procedural matter, and procedural questions should be left to the arbitrators. Further, the court found that the panel’s ruling was justified by two plausible constructions of the AAA rules. First, the court held that the panel may have treated the initial award as an interim award rather than a final award and then reopened the proceedings in November 2006 for the punitive damages hearing. Under that construction, the panel would have issued the punitive damages award less than 30 days after it reopened the proceeding. The court held that the panel may have found that it had the authority to bifurcate the punitive damages portion of the case based on a rule allowing the arbitrators “to take such steps as they . . . deem[ed] necessary and desirable to avoid delay and to achieve a just, speedy, and cost-effective resolution.”

Lloyd’s argued that the award should have been vacated under section 10(a)(2) of the FAA, because one of the arbitrators failed to disclose that he was subject to an ethics controversy—and signed a non-prosecution agreement—when he was a judge in the early 1990s. However, the court determined that the arbitrator was required to disclose “only facts indicating that he might reasonably be thought biased against one litigant and favorable to another” and that the arbitrator’s past difficulties did not meet this criteria. Lagstein, 2010 WL 2303317, at *8.

—Adam Waskowski, Novack and Macey, Chicago, IL

Supreme Court Holds That Parties Can Delegate Questions of Arbitrability

In a 5–4 decision delivered by Justice Scalia, the United States Supreme Court recently held that an ex-employee's challenge to the enforceability of an arbitration agreement was subject to arbitration, because the agreement specifically provided that disputes relating to enforceability were to be determined by an arbitrator. Rent-A-Center West, Inc. v. Jackson, No. 09-497, 2010 WL 2471058 (U.S. June 21, 2010) (Rent-A-Center).

The backdrop for the Rent-A-Center decision is the Federal Arbitration Act (FAA), which provides that covered arbitration agreements shall be enforced except "upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2. Under the FAA, the issue of "whether the parties have a valid arbitration agreement at all" is to be decided by the courts. Green Tree Financial Corp. v. Bazzle, 539 U.S. 444, 452 (2003). However, because arbitration is a matter of contract, questions relating to arbitrability may be delegated to an arbitrator provided that the delegation is clear and unmistakable. AT&T Technologies, Inc. v. Communications Workers, 475 U.S. 643, 649 (1986); First Options v. Chicago, Inc. v. Kaplan, 514 U.S. 938, 944–945 (1995).

In Rent-A-Center, the parties' agreement to arbitrate had two relevant provisions: One provision provided for the arbitration of all "past, present, or future" disputes arising out of plaintiff's employment, including "claims for discrimination" and "claims for violation of any federal . . . law." The second provision stated that "[t]he Arbitrator, and not any federal, state, or local court or agency, shall have exclusive authority to resolve any dispute relating to the interpretation, applicability, enforceability, or formation of this Agreement including, but not limited to any claim that all or any part of this Agreement is void or voidable." This second provision was referred to by the parties and the Supreme Court as the “delegation provision.”

In the lower court proceedings, the former employee opposed defendant's motion to compel arbitration on the grounds that the arbitration agreement was unconscionable and, thus, unenforceable under state law. The District Court for Nevada granted Defendant's motion. Citing Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83 (2002), the district court found that, through the delegation provision, the parties had clearly given the arbitrator exclusive authority to decide whether the agreement was enforceable. The court also found that because the former employee had challenged the validity of the agreement as a whole, the "severability rule" applied and did not prevent the court from enforcing the parties’ specific agreement to arbitrate any disputes concerning enforceability, irrespective of the nature of the defense being raised.

A divided panel of the Court of Appeals for the Ninth Circuit reversed. Jackson v. Rent-A-Center West, Inc., 581 F.3d 912 (9th Cir. 2009). The majority opinion stated that the general rule is that arbitrability is for the courts to decide unless there is "clear and unmistakable evidence" that the parties agreed to arbitrate arbitrability. 581 F.3d at 917, citing First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 943–944 (1995). The majority held that "where, as here, a party challenges an arbitration agreement as unconscionable, and thus asserts that he could not meaningfully assent to the agreement, the threshold question of unconscionability is for the court." Id.

In a decision issued on June 21, 2010, the Supreme Court reversed the Ninth Circuit and held that it was up to the arbitrator to decide plaintiff’s claim of unconscionability because the parties had delegated enforceability issues to the arbitrator under the terms of their contract. The Court found that the delegation provision of the agreement to arbitrate was severable from the remainder of the contract, citing Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 404–404 (1967), Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 445 (2006), and Preston v. Ferrer, 552 U.S. 346, 353–354 (2008). The Supreme Court reasoned that because the former employee had challenged the agreement to arbitrate as a whole and had not specifically challenge the validity of the delegation provision, the “severability rule” applied and required that the threshold issue of enforceability be submitted to the arbitrator for determination.

