Author: CPR Staff

CFPB Announces Final Rule Barring Mandatory Arbitration In Consumer Financial Contracts

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By Russ Bleemer

The broadest move by a government agency so far to restrict arbitration has been unveiled by the Consumer Financial Protection Bureau—a long-expected ban on the use of class-action waivers that require mandatory arbitration in consumer financial contracts.

While arbitration itself wasn’t the direct target, the practice has taken a public relations hit, becoming a proxy in a war over class-action processes.

Under the CFPB’s final rule—it proposed the ban last year under the Obama Administration after researching the subject since 2012—financial services firms, including those providing bank accounts and credit agreements, would be prohibited from using contracts that prevent consumers from joining together in class-action suits in court and require, instead, individualized arbitration processes.

Arbitration, the CFPB emphasized, would not be banned.

But it will be subject to unprecedented regulation.  Companies would have to note in their consumer credit agreements that the arbitration process being offered does not prevent the individual from initiating or joining a class-action suit.

And the companies using arbitration would have to provide the results of those processes to the CFPB, which on Monday announced it would post those cases, after redacting identifying information, on its website beginning in July 2019.

The rule, according to CFPB Director Richard Cordray, “prevents financial companies from using mandatory arbitration clauses to deny groups of consumers their day in court.”

Still, it may never get to the marketplace.  The rule, the CFPB said Monday, will be sent to the Federal Register for publishing, expected in the next week or two.  There is a total of 241 days needed for compliance before the rule is fully effective—the CFPB said it would announce an exact date upon publication.

In the interim, the Republican Congress may move to revoke it.  The 2017 Congress has embraced the Congressional Review Act, a formerly little-used 1996 law that allows it to review new federal regulations issued by government agencies and overrule them under a joint resolution.

This year, the CRA has been invoked 14 times to overturn regulations. The CFPB’s arbitration efforts have been squarely in the sights of banking and finance lobbyists, among others.

There are other options, including President Trump firing Cordray and replacing him with a director who would strike the CFPB proposal.  See Alan S. Kaplinsky, “Proposed CFPB Arbitration Rule Faces Multiple Obstacles,” 35 Alternatives 3 (January 2017)(available at http://bit.ly/2hRb943).

And H.R. 10, the Financial CHOICE Act of 2017, an April proposal by Rep. Jeb Hensarling, R., Texas, would repeal the CFPB’s authority to restrict arbitration.  The bill passed the House and has been referred to the Senate Committee on Banking, Housing, and Urban Affairs.

Late last month, the Trump Administration reversed course on mandatory employment arbitration contracts, switching sides in three consolidated U.S. Supreme Court cases to be argued this fall in which the National Labor Relations Board similarly had banned the use of arbitration clauses because they prevent class cases against employers.  See Nicholas Denny, “DOJ to NLRB: You’re On Your Own in the Supreme Court,” CPR Speaks (June 21)(available at http://bit.ly/2uJNDwC).

Said Cordray, “I am aware, of course, of those parties who have indicated they will seek to have the Congress nullify the new rule.” He said that such steps will be “determined on the merits.” He continued: “My obligation as the [CFPB director] is to act for the protection of consumers and in the public interest, [and] that is what I believe have done” with the release of the final class waiver-arbitration rule.

The CFPB’s press announcement, along with links to the rule’s text and a new video explaining the moves, can be found HERE.

Russ Bleemer is the editor of CPR’s award-winning magazine, Alternatives.

U.S. Court of Appeals Upholds Trial Court’s Sanctions Against Attorney for Frivolous Arguments Seeking to Avoid Arbitration Agreement

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By Mark Kantor

The US Court of Appeals for the Seventh Circuit, in Appeal of Jana Yocum Rine in Hunt v. Moore Brothers, No. 16-2055 (June 27, 2017), recently upheld sanctions imposed by the trial court against an attorney personally for her frivolous arguments seeking to avoid an arbitration agreement in a contract between an independent trucker and a trucking company.  The appellate opinion is available at http://cases.justia.com/federal/appellate-courts/ca7/16-2055/16-2055-2017-06-29.pdf?ts=1498759242.

Very briefly, the trial court had required Ms. Rine, counsel for Mr. Hunt, to pay $7,500 in legal fees and expenses incurred by Moore Brothers defending against frivolous claims in a complaint filed by Ms. Rine in District Court and frivolous arguments that the arbitration agreement in the contract between Hunt and Moore Brothers was unenforceable, including a claim that the trucking company was holding Hunt “in peonage.”

James Hunt worked as a truck driver in Nebraska. On July 1, 2010, he signed an Independent Contractor Operating Agreement with Moore Brothers, a small company located in Norfolk, Nebraska.  Three years later, Hunt and Moore renewed the Agreement.  Before the second term expired, however, relations between the parties soured.  Hunt hired Attorney Jana Yocum Rine to sue Moore on his behalf.  She did so in federal court, raising a wide variety of claims, but paying little heed to the fact that the Agreements contained arbitration clauses.  Rine resisted arbitration, primarily on the theory that the clause was unenforceable as a matter of Nebraska law.  Tired of what it regarded as a flood of frivolous arguments and motions, the district court granted Moore’s motion for sanctions under 28 U.S.C. § 1927 and ordered Rine to pay Moore about $7,500.  The court later dismissed the entire action without prejudice.

****

The relevant part of the arbitration clauses in the Agreements reads as follows:

This Agreement and any properly adopted Addendum shall constitute the entire Agreement and understanding between us and it shall be interpreted under the laws of the State of Nebraska. … To the extent any disputes arise under this Agreement or its interpretation, we both agree to submit such disputes to final and binding arbitration before any arbitrator mutually agreed upon by both parties.

When Rine decided to take formal action on Hunt’s part, she ignored that language and filed a multi‐count complaint in federal court.  The complaint was notable only for its breadth: it accused Moore of holding Hunt in peonage in violation of 18 U.S.C. § 1581 (a criminal statute), and of violating the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. § 1962; the federal antitrust laws, 15 U.S.C. §§ 1, 4, 14; the Illinois Employee Classification Act, 820 ILCS 185/1 et seq.; and for good measure, the Illinois tort of false representation.

The Court of Appeals, and the District Court before then, concluded that Rine had blown up a simple commercial dispute beyond all rational proportion; “This was a simple commercial dispute between Hunt and Moore, but one would never know that from reading Rine’s complaint.  She blew it up beyond all rational proportion.”

Writing for a unanimous appellate panel, Chief Justice Wood upheld the trial court’s imposition of sanctions against Rine personally as “within the district court’s broad discretion, in light of all the circumstances of this case….”

We have no need to consider whether the sanctions imposed by the district court were also justified under the court’s inherent power.  See Chambers v. NASCO, Inc., 501 U.S. 32, 45–46 (1991).  Nor are we saying that the district court would have erred if it had denied Moore’s sanctions motion.  We hold only that it lay within the district court’s broad discretion, in light of all the circumstances of this case, to impose a calibrated sanction on Rine for her conduct of the litigation, culminating in the objectively baseless motion she filed in opposition to arbitration.  We therefore AFFIRM the district court’s order imposing sanctions.

The judicial decisions in Hunt v. Moore Brothers are yet another illustration of the increasing peril to counsel personally in US Federal courts if the attorney pursues a frivolous “take no prisoners” approach seeking to avoid arbitration.

