Author: CPR Staff

The Nominee’s Record on Dispute Resolution

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BY PETER FEHER & RUSS BLEEMER

President Obama’s nomination of District of Columbia U.S. Circuit Court Chief Judge Merrick Garland didn’t bring with it a substantial judicial record on alternative dispute resolution cases.

But a new U.S. Supreme Court Associate Justice Garland won’t be a stranger to litigation over arbitration either.

Garland, 63, is in a tough confirmation fight.  At this writing, Senate Majority Leader Mitch McConnell, R., Ky., vowed not to allow a vote on a successor to the late Antonin Scalia before the November presidential election.

But Garland had bipartisan support when he was nominated to the D.C. Circuit in 1999 by President Clinton. He was confirmed 76-23, with a majority of Senators in both parties supporting him. Garland is well-respected on both sides of the aisle and in the legal community and reportedly was on the president’s list for SCOTUS nominees previously, when Associate Justice Sonia Sotomayor was nominated and confirmed in 2009, and Associate Justice Elena Kagan joined the Court a year later.

Research provided a limited number of arbitration cases before the D.C. Circuit in which Garland participated.  They show he backed arbitration.

It’s unclear whether and how the subject of ADR processes arose in his non-judicial career, which also is discussed below.  Garland’s extensive prosecutorial work at the U.S. Department of Justice as well as an Assistant U.S. Attorney for the District of Columbia was on the criminal side; he also was a litigation partner at Washington, D.C.’s Arnold & Porter.

Garland is probably best known for his U.S. Justice Department service from 1993 to his 1999 appointment as U.S. Circuit Judge.  During the period, when he was DOJ’s Principal Associate Deputy Attorney General, his responsibilities included supervising the Oklahoma City bombing and Unabomber prosecutions.

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In the D.C. Circuit, Garland wrote the unanimous affirmance in Kurke v. Oscar Gruss and Son Inc., 454 F.3d 350 (D.C. Cir. 2006)(available at bit.ly/1MjsCPT). The opinion backs arbitrators who awarded a brokerage customer damages after his account was churned, and the defendants charged that the award was made in manifest disregard of the law.
The case concerned a customer who brought an action seeking confirmation of an arbitration award brought by plaintiff David Kurke against securities firm Oscar Gruss, and a firm executive, after the customer’s account was subjected to what the plaintiff charged was unauthorized trading, churning and a breach of fiduciary duty.

An arbitration panel agreed, awarding Kurke compensatory damages from both Oscar Gruss and the executive, in the amounts of $648,000 and $58,000, respectively. According to the Garland opinion, Oscar Gruss trading had turned Kurke’s $520,000 investment into $39,000, just four months after the account had been valued at more than $1 million.
The federal district court granted Kurke’s enforcement petition, and Oscar Gruss appealed the arbitration award.

The appellants urged that the awards can be vacated on the ground that the arbitrators made them in “manifest disregard” of the law.

The opinion indicated that manifest disregard “is an extremely narrow standard of review.” Under the standard, the reviewing court must find that arbitrators knew of governing legal principle yet refused to apply it or ignored it altogether, and the law ignored by the arbitrators was well-defined, explicit and clearly applicable to the case. Kurke, at 354 (quoting LaPrade v. Kidder, Peabody & Co. Inc., 246 F.3d 702, 706 (D.C.Cir. 2001)).

The firm argued that the arbitration panel’s award to Kurke was made in manifest disregard of the law because under the terms of his margin agreement, Kurke’s failure to object to the unauthorized trades in writing within the stipulated time frame effectively ratified those trades.  The defendants argued that Kurke’s failure to mitigate his damages after he became aware of them relieved the company for liability for Kurke’s losses. Kurke, at 355.

Circuit Judge Garland noted three exceptions to the rule that ratification agreements will be enforced.  The opinion notes that the arbitrators could have refused to enforce the ratification agreement if they credited Kurke’s testimony that he did not comprehend the highly complicated options trades contained on his monthly statements; that assurances or deceptive acts forestalled his filing of the written complaint; or that Kurke was not advised of his right to reject the unauthorized trades.  Kurke, at 356.

Focusing on statements by an Oscar Gruss employee that forestalled the plaintiff from acting, Judge Garland wrote, “we can readily ‘discern [a] colorable justification for the arbitrator[s’] judgment,’ . . .  and cannot say their award was made in manifest disregard of the law regarding ratification.’” Id.

Garland rejected the appellants’ other arguments to establish manifest disregard and affirmed the District Court’s arbitration award in full.

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In Aliron Int’l Inc., v. Cherokee Nation Indus. Inc., 531 F.3d 863 (D.C. Cir. 2008)(available at bit.ly/22BaC7J), Circuit Judge Garland, who became the D.C. Circuit’s chief judge in February 2013,  affirmed a district court’s decision to compel arbitration.

In the case, the U.S. Army entered into a “Prime Contract” with Cherokee Nation, or CNI, which in turn entered into a subcontract with Aliron to provide the service and staffing resources that CNI needed to fulfill its duties under the Prime Contract.

The parties agreed that the subcontract “shall be construed and interpreted in accordance with the laws of the State of Oklahoma” and that “any dispute between the parties will be submitted to binding arbitration in the State of Oklahoma. The parties further agreed Oklahoma law “shall govern the arbitration proceedings.” Aliron International Inc., at 864.

About two weeks into the contract performance, the parties had to enter into an additional support agreement in order to comply with the Status of Forces Agreement between the United States and Germany.  The SOFA precluded CNI from hiring a subcontractor under the Prime Contract. But unlike the subcontract, the Support Agreement did not include an express provision requiring arbitration of all disputes. Id. at 864.

Aliron filed an action against CNI for breach of obligations under the Support Agreement. CNI moved to compel arbitration of the dispute. CNI argued that although only the subcontract contained an express arbitration clause, the two documents should be read together.

The District of Columbia federal district court agreed with CNI, holding that “because the Subcontract and the Support Agreement involve the same subject matter, and because the plain language on the fact of the Support Agreement indicated that it was entered into to preserve the intent of the Subcontract, they must be construed together as one contract.” Id. at 865.

Garland noted in an opinion on behalf of the unanimous three-judge federal appellate panel that courts generally should apply ordinary state law principles that govern contract formation. He wrote, “The Oklahoma Supreme Court has long instructed that ‘[w]here two contracts, not executed at the same time, refer to the same subject matter and show on their face that one was executed to carry out the intent of the other, it is proper to construe them together as if they were one contract.’” [Citations omitted.]

Two criteria must be satisfied before the subcontract’s arbitration provision can be deemed to govern disputes under the Support Agreement, according to the Garland opinion:  “(1) the Subcontract and Support Agreement must each refer to the same subject matter, and (2) the Support Agreement must show on its face that it was executed to carry out” the subcontract’s intent. Id. at 866.

Judge Garland found both elements were satisfied and required the two contracts to be read together as one under Oklahoma law because they referred to the same subject matter, and because the Support Agreement plainly showed that it was executed to preserve the subcontract’s intent. Id. at 868.

In affirming the lower court, Garland rejected two additional arguments by Aliron, one which required extrinsic evidence about the contract, and another contesting the formation of an arbitration agreement.

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Judge Garland handed down another decision that mentioned alternative dispute resolution in labor law. In the case, Davenport v. Int’l Brotherhood of Teamsters, AFL-CIO, members of a flight attendants union brought an action against the union and the employer challenging the union’s failure to submit a temporary side agreement on work hours to the collective bargaining accord to a rank-and-file ratification vote. 166 F.3d 356 (D.C. Cir. 1999)(available at bit.ly/1Vyplyw).

The flight attendants sought a temporary injunction against the side agreement—which had been sparked by a change in federal law—that was denied in the district court.  Again writing for a unanimous D.C. Circuit panel, Garland’s opinion affirmed the lower court.
The employer-airline in the case—Northwest Airlines Inc., now part of Delta Air Lines Inc.–was subject to the Railway Labor Act.  Under the act, an adjustment board established by the employer and the unions had exclusive jurisdiction over “minor disputes”–those arising “out of grievances or out of the interpretation or application” of existing collective bargaining agreements.

Circuit Judge Garland noted that in “’major disputes,’ however, the district courts have jurisdiction to enjoin violations of the status quo pending the completion of required bargaining and mediation procedures.” Id. at 367. Major disputes go to the formation of the collective agreements, the opinion says.

But Garland wrote that the plaintiffs’ contention that the dispute was a “major dispute” requiring an injunction couldn’t be sustained.  The opinion held that there wasn’t enough grounds to vacate the district order for major-dispute ADR treatment or any of the other grounds on which the plaintiffs sought the court’s intervention.

It did allow re-argument of the “major dispute” controversy, since it was bought by the union itself late in the litigation.  But it’s not clear that the case got beyond the argument stages, because the collective bargaining agreement was due to be renegotiated to account for the side agreement. Press reports indicate that the relationship between Northwest and its union became strained later in 1999 over several issues, and headed to mediation. See, e.g., Associated Press, “Protesters disrupt Northwest Airline meeting,” Deseret News (April 24, 1999)(available at bit.ly/1RhBNQ9).

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Some business lobbyists are wary of Garland’s nomination given his deference to government agencies.

According to a Corporate Counsel article, while Garland has significant experience deciding challenges to government regulations, given the focus of the D.C. Circuit on administrative appeals, he has less experience on corporate law and governance questions. Rebekah Mintzer, “Justice Merrick Garland: Bad for Business?” Corporate Counsel (March 21)(available at bit.ly/1UCwHkS).

The article points out that, like Justice Scalia, who he would replace, Garland adheres to the Chevron doctrine, under which the judiciary defers to agency interpretations on ambiguous statutes under the agency’s jurisdictions.

This tendency, Corporate Counsel notes, has business groups worried because they are not sure how Garland would come out on corporate law decisions.  The nation’s largest small-business lobbying group, the National Federation of Independent Business, opposes Garland’s confirmation.

One key area that may implicate conflict resolution practices is labor and employment. Garland has firmly backed the National Labor Relations Board, affirming the view of the agency—which oversees workplace issues as embodied in the National Labor Relations Act—in 18 out of 22 cases that have come before him.

It’s likely that the Supreme Court will get that exact task in the arbitration context soon.  Cases are bubbling up in which federal courts have firmly backed the Court’s view that the Federal Arbitration Act allows for mandatory individual arbitration processes in employment disputes where the employee is required to waive class action litigation or arbitration.

But the principal case from which federal courts are adopting that view is a consumer credit case, AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011)(available at bit.ly/1MWMHVN).

The NLRB in 2012 decided that the NLRA trumps the FAA, and has produced dozens of decisions banning class action waivers.  It is continuing to issue those decisions even though it has been struck down in federal courts around the country, most notably in the Fifth U.S. Circuit Court of Appeals.  Both the NLRB and management-side labor lawyers expect the case to go to the U.S. Supreme Court to resolve the conflict. For full details, see “Cutting Arbitration Classes: Facing Court Defeats on Workplace Waivers, the NLRB Refuses to Back Down,” 34 Alternatives 1 (January 2016)(available at bit.ly/1LEnG8o).

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While Merrick Garland apparently hasn’t dealt with arbitration during his professional career as a corporate litigator and prosecutor, upon his confirmation he would be dealing with a slate of cases involving business issues.  But at this writing, no arbitration cases are on the Court’s docket.

Although unrelated to ADR practice, several partners at Garland’s former firm, Washington, D.C.’s Arnold & Porter said that the D.C. Circuit chief judge focused on the arcane area of antitrust, which he reportedly taught at his alma mater, Harvard Law School.  “Garland worked on antitrust cases, a specialty of the firm, several former partners said, yet few remembered specific cases he worked on.” Katelyn Polantz, “Lightning Strikes Twice at Arnold & Porter with Merrick Garland Nomination,” National Law Journal (March 17)(available at  bit.ly/1Re0Jcs). The article also notes that in one year during his practice, Garland also published articles in both Harvard Law Review and Yale Law Journal.

Garland, unlike some of his fellow appellate judges, does not speak publicly much. The National Law Journal collected some highlights of his notable decisions and public statements at Zoe Tillman, “The Quotable Merrick Garland: A Collection of Writings and Remarks,” National Law Journal (March 16)(available at  bit.ly/1pxgKPY).

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Feher is a Spring 2016 CPR Institute intern, and currently is a student at Brooklyn Law School, Class of 2016. Bleemer edits the CPR Institute-published Alternatives to the High Cost of Litigation.

Screened Selection Offers Best of Both Worlds

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We at the CPR Institute are still abuzz over our receipt, earlier this month, of Global Arbitration Review’s (GAR’s) Innovation Award 2016 for our unique Screened Selection Process, which allows parties to select arbitrators without revealing to the neutral which party selected them. We are pleased and proud that our efforts to improve the arbitration process have received the recognition of the ADR community.

What’s so special about the screened selection option, one of many that CPR offers in its Rules? In a recent article published in Law360, CPR’s Olivier Andre and Charles B. Rosenberg of White & Case discuss how the process avoids the “moral hazard” of party-appointed arbitrators who may subtly favor the party that chose them.

How does it work exactly, when this option is selected? CPR carefully vets a list of neutrals based upon the qualifications that the parties require, conflicts, schedules and fees. The parties rank them by preference and include any objections to specific candidates without the neutrals’ knowledge. CPR then uses these rankings and objections to assign each side’s highest ranked neutral and the individual with the highest combined ranking is chosen as Chair. Then the case proceeds using CPR Rules.

Further detail about this Screened Selection Process can be found in the commentary to Rule 5.4:

Rule 5.4 presents a unique “screened” procedure for constituting a three-member Tribunal, two of whom are designated by the parties without knowing which party designated each of them. The procedure is intended to offer the benefits, while avoiding some of the drawbacks, of having party-appointed arbitrators. On the one hand, parties are able to designate arbitrators whom they consider to be well-qualified to sit on the Tribunal. On the other hand, any tendency (subtle or otherwise) of party-appointed arbitrators to favor or advocate the position of the parties who appointed them is avoided because those arbitrators are approached and appointed by CPR rather than the parties and are not told which party designated each of them. The Rules governing ex parte communications (Rule 7.4), challenges (Rule 7.6), and resignations (Rule 7.9) contain specific provisions designed to preserve the “screen” for the party-designated arbitrators under Rule 5.4 throughout the arbitration. The parties may choose the “screened” selection procedure in their pre-dispute arbitration clause (see standard pre-dispute clause), or agree to the screened procedure once a dispute arises.

CPR recognizes that, as a practical matter, some party-designated arbitrators selected pursuant to Rule 5.4 may deduce or learn which parties designated them – i.e., the “screen” may not, in all instances, be perfect. CPR nevertheless believes that the screened procedure is worthy of consideration by parties as a means to enhance the integrity of arbitrations involving party-appointed arbitrators. Any party-designated arbitrator who does, in fact, learn which party appointed him or her should disclose that fact to each of the parties and the other members of the Tribunal in order to ensure a level playing field. In the event an arbitrator discovers who appointed him or her, such knowledge would not be a basis for disqualification or challenge per se, and the arbitration can continue uninterrupted on a non-screened basis.

The Screened Selection Process is just one of the many tools CPR makes available to its users to customize an arbitration process that works best for the parties involved. If you have any questions about the Screened Selection Process or any other aspect of CPR’s rules, please contact Helena Erickson at herickson@cpradr.org.

How Patent Arbitration Fits in a Post-Grant World

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When the Leahy–Smith America Invents Act took effect in September 2012, and introduced to the U.S. Patent and Trademark Office post-grant trial proceedings, commentators said it could mean a drastic decline in the use of arbitration to decide patent disputes.

There was good reason for concern.  The proceedings were promised to be efficient and expeditious.  They provide third parties with an administrative opportunity—a trial process, to be sure, but an alternative to court litigation–to effectively and efficiently challenge validity in the USPTO of any patent claim.

The post-grant proceedings are an adversarial process before the Patent Trial and Appeal Board, with a statutory one-year pendency from the date of initiation.

Post-grant proceedings provide what alternative processes frequently promise: They are faster and less expensive than traditional litigation.

But the proceedings–post-grant review and inter partes review—are limited to validity issues.

The market outcome has been that, instead of supplanting arbitration, the post-grant proceedings have proven to be a complementary process to ADR.

And, notes New York patent neutral Peter L. Michaelson in the cover story in the new March issue of Alternatives, patent arbitration, “where employed in appropriate situations and structured properly, will likely see increasing use.”

In his article, Michaelson notes that the issues in patent disputes, whatever the forum, often range well beyond challenges to the patent’s validity.  The USPTO’s post-grant proceedings are fundamentally different from arbitration and are not ADR substitutes, writes Michaelson, “and thus not likely to adversely affect the future use of arbitration to any significant extent.”

But how do post-grant proceedings and arbitration work together in defending a patent portfolio?  Obviously, if business considerations beyond validity are part of the claim, arbitration can come into play, rather than traditional litigation.

Using a generation-old conflict resolution tenet, author Michaelson says that patent arbitration requires proper structuring.  The invocation of arbitration to resolve a patent dispute involves “fitting the process to the fuss,” he writes.

“Once properly configured, an arbitral process can yield substantial cost and time efficiencies, along with other benefits unavailable through litigation.”

In his March Alternatives article, available later this week for free for CPR members after logging into CPR’s website here, and available by subscription here and at altnewsletter.com, Michaelson details those benefit.  He describes the steps needed to provide a patent arbitration forum that maximizes satisfying outcomes faster and at less cost than proceeding to court, and discusses the need for ADR when faced with more than a validity challenge.

The New Italian Mediation Law: Experimenting with a “Soft” Approach to Mandatory Mediation

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By Giulio Zanolla, LL.M., Esq., CPR Speaks Contributor

GiulioMediation was first introduced as a prerequisite to litigation in the Italian legal system in 2011, when the government issued a decree to implement the EU Mediation Directive of 2008. This legislative measure sparked a mix of enthusiastic reactions and harsh criticisms that culminated with lawyer strikes against its implementation. In 2012, the mandatory provision of the mediation regulation was declared unconstitutional, but the Constitutional Court’s decision was based on the government’s lack of legislative legitimacy to impose the mandatory requirement, rather than on the illegitimacy of the mandatory requirement itself.

The heated debate on the mediation regulation continued inside and outside the rooms of policymakers and led the Italian Parliament to enact a law in 2013 re-introducing mandatory mediation for certain civil and commercial actions in a mitigated form. The new mediation law, which is not affected by the constitutionality issue of the previous regulation, aims to address the concerns brought by a sector of the legal community claiming that the prerequisite of participating in mediation prior to bringing a legal action unjustly burdens and restricts disputants’ rights to access to justice. Unlike the previous regulation, the new Italian mediation law mandates that parties in certain civil and commercial disputes attend only an initial information session with the mediator; it does not require parties to participate in an actual mediation process as a prerequisite to litigation. The parties remain free to opt out of the mediation before the actual process starts and without any consequence for refraining to continue in mediation.

Through the initial information session, the parties have an opportunity to learn about the mediation process and make an informed decision regarding whether to attempt an out-of-court resolution through mediation or to initiate litigation. The information session is free of charge, and parties who refuse to attend the session are subject to sanctions in the subsequent trial. Only if all the parties agree to proceed with mediation will the mediator formally commence the procedure and begin to facilitate discussions of the disputed issues. With the new Italian mediation law, the parties’ participation in the actual mediation process is fully voluntary. The parties’ only mandatory requirement is to educate themselves about the option of mediation through the initial information session.

Recent statistical data available from the Ministry of Justice regarding the first six months of 2014 demonstrates that more than 22 percent of all disputes for which the initial information meeting is mandatory and more than 50 percent of disputes mediated by deliberate initiative of the parties are resolved without recourse to court litigation. In a little over a year since enactment of the law, the benefits of the new law are tangible, not only for those parties who resolved their disputes without litigation, but also—and especially—for the overwhelmed Italian judicial system as a whole, and ultimately for all taxpayers.

Most important, each of the numerous information sessions and mediations that took place but did not result in settlement created a concrete opportunity for parties and attorneys to familiarize themselves with the mediation process and educate users about mediation, thus contributing to the development of the culture of mediation throughout the country.

If we believe that the principle of voluntariness is of fundamental value to the mediation process and if we agree that the need for user education is a critical element in the development of a culture of mediation, the Italian mediation law could represent a balanced solution to the question of how to promote the use of mediation through legislation. The next few years’ statistics will reveal whether the number of parties who choose to continue in mediation past the initial information session, and the concomitant overall settlement percentage, will grow thanks to an increased level of awareness and sophistication among mediation users.

Giulio Zanolla is an attorney, a mediator, an ADR instructor, and the author of the blog The Case for Mediation: An ADR Blog by Giulio Zanolla. This article was first published in the The Weinstein JAMS International Fellow Newsletter, Fall 2015. Mr. Zanolla can be reached at giulio@zanollamediation.com.

2016 Copyright of Giulio Zanolla, Esq. – All Rights Reserved

2nd Update*: Class Waivers and Arbitration: The Battleground Focus Moves to Labor and Employment Law

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*The area of class action waivers and employment law saw an absolutely whirlwind close to 2015, with the NLRB releasing yet another decision midday, on 12/31, following two weeks that saw 16 decisions restricting arbitration practices. Please see below for an up-to-date summary of these rapidly breaking developments.

By Russ Bleemer

The emphasis on the law and politics of consumer arbitrations, and their relationship to class waivers, has overshadowed developments in another closely related area of conflict resolution law.

But the time has come for finality on the legality of employment law class-action waivers.  Developments in 2015’s final quarter indicate that decisive events are coming in the area, which involves the intersection of U.S. labor law and the Federal Arbitration Act.

On the first day of December, the National Labor Relations Board issued two decisions finding labor law violations against companies for using mandatory pre-dispute class action waivers with their arbitration agreements requiring individual processes.  The waivers, the NLRB said, violate Sections 7 and 8 of the National Labor Relations Act, which allows employees, among other things, “to engage in . . . concerted activities for the purpose of collective bargaining or other mutual aid or protection.”

That was only the beginning:  By Christmas, the NLRB had issued at least 16 more decisions striking down mandatory pre-dispute arbitration clauses that coupled class waivers as a condition of employment.

The decisions are crucial because the rights of collective action under the NLRA address far more than union workplaces. The law applies to most employees, and key cases that have arisen in this area focus on white-collar employees.

It’s a major statement by the Board. The NLRB decisions’ reasoning—that the NLRA and the FAA co-exist compatibly but the latter isn’t preferred over workers’ rights to act in concert—had already been rejected by the Fifth U.S. Circuit Court of Appeals.  Twice, in fact, including in a decision just five weeks before the December Board decisions, in Murphy Oil Inc. v. NLRB, No. 14-60800, 2015 WL 6457613 (5th Cir. Oct. 26, 2015).

The Fifth Circuit relied on the U.S. Supreme Court’s high-profile consumer-contract arbitration decision–AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), along with the business-to-business class waiver in American Express Co., et al. v. Italian Colors Restaurant, 133 S. Ct. 2304 (2013)—to justify rulings that mandatory individualized arbitrations are authorized by the FAA.

Consumer arbitration controversy has rolled over into politics in 2015, when the Consumer Financial Protection Bureau moved to regulate the process by barring waivers of all class processes. Congressional Republicans introduced legislation to hamper the regulation efforts directly, as well as defund the federal agency.

In November, the NLRB said it would request a rehearing in Murphy Oil, but it did not appeal the Fifth Circuit reversal of its first case on the subject, D.R. Horton Inc., 357 NLRB No. 184, 2012 WL 36274 (Jan. 3, 2012), enforcement denied in relevant part, 737 F.3d 344 (5th Cir. 2013) (Graves, J., dissenting), reh’g denied, No. 12-60031 (Apr. 16, 2014).

December’s stream of cases from Board decisions backing its Murphy Oil and D.R. Horton decisions mostly occurred mid-month, leading up to Christmas.  But for good measure, just hours before the close of business on Dec. 31, the Board added its final 2015 decision, again affirming its view in the cases already rejected by the Fifth Circuit.  The decision, GameStop Corp., 363 NLRB No. 89, 20-CA-080497 (Dec. 15, 2015), went even further, affirming a line in those cases barring class waivers in employment arbitration agreements that provide an “opt out” allowing employees to waive participation in the ADR scheme.

“Regardless of the procedures required, the fact that employees must take any steps to preserve their Section 7 rights burdens the exercise of those rights,” the decision states.

It’s clear that the NLRB, an independent federal agency that oversees workplace conduct by enforcing the National Labor Relations Act, is picking and choosing its battles, which experts on both sides of the argument agree will be finalized by a U.S. Supreme Court decision.  The NLRB appears to be seeking a suitable case to ask the Supreme Court to hear, unloading years of litigation in December sourced from a variety of forums that reject the FAA’s predominance over the NLRA.

And while it awaited Murphy Oil’s Fifth Circuit fate, and while preparing the Board decisions it released in December maintaining its insistence on the NLRA’s vitality in the face of required arbitration clauses, the NLRB for the first time filed an amicus brief in a court case on the subject in the Ninth U.S. Circuit Court of Appeals, in Morris v. Ernst & Young LLP, No. 13-16599.

The November filing, just a week after the Fifth Circuit decided Murphy Oil, noted that the Board would seek en banc review of that decision, and strongly defended its own D.R. Horton/Murphy Oil lineage.

At the oral argument on Nov. 18, Ninth Circuit Judge Andrew D. Hurwitz prodded the attorneys on both sides to come up with a formula for NLRA and FAA co-existence.  He suggested severing the waiver clause, but keeping arbitration decisions for a tribunal, rather than blowing up the entire ADR process in favor of litigation.

The Ninth Circuit argument also dissected the class rights being waived by the pre-dispute mandatory arbitration agreement in the context of Federal Rule of Civil Procedure 23, which establishes the ground rules for court class actions.

The details on the December NLRB decisions; the Fifth Circuit’s Murphy Oil reversal; the NLRB Morris amicus filing, and highlights of the Morris oral argument are the subject of the January 2016 cover article in Alternatives, out this week.

Alternatives is available HERE for CPR Institute members after logging into the CPR website.  The newsletter, marking its 33rd year of publication with the January issue, is available to nonmembers at altnewsletter.com.

 

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Bleemer edits Alternatives to the High Cost of Litigation for the CPR Institute.

U.S. Supreme Court’s 2015-2016 Term Has Early Arbitration Focus

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U.S. Supreme Court’s 2015-2016 Term Has an Early Arbitration Focus

By Russ Bleemer

The U.S. Supreme Court began its new term with an early arbitration argument—the fourth case argued on the term’s second day, Oct. 6.

The argument followed a week after the nation’s top court agreed to hear a second arbitration case sometime this term.

Both of the cases involve California arbitration practice.  The new case on the docket–which started out focused on unconscionability but will be argued on whether a problematic arbitration clause is salvageable–is a federal case appeal from the Ninth U.S. Circuit Court of Appeals, which covers the state.