The significance of Rent-A-Center is that the underlying contract was a stand-alone arbitration agreement and not a contract unrelated to arbitration that simply contained an arbitration clause. Whether the parties have a valid arbitration agreement is an issue assigned to the courts by the FAA and any agreement to arbitrate arbitrability must be supported by “clear and unmistakable evidence” that the parties intended to submit such matters to an arbitrator. In Rent-A-Center, plaintiff claimed that the terms of and circumstances surrounding the arbitration agreement were unconscionable and that his consent to the arbitration agreement was not valid or legally binding. The Supreme Court acknowledged that the contract at issue in Rent-A-Center was different from the contracts involved in Prima Paint, Buckeye, and Preston, but concluded that that distinction made "no difference." In this regard, the Supreme Court held that absent a specific challenge to validity or enforceability of the delegation provision, that provision would be treated as valid under Section 2 of the FAA and enforced under Sections 3 and 4 of the FAA, thus leaving the determination of the contract revocation defense to the arbitrator.

Justice Stevens wrote a stinging dissent in which he chastised the majority for going beyond the severability rule established by the Court's earlier decisions in Prima Paint and Buckeye and for making the "breezy assertion that the subject matter of the contract at issue . . . 'makes no difference.'"

"Prima Paint and its progeny allow a court to pluck from a potentially invalid contract a potentially valid arbitration agreement. Today the court adds a new layer of severability—something akin to Russian nesting dolls—into the mix: Courts may now pluck from a potentially invalid arbitration agreement even narrower provisions that refer particular arbitrability disputes to an arbitrator."

The dissonance between the majority and the dissent seems to be based on their differing views of Section 2 of the FAA. Because the subject agreement in Rent-A-Center was a stand-alone arbitration agreement, the dissent reasoned that the Court had to decide the challenge to the validity of the arbitration agreement before deciding defendant’s motion to compel arbitration. The majority, on the other hand, found that an agreement to arbitrate a gateway issue "is simply an additional, antecedent agreement the party seeking arbitration asks the federal court to enforce." The FAA "operates on this additional arbitration agreement just as it does on any other" and is valid under Section 2 of the FAA unless grounds are found to exist for revocation. Because plaintiff's challenge was to the arbitration agreement as a whole, the majority reasoned that the delegation provision could be severed from the contract as a whole and enforced in its own right.

It was not until his brief to the Supreme Court that the plaintiff in Rent-A-Center specifically challenged the delegation provision as substantively unconscionable. The Court found that this challenge was made "too late" and, accordingly, was not considered. One lesson to be learned from Rent-A-Center concerns pleading. When the “making” of an arbitration agreement is an issue and that agreement includes a provision that delegates disputes relating to validity or enforceability to arbitration, any challenge to the validity or enforceability of the arbitration agreement must include a specific defense to the enforceability of the delegation provision. Without such specificity in the pleading, an agreement to arbitrate arbitrability is enforceable even when the validity of the arbitration agreement is challenged.

—Rebecca Callahan, Newport Beach, CA

Another Turn in the Class Action Arbitration Screw

The Supreme Court has thrown down a gauntlet yet again, agreeing to review the important question of whether a judge must adhere to an "anti-class action" requirement in the arbitration provision of a consumer "contract of adhesion." The Court, on May 24, 2010, granted certiorari in AT&T Mobility LCC v. Vincent Concepcion et ux., Case no. 09-893.

There has been a long-standing battle between consumer class-action attorneys and corporations doing business with consumers over the application of Rule 23 in arbitrations. As more arbitrators began allowing class claims in arbitration and courts affirmed those arbitration decisions, businesses began writing the arbitration clauses in their consumer contracts to prohibit class action claims. Class action attorneys decry such measures as counter to public policy and unconscionable, essentially undermining the very protections intended by Rule 23. They argue that because most individual claims are small and do not warrant pursuit even in arbitration proceeding, and because the plaintiff-consumers have no opportunity to negotiate their own contract terms, such provisions should not be enforced. Defendants, on the other hand, argue that the Federal Arbitration Act controls this matter, parties have a right to tailor the arbitration provisions in their contracts as they see fit, and state courts exceed their authority under the Act when they defeat a party’s clear intention to prohibit class action arbitration.

