Three decisions came out recently that offer guidance on appealing from arbitration awards.  Here are three pearls of arbitration appeal wisdom, one from each case:

1.  If you want to appeal from an arbitration, you must have a record.  Sounds basic, right?  But many parties, either due to confidence they will win in arbitration or due to penny-pinching, choose not to hire a court reporter to provide a transcript of the arbitration.  Similarly (though less frequently in my experience), parties sometimes opt for an arbitration award that does not include the arbitrator’s reasoning.  (I always advise clients to choose the highest level of award possible. If there were a Super Monster Supreme Award With Chocolate Sprinkles, I would recommend that.)  Those decisions can be the death knell of an arbitration appeal.  As the Sixth Circuit found recently, a party who fails to preserve a “complete record of the arbitration proceedings [] cannot meet its high burden of showing that the arbitration award must be vacated.”  Physicians Ins. Capital v. Praesidium Alliance Group, 2014 WL 1388835 (6th Cir. April 10, 2014).

2.  You cannot appeal in the middle of arbitration.  There are only two times to come to court about your arbitration: before it happens, when you want to figure out whether arbitration is required under your contract; and after it is complete, when you want to either vacate or confirm the final award.  The corollary is: you cannot appeal in between.  That rule was reiterated in Savers Property & Cas. Ins. Co. v. Nat’l Union Fire Ins. Co. of Pittsburg, 2014 WL 1378134 (6th Cir. April 9, 2014).  (Other circuits take note — Savers was argued on March 21 and the decision came out less than three weeks later.  Such efficiency!)  In Savers, the panel of arbitrators had issued an interim award on liability and were accepting submissions on damages when the liable party convinced the federal court to enjoin any further orders from the panel (based largely on allegations of evident partiality).  The Sixth Circuit reversed the district court’s injunction saying that the liable party “is entitled to its day in court to challenge the fairness of the proceedings and the partiality of the arbitrators — just not until the panel has concluded its work and issued a final award.”

3.  If your arbitration itself includes an appellate review, the court may review both levels of arbitral awards.  As you likely are aware, the AAA started offering optional appellate rules a few months ago. (CPR and JAMS already had optional appellate rules.)  If parties incorporate those appellate rules into their arbitration agreement, then they are entitled to have a first arbitrator/panel decide the issues in the case, and then a second panel of arbitrators decide if the first arbitrator(s) made any material errors of law or “clearly erroneous” factual determinations.  (I didn’t blog about it because *everyone* was blogging about it.  The same reason I am not blogging about the new General Mills policy today…)  One of the practical questions I had about that process was how the courts would review those two levels of arbitral awards on motions to confirm or vacate.  Would a court review only the “final” award of the appellate panel?  Or would it conduct an independent review of the initial arbitrators’ decision?  The Alaska Supreme Court had occasion to address that situation and decided to give both levels of arbitration award the same level of scrutiny.  In Dunham v. Lithia Motors Supports Servs., Inc., 2014 WL 1421780 (Alaska April 9, 2014), the employment agreement allowed a second arbitrator to review the award made by the first arbitrator.  Both arbitrators concluded the employees’ claims lacked merit.  In considering the employees’ allegations that the award should be vacated, the court applied the Section 10 standards to both levels of arbitration: “neither arbitrator manifestly disregarded the law nor issued a completely irrational award;”  “the arbitrators’ awards do not violate public policy.”  While that is a good belt-and-suspenders approach, it strikes me as inefficient and unworkable in cases where the appellate arbitrators actually reversed an aspect of the trial arbitrator’s award.