The state-court matter that was the subject of the early-term argument, DirecTV Inc. v. Imburgia, No. 14-462, returned to an issue that already had been covered and decided by the Court: federal preemption of conflicting state law that affected arbitrability.

Or so it seemed.

The official issue in the case was “[w]hether the California Court of Appeal erred by holding, in direct conflict with the Ninth Circuit, that a reference to state law in an arbitration agreement governed by the Federal Arbitration Act requires the application of state law preempted by the Federal Arbitration Act.”

The parties—a satellite television provider and an individual subscriber who filed a class action suit over early cancellation fees—had an agreement that provided for individual arbitrations. The form contract waived class arbitration, and was part of a purchase agreement before another California-derived case, AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), backed class waivers.

In AT&T Mobility, the U.S. Supreme Court invalidated a rule from a California Supreme Court case, Discover Bank v. Superior Court, 113 P.3d 1100 (2005), which forbid class processes. The split AT&T Mobility Supreme Court overturned California’s Discover Bank rule because it interfered with the Federal Arbitration Act.

The DirecTV customer agreement the Court reviewed had hedged its terms about class waivers and arbitration in the wake of the then-pending litigation.  Under the purchase agreement, the parties were bound by the FAA.

But the contract stated that if “the law of your state would find this agreement to dispense with class arbitration procedures unenforceable,” then the entire arbitration provision would be stricken from the purchase agreement.

Seemingly flying in the face of the since-decided AT&T Mobility, the California state Court of Appeal in DirecTV had concluded that the contract provision on “the law of your state,” in the words of the DirecTV petition to the Supreme Court, was a non-severable clause that “nullif[ied] the parties’ arbitration provision, even though [the Discover Bank] rule is concededly inconsistent with, and thus preempted by, the FAA under [AT&T Mobility], and even though the arbitration agreement here is concededly governed by the FAA.”

The petition said that the state appellate court had meant the phrase “the law of your state” to mean “state law immune from the preemptive force of federal law.”

It appeared that the U.S. Supreme Court took the case to reverse it and put it in line with its AT&T Mobility precedent.

At the argument, both conservative and liberal justices found the state appeals court’s reading of the contract, in refusing to enforce arbitration, puzzling.  Associate Justice Antonin Scalia said the state appeals court holding “flouts well-accepted universal contract-law principles.”  Associate Justice Elena Kagan lamented “the extent you can find reasoning in this opinion—which you have to search to find.”  The opinion under review is Imburgia v. DirecTV Inc., No. B239361 (Cal. 2nd App. Dist. April 7, 2014)(available at http://ow.ly/Tg4Mi).

The defense of the California state court opinion was that it must be maintained to prevent federal law from usurping state courts’ ability to interpret contract terms.

But the satellite television provider’s slam-dunk argument ran aground when the Court insisted DirecTV’s lawyer set a standard as to how the Court should evaluate state court contract interpretations.

Still, that argument was far simpler than the plaintiff’s argument, which faced a Court mostly unsympathetic to collective actions and which was looking at odd reasoning in the California appellate opinion.

The argument transcript is available at http://ow.ly/TfFui; the November Alternatives, available here on or before Nov. 9, has a full analysis.

* * *

The November Alternatives also will discuss the case that the Court accepted on Oct. 1, MHN Government Servs. Inc. v. Zaborowski, 14-1458, another matter with allegations of California hostility to arbitration.

The case focused originally on unconscionability.  MHN, a San Rafael, Calif., military contractor that provides life consulting services to military members and their families, sought to compel arbitration against the respondents, who were consultants in MHN’s network.

MHN’s motion to compel arbitration lost in both a California federal district court and in the Ninth U.S. Circuit Court of Appeals.

The Ninth Circuit, in an unpublished opinion, agreed with the lower court that MHN’s consulting contract was both procedurally and substantively unconscionable.

MHN avoided the unconscionability arguments in its successful U.S. Supreme Court cert petition, and instead counters with a focus on severability.  It tells the nation’s top Court that California has a rule on severability for contracts that operates differently when the contract is for arbitration, and the state is biased against arbitration.

The original plaintiffs counter that the federal court opinions exercised appropriate discretion in declining to sever clauses in an arbitration agreement that has been refused to be enforced “by over a dozen judges,” including in a 9-0 Washington state Supreme Court opinion that similarly refused to sever.

Full details, cites, links and analysis will be available in the November Alternatives at the link above.

Russ Bleemer is a CPR Consultant and the Editor of CPR’s award-winning publication, Alternatives

CFPB Decision Implicitly Recognizes Arbitration as Legitimate Alternative to Litigation

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CFPB’s Decision Not to Bar Mandatory Arbitration Clauses Implicitly Recognizes Arbitration as Legitimate Alternative to Litigation

There has been much focus over the past years on mandatory arbitration clauses combined with class action waiver provisions that preclude parties from bringing claims on anything other than an individual basis. Earlier this month, in a move to protect consumers, The Consumer Financial Protection Bureau’s Arbitration Field Hearing announced the Bureau’s decision, following a study and report the CFPB published and issued to Congress earlier this year, to launch a rulemaking process to bar class action waivers in combination with consumer financial arbitration agreements,

Here’s what CFPB Director, Richard Cordray, had to say regarding the decision:

After carefully considering the findings of our landmark study, the Bureau has decided to launch a rulemaking process to protect consumers. The proposal under consideration would prohibit companies from blocking group lawsuits through the use of arbitration clauses in their contracts. This would apply generally to the consumer financial products and services that the Bureau oversees, including credit cards, checking and deposit accounts, certain auto loans, small-dollar or payday loans, private student loans, and some other products and services as well. …

 So what does this rulemaking process mean?