Courts have been all over the board in this debate, some finding that in consumer contracts "anti-class" provisions are unconscionable per se, while others have created threshold tests to determine whether anti-class provisions apply. The AT&T case specifically challenges California's 3-part test for finding an anti-class provision in an arbitration agreement unconscionable under Discover Bank v. Super. Ct., 113 P.3d 1100, 1110 (Cal. 2005). On the other hand, no less than 27 jurisdictions have held that arbitration provisions prohibiting class action claims must be enforced, even in consumer agreements, so long as the cost of arbitration isn’t too high for the consumer and the claimant’s remedies are not limited.

Just last month, the Supreme Court held in Stolt-Nielson that, at least in certain circumstances, where the parties did not intend to agreeto arbitration on a class-wide basis, and the arbitration agreement does not speak to the issue, class claims would not be permitted in arbitration. Now the Court will consider whether express anti-class provisions will be upheld in the consumer arena. Clearly, the decision of the Court will have potent ramifications, either opening a clear pathway for consumers to bring class claims in arbitration or essentially shutting down class arbitration, as no company would agree to it if given the choice. Commentators agree, "This issue has become 'one of the most important—and controversial—issues in modern day class action litigation." Petitioner’s Writ of Certiorari at 15, citing Angela C. Zambrano, et al., Wavering Over Consumer Class Actions, 27 No. 12 Banking & Fin. Servs. Pol'y Rep. 4, 4 (2008).

—Jobi Halper, San Diego, CA

Illinois Appellate Court Holds That Section 34 Notice Waives Right to Arbitration

The Supreme Court has thrown down a gauntlet yet again, agreeing to review the important question of whether a judge must adhere to an “anti-class action” requirement in the arbitration provision of a consumer “contract of adhesion.” The Court, on May 24, 2010, granted certiorari in AT&T Mobility LCC v. Vincent Concepcion et ux., Case no. 09-893.

There has been a long-standing battle between consumer class-action attorneys and corporations doing business with consumers over the application of Rule 23 in arbitrations. As more arbitrators began allowing class claims in arbitration and courts affirmed those arbitration decisions, businesses began writing the arbitration clauses in their consumer contracts to prohibit class action claims. Class action attorneys decry such measures as counter to public policy and unconscionable, essentially undermining the very protections intended by Rule 23. They argue that because most individual claims are small and do not warrant pursuit even in arbitration proceeding, and because the plaintiff-consumers have no opportunity to negotiate their own contract terms, such provisions should not be enforced. Defendants, on the other hand, argue that the Federal Arbitration Act controls this matter, parties have a right to tailor the arbitration provisions in their contracts as they see fit, and state courts exceed their authority under the Act when they defeat a party’s clear intention to prohibit class action arbitration.

Courts have been all over the board in this debate, some finding that in consumer contracts “anti-class” provisions are unconscionable per se, while others have created threshold tests to determine whether anti-class provisions apply. The AT&T case specifically challenges California’s three-part test for finding an anti-class provision in an arbitration agreement unconscionable under Discover Bank v. Super. Ct., 113 P.3d 1100, 1110 (Cal. 2005). On the other hand, no less than 27 jurisdictions have held that arbitration provisions prohibiting class action claims must be enforced, even in consumer agreements, so long as the cost of arbitration isn’t too high for the consumer and the claimant’s remedies are not limited.

Just last month, the Supreme Court held in Stolt-Nielson that, at least in certain circumstances, where the parties did not intend to agreeto arbitration on a class-wide basis, and the arbitration agreement does not speak to the issue, class claims would not be permitted in arbitration. Now the Court will consider whether express anti-class provisions will be upheld in the consumer arena. Clearly, the decision of the Court will have potent ramifications, either opening a clear pathway for consumers to bring class claims in arbitration or essentially shutting down class arbitration, as no company would agree to it if given the choice. Commentators agree, “This issue has become ‘one of the most important—and controversial—issues in modern day class action litigation.” Petitioner’s Writ of Certiorari at 15, citing Angela C. Zambrano, et al., Wavering Over Consumer Class Actions, 27 No. 12 Banking & Fin. Servs. Pol’y Rep. 4, 4 (2008).

—Brandon Hummel, Chicago, IL

Michigan Court Reverses Motion to Dismiss in Arbitration

In Shaler Interiors v. MKK Technologies, Inc., 2010 WL 173 637 (January 19, 2010), the Michigan Court of Appeals reversed a trial court decision that had refused to dismiss a case in favor of arbitration.

MKK Technologies, Inc. (MKK) was the general contractor for a student housing project and needed a drywall contractor. Rick Schneider could not take the drywall job himself because he was a union member and the job was non-union, so Schneider approached David Shaler, who was not a union member, and asked him to perform the work. Schneider and Shaler agreed that Schneider would arrange to obtain the job for Shaler’s company, Shaler Interiors, and that Schneider would receive one-third of the contract price. Schneider signed a subcontract with MKK for the drywall work on behalf of Shaler Interiors. Shaler did not sign the subcontract, but he knew of and agreed to the arrangement. The subcontract contained an arbitration clause requiring all claims and disputes to be decided by arbitration unless MKK elected otherwise.

After completing its drywall work, Shaler Interiors filed suit against MKK, claiming that MKK had failed to pay it approximately $59,500. MKK moved to dismiss the case pending arbitration, arguing that discovery had established that Schneider acted as the agent of Shaler Interiors and that, in any event, Shaler Interiors had not only ratified Schneider’s acts, but had signed a change order that incorporated the original subcontract including its arbitration clause. Shaler Interiors acknowledged that Schneider facilitated obtaining the job but denied that Schneider was authorized to sign the subcontract on its behalf.

The Court of Appeals determined that Shaler knew Schneider would sign a contract with MKK on behalf of Shaler Interiors, yet did nothing to dispel the notion that Schneider was authorized to act on behalf of Shaler Interiors. Accordingly, the court ruled that MKK reasonably believed that Schneider was authorized to bind Shaler Interiors. The court also ruled that Shaler Interiors had ratified Schneider’s acts by accepting payments from MKK knowing of Schneider’s efforts on its behalf. Finally, the court agreed that Shaler Interiors became bound by the arbitration provision when it signed the change order. The change order unambiguously stated that it “shall become part of the original subcontract agreement including all terms and conditions without exception.” For all these reasons, arbitration was the appropriate forum, and the trial court erred when it denied the motion to dismiss the litigation.

—Timothy J. Abeska, Chicago

Right to Bring Class Claims in Arbitration Dealt Blow by Supreme Court in Stolt-Nielsen

On April 27, 2010, the Supreme Court issued the much-anticipated decision in Stolt-Nielsen v. AnimalFeeds International Corp., 559 U.S. ____ (April 27, 2010), responding in the negative to the question of whether arbitration on a class-wide basis can be compelled where the parties’ underlying contract does not authorize it. The Court dealt a blow to consumers, class action attorneys, and arbitrators alike, holding that a contract silent as to whether claims can be pursued on a class-wide basis may not proceed as such, absent local law authorizing it or custom or usage in the industry dictating that a class action was contemplated at the time of contracting. Stolt-Nielsen radically curtails the ability of individuals or companies to consolidate their claims under Federal Rule of Civil Procedure 23—the Class Action Rule—when in arbitration. The decision further incentivizes businesses to include arbitration provisions in contracts to stave off class action litigation.

Companies in the U.S. dealing with consumers commonly use form contracts that impose mandatory binding arbitration provisions—the very contracts that often are considered appropriate for Rule 23 treatment. Thus, class action questions have followed the tide of arbitration, forcing courts and arbitrators to grapple with the relationship between the procedural mandate and the contractual rights of the parties ever since. Typically, contracts containing arbitration provisions either are silent on the availability of class treatment for claims arising under the contract or they contain so-called “anti-class provisions” barring class treatment of such claims. Stolt-Nielsen addresses the former and most-common situation in arbitration cases.

The Court in Stolt-Nielsen began by issuing a sharp reminder to arbitrators across the country that it is not their domain to determine public policy. They are neither elected nor appointed through our federal and or state political process and are not the correct venue to determine arbiters of what is good for the public. Slip Op. 8–9. The Court’s essential message was “stick to the contract, you have limited authority.” The Court then appears to have issued a blanket policy rule removing the right to class treatment for claims in arbitration where the contract is silent on arbitration and neither applicable law nor custom usage at the time of contracting shed light on the parties’ intention.

The majority-minority split was sharply divided along the usual liberal-conservative lines, with Justices Alito, Roberts, Scalia, Kennedy, and Thomas for the majority and Justices Ginsberg, Stevens, and Bryer joining in a stinging dissent. Justice Sotomayer abstained from the matter altogether.

The majority disparages its prior holding in Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003), pointing out that no majority was reached on any point in that decision—there was mere plurality (on only one of the three questions posed). Slip Op. at 14. The Court instructed that at best, Bazzle relegated to the arbitrator the simple decision of whether a contract is or is not silent on class proceedings, which is a question of contract construction properly before an arbitrator. The Court highlighted that it had not, and has not, resolved whether an arbitrator can determine whether class provisions apply where a contract does not expressly so state, or set forth the standard either an arbitrator or court should apply to make that determination. Id.

In rejecting class arbitration for contracts silent on that point, the Court relied heavily on the Federal Arbitration Act, stating that it is fundamental to an agreement to arbitrate that “parties may specify with whom they choose to arbitrate their disputes.” Id. at 19 (emphasis in original.) The Court stated “[A] party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so. In this case, however, the arbitration panel imposed class arbitration even though the parties concurred that they had reached ‘no agreement’ on that issue.”

The Court’s rationale for blocking class arbitration seems broad, sweeping, and applicable to most arbitration clauses. The opinion stressed the unfairness of exposing cases to class treatment without an express agreement, because it changes the nature of arbitration substantially. According to the Court, the “cost-benefit” of an agreement for bilateral arbitration is that parties forgo “the procedural rigor and appellate review of the courts in order to realize the benefits of private dispute resolution: lower costs, greater efficiency and speed, and the ability to choose expert adjudicators to resolve specialized disputes.” However, financial savings, efficiency, and speed are not as likely to be achieved in class arbitration; thus, parties are less likely to trade their fundamental court rights of appeal and discovery protections for illusory benefits. Id. at 21. The parties to class arbitration further lose the valuable right otherwise enforced in arbitration to privacy and confidentiality in their matter and the awards, which many parties to arbitration value substantially. Michael Geibelson, a class action attorney with Robins, Kaplan, Miller & Ciresi LLP, says

Stolt-Nielsen simply reconfirms what the Supreme Court and many other courts have said many times before—there must be an enforceable agreement to arbitrate before arbitration will be compelled. All the public policy in the world favoring arbitration cannot outweigh the absence of an agreement to arbitrate. Absent such an agreement, parties should not be deprived of their right to a jury trial.

The Court allowed some hope to class action attorneys concerning the future of class arbitration, embedding into its final analysis specific factual aspects of Stolt-Nielsen that eventually may be differentiated from typical consumer cases (although the Court does not actually rely on these differences anywhere in the opinion). The Court highlights that (i) the parties are sophisticated business entities, (ii) there is no tradition of class arbitration under maritime law, and (iii) the plaintiff—and not the defendant—chose the contract form (called a “charter party”) for the shipment. But, notwithstanding those factors, the Court states “the panel regarded the agreement’s silence on the question of class arbitration as dispositive. The panel’s conclusion is fundamentally at war with the foundational FAA principle that arbitration is a matter of consent.” Id. at 20.  

Undoubtedly, how and if Stolt-Nielsen will be applied when these factors change will likely take several more years for the courts and arbitrators to consider before the Supreme Court speaks further on this point. The Court also states that “[w]e have no occasion to decide what contractual basis may support a finding that the parties agreed to authorize class-action arbitration. Here, as noted, the parties stipulated that there was “no agreement” on the issue of class-action arbitration.” Id. (emphasis added).

Joseph Guglielmo, national class action attorney at Scott & Scott LLP in New York, reads the opinion more narrowly:

Although I do not agree with the decision, I believe it is distinguishable based on the specific facts the Court was faced with. Specifically, the Court in Stolt-Nielsen applied principles of maritime law to sophisticated parties who presumably negotiated the provisions of their contract, which did not contain a class action provision. Thus, the decision should have no applicability to individuals and consumers who are forced to enter into unilateral contracts that are either silent or prohibit class arbitrations. It would be tragic if future courts interpret this decision as a means to further restrict the rights of individuals to otherwise bring legitimate disputes to a court.

Practice Tip for Neutrals
The Stolt-Nielsen decision pointedly reminds arbitrators of the limited scope of their appointment: Neutrals are to interpret the contract and its adherence by the parties, nothing more. In doing so, they are not to forget the basic tenets of contract law for determining the nature of the agreement, including express and implied terms, when to consider custom and usage, how to resolve ambiguity, where parole evidence is admissible, when to ascertain the intention of the parties, and how to determine if there is lack of clarity. The Court ostensibly cautioned arbitrators not to think of themselves as judges by the severity of its tone towards the role of arbitrators. The Court also reminded arbitrators that their decisions are not “precedent” like court decisions. Parties looking to arbitration must remember, particularly after this decision, that where arbitrators exceed this limited authority, their rulings may be further subject to challenge in court.