 

SCOTUS announced today that it would not review the Third Circuit’s decision in Strine v. Delaware Coalition for Open Government, Inc, holding that Delaware’s Chancery Court could not offer its judges’ services as neutral arbitrators in its courtrooms, unless those arbitrations were open to the public.  Therefore, that decision is final and Delaware will now have to decide whether it wants to stop offering arbitrations by its state court judges, or whether it will proceed with the arbitrations in public.  The amici curiae supporting a review of the decision (and thereby supporting keeping the arbitrations secret) included expected groups like the Chamber of Commerce and Business Roundtable, along with groups that don’t appear as often as amici like NASDAQ and NYSE (offering their FINRA arbitration experience), and a group called TechNet, made up of the CEOs of “leading technology companies.”  Oh well.  If those entities really want private arbitration, I am sure JAMS or the AAA will be happy to offer their services…

In other arbitration news, the Eleventh Circuit just became the fifth federal circuit court to reject the NLRB’s interpretation of whether federal labor laws prohibit class action waivers in arbitration clauses.  In Walthour v. Chipio Windshield Repair, LLC, __ F.3d__, 2014 WL 1099286 (11th Cir. March 21, 2014), employees brought a putative class action alleging their employer violated the Fair Labor Standards Act (FLSA).  The employees had entered into arbitration agreements with the employer stating “employee and employer are each giving up his/her/its right… to participate in a class action . . . Employee and employer agree that each may bring claims against the other only in his/her/its individual capacity and not as a plaintiff or class member in any purported class or representative proceeding.”  (I love that the clause also gives up the employer’s right to bring class actions against the employee.  As if that were possible.)  In response, the employer moved to compel individual arbitration.  The district court granted the motion and the Eleventh Circuit affirmed.

The plaintiffs argued that the arbitration agreement was unenforceable because the FLSA makes collective action a substantive right and overrides the FAA mandate to enforce arbitration clauses.  The Eleventh Circuit noted that the Second, Eighth, Fifth, and Fourth Circuits have already rejected that argument.  The court reasoned that under Supreme Court precedent, the text of the FLSA itself would have to clearly indicate that Congress intended that statute to override the FAA.  However, the language of the FLSA did not have any such clear indication, and neither did the legislative history.  Most interesting to me, though, is what was missing from the analysis– any mention of the NLRB’s analysis to the contrary.

No haunted house can scare general counsel as much as an opinion invalidating their company’s arbitration clause and thereby allowing a class action to proceed.  So, here is a Halloween tale for all to keep in mind.

Ralphs Grocery Company hired Zenia Chavarria to work in the deli of one of its grocery stores.  Ms. Chavarria’s employment application agreed that she would be bound by Ralphs’ arbitration policy, but Ralphs did not send her that arbitration policy until three weeks after she signed her application.  The arbitration policy included the following:

  • a prohibition on using AAA or JAMS to administer the arbitration;
  • a requirement that a single arbitrator decide the dispute, and the arbitrator must be a retired state or federal judge;
  • a method of selecting the arbitrator that ensured that, unless the parties agreed on the arbitrator, the arbitrator would be chosen by the party who did not demand arbitration;
  • a provision that each party must pay half of the arbitrator’s total expected fees at the outset of the proceeding; and
  • a provision allowing Ralphs to unilaterally modify the arbitration policy without notice.

After her employment terminated, Ms. Chavarria brought a putative class action against Ralphs.  In response, Ralphs moved to compel arbitration of her individual claims.  The district court denied the motion, finding the arbitration agreement was unconscionable and unenforceable under California law.  The Ninth Circuit affirmed that result in Chavarria v. Ralphs Grocery Co., __ F.3d__, 2013 WL 5779332 (9th Cir. Oct. 28, 2013).

The court found the arbitration agreement was procedurally unconscionable because Chavarria had to accept it in order to be employed and because she was not given the policy until three weeks after she was forced to accept it.  The court found the arbitration agreement was substantively unconscionable (i.e., so one-sided that it “shocks the conscience”) because: Ralphs would always get to choose the arbitrator in any dispute initiated by an employee; the employee must pay half of the arbitrator’s fees at the beginning of the process (fees that would run between $3,000 -$7,000 per day); and Ralphs could modify the arbitration policy without any notice.

