Dispositive Motions in Arbitration: Authority, Rules and Practical Tips

head shot 1By Janice L. Sperow

As companies, parties, and their lawyers across the nation debate whether they may, or even should, resolve their disputes in court or arbitration, courts and arbitrators—both faced with pandemic-generated, unprecedented backlogs—seem more willing to entertain docket clearing motions.

For some practitioners, dispositive motion practice in arbitration presents a new challenge. Yet, dispositive motions have existed in arbitration almost as long as arbitration itself. Now, however, both parties have embraced them. Recently, arbitrators have witnessed an increase in requests for leave to file them as parties dealing with the economic fallout of the pandemic attempt to resolve disputes sooner, more efficiently, and more cost-effectively. As more practitioners turn to arbitration to resolve disputes, they increasingly look to dispositive motion practice to promptly adjudicate them.

Still, some arbitrators have questioned their authority to entertain dispositive motions. Others hesitate to dispose of the arbitration before it really starts when it may well be the claimant’s only course of redress. Still others, like the author, view dispositive motions as a potential opportunity to narrow and resolve issues fairly and efficiently for both parties. So where do arbitrators obtain the power to consider dispositive motions?

The Parties’ Contract

Like the arbitration itself, the authority often starts with the parties’ contract. The arbitrator can and will allow dispositive motions if the parties’ arbitration clause provides for them. Many litigants now specifically provide in their arbitration agreements that the arbitrator shall have the authority to resolve jurisdiction, arbitrability, and many other threshold or dispositive issues. Indeed, astute drafters will frame their arbitration clauses to include the right to bring a dispositive or threshold motion to avoid the arbitrator’s exercise of discretion. Arbitrators will typically enforce such clauses if both parties may reciprocally invoke them.

Practical Tip: Explicitly provide the arbitrator with the authority to entertain dispositive and threshold motions directly into the parties’ arbitration agreement rather than incorporating them indirectly by reference to court rules, civil procedure rules, or forum administration rules. Court, civil procedure, and forum rules might include other provisions, which the parties may consider less desirable and which they may not want to incorporate wholesale into their agreement. The parties should also determine if they want to have the automatic right to bring such motions or merely grant the arbitrator the authority to entertain them at her discretion or upon a specified showing. If the parties intend to provide contractually for the application of a specific arbitral forum’s rules, review that forum’s dispositive motion rule and determine if the parties wish to modify it in the contract. Most arbitral fora expressly allow the parties to modify in writing the application of any rule. Finally, provide for reciprocity to enhance the clause’s enforceability.

Post-Dispute Agreement

If the contract itself does not mention the authority to hear dispositive motions, the parties may always agree to them in a written stipulation or even orally after the dispute has arisen or after the arbitration has begun. Contentious litigants may yet find common ground and agree to resolution of a threshold issue upfront if it will save time and expense. They will also routinely agree post-dispute to motions to resolve choice of law, jurisdiction, contract formation, forum rule applicability, and other threshold issues which will govern the rest of the case moving forward.

Practical Tip: Reduce the post-dispute agreement to writing whether by stipulation or in the arbitrator’s order. Identify the specific scope of the agreement including the precise issues to be determined by motion, page limits, and a briefing schedule. Decide if, pending the motion’s resolution, discovery should be stayed, continued, or restricted to information necessary to adjudicate the motion. Agree upon an early deadline for the resolution of the motion to maximize its cost savings and efficiency. Also set a cutoff date by which all dispositive or threshold issues must be brought. Early resolution saves the most time and expense; a dispositive motion brought on the eve of arbitration merely disrupts the process and often adds to, rather than minimizes, the costs of arbitration. Finally, proffer a dispositive motion agreement in writing to opposing counsel even if he will not likely agree; then track the fees spent on that issue at hearing and seek to recover them if the arbitrator rules in your favor on that point. Even if your side loses on the ultimate merits of a claim, the arbitrator may offset the prevailing party’s fee award if the other side incurred unnecessary fees on an issue, which could have been summarily adjudicated.

The Arbitral Forum’s Rules

The arbitration rules applicable to the dispute will usually permit dispositive motion practice. For example, in 2011, the pioneering  International Institute for Conflict Prevention & Resolution (CPR) specifically allowed for dispositive motion practice in the arbitral forum when it issued its 2011 Guidelines. In 2013, the American Arbitration Association also championed the arbitrator’s authority to entertain dispositive motions when it amended its rules to explicitly permit the filing of dispositive motions. Likewise, CPR’s first edition of Administered Rules promulgated in 2013 expressly authorized dispositive motions. Now, most arbitration associations include a dispositive motion rule. For example, JAMS’ Comprehensive Rule 18 explicitly authorizes them. Only the Financial Industry Neutral Regulatory Authority (FINRA), which involves primarily customer complaints, generally prohibits them; but even FINRA allows them under a few exceptions. We will explore the AAA and CPR rules in more depth because they provide parties with the most specific and comprehensive guidance.

The AAA Dispositive Motion Rules

Notably, the AAA did not adopt a uniform dispositive motion rule. Instead, it wisely chose to tailor its rules to the type of arbitration. The AAA Commercial Rule 33 now provides: “[t]he arbitrator may allow the filing of and make rulings upon a dispositive motion only if the arbitrator determines that the moving party has shown that the motion is likely to succeed and dispose of or narrow the issues in the case.” Likewise, the AAA Consumer Rule 33 and Employment Rule 27 state: “[t]he arbitrator may allow the filing of a dispositive motion if the arbitrator determines that the moving party has shown substantial cause that the motion is likely to succeed and dispose of or narrow the issues in the case.” The AAA Construction Rule 34 provides: “[u]pon prior written application, the arbitrator may permit motions that dispose of all or part of a claim or narrow the issues in a case.”

Interestingly, the dispositive motion rule applicable to consumer and employment cases, which involve individuals arbitrating against companies, require a higher initial showing than the dispositive motion rule applicable to commercial cases, which involve two companies arbitrating against each other. The consumer and employment rules require the moving party to show “substantial cause” that the motion is likely to succeed while the commercial rule only requires the moving party to show that the motion is likely to succeed. “Substantial cause” suggests more ample, considerable, or abundant cause whereas “likely to succeed” evokes mere feasibility and reasonableness – a fair chance rather than a good chance.

Conversely, the construction rule does not require proof of a likelihood of success but merely a written application showing that the motion will “dispose of all or part of a claim or narrow the issues in a case.” Of course, the written application itself will be more persuasive if it demonstrates the motion’s likely success. Unlike the construction rule, the AAA employment, commercial, and consumer dispositive motion rules do not technically require a written application. However, most arbitrators require them, nonetheless. At a minimum, arbitrators will expect an email requesting leave, not just an oral request.

While the specific rules differ in some key respects, they also share some important commonalities. For example, all the AAA dispositive motion rules – and indeed many if not most arbitral fora rules – allow dispositive motion practice only at the arbitrator’s discretion. AAA Commercial Rule 33, Consumer Rule 33, and Employment Rule 27 (“arbitrator may allow”); Construction Rule 34 (“arbitrator may permit”). Unlike civil litigation, arbitration does not include an automatic right to file a dispositive motion. Parties must request leave to file a motion, which the arbitrator may grant or deny within her discretion.

The three rules all also require the moving party to make some initial showing to convince the arbitrator why she should exercise her discretion to permit the dispositive motion. AAA Commercial Rule 33 (“only if the arbitrator determines that the moving party has shown”); AAA Consumer Rule 33 and Employment Rule 27 (“if the arbitrator determines that the moving party has shown substantial cause”); AAA Construction Rule 34 (“upon prior written application”).

All three also require the moving party to show that the motion will “dispose of or narrow the issues in the case.” Hence, in addition to the required degree of success, the moving party must demonstrate that the motion, if granted, will eliminate an issue, or at least narrow the scope of the hearing. Basically, the AAA’s rules all require two different types of proof: merit and efficiency – some likelihood of success and some cost savings over a hearing on the issue or claim.

But the AAA’s rules all require only either disposition or narrowing of the issues, not both. Accordingly, if the motion will achieve some economies of scale, the arbitrator can and should properly entertain the motion even if it does not completely dispose of an issue.

Practical Tip: Practitioners who wish to use the rules to narrow, rather than dispose of, issues should still present adequate proof of efficiency. For example, the moving party may want to demonstrate that early resolution of the issue may eliminate the need for expert or other witnesses who would not otherwise testify, may reduce the number of exhibits, may limit the necessary scope of discovery, or may reduce hearing time in some other way or even encourage settlement. 

Arguably, the rules do not require the complete disposition of a claim. For example, Construction Rule 34 explicitly provides that the motion may dispose of all “or part” of a claim. While the AAA’s Commercial, Employment, and Consumer Rules do not contain the same express language, they likely also permit partial disposition of a claim because they all permit the motion if it would narrow an issue and an arbitrator will likely find that partial resolution of a claim will indeed narrow the issues in the case.