To start, the rules wouldn’t ban arbitration clauses altogether. Rather, they would require clauses to state that they don’t apply to cases filed as potential class-action lawsuits unless a judge denies class certification or a court dismisses the claims. Furthermore, the proposals would mandate that companies using arbitration clauses divulge records to the CFPB showing the claims filed by consumers and the awards issued — which may be made available to the public in an effort to ensure fairness and transparency of the arbitration process on behalf of the consumer. Should the proposal be adopted by the CFPB, new rules would apply to financial products overseen by the CFPB, including those cited by CFPB director, Cordray.

Many consumer groups are hailing the CFPB’s efforts as a victory for consumers. Still, the CFPB’s move is expected to face stiff opposition from the likes of the U.S. Chamber of Commerce; the Minneapolis-based Association of Credit and Collection Professionals (ACA International), a membership group of credit and collection industry firms as well as asset buyers, attorneys, creditors and vendor affiliates; and other business groups which, according to a recent New York Times article, maintain that “arbitration offers a more efficient but equally fair means for consumers to resolve complaints. These private proceedings, held outside court, provide the same opportunity for relief without the staggering legal bills, the groups say.”

According to CPR’s SVP of Product Development and Public Policy, Beth Trent, “While it’s difficult to tell the precise impact of the CFPB’s proposed rule, the CFPB’s decision not to bar mandatory arbitration clauses is quite telling. It implicitly recognizes that arbitration is a legitimate alternative to litigation, which is supported by the CFPB’s own data which shows that arbitration is a speedier process than class action litigation, that claim rates in class actions are low, and that average recovery per class member is low.”

“People generally prefer speedy resolution of their claims, and it’s not clear that individuals would necessarily choose to bring a class action,” Ms. Trent added. “That said, lawyers most often initiate class actions with only one, or a few named class representatives, and the vast majority of individuals have no choice regarding whether they are included in a proposed class. In fact, they may be entirely unaware that they are included in a class action at all. Ultimately, the impact of the proposed rule will be shaped, at least in part, by the business response to that rule. Most notably, whether businesses offer arbitration programs that meet standards of due process and consumer needs in a cost-effective manner.”

The next CFPB step is convening meetings of a Small Business Regulatory Enforcement Fairness Act panel, which will review the impact of the proposed regulation on small businesses.  The first such meeting is scheduled for Washington, D.C., Oct. 28, according to the CFPB Monitor, a blog published by the Philadelphia-based law firm Ballard Spahr.

Litigation Financiers: Explain Yourselves!

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Litigation Financiers: Explain Yourselves!

By Russ Bleemer

Replies are due from litigation financing companies to a request by prominent U.S. senators on how the firms run their operations and earn their profits.

In a sweeping inquiry, the senators asked three financing firms about how they fund lawsuits and arbitrations, usually against big companies, in exchange for a share of the recovery.

Two of the firms are based in the United Kingdom, and a third in Australia.  All are affiliated with hedge funds.  The litigation financing firms, whose parents are publicly traded overseas, get most of their revenue from investing in U.S. litigation and arbitration cases.

The field has grown immensely in recent years, and U.S. regulation is a patchwork of court decisions, legal ethics rules, and state laws.

But this is the first time lawmakers in the nation’s capital have taken notice, and they are not happy with what they are seeing in the wake of the industry’s growth.

In a late August release, Senate Judiciary Committee Chairman Chuck Grassley, R., Iowa, and Senate Majority Whip John Cornyn, R., Texas, issued three letters they had sent to the companies.  The letters were a deep dive into the companies’ operations, asking 12 expansive questions about the kinds of cases that the companies invest in, how much money the firms have advanced, and the names of the law firms they are backing.

Grassley and Cornyn—generally business-friendly conservatives—are clearly suspicious, and the questions may be precursors to regulating litigation financing.  In giving the firms until the middle of last month to produce the extensive replies the questions require, Grassley noted in a press release statement that:

Litigation speculation is expanding at an alarming rate. And yet, because the existence and terms of these agreements lack transparency, the impact they are having on our civil justice system is not fully known.  . . . It’s vitally important to our civil justice system that litigation decisions aren’t unduly influenced by third parties.

The senators’ concern is that the litigation financing firms are perpetuating courtroom fights and adding frivolous litigation to court dockets–even though at least one firm says it is backing fewer individual plaintiffs and leaning significantly toward financing business-to-business litigation conducted by big law firms.

The senators’ questions asked for the financing firms’ revenues for supporting arbitration matters, too, as well as whether the financing agreements include arbitration clauses.  The letters asked if the arbitration clauses cover disputes between the financing firms and the plaintiffs they back over whether the plaintiffs should settle their cases.

The Grassley/Cornyn inquiry picks up on long-running objections by the U.S. Chamber of Commerce, whose tort-reform arm has blasted litigation financing since its U.S. emergence over the past decade.  But the letters are information requests, and not subpoenas; Grassley, chairman of the powerful Senate Judiciary Committee, has not announced that he is considering hearing.

The senators asked for a reply by Sept. 18.  At this writing, neither Grassley nor Cornyn have released further information.  And only one of the three firms, Burford Capital, a U.K. firm incorporated in Guernsey, an island in the English Channel, has issued a full public response. Noting that “[w]hat may be new about Burford is its introduction of professionalism and institutional specialization to the field,” the firm posted its lengthy Sept. 25 defense of litigation financing in response to the senators’ inquiries on its blog, here.

