The Sixth Circuit recently answered a question I get asked regularly: does an arbitration clause survive the termination of the contract containing it?  I usually say yes, and thankfully the Sixth Circuit backed me up.

In Huffman v. The Hilltop Cos., LLC, __ F.3d __, 2014 WL 1243795 (6th Cir. March 27, 2014), a class of employees alleged FLSA violations by their employer.  Each of their employment agreements had an arbitration clause and a “survival clause” which listed a few of the contractual clauses that survive termination of the agreement.  But the survival clause did not mention the arbitration clause.  The employees attacked the enforceability of the arbitration clauses with an onslaught of latin phrases (“expressio unius est exclusion alterius!” and “contra proferentem!”) intended to convey the idea that if the employer had wanted the arbitration clause to survive, it would have listed it in the survival clause.  The district court agreed and denied the employer’s motion to compel arbitration.

The Sixth Circuit reversed.  It reached way back to a 1991 SCOTUS decision, Litton v. NLRB, 501 U.S. 190 (1991), which “recognized a ‘presumption in favor of postexpiration arbitration of matters unless negated expressly or by clear implication [for] matters and disputes arising out of the …contract.'”  In this case, because the survival clause was silent about arbitration as well as about other clauses that would logically survive the contract’s termination (like the severability clause and integration clause), the court found that silence was not enough to expressly negate the survival of the arbitration clause.

After finding the dispute was arbitrable, the Sixth Circuit applied its recent precedent allocating decisions about whether to allow classwide arbitration to courts.  The court found class arbitration was not authorized because the arbitration agreement did not say anything about classwide arbitration, and it ordered plaintiffs to proceed individually in arbitration.

In the past year, if I wrote about “FLSA” and “arbitration” in the same post, it likely meant that another federal court had found employers can include class action waivers in their employment contracts without violating the Fair Labor Standards Act.  Today, however, is different.  The Eleventh Circuit last week found that it was the FLSA that gave the district court sufficient “managerial responsibility” over workers’ collective actions to override an employer’s coercive, post-lawsuit rollout of a new arbitration agreement.  Billingsley v. Citi Trends, Inc., 2014 1199501 (11th Cir. March 25, 2014).

The collective action is made up of store managers at a clothing retailer, who allege the retailer systematically failed to compensate them for overtime.    The putative class action was filed in February of 2012.  By June of 2012 there was a preliminary scheduling order.  Under Eleventh Circuit precedent, the plaintiff would start the process of notifying similarly-situated store managers 60 days after the scheduling order.  In response, the retailer asked for extensions and then presented the court with new arbitration agreements executed by “several dozen” store managers.  The store argued that these managers were now subject to arbitration and unable to join the court action.  The plaintiffs objected and requested “corrective actions” (i.e., sanctions).

After a two-day evidentiary hearing, the district court in Alabama made its findings and conclusions.  It found that after the scheduling order in the case came out, the retailer got busy instituting a new ADR policy.  The new policy called for binding arbitration that could only proceed on an individual basis.  And, instead of being handed out in a group setting like the retailer’s usual handbook changes, the new policy was delivered individually to store managers in small rooms at the back of the store, “the same places where the store interrogated or investigated its employees.”  H.R. representatives asked the store managers to sign the new arbitration agreement along with a fill-in-the-blank declaration about their job duties.  The store managers testified they understood they would be fired if they did not consent.

The district court found the timing of the rollout “was calculated to reduce or eliminate the number of collective action opt-in Plaintiffs in this case” and was designed to be “intimidating and coercive.”  Therefore, and in response to the retailer’s motion to compel arbitration against the managers who signed the new arbitration agreements, the district court concluded the arbitration agreements were unconscionable and unenforceable.  Furthermore, the district court exercised its managerial responsibility to oversee collective actions under the FLSA and refused to enforce the arbitration agreements for that second, independent basis.

The Eleventh Circuit affirmed.  Interestingly, it did not analyze whether the new arbitration agreements were unconscionable.  Instead, the opinion consists entirely of the appellate court applying the “abuse of discretion” standard to the district court’s use of its “managerial responsibility” under the FLSA.  The opinion described a district court’s responsibility for overseeing FLSA actions broadly — including governing the conduct of the counsel and parties in order to avoid confusion and unfairness (especially ex parte contact with potential class members), as well as ensuring an orderly process.  Given that expansive authority, the court concluded the district court did not abuse its discretion in determining the retailer’s conduct “undermined the court’s authority to manage the collective action” and therefore putative plaintiffs could join the lawsuit notwithstanding their signature on the new arbitration agreements.