The Ninth Circuit also concluded that California’s procedural unconscionability rules are not preempted, because they do not disproportionately affect arbitration agreements.  With respect to substantive unconscionability, the court found that its holding fell within the newly narrowed “effective vindication” doctrine that SCOTUS set forth in AmExIn particular, because Ralphs arbitration policy made it prohibitively expensive to file an arbitration against Ralphs (not just prove a case against Ralphs), it “effectively foreclose[d] pursuit of the claim.”

Finally, the Ninth Circuit made a plea in favor of allowing states to define some arbitration agreements as unconscionable:

“If state law could not require some level of fairness in an arbitration agreement, there would be nothing to stop an employer from imposing an arbitration clause that, for example, made its own president the arbitrator of all claims brought by its employees.  Federal law favoring arbitration is not a license to tilt the arbitration process in favor of the party with more bargaining power.”

What is the lesson for arbitration clause drafters everywhere? Do not overreach.

As a thank you to all the subscribers and readers who continue fueling Arbitration Nation’s success, this 100th blog post contains my recipe for the Best Arbitration Agreement Ever.  (I know, where did the time go??  The blog is growing up so fast!)  What should your arbitration agreement include?  How can you best take advantage of the new case law under the FAA?  Here are some tips.

First, a caveat.  I will not include draft language here.  That would be what my marketing team calls “giving away the store.”  They frown upon that.  But, here is a list of items that should be in your arbitration agreement, and others you should at least seriously consider putting in your arbitration agreement.

Ingredients You Must Have

  • A clear statement of the types of disputes that should be arbitrated (Think broad! “Any and all disputes arising out of” the contract is a good place to start.)
  • A clear statement of whether the Federal Arbitration Act will govern or a particular state’s Uniform Arbitration Act will govern instead (state acts may provide more authority for third-party discovery or judicial review, but the federal act is very strong in enforcing arbitration agreements)
  • A separate delegation clause (meaning that even disputes about the validity of the arbitration agreement will be decided by the arbitrator, taking advantage of Rent-A-Center — because in my view, if you are going to arbitrate, arbitrate everything)
  • An identification of who will administer the arbitration (AAA? JAMS? CPR? or will the arbitrators self-administer it?) and what rules will govern
  • A reasonable limitations period on claims, or an indication of what law will set statutes of limitations
  • Clear language about whether class (or even multiple-claimant) arbitration is or is not authorized (taking advantage of Stolt-Nielsen)
  • A severability clause (so that if any part of your arbitration agreement itself is invalid, the rest will be enforceable)
  • A statement that the prevailing party may turn the arbitration award into a court judgment in a specific court (taking advantage of Section 9 of the FAA)

Considering Sprinkling In:

  • A required hearing location
  • A required number of arbitrators (a single arbitrator is cheaper, but increases the chance of a wacky award; alternatively some provider’s rules say claims under a certain dollar amount will be heard by a single arbitrator, while those over that amount will be heard by a panel of three)
  • Required qualifications of the arbitrators (should it be someone from a particular industry?)
  • The availability of emergency equitable relief (with the AAA, this can be done by incorporating the “Optional Rules For Emergency Measures of Protection”)
  • A requirement that the arbitrators issue a reasoned award (otherwise you reduce your already limited ability to try and vacate any potential wacky award — but if you anticipate only small claims, this may unnecessarily drive up expense)
  • The availability of a quick appeal through the arbitration provider
  • Required mediation either before, or during, the arbitration process
  • Requiring that the loser pay the prevailing party’s attorneys fees (or other modifications to the default rules as to costs and fees of arbitration)
  • If you have chosen an institution to administer the arbitration that is uncommon, you may want to include a statement about what happens if the provider is no longer in business or otherwise unavailable
  • A limitation on the types of damages available
  • Some parameters on discovery – in all disputes or in certain types of disputes (i.e., no more than X depositions, no interrogatories, no requests for admission, no expert depositions…)
  • If your form contract will be used with thousands (or millions) of consumers, and those consumers may have claims that are not economical to pursue on an individual basis, but have significant public benefit, you may want to address the AmEx decision (which refused to compel individual arbitration of antitrust claims because plaintiffs could not “effectively vindicate” their statutory rights via individual arbitrations).  That could be accomplished by stating that claims under certain federal statutes (like antitrust statutes) are outside the scope of the arbitration clause
  • Similarly, consider allowing low-dollar individual claims to be heard in small claims court