 

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.

Changes to Mediation Confidentiality to Be Considered by California Legislature

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By Lyn Lawrence

The California Law Revision Commission, acting under the order of a resolution by the California Legislature, last month finalized a tentative recommendation that creates an exception in the state’s Evidence Code to mediation confidentiality.

If it is passed into law it will allow disgruntled clients to use information that is currently considered confidential as evidence in attorney malpractice suits.

The final version of the CLRC proposal is available at http://bit.ly/2rIuTvF.

This week, CPR and its monthly newsletter, Alternatives to the High Cost of Litigation, continue their coverage with two extensive examinations of the moves to change mediation confidentiality—a commentary by Los Angeles neutral Jeff Kichaven (see http://bit.ly/2snQUjF), and a compilation of key debate points submitted to the CLRC during its three years examining the issue, by CPR Summer 2017 intern Lyn Lawrence.

The new July/August issue of Alternatives can be found at http://bit.ly/1BUALop. CPR Institute members can access the issue when signed into CPR’s website at http://bit.ly/2kAakxH. Kichaven’s cover story will be available at altnewsletter.com later in July.

You can read last month’s “How California Intends to Recalibrate the Concept of Mediation Confidentiality,” 35 Alternatives 93 (June 2017) at http://bit.ly/2sWyqr1.

The CLRC’s recommendation for a mediation confidentiality exception for legal malpractice was sparked by California Supreme Court Justice Ming W. Chin’s concurring opinion in Cassel v. Superior Court (2011) 51 Cal. 4th 113, 117 (available at http://bit.ly/2tOHBgV). In the case, the client accused his attorneys of coercing him into accepting a mediation settlement that was not in his best interest.

The client was unsuccessful in his claim, but Chin wrote that the court had “to give effect to the literal statutory language” prohibiting disclosure of the mediation communications. “But,” he added, “I am not completely satisfied that the Legislature has fully considered whether attorneys should be shielded from accountability in this way. There may be better ways to balance the competing interests than simply providing that an attorney’s statements during mediation may never be disclosed.”

The exception contained in the CLRC’s tentative recommendation has received mixed reviews from ADR professionals, organizations and even California state departments operating in the mediation field.

Opponents of the CLRC efforts were dealt a blow when the tentative recommendation was approved by the commission on June 8. The approved tentative recommendation is available for public comment until Sept. 1, 2017.  A press release and instructions for commenting are available at http://bit.ly/2t0UyE8.

The creation and acceptance of the tentative recommendation come as a surprise to at least some practitioners, mainly due to California’s longstanding advocacy for the protection, support and growth of mediation. At the same time, some longtime practitioners viewed the preservation of a path to attorney malpractice cases as an enhancement to the integrity of mediation practice.

Confidentiality is a cornerstone of the mediation process, and it is unclear what the effect the exception would have if it is adopted into California law.  A legislative fight looms.

But exceptions to mediation confidentiality aren’t particularly new. For example, the Uniform Mediation Act (available at http://bit.ly/2tGNrRj) has been adopted by numerous states and contains exceptions to mediation confidentiality. Jeff Kichaven expands on these exceptions in his Alternatives commentary, which strongly backs the CLRC tentative proposal.

The CPR Institute will continue to follow the CLRC’s activity, including when the commission publishes the public comments, which it stated in an email would be after the Sept. 1 comment deadline.

The author is a CPR Institute Summer 2017 Intern.

Third Circuit Clarifies its Standard on Motions to Compel

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By Ugonna Kanu

The Third U.S. Circuit Court of Appeals recently held that a federal district court had erred when it denied an employer’s motion to dismiss a suit before the court had determined the fate of its motion to compel arbitration. The case was Silfee v. Automatic Data Processing Inc.; ERG Staffing Service LLP, No. 16-3725 (3d. Cir. June 13, 2017)(unpublished)(available at http://bit.ly/2rUZpln).

A unanimous Third Circuit panel ruled, in an unpublished decision, that the trial court first must determine the motion to compel arbitration before the motion to dismiss.

The plaintiff in Silfee filed suit against his former employer for violating Pennsylvania law on payroll practices. ERG, a Dickson City, Pa.-based employment agency, filed a motion to compel arbitration “arguing that the arbitration agreement between Silfee and ERG’s payroll vendor precluded Silfee’s suit against ERG,” according to the opinion.

ERG moved to dismiss Silfee’s suit. The district court, however, placed a hold on compelling arbitration, and denied the motion to dismiss the suit.

The Third Circuit panel opinion, written by Circuit Judge Thomas M. Hardiman, of Pittsburgh, distinguished between the case and Guidotti v. Legal Helpers Debt Resolution L.L.C., 716 F.3d 764, 771 (3d Cir. 2013)(available at http://bit.ly/1pXcNnD), in which the Third Circuit held that where it is apparent that a party’s claims are subject to an enforceable arbitration clause, a motion to compel arbitration should be considered without discovery delay under Federal Rule of Civil Procedure 12(b)(6).

But, where the agreement to arbitrate is unclear, or the plaintiff facing the motion to compel has provided “additional facts sufficient to place the agreement to arbitrate in issue,” then the court may order limited briefing and discovery on the issue of arbitrability, and assess the question under a summary judgment standard of Rule 56, the opinion explained.

Before Guidotti’s application, the panel opinion noted that the FAA provides a gateway test. It says that a trial court must make an inquiry under Federal Arbitration Act Section 4 where there is a motion to compel arbitration.

Section 4, the opinion emphasized, provides that “[a] party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration may petition any United States district court . . . for an order directing that such arbitration proceed in the manner provided for in such agreement.”

Plaintiff Silfee didn’t produce “additional facts sufficient to place the agreement to arbitrate in issue”—the Guidotti standard to get past a motion to dismiss. As a result, the Third Circuit ruled, the court should have applied the Rule 12(b)(6) standard.

While the appeals panel stopped short of dismissing Silfee’s suit and compelling arbitration, it remanded the case to the U.S. District Court with an order to consider the parties’ “competing arguments regarding arbitrability” under ERG’s motion to compel.

The author is a CPR Institute Summer 2017 intern.

DOJ to NLRB: You’re On Your Own in the Supreme Court

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CLASS WAIVER/MANDATORY ARBITRATION CASES

By Nicholas Denny

In the clearest illustration so far of the Trump Administration’s evolving hands-off policy toward mandatory arbitration clauses and class action waivers, the U.S. Solicitor General authorized the National Labor Relations Board (NLRB) last week to represent itself in one of three consolidated arbitration cases to be heard by the U.S. Supreme Court this fall.

At the same time, the U.S. Department of Justice, which had been representing the board in NLRB v. Murphy Oil USA Inc., No. 16-307 (U.S. Supreme Court docket page at http://bit.ly/2kOPxal) until last week, switched sides in the case, filing an amicus brief backing the employer in the matter.

Justice, via the friend-of-the-court briefs, is now advocating against the NLRB, and against its previous position.

The case—along with its companions, Ernst & Young v. Morris, No. 16-300 (Docket page at http://bit.ly/2kLxCEg) and Epic Systems Corp. v. Lewis, No. 16-285 (Docket page at http://bit.ly/2kFVxm6)—asks whether mandatory arbitration clauses as a condition of employment bar individual employees from pursuing work-related claims on a collective or class basis under the National Labor Relations Act (NLRA). Mandatory arbitration clauses are used throughout employment settings and apply to employees regardless of titles or union affiliation; two of the three cases involve white-collar office workers.

The Supreme Court will hear the consolidated cases in the term beginning in October.

The issue in the consolidated cases is whether employers can continue to unilaterally require that employees agree to a mandatory arbitration clause in employment contracts. Often, these clauses are non-negotiable: either employees accept the employer’s terms or the employer finds someone else to hire.

The Supreme Court must decide which of two laws controls: the National Labor Relations Act, 29 U.S.C. § 151, et seq., or the Federal Arbitration Act, at 9 U.S.C. § 1 et seq. Under the NLRA, an employee’s rights to collective bargaining and action are protected. Under the FAA, however, an employment contract that includes a mandatory arbitration clause binds the worker to arbitrate with the employer instead of litigating in court, and is accompanied by a waiver barring the employee from bringing a class-action suit in favor of an individualized process.

As a result, arbitration clauses can deliver a one-two punch: (1) workers arbitrating individually may have less power, because they are not operating as part of a collective whole as contemplated by the NLRA, and (2) a worker may be less likely to find counsel because arbitration awards are perceived to be much smaller than court and class-action outcomes—meaning a lawyer working for a portion of the settlement would be less likely to take the case.

On the other hand, employers contend that mandatory arbitration clauses protect the company and benefit the employee. They argue that arbitration clauses ensure a speedier and more cost-effective conclusion to conflicts: class actions are harder and more costly to fight than arbitrations.

The disagreement over the use of mandatory arbitration clauses has arisen in the political arena, too. While the Obama Administration focused on pro-employee, anti-mandatory arbitration policies that prohibited employers from unilaterally waiving workers’ rights to concerted action under the NLRA, the Trump Administration is leaning toward an employer-centric policy by permitting mandatory arbitration clauses in employment contracts and as a condition of hiring.

This drastic shift in policy culminated with Friday’s news that the NLRB will represent itself, and that the Department of Justice would switch sides. The NLRB, as an autonomous government entity, is tasked with protecting “the right of employees to engage in protected concerted activities—group action to improve wages, benefits, and working conditions and to engage in union activities and support a union,” according to its website, as well as protecting the right of workers to refrain from engaging in protected concerted or union activities.

While the Justice Department prosecutes on behalf of the nation as well as defends government agencies, it is exceedingly rare for it to withdraw its representation of an agency it had been representing and subsequently file a brief in opposition to the position had it previously taken.

The Justice Department amicus brief switching sides in Murphy Oil is available at http://bit.ly/2sUnFbL.  The NLRB’s June 16 announcement that it would represent itself without Justice Department support can be found on the board’s website at http://bit.ly/2traH2s.

The move, however, is consistent with another recent Trump Administration policy shift on arbitration. In early June, the Centers for Medicare and Medicaid Services, an arm of the U.S. Department of Health and Human Services, withdrew a 2016 Obama Administration position prohibiting mandatory arbitration clauses in long-term care nursing home contracts.

CMS’s new position allows arbitration agreements provided that the provisions are written in plain language, and explained to and accepted by the applying resident.  Among other conditions, the CMS requires that the nursing home retain a copy of the signed agreement and post a notice that details the nursing home’s arbitration policy.

In addition, House Republicans introduced the “Financial CHOICE Act” earlier this month, a proposed law that aims to dismantle the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. Dodd-Frank is an extensive law that was passed to ensure higher accountability in the U.S. financial sector after the economic recession of 2008 and it was endorsed by former President Obama.

Among its many goals, Dodd-Frank pointed its then-new Consumer Financial Protection Bureau at pre-dispute mandatory arbitration clauses in consumer finance contracts. A lengthy study concluded last year by the CFPB resulted in a promise to finalize regulations that would ban the use of predispute mandatory arbitration in consumer financial contracts, such as cellphone agreements.

But should the “Financial CHOICE Act” become law, it likely would allow financial institutions to include mandatory arbitration clauses in their consumer contracts and agreements, and negate the CFPB efforts.

President Trump’s stance on mandatory arbitration clauses is becoming clear. Whether the clauses are legal in the employment context, and whether they will withstand Supreme Court scrutiny, are developing issues that are expected to be answered within the year. Watch CPR Speaks for updates.


The author is a CPR Institute Summer 2017 intern.

California Appeals Panel Declines to Compel Arbitration in a Nursing Home Case

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By Lyn Lawrence

The author is a CPR Institute Summer 2017 Intern.

California’s Third Appellate District has refused an appeal to compel arbitration in Hutcheson v. Eskaton FountainWood Lodge, No. C074846 (Cal. A.D.3d. June 14, 2017)(available at http://bit.ly/2rxIc1T), a nursing home dispute in which family members of a deceased former resident sought to sue the residential care facility for elder abuse, fraud and negligence.

The decedent, Barbara Lovenstein, granted a health care power of attorney to her niece, Robin Hutcheson, and a personal care power of attorney to her sister, Jean Charles. Charles transferred Lowenstein to Eskaton FountainWood Lodge, a residential care and assisted living facility in Orangevale, Calif., and entered into the admission agreement.

After the Lovenstein died, Hutcheson and Charles instituted legal proceedings against FountainWood, which submitted a motion to compel arbitration. A trial court denied the motion.  The court found that Charles acted beyond the powers of her personal care power of attorney when entering into the admission agreement, making the arbitration clause invalid.

FountainWood approached the Third Appellate District to overturn the trial court’s decision. But a unanimous three-judge panel affirmed, based on its interpretation of California’s Power of Attorney Law and Health Care Decisions Law, holding that the decision to admit the deceased was a health care decision, not within Charles’ personal care POA.

The court concluded that the trial court was correct in denying the defendant’s motion to compel arbitration.

It can be inferred from the judgment that the court would have compelled arbitration had Hutcheson, who held the health care power of attorney, entered into the admission agreement. The court stated that, “There is no evidence in the record that Hutcheson, Lovenstein’s attorney-in-fact for health care under the health care POA, was involved in any of the decisions and actions regarding Lovenstein’s admission, stay at, or discharge from FountainWood.”

The California case denying the care facility’s motion to compel arbitration runs counter to two recent events with national implications that backed arbitration for conflicts related to nursing home patients.

Hutcheson follows just a month after the U.S. Supreme Court held that the Kentucky Supreme Court’s interpretation of the state’s power-of-attorney law discriminated against arbitration.

See Kindred Nursing Centers v. Clark, No. 16-32 (May 15)(available at http://bit.ly/2pCk94L) (for analysis, “SCOTUS Says States Can’t Discriminate Against Arbitration, Directly or Indirectly,” CPR Speaks blog (May 16)(available at http://bit.ly/2rxGFeB).

In addition, the Center for Medicare and Medicaid Services, a part of the U.S. Department of Health and Human Services, rescinded its 2016 ban on including mandatory arbitration provisions in nursing home agreements early this month (see CMS fact sheet at http://go.cms.gov/2sA2Wae).

Thoughts on Non-Administered Arbitration

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johnwelborn By

Non-administered arbitration (“NAA”) is an informal dispute resolution process designed to proceed without the involvement of a separate administering entity. The arbitrator and parties administer the proceedings.

The proceedings may be guided by a procedure the parties define, or the parties may agree to use institutional rules and procedures such as Rules for Non-Administered Arbitration published by the International Institute for “alternative” Conflict Prevention and Resolution (“CPR”). The objective is a dispute resolution process that is truly alternative – more efficient, flexible and expeditious than both adversarial litigation and formal administered arbitration.

I was recently an arbitrator in an NAA proceeding under the CPR Rules. This posting provides some of my reactions.

Avoid litigation in disguise

The effectiveness of the NAA alternative is only as good as the joint effort of all participants – the parties, their representatives and the arbitrator. Everyone involved in a non-administered arbitration proceeding must share the objective and make certain that the speed, flexibility and efficiency that the NAA process offers are realized and that the proceeding doesn’t devolve into litigation in disguise.

Parties who agree contractually to resolve their disputes in an NAA process seek a non-appealable, binding, just and fair result. That’s the low hanging fruit. Those contracting parties also deserve fruit higher up the tree – they deserve a dispute resolution proceeding that is focused, flexible, and less costly and time-consuming than formal administered arbitration or litigation. Everyone involved has an obligation to work to that end.

The approach

An important factor in meeting that obligation is how each participant approaches the NAA proceeding. Helena Tavares Erickson, a Senior Vice President at CPR, published an article on point some time ago (2006). Among her several valuable messages is the view that those involved must approach the dispute “as a problem to be solved, not a contest to be won.”

I agree. Contests to win are more expensive, more time consuming and less controllable than joint problem solving efforts. The benefits of an NAA proceeding are best realized in a problem solving context.

The schedule – agree and stick to it

As soon as the parties acknowledge the existence of a dispute to be arbitrated under NAA rules, they engage a mutually acceptable arbitrator. Then all concerned, including the arbitrator, should quickly (within days, not weeks or months) confer and agree to a date for a substantive hearing on the issues. This date should be written in stone, i.e., should be changed only (i) due to force majeure events and (ii) if and when not changing the date would mean genuine prejudice to a party.

The date should be realistic in terms of time needed for preparation. The original agreement which calls for dispute arbitration may provide unrealistic timing, e.g., 60 days to select and appoint an arbitrator and get to hearing on complicated factual/legal matters. It’s fine to override that prior agreement in the face of an actual dispute.

What shouldn’t be overridden is the clear intent of the parties to have the dispute heard and resolved quickly. Not getting to a substantive hearing on the merits of the dispute many months or more after arbitrator appointment is not the expeditious, economical dispute resolution process the parties originally bargained for.

Core issues – early identification and focus

Identification of the core issues in dispute, and early focus on those issues, can and should happen in arbitration, especially NAA. The flexibility to make this happen is a major advantage of the NAA process.

To get there, the parties and their representatives need to find the courage to work together to prioritize the factual and legal issues that comprise the dispute. This makes it possible to bring these core issues to the arbitrator for preliminary, non-binding review, or perhaps even for formal determination. Either way, the expertise of the arbitrator, the primary reason he/she was retained, is taken advantage of early on, and the possibility of mediation, or even settlement, of the entire dispute is increased.

If the parties and their representatives are reluctant to single out core issues for early scrutiny, the arbitrator should be ready to encourage them in that direction. The arbitrator needs to be sensitive to the time/cost value of bringing his/her expertise into the dispute in a constructive way early on.

This preliminary issue review requires two things:

1. Confidence on the part of the arbitrator — the ability to express a high level opinion (make a call) based on the experience and expertise that he/she is bringing to the table without first having to see every possible bit of data or hear every possible legal argument.
2. Parties and party representatives who are willing to listen and act on the arbitrator’s early stage opinion regardless of whether they agree that this preliminary arbitrator opinion is binding.

Atmosphere – informal, open

This is a challenge, especially for lawyers trained in the courtroom. I’m not suggesting that everyone arrive at each session in blue jeans and flip-flops. I am suggesting that the participants strive for an atmosphere that is conducive to problem solving, that fosters professionalism as well as mutual respect and friendliness, and that leaves room for important openness and listening.

For the parties and their representatives, this requires:

• Self-control in terms of what each participant brings to the table,
• Fewer motions and objections in response to what has been put on the table,
• The courage to make their own conscience-guided determinations of what is truly relevant and helpful to the effort, and
• Confidence that the arbitrator is good enough not to need formal motions in order to see every weakness in what has been presented.

For the arbitrator, this is about not letting evidentiary issues get in the way. Let your experience, judgment and expertise (the qualities that brought you to this proceeding in the first place) tell you what you don’t need to know or listen to in order to do your job.

The record – do we need one?

The reasons for making a record in a formal dispute resolution proceeding don’t exist in an NAA proceeding. There won’t be an appeal on the merits of the final award, so that’s not a reason. Preserving a possible challenge to the final award based on arbitrator conflict or bias is also not a valid reason for a record. The potential for such a challenge should be raised and resolved long before the proceeding commences. That leaves the possible need for a record for reference purposes for final briefing and arguments to the arbitrator, and the making of the record can be tailored to that need.

So, this is not to advocate that NAA proceedings not be recorded. I am suggesting that the participants first work together to determine why a record is needed. They should then tailor the making of the record to the identified need before engaging in the expense and the additional logistics of making a record of all evidentiary presentations.

CPR is a leading NAA advocate. Their website is a valuable tool for those interested.

In summary

• The benefits of an NAA proceeding are best realized in a flexible, problem solving context.
• The judicial process, the formal administered arbitration process, and all of the evidentiary and other rules and procedures that go along with those processes, are designed for win-lose contests. They don’t allow for the flexibility that is an important benefit of an NAA proceeding, and they cost money and consume time.
• Participants (parties, representatives and arbitrators) who are committed to the expediency and effectiveness of the NAA process must avoid engaging in litigation in disguise. They should welcome and take full advantage of the flexibility that comes from working together to solve a problem.

John F. (Jeff) Welborn is Special Counsel at Welborn Sullivan Meck & Tooley. He specializes in serving as a mediator/facilitator in disputes that involve (U.S. and international) oil and gas, mining or other natural resource matters.  He has almost 40 years of experience in oil & gas and mining transactions and matters, both in the U.S. and globally, in natural resource regulatory matters and in negotiating and drafting natural resource development agreements, financing arrangements, and conveyance documents.

Copyright (2016) John F. (Jeff) Welborn – Welborn Sullivan Meck & Tooley, P.C.  All Rights Reserved. This post originally appeared on the firm’s blog at http://www.wsmtlaw.com/ and is republished with permission.

The U.S. Paris Climate Accord Pull-Out: From a Negotiation Standpoint, A Bit of an Artless Deal?

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By John Bickerman

President Donald Trump’s decision to have the U.S. withdraw from the Paris Climate Accord will undoubtedly have many repercussions in many different areas and industries, ranging from energy to environmental and well beyond. But, at its core, Thursday’s action can be boiled down to a deal negotiation. Below are a few basic alternative dispute resolution (ADR) principles, and how they apply to the U.S. Paris Accord pull-out:

Any analysis of negotiation strategy starts with identifying the ‘interests,’ not the positions of parties. One also must assume that parties behave rationally.  

The President has two plausible interests that he was trying to vindicate.  First, he could be trying to do what he said, which was protect American jobs; the second plausible interest is that he was trying to affirm and solidify his political base. The second appears to be the more rational explanation for his behavior. When the President returned from his European trip after failing to endorse fully NATO, his popularity ticked up, almost exclusively with his hard core Republican base. It wouldn’t be surprising if withdrawal from the Paris Accord further solidifies his base and marginally increases his popularity and affirms his promise to the voters he believes elected him.

A corollary would be that it gets the Russia investigation off the front pages, although based on the subsequent news cycles that seems highly unlikely. With respect to protecting American jobs, the better data suggests that this interest will not be achieved and employment in the U.S. could actually be harmed if foreign countries retaliate against the United States by enacting carbon taxes as some analysts have suggested they might. Moreover, there is a seemingly strong case that jobs are being created in the renewable energy sector that would surpass the jobs lost in the fossil fuel industry.  The Washington Post reported that there was a fierce battle in the White House over the decision.  The “withdrawal” side, led by Senior Advisor Steve Bannon, appear to have deluged the President with data that rejected the consensus view. Much of the data presented by the Bannon team was highly suspect, according to the Post.

Remember that only three countries are now not part of the Paris Accord — Syria, Nicaragua and the United States.  It’s extremely rare, perhaps unprecedented, to have such worldwide unanimity on an issue.

 A good negotiator also tries to understand how his counter-parties will react to his negotiating position.  

The Administration, either misjudged or doesn’t care about International repercussions.  Other countries, especially China, Germany and France will step into the vacuum created by the withdrawal of the U.S. As reported by the news media, China intends to ramp up its production of renewable energy products, potentially usurping a role that the United States could have.

The threat of an action often carries much greater leverage than the action itself.  

There is no opportunity under the Paris Accord to withdraw from its terms until 2019.  The President would have had much greater leverage if he had continued to threaten withdrawal between now and 2019 instead of playing his hand now. This line of thinking was apparently presented to the President by Secretary of State Tillerson and other according to news reports.  Clearly, the federal government has lost its leverage in influencing further changes in the pact.  Interestingly, 30 cities, 3 states, including California and 100 companies have formed an alliance that supports the Accord and will affirm their support to the U.N.  This development further undermines the influence President Trump will have on this issue.  It’s rare for a negotiator to dissipate his bargaining power in this manner.

The best negotiators are able to reach strategic and creative compromise with equal negotiation partners, and not only with weaker parties who are more easily pressured into action.

The President has not shown himself to be an especially good negotiator when there are other equal partners with which to negotiate. The strategy he employed in his business, when he was often negotiating with weaker counter-parties and could afford to stake out extreme positions, doesn’t work in International negotiations (or with the other branches of government) where parties are less likely to be “bullied” into agreement.

Time and again, since he took office, the President has staked out extreme positions or made ultimatums.  When his bluff has been called, he has lost all ability to negotiate and has been ignored. That’s what seems to be happening with the Paris Accord. The rest of the world will continue to adhere to the agreement. The United States has squandered its leadership position and has no “fallback” position that would allow it to exert any influence in the future, unless it rejoined the Accord.

There is no art to “re-negotiating” completely voluntary, or multi-party, deals.

Despite the President’s avowed intent to re-negotiate the Paris Accord, that will not be possible.  First, the Paris Accord has only voluntary commitments.  There are no binding obligations, other than the promise of the first world countries to pay for environmental efforts in developing countries.  (So far, the United States has paid $1 billion of the $3 billion it has promised to pay under the agreement.). Second, it’s not possible to renegotiate a multi-lateral agreement.  There simply is no “one” party with which to negotiate.

John Bickerman is the Chair of the International Institute for Conflict Prevention & Resolution’s Environmental Committee, a lawyer and the founder of Bickerman Dispute Resolution, PLLC

CASE SUMMARY: Pershing LLC v. Kieback et al – Rare US Federal Court Ruling Assessing When Tribunal’s Rejection of Discovery Request May Constitute Improper Refusal to Hear Evidence Justifying Vacatur

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Kantor Photo (8-2012)By Mark Kantor

Last week, the US District Court for the District of Louisiana issued a ruling in Pershing LLC v. Kieback et al (Judge Lance M. Africk, Civ. Act. No. 14-2549, May 22, 2017, available at https://scholar.google.com/scholar_case?case=5882751863819676163&hl=en&as_sdt=20006) confirming the arbitration award by a Financial Industry Regulatory Authority (“FINRA”) arbitration panel, notwithstanding efforts to vacate the award on grounds that the arbitral panel’s failure to require production of certain documents in discovery, or to even review those documents in camera before denying a motion to compel production, constituted “misconduct … in refusing to hear evidence pertinent and material to the controversy” under the US Federal Arbitration Act (FAA), “evident partiality” on the part of the arbitrators, and “manifest disregard of the law.”

This decision is one of the rare US Federal court rulings assessing when a tribunal’s rejection of a discovery request may constitute an improper refusal to hear evidence justifying vacatur.  As you will see, the Louisiana Federal District  Court set the standard high.

The dispute arose out of R. Allen Stanford and Stanford Financial Group’s fraudulent Ponzi scheme (https://en.wikipedia.org/wiki/Allen_Stanford) resulting in Stanford being ordered by law enforcement agencies to disgorge $6.7 billion  and pay a $5.9 billion fine.

A number of retired individuals living in Louisiana (the “Louisiana Retirees”) who had invested in Stanford certificates of deposit brought FINRA arbitrations for an aggregate of about $80 million in damages against Pershing LLC (“Pershing”), the clearing broker for the Stanford Group, alleging due diligence and non-disclosure theories on the basis of which the clearing broker might be held liable for a portion of the damages caused by the fraud (footnotes and many citations omitted from quotations).

They claim that Pershing, as Stanford Group Company’s clearing broker, failed to exercise due diligence in its business relationship with Stanford Group Company and failed to disclose adverse financial information which would have resulted in the Ponzi scheme being uncovered sooner than it was.

Pershing naturally presented defenses to those claims.

The Retirees’ claims were all consolidated into a single arbitration hearing, a process that (by the way) may be worth exploring by readers interested in the relationship between consolidation in arbitration and class arbitration.

During the arbitration, the Louisiana Retirees sought discovery, including document production.  As to certain of the documents covered by a discovery demand, Pershing asserted two privileges; the attorney-client privilege and a US financial services regulatory privilege known as the “Suspicious Activity Report (“SAR”) privilege” established by US Federal regulation to protect financial institutions who are required to report suspicious financial activities to Federal enforcement officials.  The arbitration panel upheld those assertions of privilege.

The arbitration panel held that Pershing was not required to produce to the Louisiana Retirees certain categories of documents which Pershing claimed were privileged. The documents consist inter alia of emails which Pershing claimed were protected under the attorney-client privilege and “Incident Reports” which Pershing says it uses to begin the process of internally investigating potential suspicious activity. Pershing claims the second category of documents are protected by the SAR privilege.

After extensive hearings, the arbitral panel ruled in favor of Pershing on the merits.

After a two week hearing at which the panel heard over 1,600 pages of testimony from fifteen witnesses and considered over 900 separate exhibits, the panel ruled in Pershing’s favor.

Pershing then sought confirmation of the FINRA award in the District Court.  The Louisiana Retirees sought vacatur.  The District Court was therefore faced with the need to balance two oft-argued principles in confirmation/vacatur proceedings; “an arbitration panel’s decision cannot be overturned simply because it was incorrect. …. But under the Federal Arbitration Act (FAA), an arbitration panel’s refusal to hear evidence material and pertinent to the controversy can result in vacatur of the arbitration award when the refusal deprived a party of a fundamentally fair hearing.

The Louisiana Retirees primarily argued that the arbitration was “fundamentally unfair” due to their inability to obtain and present the documents withheld by Pershing from document production.

The Louisiana Retirees first argue that the panel’s decision should be vacated pursuant to section 10(a)(3) of the FAA because the panel denied the Louisiana Retirees access to key documents, and the withholding of the documents was prejudicial to the Louisiana Retirees to the extent it rendered the arbitration proceeding fundamentally unfair. Their position is essentially that the Louisiana Retirees were unable to prove their case and were unable to refute false testimony offered by Pershing witnesses during the arbitration proceeding because they did not have certain documents which they have now had an opportunity to review.

In particular, the Retirees pointed to the decision by the arbitral panel not to review the documents in camera before upholding the privilege claims and to their substantive privilege rulings.

The prejudice claimed by the Louisiana Retirees really stems from two separate decisions of the arbitration panel: (1) the decision not to review the documents in camera before deciding whether Pershing should produce them; and (2) the decision on the merits of the claimed privileges.

In an earlier decision in the judicial confirmation/vacatur proceedings, Judge Africk of the District Court had previously allowed limited discovery by the Louisiana Retirees.  When faced with the same assertions of privilege by Pershing, the Court itself reviewed the documents in camera (unlike the arbitral panel) to determine whether they were covered by the SAR privilege under federal law.  In its consequent ruling on privilege (available at https://scholar.google.com/scholar_case?case=17082729013022954526&hl=en&as_sdt=20006), the District Court upheld most of Pershing’s privilege assertions but concluded that some of the documents (or parts thereof) were not privileged and should have been disclosed.

After closely reviewing the documents produced for in camera review by Pershing, the Court finds that the Incident Reports at Tabs 1-67 bear no arguable relationship to the claims or defenses in this case and are not discoverable for that reason. On the other hand, the Court finds that the Incident Reports at Tabs 68-74 should be produced, as they are relevant to the claims and/or defenses of the Defendants in this case and are not privileged. Additionally, the redacted version of the Summary Reports that correlate to Tabs 68-74 should be produced, as should the redacted versions of Tabs 1-14 of the Summary Reports produced in Pershing’s third production on March 14, 2017.

Judge Africk ordered those documents turned over to the Louisiana Retirees as part of the judicial vacatur proceedings.  The Retirees then relied upon the fact that the arbitral tribunal had neither reviewed those documents in camera nor required them to be produced in document production as their basis for arguing fundamental prejudice.  As the Court noted in its subsequent decision last week, “Now the question is simply whether, considering the produced documents in conjunction with the record of the arbitration proceeding, the Louisiana Retirees have satisfied one of the recognized grounds for vacating an arbitration award.”

The Louisiana Retirees assert three bases for vacatur in this lawsuit. According to their motion, they contend “(1.) that the arbitration proceeding was fundamentally unfair because severe prejudice occurred to the Louisiana Retirees when Pershing did not disclose to the Louisiana Retirees [certain documents which were not produced by Pershing until this Court ordered them produced in this lawsuit]; (2.) the obvious partiality and bias of the arbitrators because of the apparent `assumed veracity’ of Pershing when the Panel allowed Pershing to serve as the judge and jury on defining the scope of the documents withheld under attorney client privilege and the SARs/AML privilege; and (3.) that the Panel committed manifest error reviewing the evidence that was actually presented to the arbitration hearing based upon the review standard of the Second Circuit because of the application of New York Law.”

Judge Africk addressed the Retirees’ “fundamentally unfair” presentation first.  He rejected the Retirees’ arguments.  The Judge began by repeating the commonly-accepted “exceedingly narrow” standard for vacatur of an arbitration award in FAA jurisprudence.

“In light of the strong federal policy favoring arbitration, judicial review of an arbitration award is extraordinarily narrow.” …. “Under this review, an award may not be set aside for a mere mistake of fact or law.” …. “Instead, Section 10 of the FAA provides the only grounds upon which a reviewing court may vacate an arbitrative award.”

Looking at the argument that the panel’s failure to review the documents in camera before ruling on the privilege justified vacatur, the District Court ruling noted that the FINRA arbitration rules do not require in camera review.  Moreover, commented the Court, the overall discovery process was not fundamentally unfair (“A FINRA arbitration panel has great latitude to determine the procedures governing their proceedings and to restrict or control evidentiary proceedings.”).

With respect to the first decision—not to review the documents in camera—the Court observes that nothing in the FINRA arbitration rules requires in camera review prior to ruling on a discovery motion. To the extent the Louisiana Retirees claim that the manner in which the panel resolved discovery issues rendered the proceeding fundamentally unfair, the Court rejects that argument. Even if this Court would have proceeded differently, this Court cannot conclude that the entire arbitration proceeding was tainted because of it. See Bain Cotton Co. v. Chesnutt Cotton Co., 531 F. App’x 500, 501 (5th Cir. 2013) (“Regardless whether the district court or this court—or both—might disagree with the arbitrators’ handling of Bain’s discovery requests, that handling does not rise to the level required for vacating under any of the FAA’s narrow and exclusive grounds.”).

“A FINRA arbitration panel has great latitude to determine the procedures governing their proceedings and to restrict or control evidentiary proceedings.” …. Indeed, even in federal court the decision whether to conduct an in camera inspection is wholly within the discretion of the district court. …. The record reveals that discovery was extensively litigated before the panel, which decided six motions to compel, received multiple rounds of briefing from the parties, and held a telephonic hearing to address the SAR privilege and the request for an in camera review. …. Ultimately, the Louisiana Retirees received over 121,000 documents from Pershing totaling over 635,000 pages. …. The discovery process was not fundamentally unfair. See Prestige Ford v. Ford Dealer Computer Servs., Inc., 324 F.3d 391, 395 (5th Cir. 2003) (abrogated on other grounds) (“In the case at hand, hearings were held and each disputed item was given consideration by the panel; thus, more than adequate opportunity was afforded to the parties and the minimum standards of fundamental fairness were met.”).

Having disposed of the Retirees’ complaint based on the failure of the panel to review the documents in camera before ruling, the Court then turned to the second assertion of fundamental unfairness – the panel’s merits decision that the attorney-client privilege and the SAR privilege shielded all of the documents withheld by Pershing.  Here too, Judge Africk was not persuaded that the tribunal’s decision deprived the Retirees of a fair hearing. The District Court considered that the documents not disclosed during the arbitration were cumulative of documents that were produced (“The documents produced to the Louisiana Retirees in this litigation are cumulative of the documents produced to the Louisiana Retirees in the arbitration proceeding. …  There is no reasonable basis to suggest that if the new documents had been produced during the arbitration proceeding, the result would have been different.”).