Not many employers will attempt to rollout a new ADR policy in a “blitzkrieg fashion” like this retailer.  So, what’s the significance of this case?  It shows that in the current era of the strong federal policy in favor of arbitration, courts who believe arbitration agreements are unenforceable are searching for some basis other than the usual state law contract defenses.  That is because those contract defenses could be preempted by the Federal Arbitration Act and the allowable bases for “substantive unconscionability” narrow each year.  This case essentially re-frames the case from one about enforcing arbitration agreements to one about whether district courts have the ability to manage their cases and not get manipulated.  I believe the Eleventh Circuit saw that as less likely to be reviewed and reversed.

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.

You may have already heard that SCOTUS affirmed arbitrators’ authority to interpret contractual prerequisites to arbitration last week in BG Group, PLC v. Republic of Argentina.  But that is just one of a number of recent decisions from high courts on the deference due arbitrators.

In the BG Group case, the D.C. Circuit had vacated an arbitration award, finding the arbitration panel overstepped its authority by hearing the case before certain conditions precedent had been met.  (My preview of the case is here.)  In a 7-2 decision written by Justice Breyer, the Court gave this helpful roadmap to its analysis:

we shall initially treat the document before us as if it were an ordinary contract between private parties. Were that so, we conclude, the matter would be for the arbitrators. We then ask whether the fact that the document in question is a treaty makes a critical difference. We conclude that it does not.

Why is the conditions precedent issue for the arbitrators in an ordinary contract?  SCOTUS repeatedly cites its 2002 decision in Howsam and explains that “courts presume that the parties intend arbitrators, not courts, to decide disputes about the meaning and application of particular procedural preconditions for the use of arbitration…includ[ing] the satisfaction of ‘prerequisites such as time limits, notice, laches, estoppel, and other conditions precedent to an obligation to arbitrate.'”  Because the section of the treaty at issue dealt with a condition precedent to arbitration, the Court found it was properly a question for the arbitrators, and the fact of the treaty did not change that analysis one bit.

After concluding the arbitrators properly had authority to determine whether the conditions precedent were satisfied, the Supreme Court easily determined that the arbitrators’ substantive determination about those conditions precedent did not “exceed their powers” under the highly deferential standard of Stolt-Nielsen.  While this case is about international arbitration, its analysis begins as a normal contract analysis and in that way is a helpful reminder even in FAA cases about which decisions belong squarely with the arbitrator(s).

The U.S. Supreme Court is not the only one that has been busy confirming arbitration awards, however.

  • West Virginia recently confirmed an arbitration award after hearing arguments that the arbitrators lacked authority to interpret a lease.  In CDS Family Trust, LLC v. ICG, Inc., 2014 WL 184441 (W. Va. Jan. 15, 2014), the high court of West Virginia disposed of the arguments in support of vacatur easily by noting that the losing party had not raised those arguments to the arbitration panel and that the arbitrators were at least arguably construing the lease, citing Sutter.
  • In McAlpine v. Priddle, 2014 WL 685854 (Alaska Feb. 21, 2014), the Supreme Court of Alaska affirmed an arbitration award in favor of an attorney in a dispute with a client.  In response to most of the client’s arguments for vacatur, the court found that “[u]nder our precedent, neither the panel’s factual findings nor its legal conclusions are reviewable.”  Even the arbitrators’ finding that the fee agreement was not falsified or a fraudulent copy was not reviewable.
  • In Hawaii State Teachers Assoc. v. Univ. Laboratory School, 2014 WL 783135 (Hawaii Feb. 27, 2014), the Supreme Court of Hawaii enforced the parties’ agreement that “the arbitrator shall first determine the question of arbitrability” and found that the union was therefore entitled to arbitrate its claim that its grievance is arbitrable.

California is the Judd Nelson of The Preemption Club.  (Or the John Bender, if you prefer using character names.)  The Supreme Court has sent the California courts to preemption detention for ignoring the Federal Arbitration Act in blockbuster, groundbreaking cases (see Concepcion).  But California cannot help itself.  It keeps coming up with novel arguments to avoid arbitration.  And in doing so, it keeps inviting reversal.  Of course, other states get sent to The Preemption Club (West Virginia and Oklahoma, for example), just not with the same panache.

Just last week, the Supreme Court reversed a decision of the California Court of Appeals and remanded it for reconsideration in light of AmEx. In CarMax Auto Superstores California, LLC v. Fowler, a putative class of CarMax employees alleged CarMax violated California labor laws.  The parties engaged in discovery and motion practice for over a year and then stayed the case.  Two years into the stay period, in June of 2011, CarMax moved to compel the plaintiffs to individually arbitrate their claims, in accordance with the terms of their employment agreement.  The plaintiffs opposed the motion, arguing that CarMax had waived its right to arbitrate and that the arbitration agreement was unconscionable.  Plaintiffs also relied on California’s Gentry rule, which provides that class-action waivers in employment arbitration agreements are invalid if “a class arbitration is likely to be a significantly more effective practical means of vindicating the rights of the affected employees than individual litigation or arbitration.”

The district court sided with CarMax but in March of 2013 the California Court of Appeals reversed.  It did not rest its decision on an uncontroversial issue like waiver, however.  (It gave CarMax a break for not moving to compel arbitration before Concepcion, as the motion would have likely been futile under California law, and it also said that the discovery and dispositive motion proceedings could have taken place in arbitration so there was no prejudice.)  The court also did not rest its decision on the alleged illusoriness of the arbitration agreement, because California law does not find agreements illusory, even if they can be modified without advance notice.  Instead, the court went with the riskiest possible basis for its decision: finding that Gentry was not preempted under the Concepcion analysis.  After the California Supreme Court refused to review the decision, CarMax took the issue up to the Supreme Court.

The Supreme Court made short work of the matter.  Just three days after considering the certiorari petition in conference, the Supreme Court granted cert, reversed the Court of Appeals, and remanded the case for reconsideration in light of AmEx.  AmEx is the decision that, in June of 2013, seriously weakened the “effective vindication of statutory rights” line of cases.  So, what will the Court of Appeals do now?  I don’t see much room for fitting the case into what is left of the “effective vindication” doctrine, because that only applies to federal statutory rights and CarMax appears based on state statutory rights.  So if California really wants these CarMax employees to continue as a class, it either has to reverse itself on waiver, or come up with a different basis for finding the arbitration agreement unenforceable.  And in doing so, it will effectively say “Eat… My… Shorts” to SCOTUS.

Just how hard is it to vacate an arbitration award?  The Sixth Circuit recently held that even if the arbitrator reached a result directly contrary to federal precedent, the arbitration award would be upheld.  And the Tenth Circuit found that even if the arbitrator based his award on an agreement that does not support the award, it will be upheld if there is any other basis to confirm.

In Schafer v. Multiband Corp., 2014 WL 30713 (6th Cir. 2014), two directors of a holding company sold that company to Multiband.  Everyone involved knew that the federal government was investigating whether the holding company had purchased stock for its ESOP at inflated prices.  (ESOP = Employee Stock Ownership Plan.)  As part of the deal, Multiband agreed to indemnify the directors if they were found to have wrongly purchased stock.  Later, however, when the federal government actually sued the directors, Multiband refused to indemnify them.  So, the directors settled the suit with their own funds and started an arbitration against Multiband.

In arbitration, Multiband argued that the indemnification agreement was void against public policy (under ERISA) and therefore unenforceable.  The arbitrator agreed.  The directors moved to vacate the award, and the district court granted the motion.  The district court concluded the arbitration award was in “manifest disregard of the law” because the arbitrator was aware of controlling Sixth Circuit precedent and chose to ignore it.  The Sixth Circuit was able to look past the arbitrator’s error and rely on the extraordinary deference to arbitration awards to confirm the award:

Even assuming that manifest disregard of the law is a basis for vacatur of an arbitral decision, the scope of the basis has to be very narrow. Manifest disregard of the law is not just manifest error of law. If the arbitrator expressed disagreement with the law, rather than interpretation of the law, that might suggest “disregard.” But there is little evidence of that in the arbitrator’s decision. Instead, the arbitrator relied on a very broad “plain” reading of the ERISA provision invalidating contractual provisions that relieve a fiduciary of liability, and relied on a narrow and formal meaning of the insurance exception to that provision.

But here’s the opinion’s real kicker:

Moreover, the very idea that an arbitral decision is not appealable for legal error leads to the conclusion that the arbitrator is not necessarily bound by legal holdings of this court. If an arbitrator relies on a colorable meaning of the words of the statute—as the arbitrator did here—the fact that there is Sixth Circuit precedent to the contrary is not necessarily determinative. Sixth Circuit holdings are binding in courts and on agencies whose decisions are appealable to the Sixth Circuit, ultimately because of that appealability. An arbitrator cannot reject the law, but can disagree with nonbinding precedent without disregarding the law.

What can one learn from this opinion?  First, in drafting arbitration provisions, parties need to think carefully about whether they want to forego even this type of legal challenge to an arbitrator’s award.  If not, consider either staying in court or opting to build in an arbitral appeal.  Second, the Sixth Circuit appears to believe “manifest disregard of the law” may be a valid challenge to an arbitration award.  But they consider manifest disregard to be so narrow (the arbitrator disagreeing with a controlling statute and refusing to apply it) that it might as well have died with Hall Street.  And finally, the Sixth Circuit is willing to say in a published opinion what I have only heard others whisper in select company: that if the grounds for appeal of an arbitration award are this constrained, maybe arbitrators really do not have to follow the law after all…

In a less dramatic opinion, the Tenth Circuit also recently affirmed a portion of an arbitration award that the district court had vacated.  In Adviser Dealer Services, Inc. v. Icon Advisers, Inc., 2014 WL 541914 (10th Cir. Feb. 12, 2014), it upheld the arbitration panel’s award forcing Party X to pay attorneys’ fees, even though the award had indicated the fees were “pursuant to the terms of” an agreement, and Party X was not a signatory to that agreement.  However, the appellate court found all parties had requested attorneys’ fees and the rules allowed the panel to award attorneys fees in that situation.  “Because the arbitration panel had general authority  . . . to award attorneys’ fees, an erroneous reference to the [agreement] as a basis for its award was merely an error of fact, which does not justify overturning the panel’s award of attorneys’ fees.”

A new opinion from the Eleventh Circuit highlights an issue that can be confusing to those encountering FAA case law for the first time: when does the federal presumption of arbitrability apply?  The answer is the presumption only applies to whether the scope of an arbitration agreement is broad enough to encompass the parties’ dispute, not whether a valid arbitration agreement exists between the parties.

In Dasher v. RBC Bank (USA), __ F.3d __, 2014 WL 504704 (11th Cir. Feb. 10, 2014), the class action plaintiffs allege a bank charged excessive overdraft fees in breach of their account agreement.  While the parties were conducting discovery related to the bank’s motion to compel arbitration, the bank was acquired by another bank, who issued new account agreements to all the customers (including the named plaintiff).  The new account agreement had no agreement to arbitrate disputes; the old account agreement did.  A dispute then arose as to which account agreement controlled.

The defendant bank argued that the FAA’s presumption in favor of arbitrability should apply to find the parties still had an arbitration agreement.  The Eleventh Circuit set it straight, noting that in Granite Rock SCOTUS said courts may apply “the presumption of arbitrability only where a validly formed and enforceable arbitration agreement is ambiguous about whether it covers the dispute at hand.”  It also cited the Second Circuit which has explicitly recognized that “the presumption does not apply to disputes concerning whether an agreement to arbitrate has been made.”  In this case, because the dispute centered on whether the parties had an arbitration agreement at all, the FAA did not provide a presumption in favor of arbitrability.  (For a classic case in which the presumption operates to find a dispute falls within the scope of an arbitration agreement, despite a “lack of clarity” in the agreement, see Pureworks, Inc. v. Unique Software Solutions, Inc., 2014 WL 211831 (6th Cir. 2014).)

The Eleventh Circuit ended up finding there was no valid arbitration agreement between the Dasher plaintiffs and the bank.  The account agreements had language showing that the new agreement completely superseded the old agreement, therefore the court concluded that the absence of any arbitration clause in the new agreement was controlling.  Furthermore, even though the alleged excessive charges took place while the old agreement was effective, the court found the new agreement controlled the dispute resolution.  That was because the amendment clause stated that the “most current version” of the account agreement “will at all times govern,” which the court interpreted to mean that the parties intended the new agreement to apply retroactively.  In my view, this is a curious result, which places a great deal of reliance on very few words in the contract, and may show that the Eleventh Circuit was working hard to avoid the plaintiffs’ backup argument: that the arbitration agreement was invalid because it deterred him from vindicating his rights, an argument that is likely not supportable after Concepcion and AmEx.

The Tenth Circuit ruled last week that arbitration case law from New Mexico is preempted by the FAA.  This decision calls into question whether states can find arbitration agreements unconscionable simply for being unilateral, i.e. one party is bound to arbitrate its claims while the other party is free to litigate in court.

In 2012, the New Mexico appellate court had found that arbitration agreements are unconscionable, and thereby unenforceable, if they are one-sided.  Figueroa v. THI of New Mexico at Casa Arena Blanca, LLC, 306 P.3d 480 (N.M. Ct. App. 2012).  The context was an arbitration agreement in a contract between a nursing home resident and the facility itself.

In THI of New Mexico at Hobbs Ctr, LLC v. Patton, __ F.3d __, 2014 WL 292660 (10th Cir. Jan. 28, 2014), the very same arbitration agreement was at issue, but this time in federal court.  The wife of a deceased nursing home resident sued the facility for negligence and misrepresentation, and the facility moved to compel arbitration.  The wife opposed the motion, pointing out that the agreement required arbitration of claims that residents are likely to have (like personal injury and consumer protection claims) while allowing court litigation of claims that the facility is likely to have (“guardianship proceedings, collection and eviction”).  The federal district court denied the motion to compel arbitration, finding that under the generally applicable uncosncionability law of New Mexico, the arbitration agreement was unenforceable, citing Figueroa. 

After marching through thirty years of arbitration case law (a little overboard, law clerk, Concepcion probably would have sufficed!), the Tenth Circuit reversed the district court and found arbitration must be compelled.  In short, the opinion found that “the only way the [agreement] can be deemed unfair or unconscionable is by assuming the inferiority of arbitration to litigation.  After all the state court spoke of ‘subjecting the weaker party to arbitration’ clearly evincing the view that having to arbitrate a claim is disadvantageous.”  Put more succinctly “A court may not invalidate an arbitration agreement on the ground that arbitration is an inferior means of dispute resolution.”  Because Concepcion made clear that the FAA preempts state common law contract defenses that depend on the underlying contract being one for arbitration, the FAA preempted Figueroa.  The Tenth Circuit went further and noted that a 2008 decision from the New Mexico Supreme Court (Fiser v. Dell) is also preempted by the FAA.

Whether arbitration agreements are enforceable in personal injury cases against nursing homes has been a repeat issue in courts across the country in the past year.  At least five state courts  and the Eighth Circuit have opined on whether arbitration agreements signed by family members of the residents are enforceable.  In two additional decisions last month, the Massachusetts Supreme Court found arbitration agreements unenforceable because neither a resident’s child or spouse had authority to execute an arbitration agreement for the resident, even if the relative had been named a health care proxy under state law.  Johnson v. Kindred Healthcare, Inc., __ N.E.2d __, 2014 WL 92187 (Mass. Jan. 13, 2014); Licata v. GGNSC Malden Dexter LLC, __ N.E.2d __, 2014 WL 92185 (Mass. Jan. 13, 2014).

In recent months, three federal circuit courts have confronted this question: can a defendant compel arbitration even in the absence of a signed written agreement containing an arbitration clause?  The answers were yes, no, and maybe, but the analysis in all three turns on whether the party resisting arbitration should reasonably have known that an arbitration clause was part of the deal.

In one case, an iron foundry had sought equipment from a sales representative of the defendant.  The rep prepared a quote on its stationery, the back of which contained the “Standard Terms and Conditions of Sale.”  The arbitration clause was included in those terms.  But when the sales rep copied only the front of the quote for the customer, no arbitration clause was included.  Six months later, the sales team emailed the foundry an addendum to the price quote, attaching the standard terms and conditions of a sister company.  The foundry agreed to the new quote.

When the foundry sued over problems with the equipment, the defendant moved to compel arbitration.  The district court denied the motion and the Eighth Circuit affirmed.  Dakota Foundry, Inc. v. Tromley Indus. Holdings, Inc., 2013 WL 6405022 (8th Cir. Dec. 9, 2013).  The court found that the parties had not incorporated the “Standard Terms and Conditions of Sale” by reference, because those terms were not readily available to the foundry and the foundry did not have a reasonable opportunity to reject the arbitration clause.  The terms later attached to the email could not bind the foundry because the terms referred to the wrong company and the foundry could reasonably have concluded the terms were mistakenly provided.

In contrast, in Tillman v. Macy’s, Inc., 2013 WL 5827729 (6th Cir. Oct. 31, 2013), the Sixth Circuit found an employee did agree to arbitrate her discrimination claim against Macy’s, notwithstanding the lack of a signed arbitration agreement.  The department store alleged that the employee agreed to arbitrate by virtue of her failure to opt-out of a dispute resolution program that the company rolled out four years after the plaintiff was hired.  Employees were mailed a postcard, plan document, and an election form that advised employees they must opt-out by a certain date if they did not want to arbitrate disputes.  (They also had to watch a mandatory video about the program.)  The Sixth Circuit held that this information was “sufficient to constitute a valid offer to arbitrate” and that the employee accepted the offer by continuing her employment without opting out of the arbitration program.

Finding the middle ground, the Second Circuit found an arbitration may have been incorporated by reference in Hirsch v. Citibank, N.A., 2013 WL 5716397 (2d Cir. Oct. 22, 2013).  In that case, plaintiffs had signed signature cards when they opened accounts at Citibank.  Those cards, in turn, bind the customers to “any agreement governing” their accounts.  Citibank argued that language incorporated a Client Manual containing an arbitration agreement.  The district court denied Citibank’s motion to compel arbitration, but the Second Circuit remanded for a determination whether the plaintiffs actually received the Client Manual upon opening their accounts.  The Second Circuit reasoned that receipt of a physical document can be enough to put the party on notice of the terms as long as it was clearly a binding legal document.

Arbitration is in the news.  Not just a buried paragraph in the business section, but the front page.   (A three-arbitrator panel issued a 34-page arbitration award finding Major League Baseball was justified in suspending baseball player Alex Rodriguez for 162 games, which A-Rod is now trying to vacate.)  My own hope is that this high-profile arbitration becomes a tool for teaching the public about arbitration.  Indeed, A-Rod’s experience to date offers pointers for everyone from the arbitration novices to nerds. For example:

  • Labor disputes — i.e. those between employees who are members of unions and the employer or other employees — are frequently arbitrated.
  • In a case where the arbitration will be decided by three arbitrators, the agreement often provides that each party to the arbitration will choose one of the three, and only the third arbitrator will be neutral.  (In this case, one of A-Rod’s complaints is that his union, the MLB Players Association, chose his arbitrator and did not allow his personal legal team to make the selection.)  A-Rod’s panel was made up of the General Counsel of the Players Association, the COO of Major League Baseball, and then the impartial chair, Fredric Horowitz.  (The Players Association appointee did not agree to the award.)
  • Arbitration hearings do not generally proceed under either the Federal Rules of Civil Procedure or any state’s rules of civil procedure, nor do they necessarily abide by the federal or state rules of evidence.  Instead, the parties’ contract dictates what rules will govern the arbitration proceeding (contracts often choose rules of the arbitration provider, like the AAA).  In this case, the parties’ collective bargaining agreement set out its own rules of procedure that would govern.
  • Arbitration proceedings are not necessarily confidential.  A-Rod was unsuccessful in asking a federal judge to “seal” his arbitration award, i.e. keep it out of the public record.  And in general, once any party goes to court to confirm or vacate an arbitration award, the award is likely to become public, even if the parties’ agreement or the arbitral rules provide for confidentiality.
  • Arbitrators only have power over the parties who signed the arbitration agreement at issue, but not over third parties like media outlets.  In this case, both parties complained about violations of the confidentiality clause in the parties’ agreement during the arbitration, but the arbitration award noted that “the Panel does not have authority to enjoin third parties or the media from breaching the confidentiality provisions” of the agreement.
  • Arbitration awards are extremely difficult to overturn.  There are only four valid bases to overturn an arbitration award under the Federal Arbitration Act.  Rodriguez is arguing two of those bases (that the arbitrators refused to hear pertinent evidence and were partial to MLB).  He is also arguing a basis that is not found in the FAA, but was created by judges: the arbitrator manifestly disregarded the law.  Many federal courts have declared that “manifest disregard of the law” cannot be used to overturn arbitration awards (because it is not in the statute), but the federal courts in New York have continued to allow arguments that arbitrators effectively disregarded legal precedent.