—Jobi Halper, San Diego, CA

FINRA Expands Pilot Program to Benefit Investors

FINRA (the Financial Industry Regulatory Authority) Dispute Resolution announced in early October that it will expand its pilot program for eligible investors; the program allows investors to strike all industry arbitrators from the three-person panel selected to hear the investor’s case. Typical FINRA cases require panels to include two “public” arbitrators and one “industry” arbitrator, or someone who works in the securities industry. The two-year pilot program, started in 2008, now expands the number of broker-dealer companies who have agreed to participate in the program and the number of cases committed to the program. Broker-dealer firms must agree to participate and commit a number of cases they will place into the program, but the firms have no involvement in which cases actually are submitted to the FINRA pilot program. Instead, eligible investors decide whether to participate.

To be considered eligible, investors must name only a participating firm in their complaint and be entitled to a three-person panel. FINRA expects that the expansion will increase the number of cases arbitrated through the pilot program by nearly 505 to 411. Chase Investment Services, Oppenheimer & Co., and Raymond James Financial Services are the newest participating broker-dealers. Larger broker-dealers such as Citigroup Global Markets, Merrill Lynch and Morgan Stanley Smith Barney, and eight other firms, were the first companies to have agreed to participate. FINRA is monitoring the success of the program based both on the number of investors who elect an all-public arbitrator panel and the different results in awards between the all-public panels and public-industry panels.

Second Circuit Holds That Claims Under SOX Are Arbitrable

On October 2, 2008, the Second Circuit Court of Appeals affirmed a decision of the District Court of Connecticut holding that claims brought under the whistleblower protection provision of the Sarbanes-Oxley Act are arbitrable.

FAA Does Not Allow for Expandable Judicial Review

On March 25, 2008, the U.S. Supreme Court issued its decision in Hall Street Associates, LLC v. Mattel, Inc., holding that the Federal Arbitration Act (FAA) precludes expanding the grounds available for review of arbitral awards by agreement of contracting parties. While the U.S. Supreme Court rejected Hall Street's arguments of an expandable judicial review of arbitration awards by contract under an FAA analysis, it remanded to the district court for consideration other possible authority for the judicial enforcement of arbitral awards independent of the Federal Arbitration Act.

Supreme Court Supports Arbitrator Authority in Preston v. Ferrer

On February 20, 2008 the United States Supreme Court issued its opinion in Preston v. Ferrer, where the question presented was whether parties were required to first submit their dispute to a state administrative agency before filing an action in court or submitting the matter to an arbitrator. The controversy between Preston and Ferrer arose after parties had a disagreement about whether certain commissions were owed, and whether the dispute had to be heard in the first instance by a California Labor Commissioner pursuant to a state statute, or whether the dispute should be resolved in arbitration as a result of the parties’ agreement which provided for arbitration pursuant to the rules of the AAA.

In an opinion by Justice Ginsburg, the Court held in an 8-1 decision that when parties agree to arbitrate all questions arising under a contract the FAA supersedes state laws which give primary jurisdiction in another forum such as a state administrative agency. The Preston case therefore reflects the Supreme Court’s continued endorsement and support of the arbitration process and arbitrators’ authority. The opinion is also important because it discusses whether the parties’ incorporation of the AAA’s Rules into their agreement trumps choice of law provisions which might dictate that disputes are resolved in a manner other than arbitration. In connection with that issue, the Court cited to Rule 7(b) of the AAA’s Commercial Arbitration Rules, which states that “[t]he arbitrator shall have the power to determine the existence or validity of a contract of which an arbitration clause forms a party.” That language, the Court held, infers an understanding among the parties that their dispute would not be heard by the Labor Commissioner pursuant to California law, but instead by an arbitrator.

The opinion also reaffirms a number of other important arbitration law principles that have been previously expressed by the Supreme Court. Specifically, the Court stated that a “recurring question” under the FAA is who decides whether grounds exist to invalidate an arbitration agreement, and that attempts to invalidate agreements as a whole are decided by arbitrators, and not courts, unless the attack is made on the arbitration agreement specifically. This outcome is not impacted where an administrative agency has been designated by state law as the forum where disputes are to be resolved, even if the matter could be submitted to an arbitrator subsequently. In addition, the Court emphasized that state laws cannot conflict with the FAA’s “dispute resolution regime” where they grant jurisdiction to an administrative agency or where they impose prerequisites on arbitration agreements that are not applicable to contracts generally.