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.


Making the Mandatory Argument: Arbitration, Class Waivers and the Practitioners’ Role

By Russ Bleemer

Legislative and court arguments over whether ADR processes can be used to defray class litigation are moving toward a decisive 2017 conclusion.

New regulations barring the use of class waivers associated with mandatory arbitration clauses in consumer financial contracts, like credit card agreements or wireless telephone service agreements, are due for release soon by the Washington, D.C.-based Consumer Financial Protection Bureau.  The CFPB had issued a proposal in May and accepted public comments until August.

In the December Alternatives, Sanford Jaffe and Linda Stamato, longtime conflict resolution process theorists, designers, and practitioners at the Center for Negotiation and Conflict Resolution at Rutgers University in New Brunswick, N.J., backed the move.  They argue that the mandatory arbitration processes that prohibit class litigation that the CFPB targets indeed should go.

But with the intervention of last month’s election, the prospects for the vitality and longevity of the coming regulation has dimmed.

So the authors also argue that the responsibility for preserving the integrity of alternative dispute resolution processes by breaking the link between mandatory processes and class waivers lies with practitioners themselves.

“Rarely seen are misgivings about mandatory arbitration expressed by dispute resolution professionals,” the authors write. “But we ought to be heard in the hearings and rule-making processes, and in social and print media, to support the proper use of the processes we have worked to design, develop, apply and evaluate.  We need . . . to defend the principles upon which this field is grounded, not the least of which is choice. We need to return to the attitudes and beliefs with which the field started decades ago, to fulfill the promises of the architects of the field.”

In addition to discussing mandatory arbitration in contracts over which the CFPB regulates, Jaffe and Stamato discuss mandatory arbitration in the employment context, noting the line of cases involving the clash between the Federal Arbitration Act and the National Labor Relations Act.

Three federal circuit courts have held that the FAA permits employers to use class waivers in requiring arbitration to resolve workplace disputes, while two circuits have gone the other way, saying that the NLRA preserves a right to class processes, including litigation, under the law which says that employees may “engage in . . . concerted activities.” See CPR Blog post from Aug. 23 HERE.

Since the December issue of Alternatives was released (HERE free on CPR’s website for members logged in; HERE with archives on publisher John Wiley’s site) , the U.S. Supreme Court has scheduled five FAA-NLRA cases for discussion at its Jan. 6 case conference.

Experts believe the Court will accept one or more of the cases—perhaps one favoring the defense view upholding mandatory arbitration with a class waiver, and one backing the National Labor Relation Board’s ruling that class processes must be preserved—to finally decide the matter, which has been brewing since the NLRB struck the mandatory arbitration/class waiver provision it found in D.R. Horton Inc., 357 NLRB No. 184, 2012 WL 36274 (Jan. 3, 2012)(PDF download link at http://1.usa.gov/1IMkHn8), enforcement denied in relevant part, 737 F.3d 344 (5th Cir. 2013)(Graves, J., dissenting)(PDF download link at http://bit.ly/1XRvjrM), reh’g denied, No. 12-60031 (Apr. 16, 2014).

Meantime, the viability of the CFPB’s yet-to-be-released regulations is in doubt in light of President-elect Trump’s anti-regulation views, including his loathing of the Dodd–Frank Wall Street Reform and Consumer Protection Act, which authorized the CFPB.  While the agency is committed to a forthcoming final regulation, it’s unlikely it will stand without attack.

In the forthcoming January issue of Alternatives, available at the links above on or around Jan. 4, Philadelphia-based Ballard Spahr partner Alan Kaplinsky will counter the December Alternatives commentary discussed above with an outline of the options to challenge to the CFPB’s regulation, which some analysts say may emerge before Trump’s Jan. 20 inauguration.

As Kaplinsky points out, a Congressional repeal may not even be necessary.  A new Trump appointee replacing current CFPB Director Richard Cordray could roll back the roll-out, restore (or reassert) mandatory arbitration and class waivers, and delay or change the regulations via the Administrative Procedure Act.

The December Alternatives commentary, “Private Justice: Losing Our Day in Court,” by Sanford M. Jaffe and Linda Stamato, is available now for all readers HERE.

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

New Suit Demands Faster Work on Veterans Benefits Appeals

By Russ Bleemer

In the latest phase of an issue CPR has been following closely for almost a decade, the American College of Trial Lawyers filed suit last month against the U.S. Department of Veterans Affairs in a renewed move to improve an agency appeals process long beset by delays that prevent military personnel from getting timely benefits determinations.

Last week, President Obama trumpeted improvements in access to benefits, and cutting veterans’ incidents of homelessness.

But on the appeals issues, the President’s report conceded that the process is “broken,” a “state of affairs [that] is unacceptable and is failing veterans.”

The Backlog Bludgeons

The appeals backlog is a persistent problem. It is a different concern than the delays in medical care, which was the principal subject of a post-White House report analysis in the New York Times Saturday. Nor does the appeals backlog at the VA address the department’s responsibility for addressing veterans’ homelessness, an editorial also appearing over the weekend.

In fact, the new case, which is filed in the Washington, D.C.-based U.S. Court of Appeals for Veterans Claims, and requests mandamus relief, relies in part on a panel decision by the Ninth U.S. Circuit Court of Appeals matter that confronted the problem directly in 2011.  The California suit resulted in an order that the VA submit to a federal court a new process that would alleviate the backlog in the stalled claims and appeals matters.

But the panel decision was reheard en banc by the full Ninth Circuit, which overturned it. The opinion acknowledged the problems but did not dispute the constitutional findings. It cited jurisdictional issues—some weighted in separation-of-powers arguments, and most because of appropriateness of the claims for the U.S. Court of Appeals for Veterans Claims–in overturning the original decision. Veterans for Common Sense v. Shinseki, 678 F.3d 1013 (9th Cir. 2012)(en banc)(available for download at http://bit.ly/2b64YKo). The U.S. Supreme Court denied certiorari.

The July 21 U.S. Court of Appeals for Veterans Claims filing–in which the American College of Trial Lawyers represents a class of veterans whose benefits requests have been denied by the VA and whose appeals have not been processed in a timely manner–relies in part on the finding in the original Ninth Circuit decision that the delays violate the veterans’ constitutional due process rights.

Fellows in the Washington, D.C.-based trial lawyers’ group prepared the petition with two partners in the Atlanta office of King & Spalding LLP, and a partner in Washington, D.C.’s Williams & Connolly LLP, according to a press release.

“Thousands of veterans die before their appeals are decided,” states the petition.  It says that benefits appeals now take nearly four years to reach a decision, a situation the filing calls “disgraceful.”

CPR on the Backlogs

The CPR Institute addressed the appeals issue, which had been a subject of controversy for two decades, in a “Why Not ADR? Burdened by Backlogs, the System That Deals with Veterans’ Disability Claims Needs Help,” 25 Alternatives 131.  That September 2007 Alternatives article by Richard M. Rosenbleeth, a retired partner in Philadelphia’s Blank Rome LLP, who works as an arbitrator, was the first to suggest that conflict resolution processes should be deployed to alleviate the strain on the benefit appeals process.

Rosenbleeth proposed that a claims facility be established to swiftly address the languishing appeals claims.

Rosenbleeth followed the issue and returned to it in Alternatives pages repeatedly over the years. The CPR Institute on its website, as well as Alternatives and the national media, covered the Ninth Circuit case filings in 2009 through the 2012 en banc decision.

Key articles, available at the links and in full text on Lexis and Westlaw, included:

  • A piece in the July/August 2011 Alternatives (second page of the issue)—“‘This Is Their Wake-Up Call’: Ninth Circuit Trashes the Veterans’ Administration Claim Processes,’” 25 Alternatives 130 (July/August 2011)—discussing the case at length and analyzing the initial victory that became a basis of the new July Veterans Claims Circuit Court of Appeals filing.

Rosenbleeth explains that the current suit follows years of approaches to various legislators, the VA’s Board of Veterans Appeals, and a veterans’ organization requesting pursuit of a post-Shinseki solution, including ADR processes. The outreach efforts, Rosenbleeth says, were conducted by Fellows of the American College of Trial Lawyers, including himself; John A. Chandler, a partner in the Atlanta office of King  & Spalding, and J. Denny Shupe, a partner in Philadelphia’s Schnader Harrison Segal & Lewis LLP.

“Finally,” says Rosenbleeth, “the College decided a suit was necessary.”

Given the broad nature of the mandamus request in the new suit, and the U.S. Court of Appeals for Veterans Claims’ ability to order innovative relief—as well as the renewed political focus on the broader VA issues in an election—the new American College of Trial Lawyers suit may provide an opportunity for improving the benefit appeals process.

“What is needed is broad reform, and the problem is only going to get worse until Congress acts,” noted the White House’s report last week, “reiterating [President Obama’s] call for comprehensive legislative modernization of the appeals process.”  The report concluded, “Congress should act on this legislation without delay–our veterans cannot afford to wait any longer.”

The Veterans Claims appeals court has not yet scheduled further proceedings on the new suit.

The author edits Alternatives for the CPR Institute.

Examining New Jersey’s Arbitration Scrutiny

New Jersey courts’ recent arbitration decisions have opened a floodgate of controversy en route to the establishment of new precedent.

The most recent case, Morgan v. Sanford Brown Institute, 2016 WL 3248016 (N.J. June 14, 2016)(available at http://bit.ly/29mSQkS), demonstrates the discord among courts in reaching a consensus about arbitration enforcement—or, at least, a strong New Jersey trend of scrutinizing the particulars of agreements before compelling ADR processes.

The case stems from a complaint by New Jersey residents Annemarie Morgan and Tiffany Dever, who had enrolled in an ultrasound technician program provided by defendant Sanford Brown Institute, a for-profit educational company that is winding down its operations. The plaintiffs alleged that the defendant violated the Consumer Fraud Act and had committed breach of contract, breach of warranties and negligent misrepresentation. The complaint alleged the institute misrepresented the value of the ultrasound program, the quality of its instructors, and that the school used high-pressure and deceptive business tactics that led the plaintiffs to finance the classes using high-interest loans.

“This New Jersey trend should be taken as a warning for employers to address their notice provisions.”

The trial court followed the ruling in Atalese v. U.S. Legal Servs. Group L.P., 219 N.J. 430, 99 A.3d 306 (2014), cert. denied, 135 S. Ct. 2804 (2015)(available at http://bit.ly/ZtfbW4), invalidating the arbitration clause because it didn’t provide proper notice that court remedies were being waived, and violated the New Jersey Consumer Fraud Act (CFA), N.J.S.A. 56:8-1 to -195.

The Appellate Division reversed, ordering arbitration, noting that the ADR clause was sufficiently clear for all parties.

Last month, the New Jersey Supreme Court reversed again, holding that the arbitration provision and delegation clause in the school’s enrollment agreement failed to comply with the requirements of First Options of Chi., Inc. v. Kaplan, 514 U.S. 938 (1995), and Atalese. The arbitration and delegation clauses also failed to satisfy the elements necessary for the formation of a contract.

The defendants had argued that Rent-A-Center West, Inc. v. Jackson, 561 U.S. 63 (2010), required a specific challenge to the delegation clause by the plaintiffs, but the New Jersey Supreme Court found that the lack of the challenge didn’t matter.

“The arbitration provision did not clearly and unmistakably delegate arbitrability to the arbitrator,” wrote Associate Justice Barry T. Albin for a 5-1 court, adding, “Plaintiffs cannot be faulted for not objecting to an inadequately limned delegation clause that, in addition, did not define arbitration as a substitute for a judicial forum.”

Consequently, whether the parties agreed to arbitrate their dispute is an issue for determination by the court.

This decision does not stray far from its recent predecessors—Scamardella, et al. v. Legal Helpers Debt Resolution LLC, No. A-4170-14T3 and L-2402-14 (Middlesex County and Statewide) (April 19, 2016), and Guidotti v. Legal Helpers Debt Resolution, L.L.C., No. 15-1054 (3rd Cir. Feb. 10, 2016)(available at http://bit.ly/1QOkCSm), vacating 866 F. Supp. 2d 315, 332–36 (D.N.J. 2011)–New Jersey cases in, respectively, state and federal courts that also denied motions to compel arbitration.

Atalese, the parent case for the rest, outlined disclosure requirements that the subsequent decisions have used as the reason for invalidating the arbitration provision. The New Jersey Supreme Court found that the arbitration provision in the case did not have “clear and unambiguous” language stating that the plaintiff was waiving her right to sue in court to secure relief.

“Two more unpublished decisions show the significance of the new trend in addressing notice in arbitration provisions.”

The New Jersey Supreme Court stated in Atalese that an enforceable arbitration clause “at least in some general and sufficiently broad way, must explain that the plaintiff is giving up her right to bring her claims in court or have a jury resolve the dispute.”
Furthermore, the waiver must “be written in a simple, clear, understandable and easily readable way.”