But for the litigation financing firms’ initial reactions, and more facts and figures as well the background that led to the Grassley/Cornyn letters, see the ADR Briefs feature, “Senators Want Explanations from Top Litigation Funding Firms,” in the October Alternatives (to be cited at 33 Alternatives 140 (October 2015)), which will be available on Oct. 6 HERE for free for CPR members and HERE for subscribers.  CPR membership information is available HERE, and Alternatives subscription information is available at www.altnewsletter.com.

Russ Bleemer is a CPR Consultant and the Editor of CPR’s award-winning publication, Alternatives

CPR’s World ADR Tour Continues

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Those who enjoyed “ADR Around the World,” summarizing the current state of ADR in Colombia, Mexico, Taiwan, and Turkey can continue exploring international arbitration and mediation through “Worldly Perspectives,” a series from Alternatives which ran from 2009 to 2014.

“Worldly Perspectives,” by Giuseppe De Palo and Mary Trevor, provided individual assessments of ADR in countries worldwide, such as Finland. The March 2012 issue of Alternatives noted the longstanding Finnish tradition of mediation use in labor disputes, but that the process is still emerging for commercial disputes. In 2011, the Finnish Parliament implemented the European Directive on certain aspects of mediation in civil and commercial matters (Directive 2008/52/EC), which is covered in “Update: Nations Are Sharing their Progress on Installing the Cross-Border Mediation Directive” from the December 2011 issue of Alternatives, but mediation retains uniquely Finnish aspects, such as the public nature of court documents in Finland, which can include mediation documents.

The April 2010 “Worldly Perspectives” noted the impact of economic trends on arbitration’s popularity in Jordan, while the Maltese Malta Mediation Center was discussed in Alternatives March 2013. Other countries covered throughout the series have included Morocco, Lithuania, Spain, the Netherlands, Belgium and Hungary, among others.

A number of columns in 2013 were focused on a controversial mandatory mediation requirement in Italy, which was implemented, declared unconstitutional, and then reinstated between 2010 and 2013. The October 2013 issue of Alternatives recapped the latest development, which concluded that the process was far from over.

The full text of these articles and further columns of “Worldly Perspectives” are available to CPR members through our website. In terms of future travels, the next update on the state of mediation in Italy, including the status of the mandatory mediation requirement, is forthcoming and will be featured here on CPR Speaks.

ADR Around the World: Turkey

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This article is the fourth in a four-part CPR summer series that examines ADR in a number of rapidly changing locales around the world. If you missed it, you can find the first post, about Colombia, here, the second about Mexico here, and the third about Taiwan, here.

Turkey: Political Conflict Makes ADR an Essential Tool

By Boaz Cohon and Ngutjiua Hijarunguru, CPR Student Interns

On June 3rd, 2015 the World Justice Project released an updated version of their Rule of Law Index.  In this iteration, the Rule of Law Index dropped Turkey from 59th to 80th out of the 102 countries surveyed.  This fall no doubt was impacted by recent developments involving interference by Turkey’s executive branch in the judiciary.

The Turkish economy has, to a lesser extent, also struggled.  Notwithstanding that Turkey attracted over $12.5 billion dollars of Foreign Direct investment (FDI) in 2014, its gross domestic product (GDP) growth rate was just 2.9% for that year, down from 9.2% in 2010.

Currently litigation that relies on Turkey’s judicial system is the primary mode of commercial dispute resolution in Turkey, but complex commercial litigation can take over six years to complete.  The primacy of litigation is due in part to technological innovations such as electronic proceedings and increased courthouse construction that have enhanced the effectiveness of the Turkish court system, but is mostly due to the fact that Turkish businessmen are still quite reluctant to initiate arbitral proceedings at distant venues that utilize unfamiliar rules and procedures.

That being said, the legal framework exists in Turkey for both foreign and domestic companies looking to avoid a legal system mired in political conflict by using impartial, independent forms of ADR to resolve commercial disputes.  The primary law governing international arbitral proceedings that could be used by multinational enterprises (MNEs) is the Turkish International Arbitration Law (IAL), which is based on the UNCITRAL Model Law and the Swiss Federal Statute on Private International Law  Domestic disputes are regulated under the Turkish Civil Procedure Law, which also draws heavily from the UNCITRAL Model Law.

In 2012 Turkey added a modern mediation law—the Law on Mediation for Civil Disputes—to its legal code.  This law, which was opposed by the Istanbul Bar Association, took to heart the most cherished principles of mediation, such as insuring equal treatment of both parties by the mediator, confidentiality, and a duty to inform parties about the process of mediation.  Although most disputes resolved thus far have been employment related, commercial disputes can certainly use mediation as a dispute resolution strategy as well.

Organizations like the Istanbul Chamber of Commerce and the Turkish Union of Chambers and Commodity Exchanges (TOBB) generally administer arbitrations, and a newly established institution, the Istanbul Arbitration Centre, was founded by the government effective January 1, 2015, to facilitate the settlement of domestic and international disputes through arbitration.

In sum, ADR processes in Turkey are slowly advancing toward becoming common practice, making Turkey both a potentially promising ADR marketplace and an ADR destination to watch.  It may well be that government interventions in the judicial system will push the business community in Turkey towards more thoroughly utilizing ADR options at their disposal.

The CPR Institute would like to thank Boaz Cohon and Ngutjiua Hijarunguru for this contribution. Boaz, a summer public policy/legal intern at CPR, is majoring in Political Science and History at Vanderbilt. Ngutjiua is a LLM graduate from the Center of the Study of Dispute Resolution at the University of Missouri-Columbia.