Practical Tip: As noted, the parties can choose to include the right to file motions in their arbitration clause or post-dispute agreement rather than leave it to the arbitrator’s discretion. They can also set the applicable standard that they want to govern the grant or denial of the motion if they do so in writing. If the rules apply as written, consider a two-step proffer to save costs: during the first step, the moving party shows the rule’s satisfaction in a short letter or email without a response from the opposing party during which time the case and discovery proceed; then, in the second step, if the arbitrator finds that the moving party has satisfied the applicable standard, the parties set a full briefing schedule and suspend all or some discovery pending the motion’s resolution. In whatever manner litigants decide to tackle dispositive motion practice in arbitration, plan ahead and raise the issue early in the initial case management conference to allow sufficient time to schedule the motion(s) well before the hearing date in order to maximize cost savings for all parties. Consider the desirability of two different deadlines: an early one for purely legal or threshold questions and a later one at the close of discovery, if appropriate, for remaining disputes.

CPR’s Dispositive Motion Rule

In 2013, ADR industry leader CPR also issued its rules to expressly provide for dispositive motion practice. Under Rule 12.6, a party may apply to file “a motion for early disposition of issues, including claims, counterclaims, defenses, and other legal and factual questions.” CPR 2019 Administered Arbitration Rules, Rule 12.6(a). Rule 12.6 then instructs the applicant to include the issues to be resolved, the basis for the motion, the relief requested, how early disposition would “advance efficient resolution of the overall dispute” and a proposed procedure for resolving the issues. Rule 12.6(b).

CPR’s standard for the granting of the application differs slightly from the AAA’s Rules. CPR requires the arbitrator to find “a reasonable likelihood that hearing the motion for early disposition may result in increased efficiency in resolving the overall dispute while not unduly delaying the rendering of a final award.” Rule 12.6(c). If the arbitrator finds the motion “appropriate,” she will then establish the governing procedure, which may involve “written submissions, witness testimony by affidavit or other written form, limited hearings, or in any other manner.” Rule 12.6(d).

While the CPR and AAA Rules may differ somewhat in terminology, they represent a fairly uniform standard at least in the commercial arbitration context. The AAA Commercial Rule 33 requires “likely” success whereas the CPR Rule 12.6(c) requires “reasonable” success. Yet, they essentially require the arbitrator to undertake the same analysis in evaluating the burden of proof since “likely” evokes a fair, reasonable chance of success, whereas the AAA Consumer Rule 33 and the AAA Employment Rule 27 with their “substantial cause” requirement demand a higher quantum of proof.

But the rules do differ slightly more when it comes to what the applicant must prove: under the AAA Rules, the arbitrator will determine if the applicant has shown that the motion will dispose of or narrow the issues whereas the CPR Rule requires the arbitrator to focus on the motion’s overall efficiency without added delay. The CPR Rule technically does not focus on the likely success of the motion itself but rather reasonable likelihood of gaining efficiencies if the arbitrator grants the motion. The difference is nuanced, however, and may ultimately result in the same outcome as motions which dispose of or narrow the issues will necessarily promote efficiency.

The real difference between the AAA and CPR rules centers on the concept of delay. CPR specifically directs the arbitrator to consider the potential delay caused by adding a dispositive motion practice to the arbitration process, while the AAA rules do not mention delay to the final award as a specific consideration. Under the CPR Rule, an arbitrator may rightfully deny an application for leave to file a dispositive motion if it would unduly delay the rendering of the final award. Thus, under the CPR Rule, an arbitrator is much more likely to deny leave to file a dispositive motion the closer the parties get to the scheduled hearing. Indeed, CPR’s emphasis on “early” disposition of issues encourages the parties to use dispositive motions during the preliminary stages of the arbitration before or after limited discovery.

Practical Tip: As the applicant, counsel should consider raising issue identification and disposition, especially of legal questions, at the very first case management conference to forestall any delay argument. If the parties and the arbitrator calendar the motion from the outset of the case, the nonmoving party will be hard pressured to argue undue delay. To further minimize delay, allow discovery to proceed on the factual issues while the arbitrator considers the legal issues. Conversely, as the nonmoving party, counsel should insist on the discovery necessary to fully adjudicate the issues before any motion practice. Be prepared to identify with particularity the discovery needed on each issue for which the applicant seeks early disposition.  

CPR’s Dispositive Motion Guidelines

More than just a rule, CPR provides arbitrators and parties well-considered guidelines on the process. CPR issued formal “Guidelines on Early Disposition of Issues in Arbitration,” (“Guidelines”), which strike a fair balance between unmeritorious motions and issue winnowing. The Guidelines clarify that the parties may use dispositive motion practice to narrow and simplify the issues for hearing and not just to dispose of the entire case. They also encourage arbitrators to take an active role in promoting early issue identification and disposition. Guideline 1.1. They also warn the parties and the arbitrator to consider efficiency to the case overall. In other words, the arbitrator may properly deny leave to file a dispositive motion if, even if granted, it would not materially reduce the total time and cost involved in the arbitration. Guideline 2.4.

Court Approval & Inherent Authority

The Sixth Circuit recently relied upon AAA Rule 27 to uphold an arbitral tribunal’s summary judgment disposition in a AAA employment arbitration. McGee v. Armstrong No. 18-3886, October 29, 2019. McGee did not explicitly address Rule 27’s language. McGee merely cited R-27 and held “as such, the arbitrators did not exceed their power.” While the court based its decision upon Ohio’s state vacatur statute, the statute contains nearly identical grounds for vacatur as the FAA. Consequently, McGee teaches us that courts will not likely vacate a dispositive award by arbitrators under the FAA or state law as an excess of power if it satisfies the requirements of the applicable arbitration rules authorizing arbitrators to summarily dispose of matters. However, even before the AAA and the CPR adopted their dispositive motion rules, the courts routinely held that arbitrators had inherent authority to entertain dispositive motions. See, e.g., Schlessinger v. Rosenfeld, Meyer & Susman, 40 Cal. App. 4th 1096 (Cal. App. Ct. 1995).

Types of Dispositive Motions

Dispositive motions typically fall into three groups: (1) threshold or pre-discovery motions; (2) post-discovery summary adjudication motions; or (3) tactical motions. Threshold motions often raise procedural issues, such as venue, necessary parties, arbitrability, jurisdiction, applicable arbitral rules, scope of the arbitration, mootness, standing, res judicata, collateral estoppel, joinder, small claims election, or consolidation. But they can present substantive issues as well, such as contract formation, contract existence, contract validity, waiver, laches, plain meaning, estoppel, choice of law, failure to state a claim, right to punitive damages, right to attorneys’ fees, statute of limitations, tolling, statutory construction, statute applicability, consent, irrevocable consent, contract provision enforceability, liquidated damages availability, injunctive relief, defenses based upon contractual covenants, statutes of fraud, release, and more.

Substantive post-discovery motions are akin to partial or complete summary adjudication but can also include a motion to amend the claim based upon newly discovered facts, a failure to state a claim based upon undisputed facts, or even a motion on the pleadings.

Parties sometimes use tactical motions, not necessarily for their merits, but to educate the arbitrator early on about a key issue or to get a pre-mediation or pre-settlement “read” from the arbitrator on a key issue. They may seek to eliminate an expert or other witness by removing the issue from the arbitration’s scope. They may simply hope to delay the proceedings, raise the costs to the underfunded party, or disqualify counsel. Fortunately, CPR’s rule specifically considers any delay caused by the motion as an explicit factor in denying leave to seek a dispositive ruling. Some have even used AAA Commercial Rule 57 to defeat jurisdiction: they move to amend the claim, increasing the amount of damages, which in turn increases the AAA administrative fees, which defeats jurisdiction pending payment of the augmented fees.

Practical Tip: Regardless of the type of motion, all should result in a written award or order, which specifies the basis for the denial or grant of the motion. The movant should craft a well-written proposed order for the arbitrator as part of the motion but so should the opponent. Consider whether to request an opportunity for renewal after the completion of discovery or an aspect of discovery if the arbitrator denies the motion. The proposal should also identify the discovery completed up to the motion to circumvent an attack based on incomplete discovery or evidence. The opponent should identify the discovery still needed before the arbitrator can fairly resolve the issue. If the motion only partially disposes of the dispute, identify the remaining issues to be decided at the hearing.

Bottom line: As long as an arbitrator provides the parties a fair opportunity to present their cases, she can grant a dispositive motion without violating the right to a fundamentally fair hearing—the touchstone for whether or not a court will vacate an arbitral award. So, when you can, consider threshold and dispositive motion practice in arbitration as a way to cost-effectively narrow or resolve the arbitration.

The views expressed in this article are those of the author(s) and do not necessarily reflect the views of The CPR Institute.