With respect to the second decision complained of by the Louisiana Retirees— the panel’s decision that the attorney-client privilege and the SAR privilege shielded all of the documents withheld by Pershing—the Court also concludes that the decision did not render the arbitration proceeding fundamentally unfair. …. Even if this Court disagrees with the arbitration panel regarding the appropriate scope of those privileges, the Court does not find that the Louisiana Retirees were deprived of a fair hearing as a result of the decision.

The documents produced to the Louisiana Retirees in this litigation are cumulative of the documents produced to the Louisiana Retirees in the arbitration proceeding. A review of the record shows that Pershing produced a vast amount of material during the arbitration proceeding which evidenced that high-level Pershing employees were aware as early as 2006, to one degree or another, of potential “red flags” regarding Stanford Group Company. …. The Louisiana Retirees marshaled this evidence in support of their position that Pershing knew or should have known that there were serious questions about Stanford Group Company’s legitimacy during the period that the Ponzi scheme was in operation, and that Pershing should have done more sooner to raise the alarm regarding Stanford Group Company. The arbitration panel rejected the Louisiana Retirees’ arguments. There is no reasonable basis to suggest that if the new documents had been produced during the arbitration proceeding, the result would have been different.

Because the Louisiana Retirees were able to introduce comprehensive evidence supporting their theory of the case, the deprivation of additional arguably relevant evidence did not deprive the Louisiana Retirees of a fair hearing.

The Judge in any event also assessed whether the evidence in the withheld documents about Pershing’s knowledge regarding Stanford’s suspicious behavior was a primary focus of the arbitration.  Judge Africk ruled it was not.  Moreover, the additional evidence would not have shown a direct conflict with testimony of Pershing witnesses.

To the extent the Louisiana Retirees argue that the newly produced documents directly contradict the testimony of Pershing witnesses in the arbitration, the Court finds the Louisiana Retirees’ position to be a mischaracterization of the record. Pershing witnesses acknowledged that there were concerns raised regarding Stanford Group Company as early as 2006. The primary focus of the arbitration proceeding was not whether Pershing had notice of suspicious behavior by Stanford Group Company, but rather whether Pershing acted reasonably to address their concerns and—more importantly—even if Pershing acted unreasonably, whether Pershing violated any legal duty owed to the Louisiana Retirees. (Pershing argued during the arbitration that Pershing could have no liability for fraud committed by Stanford Group Company even if Pershing should have discovered that fraud or done more to prevent it). All of these issues were exhaustively litigated.

Importantly, the Court also pointed out that, if there were ambiguities in the record, any “doubts or uncertainties must be resolved in favor of upholding the arbitration award.”  Applying this legal standard, the Court rejected the Retirees’ vacatur argument.

The Louisiana Retirees also packaged the same underlying situation as an argument that, by not reviewing the withheld documents in camera, the arbitrators evidenced partiality on the part of the arbitrators. The Retirees’ “evident partiality” attack actually involved three separate issues; (1) the in camera issue, (2) the fact that the then-CEO of Pershing had been a member of the FINRA Board of Governors, and (3) the fact that Pershing had presented a defense in the arbitration (the so-called “FINRA defense”) that regulatory examination and enforcement failures (i.e., alleged misconduct by FINRA and the Securities Exchange Commission (SEC) in failing to promptly identify the Stanford Ponzi scheme) meant that FINRA and the SEC should be held equally responsible for the failure to discover the Ponzi scheme earlier.

The Louisiana Retirees next argue that the panel’s decision should be vacated pursuant to section 10(a)(2) of the FAA because there was evident partiality or corruption by the arbitrators. They say the bias was made evident in three ways. First, the Louisiana Retirees claim that the panel’s failure to conduct the in camera review proves the panel was biased in favor of Pershing. Second, the Louisiana Retirees argue the panel was biased because the CEO of Pershing during the relevant time period, Richard Brueckner, was a former member of the FINRA Board of Governors. Third, the Louisiana Retirees contend that the panel was inclined to rule in favor of Pershing because Pershing asserted a so-called “FINRA defense,” in which Pershing supposedly argued to the panel that regulator misconduct or negligence served as a defense to Pershing, i.e. that if Pershing was liable to the Louisiana Retirees then FINRA and the SEC must be deemed equally culpable for failing to discover the Ponzi scheme sooner.

Judge Africk did not accept any of these arguments by the Retirees.  With respect to the claim that the the arbitrators showed bias by declining in camera review, the Judge referred back to his conclusion that the tribunal’s conduct did not produce an unfair hearing.

The Court has already addressed the Louisiana Retirees’ argument that the panel should have reviewed Pershing’s documents in camera. The FINRA rules do not require such an in camera review, and placed in the context of the lengthy discovery proceedings as a whole the panel’s decision not to review the documents does not suggest bias.

The Court then disposed of the other two assertions of bias (“that they strenuously objected to Mr. Brueckner [the former Pershing CEO who had been on the FINRA Board] not testifying in person in the order desired by the Louisiana Retirees during the arbitration proceeding, and that they objected to Pershing advancing the FINRA defense”).  With respect to the issue of the former CEO not be compelled to testify, Judge Africk declined to consider that the former CEO’s position on the FINRA Board produced any partiality on the part of the arbitrators appointed by FINRA.

As for Mr. Brueckner’s relationship with FINRA, the U.S. District Court for the Southern District of New York recently rejected an identical argument by a losing party to an arbitration, and the Court finds its reasoning persuasive and applicable here. See Freedom Inv’rs Corp. v. Hadath, 2012 WL 383944, at *5 (S.D.N.Y. Feb. 7, 2012) (“Blumenschein’s service on FINRA’s Board of Governors is insufficient to meet the objective test for assessing bias. Pinter has not made any showing that an individual member of the FINRA Board of Governors, or indeed the Board of Governors as a whole, has any influence over the selection of FINRA [Dispute Resolution] arbitrators, their compensation, or their assignment to panels. At the very most, he has raised the specter of an appearance of bias, insufficient grounds for disturbing an arbitration award.”).

The last bias claim put forward by the Louisiana Retirees, based on the “FINRA defense,” fared no better (“Even if Pershing had notified the regulators of any concerns it had regarding Stanford Group Company, it would not have made a difference in terms of shutting down the Ponzi scheme because the regulators and law enforcement agencies already knew far more about Stanford Group Company than anything Pershing could have reported.”).

Finally, with respect to the alleged bias created by the FINRA defense, the Court finds the Louisiana Retirees’ characterization of the defense somewhat misleading. This defense—one of many advanced by Pershing—was essentially a causation argument: Even if Pershing had notified the regulators of any concerns it had regarding Stanford Group Company, it would not have made a difference in terms of shutting down the Ponzi scheme because the regulators and law enforcement agencies already knew far more about Stanford Group Company than anything Pershing could have reported. However the defense is characterized, the Court is not at all convinced that Pershing’s assertion of a particular legal theory demonstrates that the arbitration panel was biased.

Notably, the District Court independently ruled that these “evident partiality” arguments had been waived by the Louisiana Retirees.  Once again, a positive response by counsel to the formula question put by the arbitral panel at the end of the hearings (did they receive “a full and fair opportunity to present their case”) played an important role.

