CPR Tribute to Peter Kaskell

kaskellparty

By Russ Bleemer

Longtime CPR Institute senior vice president Peter F. Kaskell, who spearheaded the translation of seminal commercial ADR theories into everyday dispute management processes, died Dec. 11 at 94. He lived in West Redding, Conn.

Kaskell joined the CPR Institute in 1983, soon after it was founded, following a lengthy legal career, mostly in-house.  He devoted two decades at the New York nonprofit to devising ADR procedures and leading initiatives that produced still-vital versions ADR tools.

“Peter paved the way for CPR Institute’s committees and task forces continued work on identifying better ways to resolve legal conflict,” said CPR President and Chief Executive Allen Waxman, “producing first-generation, fundamental processes in prominent areas including arbitration.”

Kaskell is best known later in his career for co-editing with Thomas J. Stipanowich, who headed the CPR Institute from 2000 to 2005, an often-cited best practices treatise, Commercial Arbitration at Its Best, a 2001 volume published with the American Bar Association.

But well before the treatise, Kaskell was an organizing force for the CPR Institute.  He set up what became a prototype for CPR Institute annual meetings, establishing cutting-edge agendas and recruiting and moderating numerous panels.

He led committee work that produced key CPR Institute Model ADR Practices and Procedures, for which Kaskell did the bulk of the writing and editing.

The first of his significant works was an analysis of the workings of the minitrial, which brought an informal way of assessing a case into a structured toolbox process for addressing and diffusing litigation.  A minitrial consists of an adversarial information exchange, followed by management negotiations directed to settling a dispute before a full-blown legal proceeding in a public court.

Kaskell wrote the minitrial rules, which were reviewed by an ad hoc committee assembled by the CPR Institute—then, the Center for Public Resources—before they were offered for adaptation to legal conflicts.

They were unprecedented–“the first model rules for minitrials and . . . designed to be flexible enough to be adopted by virtually any company contemplating submitting a dispute to minitrial for resolution.” Model Mini-Trial Agreement for Business Disputes, 3 (5) Alternatives 1 (May 1985) (available at http://bit.ly/2sDJo9k).

Kaskell returned to the subject of minitrials at CPR events and meetings.  The procedure, which was updated and supplemented twice over the years, is still used: You can read the full minitrial procedure and commentary at CPR Institute’s website at http://bit.ly/2sDJo9k.

Even more significantly, CPR’s arbitration rules began on Peter Kaskell’s desk.  When the CPR Institute first looked at arbitration in the 1980s, it saw the process as another independent means for lawyers to assist parties in resolving disputes without courts that could be used more effectively and frequently.  The CPR Institute conceived of arbitration as a nonadministered process run by the attorneys and tribunal as part of the practice of law.

Organization founder James H. Henry tasked Kaskell with heading what has become one of CPR’s longest-running committee projects.  Overseeing the Center for Public Resources’ Committee on Private Adjudication, Kaskell led a blue-ribbon commission in producing the organizations’ first set of arbitration rules in 1989.  The debut constituted a special supplement in the September 1989 issue of Alternatives, and can be found at http://bit.ly/2PD8crc.

Thirty years’ of subsequent history of the CPR Institute Arbitration Committee and rules, both nonadministered and, in this decade, administered rules, most of which included Kaskell’s input, can be surveyed at CPR’s website at www.cpradr.org/resource-center/rules/arbitration.

There were other areas that caught Kaskell’s attention and to which he contributed to making alternative dispute resolution standard practices. For example, in the environmental area, he was staff director in 1985 of a committee that produced the Superfund Multi-Party Site Cost Allocation Procedure. He led as staff director the CPR Institute’s first international committee efforts, as well as antitrust, insurance and technology committee initiatives.

Kaskell was both an expert in and fascinated by the workings of the corporate law department.  Before joining the CPR Institute as a vice president, he spent 27 years at Olin Corp., a Clayton, Mo., publicly traded chemical company.

In the 1990s, with CPR Institute Vice President Catherine Cronin-Harris, Kaskell conducted a study of in-house attorneys’ views of alternative dispute resolution.  The work charted the increasing awareness through the 1990s of the availability and efficacy of ADR.

The 1997 version of the study found, among other things, that nearly 17% of all cases in the in-house respondents’ portfolios used ADR process, more than double from just four years earlier.  See Catherine Cronin‐Harris and Peter H. Kaskell, “How ADR finds a home in corporate law departments,” 15 Alternatives 158 (December 1997) (available at http://bit.ly/2rZZ4Un).

Later, as a senior fellow at the CPR Institute, Kaskell focused on intellectual property issues.  See Peter H. Kaskell, “Is Your Infringement Dispute Suitable for Mediation?” 20 Alternatives 45 (March 2002) (available at http://bit.ly/2sL6QRV).

Kaskell was born in Berlin, Germany, in 1924, and came to the United States as a child.  He grew up in New York and completed his undergraduate work and his law degree at Columbia University.

He interrupted his Columbia education to enlist and serve in World War II, where he was a war hero.  For details on Kaskell’s wartime efforts, see Jeannette Ross, “Wilton loses war hero Peter Kaskell,” Ridgefield (Conn.) Bulletin (Dec. 17) (available at http://bit.ly/2S6SJRz).

Kaskell was a former trustee of the Aldrich Contemporary Art Museum in Ridgefield, Conn., and served as vice chairman of Connecticut Humanities.

On behalf of CPR, Waxman extends condolences to Kaskell’s wife, Joan Kaskell, who was a frequent presence at CPR Institute events over the years, and his four children and their families.

 

NY State Bar Assoc Issues New Ethics Opinion Confirming that Lawyer-Mediator Acting as Third-Party Neutral is Not in Lawyer-Client Relationship or Providing Legal Services

By Mark Kantor

Kantor Photo (8-2012)

The New York State Bar Association Committee on Professional Ethics issued on Friday its Ethics Opinion No. 1178 addressing the ethics obligations of a lawyer acting as a mediator (https://www.nysba.org/CustomTemplates/SecondaryStandard.aspx?id=98793).  According to this new Opinion, a lawyer-mediator acting as a neutral is not acting in a lawyer-client relationship or providing legal services (“In so concluding, we expressly supersede N.Y. State 678 (1996) insofar as that opinion says that the provision of mediation services by lawyers constitutes the practice of law. ****  Only when a lawyer-mediator engages in services beyond providing neutral services, such as filing papers in court, does the lawyer-mediator cross the line into providing legal services.”).  Therefore, much of the New York Rules on Professional Conduct for New York-qualified attorneys are not applicable to mediation services that do not cross that line.

Thus, the N.Y. Rules of Professional Conduct (the “Rules”) that apply when a lawyer represents a client do not necessarily apply in the context of a lawyer providing mediation services, including Rule 1.5 concerning fees, Rule 1.6 concerning confidentiality, and Rule 1.7 concerning conflicts, although lawyer-mediators should be aware that certain rules will continue to apply even in the absence of an attorney-client relationship.  See Rule 5.7, Cmt. [4].

I quote the entirety of the Opinion at the end of this post.

New York State Rule 2.4, which expressly addresses lawyers as third-party neutrals (including as arbitrator and as mediator), remains of course directly applicable.  That Rule requires the lawyer/third-party neutral to inform unrepresented parties that the lawyer serving as the neutral is not representing them and, where appropriate, to explain to the party the difference between a third-party neutral and a lawyer representing a client.  Rule 2.4 provides that:

(a) A lawyer serves as a “third-party neutral” when the lawyer assists two or more persons who are not clients of the lawyer to reach a resolution of a dispute or other matter that has arisen between them.  Service as a third-party neutral may include service as an arbitrator, a mediator or in such other capacity as will enable the lawyer to assist the parties to resolve the matter.

(b) A lawyer serving as a third-party neutral shall inform unrepresented parties that the lawyer is not representing them.  When the lawyer knows or reasonably should know that a party does not understand the lawyer’s role in the matter, the lawyer shall explain the difference between the lawyer’s role as a third party neutral and a lawyer’s role as one who represents a client.

Newly issued Opinion 1178 also offers advice on issues commonly faced by lawyer-mediators navigating the line between legal services and mediation services, including confidentiality, meeting with parties separately, entering into an alternative fee arrangement, and memorializing an agreement reached in the mediation.

  1. In addition, even though the confidentiality provisions of Rule 1.6 would not apply, a lawyer-mediator may be governed by other confidentiality obligations found in substantive laws (such as statutes or court rules) or private sources (such as ethics codes promulgated by mediation groups).  See Rule 2.4, Cmt. [2] (“the lawyer may be subject to court rules or other law that applies either to third-party neutrals generally or to lawyers serving as third-party neutrals.  Lawyer-neutrals may also be subject to various codes of ethics”); Rule 1.12, Cmt. [3] (lawyers who serve as third-party neutrals “typically owe the parties an obligation of confidentiality under law or codes of ethics governing third-party neutrals”); N.Y. State 1026 ¶ 7 (2014).
  2.  Accordingly, as long as the lawyer-mediator follows Rule 2.4 (and any other applicable rules or laws), the lawyer-mediator would be free to conduct the mediation in the way the lawyer-mediator thinks best, including meeting with the parties separately, and contracting for and structuring her fee however the lawyer-mediator would like.
  3.  We also note that the lawyer-mediator may assist the parties with memorializing in writing the terms to which they agree during the mediation.  Such an aide memoire or Memorandum of Understanding is a common product of the mediation process.

The context of Ethics Opinion 1178 is a lawyer who wishes to act as a mediator in divorce disputes.  However, the scope of the Opinion itself arguably extends to third-party neutral services more generally, and certainly to mediation outside the divorce context.  Since the description in Rule 2.4 of third-party neutrals expressly encompasses arbitrators as well as mediators and the rationale for Opinion 1178 includes the adoption of that Rule to distinguish third-party neutral services from the delivery of legal services, one may easily construe Opinion 1178 to apply to a lawyer’s service as a neutral arbitrator as well.  However, the direct conclusions of the Opinion speak only to mediation services.  I invite comments and corrections in that regard from others who may know more on this subject.

Hat tip to Jill Gross at that wonderful blog Indisputably for bringing this development to the attention of the ADR community yesterday (http://indisputably.org/2019/12/new-nys-ethics-opinion-lawyer-as-third-party-neutral/).

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Ethics Opinion 1178

New York State Bar Association
Committee on Professional Ethics

Opinion 1178 (12/13/2019)
Modifies NY State 678 (1996)

Topic:  Lawyer as third-party neutral

Digest:  A lawyer-mediator engaged in providing third-party neutral services is subject to Rule 2.4 but not the Rules that govern the representation of clients.  As such, the lawyer-mediator is generally free to conduct the mediation in the way the lawyer thinks best, and to charge whatever fee may be appropriate, provided always that the lawyer fully discloses to the parties that the lawyer is acting as a disinterested mediator and not as counsel to any party, including the consequences of that difference.  In the event of an agreement, the lawyer-mediator may memorialize the parties’ understanding in a document and may appear as counsel for one party (but not both) in filing a divorce action if the other party gives informed consent confirmed in writing.

Rules:  1.5, 1.6, 1.7, 1.12, 2.4, 5.7

FACTS

1. The inquiring lawyer intends to become a mediator and plans to focus on mediating cases involving parties who would otherwise seek a contested divorce.  The lawyer-mediator anticipates that the parties may find that meeting individually to discuss the issues that need to be resolved in order to submit their agreement to the court would be beneficial given the antagonistic position between them.

2. The lawyer-mediator intends to charge an upfront, flat rate for the mediation services. The goal of those services is for the parties to resolve all of the issues necessary for the parties to be in a position to submit an uncontested divorce package.  In the event that the parties discontinue using the lawyer as a mediator before all of the issues are resolved, the contract will provide that the parties will pay the lawyer-mediator an hourly rate for the services performed, charged against the upfront payment with any unused amount returned to the parties.

QUESTIONS

3. In connection with setting up a mediation practice, the inquiring lawyer poses several questions:

(a) May the lawyer-mediator meet with the parties individually to inform them of the various issues that need to be resolved in order to have a divorce granted in New York?
(b) May the lawyer-mediator enter into a contract with the parties to provide mediation services?  If so, may the contract provide for the payment of a flat rate by the parties in the event resolution is reached that results in an uncontested divorce packet but otherwise provides for the payment by the parties on an hourly basis if the parties discontinue the lawyer-mediator’s services before all issues can be resolved?
(c) What disclosures does the lawyer-mediator have to provide to parties to the mediation concerning her role as mediator?
(d) May the lawyer-mediator prepare documents, including a divorce action representing the parties, if the parties reach agreement?

OPINION

4. Generally, lawyer-mediators are not engaged in the representation of a client and are not providing legal services to the parties to the mediation.  See N.Y. State 999 ¶ 2 (2014); N.Y. State 1026 ¶ 6 (2014).  Thus, the N.Y. Rules of Professional Conduct (the “Rules”) that apply when a lawyer represents a client do not necessarily apply in the context of a lawyer providing mediation services, including Rule 1.5 concerning fees, Rule 1.6 concerning confidentiality, and Rule 1.7 concerning conflicts, although lawyer-mediators should be aware that certain rules will continue to apply even in the absence of an attorney-client relationship.  See Rule 5.7, Cmt. [4].

5. Instead, Rule 2.4 is directed to lawyers acting as third-party neutrals and provides:
(a) A lawyer serves as a “third-party neutral” when the lawyer assists two or more persons who are not clients of the lawyer to reach a resolution of a dispute or other matter that has arisen between them.  Service as a third-party neutral may include service as an arbitrator, a mediator or in such other capacity as will enable the lawyer to assist the parties to resolve the matter.

(b) A lawyer serving as a third-party neutral shall inform unrepresented parties that the lawyer is not representing them.  When the lawyer knows or reasonably should know that a party does not understand the lawyer’s role in the matter, the lawyer shall explain the difference between the lawyer’s role as a third party neutral and a lawyer’s role as one who represents a client.

6. In terms of the required disclosure under Rule 2.4(b) stated above, we have noted that “[t]he precise content of the required conversation, and the exact information the lawyer-mediator will have to disclose to a party about the lawyer’s role, may vary from one mediation to another.”  See N.Y. State 878 (2011).  Comment [3] to Rule 2.4 provides some guidance:

Unlike nonlawyers who serve as third-party neutrals, lawyers serving in this role may experience unique problems as a result of differences between the role of a third-party neutral and a lawyer’s service as a client representative.  The potential for confusion is significant when the parties are unrepresented in the process.  Thus, paragraph (b) requires a lawyer-neutral to inform the unrepresented parties that the lawyer is not representing them.  For some parties, particularly parties who frequently use dispute-resolution processes, this information will be sufficient.  For others, particularly those who are using the process for the first time, more information will be required.  Where appropriate, the lawyer should inform unrepresented parties of the important differences between the lawyer’s role as a third-party neutral and as a client representative, including the in-applicability of the attorney-client evidentiary privilege.  The extent of the disclosure required under this paragraph will depend on the particular parties involved and the subject matter of the proceeding, as well as the particular features of the dispute resolution process selected.

7. “Thus, unless all mediating parties are represented by counsel in the mediated matter, a lawyer-mediator must explain whatever needs to be explained to assure there is no confusion about the lawyer-mediator’s role and the difference between a lawyer’s role on behalf of a client and a mediator’s role as a neutral.”  See N.Y. State 878 (2011).

8. There may also be times when it is not possible for the lawyer-mediator to provide an effective explanation regarding the difference between the role as a lawyer-mediator compared to a lawyer’s role when representing a client.  As we noted in N.Y. State 736 (2001), matrimonial mediation may be undertaken in many circumstances, but sometimes “the complex and conflicting interests involved in a particular matrimonial dispute, the difficult legal issues involved, the subtle legal ramifications of particular resolutions, and the inequality in bargaining power resulting from differences in personalities or sophistication of the parties make it virtually impossible to achieve a result free from later recriminations or bias or malpractice, unless both parties are represented by separate counsel.  In the latter circumstances, informing the parties that the lawyer ‘represents’ neither and obtaining their consent, even after a full explanation of the risks, may not be meaningful; the distinction between representing both parties and not representing either, in such circumstances, may be illusory.”

9. In addition, even though the confidentiality provisions of Rule 1.6 would not apply, a lawyer-mediator may be governed by other confidentiality obligations found in substantive laws (such as statutes or court rules) or private sources (such as ethics codes promulgated by mediation groups).  See Rule 2.4, Cmt. [2] (“the lawyer may be subject to court rules or other law that applies either to third-party neutrals generally or to lawyers serving as third-party neutrals.  Lawyer-neutrals may also be subject to various codes of ethics”); Rule 1.12, Cmt. [3] (lawyers who serve as third-party neutrals “typically owe the parties an obligation of confidentiality under law or codes of ethics governing third-party neutrals”); N.Y. State 1026 ¶ 7 (2014).

10. Accordingly, as long as the lawyer-mediator follows Rule 2.4 (and any other applicable rules or laws), the lawyer-mediator would be free to conduct the mediation in the way the lawyer-mediator thinks best, including meeting with the parties separately, and contracting for and structuring her fee however the lawyer-mediator would like.

11. We also note that the lawyer-mediator may assist the parties with memorializing in writing the terms to which they agree during the mediation.  Such an aide memoire or Memorandum of Understanding is a common product of the mediation process.

12. Beyond this, however, that lawyer-mediator may not cross the line between acting as a neutral arbiter and acting as counsel to the parties.  N.Y. State 1026 ¶ 10 (the lawyer performs legal services when the lawyer drafts and files divorce papers in court on behalf of the parties).  In that event, all of the mediation services would then be covered by the Rules as the non-legal mediation services would not be distinct from the legal services.  See Rule 5.7.  Nevertheless, Rule 1.12(b) expressly permits the lawyer-mediator, at the conclusion of the mediation, in the event of an agreement between the parties, to represent one of the parties in filing a divorce action in court, provided the other party gives informed consent, confirmed in writing.  At that point, the erstwhile mediator owes all the duties accompanying the attorney-client relationship under the Rules to the represented party.  Rule 1.7(b)(3) forbids a lawyer from representing adverse parties in a proceeding, even with informed consent, and so the lawyer-mediator may not represent both parties in the filing of a divorce action.

13. In so concluding, we expressly supersede N.Y. State 678 (1996) insofar as that opinion says that the provision of mediation services by lawyers constitutes the practice of law.  That opinion was issued before adoption of Rule 2.4, which specifically governs a lawyer’s provision of neutral services and which had no equivalent in the predecessor N.Y. Code of Professional Responsibility.  We have earlier so hinted:  Following adoption of the Rules, we noted the possibility that our conclusion under the Rules might change on this issue. In N.Y. State 979 (2013), we said that there were conflicting opinions concerning whether the provision of mediation services was the practice of law and that “[t]he case that such services are not the practice of law was arguably bolstered by New York’s adoption of the Rule specifically governing a lawyer’s service as a mediator.”  We now make explicit that Rule 2.4 ousts our conclusion in N.Y. State 678 that the provision of mediation services invariably constitutes the practice of law.  Only when a lawyer-mediator engages in services beyond providing neutral services, such as filing papers in court, does the lawyer-mediator cross the line into providing legal services.

CONCLUSION

14. A lawyer-mediator engaged in providing third-party neutral services is subject to Rule 2.4 but not the Rules that govern the representation of clients.  As such, the lawyer-mediator is generally free to conduct the mediation in the way the lawyer-mediator thinks best and to charge whatever fee the lawyer-mediator thinks appropriate and must provide disclosure to the parties concerning the lawyer-mediator’s role as a mediator compared to that of a lawyer representing a client.  If, however, the lawyer-mediator engages in an activity that constitutes a legal service, that legal service would not be distinct from the non-legal mediation services and the Rules would then apply to both the legal and non-legal services provided by the lawyer-mediator.  At the conclusion of the mediation, the lawyer may represent one (but not both) of the parties in filing a divorce action, provided the other party gives informed consent, confirmed in writing.

(08-19)

You May Be Interested In…

New York State Bar Association Committee on Professional Ethics Opinion 1178 (12/13/2019) Modifies NY State 678 (1996) Topic: Lawyer as third-party neutral Digest: A lawyer-mediator engaged in providing third-party neutral services is subject to Rule 2.4 but not the Rules that govern the representation of clients. As s

Lawyer?mediator may not draft and file separation agreement and divorce papers on behalf of spouses as joint clients unless the lawyer can satisfy the “disinterested lawyer” test of DR5?105(C)

New York State Bar Association Committee on Professional Ethics   Opinion 999 (3 28 14)   Topic    Marital Mediation and referrals.

Lawyer may not ethically enter into arrangement with a non-lawyer to accept referrals for a fixed monthly fee for each case referred where case has been obtained by telephonic solicitation.

A lawyer may not participate in a divorce mediation referral service that is not operated, sponsored or approved by a bar association

_______________________________________________

Mark Kantor is a CPR Distinguished Neutral. Until he retired from Milbank, Tweed, Hadley & McCloy, Mark was a partner in the Corporate and Project Finance Groups of the Firm. He currently serves as an arbitrator and mediator. He teaches as an Adjunct Professor at the Georgetown University Law Center (Recipient, Fahy Award for Outstanding Adjunct Professor). Additionally, Mr. Kantor is Editor-in-Chief of the online journal Transnational Dispute Management.

This material was first published on OGEMID, the Oil Gas Energy Mining Infrastructure and Investment Disputes discussion group sponsored by the on-line journal Transnational Dispute Management (TDM, at https://www.transnational-dispute-management.com/), and is republished with consent.

Ninth Circuit, Overturning an Award, Backs More Arbitrator Disclosure

By Daniel Bornstein

The Ninth U.S. Court of Appeals ruled this week that arbitrators are required to disclose their ownership interests in the organizations they are affiliated with and the organizations’ business dealings with the arbitration parties.

In Monster Energy Co. v. City Beverages LLC, Nos. 17-55813/17-56082 (9th Cir. Oct. 22)  (available at http://bit.ly/2PjmXzq), a 2-1 appellate panel vacated an arbitration award because the arbitrator, retired California state judge John W. Kennedy, failed to disclose both his ownership interest in JAMS and the fact that JAMS had administered 97 arbitrations for one of the parties.

The decision has important implications for arbitrators’ disclosure of their financial interests. Under the majority decision by Circuit Judge Milan D. Smith Jr.–joined by Oregon-based U.S. District Court Judge Michael H. Simon, sitting by designation–it isn’t sufficient for arbitrators to vaguely state that they have an economic stake in the success of their organization, and to merely note that their organization has done business in the past with one of the parties.