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Janice Sperow is a full-time arbitrator, mediator, hearing officer, and prevention facilitator. She serves on the CPR’s mass claims, employment, commercial, banking, financial services, dispute prevention, mediation, flat fee mediation, and pro bono panels as well as the AAA’s commercial, large case, employment, technology, healthcare, consumer, pro se, and workplace investigation panels. Also serves as a neutral for the San Diego Superior Court (where she sits as a Judge Pro Tem), the Financial Industry Neutral Regulatory Authority, the National Arbitration FORUM, the World Intellectual Property Organization, the National Futures Association, the National Association of Arbitrators and Mediators, and the Better Business Bureau. Member, National Academy of Distinguished Neutrals. Serves as Hearing Officer for the Port of San Diego. Former President of the National Association of Women Lawyers and Vice-President of California Women Lawyers, Member, ABA Dispute Resolution and Business Law Sections. www.sperowadr.com.

A Boxer’s Day: First Circuit Refuses to Compel the WBO’s In-House Arbitration Scheme

By Alice Albl

The First U.S. Circuit Court of Appeals has vacated a judgement to enforce an arbitration agreement, ruling that the contract between a professional boxer and sanctioning organization was unconscionable because it allowed the organization to select arbitrators from its own staff. 

In Trout v. Organización Mundial de Boxeo Inc., 965 F.3d 71 (1st Cir. 2020) (available at https://bit.ly/2FNdUEF), the First Circuit Court remanded a case against the World Boxing Organization to the U.S. District Court of Puerto Rico. The court called the arbitrator-selection provision in the WBO’s Appeal Regulations “unconscionable.”

After declaring this selection process invalid, Circuit Judge David Barron, writing for a unanimous panel, left it to the federal district court to determine whether a severability clause from the separate but applicable WBO Championship Regulations would allow arbitration under the Appeal Regulations to continue.

In a concurring opinion, Circuit Judge Timothy Dyk wrote that, though the panel had declared the WBO arbitration setup unconscionable, it had omitted saying whether that determination would have to fall under state or federal law. Dyk noted that the court had avoided contribution to the thorny debate over how the Federal Arbitration Act may preempt state arbitration laws.

For now, according to the WBO’s attorney, Edward Ricco, a director at the Rodey Law firm in Albuquerque, N.M., the case can either proceed in the district court or transition into litigation. Ricco did not mention any plans to seek certiorari or a rehearing.

Professional boxer and World Boxing Organization member Austin Trout filed suit in a New Mexico state court in November 2015 alleging that “the WBO’s decision to remove him from its rankings for a certain weight class cost him a chance to pursue the world championship in that class,” as described in the opinion. Trout called the act a violation of the Muhammed Ali Boxing Reform Act (“MABRA”), and added claims under Puerto Rico law for breach of contract, fraud and negligence.

The WBO claimed that Trout had caused his own removal by committing to another fight while scheduled for a ranking match. The WBO invoked its Championship Regulations, which bound Trout as an organization member, and transferred venue to the U.S. District Court of Puerto Rico.

There, the WBO filed a motion to compel arbitration. It cited a provision of the Championship Regulations that required disputes to be arbitrated under its separate Appeal Regulations.

The motion was granted despite Trout’s insistence that a MABRA complaint was entitled to federal court adjudication. Trout included this contention along with three others in an appeal to the First Circuit.

While the First Circuit was quick to disarm Trout’s claim about MABRA requirements, along with two other claims, it focused on his assertion that a provision in the Appeal Regulations was unfair.

 This provision notes that arbitrators are gathered into a Grievance Committee of “[t]hree persons designated by the President” of the WBO. Those chosen served for “indeterminate terms” and were “subject to replacement by the nomination of the President of the WBO.”

Trout contested the WBO’s President’s power to freely choose and replace arbitrators as unconscionable.

The WBO countered by indicating additional language stating: “the Grievance Committee shall act as a fair and independent arbitrator of any grievance arising out of WBO Participation and it shall conduct all of its proceedings as Amiable Compositeur, Ex Aequo et Bono.”

It drew parallels between the regulations’ phrasing, and clauses deemed acceptable by other courts. Those clauses required the selection of arbitrators who were “qualified and independent.’”

That, held the First Circuit, was the problem. While cited precedent called for individuals who were “independent,” the WBO only required that an arbitrator’s performance be independent. Its selection provision called for “[t]hree persons designated by the President” of the WBO, none of whom may be members of the WBO Executive Committee.”

But the contract permitted the president to select biased individuals, even from within the WBO itself. “In fact,” the First Circuit opinion notes, “at oral argument the WBO conceded that the Appeal Regulations give the WBO’s president the power to nominate his or her own assistant to serve on the Grievance Committee.”

Allowing arbitrators to be biased toward one side of a dispute, even if expected to perform in an “independent” manner, was unconscionable, according to the First Circuit opinion.

With the selection provision struck as unconscionable, the First Circuit sent the case back to the district court to determine whether a severability clause that would allow the arbitration to continue applied. The severability clause was written not among the terms of the Appeal Regulations it was intended to preserve, but in the Championship Regulations which compelled WBO members to arbitrate.

In his concurring opinion, Circuit Judge Dyk, sitting by designation from the Federal Circuit Court of Appeals, commented on an issue unaddressed by the court. Although the WBO’s selection provision was soundly unconscionable, he wrote: “whether arbitration-clause-specific issues of unconscionability (and certain related defenses) are governed by individual state law or federal common was up for debate.”

Dyk’s comment referred to a fiery debate ignited by the U.S. Supreme Court’s ruling in AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011) (available at https://bit.ly/363u7jW) centered around whether the FAA preempts conflicting state law defense arbitration or rather acts a guideline for it. This topic, he concluded, “we appropriately leave to another day the question[…].”

While Trout awaits further action in the San Juan federal court, WBO counsel Edward Ricco says that he believes that the case’s impact on ADR practice will go back to contract construction. “I imagine the case will warn drafters away from the sort of arbitrator-selection provision at issue,” he said, “certainly in the First Circuit and presumably in other jurisdictions where the Trout decision may have persuasive value.”

* * *

The author, a CPR Institute Fall 2020 intern, is a second-year student at Brooklyn Law School in New York.

[END]

A Look Ahead: The Supreme Court’s Arbitration Docket in Focus

In a preview of the September issue of Alternatives to the High Cost of Litigation, author Heather Cameron discusses the arbitration year at the U.S. Supreme Court with editor Russ Bleemer.

The article wraps up the Court year ended this summer, and previews the new fall 2020-2021 term. [UPDATE: The article is now available at https://onlinelibrary.wiley.com/doi/full/10.1002/alt.21852.]

The subject, of course, is the Court’s seemingly favorite business topic, arbitration. 

In this video preview of the article, which will be available at altnewsletter.com on or around Sept. 1, Heather first looks at the GE Energy case, the sole Supreme Court arbitration opinion issued in the last term. GE Energy, which was decided June 1, is about international arbitration practice, an area the Court doesn’t visit often. Heather discusses why the opinion’s guidance is intertwined with the factor the Court avoided discussing, arbitration costs.

Next, Heather looked ahead to the term that starts in October, to the Schein case.  Schein was just decided last year, and now the same case is back on another similar arbitration point.  See our most recent CPR Speaks blog post on the case here.

Finally, in the video and the article, Heather fills us in on a case the Court rejected, and tell us why maybe the Court shouldn’t have declined the case and why its effects are a crucial practice point for arbitration advocates and, especially, neutrals.

Second Circuit: No U.S. Discovery for Private International Arbitration

By Yixian Sun

Does 28 U.S.C. §1782(a), which authorizes “any interested person” in a proceeding before a “foreign or international tribunal” to ask for and receive discovery from a person in the United States, cover private international arbitration tribunals? (Full text available at https://bit.ly/3fvtr8z .)

This is a hot issue in the arbitration world, with cases sprinkled throughout the federal courts. In the latest decision, the Second U.S. Circuit Court of Appeals held last week that arbitration isn’t covered by Section 1782. In re Application and Petition of Hanwei Gup for an Order to take Discovery for Use in a Foreign Proceeding Pursuant to 28 U.S.C. 1782 (Guo v. Deutsche Bank Securities Inc.), No. 19-781, 2020 WL 3816098 (2d Cir. July 8, 2020), as amended (July 9, 2020) (available at https://bit.ly/38SLd) (Guo).

And that move aggravates a circuit split created in recent months that points to the U.S. Supreme Court in an area that a year ago was considered settled law.

For more than two decades, the answer to the question on Section 1782’s applicability to private arbitral tribunals has been a firm “no.” In National Broadcasting Co. v. Bear Stearns & Co., 165 F.3d 184 (2nd Cir. 1999) (available at https://bit.ly/2UcWfdq) (“NBC”), the Second Circuit held that the phrase “foreign or international tribunal” does not encompass “arbitral bod[ies] established by private parties,” id. at 191. The Fifth Circuit quickly reached the same conclusion in Republic of Kazakhstan v. Biedermann Int’l, 168 F.3d 880 (5th Cir. 1999) (available at https://bit.ly/3gViPB0).

But the tide is turning. In 2019 and 2020, the Sixth Circuit and Fourth Circuit each decided that a private, party-contracted international arbitration panel constituted “tribunals” under Section 1782, in In re Application to Obtain Discovery for Use in Foreign Proceedings (Abdul Latif Jameel Transp. Co. v. FedEx Corp.), 939 F.3d 710 (6th Cir. 2019) (available at https://bit.ly/2AFPIB9) and Servotronics Inc. v. Boeing Co., 954 F.3d 209 (4th Cir. 2020) (available at https://bit.ly/3h7s0P8), thereby breaking with its sister circuits.

In the new July/August edition of Alternatives, and in an online discussion with Alternatives’ Editor Russ Bleemer, John B. Pinney, a senior trial lawyer at Graydon, in Cincinnati, provided an in-depth explanation on the changing landscape on this seemingly settled legal issue. See CPR Speaks for the discussion, the article, and links to the cases, at https://bit.ly/3gxyPIG.

Lying in the background of this debate is Intel Corp. v. Advanced Micro Devices, Inc., 542 U.S. 241 (2004) ((available at https://bit.ly/2zamp9C), the only Section 1782 case considered by the U.S. Supreme Court. In Intel, writing for the majority, Justice Ruth Bader Ginsberg held that the European Commission’s Directorate-General for Competition constituted a “foreign or international tribunal” within the meaning of Section 1782.

Intel did not directly address the issue of whether a private international tribunal is a “foreign or international tribunal.” Ginsberg’s opinion, however, cited a 1965 law review article written by Columbia Law School’s Professor Hans Smit, who has participated in the amendment of Section 1782: “the term ‘tribunal’ … includes investigating magistrates, administrative and arbitral tribunals, and quasi-judicial agencies, as well as conventional civil, commercial, criminal, and administrative courts.” Id. at 248-49 (citing Hans Smit, International Litigation Under the United States Code, 65 Colum. L. Rev. 1015, 1026, n.71 (1965)).

The Intel court’s favorable reference to Smit’s expanded interpretation of “foreign or international tribunals” was used by the Sixth Circuit as an additional support of its inclusion of private international arbitration under Section 1782. In re Application to Obtain Discovery for Use in Foreign Proceedings, 939 F.3d at 724.

This fact was also heavily relied upon by the petitioner in the new Second Circuit Guo decision. As noted, the panel rejected the petitioner’s reasoning, and concluded that “nothing in the Supreme Court’s Intel decision alters [its] prior conclusion in NBC that §1782 (a) does not extend to private international commercial arbitrations.” In re Guo, at *2.

* * *

In 2018, Hanwei Guo initiated arbitration against Guomin Xie, Tencent Music, and several other entities before the China International Economic and Trade Arbitration Commission, best known as CIETAC. Id. at *4.

According to Guo, Xie and other respondents, through a series of fraudulent transactions, led him into selling his shares in the companies that later became part of Tencent Music for less than the shares allegedly were worth. Guo asked for compensation and asked to have his equity stake restored. The parties selected an arbitral panel in April 2019, and the matters are still pending. Id. at *3-5.

In December 2018, Guo filed a petition for discovery for information from four underwriters related to Tencent Music’s IPO pursuant to Section 1782 in New York’s  Southern District Court. Following the NBC precedent and determining that the nature of CIETAC is closer to a “private arbitral body,” the SDNY denied Guo’s application in February 2019. In re Application of Hanwei Guo for an Order to Take Discovery for Use in a Foreign Proceeding Pursuant to 28 U.S.C. § 1782, 2019 WL 917076, at *3 (S.D.N.Y. Feb. 25, 2019).

The Second Circuit affirmed last week. According to the panel, private international commercial arbitrations are still barred from proceedings under Section 1782 even in the wake of the Supreme Court’s Intel decision. The panel also determined that the arbitration before CIETAC is indeed a “non-covered, private, international commercial arbitration.” In re Guo, at *1-2.

Writing for a unanimous panel, Judge Debra A. Livingston offered several reasons in defending why NBC remains good law.

The Second Circuit recounted the NBC-Intel history, and tackled the recent Fourth and Sixth Circuit cases going the other way, finding that Section 1782 applied to private arbitrations. 

Judge Livingston noted that the Intel court’s “fleeting reference” of “arbitral tribunals” is merely dicta. Id. at *17. Even if this reference had any legal significance, she added that under Section 1782, “‘arbitral tribunals’ does not necessarily encompass private tribunals,” because even Prof. Smit stated that “an international tribunal owes both its existence and its powers to an international agreement.” Id. (Quoting Hans Smit, Assistance Rendered by the United States in Proceedings Before International Tribunals, 62 Columbia L. Rev. 1264, 1267 (1962); the opinion also points to NBC, 165 F.3d at 189 (citing Smit’s 1962 article)).

Moreover, according to the Second Circuit panel, the legislative history does not warrant recognition of private international arbitration as “tribunals” under Section 1782. While Congress introduced the phrase “foreign or international tribunal” in order to expand the provision’s earlier formulation (which permitted for assistance only for “judicial proceeding[s] in any court in a foreign country”), a survey of House and Senate reports did not reveal the legislators’ intention to promote a “much more dramatic expansion into private arbitration.” Id. at *18-19. (Emphasis is the Second Circuit’s.)

The Second Circuit then found that the CIETAC arbitration did not qualify as an arbitration under a state-sponsored adjudicatory body, noting that “district court correctly concluded that the CIETAC arbitration is a private international commercial arbitration outside the scope of § 1782(a)’s ‘proceeding in a foreign or international tribunal’ requirement.”

In doing so, Judge Livingston analyzed whether “the [arbitral] body in question possesses the functional attributes most commonly associated with private arbitration.”

Several factors were taken into account. First, CIETAC, evolving from a government-sponsored entity, now “possesses a high degree of independence and autonomy” in its administration of arbitral cases, “and, conversely, a low degree of state affiliation.” Id. at *21-22.

Second, the power possessed by the Chinese government to “intervene to alter the outcome of an arbitration after the [CIETAC] panel has rendered a decision” is limited. In fact, such power is similar to that possessed by a U.S. court in setting aside or enforcing a private arbitration award under the Federal Arbitration Act and its incorporation of the New York Convention on the enforcement of international arbitration awards. Id. at *22-24.

Third, the CIETAC panel derives its jurisdiction “exclusively from the agreement of the parties,” rather than “any governmental grant of authority.” Id. at *24.

Finally, the ability of the parties to select their own arbitrators further suggests the private status of the CIETAC arbitration. Id. at *24-25.

* * *

The Second Circuit’s ruling mirrors the Fifth Circuit opinion in El Paso Corp. v. La Comision Ejecutiva Hidroelectrica Del Rio Lempa, 341 F. App’x 31 (5th Cir. 2009) (unpublished) (Available at https://bit.ly/3gXOTU7). There, the Fifth Circuit held that Intel has no negative effect on its Biedermann analysis, and concluded that a private Swiss arbitral tribunal did not constitute a “tribunal” within Section 1782. Id. at *34.

Judge Livingston also responded to the more-recent contrary rulings made by the Sixth and the Fourth Circuits. She pointed out that the Sixth Circuit never said that Intel compels a ruling allowing discovery for private arbitration. Rather, it held that such a way of understanding “was merely consistent” with Intel. In re Guo, at *17 (emphasis is the Second Circuit’s); see also In re Application to Obtain Discovery for Use in Foreign Proceedings, 939 F.3d at 725-26.

The Fourth Circuit’s Servotronics opinion, on the other hand, was based on the finding that the U.K. arbitration at issue was a “product of government-conferred authority,” thereby falling into the same framework as the Second and the Fifth Circuits which limited § 1782 to tribunals “acting with the authority of the State.” In re Guo at *14 (quoting Servotronics, 954 F.3d at 214).

Indeed, the Intel decision neither compelled, nor rejected, the inclusion of private international commercial arbitration under Section 1782.

Therefore, before a directly on-point Supreme Court opinion, lower courts are free to make their own judgments, according to their own statutory construction methodologies, policy considerations, and factors considered in determining the nature of a foreign tribunal.

The Second Circuit relies more on legislative history in understanding the scope of “tribunals,” but the Sixth Circuit uses a textualist approach and looks into the usage of “tribunals” in legal writings. Compare In re Application to Obtain Discovery for Use in Foreign Proceedings, 939 F.3d at 726-28, with In re Guo at *18-19.

The Second Circuit fears that allowing discovery would decrease the efficiency and the cost-effectiveness of private arbitration, whereas the Sixth Circuit appear to dismiss such concerns. Compare In re Application to Obtain Discovery for Use in Foreign Proceedings, 939 F.3d at 728, with In re Guo at *11. The Second Circuit believes that the fact that arbitrations are sanctioned, regulated and judicially supervised by the national authority does not suffice to make them “state-sponsored,” while the Fourth Circuit holds the contrary. Compare Servotronics, Inc. v. Boeing Co., 954 F.3d at 214-15, with In re Guo at *21-26.

* * *

One thing seems to be certain. A Supreme Court response is strongly called for. In a motion to stay issuance of the mandate, Rolls-Royce, the appellee in the Fourth Circuit’s Servotronics decision, represented that it intended to file a petition for certiorari to the Supreme Court.

Now that the Second Circuit refuses to change its position, author John Pinney predicted that the odds of the Supreme Court granting certiorari would increase. John B. Pinney, “Will the Supreme Court Take Up Allowing Discovery Under Section 1782 for Private International Arbitrations?” 38 Alternatives 103 (July/August 2020) (available in multiple formats at https://bit.ly/2ZwUt8N).

Other commentators, share similar expectations with Pinney. See, e.g., David Zaslowsky, “Second Circuit Holds That Section 1782 Discovery is Not Available in Aid of Private International Commercial Arbitration,” Global Arbitration News (July 10, 2020) (available at https://bit.ly/2CDUzne). Stay tuned for the next development.

* * *

The author, a second-year Harvard Law School student, is a 2020 CPR Institute Summer Intern.

Will the U.S. Supreme Court Allow Discovery in Private International Arbitrations?

By Russ Bleemer

Under federal circuit court case law, 28 U.S.C. §1782(a) did not include private international arbitration tribunals under its provisions for ““Assistance to foreign and international tribunals and to litigants before such tribunals.”

In other words, “foreign and international tribunals” didn’t include arbitrations.

Suddenly, last fall, that court view began to change, and an esoteric and once-sedentary point of law is facing upheaval. 

In an article in the new July/August issue of Alternatives, and in the video above, John B. Pinney of Graydon in Cincinnati explains how seemingly settled law has erupted into six federal circuit court cases, and is about to be put before the justices of the U.S. Supreme Court on a cert petition.

Will the nation’s top Court take up the matter?

John ties together the cases and sets out the prospects on whether the Court will decide to incorporate arbitral tribunals into the §1782 definition in his just-posted article, “Will the Supreme Court Take Up Allowing Discovery Under Section 1782 for Private International Arbitrations?” 38 Alternatives 103 (available in multiple formats at https://bit.ly/2ZwUt8N; see altnewsletter.com for full issues and archives).

He also discusses in the video and the article the practice implications—what arbitrators, arbitration users, and providers need to do now in the wake of the evolving caselaw.

* * *

The author edits Alternatives to the High Cost of Litigation, on publisher CPR Institute’s website here, and on the Wiley Online Library at altnewsletter.com.

The CPR European Advisory Board Presents: “Meet CPR Distinguished Neutrals Based in Europe: Piotr Nowaczyk”

The CPR European Advisory Board (EAB) continues its series “Meet CPR’s Distinguished Neutrals in Europe” and today it presents its next Q&A with Piotr Nowaczyk.

Piotr is based in Warsaw.  In addition to being a CPR Distinguished Neutral, he is a chartered arbitrator, advocate, the former president of the Court of Arbitration at the Polish Chamber of Commerce, a former member of the ICC International Court of Arbitration and a member of the VIAC Advisory Board. https://whoswholegal.com/piotr-nowaczyk

How did you get your start as a neutral?

In 1998 I was included on the roster of VIAC arbitrators and at around the same time I was appointed by the Court of Arbitration at the Polish Chamber of Commerce and recommended by the ICC Polish National Committee.  I believe my background as an ex-judge, advocate admitted in Poznan, Paris and Warsaw, partner at Salans (legacy firm of Dentons) and polyglot with an international background was helpful and has led to over 350 arbitration appointments in the last 20 years.

Who is your dispute resolution hero/heroine?

Pierre Karrer, Robert Briner and Eric Schwartz. 

Starting with the youngest (Eric Schwartz):  In 1991 I came to Paris, having been invited as a visiting lawyer by the Law Offices of S.G. Archibald.  Eric Schwartz was leading the arbitration practice there, together with Sarah François-Poncet.  He was an arbitrator in the dispute over the Egyptian Assuan Dam.  For me, a newcomer from Poland, it was my first introduction to a large-scale arbitration.  Later, our paths crossed many times.  Eric became Secretary General of the ICC Court of International Arbitration.  He wrote, together with Yves Derains, a Commentary on the ICC Rules of Arbitration.  About 12 years later I became a member of the ICC Court.  Eric became a partner at Salans Herzfeld & Heilbronn, where I was also a partner.  I organized his meetings and lectures in Warsaw.  To this day, I admire his calmness and composure.  He always speaks quietly and calmly about the most difficult matters.

Pierre Karrer was my favorite colleague among the members of the ICC Arbitration Court.  We usually sat side by side around the oval table at the court’s monthly plenary sessions.  I admired his comments on draft awards.  They were always light, accurate, often witty, and at the same time positive, even if critical.  We served as arbitrators on a few occasions and he gave me some practical advice.  For example, he advised me to separate the parties’ submissions.  He put the claimant’s submissions into the green file (“because, as at the pedestrian crossing, the claimant always wants to go forward”), and the respondent’s submissions into the red file (“because the respondent usually tries to stop the proceedings”).  The papers produced by the arbitral tribunal and the arbitral institution he assembled in a yellow binder.  In his house, he showed me specially designed shelves on wheels.  Each of them contained binders of documents regarding a particular case.  He moved them easily across the floor.  The files were bound in soft binders (“because they don’t damage the inside of the traveling suitcase”).  He gave me a lot of good advice. He said, “Piotr, if I have one dollar and I give it to you, it will be your dollar, not mine anymore. However, if I give you an idea or give you a thought, it will be mine and your thought, mine and your idea”.  He shared countless ideas and thoughts with me.  His famous multilingual Glossary of Arbitration and ADR was developed and expanded in Warsaw to include arbitration terminology in Czech, Polish and Russian.  It was my idea, his idea, our idea, my thought, his thought, or our common thought.

Robert Briner was the President of the ICC Court when I became a court member for Poland. He was one of the giants of international arbitration, a man of slightly old-fashioned ways, a gentleman always holding fast to his principles.  His three full terms of office making nine full years as president of the world’s biggest court of arbitration had left an indelible stamp on this institution.  He was an elegant, distinguished man, sparing in word and gesture.  He was ready to advise anyone who asked for his advice, in the simplest way possible, discreetly and briefly, sometimes in one sentence.  When the Polish National Committee put forward my candidacy for the ICC Court membership, I asked Robert Briner what he thought of it.  He looked me in the eye and asked: “Why hesitate?”  It’s difficult to forget that conversation which took place many years ago in a very unusual setting. We were both watching a pair of koalas in an Australian eucalyptus wood during a break at the annual congress of the Union Internationale des Avocats.

What is the one piece of advice you would want to give to the younger generation looking for a first appointment as neutral?

It is not easy to start out as an arbitrator.

Arbitrators are late starters.  At first, you have to establish yourself as a barrister, solicitor, judge, academic, diplomat, businessman, politician or expert.  So, it is only later in life that you would typically become an arbitrator.  Young legal eagles tend to champ at the bit, eager to get their first case.  A rude awaking often comes at the first interview when they have to field these brutal questions: “How often have you acted as arbitrator?” “How many awards have you made?” “What is your experience with arbitration?

The young hopefuls are stumped for an answer.  Imagine a patient asking a budding orthopedic surgeon eager to perform his first knee operation: “How many knee operations have you conducted, doctor?”  If the flustered doctor says, “Not even one, but I’d love to make a start,” the patient will go to see a real specialist, preferably one with more than 100 knee operations to his name.

There is no clear recommendation on how to get the first appointment.  David Rockefeller published the book “How to make a million dollars”.  In the preface he stated: “from this book you will learn how to make the second, the third or the fourth million…”.  I would rather not mention his advice on how to get the first million!  Young people are often attracted to arbitration because it offers the opportunity to publish articles, go to conferences and take part in the Vis Moot.  Many of the famous arbitral institutions sell modular training courses scaling up from introductory to advanced, from domestic to international and so on.  I would caution aspiring young arbitrators, completion of such courses does not necessarily mean that appointments will automatically follow.  Young lawyers can include an arbitration clause in every contract drafted and act as a counsel or administrative secretary.  One day, someone will offer an appointment as an arbitrator.  Currently, we have more participants in arbitration conferences than there are arbitration cases on this continent.  Telling young people “under 40” that they are well prepared and will replace us all one day is only partly true.  Parties still prefer experienced arbitrators who have earned their reputation with years of impeccable professional activity.  The patient prefers an experienced surgeon, not a young one, who is eager for the first surgery in his life.

Were you ever the first in doing something?

Yes, I was the first Polish advocate admitted to the Paris Bar back in 1993.

What makes your conflict resolution style unique?

I would like to think it is my intuition.

What has been the most difficult challenge you have faced as a neutral?

Initiating disciplinary proceedings against three young counsels who were intent on seizing my personal bank account to cover their fees in case they lost the arbitration case.

The counsel were defending the family business of one of them.  I was an arbitrator nominated by the claimant.  From the beginning, the counsel treated me as their number one enemy.  They also tried to seize the chairman’s bank account.  We learned about their activities in the middle of the proceedings.  At the hearing, we informed the claimant because we were concerned that doubts may be raised as to our impartiality and independence.  We completed the arbitration and passed a fair award, mostly in favor of these rogues.  We initiated disciplinary proceedings immediately after the award was delivered.  It lasted 5 years and resulted in discontinuation due to the statute of limitations.  The young counsel made friends with the dean of the local bar council. They became his friends and helpers, to the point of becoming members of the local bar council.  They became almost untouchable.  Time went by, and the bar members, including the dean, acting as disciplinary prosecutors dragged out the proceedings to such an extent that the claim ultimately became time barred.

What is the most important mistake you see counsel make?

Typically, they file too many documents and charge too many billable hours!

Now let’s turn to some specific topics:

  1. What is your view on the duration of arbitration proceedings?

Arbitration is like a pregnancy.  It should not be aborted or last longer than 9 months.  Every dispute can be managed within 9 months. It all depends on the energy, proactivity, devotion and dedication of the arbitral tribunal.  One of our roles is to combat delays provoked by counsel.  Unfortunately, counsel want to have as much time (billable) as possible and produce endlessly long submissions.  Counsel for the conflicting parties are able to agree on a highly extended provisional timetable, and then want to impose it on the arbitral tribunal.  Weak arbitrators spread their hands and say: “It is the parties who are the hosts of the dispute. We have to accept their joint proposal”.  I ask the co-arbitrators then: “If they are the hosts, then who the hell are we, the arbitrators? Guests?”

2. With respect to the taking of evidence in arbitration: are you IBA Rules or Prague Rules? And why?

Prague Rules are much simpler and tailor made for Eastern and Central Europe.

What do you see as the next “big thing” in global dispute prevention and resolution?

The big problem is arbitrators’ safety.  It is time to think about arbitrators’ immunity and an international convention to grant it.

For which types of conflicts would you recommend ADR?

I think you can use ADR for all types of conflicts, with very few local exceptions.

Monster Energy and Evident Partiality

Alternatives to the High Cost of Litigation Editor Russ Bleemer is joined by veteran arbitrator-litigators Philip J. Loree Jr., in New York, and Richard Faulkner, in Dallas, to discuss the U.S. Supreme Court’s Monday cert denial in Monster Energy v. City Beverages LLC. The panel also discusses a recent Pennsylvania federal court case that follows Monster Energy, Martin v. NTT Data Inc., No. 20-CV-0686 (E.D. Pa. June 23) (available at https://bit.ly/2VwZi0V).   

By Heather Cameron

The U.S. Supreme Court this morning declined to grant certiorari on a petition requesting clarification of the Federal Arbitration Act’s “evident partiality” standard.

This means that the Court, for now, will not revisit the “evident partiality” standard for arbitrators that can be used to overturn an arbitration award under the Federal Arbitration Act at 9 U.S.C. § 10(a)(2). And a Ninth Circuit decision overturning an arbitration award because a JAMS Inc. arbitrator failed to disclose his ownership ties to the Irvine, Calif., provider, will stand.

The Court’s docket page for the case, Monster Energy Co. v. City Beverages LLC, No. 19-1333, is available HERE.

Monster Energy was an appeal from a Ninth U.S. Circuit Court of Appeals decision last October, throwing out an arbitration award in favor of Monster Energy and ruling that “arbitrators are required to disclose their ownership interests in the organizations they are affiliated with and the organizations’ business dealings with the arbitration parties.” Monster Energy Co. v. City Beverages LLC, Nos. 17-55813/17-56082 (9th Cir. Oct. 22, 2019) (available at http://bit.ly/2PjmXzq); for more background and analysis, see Daniel Bornstein, “Ninth Circuit, Overturning an Award, Backs More Arbitrator Disclosure,” 37 Alternatives 170 (December 2019) (available at https://bit.ly/2NE7Q1x).

The decision is unusual because of its emphasis on the “repeat-player” phenomenon in arbitration.  It highlighted a circuit split over disclosure requirements for arbitrators, and reflected concern over bias in favor of repeat players in arbitration—an issue usually restricted to employment and consumer arbitration cases, not big companies. See Lisa Bingham, “Employment Arbitration: The Repeat Player Effect, 1 Emp. Rights & Emp. Policy J. 189, 209–17 (1997) (available at https://bit.ly/2VuElDJ).

The questions presented to the Supreme Court were:

  1. What is the standard for determining whether an arbitration award must be vacated for “evident partiality” under the Federal Arbitration Act, 9 U.S.C. § 10(a)(2)?
  2. Under the correct “evident partiality” standard, must an arbitration award be vacated when the arbitrator does not disclose that (i) he has a de minimis “ownership interest” in his arbitration firm and (ii) that firm has conducted a “nontrivial” number of arbitrations with one of the parties?

City Beverages, which distributed its adversary’s energy drinks in the Pacific Northwest, alleged that Monster Energy committed breach of contract in 2015 when it terminated their distribution contract without good cause. Monster Energy  exercised the contract’s clause permitting such termination so long as severance of $2.5 million was paid.

Though City Beverages rejected payment, the move was upheld in arbitration and Monster Energy was awarded $3 million in attorneys’ fees.

Overturning that award, the Ninth Circuit agreed with City Beverages’ claim that the arbitrator had failed to adequately disclose his relationship to JAMS and his firm’s relationship with Monster Energy.

In the Supreme Court’s only prior case examining the FAA’s evident partiality  standard, which authorizes vacatur of arbitration awards “where there was evident partiality or corruption in the arbitrators,” a majority agreed to overturn the award in question, but no clear rationale emerged. See Commonwealth Coatings Corp. v. Continental Cas. Co., 393 U.S. 145 (1968) (available at https://bit.ly/3g766Ks); see also Petition for Writ of Certiorari at 6–8 (available at https://bit.ly/2Bo3VU7).

Commonwealth Coatings, written by Justice Hugo Black, interpreted evident partiality as coextensive with the judicial standard, finding that arbitrators must not only be unbiased, “but must also avoid even the appearance of bias.” Commonwealth Coatings, 393 U.S. at 150.

Two of the five justices joining Black’s opinion, however, wrote a narrowing concurrence, penned by Justice Byron White, concluding that vacatur was only appropriate where the arbitrator failed to disclose “a substantial interest in a firm which has done more than trivial business with a party” to the arbitration. Id. at 151­–52. They found that the mere “appearance of bias” disqualification standard for federal judges does not establish evident partiality on the part of an arbitrator. See Petition at 19.

A majority of federal circuit courts have applied something akin to Justice White’s reasoning, according to the petition. “The First, Second, Third, Fourth, Fifth, and Sixth Circuits require those seeking vacatur of an arbitration award for evident partiality to show ‘a reasonable person would have to conclude that an arbitrator was partial to one party to an arbitration.’” Id. (Citations omitted; emphasis is in the brief.)

In its Monster Energy decision, the Ninth Circuit joined the Eleventh Circuit in adopting Justice Black’s less-demanding “reasonable impression of partiality” standard.

In her dissenting opinion in Monster Energy,Ninth Circuit Judge Michelle T. Friedland wrote that such a standard will have the effect of generating endless litigation over arbitral awards, defeating arbitration’s benefits of expedience and finality, echoing Monster Energy’s claims. See Bornstein, supra at 172.

JAMS, noting its role as a neutral organization “that has always refrained from supporting or opposing challenges to the arbitral process or arbitration awards,” filed an amicus brief in support of Monster’s rehearing petition. (Available HERE).

Both Monster Energy’s petition and JAMS’ brief stressed the lack of evidence to support the Ninth Circuit’s assumption that arbitrators might be biased in favor of repeat players since the law review article it cited on the phenomenon described a single study of employment, rather than commercial, arbitrations. See Petition at 31–32.

* * *

Cameron, a second-year Fordham University School of Law student, is a CPR Institute 2020 Summer Intern.

The CPR European Advisory Board presents: “Meet CPR Distinguished Neutrals Based in Europe: Fatos Lazimi”

The CPR European Advisory Board (EAB) continues it series “Meet CPR’s Distinguished Neutrals in Europe” and today it presents its next Q&A, with Fatos Lazimi.

Fatos is a partner at Optima Legal and Financial based in Tirana, Albania.  He is an expert in international arbitration law and has participated in several international arbitration cases.  He is also a member of the ICC Court of Arbitration in Paris. Please see http://optimalaw.al/2016/11/03/fatos-lazimi/

 

How did you get your start as a neutral?