Do you think I missed some key ingredients?  Please tell me via email or Twitter and I will consider updating the lists.

Other Resources:

If you were hoping for the full, frosted contractual cake, instead of just a recipe, and you aren’t yet ready to hire me, here are some sources you may want to consider visiting, but note that they do not take advantage of the recent case law.

AAA’s “Clause Builder” 

JAMS

CPR

Ken Adams, a specialist in contract drafting, has a suggestion for the first few lines of your agreement

 

 

By Liz Kramer and Patrick Burns (http://www.valuesolveadr.org/patrick.html ), Guest Blogger

If an arbitration agreement calls for the dispute to be administered by an ADR provider that will not or cannot accept the case, or calls for the application of non-existent rules, it may not be enforceable.  That issue seems to be increasingly prevalent in consumer arbitrations today, which frequently call for the application of rules or arbitral fora that are unavailable. 

Consumer arbitration in the United States changed drastically in 2009.  In July of that year, the National Arbitration Forum (NAF) was essentially put out of the consumer arbitration business by the Minnesota State Attorney General’s Office.  Soon thereafter, the American Arbitration Association (AAA) ceased administering almost all consumer cases.  

Yet the resulting void of administrated consumer arbitration programs did not change the fact that many existing contracts still called for arbitration via those primary providers’ programs.  Nor does it appear to have stopped businesses from naming those same two ADR administrators in their subsequently-revised contracts.

The result is that after a dispute arises, both consumers and businesses are faced with an arbitration provision that calls for something impossible –arbitration administered by an ADR provider that refuses to accept the dispute or under rules that do not exist.  If the parties cannot agree to proceed in a replacement forum or under replacement rules, they must decide whether to roll the dice with the courts.  The trend among courts to date appears to be that they will not compel arbitration (under any rules or in any forum) if the arbitration agreement calls for arbitration before an administrator that refuses to hear the dispute. 

For example, a Pennsylvania state court recently refused to enforce an arbitration agreement between orthopedists and their patients when it called for non-existing rules.  The agreement in question called for the application of “‘Health Care Claims Arbitration Rules of the American Arbitration Association,” yet there are no rules with that title from the AAA.  In fact, the only health care rules available from the AAA do not govern disputes between doctors and patients.  The AAA’s health care rules only apply to “business-to-business” disputes (such as reimbursement disputes between health care providers and insurance payors).  The orthopedists argued that the agreement to arbitrate should still be enforced, just in another forum and under different rules, but the court found that the specific rules and forum were essential terms of the agreement.  Because those essential terms failed, the arbitration agreement was not enforceable.  (The decision is not reported; its title is Luderer v. Nazarian, and it was issued on Sept. 12 by the Philadelphia Common Pleas Court.)

 Similarly, in February of this year, the Supreme Court of Illinois held that the selection of the NAF in a consumer contract was “integral to the parties’ agreement to arbitrate,” such that when the NAF stopped conducting consumer arbitrations, the arbitration agreement was unenforceable.  Carr v. Gateway, Inc., 944 N.E.2d 327 (Ill. 2011).  However, the authors are aware of a Minnesota state court judge who resolved this problem by ordering the parties to select a new forum for arbitration when the one specified in the arbitration agreement was no longer available.   

 ENDNOTE: