Success: Many Controversial Amendments to CPLR’s Article 75 on Arbitration Via NY State 2018 Budget Bill Removed

By Ginsey Varghese

Via budget bill AB 9505 for fiscal year 2018-2019, the New York State (NYS) Assembly proposed several amendments to Article 75 of the NY Civil Practice Law & Rules (CPLR), rules governing arbitrations. AB 9505, print 9505c §§ 6-10, p.189-192 (Jan. 18, 2018).

In responses in late March, arbitral institutions, including CPR and AAA, as well as the New York State Bar Association’s Dispute Resolution Section and the New York City Bar Association’s Arbitration Committee and International Commercial Disputes Committee, issued comments about the proposed amendments to Article 75 of the CPLR, raising concerns and highlighting the expected negative impact on New York’s pro-arbitration reputation.

Some of the key concerns on the earlier draft of the bill (AB9505c) were as follows:

  • NY CPLR § 7507, as currently written, requires that an arbitration award must be in writing. The proposed amendments would have required that all arbitral awards “state the issues in dispute and contain the arbitrator’s findings of fact and conclusions of law.” at §8, p.191 lines 31-34.  This proposal was criticized for importing litigation concepts – “findings of fact and conclusions of law” –  incongruent with arbitration, creating additional cost and confusion.  Moreover, parties in an arbitration, especially sophisticated ones, often do not seek formal court-like decisions, rather, “reasoned” awards and the freedom to design a process for the parties involved.  The proposed amendment would have essentially rendered impossible creative and collaborative approaches to dispute resolution.
  • In proposed amendments to NY CPLR § 7511, the bill would have codified “manifest disregard of the law” of an arbitrator as additional grounds to vacate an award. Id at 9, p. 191 lines 51-52. Manifest disregard of the law is a highly controversial doctrine, and courts across the country have not considered it uniformly because it is often criticized as diminishing the finality of arbitration awards. Claudia Salomon, New York Vacates Arbitral Award with Manifest Disregard Doctrine, 258(25) N.Y. L.J. (Aug. 7, 2017) (available at http://bit.ly/2DL3vCq).  New York courts have rarely used the “manifest disregard” standard, reflecting respect for the arbitral process and thereby maintaining New York State’s pro-arbitration reputation.  Id.
  • Under the proposed amendments to NY CPLR § 7504, concerning the “appointment of an arbitrator,” the bill requires all arbitrators to be “non-neutral third-party arbitrator[s],” adding also that it was a non-waivable requirement. AB 9505 §6, p.190 lines 1-9. Would the common practice of party-selected arbitrators on a panel render the arbitrator “non-neutral”?  What about choice for sophisticated parties desiring an expert to adjudicate? The core concerns were the lack of clarity concerning the definition of “neutrality” and the failure to respect the principle of party autonomy, a fundamental benefit of arbitration.
  • Proposed amendments to NY CPLR § 7504 would also have allowed the parties to wait until the eve of the arbitration hearing to raise objections to the arbitrator(s), even if the party knew of grounds earlier, setting the stage for disruption and delay tactics in the arbitration. (AB 9505 § 6, p. 190 lines 45-48.)

The Ways and Means Committee omitted the proposed amendments to Article 75 of the CPLR in its latest draft (9505d) on March 28, 2018 – a major victory for the New York arbitral community, which had cautioned that “considering amendments of this magnitude in the context of a budget bill does not provide the level of due process and scrutiny decades of New York arbitration practice deserves” and had urged the legislature to “allow a thorough review, hearings and an opportunity for public comment.” CPR, Comments on Sections 6-11 of New York Assembly Bill 9505 (Mar. 23, 2018)(available at https://bit.ly/2ElR9Rp); 2017 Bill Tracking NY A.B. 9505.

On March 29, 2018, the bill (without the above-referenced amendments) passed both floor votes in the NY State Senate and the NY State Assembly and is awaiting Governor Andrew Cuomo’s approval. AB 9505, §§ 6-10, p.189-192 (Jan. 18, 2018).

The entire bill – AB 9505 – in its latest form is available at: http://bit.ly/2pvMTcv.

Another piece of budget legislation to monitor is S7507-C/AB9507-C, which will impact the arbitration of sexual harassment claims. AB 9507, Part KK, Subpart B, §1, p.80-81, lines 22-54 (available at https://bit.ly/2uMRmxu).

The bill renders mandatory arbitration clauses in sexual harassment claims “null and void.” Id. at p. 80, line 52.

On March 30, 2018, S7507-C/AB9507-C also passed floor votes in the NY State Senate and the NY State Assembly and is currently before the Governor Cuomo. Id.

Governor Cuomo is expected to sign the bill into law. Vivian Wang, New York Rewrites Harassment Laws, but Some Say the Changes Fall Short, N.Y. Times (Mar. 30, 2018) (available at https://nyti.ms/2HfX11O).

The bill is a part of broader state proposal to address sexual harassment in the workplace. See Summary of the Assembly Recommended Changes to the Executive Budget, Legislative Reports, at 76 (Mar. 13, 2018) (available at https://bit.ly/2Hwt64p).

According to the National Conference of State Legislatures, NY’s move to address sexual harassment mirrors a larger effort nationally as “29 states have introduced [similar] sexual harassment bills in 2018.” Wang, supra.


The author is a CPR Institute 2018 intern. She is a law student at Pepperdine University’s School of Law in Malibu, Calif.  

Appropriations Bill to Prohibit Fed Contractors from Mandatory Arbitration of Employee or Independent Contractor Claims under Title VII or Torts Related to or Arising Out of Sexual Assault or Harassment

By Mark Kantor

Kantor Photo (8-2012)On March 21, Congressional negotiators reached last-minute agreement on a 2232-page “Consolidated Appropriations Act, 2018” to implement the bipartisan budget agreement from earlier this year (available at http://docs.house.gov/billsthisweek/20180319/BILLS-115SAHR1625-RCP115-66.pdf). Such “must pass” legislation is always a popular vehicle for “policy riders.” This year, one such rider that appears to have successfully made its way into the final legislation prohibits Federal contractors or subcontractors, under Federal contracts exceeding $1 million, from entering into or enforcing pre-dispute arbitration provisions under which an employee or independent contractor agrees in advance to resolve through arbitration “any claim under title VII of the Civil Rights Act of 1964 or any tort related to or arising out of sexual assault or harassment, including assault and battery, intentional infliction of emotional distress, false imprisonment, or negligent hiring, supervision, or retention.” Title VII, of course, covers all employment discrimination, not just sexual assault or harassment (https://www.eeoc.gov/laws/statutes/titlevii.cfm). There is an exclusion in the provision for agreements that may not be enforced in US courts. In addition, the Secretary of Defense can waive the prohibition if “the Secretary or the Deputy Secretary personally determines that the waiver is necessary to avoid harm to national security interests of the United States, and that the term of the contract or subcontract is not longer than necessary to avoid such harm.”

The agreed text reads as follows:

24 SEC. 8095. (a) None of the funds appropriated or
25 otherwise made available by this Act may be expended for
1 any Federal contract for an amount in excess of
2 $1,000,000, unless the contractor agrees not to—
3 (1) enter into any agreement with any of its
4 employees or independent contractors that requires,
5 as a condition of employment, that the employee or
6 independent contractor agree to resolve through ar-
7 bitration any claim under title VII of the Civil
8 Rights Act of 1964 or any tort related to or arising
9 out of sexual assault or harassment, including as-
10 sault and battery, intentional infliction of emotional
11 distress, false imprisonment, or negligent hiring, su-
12 pervision, or retention; or
13 (2) take any action to enforce any provision of
14 an existing agreement with an employee or inde-
15 pendent contractor that mandates that the employee
16 or independent contractor resolve through arbitra-
17 tion any claim under title VII of the Civil Rights Act
18 of 1964 or any tort related to or arising out of sex-
19 ual assault or harassment, including assault and
20 battery, intentional infliction of emotional distress,
21 false imprisonment, or negligent hiring, supervision,
22 or retention.
23 (b) None of the funds appropriated or otherwise
24 made available by this Act may be expended for any Fed-
25 eral contract unless the contractor certifies that it requires
1 each covered subcontractor to agree not to enter into, and
2 not to take any action to enforce any provision of, any
3 agreement as described in paragraphs (1) and (2) of sub-
4 section (a), with respect to any employee or independent
5 contractor performing work related to such subcontract.
6 For purposes of this subsection, a ‘‘covered subcon-
7 tractor’’ is an entity that has a subcontract in excess of
8 $1,000,000 on a contract subject to subsection (a).
9 (c) The prohibitions in this section do not apply with
10 respect to a contractor’s or subcontractor’s agreements
11 with employees or independent contractors that may not
12 be enforced in a court of the United States.
13 (d) The Secretary of Defense may waive the applica-
14 tion of subsection (a) or (b) to a particular contractor or
15 subcontractor for the purposes of a particular contract or
16 subcontract if the Secretary or the Deputy Secretary per-
17 sonally determines that the waiver is necessary to avoid
18 harm to national security interests of the United States,
19 and that the term of the contract or subcontract is not
20 longer than necessary to avoid such harm. The determina-
21 tion shall set forth with specificity the grounds for the
22 waiver and for the contract or subcontract term selected,
23 and shall state any alternatives considered in lieu of a
24 waiver and the reasons each such alternative would not
25 avoid harm to national security interests of the United
1 States. The Secretary of Defense shall transmit to Con-
2 gress, and simultaneously make public, any determination
3 under this subsection not less than 15 business days be-
4 fore the contract or subcontract addressed in the deter-
5 mination may be awarded.

The agreed legislation is now expected to pass Congress very promptly. But, if the appropriations bill is not signed by the President before midnight Friday, then the US Government will once again shut down for lack of funds (https://www.cnn.com/2018/03/21/politics/congress-unveils-spending-package-fix-nics/index.html). Observers expect the bill to pass Congress on a bipartisan vote, just as the original agreement did earlier this year. But the timing of passage, and thus the possibility of another very short Government shutdown, may be affected by opponents’ parliamentary maneuvers.

 

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

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

No Notice: NJ Federal Court Declines to Compel Arbitration

By Elena Gurevich

Morgan Stanley has lost a bid to compel arbitration against a former employee.

A New Jersey federal district court ruled that the arbitration agreement circulated by the company via email could not be constituted as adequate notice, and therefore was not binding on the plaintiff.

This is not the first time a New Jersey court has struck down a motion to compel arbitration. There seems to be a trend in the approach that New Jersey state and federal courts take in examining the ADR process. The courts are looking closely at arbitration clauses in light of the state’s consumer protection and employment discrimination laws. See “Examining New Jersey’s Arbitration Scrutiny,” CPR Speaks blog  (July 12, 2016)(available at http://bit.ly/2GMH0A5).

In Schmell v. Morgan Stanley & Co., Civ. No. 17-13080 (D.C. N.J. March 1)(available at http://bit.ly/2FZnmiY), the court did not even look at the cases Morgan Stanley relied on, saying that the fact the plaintiff—a senior vice president in the financial services company’s Red Bank, N.J., office—had notice of the agreement was in dispute.

The court found that the defendant company’s evidence that the plaintiff was working and accessing emails on the day the email in question was sent could not be considered as proof of adequate notice.

U.S. District Court Judge Anne E. Thompson also found that the plaintiff’s certified statements that he had no recollection of receiving and viewing the email were indicative of the fact that there had been no meeting of the minds, and therefore no mutual assent to the agreement.

Noting the plaintiff’s certification, the opinion also stated that the email notification and the plaintiff’s continued employment did not constitute notice, despite contrary case law. Therefore, Thompson reasoned, the court did not have to “consider whether this dispute falls within the scope of the Arbitration Agreement.”

She declined to compel arbitration, rejecting Morgan Stanley’s motion. The firm had fired the plaintiff last October, alleging discrimination for past conduct involving drug and alcohol abuse that the plaintiff detailed in a book about his life. The Thompson opinion states that the plaintiff was terminated even though he had made the changes to the book that Morgan Stanley had demanded he make, in order to continue working at the company.

According to the plaintiff’s attorney, Joshua Bauchner, a partner in the Woodland Park, N.J., office of Ansell Grimm & Aaron, no notice of appeal has been filed in the case. Attorney for Morgan Stanley, Kerrie Heslin, a partner in Chatham, N.J.’s Nukk-Freeman & Cerra, has not responded to an email request for comment.

The New Jersey treatment of arbitration agreements continues to evolve. A December attempt to make legislative changes died in committee, but it is likely that similar initiatives will emerge.

A Senate bill attempted to bar provisions in employment contracts that waive rights or remedies as well as agreements that conceal details relating to discrimination claims. Though the bill didn’t mention arbitration, the accompanying statement makes its intention clear, noting that “provision in any employment contract or agreement which has the purpose or effect of concealing the details relating to a claim of discrimination, retaliation, or harassment, including claims that are submitted to arbitration, would be deemed against public policy and unenforceable.”

The proposal can be found here: http://bit.ly/2IEKtBl.

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The author is a CPR intern.

 

 

International Commercial Mediation Update: UNCITRAL Working Group II Moves Forward on Convention and Model Law

erinBy Erin Gleason Alvarez

The United Nations Commission on International Trade Law (UNCITRAL) Working Group II met at its 68th session in New York from February 5 through 9 to finalize draft convention and model law documents. The focus of these instruments is on the enforcement of international commercial settlement agreements resulting from mediation.

Working Group II was initiated by UNCITRAL in 2014 in order to explore whether it is feasible to develop mechanisms for the enforcement of mediated agreements in international commercial disputes.  Since then, there have been several sessions to explore the most appropriate path forward.

The need for this Working Group grew out of concern that parties to mediated agreements may not be afforded the same protections as those available in international commercial arbitration. The United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention), entered into force in 1959, obligates States to recognize and enforce arbitral awards made in other contracting States.

To accommodate parties’ desire to mediate international commercial disputes, practices have emerged to try to transform a mediated settlement agreement into an arbitral award. In addition to practical concerns over enforceability, these steps add significant process to mediation, which parties tend to like because it is simpler than arbitration (among other reasons). Other recourse for enforcement of mediated settlements in international commercial disputes can include pursuing claims for enforcement of the agreement under contract law. But this may also be difficult in the international context, depending upon the jurisdiction where enforcement is sought. Protracted cross-border litigation to enforce a mediated settlement is counterintuitive at best.

Thus the proposed model law and convention seek to alleviate these concerns, recognizing the increased use of mediation in the international commercial context and the benefits that the mediation process affords parties. The instruments, as they are currently drafted, address both enforcement concerns and the possibility for a party to invoke a settlement agreement as a defense. To date, changes have not yet been uploaded to the UNCITRAL website that would show the most recent revisions to the draft model law and convention. The most recent drafts are available here.

By way of background, a “model law” is a template of sorts, for States to consider adopting locally. A “convention” on the other hand is an instrument that is binding on States and other entities (so long as they are signatory to the document).

What does all of this mean for parties to mediation? For now, it means waiting for further developments. UNCITRAL must ultimately approve the instruments before any adoption or ratification processes may commence. The Commission will commence review this summer.


Erin Gleason Alvarez is Principal at Gleason Alvarez ADR, LLC.  She serves on the CPR Institute Panel of Distinguished Neutrals and co-chairs the CPR Institute Mediation Committee.  Erin previously acted as the former Global Head of ADR Programs for AIG. 

Erin now serves as mediator and arbitrator in commercial and insurance disputes and may be reached at erin@gleasonadr.com

Predispute Arbitration Would be Barred for Sex Harassment Claims Under Legislative Proposal

By Elena Gurevich

The Federal Arbitration Act is being targeted in Congress in a bill that seeks to ban predispute arbitration in matters involving sexual harassment.

Last month, Sen. Kirsten E. Gillibrand, D., N.Y., along with 13 co-sponsors., introduced U.S. Senate bill S-2203, titled “Ending Forced Arbitration of Sexual Harassment Act of 2017.”

The act makes predispute arbitration agreements unenforceable for sex discrimination disputes.  It would put the responsibility for determining arbitrability on courts, not arbitrators.

The Dec. 6 proposal was immediately referred to the Committee on Health, Education, Labor, and Pensions.  It was introduced in the House by Rep. Cheri Bustos, D. Ill., on Dec. 26, with seven co-sponsors, and sent to the Judiciary Committee.

The act would amend United States Code Title 9—the FAA—by adding a new Chapter 4 “Arbitration of Sex Discrimination Disputes” at the end.

In a proposed Section 401, the legislation would define “predispute arbitration agreement” as “any agreement to arbitrate a dispute that had not yet arisen at the time of the making of the agreement,” and “sex discrimination dispute” as “a dispute between an employer and employee arising out of conduct that would form the basis of a claim based on sex under title VII of the Civil Rights Act of 1964 [citation omitted] if the employment were employment by an employer [as defined in the act], regardless of whether a violation of such title VII is alleged.”

Proposed Section 402, on validity and enforceability, states that “no predispute arbitration agreement shall be valid or enforceable if it requires arbitration of a sex discrimination dispute.”

According to a blog by employment attorneys at the law firm of Orrick, Herrington & Sutcliffe, if the act is passed into law, it “would not make employment arbitration agreements altogether unenforceable.” Joe Liburt, Allison Riechert Giese and Akasha Perez, “The Ending Forced Arbitration of Sexual Harassment Act: A Legislative Response to #MeToo,” Orrick Employment Law and Litigation blog (Dec. 14) (available at http://bit.ly/2rmpHSx).

The blog post notes that the proposal “would require employers and employees to litigate sexual harassment claims, while leaving unaffected all other arbitration-eligible claims.  This could potentially require employees who bring both harassment and non-harassment legal claims to litigate some claims in court while simultaneously submitting other claims to arbitrators.”

The proposed law, however, does not prohibit workers and employers from agreeing to arbitration after a dispute arises.

The Orrick blog notes that the legislative proposal “has a long journey” before it is signed into law, explaining that “the bill must be assigned to a committee for consideration, withstand debate” and “pass a vote.” The blog post predicts that it “could take months or even years to complete, if ever.”

A USA Today article notes that Congress also “is wrestling with incidents of sexual harassment,” referring to a resolution passed by the Senate that requires sexual harassment training for senators and staff.

The article discusses a bipartisan bill that was introduced in November that would “overhaul the congressional complaint process and provide better protections for accusers.” The article also notes that “other lawmakers are looking to reform the secret process lawmakers have used to settle numerous workplace harassment and discrimination claims.” See Jessica Guynn, “‘Enough is enough’: Gretchen Carlson says bill ending arbitration would break silence in sexual harassment cases,” USA Today (Dec. 6)(available at https://usat.ly/2ynUM6y).

Some companies already have taken action in the light of the proposed legislation. Last month, Microsoft became the first Fortune 100 company to support the bill. Microsoft President and Chief Legal Officer, Brad Smith, stated that the company should “act immediately and not wait for a new law to be passed.” Brad Smith, “Microsoft endorses Senate bill to address sexual harassment,” Microsoft blog (Dec. 19)(available at http://bit.ly/2mR65jR).

The author is a CPR intern.

Roundup: Legislation with Mediation or Arbitration…Maybe for the future?

By Elena Gurevich

According to Congress.gov, the official website for U.S. federal legislative information, and Govtrack.us, an organization that tracks legislation and votes, several bills have been introduced in the U.S. House of Representatives and the Senate this year that touch upon arbitration or mediation.

Out of five bills introduced, only one deals with mediation as well as arbitration. Although (according to Govtrack) it is highly unlikely that these bills will be passed by the present Congress, they might get a shot in the future under a different Congress.

H.R. 156—Labor Relations First Contract Negotiations Act of 2017. The bill, introduced on Jan. 3 by Rep. Gene Green, D., Texas, has a prognosis of passage of 1%, according to Govtrack, whose projection estimates are supplied by Skopos Labs, a New York software company. The bill amends the National Labor Relations Act to address initial contract negotiation. Specifically, the bill requires mediation if an employer and a newly certified union have not reached a collective bargaining agreement within 60 days. “Either the employer or the union may request binding arbitration if the parties have not reached an agreement within 30 days of selecting a mediator.”

See https://www.congress.gov/bill/115th-congress/house-bill/156.

H.R. 832—Arbitration Transparency Act of 2017, with a 3% chance of passage, requires that an arbitration proceeding between a consumer and a financial institution, in a dispute involving a consumer financial product or service, must be open to the public. It was introduced Feb. 2 by Rep. Michael Capuano, D., Mass.

See: https://www.congress.gov/bill/115th-congress/house-bill/832?r=10

H.R. 1374—Arbitration Fairness Act of 2017 was introduced on March 7. The bill prohibits a predispute arbitration agreement from being valid or enforceable if it requires arbitration of an employment, consumer, antitrust, or civil rights dispute. The bill, sponsored by Rep. Hank Johnson, D., Ga., has a 3% chance of passing, according to Govtrack.

See: https://www.congress.gov/bill/115th-congress/house-bill/1374?r=7

  1. 542—Safety Over Arbitration Act of 2017 was introduced on March 7, with a current prognosis of 9%. The Congress.gov summary says the bill “prohibits the use of arbitration whenever a contract between an individual and another party requires arbitration to resolve a claim or controversy alleging facts relevant to a hazard to public health or safety unless all parties to the controversy consent in writing after the controversy arises.” The sponsor is Sheldon Whitehouse, D., R.I.

See: https://www.congress.gov/bill/115th-congress/senate-bill/542?r=22

  1. 647—Mandatory Arbitration Transparency Act of 2017. The bill has only a 2% chance of passing in this Congress, according Govtrack and Skopos Labs. The bill amends U.S.C. Title 9 on arbitration. According to the Congress.gov summary, the bill “prohibits predispute arbitration agreements from containing a confidentiality clause regarding an employment, consumer, or civil rights dispute that could be interpreted to prohibit a party from: (1) making a communication in a manner such that the prohibition would violate a whistle-blower statute; or (2) reporting or making a communication about tortious conduct, unlawful conduct, or issues of public policy or public concern. But the prohibition shall not apply if a party can demonstrate a confidentiality interest that significantly outweighs the private and public interest in disclosure.” Richard Blumenthal, D., Conn., is the sponsor.

See: https://www.congress.gov/bill/115th-congress/senate-bill/647

* * *

The author is a CPR Institute 2017 Fall Intern.

The Reaction: Here’s What They’re Saying in the Wake of the Senate’s Vote to Overturn the CFPB Arbitration Rule

By Elena Gurevich and Russ Bleemer

Last night in a narrow 51-50 vote, Senate Republicans overturned the Consumer Financial Protection Bureau rule that would have allowed the consumers to file class action suits against financial institutions and prohibited waivers of such processes accompanied by mandatory predispute arbitration.

Vice President Mike Pence cast the deciding vote.  See our blog post from earlier today here.

According to the New York Times, “By defeating the rule, Republicans are dismantling a major effort of the Consumer Financial Protection Bureau, the watchdog created by Congress in the aftermath of the mortgage mess.” See Jessica Silver-Greenberg, “Consumer Bureau Loses Fight to Allow More Class-Action Suits,” N.Y. Times (Oct. 24)(available at http://nyti.ms/2yL9eHn)

Reuters, noting that the House already passed the resolution repealing the rule soon after it was released in July, observed that the resolution under the Congressional Review Act “also bars regulators from instituting a similar ban in the future.” Lisa Lambert, “Republicans, Wall Street score victory in dismantling class-action rule,” Reuters (Oct. 24)(available at http://cnb.cx/2yQd8B2).

Moments after the vote, the White House issued a statement applauding Congress for passing the resolution and stating that a recent Treasury Department report was clear evidence that “the CFPB’s rule would neither protect consumers nor serve the public interest.” The White House statement is available at http://bit.ly/2yLFOew.

President Trump is expected to sign the resolution the moment it hits his desk. This, according to Reuters, will “abruptly end a years-long fight that has included multiple federal regulators, consumer advocacy groups, and financial lobbyists.”

In its blog that closely monitors the CFPB, consumerfinancemonitor.com, Ballard Spahr, a Philadelphia-based law firm, congratulated the Senate for “its courageous action and for recognizing . . . that arbitration benefits consumers, while class action litigation benefits only the plaintiffs’ bar.”

Keith A. Noreika, the acting Comptroller of the Currency, issued a statement praising the vote and calling it “a victory for consumers and small banks across the country.” Noreika stressed the crucial role of the OCC that “identified the rule’s likely significant effect on consumers.” The OCC statement is available at http://bit.ly/2gJ1rFC.

Late Tuesday night, Sen. Elizabeth Warren, D. Mass., who was among those who defended the rule this week wrote on Twitter, “Tonight @VP Pence & the @SenateGOP gave a giant wet kiss to Wall Street. No wonder Americans think the system is rigged against them. It is.”

CNN reported that “Consumer advocates said the vote was a tremendous setback for Americans, and that it offered companies like Wells Fargo and Equifax ‘a get-out-of-jail-free card.’” Donna Borak & Ted Barrett, “Senate kills rule that made it easier to sue banks,” CNN (Oct. 25)(available at http://cnn.it/2zCxJFN).

CNN also quoted Karl Frisch, executive director of Washington’s Allied Progress, a consumer watchdog group, who said that “This repeal will hurt millions of consumers across the country by denying them their rightful day in court when they get screwed over by financial predators.”

Public Citizen, a Washington, D.C., nonprofit consumer advocacy group echoed this sentiment, tweeting that the “#RipoffClause enables bad actor banks like @WellsFargo to steal billions from the very consumers they defraud and get off scot free.”

***

Gurevich is a CPR Institute 2017 Fall Intern. Bleemer edits Alternatives for the CPR Institute.

The CFPB’s Arbitration Rule is Overturned by the Senate

By Elena Gurevich and Russ Bleemer

Just a day after the U.S. Treasury Department issued a report criticizing a controversial Consumer Financial Protection Bureau rule that prohibited class waivers requiring consumers use mandatory predispute arbitration for disputes, the U.S. Senate voted on October 24 to overturn the rule.

The House in July had voted to overturn the rule under the Congressional Review Act, which gives Congress 60 legislative-session days to reverse administrative rulings it disagrees with.

The bill will go to President Trump, who is expected to sign it.

The legislative moves will overturn five years’ worth of efforts to roll back the use of class waivers accompanied by arbitration by the CFPB, which was designated by the 2010 Dodd-Frank Act to examine the utility of the ADR process in consumer disputes.

A 728-page 2015 study by the independent Washington agency said that arbitration was ineffective in vindicating consumers’ rights in financial services contracts, which are under the CFPB’s jurisdiction. The agency vowed to regulate arbitration.

After the report, Republicans, who long said the agency was too powerful, used the CFPB’s moves to increase calls to eliminate the agency in last year’s presidential campaign.

Late last night, Jeb Hensarling, R., Texas,  who as House Judiciary Committee chair led the fight against the rule, congratulated the Senate, noting in a statement on his social networks that the vote “is a victory for consumers, a defeat for the wealthy trial lawyers lobby and a rejection of the unchecked, unconstitutional and unaccountable CFPB.”

The CFPB had finalized its rule and published it July 19. It would have fully taken effect next year after a 180-day waiting period.

The rule, however, didn’t outlaw arbitration, though it increased the CFPB’s scrutiny by requiring reporting. The rule instead required that class processes, in either litigation or arbitration, be made available to consumers signing financing contracts or purchasing financial services.

Business lawyers, lobbyists and trade groups said the rule would wipe out financial services arbitration, because companies would rather face class action in courts, under familiar federal rules, than class arbitration with few outlets for appeal.

The Senate didn’t follow the House’s quick lead because it didn’t have the votes to overturn the rule, with some Republicans fearing a backlash for voting to support a banking industry-approved bill in the wake of scandals that invoked arbitration.

In fact, the Senate was split evenly, with two Republicans, Lindsay Graham, of South Carolina, and John Kennedy, of Louisiana, joining the Democrats. Vice President Mike Pence joined fellow Republicans to cast the deciding vote.

Treasury might have brought a senator or two to the side of overturning the law. On Monday, in a highly unusual move, the Treasury Department issued a 17-page report blasting the rule. See “Limiting Consumer Choice, Expanding Costly Litigation: An Analysis of the CFPB Arbitration Rule,” U.S. Dept. of the Treasury (Oct. 23)(available at http://bit.ly/2h0N7VB).

According to the Washington Post, Jaret Seiberg, an analyst with Cowen and Co.’s Washington Research Group, said that the Treasury Department report “[p]rovides some needed political cover for the few Senate Republicans who have been reluctant to vote in favor of the banks.” See Renae Merle, “Treasury Department sides with Wall Street, against federal consumer watchdog agency on arbitration rule,” Washington Post (Oct. 23)(available at http://wapo.st/2zxMABI).

It wasn’t the first Washington institution to fire back at one of its own on arbitration.  Earlier this month, the CFPB report and rule had been the subject of a heated argument between Keith A. Noreika, the acting U.S. Comptroller of the Currency, and Richard Cordray, the CFPB’s director.

Noreika slammed the CFPB’s action in an article on the Beltway website The Hill.  See “Senate should vacate the harmful consumer banking arbitration rule,” The Hill (Oct. 13)(available at http://bit.ly/2izENzT).

According to Noreika, the CFPB failed to support its case and “failed to disclose the costs to consumers that will likely result from the rule’s implementation.”

Soon after Noreika’s post, Cordray responded, stating that Noreika’s claims were “bogus” and “out of the blue.” See “The truth about the arbitration rule is it protects American consumers,” The Hill (Oct. 16)(available at http://bit.ly/2gIHbk2).

Added Cordray, “Why should Wells Fargo be able to block groups of customers from suing over fake accounts? Why should Equifax be able to force people to surrender their legal rights when the company put their personal information at risk?”

For more on yesterday’s vote, see Jessica Silver-Greenberg, “Consumer Bureau Loses Fight to Allow More Class-Action Suits,” N.Y. Times (Oct. 24)(available at http://nyti.ms/2yL9eHn).

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Gurevich is a CPR Institute 2017 Fall Intern. Bleemer edits Alternatives for the CPR Institute.

A DOA Exception? California’s Law Revision Commission Looks to Reassess Mediation Confidentiality as Commenters Blast its Legislative Recommendation

By Russ Bleemer

The prospects for a new California mediation confidentiality law that would provide an exception allowing parties to introduce evidence in a post-ADR malpractice case faded this week in the face of a frank report by the state commission that proposed the change.

“The opposition to the [California Law Revision] Commission’s tentative recommendation can only be described as overwhelming,” concludes Barbara Gaal, chief deputy counsel to the California Law Revision Commission, in a 36-page report released Wednesday.  She adds, “It is not unanimous, but it is deep and widespread. California’s mediation confidentiality statute may differ from those in other jurisdictions, providing greater protection in some respects, but a broad range of stakeholder organizations and many individuals appear to be well-satisfied with that approach and offer many reasons for their position.”

The new Sept. 27 report provides 155 pages of comments on a proposal to amend the state’s evidence that the commission has studied since 2012.  (The commission’s analysis is at http://bit.ly/2xQBnON; the comments are collected at http://bit.ly/2x2Dx9Y.) The amendment would add a new Section 1120.5 to the California Evidence Code, titled “Alleged misconduct of lawyer when representing client in mediation context.”

Because of an absolutist approach by the state’s courts, concerns have been raised for years over malpractice cases.  The state courts have barred the introduction of materials made in preparation for and used at mediation sessions in most cases.

The approach has provided a boost to California’s strong mediation culture, but has left victims of attorney malpractice with tough—some say insurmountable–paths to proving their claims.

The many comments submitted on the tentative recommendation “include scattered words of praise or appreciation for the Commission, its staff, its process, and its work on this study,” Gaal writes, but “[i]n general, however, they do not have much positive to say about the Commission’s proposal.”

Gaal urges the members of the commission to go back to the drawing board—not necessarily re-do the commission’s work (“Relationship Between Mediation Confidentiality and Attorney Malpractice and Other Misconduct – Study K-402,” available at http://www.clrc.ca.gov/K402.html), but re-examine the reasons the study was undertaken, and whether the commission wants to proceed with a recommendation to the legislature.

She writes that the staff urges the commission members to “re-read” the tentative recommendation’s “key policy considerations at stake” in the study in assessing the criticisms.  (Direct access to the tentative recommendation is at http://bit.ly/2x2ePqr .)

The 15-page policy section emphasizes that protecting mediation confidentiality “rests on four key premises”: confidentiality promotes candor in mediation; candid discussions lead to successful mediation; successful mediation encourages future use of mediation to resolve disputes; and mediation use in resolving disputes is beneficial to society.

“The preparation of a Commission recommendation is not a popularity contest, but rather a quest to develop an analytically sound proposal that will serve the citizens of California well,” Gaal advices. “Nonetheless, the degree of opposition to the Commission’s proposal suggests that careful reexamination of the competing consideration is in order.”

If the commission elects to go forward with the tentative recommendation, Gaal notes that the commission’s staff will prepare a memo—presumably on the reasons for the proposal to be forwarded to the legislature—for the commission’s December meeting.

The commission’s efforts were examined extensively in Jeff Kichaven, A California Correction? Legislature Will Consider Allowing Attorney Malpractice Proof from Mediation,” 35 Alternatives 97 (July/August 2017)(available at http://bit.ly/2sNUOm1), and “How California Intends to Recalibrate the Concept of Mediation Confidentiality,” 35 Alternatives 93 (June 2017)(available with a subscription or after login at www.cpradr.org at http://bit.ly/2sWyqr1).

Kichaven’s July/August Alternatives cover article, in which the Los Angeles mediator strongly backed the proposal, which will allow evidence from mediations pertaining to attorney malpractice to be introduced in litigation, was submitted as a comment.

The article also a comparatively rare show of support in the face of the avalanche of the “decidedly negative” reaction.  Among the reasons commenters opposed the proposal, according to the commission report:

  • It will undermine confidentiality;
  • It could harm mediation participants who are not parties to an attorney-client dispute
  • It will overburden the courts;
  • The proposed mediation confidentiality exception’s benefits are minimal compared to the downsides;
  • The exception “provides insufficient protection for mediator communications and will cause mediators to quit and mediator malpractice insurance rates to rise”;
  • It will threaten the stability of mediated settlements;
  • It would create the need to warn participants about the new proposed exception, “and that will create problems”;
  • It will hurt vulnerable groups;
  • It will affect attorneys disproportionately; and
  • It “is a trap for the unwary,” will yield unpredictable results, and unpredictable protection for mediation communications.”

“In light of the generally negative input on the tentative recommendation,” Chief Deputy Counsel Gaal writes, “the Commission should take a hard look at its options and consider how to proceed. While the Commission should not base its policy recommendations on political considerations, neither should it ignore practical reality. The goal of a Commission study is to achieve positive reform of the law. That requires the crafting of a balanced reform that has a realistic chance of enactment.” [Emphasis is in the original.]

The document lays out the Commission’s options: Proceed with the current proposal in the face of what likely will be strong legislative opposition; turn the tentative recommendation into an information report for the California Legislature without recommending or proposing legislation; limit the exception to the private attorney-client discussions in a mediation context, instead of allowing litigants to introduce communications from the proceedings itself, thereby shielding the mediator or its adversaries; develop an “informed consent approach” and circulate a revised tentative recommendation; or revisit all of the options raised in the study, including leaving the current law intact.

The author edits Alternatives to the High Cost of Litigation for the CPR Institute. CPR Institute Fall 2017 Intern Angela Cipolla contributed to research.

 

Growth of Cannabis Plants and Issues Fertilizes Legal and ADR Business

By Judge Steven I. Platt (Ret.)

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If you think lawyers who are creative, indeed entrepreneurial, should be encouraged to ply their trade, and that emerging industries are fertile ground to do so, then you should give a shout-out to the rapidly expanding business of manufacturing, packaging, selling and distribution of cannabis for medicinal and recreational purposes.

More and more states, including Maryland, are legalizing cannabis for multiple purposes. These jurisdictions are providing forums for the creation, development of new, and in some cases, eclectic business relationships. These include consulting agreements, distribution deals, partnerships, licensing relationships and even the co-authoring of “How-to Manuals.”

Like all other business dealings and organizations created for the purpose of developing new and different products for profit, the potential for disputes to arise between partners, competitors, and parties working together, one day and competing against each other the next, is present.

Due to the nature of the cannabis industry and its multiple levels and conflicting state and federal regulatory schemes, many individuals and businesses are choosing to use ADR instead of litigating when troubles or disputes arise. This is for a variety of reasons.

For one, there is a perception, or at least a concern, among the individuals and business organizations that are invested in this emerging industry as well as many of the lawyers and law firms who may represent them that judges and juries who don’t “like” them or “don’t like” what they do for historical and/or cultural reasons may “punish” them, i.e. not give them a fair hearing in their case. This perception can be effectively addressed by private mediation and/or arbitration by one or more Neutrals agreed upon by the parties and who hopefully have some knowledge of the industry.

This perception leads cannabis industry entrepreneurs to insert into their contracts, mandatory mediation and arbitration classes designed to avoid these negative possibilities.

Mediation, by its inherent nature, as well as, in certain situations, by statute, rule, or contract includes a confidentiality component. Confidentiality, as the state of Delaware found out the hard way, is prohibited in public dispute resolution forums, i.e. The Courts. Private Arbitration on the other hand, can be confidential if agreed upon and mandated accordingly by contract or by ADR provider rules.

Confidentiality is very important if the activity, or even part of the activity which is the subject of the dispute remains illegal under federal law even if it is legal in many states. This is the case with most of the activities associated with the cannabis industry. Evidence of this includes the refusal of most banks and other traditional financial institutions to finance the development of the industry and the companies which are forming within it. This reality is further evidenced by the refusal of colleges and universities to offer training for those who work in the medical marijuana industry. It is noteworthy that the most recent example of this trend was our own University of Maryland School of Pharmacy, acting on the advice of the Maryland Attorney General’s Office cancelling plans to offer training for those who work in the medical marijuana industry.

This development has necessitated medical marijuana industry entrepreneurs and workers to search elsewhere for education and training on everything from how to set up their business, to how to grow, store, transport, market and sell. Their product as well as bookkeeping of their business while staying within the law, i.e., not running afoul of conflicting federal and state regulations of their businesses. They have found, by process of elimination, that the only sources for that education and training are other individuals and companies located in states which legalized medical, and in some cases, recreational marijuana use in previous years. These individuals and companies alone have the education, background, and most importantly the experience to provide the education and training needed to establish and develop potentially profitable medical marijuana enterprises here.

The result has been that these new entrepreneurs and their businesses are negotiating and entering into consulting contracts with experienced individuals and companies in the medical marijuana industry in other states in order to obtain information and training. These contracts are not easily crafted and understood even by lawyers familiar with the industry.

The relationships created by the contracts between the consulting companies and those who avail themselves of their services to provide start-up training are often fraught with the risk of the disclosure of trade secrets, as well as the violation of covenants not to compete, etc. In turn, the contracts often have provisions drafted to minimize, if not eliminate, those risks.

They are not always successful which in turn creates conflicts which if not resolved quickly and efficiently can kill an emerging medical marijuana business before it gets started. The result has been mediation and arbitrations generated by the dispute resolution provisions in these consulting contracts.

I have been involved as both a Mediator and an Arbitrator in a number of these cases involving lawyers and parties from across the country. Intermingled with these is litigation usually filed in multiple federal courts in an attempt to either consolidate in a geographically convenient or perceived philosophically friendly forum the cases involving identical parties or 3rd parties spun off for tactical reasons from other parties. No end to this time-consuming and expensive as well as in many cases overlapping litigation, arbitrating and mediations is in sight.

Indeed, my favorite case and experience so far is the case in which the parties and counsel sought dismissal or transfer of a case in which I was the Chair of a 3-Arbitrator Panel. They first sought that relief from the U.S. District Court in D.C. which not only declined to dismiss or transfer our arbitration case, but instead ordered the parties to proceed before my panel in Maryland or D.C. The losing party then came to our panel requesting the same relief. When we realized that they were asking the panel to, in effect, reverse the U.S. District Court’s decision, my only comment on behalf of The Panel which accompanied our negative decision was—“I’d ask you what you are smoking-but we already know.”

This post is reprinted with permission from “A Pursuit of Justice,” a blog by Judge Steven I. Platt (Ret.) that focuses on the intersection of law, economics, politics and the development of public policy.  Judge Platt currently owns and operates his own private Alternative Dispute Resolution Company, The Platt Group, Inc. through which several retired judges and experienced practitioners offer mediation, arbitration and neutral case evaluation services to business, governmental agencies and their lawyers mostly in complex litigation and disputes.  Judge Platt’s experience and vocation make him an expert in conflict resolution particularly in complex disputes whether they are political, economic, legal, or as most often the case all of the above. Judge Platt can be reached at info@apursuitofjustice.com or via his website at www.theplattgroup.com.