It all began back in 2015 when I was a party appointed arbitrator in a domestic case and at about the same time I was handling an ICC FIDC based case.  I was appointed as an Arbitrator by a well known company based in Albania but with foreign control.  The case was very complex as it dealt with a commercial transaction in the mining industry with a State party.  The proceedings lasted longer than expected due to the involvement of many accountant experts and witnesses of facts.

Who is your dispute resolution hero/heroine?It is very hard to pick just one hero or heroine in the dispute resolution arena, but I am deeply inspired by three esteemed gentlemen arbitrators:

  • Sigvard Jarvin
  • G. Bunny
  • Christofer C. Seppala

Sigvard Jarvin: I have been lucky to be local counsel in proceedings where Mr. Jarvin was an Arbitrator (mainly FIDIC Contract based disputes).  He is extremely skilled in the management of proceedings and he demonstrates an insightful analysis of the cases before him.  His patience and thoughtfulness are very impressive.

Nal G.Bunny: I have not been so lucky to be involved in proceedings where Mr. Bunny has served as an Arbitrator but I have admired him from a distance.  He has an encyclopedic knowledge of FIDIC contracts and his Awards – which I have been able to examine – are always well reasoned.

Christofer C. Seppala: I have been honored and privileged to be in close contact with Mr. Seppala while being Member of ICC Court of Arbitration in Paris.  On the one hand, he could be characterized without any hesitation as a mentor of interpretation and implementation of ICC Rules.  On the other hand, he is an excellent and unique interpreter of FIDIC concepts which are mirrored in many ICC FIDIC based cases. 

What is the one piece of advice you would want to give to the younger generation looking for a first appointment as neutral?

They must recognize that they have to live with their cases so they must make their best professional endeavors to ensure the legal process is full of integrity, independence and impartiality.

What makes your conflict resolution style unique?

I encourage the parties in dispute to try and find the things they have in common and I insist on this as part of the process.

What has been the most difficult challenge you have faced as a neutral?

Probably having to consider and then make a decision on a procedural issue which was requested by one party after the proceedings were declared closed.  I remember a case where the Claimant asked that the proceedings be reopened more than a year and a half after they were declared closed.  It was a very difficult decision to make because the circumstances which triggered the request to reopen were rather exceptional.  In particular, evidence had come to light but for state reasons it was classified as highly confidential.  The particular difficulty I was faced with was a lack of applicable legislation covering the confidentiality matters and their reflection in arbitration proceedings.

What is the most important mistake you see counsel make?

Devising dilatory tactics and unethical conduct.  I have witnessed  cases where the parties’ counsels engage in dilatory tactics.  For example, filing numerous applications seeking permission to postpone decision making and deferring the time for making a draft award.  I view these strategies as harmful for the parties which counsel represents and for the proceedings in their entirety.  They have the potential to undermine a party’s position in the eyes of the Tribunal and this may prompt the latter to make adverse inferences.  In the long run, such delay tactics decrease the advantages of arbitration as a method for resolving disputes

If you could change one thing about commercial arbitration/mediation [please chose one], what would it be?

Adoption and enforcement of strong conflict rules, i.e. procedural controls on appointments so that the parties do not abuse the right to nominate arbitrators.

What is your approach to cybersecurity and data protection in international dispute resolution?

Data protection and cyber risks are becoming more and more important aspects in administration of arbitration proceedings.  I would support a revision of the various institutional rules e.g. ICC, ICSID, LCIA etc. so that they address these issues in stronger terms and impose penalties for breach of the applicable data protection rules.

In preliminary/ early decisions: do you attempt to identify and decide potentially dispositive issues early in the case?

Yes.  It is very important in terms of efficiency of the arbitration proceedings to identify the potential areas of dispute, in particular, those which are fundamental to the whole process, like jurisdiction matters, validity of arbitration agreements, bifurcation of proceedings on liability and quantum etc.

With respect to the taking of evidence in arbitration: are you IBA Rules or Prague Rules?  And why?

Given my professional background and personality I support a more proactive approach in administration of arbitration proceedings and I would therefore opt for the Prague Rules.

What do you see as the next “big thing” in global dispute prevention and resolution?

Extending arbitration to disputes arising from the Belt & Road Initiative.  This initiative is likely to spawn many disputes and ADR could be beneficially deployed.

For which types of conflicts would you recommend ADR?

If I had to pick one, I would say labor disputes.

In your view, what makes CPR unique?

Its philosophy and policy of conducting disputes.  I think CPR has unrivalled experience in procedural approaches and adopting final workable solutions.

Do you have an anecdote you would like to share?

Arbitration is the key but not the open door.

Supreme Court Returns Schein To Its Docket, With a Focus on Arbitrability

By Russ Bleemer & Heather Cameron

Schein is back.

The U.S. Supreme Court this morning agreed to hear a new arbitration petition on an old case. 

The Court granted cert today on the issue of “Whether a provision in an arbitration agreement that exempts certain claims from arbitration negates an otherwise clear and unmistakable delegation of questions of arbitrability to an arbitrator.”

The case, Henry Schein Inc. v. Archer and White Sales Inc., No. 19-963, is expected to be scheduled in the Court’s 2020-2021 term beginning in October. The Court’s docket page is available at https://bit.ly/30L3gX4.

The issue will be on the delegation agreement in the arbitration contract in a case the Court saw and decided last year, Henry Schein, Inc. v. Archer & White Sales, Inc., 139 S. Ct. 524 (Jan. 8, 2019) (available at https://bit.ly/2CXAgPw).

The new case, which comes at the request of New York-based health care supplier Schein, will likely center on whether the arbitration agreement’s exclusion of injunctive relief from an arbitrator decision in favor of a court overrides the agreement’s delegation to an arbitrator a decision on whether the matter should be arbitrated.

But that’s also only half the Court’s arbitration story today.  It also denied a cross petition in the case by Texas dental supply company Archer & White Sales on two more arbitration issues that still could still work their way into the decision or, at the least, are guaranteed to see more litigation in state and circuit courts. 

The cross-petition cert denied issues were

(1) Whether an arbitration agreement that identifies a set of arbitration rules to apply if there is arbitration clearly and unmistakably delegates to the arbitrator disputes about whether the parties agreed to arbitrate in the first place; and

(2) whether an arbitrator or a court decides whether a nonsignatory to an arbitration agreement can enforce the arbitration agreement through equitable estoppel.

A question related to the latter issue already appeared just this month in the Court’s decision in an international arbitration case, GE Energy Power Conversion France SAS Corp. v. Outokumpu Stainless USALLC, et al., No. 18-1048 (available at https://bit.ly/2XogerH) (see a CPR Speaks article and video analysis at https://bit.ly/2U1QrDs).

When the Court first decided Schein in January 2019, it reversed the Fifth Circuit and unanimously held that under the Federal Arbitration Act, an arbitrator, not the court, should determine the threshold question of arbitrability—whether an arbitration agreement applies to a particular dispute—when the parties have clearly and unmistakably delegated that question to an arbitrator via delegation agreement, even if the argument for arbitrability is “wholly groundless.” See Henry Schein, Inc. v. Archer & White Sales, Inc., 139 S. Ct. at 526 (Jan. 8, 2019) (available at https://bit.ly/2CXAgPw).

The case was remanded to the Fifth Circuit to determine whether the parties’ contract contained a delegation agreement, sending the determination of arbitrability to a tribunal rather than a court, and satisfied the Supreme Court’s “clear and unmistakable” intent standard established in First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995) (available at https://www.oyez.org/cases/1994/94-560).

Rule 7(a) of the AAA Commercial Arbitration Rules, which the parties incorporated into their contract in the case, explicitly gives the arbitrator power to determine his or her own jurisdiction as well as the arbitrability of any claim or counterclaim. (available at https://www.adr.org/Rules).

Following circuit precedent, the Fifth Circuit noted that by incorporating the AAA’s rules, the parties had indeed entered into a delegation agreement for at least some disputes. But in its remand, the Fifth Circuit also found an explicit “carve-out” exception in the contract for disputes, like the one at hand, seeking injunctive relief.

The appeals court, therefore, affirmed the district court’s denial of Schein’s motion to compel arbitration. Archer & White Sales, Inc. v. Henry Schein, Inc., 935 F.3d 274 (5th Cir. 2019) (available at http://bit.ly/33Cb78g).

Schein petitioned the Supreme Court again to challenge that decision. That’s the case and the issue the Court agreed to hear today, while Archer & White’s conditional cross-petition issues were not accepted.

For more on the case and an in-depth discussion of the issues involved, see Philip J. Loree Jr., CPR Speaks, “Schein Returns: Scotus’s Arbitration Remand Is Now Back at the Court” (Feb. 19, 2020) (available at http://bit.ly/3bQXQgl); Richard D. Faulkner & Philip J. Loree Jr., “Schein’s Remand Decision: Should Scotus Review the Provider Rule Incorporation-by-Reference Issue?” 38 Alternatives 70 (May 2020) (available at https://bit.ly/2C6Ksap), and Richard D. Faulkner & Philip J. Loree Jr., “Why the U.S. Supreme Court Should Review Whether Arbitrability May Be Incorporated by Reference,” 38 Alternatives 87 (June 2020) (available athttps://bit.ly/2YB0zVj).