At the beginning of the arbitration hearing, counsel for the Louisiana Retirees stated that they accepted the panel. At the end of the arbitration hearing, counsel for the Louisiana Retirees agreed that they had enjoyed “a full and fair opportunity” to present their case. …. Counsel for the Louisiana Retirees even thanked the panel for its time. … (“We appreciate y’all’s efforts.”). At that point, the Louisiana Retirees already knew of all the panel’s decisions described above, yet they failed to object. It was only once the arbitration panel ruled against them that the bias argument emerged. The waiver rule is designed to prevent just such a circumstance from occurring.

The Louisiana Retirees also made a “manifest error” argument, arguing that, by operation of choice of law principles, the judge-made New York law “manifest error” ground for vacatur was applicable in the Louisiana District Court.  The District Court rejected the choice of law argument, holding instead that the position in the US Circuit Court of Appeals for the 5th Circuit against any “manifest error” vacatur ground was binding.  Moreover, in a brief footnote, Judge Africk also held that “Regardless, this Court finds no circumstances evidencing manifest disregard of the law by the arbitration panel.”

The principal import of this ruling lies in the willingness of the District Court to conclude, in the face of its own prior ruling that some of the withheld documents should have been produced, that vacatur was still not appropriate.  But, to reach that conclusion, the Court found it necessary to rely in part on its own conclusion that the information in those documents was cumulative of information already in the arbitration record so that no fundamental unfairness had occurred.  The decision therefore has something for everyone in future disputes on each side of this issue.  Of course, it is not unlikely the Louisiana Retirees will appeal Judge Africk’s decision to the for the 5th Circuit Court of Appeals.  So, there may very well be more to come later this year.

 

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.

CASE SUMMARY: Ann Eleanor Ploetz, as Trustee For the Laudine L. Ploetz, 1985 Trust v. Morgan Stanley Smith Barney, LLC

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Kantor Photo (8-2012)By Mark Kantor

A decision last Thursday from the US District Court for the District of Minnesota is worth a brief report, as an example of the rejection by US Federal courts of the argument that an arbitrator’s failure to disclose is an automatic basis alone for vacating the resulting arbitration award.  In Ann Eleanor Ploetz, as Trustee For the Laudine L. Ploetz, 1985 Trust v. Morgan Stanley Smith Barney, LLC, Civ. No. 17-1112 (PAM/DTS)(May 25, 2017, available at https://scholar.google.com/scholar_case?case=14229967613986037394&hl=en&lr=lang_en&as_sdt=20003&as_vis=1&oi=scholaralrt), the District Court (Paul Magnuson, District Judge) concluded that “every Court of Appeals to have addressed the issue has rejected Ploetz’s interpretation of Commonwealth Coatings that “the fact of the nondisclosure alone mandates vacatur under either a `reasonable impression of bias’ or `appearance of bias’ standard.”.

Ploetz does not cite any case decided after Commonwealth Coatings [Commonwealth Coatings Corp. v. Continental Casualty Co., 393 U.S. 145 (1968)] interpreting that decision to require vacatur of an award solely because an arbitrator failed to disclose relevant party contacts.  This is likely because there are no such cases.  It appears as though every Court of Appeals to have addressed the issue has rejected Ploetz’s interpretation of Commonwealth Coatings that “the fact of the nondisclosure alone mandates vacatur under either a `reasonable impression of bias’ or `appearance of bias’ standard.” Nationwide Mut. Ins. Co. v. Home Ins. Co., 429 F.3d 640, 644 (6th Cir. 2005); see also id. at 645 (explicitly rejecting “as dicta . . . the appearance of bias standard espoused in the [Commonwealth Coatings] plurality opinion”).

In Ploetz, the losing party in a 2016-2017 FINRA arbitration sought vacatur of the adverse arbitration award on the ground that one of the arbitrators (Goldman) had failed to disclose his 2012 participation as mediator in an unrelated FINRA matter involving the respondent in the arbitration, MSSB.  Goldman had, however, disclosed his service as arbitrator in 6 arbitrations involving Morgan Stanley Smith Barney (MSSB).  The parties in the instant arbitration had not objected on the basis of those disclosed matters.

FINRA requires that arbitrators disclose any potential conflicts, including past service as an arbitrator or mediator. ….  Goldman disclosed that he had served as an arbitrator in proceedings involving MSSB on four occasions and was currently serving as an arbitrator in two pending MSSB arbitrations. …  Neither party sought to disqualify him on the basis of these contacts with MSSB.  After a two-day hearing, the panel unanimously determined that Ploetz’s claims were without merit. …

In February [2017], Ploetz’s attorney learned that Goldman had served as a mediator in a 2012 proceeding in Michigan involving MSSB. ….   Mediation under FINRA is voluntary and private, akin to settlement discussions, and thus there was no record of this proceeding and it was handled by attorneys not involved in the instant arbitration.  The 2012 mediation was unsuccessful and that case eventually proceeded to arbitration, with the arbitration panel finding for the claimant and against MSSB. …  There is no indication that Goldman was involved in the case after the unsuccessful mediation.

Petitioner Ploetz argued that Goldman’s failure to disclose his service as mediator in the earlier MSSB matter required vacating the 2017 arbitration award for “evident partiality”.  She contended that the US Supreme Court’s 1968 decision in Commonwealth Coatings [MK: the only, and famously internally inconsistent, set of Supreme Court opinions seeking to apply the “evident partiality” vacatur grounds in the US Federal Arbitration Act] “sets forth a bright-line rule that when the parties bargain for disclosure of conflicts and the arbitrator fails to disclose a conflict, the arbitration award must be vacated.”  Vacatur was required, said Ploetz, “because the parties agreed to be bound by the FINRA rules, and because the FINRA rules provide that failure to disclose is a “circumstance[] which might preclude the arbitrator from rendering an objective and impartial determination …, a refusal to vacate the award would frustrate the parties’ bargained-for legitimate expectations, not to mention the FAA’s standards.”

For that purpose, Ploetz also asserted that “it is inappropriate for the Court to consider any more recent appellate court interpretations of Commonwealth Coatings because the Supreme Court itself has not changed the Commonwealth Coatings holding.”

Judge Magnuson of the Federal District Court in Minnesota criticized that argument for treating the common-law system as “sclerotic.”

Her position that the law on this issue is sclerotic and may only be refined by the Supreme Court is not supported by either subsequent caselaw or by our legal system’s precedent-based jurisprudence, which relies on the evolution of legal principles through subsequent interpretations of Supreme Court opinions.

Automatic vacatur for arbitrator non-disclosure was not, therefore, mandatory.  Instead, said the Judge, the party seeking vacatur must still satisfy the “heavy burden” of showing “evident partiality”; “Even if an arbitrator fails to make a disclosure regarding potential conflicts of interest, a party must still “demonstrate evident partiality” on the arbitrator’s part.”  Moreover, “a party contending that an arbitration award should be vacated because of an arbitrator’s “evident partiality” bears a “heavy burden.””

Judge Magnuson then concluded that the failure by Goldman to disclose the 2012 MSSB mediation was not sufficient to show “evident partiality” in circumstances where the arbitrator had already disclosed 6 MSSB arbitrations without objection and the prior mediation had no demonstrated effect on the 2016-2017 arbitration.

Here, there is simply no evidence that Goldman’s prior mediation with MSSB had any effect on the resolution of Ploetz’s claim.  Indeed, Goldman disclosed six other MSSB-related proceedings over which he had presided and those proceedings did not cause Ploetz to question his impartiality.

 

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.