Rather, arbitrators must make clear the specific nature of their economic interest—that is, their ownership–and the scope of those past business ties.

City Beverages had alleged that Monster Energy had committed a breach of contract. After an almost nine-year business relationship, Monster Energy terminated the distribution contract without cause, an act that was permitted by the contract as long as it made a severance payment. But City Beverages rejected a $2.5 million payment, invoking the Washington Franchise Investment Protection Act, which prohibits termination of a franchise contract absent good cause.

Monster Energy’s move was upheld in arbitration, and it was awarded $3 million in attorneys fees. City Beverages appealed to the Ninth Circuit on the basis that the arbitrator had not adequately disclosed his ties to JAMS, and his and his firm’s relationship with Monster Energy. See By Savannah Billingham-Hemminger, “Not Just the Arbitrator: Ninth Circuit Looks at Provider Disclosure Obligation,” 37 Alternatives 119 (September 2019) (available at http://bit.ly/2WmriUh).

As the panel opinion noted, an arbitrator is required to disclose when he has a “substantial interest in a firm which has done more than trivial business with a party.” Commonwealth Coatings Corp. v. Cont’l Cas. Co., 393 U.S. 145, 151-152 (1968). In turn, vacating an arbitration award is appropriate when the arbitrator neglects to disclose “any dealings that might create an impression of possible bias.” Id., at 149.

Judge Smith’s analysis of Arbitrator Kennedy’s “evident partiality”—a Federal Arbitration Act standard for overturning awards–is contained in two parts. First, it reasoned that the arbitrator’s ownership interest in JAMS was “sufficiently substantial” to warrant disclosure. A JAMS arbitrator who is a co-owner of the organization is entitled to a share of the profits from all arbitrations administered by JAMS, not merely the ones the neutral undertakes personally.

Because only about one-third of JAMS’ more than 400 neutrals are owners, Kennedy’s ownership interest “greatly exceeds the general economic interest that all JAMS neutrals naturally have in the organization.”

Second, the appeals court determined that JAMS and Monster Energy were engaged in “nontrivial business dealings” that were not disclosed to City Beverages. Over the past five years, JAMS had administered 97 arbitrations in which Monster Energy was a party. This is largely because the energy drink maker’s form contracts contain a provision identifying JAMS’ Orange County, Calif., office as its arbitrator source.

Kennedy submitted a disclosure statement, which read:

I practice in association with JAMS.  Each JAMS neutral, including me, has an economic interest in the overall financial success of JAMS.  In addition, because of the nature and size of JAMS, the parties should assume that one or more of the other neutrals who practice with JAMS has participated in an arbitration, mediation or other dispute resolution proceeding with the parties, counsel or insurers in this case and may do so in the future. “

The majority opinion considered this statement inadequate because it failed to mention Kennedy’s ownership interest in JAMS, and JAMS’ business relationship with Monster.

Judge Smith wrote

We thus hold that before an arbitrator is officially engaged to perform an arbitration, to ensure that the parties’ acceptance of the arbitrator is informed, arbitrators must disclose their ownership interests, if any, in the arbitration organizations with whom they are affiliated in connection with the proposed arbitration, and those organizations’ nontrivial business dealings with the parties to the arbitration.

The opinion notes, “Prospectively, arbitration organizations like JAMS, which are already well-accustomed to extensive conflicts checks and disclosures, will have no difficulty fulfilling, and even exceeding, the requirements described here.”

Judge Smith concluded that failing to disclose the extensive business relationship with Monster Energy and the arbitrator’s JAMS ownership interest “creates a reasonable impression of bias and supports vacatur of the arbitration award.”  The panel also overturned the fees.

Circuit Judge Michelle T. Friedland dissented, noting that she disagreed that in evaluating “whether the Arbitrator might favor Monster, the additional information the majority believes should have been disclosed would have made any material difference.”

She writes that the majority opinion is unclear on the nature and extent of disclosure, and “[a]s these lingering questions demonstrate, . . . is likely to generate endless litigation over arbitrations that were intended to finally resolve disputes outside the court system.”

In addition to her view that the Monster Energy attorneys fees arbitration award should be upheld, Friedland looked extensively at the repeat-player issue regarding the relationship between JAMS and Monster Energy.  She noted

Owners of JAMS have an interest in maximizing JAMS’s amount of business, because they share in JAMS’s profits. Likewise, non-owner arbitrators have an interest in advancing their professional careers and maintaining their status with JAMS, which creates similar incentives to decide cases in a way that is acceptable to repeat player customers—otherwise, JAMS might terminate the nonowner’s JAMS affiliation.

In her dissent’s final paragraph, Friedland took a dim view of arbitration:

To the extent that the private arbitration system favors repeat players, I think it is unfortunate that so many parties forgo the protections of Article III and turn to arbitration instead. It is especially unfortunate when arbitrations involve a non-repeat player party that had no choice but to agree to arbitration in order to acquire employment, purchase a product, or obtain a necessary service. The majority laudably seeks to mitigate disparities between repeat players and one-shot players in the arbitration system. But I disagree that requiring disclosures about the elephant that everyone knows is in the room will address those disparities. It will only cause many arbitrations to be redone, and endless litigation over how many repeated arbitrations there will be.

 

The author, a 2L at St. John’s University School of Law in Jamaica, N.Y., is a CPR Institute Fall 2019 intern.

Understanding the Mediation Process to Assist Mediators, Self-Represented Litigants and Attorneys

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By:  Judge Steven I. Platt (Ret.)

The following guest post is a transcript of a speech that the author presented to the meeting of The Legal Research Institute of the Law Library Association of Maryland (LLAM), on October 11, 2019 at the University of Maryland School of Law. It is reprinted here with permission.

INTRODUCTION:

Good afternoon.

I appreciate this opportunity to discuss the role of the legal researcher in the 21st Century profession of dispute resolution from the perspective of what I now call myself, “a Recovering Judge.” I spent a total of 29 years from 1978 to 2007 on three different Trial Courts. I was also assigned to Maryland’s intermediate appellate court on multiple occasions. For the last 17 years, I have engaged in the world of private dispute resolution as an arbitrator, mediator, neutral case evaluator, Special Magistrate and Consultant on dispute resolution system design and implementation.

What I see is vastly different from what I saw from the Bench in the last quarter of the 20th Century, 1978-1999 and the first decade of the 21st Century, 2000-2007. Like every other institution of government, The Judiciary, as well as the private dispute resolution sector is rapidly changing. “Evolving” connotes too slow a process to be an accurate description of what is going on. Technology and globalization are rapidly transforming the forums and techniques of dispute resolution and with them the paradigms of the administration of civil justice.

These modifications of existing governmental institutions, corporate organizations as well as new financial products and devices, result from rapid technological development and globalization. These trends will, notwithstanding some of the subliminal messages from our recent elections, not be reversed. So, therefore, the work and role of the legal researcher must necessarily expand and diversify to accommodate these changes and trends.

I recognize, that it is ironic that almost contemporaneous with these changes and my remarks, we just recently witnessed a not-significant portion of the electorate in the country, and if you want to count “Brexit”, indeed the world, revolting at the voting booths against “elites.” Legal researchers are, at times, in the business of identifying and defining what and who are “elite.”

CHANGES IN THE METHODS OF DISPUTE RESOLUTION:

Traditionally, our citizens have had their disputes (legal and factual) resolved by a judge or jury in a courtroom. There, the role of the legal researcher has historically focused on assisting the trier of fact, and the arbiter or authority on the law, be it a judge or jury, to locate and understand the evidence and the law which applies to it. Traditionally, those legal researchers except for law clerks, staff attorneys, and law librarians have not worked for the court and are not paid by the court. Rather, they work for and are paid by the parties and/or counsel. Therefore, in many instances, their research and the advocacy based thereon are, at least initially, viewed by both judges and juries as suspect. I am sure that almost everyone in this room has encountered that barrier if not overt cynicism to your research and arguments based thereon being received and found persuasive.

That is changing. For one thing, the appointment by the Court of its own experts and reliance on its own research frankly as a reaction to the diffusion of the “mainstream” media and social media particularly in cases involving valuation issues is on the rise. Most state courts have the authority to do that and more and more are open to exercising it. Judges and Court Administrators who do not always know or understand “who you are, what you do, how you do it.” I encourage you to reintroduce yourselves to judges and court administrators who you may think you need further introduction. In doing so, however, you must educate them. As a caution, do not assume a basic knowledge except among a very few experienced judges of the terminology produced by your research including valuation techniques, particularly of intellectual property, businesses (distressed and other) as well as intangibles and other forensic accounting issues.

Courts are also increasingly relying on their own appointed Financial Forensic Experts as Receivers and Special Magistrates. In doing so, they expect their experts to be able to access complex legal research as well as multi-disciplinary research. Most state courts and all federal courts give their Judges the authority and discretion to appoint whomever they want including non-lawyers. The standard is “abuse of discretion.” Appointing someone with knowledge of the issues and industry before the courts and who can make informed and educated recommendations or even run a company for the Court, having the experience to do so, is clearly not an “abuse of discretion.”  The judges will increasingly depend on you and your research to identify who those individuals are and their methodologies.

Finally, The Courts are increasingly utilizing Special Magistrates and Settlement Administrators a/k/a “Claims Adjudicators” to administer and manage settlements of high stakes, multi-party litigation particularly Class Action cases and Mass Tort cases. Court Appointed Special Magistrates and Settlement Administrators are most of the time authorized by Rule and/or Court Order to employ “such professionals, experts and consultants as they deem necessary” to carry out their court ordered duties, which likely will include recommending the allocation of damages, expert fees, and attorney’s fees to The Court. That is you! Those Settlement Administrators, Special Magistrate, and Receivers are a market which, if currently unexplored, should be on your marketing screen shortly. They need your cutting edge multi-disciplinary research.

The best-known example of this relatively recent phenomenon and “The Man” is of course, Ken Feinberg of 9-11 Fund, BP Gulf Oil Spill, and Virginia Tech fame, to name a few. In each of these cases, and others, the roles of Financial Forensic Experts and the legal and multi-disciplinary researchers they employ, has been to perform among other functions:

  1. Research and Develop formulas and algorithms to determine the allocation of economic damages based on severity indexes established by the terms of the settlement agreement and data collected to support it.
  2. Explain to the Special Magistrate, The Administrator, and/or The Court, those formulas and the allocation of damage awards based thereon.
  3. Explain to the recipients of the different categories and amounts of damage the basis for the differentiations in the size of their distribution or award.
  4. Supervise the transfer and application of data from investigations, interviews and records to the administrators formulating and implementing the settlement.

I, myself, have been involved in this process more than once as a Special Magistrate and Settlement Administrator, and I can tell you that the research needs of these Financial Forensic Experts who are qualified to, and willing to perform these functions are growing, but the number of potential legal researchers who understand those needs, and can meet them and are qualified to do so by education and experience is not large or at least not known.

THE USE OF EXPERTS IN ADR:

Furthermore, the non-traditional use of Experts, particularly Financial Forensic Experts in what is known as Alternative Dispute Resolution (ADR) is growing. As I have said, these new roles derive from the traditional role of assisting a judge or jury but are expanded to include or substitute persuading other players in the dispute. For example, in Mediation, the legal researcher can be most effective by assisting the opposing party, opposing counsel, or even the opposing expert in understanding the issues from the opposing parties’ perspective or how a court would understand it. There’s an old saying in the litigation world – “Don’t play in the other guys analytical ballpark.” However, in a Mediation, you DO play in the other guy’s analytical ballpark. That’s how you persuade him/her. If successful, it is likely that your research will result in the desired resolution of the dispute.

In an Arbitration, explaining to a single arbitrator or a three-arbitrator panel the methodology which is appropriate to value market share in order to determine as in asbestos cases the percent of allocation of damages, between defendants or in the newly emerging cannabis industry, with which I am familiar, the percentage of revenue or profits to which a consultant is entitled are examples. Here the success of the expert’s client will very much depend on the legal researcher’s ability to persuade the Arbitrator that the methodology utilized is appropriate and individualized to the valuation of the real, personal, or even intellectual property at issue in the case and not just a one size fits all over formula developed by the industry particularly the insurance industry.

Finally, it is useful to understand that in the new “Administration of Justice” paradigm, the data, opinions and related experience and information that will be sought from you will, to a certain extent, depend on the dispute resolution forum and technique being utilized by the parties and Counsel. In litigation and arbitration, your opinion as to how to determine the specific quantification of damages will be sought utilizing the theory of the case, and the valuation theory selected by the hiring authority. In a Mediation or Neutral Case Evaluation, your opinion is most likely to be sought to aid in a risk analysis designed to leverage the possible settlement of the case.

I hope I have been helpful and have adequately described the comparatively new world that you, as legal researchers have been or will shortly be operating in. As we look to the future of the field of dispute resolution and the administration of justice and specifically to your role as experts in that system, perhaps the best guidance that I can provide in conclusion is the advice of Abraham Lincoln which we would all do well to heed today, “The dogmas of the quiet past are inadequate for the stormy present and future. As our circumstances are new, we must think anew and get anew.”

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Judge Steven I. Platt (Ret.) is the Founder and Managing Member of The Platt Group, Inc., a professional Alternative Dispute Resolution Firm. He is also a member of The Maryland Board of Directors of The National Academy of Distinguished Neutrals (NADN), which, after a thorough peer review by the Board of Directors of that “invitation only” organization, selects only the top 10% of Neutrals in the country. He is also on the Judicial, Commercial, Employment, Large Complex Case, and Construction Panels of the American Arbitration Association (AAA), the International Institute for Conflict Prevention and Resolution (CPR), The International Mediation Institute (IMI). The Association for resolving business disputes to judges and lawyers both in Maryland and nationally through both The Judicial Education Program of the American Enterprise Institute (AEI) Brookings Joint Center for Regulatory Studies (served on Judicial Advisory Board), and through The American College of Business Court Judges (Past President).

Judge Platt may be reached at info@theplattgroup.com or at 410-280-0908.

His writings and other background information can be found on his website, www.theplattgroup.com and his Blog at  www.apursuitofjustice.com.

Any opinions expressed in this post are solely those of the author and do not necessarily constitute the opinions of The CPR Institute.

 

 

New California Law Prohibits Pre-Dispute Employment Arbitration Agreements

By Andrew Garcia

California last week enacted a new law that prohibits employers from requiring job applicants, or any existing employee, to enter into pre-dispute arbitration agreements as a condition of employment.

California Gov. Gavin Newsom signed the bill into law Oct. 10. It also criminalizes any retaliation against an employee who refuses to enter into a pre-dispute arbitration agreement.

Assembly Bill 5, introduced by Assemblywoman Lorena Gonzalez, D., San Diego, says that a violation of the amended California Labor Code is a misdemeanor. Despite the law’s harsh prescriptions for violators, the bill clarifies that it does not purport to invalidate any existing arbitration agreement that is consistent with the Federal Arbitration Act.

The California Chamber of Commerce identified AB 51 as a “job killer.” (See the chamber’s press release ahead of the first major hearing on the bill in March at http://bit.ly/2pmYYEu.)  The chamber said that the new law conflicts with the U.S. Supreme Court’s decision in Kindred Nursing Centers Ltd. Partnership v. Clark, 137 S.Ct. 1421 (2017), among many cited cases that it notes are part of the Supreme Court’s jurisprudence favoring arbitration agreements. The chamber predicts that the law will be challenged and overturned, preempted by federal law. (You can read the chamber’s statement in opposition to the California Legislature, joined by 41 local chamber and specialized industry groups, at http://bit.ly/33zTLIz.)

As other jurisdictions wrestle with local restrictions, courts are beginning to see challenges.  A New York federal court last spring stuck down a New York state pre-dispute mandatory arbitration bar in a decision that was mirrored by the California Chamber’s view. See Latif v. Morgan Stanley & Co. LLC, No. 18-cv-11528, 2019 WL 2610985 (S.D.N.Y. June 26, 2019), where the U.S. District Court held that a newly enacted New York state law that invalidated pre-dispute employment arbitration agreements was preempted by the Federal Arbitration Act. See also, Andrew Garcia, “Update: Legislatures on Invalidating Pre-Dispute Arbitration Agreements,” CPR Speaks blog (Aug. 1) (available at http://bit.ly/2IPg6dd).

AB 51 is one of three bills signed by Gov. Newsom, a Democrat who took office in January, that expanded California’s workplace protection laws.  “Work is about more than earning an income,” he stated, adding, “For many, a job can provide a sense of purpose and belonging–the satisfaction of knowing your labor provides value to the world. Everyone should have the ability to feel that pride in what they do, but for too many workers, they aren’t provided the dignity, respect or safety they deserve. These laws will help change that.”

That move is a big change from Newsom’s predecessor. The new law is a reintroduction of an identical 2018 bill that was vetoed by then-Gov. Jerry Brown, also a Democrat–the second time Brown vetoed legislation restricting arbitration.  The California Chamber of Commerce opposition letter quotes Brown’s 2018 veto extensively, including the Kindred Nursing decision, which noted, “A rule selectively finding arbitration contracts invalid because improperly formed fares no better under the [Federal Arbitration Act] than a rule selectively refusing to enforce those agreements once properly made. Precedent confirms that point.”

An August California court decision, however, shares the new law’s skeptical arbitration view. In OTO LLC v. Kho, 447 P.3d 680 (Cal. 2019) (available at https://stanford.io/2ON8f3x), the California Supreme Court rejected the validity of an arbitration agreement because, among other reasons, the defendant required plaintiff Kho to sign the agreement as a condition of his employment.

The court found that the porter who delivered the agreement remained at Kho’s place of work until he signed the agreement, which created an impression that he had to sign it immediately. Therefore, the court ruled that since Kho had no choice but to sign the arbitration agreement or lose his job without an opportunity to review the agreement in his native language, it could not be enforced.

To view the bill in its entirety, click here.

The author, a Summer and Fall 2019 CPR Institute intern, is a law student at Brooklyn Law School.

 

 

Committee Q&A: A Conversation with Mediation Committee Co-Chair, Marjorie Berman 

marjorieberman

As part of our continuing “Committee Q&A” series, we sat down recently with Mediation Committee Co-Chair, Marjorie Berman of Krantz & Berman (pictured), to learn more about what this committee has been up to and has planned for the future.

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The Mediation Committee consists of CPR members throughout the world and aims to enhance the quality and effectiveness of corporate mediation practice, both domestically and internationally.  The Mediation Committee recently released Mediation Best Practices Guide for In-House Counsel: Make Mediation Work for You, a CPR members-only guide with insider tips from in-house counsel on how to navigate every step of the mediation process (digital copies available to CPR members at no cost).  The Mediation Committee meets quarterly to collaborate and share best practices and put on programs of interest.   In addition, the Committee works to identify qualified neutrals to serve on CPR’s Panels of Distinguished Neutrals. You may find online, CPR’s Mediation ProcedureFast Track Rules for Mediation, and International Mediation Procedure (2017), as well as other industry-specific protocols.

Q. What are some of the specific issues that the Mediation Committee has focused on recently, and how?

A. I am a relatively new add to the committee but, looking back at just the past two meetings we’ve held, the first was on the Singapore Convention. We worked to fashion a program that would be meaningful – and useful – to people at all levels, including some who may not be as familiar with international law.  And at our most recent meeting, we focused on the very timely topic of confidentiality in mediation.

There has been a recent vintage of challenges to the confidentiality of mediation in the courts. Eugene Farber and Professor Nancy Rogers of the Ohio State University Moritz College of Law spoke, and the meeting was super lively and chock full of information. The event also inspired a very strong dialogue among the participants with respect to both knowledge and practice tips on anticipating that such issues could arise.

Q. Can you give us a preview of some of the important issues the Mediation Committee will be focusing on in the coming year?  

A. One long-term focus of the committee is an even closer look at this issue of confidentiality in mediation. Because candor between a mediator and parties is essential, mediation depends upon the privileges and confidentiality that protect those communications. The law protecting mediation communications is a patchwork of federal and individual case statutes, case law and rules of conduct that vary across jurisdictions.

This project will inform practitioners of the law and rules governing mediation confidentiality by jurisdiction so they can prepare themselves in the event they need to mediate in an unfamiliar locale. In fact, as people are reading this, and they have personal experiences with challenges to confidentiality and being put in the spotlight in a litigation – not where mediators wish to be! – I encourage them to share those stories with the committee.  

Q. What have you personally gotten out of participating in CPR’s committee structure, and what would you say to busy CPR members about why they should become more involved?

A. Even in the short term in which I’ve been intensely involved, participation in the committee has given me exposure to a wide variety of mediators working in many different contexts, and to a breadth of mediation practices. We can all so easily develop a narrow focus in our work, so it is especially valuable to get perspective from all angles – including from inside and outside litigators using mediation, mediators doing mediation, mediators working both in the US and around the world and academics studying mediation.

Q. Why would you encourage people to join CPR’s Mediation Committee in particular?

A. To some degree mediators tend to be in a bit of a closed world. They mediate cases and its often just them, in a room as a mediator. Being a part of such a dynamic and interactive group expands your view and allows you to process and grow both your perspective and your practice. This is valuable whether you’re a mediator trying to develop your own practice, or a litigator from a corporation or a law firm who is involved as a participant, trying to get a perspective of where mediators are coming from – because you can’t have that kind of conversation with your own mediator.

Committee participation also provides the broader opportunity to act as a thought leader, helping to improve the effectiveness of mediation and to shape best practices. Mediation is a very dynamic area where small changes can produce big results in terms of outcomes, and this committee offers an opportunity to become a meaningful part of that.

Marjorie Berman of Krantz & Berman LLP represents civil litigants in business disputes, employers and employees in employment conflicts, and individuals in white-collar criminal matters.

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CPR committees are always looking to increase membership and participation, and there are no extra fees or costs associated with joining. Learn more about CPR’s other industry and subject matter committees here. To become a committee member, log in and join the committee(s) of your choice or email a note of interest to Richard Murphy at rmurphy@cpradr.org.

Take your seat at the table, along with
other thought leaders in your industry.

JOIN A CPR COMMITTEE TODAY

 

 

A Report on the 2019 CPR European Congress on Business Dispute Management (Part II)

EU flagBy Vanessa Alarcón Duvanel and Kathleen Fadden

On 15 May 2019, CPR held its third annual European Congress on Business Dispute Management, in London. Organized by CPR’s European Advisory Board (the “EAB”) and kindly hosted once more by SwissRe in the magnificent Gherkin building, the Congress inspired thought provoking considerations on topics of dispute prevention and resolution. As with last year’s summary, we have split this reporting in two parts; Part I sharing the morning panel sessions can be found HERE

The afternoon’s session began with a keynote address by Teresa Giovannini of LALIVE in Geneva, Switzerland.  Teresa Giovannini has a wealth of experience in international arbitration having served as an arbitrator in over 200 arbitrations and held leadership positions in various institutions.  In a captivating speech entitled “what happens behind the curtains”, she gave the audience a glimpse of how arbitral tribunals operate.  The integrity of the arbitral process has often been criticized and bias, in particular, be it unconscious or conscious, can impact throughout the process.  Complete elimination of bias may be difficult and Teresa Giovannini outlined some simple steps that can minimize bias: adopting the screen selection process in the CPR Rules whereby the arbitrators do not know which party has appointed them; ensuring that the issues to be determined are identified at the outset of the proceeding and put to the parties; and strictly adhering to the principle that a case must be put aside if a party does not adduce sufficient evidence to support its case.

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“Master Mediators Answer the Most Intriguing Mediation Questions”

The first panel of the afternoon proved to be a lively discussion about mediation challenges.  The panel was moderated by Isabelle Robinet-Muguet (Orange) and Alexander Oddy (Herbert Smith Freehills).  The panelists were: Eileen Carroll (Mediator and CPR Neutral), Renate Dendorfer-Ditges (Ditges and CPR Neutral), Diego Faleck (Mediator and CPR Neutral) and Birgit Sambeth Glasner (Altenburger and CPR Neutral)

The panel addressed three intriguing mediation questions:

What are the challenges when dealing with cross border mediation and what advice would you offer?

Obviously good preparation is table stakes.  It is essential to take time to talk to the clients in order to understand what might be driving the dynamics, including whether the parties are being guided by lawyers and – in either joint or evaluative sessions – what the expectations are including how active they expect the mediator to be.  The mediator must establish the process and set a substantive agenda for the clients.  In this respect, another challenge that often arises in cross border mediations is that cross border frequently means cross-cultural.  Mediators must therefore be sensitive to, and familiar with, cultural differences as such awareness can guide the mediator in selecting negotiation strategies/tactics that are more likely to be successful.

A second challenge is one of timing of the mediation hearing.  Increasingly, mediations are being forced into short time frames, typically a day and no more.  Master mediators however criticized the efficiency of this template – check the box – practice.  It has proven helpful to require the parties to resume the following day because the interim night often provides valuable time for reflection.  Where does this 24-hour model come from?  The audience contributed suggestions pointing the finger to mediators who in most cases are lawyers and have other cases to attend to or at the insurers who tend to drive the 24-hour template.

Is the concept of a mediated settlement changing?

The concept itself may not have changed but its implementation suffers difficulties.  In line with its remarks to the first question, the panel noted that the purpose of mediation is unfortunately too often gravitating towards setting the stage for arbitration rather than settling the dispute.  It may be a function of the compressed time frames in which mediations increasingly take place (see above).

How do you deal with a conflict within a conflict?

There was no question that conflicts within conflicts impact the mediation process and therefore it is critical they be addressed effectively.  It is not an easy situation to navigate.  Good mediation process management and managing expectations are key as each case is different.  Master mediators on the panel shared illustrative examples of what can generate a conflict within a dispute such as the imbalance in the parties’ levels of sophistication and/or resourcing.  One often finds the weaker party being aggressive and/or irrational.  From a process perspective, a mediator should be equipped to handle such situation proactively by taking the time to understand the concerns (the party may be missing information or believing that its interests are unmet) and by warning the stronger side to be patient.

Mediation is an art – it requires skills, training and practice!

“The Resolution of Complex, Multi-Stakeholder, Multi-Jurisdictional Disputes”

The final panel of the day examining the use of ADR tools in large complex disputes was moderated by Cliff Hendel (Hendel IDR) and the panelists were: Gavin Chesney (Debevoise & Plimpton), James Cowan (Shell International), Ania Farren (Vannin Capital), Albert Hilber (Swiss Reinsurance) and Richard Little (Eversheds Sutherland).

Setting the stage for the discussion, Cliff Hendel offered a couple of interesting preliminary remarks.   Firstly, he reminded everyone that in large and complex disputes culture eats process for breakfast.  In other words, culture counts!  Failures often stem from the inability to understand one another.  Engaging in active listening is therefore key.  Secondly, there are of course trade-offs inherent to the co-existence of different legal systems.  Notwithstanding some European laws in the ADR field, national laws are not particularly harmonized, leading to the risk of forum shopping (among others).

This panel addressed two main issues:

What are your views on the use of co-mediation in complex disputes?

The overall view was that generally mediation, per se, remains difficult in many jurisdictions and that is for cultural reasons. For many Europeans resorting to non-binding ADR is still perceived as a sign of weakness and many parties adopt a mindset whereby if they are to spend money on a dispute resolution process, they want a binding result.  It is important to work to help parties overcome this hurdle.  There is really no substitute for having all the parties in one room and giving all stakeholders visibility as to the whole picture.  In the panel’s experience, this tends to produce more creative solutions.  On co-mediation specifically, experience shows that it works well when all involved mediators are well prepared and even better if they have worked together in the past.

Does litigation/arbitration funding have an impact on mediation?

There is an often referred to “traditional” view that third party funder involvement will make settlement less likely.  The panel did not entirely agree with that.  Ania Farren, offering a funder’s perspective, explained that having a funder on board signaled a strong case.  Funders typically do not influence the dispute resolution process and do not normally attend settlement discussions.  Funders in fact do favor early settlement often preferring less money early than more money later. That said, and unsurprisingly, different third-party funders have different risk appetites. This diversity while beneficial to parties seeking funding for their case brings uncertainty and raises concerns as to the funders’ impact on the parties’ ability to settle or mediate the dispute.  In international arbitration there is no formal regulation of the use of third-party funding and the panel agreed on the need for more transparency concerning funder involvement particularly given the potential for conflicts of interest.

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The Conference concluded with closing remarks from Noah Hanft, CPR’s outgoing President and CEO and James South, Managing Director of CEDR.  This was an opportunity to outline the fruitful collaboration between CEDR and CPR.

Noah was thanked profusely for his phenomenal contribution to CPR.

 

 

Vanessa Alarcon Duvanel is an attorney admitted to practice in New York and Switzerland and specializing in international arbitration. She is based in Geneva and serves as the Secretary to the European Advisory Board.

Kathleen Fadden is a legal consultant and member of the CPR’s European Advisory Board.

 

A Report on the 2019 CPR European Congress on Business Dispute Management (Part I)

EU flagBy Vanessa Alarcón Duvanel and Kathleen Fadden

On 15 May 2019, CPR held its third annual European Congress on Business Dispute Management, in London. Organized by CPR’s European Advisory Board (the “EAB”) and kindly hosted once more by SwissRe in the magnificent Gherkin building, the Congress inspired thought provoking considerations on topics of dispute prevention and resolution. As with last year’s summary, we have split this reporting in two parts: a Part I sharing the morning panel sessions, and a Part II covering the afternoon panels.

“The Future of ADR”

The first panel examined how the ADR community was responding to recent attacks on traditional arbitration and mediation and how ADR can remain relevant.  It was moderated by Mark McNeill (EAB member, Quinn Emmanuel Urquhart & Sullivan (then Sherman & Sterling).  The panelists sharing their perspectives were: Stefano Catelani (DuPont), Ferdinando Emanuele (Cleary Gottlieb Steen & Hamilton), Jennifer Glasser (White & Case) and Noah Hanft (CPR).

Considering the recent developments in dispute resolution, the panel’s remit was to consider whether ADR was approaching crisis point or, whether in fact, there were new opportunities to be seized.  The panel tackled a variety of topics:

Driving mediation into the arbitration process and whether arbitrators should encourage mediation.

Some jurisdictions still have limited acceptance of mediation for multifarious reasons: it can be difficult to find qualified mediators, arbitrators are reluctant to promote mediation and model escalation clauses often force a “check the box” type approach where mediation is not given adequate consideration and viewed solely as a mandatory step.  CPR has been actively encouraging mediation over the world and made a particular push in Brazil.  It has been considering a more flexible model escalation clause that whilst mandating mediation, is not prescriptive about when it shall occur – provided it is before the case is heard.  The use of mediation is referenced in the new 2019 CPR Rules for Administered Arbitration of International Disputes and mediation is now a topic for discussion within the preliminary conference (Rule 9.3e).

How will this change the ADR landscape in the coming years?

Noah Hanft offered his perspective on the evolution of ADR: In his view there is no dispute that mediation is effective so it really is in companies’ interests to adopt mediation.  He anticipates a growth in mediation even though he noted that user complaints have succeeded in driving down the average time it takes to conclude an arbitration.  But there will also be more use of hybrid approaches and the desire for efficiency and cost containment will drive innovation in the area.  These thoughtful comments led the panel to add that mediation was in fact being used nowadays in various stages of a commercial relationship.  For example, mediation is resorted to in transactions to facilitate deals and in the joint venture space consideration was being given to the early identification of those issues that may lead to a dispute with the engagement of a standing neutral and/or the introduction of turnkey provisions requiring stakeholders to focus on the health of the joint venture.

Is ADR at all relevant in investor state disputes?

When it comes to mediation or settlement negotiation, it is often politically very difficult for states to settle disputes with investors.  Andy Rogers of CEDR reported on an interesting development whereby CEDR, in collaboration with other organisations, is currently organizing training for mediators, ISDS practitioners and government officials to equip them with the knowledge and skills necessary to mediate investment disputes.

Will Brexit change the ADR landscape?

Since the Congress was hosted in the United Kingdom (UK) it would have been remiss not to consider the impact of Brexit on ADR!  English governing law and jurisdiction clauses have historically been popular choices for commercial parties and panelists were asked for their views on whether businesses should rethink this choice in light of Brexit.  The overall reaction was that there is no clear answer to the question and the area of greatest uncertainty likely concerns the enforcement of judgments.  Currently, under the Recast Brussels Regulation (Regulation (EU) No 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (recast) also known as the “Brussels regime”), a judgment rendered in an EU member state and enforceable in that member state is enforceable in all other member states.  If the UK exits the EU without an agreement on the continued operation of the Brussels regime, the latter will cease to apply and the reciprocity will be lost.  This could be remedied – to some extent – as the UK is seeking to become a member, in its own right, of the Hague Choice of Court Convention. As the panel noted, if the UK accedes to this international instrument, then as contracting state its courts must give effect to exclusive jurisdiction clauses and enforce any judgments resulting from such clauses. This blog cautions that the Hague Convention is narrower in scope than the Recast Brussels Regulation and questions still remain about the application of the Convention in circumstances where an exclusive jurisdiction clause has been entered into prior to the U.K.’s exit from the EU.   Post Congress, a new “Hague Convention on the Recognition and Enforcement of Foreign Judgments in Civil or Commercial Matters” was adopted on 2 July 2019.  The UK adherence to this new treaty would resolve many of the enforcement issues triggered by Brexit.  Although the 2018 Queen Mary & White & Case International Arbitration Survey reported that London remained the most preferred seat of arbitration and over half of the respondents thought that Brexit will have no impact on the use of London as a seat, it is clear, Brexit has created doubts and given rise to many questions that only time will answer.

This led panelists to move naturally to another new development in ADR, namely the introduction in various jurisdictions of “international” courts.  The Netherlands, Germany and Singapore to name just a few have created or contemplated the opportunity of creating “international” commercial courts.  Typically, these courts – which are established under national law rather than by international treaty – operate in English and adopt arbitration type rules.  Do these represent a threat or a challenge to arbitration?  In general, the panel did not see a significant threat.  There are, of course, pros and cons with national courts and arbitration tribunals.  A key benefit of arbitral proceedings is confidentiality, which is not necessarily guaranteed in court proceedings.  With respect to enforcement, currently, there is no global convention for the enforcement of court judgments in the same way that the New York Convention facilitates enforcement of arbitral awards.  On the other hand, summary disposition of issues is available in some court systems but historically arbitrators have been cautious about their use – even though recent revisions to most leading arbitral rules (including the CPR Rules) permit such procedures.  In summary, there is space for both fora and the panel noted that certainly from a user perspective, competition and choice could only be positive.

The last aspect concerning the future of ADR which the panel considered was: the Prague Rules and whether they will lead to increased efficiencies in arbitration.

The Rules are intended to be an alternative to the well-known IBA Rules on the Taking of Evidence in International Arbitration (IBA Rules) and to bridge the gap between common and civil law approaches.  The panel’s position was not too optimistic.  Neither document production nor the taking of witness evidence are likely to be more efficient under the Prague Rules and the costs of arbitration proceedings are unlikely to reduce.  This is so because the Prague Rules provide a framework and do not exist in a vacuum; in many respects the level of efficiency and the nature of document production is driven more by the arbitrator.  In the panel’s view, rather than a new set of rules, it would be more useful to increase the pool of arbitrators  and even better, arbitrators that are more active!  The panel shared four examples as to why in its view the Prague Rules would not deliver efficiencies.  I) there is a conflict between article 2.1 which requires that the arbitral tribunal “shall” convene a case management conference “without any unjustified delay,” and the requirement in article 2.2 that the arbitral tribunal “shall” clarify at that same case management conference, undisputed / disputed facts and the legal grounds of the parties’ respective cases (among others). Indeed, experience shows that it would be inefficient (perhaps impossible) to clarify disputed and undisputed facts or legal positions on the basis of a Request for Arbitration and Answer to the Request since these typically do not contain sufficient detail.  II) article 4.2 on documentary evidence discourages document production but the rest of the provisions in the same section retreat from this position.  III) with respect to fact witnesses, articles 5.2 and 5.3 empower arbitrators to make determinations about calling witnesses but article 5.7 then rather diminishes that power by providing that if a party insists on calling a witness whose statement has been submitted by the other party, the arbitral tribunal should call the witness to testify at the hearing.  Finally, iv) in respect of experts, article 6.1 appears to make tribunal-appointed experts the default rule.  However article 6.5 states that a party may nonetheless submit a report from an expert appointed by that party.  Given that in practice many tribunals hear only party-appointed experts, the Prague Rules’ regime is likely to lead to arbitrations with both tribunal-appointed and party-appointed experts which will increase the volume of the parties’ submission, hearing time, and inevitably costs.

The future of ADR is in some respects uncertain (Brexit being an example) but at the same time full of interesting challenges and novelties.

“Preparing for the Robo-Revolution”

The second panel of the morning was similarly looking to the future but this time with a legal-tech focus.  The panel was moderated by Javier Fernández-Samaniego (Samaniego Law) and the panelists were: Ulyana Bardyn (Dentons US LLP), Diana Bowman (VINCI Energies), Sarah Ellington (DLA Piper) and Ralph Lindbäck (Wärtsila Corporation).

Should ADR practitioners be concerned about robots? Or do we consider that robots and computer arbitrators are still in the realm of science fiction?

To answer this question, the panel started by looking at the state and use of legal-tech today.  Certain types of dispute and several aspects of dispute management can be automated and in fact there are already automated tools deployed to handle routine and administrative tasks.  EBay was cited as an example, as it uses algorithms to generate decisions in e-commerce disputes.  Currently, automation is however mostly applied in low value disputes rather than complex cases. Whilst appropriate deployment of automated tools can bring benefits in terms of speed and accuracy, the panel noted that it also carries disadvantages and has its limitations.  For instance, it is not necessarily clear how due process will be respected if a computer arbitrator presides in an arbitration, or how algorithms could be created and comply with the confidentiality of arbitral proceedings, or how the parties would know how to pick the right algorithms for their dispute.  One significant limitation highlighted by the panel was the inescapable fact that disputes involve human beings and one cannot automate the relationship management aspect of dispute resolution!  Even if artificial intelligence were able to accurately predict the verdict in a dispute, some litigants simply want their day in court or their day in arbitration, an experience that no robot can satisfy.

Notwithstanding the challenges, law firms are preparing for the robot revolution and some have already achieved significant milestones in this respect. Law firm practitioners on the panel provided real insights into the approaches taken by their respective organizations.  Ulyana Bardyn shared with the audience some of Dentons’ leading efforts in this space including its collaborative innovation platform “Nextlaw Labs”; various programmes focused on case management enabling clients to see spending in real time, or assisting clients with finding the best pro bono help available; and the “Libryo platform” which aims to simplify legal complexity by providing a curated collection of all laws relevant to specific business sectors enabling lawyers to understand their organisation’s legal obligations in any given situation.

Sarah Ellington reported on DLA Piper’s own investments in technology and elaborated on three of the DLA tools, all of which are aimed at dispute avoidance.  A first tool is a guided pathway app geared to IT outsourcing projects and intended for commercial managers, it contains questions about project progress and status and produces a report with red flags if problems are detected.  The second is a virtual secondment tool which enables businesses to submit questions and have a response within 24 hours.  Finally, the firm has an immersive business simulation, essentially a training tool, geared toward infrastructure projects where users can engage in a facilitated session where they take on a particular role within a simulated project.

These tools are impressive from the lawyers’ perspective.  How is the business community reacting to this technology assisting their counsel?  Corporate counsels on the panel all agreed that dispute resolution should be looked upon as a value stream with a significant focus on dispute avoidance.  To reach this goal and develop successful tools, collaboration between law firms and their clients is key.  That is all the more relevant as the business community is making its own progresses in the digital arena.  Many businesses are entering into collaborations, partnerships and campus initiatives – e.g., sandbox environments where universities, startups and investors can come together to innovate– are growing.  Dispute resolution though is not always part of the picture. Would it ever be possible to predict that a dispute was coming?  In certain sectors, that Holy Grail may not be too far off.  As Diana Bowman described, VINCI Energies already attempts to obtain information about events that occur on site and shares it with the back office in real time.  With good record keeping and quality information there may be opportunities to both predict and resolve issues early before a dispute escalates.

Shifting gears slightly, the panel touched on another technology hot topic: cyber security. Cyber attacks are a significant and rapidly evolving peril for today’s businesses but the levels of security deployed, particularly in the arbitration field, varies significantly between, for example, sole practitioners and top tier international law firms.  Regardless of size, all can fall victim to an attack.  Speaking from experience, Sarah Ellington shared some of the lessons learned after DLA Piper suffered from the NotPetya malware attack in June 2017 resulting in all the firm’s IT systems globally being taken offline. The risks are real and the consequences of an attack can be devastating.  To cope with a potential problem, it is fundamental to have: an up-to-date business continuity plan including practical solutions for work continuation, a clear communication protocol, emergency contact groups, back up email, calendar and document management systems.

The digital revolution has arrived although not necessarily in all legal departments! In some of the most sophisticated companies the legal department does not even have a suite of templates.  Readers of this blog, as the audience at the Congress, are encouraged to think about the digital revolution as a wave: do you want to be bowled over by it or do you choose to ride it on a surf board?

Stay tuned for part II…

 

Vanessa Alarcon Duvanel is an attorney admitted to practice in New York and Switzerland and specializing in international arbitration. She is based in Geneva and serves as the Secretary to the European Advisory Board.

Kathleen Fadden is a legal consultant and member of the CPR’s European Advisory Board.

 

US Appeals Court in “Manifest Disregard” Claim Instructs Arbitrator to Clarify “Irreconcilable Determinations”

By Mark Kantor

Kantor Photo (8-2012)

I draw to your attention an interesting recent approach from the U.S. Court of Appeals for the Second Circuit towards an argument that an arbitration award should be set aside for manifest disregard of the law – Weiss v. Sallie Mae, Incorporated (2d Cir. Dkt No. 18-2362, September 12, 2019, available here – https://cases.justia.com/federal/appellate-courts/ca2/18-2362/18-2362-2019-09-12.pdf?ts=1568298609).  Instead of vacating the arbitration award for “manifest disregard,” the Court of Appeals remanded the case to the lower court to require the arbitrator to seek to clarify material inconsistencies in the arbitration award.  The Court of Appeals also took steps to assure that the same District Court judge and the same 3-person panel of Court of Appeals judges would be the ones to review any effort by the arbitrator to resolve the “irreconcilable determinations.”

The summary for the Court of Appeals opinion states the relevant circumstances and the appellate order succinctly.  The lower court (the U.S. District Court for the Western District of New York) had vacated the underlying arbitration award due to irreconcilable determinations relating to the effectiveness of a general release in a judicial class action versus an award of damages in the arbitration award (“the arbitrator ignored the unambiguous terms of the general release”).  The Court of Appeals (Peter Hall, J., for a unanimous 3-person appellate tribunal) in turn vacated that decision of the District Court and instead remanded to the lower court with instructions “to require the arbitrator to clarify whether he intended to deem the class notice sufficient and, if determined to be sufficient, to construe the general release in the first instance and vacate or modify the award as necessary.”

[The district court granted] Defendant‐Appellee’s motion to vacate an arbitration award based on the arbitrator’s failure to apply a general release provision in a settlement agreement that barred all of Plaintiff‐Appellant’s claims.  We agree with the district court that the arbitrator ignored the unambiguous terms of the general release and therefore conclude that the award of statutory damages for a subset of Plaintiff’s claims is irreconcilable with the arbitrator’s determination that Plaintiff was a member of the settlement class and that she received adequate notice of its terms. The arbitrator’s failure to provide an explanation for these mutually exclusive determinations renders this Court unable to ascertain whether the arbitrator adhered to applicable substantive law as required by the parties’ arbitration agreement and, consequently, whether the arbitral award was issued in manifest disregard of the law, as the district court held. We therefore vacate the decision and order of the district court and remand the case to provide an opportunity for the district court to require the arbitrator to clarify whether he intended to deem the class notice sufficient and, if determined to be sufficient, to construe the general release in the first instance and vacate or modify the award as necessary.

The doctrine of manifest disregard sets a very high barrier for successful application in the Second Circuit.  Vacatur is appropriate only in “exceedingly rare instances where some egregious impropriety on the part of the arbitrator is apparent ….” (citations omitted here and below).

“A litigant seeking to vacate an arbitration award based on alleged manifest disregard of the law bears a heavy burden, as awards are vacated on grounds of manifest disregard only in those exceedingly rare instances where some egregious impropriety on the part of the arbitrator is apparent.” …. We will uphold an arbitration award under this standard so long as “the arbitrator has provided even a barely colorable justification for his or her interpretation of the contract.” …. Vacatur is only warranted, by contrast, “when an arbitrator strays from interpretation and application of the agreement and effectively dispenses his own brand of industrial justice.”

Here, the appeals court made clear that the failures in the arbitration award indeed appeared egregious.

The arbitral award granted Weiss $108,500 in statutory damages under the Telephone Consumer Protection Act (“TCPA”), 47 U.S.C. §§ 227 et seq.  The arbitrator, however, determined simultaneously that Weiss was a class member in a class action against Defendant‐Appellee Sallie Mae, Inc. that had been resolved by a settlement agreement containing a general release barring class members from bringing TCPA claims against Sallie Mae and its successors.  We agree with the district court’s conclusion that the arbitrator ignored the unambiguous general release provision in that settlement agreement.

****

… ignored the unambiguous terms of the general release ….

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The arbitrator’s failure to provide an explanation for these mutually exclusive determinations ….

****

… it is impossible to square that conclusion [that a notice of class proceedings “entitled Weiss to recover for ATDS calls made prior to the consent revocation deadline] with the general release provision [in the consequent class action] barring Weiss’s recovery for “any and all” TCPA claims ….

****

… the arbitrator’s finding …  appears to rest on a parsing of the applicable law grounded neither in a constitutional due process analysis nor in a faithful exercise in contract interpretation.

****

… the incoherence of the arbitrator’s decision ….

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… the arbitrator did not even mention the release in his decision ….

Judge Hall saw nothing in the arbitration award addressing the impact of the “unambiguous” general release.  Unlike the District Court, however, the Court of Appeals did not set aside the arbitration award for manifest disregard of the law.

Because the arbitrator did not even mention the release in his decision, we are unable to ascertain from the record whether the arbitrator in fact based his decision on the four corners of the Arthur Settlement agreement and its accompanying class notice, as Weiss appears to contend, or whether he instead discarded the agreement in favor of his own policy preferences.

Significantly, the Court of Appeals did not then conclude that the arbitrator had actually manifestly disregarded applicable law.  Rather than vacate the arbitration award entirely on grounds of manifest disregard as the District Court had done, the appeals judges instead remanded the case, instructing the lower court to require the arbitrator to clarify the inconsistency.

In light of the incoherence of the arbitrator’s decision, we hereby VACATE the district court’s order and REMAND the case to the district court to remand to the arbitrator with instructions to clarify whether the class notice was or was not sufficient and, if determined to be sufficient, then to construe the general release provision in the first instance and to vacate or modify the arbitral award if necessary. See Hardy v. Walsh Manning Sec., L.L.C., 341 F.3d 126, 134 (2d Cir. 2003) (acknowledging this Court’s “authority to seek a clarification of whether an arbitration panel’s intent in making an award evidences a manifest disregard of the law” (internal quotation marks and alterations omitted)).

The citation in the above quote to the Hardy decision for authority to order a remand to the arbitrator for clarification is interesting in the context of an application to vacate an arbitration award for manifest disregard of the law.  The Hardy decision finds its authority for remanding to the arbitrator to resolve problems with the award in only one other cited opinion, Americas Insurance Company, v. Seagull Compania Naviera, S.A., 774 F.2d 64 (2d Cir. 1985).  Neither Hardy nor Americas Insurance, however, refer to a statutory or juridical basis for that asserted authority.  As the 2nd Circuit appeals court in Hardy had stated:

Although certainly not the normal course of things, we do have the authority to remand to the Panel for purposes broader than a clarification of the terms of a specific remedy.  That is, we have the authority to seek a clarification of whether an arbitration panel’s intent in making an award “evidence[s] a manifest disregard of the law.” Americas Ins. Co., 774 F.2d at 67.  The Panel should be afforded such an opportunity.   In Americas Insurance, 774 F.2d at 67, we directed a district court to remand awards to an arbitration panel for clarification of whether the panel intended awards to be subject to principles of subrogation.  We believe that this is the proper result here.

In addition to instructing the arbitrator to seek to clarify the arbitration award, Judge Hall also took steps in his Weiss v. Sallie Mae opinion to assure that any resulting reinterpretation of the arbitration award returned to the same District Court judge and then to the same Second Circuit appellate panel, rather than moving to another set of judges.

The arbitrator shall be instructed either to interpret and apply the terms of the Arthur Settlement agreement’s general release provision or to explain why that provision does not bar Weiss’s claims. Further, the district court shall thereafter hear and rule on any subsequent objections to the arbitrator’s decision, which objections may be advanced by appropriate motion of either party. Any appeal from the district court’s decision thereon may be advanced by letter notice to the Clerk of this Court without necessity of filing a new notice of appeal, and that appeal shall be assigned to this panel.

The uncommon feature of the Court of Appeals ruling in Weiss v. Sallie Mae lies in its remand with instructions to the arbitrator to address and resolve the inconsistent determinations.  That judicial approach arguably avoids a common criticism of the doctrine of manifest disregard as unauthorized by the FAA and the New York Convention.  Rather, Judge Hall and his appellate colleagues appear to be relying on the appeals court’s general judicial authority to require clarification of a material ambiguity in the underlying arbitral record.  That remedy puts the purportedly offending arbitrator back in control of the arbitration award, rather than vacating that award.  But the appeals court additionally assured that the same previously-briefed and skeptical judges at the U.S. District Court and Second Circuit Court of Appeals would review any resulting modifications put forward by the arbitrator.  Does that suffice for a petitioner seeking vacatur of the award?   What do you think?

_______________________________________________

Mark Kantor is a CPR Distinguished Neutral. Until he retired from Milbank, Tweed, Hadley & McCloy, Mark was a partner in the Corporate and Project Finance Groups of the Firm. He currently serves as an arbitrator and mediator. He teaches as an Adjunct Professor at the Georgetown University Law Center (Recipient, Fahy Award for Outstanding Adjunct Professor). Additionally, Mr. Kantor is Editor-in-Chief of the online journal Transnational Dispute Management.

This material was first published on OGEMID, the Oil Gas Energy Mining Infrastructure and Investment Disputes discussion group sponsored by the on-line journal Transnational Dispute Management (TDM, at https://www.transnational-dispute-management.com/), and is republished with consent.

New Clear and Unmistakable Outcome Exception to the Old Clear and Unmistakable Rule? (Part II)

loreejrII

By Philip J. Loree Jr.

Part I of this post discussed how the Second and Fifth Circuits, in  Metropolitan Life Ins. Co. v. Bucsek, ___ F.3d ___, No. 17-881, slip op. (2d Cir. Mar. 22, 2019), and 20/20 Comms. Inc. v. Lennox Crawford, ___ F.3d ___, No. 18-10260 (5th Cir. July 22, 2019), suggest a trend toward what might (tongue-in-cheek) be called a “Clear and Unmistakable Outcome Exception” to the First Options Reverse Presumption of Arbitrability (a/k/a the “Clear and Unmistakable Rule”).

Under this Clear and Unmistakable Outcome Exception to the Clear and Unmistakable Rule, courts consider the merits of an underlying arbitrability issue as part of their analysis of whether the parties clearly and unmistakably agreed to arbitrate arbitrability issues.

But the Clear and Unmistakable Outcome Exception runs directly counter to the U.S. Supreme Court’s decision in Schein v. Archer & White Sales, Inc., 586 U.S. ___, 139 S. Ct. 524 (January 8, 2019), and thus contravenes the Federal Arbitration Act as interpreted by Schein. 139 S. Ct. at 527-28, 529-31.

This Part II analyzes and discusses how Met Life and 20/20 Comm. effectively made an end run around Schein and considers what might have motivated those Courts to rule as they did.

Making an End Run Around Schein?

When, prior to 20/20 Comm. we wrote about Met Life, we said it “an important decision because it means in future cases where parties have not expressly agreed to arbitrate arbitrability questions, but have agreed to a very broad arbitration agreement, the question whether the parties’ have nevertheless clearly and unmistakably agreed to arbitrate arbitrability questions may turn, at least in part, on an analysis of the merits of the arbitrability question presented.” (See here. )

But after the Fifth Circuit decided 20/20 Comm. this July, in comments we made to Russ Bleemer, Editor of Alternatives, the Newsletter of the International Institute for Conflict Prevention & Resolution (“CPR”)—which were reproduced with our consent in Mr. Zhan Tze’s CPR Speaks blog article about 20/20 Comm. (here)—we expressed the belief that the Fifth Circuit was (whether intentionally or unintentionally) making an end run around Schein, effectively creating an exception to the Clear and Unmistakable Rule.

After analyzing 20/20 Comm. and comparing it to the Second Circuit’s Met Life decision, we concluded that the Second Circuit’s decision also ran counter to Schein.

Schein’s Abrogation of the “Wholly Groundless Exception” to the Clear and Unmistakable Rule

In Schein the U.S. Supreme Court abrogated the so-called “wholly groundless exception” to the Clear and Unmistakable Rule. Prior to Schein certain courts, including the Fifth Circuit, held that even when parties clearly and unmistakably agreed to arbitrate arbitrability questions, courts could effectively circumvent the parties’ agreement and decide for itself arbitrability challenges that it determined were “wholly groundless.”

The rationale Schein used to jettison the “wholly groundless exception” to the Clear and Unmistakable Rule is incompatible with the rationales the Second and Fifth Circuit used to support their decisions in Met Life and 20/20 Comm.

Under FAA Section 2, the Schein Court explained, “arbitration is a matter of contract, and courts must enforce arbitration contracts according to their terms.” Schein, 139 S. Ct. at 529 (citation omitted). When those contracts delegate arbitrability questions to an arbitrator, “a court may not override the contract[,]” and has “no power to decide the arbitrability issue.” 139 S. Ct. at 529. That is so even where a Court “thinks that the argument that the arbitration agreement applies to a particular dispute is wholly groundless.” 139 S. Ct. at 529.

Schein explained that its conclusion was supported not only by the FAA’s text, but also by U.S. Supreme Court precedent. Citing and quoting cases decided under Section 301 of the Labor Management and Relations Act, the Court explained that courts may not “‘rule on the potential merits of the underlying’ claim that is assigned by contract to an arbitrator, ‘even if it appears to the court to be frivolous[,]’” and that “[a] court has “‘no business weighing the merits of the grievance’” because the “‘agreement is to submit all grievances to arbitration, not merely those which the court will deem meritorious.’” 139 S. Ct. at 529 (quoting AT&T Technologies, Inc. v. Communications Workers, 475 U.S. 643, 649–650 (1986) and Steelworkers v. American Mfg. Co., 363 U.S. 564, 568 (1960)).

This “principle,” said the Schein Court, “applies with equal force to the threshold issue of arbitrability[]”—for “[j]ust as a court may not decide a merits question that the parties have delegated to an arbitrator, a court may not decide an arbitrability question that the parties have delegated to an arbitrator.” 139 S. Ct. at 530.

Exception to Clear and Unmistakable Rule? Why the Second and Fifth Circuit Decisions Conflict with Schein

Both the Second Circuit and Fifth Circuit decided that the parties before them did not clearly and unmistakably agree to arbitrate arbitrability because each Court believed that there was not even a barely colorable basis for a court or an arbitrator to find that the underlying dispute should be submitted to arbitration. In other words, both courts focused on contractual provisions governing the merits of the arbitrability dispute rather than confining their analysis to the terms of the contract dealing directly with whether the parties clearly and unmistakably agreed to arbitrate arbitrability.

In Met Life the Court decided the merits of the underlying arbitrability issue before analyzing whether the provisions of the contract directly pertinent to the arbitration of arbitrability did or did not clearly and unmistakably delegate arbitrability to the arbitrators. The Court quite correctly found it implausible that the parties agreed to arbitrate a dispute that arose years after one of the parties had left the NASD and was not a member of FINRA.

But that was a conclusion about the merits of the arbitrability dispute, not about whether the parties clearly and unmistakably agreed to arbitrate arbitrability disputes. The Clear and Unmistakable Rule turns solely on whether the parties clearly and unmistakably delegated arbitrability questions to the arbitrator, irrespective of what the merits of those arbitrability questions may be.

In 20/20 Comm. the Court’s focus was on the parties’ broad class arbitration waiver. Class arbitration waivers are ordinarily dispositive of the merits of whether the parties consented to class arbitration, but the class arbitration waiver in 20/20 Comm., like most or all others we’ve seen, says nothing about who decides whether or not the parties consented to class arbitration.

Had the Fifth Circuit not focused on the class arbitration waiver, and instead on the three provisions directly relating to arbitrability, then it could have easily found that the parties clearly and unmistakably delegated class arbitration consent issues to the arbitrator.

The so-called “exception language” in those provisions (see Part I, here) was quite beside the point. There is nothing “inconsistent” with an arbitrator, rather than a court, deciding the effect of the class arbitration waiver, no matter how clear it may be that the outcome will, or at least should, be an arbitral determination that the parties did not consent to class arbitration.

Exception to Clear and Unmistakable Rule?Second Circuit Attempted to Distinguish Schein, but Fifth Circuit did not

The Second Circuit articulated the reasons it believed that Schein did not foreclose its examination of the merits of the arbitrability issue before it, but the Fifth Circuit did not address Schein.

The Second Circuit said “[t]he point of the [Schein] opinion was that, where the parties have agreed to submit arbitrability to arbitration, courts may not nullify that agreement on the basis that the claim of arbitrability is groundless.” Met Life, slip op. at 24 (emphasis in original). The Court said it “reject[s] [A’s] claim for arbitration of arbitrability not because” it considers the “claim of arbitrability” to be “groundless[,]” but “because, upon consideration of all evidence of the intentions of the arbitration agreement, including the groundlessness of [A’s] claim of arbitrability, the agreement does not clearly and unambiguously provide for arbitration of the question of arbitrability.” Met Life, slip op. at 25. That “reasoning is based on the parties’ contract, and not based on any exception to what the parties have contracted for.” Met Life, slip op. at 25.

The Fifth Circuit might have made the same or a similar argument, but said nothing about whether it thought its decision was consistent with Schein.

While the Second Circuit’s reasoning was theoretically sound, it doesn’t hold up in practice. Apart from questions concerning the existence of the contract, the merits of most, if not all, arbitrability questions turn in large part on the language of the parties’ contract. That was certainly the case in both Met Life and 20/20 Comm.

Under the reasoning of those cases, however, the language directly relating to the question whether the parties clearly and unmistakably agreed to arbitrate arbitrability must be viewed in conjunction with the language of the contract bearing on the merits of the arbitrability dispute. If the language pertinent to the merits of the arbitrability issue suggests that the parties did not agree to arbitrate the dispute (or did not consent to class arbitration), then under the Second and Fifth Circuits’ reasoning, that conclusion weakens (or eliminates) the inference that the parties clearly and unmistakably agreed to arbitrate arbitrability.

Met Life and 20/20 Comm. Contravene the U.S. Supreme Court’s Decision in Schein

The Met Life/20-20 Comm. analytical regime effectively revives—and potentially might even expand the scope of—the “wholly groundless exception” that the U.S. Supreme Court laid to rest in Schein. Remember that disputes about arbitrability of arbitrability can be analytically broken down into at least four separate questions: (a) what the dispute on the merits is; (b) does that dispute raise a question of arbitrability, which is ordinarily decided by the court; (c) if so, did the parties clearly and unmistakably agree to arbitrate arbitrability disputes (i.e, does the Clear and Unmistakable Rule apply); and (d) what is the outcome of the dispute on the merits that the proper decisionmaker should reach once he or she decides it?

The Clear and Unmistakable Rule is concerned only with question (c), above, that is, did the parties clearly and unmistakably agree to arbitrate arbitrability disputes? The “wholly groundless exception” to the Clear and Unmistakable Rule—and the analytical regime imposed by the Second and Fifth Circuits—focuses not only on  question (c), above, but simultaneously considers question (d), that is, what is the outcome on the dispute on the merits that the proper decisionmaker should reach?

Assuming the dispute on the merits is a question of arbitrability (as was the case in Schein, Met Life, and 20/20 Comm.), if the provisions of the parties’ agreement suggest that there is only one proper outcome that a decisionmaker should reach on the merits of the arbitrability dispute—the subject of question (d), above— then a Court following Met Life and 20/20 Comm. would be more chary about concluding the parties clearly and unmistakably agreed to arbitrate arbitrability—the subject of question (c), above.

Schein forecloses any consideration of the merits of the arbitrability issue (question (d), above), limiting the scope of the Court’s analysis to whether the parties’ clearly and unmistakably agreed to arbitrate arbitrability (question (c), above).

Schein explains that, if the parties clearly and unmistakably agree to arbitrate arbitrability disputes, then courts should direct the parties to arbitrate the arbitrability issue. Just as it is with any other arbitrable issue, judicial review is postponed until the final award stage, and is limited to the grounds enumerated by Section 10 of the FAA, including manifest disregard of the agreement under Section 10(a)(4), and, in Circuits which recognize it (such as the Second—but not the Fifth—Circuit) manifest disregard of the law.

In Schein the proponent of the “wholly groundless exception” argued that the “back-end judicial review” available if an arbitrator “exceeds his or her powers” impliedly authorizes courts to determine that an arbitrability question is “wholly groundless” and obviates the need to submit the arbitrability question to arbitration. Schein, 139 S. Ct. at 530. But the Supreme Court said “[t]he dispositive answer to [the “wholly groundless exception” proponent’s] §10 argument is that Congress designed the Act in a specific way, and it is not our proper role to redesign the statute.”  Schein, 139 S. Ct. at 530.

The Schein Court further explained that acceptance of the “wholly groundless exception” proponent’s “argument would mean. . . that courts presumably also should decide frivolous merits questions that have been delegated to an arbitrator.” But, said the Supreme Court, “[we] have already rejected that argument: When the parties’ contract assigns a matter to arbitration, a court may not resolve the merits of the dispute even if the court thinks that a party’s claim on the merits is frivolous. So, too, with arbitrability.” 139 S. Ct. at 530 (citation omitted).

Under Schein the proper course for the Second and Fifth Circuits was to determine whether the parties clearly and unmistakably delegated arbitrability issues to the arbitrators without determining or analyzing the merits of those underlying arbitrability issues. If the answer was “yes,” then the Courts should have directed the arbitrators to decide those arbitrability questions.

If the arbitrators, after having decided those underlying arbitration issues, decided that the issues were arbitrable, then the arbitration opponents could challenge them as being in manifest disregard of the contract (and, in the Second Circuit, perhaps also in manifest disregard of the law).

But rather than let the arbitration and post-award review process run its course, the Second and Fifth Circuit took it upon themselves to decide arbitrability issues that the parties clearly and unmistakably agreed to submit to arbitration. Met Life and 20/20 Comm. cannot be meaningfully squared with Schein.

What Might have Motivated Met Life and 20/20 Comm. Courts to Rule the way they did?

While we respectfully believe that Met Life and 20/20 Comm. are inconsistent with Schein, it would be unfair not to acknowledge that the very able and experienced judges who decided those cases were faced with unusual circumstances that would presumably be of concern to many or most other fair-minded jurists. In Met Life a FINRA arbitration claim was made against an entity that had never been a member of FINRA, and had not been a member of the NASD, FINRA’s predecessor, for several years. The claim itself arose out of conduct that took place after the entity had left the NASD.

The Second Circuit concluded the dispute was not arbitrable because FINRA had no regulatory interest in the dispute, but apparently there were no FINRA rules, or terms in the parties’ agreement, which addressed directly the unusual arbitrability question the case presented. And prior Second Circuit precedent suggested that, under the Clear and Unmistakable Rule, the breadth of the parties’ arbitration agreement, together with a provision of the applicable arbitration rules, constituted clear and unmistakable evidence of an intent to arbitrate arbitrability.

The Second Circuit might have been legitimately concerned about whether a FINRA arbitrator would necessarily reach the same conclusion as the Court did, and if so, whether the award could be vacated if the arbitrator got it wrong. That would mean that the arbitration opponent might have been forced to arbitrate not only the underlying arbitrability issue, but also the entire dispute on the merits, before there was any opportunity for FAA Section 10 review.

If the award was ultimately vacated, the parties would be forced to incur a great deal of time and expense vindicating their rights. But if the award was not, and could not be, vacated, and the arbitration opponent lost on the merits, then the arbitration opponent would effectively have been forced to arbitrate a dispute that the Second Circuit strongly believed the parties never agreed to arbitrate.

“Hard cases,” the adage goes, “make bad law.”

The Fifth Circuit might have had similar reservations about the case before it, although the stakes were probably not as high as they were in Met Life. The contract’s incorporation of AAA employment arbitration rules, which brought into play the AAA Supplementary Rules for Class Arbitration, meant that the arbitrator would have been empowered to make a “Clause Construction Award,” which the parties are deemed to agree is a final award subject to judicial review under Section 10.

There was no reason to think that the briefing, argument, and decision of the Clause Construction issue, and the rendering of the Clause Construction Award, would take a great deal of time, given how narrow the issue was, and given the clear class arbitration waiver. And FAA Section 10 review would have been available once the Clause Construction Award was made.

Thus, had the Fifth Circuit compelled arbitration of the class arbitration consent issue, and had the arbitrator made a ruling in favor of class arbitration consent by ignoring the class arbitration waiver (or at least by not even arguably interpreting it), FAA Section 10 review would be available in relative short order, and certainly long before the parties were forced to engage in a class arbitration that could drag on for several years before Section 10 review could take place.

But the Fifth Circuit might nevertheless have been very concerned that a class arbitration opponent who had taken the time to include a broad class arbitration waiver in its contract, the enforceability of which is not really open to legitimate question in light of the many U.S. Supreme Court decisions that have closed state- and federal-law enforcement loopholes, should be forced to engage in the several months of arbitration and litigation necessary to vindicate its legitimate, bargained-for right to arbitrate on a bilateral basis only. Even apart from the extra costs imposed on the class arbitration opponent, compelling arbitration would have virtually guaranteed that within a relatively short period, the district court and, possibly also the Fifth Circuit, would again have to devote substantial time and effort into matters that were the subject of the consolidated appeal in 20/20 Comm.

Those concerns about economic inefficiency and judicial economy are unquestionably legitimate. But Schein, as we’ve seen, has already said that the courts do not, in the name of public policy or judicial economy, have the power to amend or alter the post-award-review-only procedures mandated by the FAA.

And the class arbitration opponent, a sophisticated business entity, could have drafted its contract more precisely, providing that notwithstanding anything to the contrary, disputes about class arbitration consent, including the application and interpretation of the class arbitration waiver, must be decided by courts, not arbitrators. In fact, other class arbitration opponents would be well advised to consider carefully whether they might find themselves in a situation where they are forced to arbitrate and litigate in the district court (and perhaps in an appellate court) for several months or more court, and if so, to take appropriate steps to mitigate this risk by more precisely drafting their contracts’ class arbitration waivers.

***

 

Philip J. Loree Jr. is a co-founder and partner at law firm, Loree and Loree. This post was originally published on the firm’s blog, Loree Reinsurance and Arbitration Forum, and has been republished with permission here.