* * *

Bleemer edits Alternatives at altnewsletter.com for the CPR Institute.  Cameron, a second-year Fordham University School of Law student, is a CPR Institute 2020 Summer Intern.

Supreme Court Declines to Hear a California Supreme Court Case on Arbitration and Unconscionability

By Seorae Ko

Alternatives editor Russ Bleemer is joined once more by Richard Faulkner and Philip Loree Jr., this time talking about the Supreme Court recently declining to hear a California Supreme Court case on arbitration and unconscionability, OTO LLC v. Kho, discussed below

The U.S. Supreme Court this morning declined a certiorari petition ona California Supreme Court decision to render a wage arbitration agreement unenforceable as procedurally and substantively unconscionable.

While the issue of unconscionability overhangs the breadth of arbitration jurisprudence, the Supreme Court has used the Federal Arbitration Act to preempt such concerns in favor of arbitration’s predominance. AT&T Mobility LLC v. Concepcion, 563 U.S.333, 344, 348 (2011). Today’s cert denial can be seen as a divergence from the pattern.

On the other hand, today’s declined case, OTO LLC v. Kho, No. 19-875, reinforces the California’s top Court decision that, though it found in favor of the employee opposing arbitration, permitted an agreement to arbitrate wage disputes “so long as it provides an accessible and affordable process.” The California decision follows AT&T Mobility in that it states that the “FAA preempts a state-law rule that categorically prohibits an adhesive arbitration agreement from requiring an employee to waive access to a Berman hearing.”

The Berman hearing is a California administrative process designed to provide a quick, informal, and affordable method for resolving disputes over unpaid wages, according to a brief filed in the case by the state’s labor commissioner. (See below.)

The California Supreme Court OTO decision held that a court “faced with a petition to compel arbitration under these circumstances must grant the petition unless the party opposing the petition asserts a valid contract defense.”

In the case, the parties contested the enforceability of an arbitration agreement on wage disputes, which the employee, Ken Kho, challenged as unconscionable. OTO L.C. v. Ken Kho, 447 P.3d 680 (Cal. 2019) (available at https://casetext.com/case/oto-llc-v-kho-1).

The California Supreme Court first noted that general contract defenses such as unconscionability may be applied to invalidate arbitration agreements without contravening the FAA or state arbitration acts, citing Pinnacle Museum Tower Assn. v. Pinnacle Market Development (US), LLC, 282 P.3d 1217, 1231 (Cal. 2012)).

The opinion then evaluated the agreement’s substantive and procedural unconscionability on a “sliding scale,” and stated that substantive fairness must be considered in the context of the agreement’s procedural unconscionability, citing Armendariz v. Foundation Health Psychcare Services, Inc., 6 P.3d 669, 689 (Cal. 2000); Sanchez v. Valencia Holding Co., LLC, 353 P.3d 741(Cal. 2015)).

Ultimately, the California Supreme Court ruled that the arbitration agreement in question was unenforceable as unconscionable. It found that the agreement was made under such oppression and surprise as to produce a high degree of procedural unconscionability. In light of the substantial procedural unconscionability, the court also found substantive unconscionability in the agreement.

OTO filed a cert petition in January to have the decision reversed. Petitioner argued that the California Supreme Court’s decision violated U.S. Supreme Court precedent in two ways.

First, the petitioner argued that the decision went against precedent mandating that the FAA preempt state rules discriminating against arbitration. The California Supreme Court’s comparative approach to substantive unconscionability, unique to arbitration agreements, failed to place arbitration agreements on equal footing with other agreements. Brief for Petitioner at 4 (citing AT&T Mobility, 563 U.S. at 339-340 (2011)) (available at https://www.supremecourt.gov/DocketPDF/19/19-875/128316/20200113114622841_OTO%20cert%20petition.pdf).

The petitioner connected this approach to a broader trend in the California Supreme Court to adopt “sharply anti-arbitration rules, only to be reversed by this Court.” Brief by Petitioner at 13 (citing DIRECTV Inc. v. Imburgia, 136 S. Ct. 463, 468-471 (2015); AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 339-340 (2011); Preston v. Ferrer, 552 U.S. 346, 353-354 (2008); Perry v. Thomas, 482 U.S. 483, 492 n.9 (1987); Southland Corp. v. Keating, 465 U.S. 1, 16 n.11 (1984)).

Citing Sonic-Calabasas A Inc. v. Moreno, 247 P.3d 130 (2011) (Sonic I), the petitioner explained that the California Supreme Court’s substantive unconscionability analysis was a method devised to reach “effectively the same result” as its decision in Sonic I, which had been vacated by the Supreme Court for violating the equal treatment principle. Brief for Petitioner at 13. The Sonic I decision had been condemned because its class-arbitration rule uniquely addressed arbitration agreements; by the same reasoning, the petitioner suggested, the OTO decision could not stand.

Second, the petitioner, an auto dealership, argued that the decision went against precedent mandating the FAA to preempt even a general contract defense if it interferes with the “‘fundamental attributes of arbitration,’ including lower costs, greater efficiency and speed, and the ability to choose an expert adjudicator to resolve specialized disputes.”

Accordingly, a contract defense erecting “preliminary litigating hurdles” that destroy the “prospect of speedy resolution” is preempted by the FAA. Brief for Petitioner at 6 (citing AT&T Mobility, 563 U.S. at 344, 348). The petitioner argued that the California Supreme Court’s approach erected such a litigating hurdle because it required a prolonged fact-intensive inquiry. Brief for Petitioner at 17 (referring to American Express Co. v. Italian Colors Restaurant, 570 U.S. 228 (2013)).

A particularly salient point pursued by the petitioner focused on the California Supreme Court’s substantive unconscionability analysis. The petitioner suggested that the court condemned the arbitration agreement, which it claimed covered a wage dispute with the respondent, a service technician, as a time-consuming hurdle to litigation when the agreement consumed time because it “offered too many of the protections of civil litigation.” Brief for Petitioner at 12. (Emphasis is in the brief.) Such an approach evaluates an agreement to be substantively unconscionable for the reason that it tries too hard to avoid unfairness.

The petitioner also stressed that the case holds enormous significance in “safeguard[ing] the [FAA]’s commitment to the enforceability of arbitration agreements.” Brief for Petitioner at 19.

Petitioner OTO was not alone in its view. Five amicus briefs were filed in support of the objections. Cautioning against “judicial hostility towards arbitration” (Amicus Brief by Atlantic Legal Foundation at 2 (citing Nitro-Lift Techs., L.L.C. v. Howard, 133 S. Ct. 500, 503 (2012) (per curiam)) (available at https://www.supremecourt.gov/DocketPDF/19/19-875/133006/20200213191401278_19-875tsac%20Atlantic%20Legal%20Foundation%20%20-OTO%20v%20Kho%20FINAL.pdf)), they called out the decision below as “a thinly veiled effort to bar wage-dispute arbitration altogether.” Amicus Brief by Washington Legal Foundation at 8 (available at https://www.supremecourt.gov/DocketPDF/19/19-875/133008/20200214090311910_19-875%20tsac%20Washington%20Legal%20Foundation.pdf).

The petitioner’s reasoning on both the equal treatment principle and the litigating hurdle assessment found support in the amicus briefs.

On the other side, respondent Kho argued that the California Supreme Court’s decision was consistent with the Supreme Court’s arbitration precedents. Brief for Respondent California Labor Commissioner at 10 (available at https://www.supremecourt.gov/DocketPDF/19/19-875/142627/20200429130457818_No.%2019-875%20DOJ%20CA%20FINAL%20BIO.pdf). Pointing to the California courts’ tradition of comprehensive and contextual approach to unconscionability, the respondent emphasized that OTO had offered “no conflicting case remotely similar which creates a need to hear [the] case.” Brief for Respondent Ken Kho at 18 (available at https://www.supremecourt.gov/DocketPDF/19/19-875/142640/20200429135355866_OTO%20v.%20Kho%20Opposition%20to%20Petition%20for%20Writ%20of%20Certiorari%2019-875.pdf). The respondent further asserted that, instead of disfavoring arbitration, the California Supreme Court had promoted arbitration by “requir[ing] an arbitration procedure that has all of the ‘fundamental attributes of arbitration.’” Brief for Respondent Ken Kho at 25.

As a tangentially related matter, Kho also challenged the jurisdiction of the Supreme Court, arguing that petitioner had failed to establish either that the FAA applies or that the dispute effects commerce as per the commerce clause. Brief for Respondent Ken Kho at 27.

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The author, a second-year Harvard Law School student, is a 2020 CPR Institute Summer intern.