Similarly, Scarmadella ruled that the arbitration clause failed to comply with Atalese disclosure requirements.

Guidotti determined that the plaintiff had not received the account agreement containing the arbitration provision. The court did not require or permit discovery on that issue because it concluded that the existing documentary record was sufficient. Further proceedings will be held next month.

There’s other arbitration coming out of New Jersey courts to raise eyebrows. Just before Morgan v. Sanford Brown Institute was released, a published Appellate Division decision, Kleine v. Emeritus at Emerson, Docket A-4452-14T3 (N.J. App. Div. June 9, 2016), struck an arbitration agreement because a forum suggested by the contract’s use of the American Arbitration Association rules was ruled by the court to be unavailable. The personal injury case was against a nursing home; the decision included strong wording about the presumption to arbitrate.

And there’s more. Two more unpublished decisions show the significance of the new trend in addressing notice in arbitration provisions. Shortly after the Atalese decision, in Kelly v. Beverage Works NY Inc., No. A-3851-13T4 (NJ App. Div. Nov. 26, 2014)(unpublished)(available at http://bit.ly/29kJwR6), the New Jersey Appellate Division applied Atalese to decide whether the arbitration provisions in a collective bargaining agreement barred a plaintiff’s lawsuit for wrongful termination.

The appeals court first declined to consider the employer’s argument concerning preemption because that argument was not raised prior to oral argument. The Appellate Division then held that “neither the arbitration provisions nor the employee handbook put plaintiff on notice that he was waiving his right to try his claims in court.”

Therefore, those provisions did not clearly and unambiguously waive plaintiff’s right to seek a remedy in court and, thus, were unenforceable.

Similarly, in Milloul v. Knight Capital (App. Div. N.J. Sept. 1, 2015)(unpublished)(available at http://bit.ly/1INt69V), the Appellate Division held that an arbitration agreement between a plaintiff and his employer was unenforceable because it did not “even mention a waiver of plaintiff’s right to a trial.” Therefore, the contract did not meet the minimal requirement of stating “in some express fashion that the employee is sacrificing his or her right to a trial.”

This New Jersey trend should be taken as a warning for employers to address their notice provisions. Employers should carefully review every arbitration agreement to ensure that every employee understands that they are waiving their right to bring claims in court, and agreeing to arbitrate all claims that may arise out of the contractual relationship.

This report will be expanded and updated in September’s Alternatives. For more recent background, see Daniela Albert & Russ Bleemer, “New Jersey Court Again Refuses To Compel, Demanding Better Arbitration Notices,” 34 Alternatives 66 (May 2016)(available at http://bit.ly/29lwZeG).


CPR would like to thank interns Daniela Albert (working towards her LLM at Northeastern) and Elizabeth Heifetz (Brooklyn Law School), supervised by Alternatives editor Russ Bleemer, for their research and writing contributions to this post. A longer version of this post, with comments from the attorneys involved, will run in the September issue of Alternatives.

Class Act: Looking at How the CFPB Wants to Restrict Arbitration Agreements

By Russ Bleemer

If you want to make your voice heard on federal arbitration regulation, now’s the time.
The Consumer Financial Protection Bureau in May released its proposal to ban arbitration agreement provisions that bar class processes and require individual ADR for disputes in consumer financial services contracts under the agency’s jurisdiction.

The formal public announcement early last month was followed by the publication May 24 of the official proposal. “If finalized in its current form,” said CFPB Director Richard Cordray last month, “the proposal would ban consumer financial companies from using mandatory pre-dispute arbitration clauses to deny their customers the right to band together to seek justice and meaningful relief from wrongdoing. This practice has evolved to the point where it effectively functions as a kind of legal lockout.”

Public comments, due by Aug. 22, are piling up. There are 599 at this writing. (You can view them HERE, along with the full proposal and the link to provide a comment.) A day after the comment period opened, the deluge was kicked off with a letter signed by more than 200 law professors strongly supporting the agency’s proposals.

But Republicans on the House Financial Services Committee, continuing a long-running push to eliminate the CFPB and overturn the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 that created the agency, introduced on June 8 a new proposal that specifically bars the CFPB from regulating arbitration.

The June Alternatives, available now HERE, covers in detail Cordray’s remarks and those of a pro-and-con panel at the May 5 CFPB Albuquerque, N.M., field hearing that introduced the proposed regulation. (An enhanced, annotated version of the article can be accessed directly by subscribers and individuals at CPR Institute members who are logged into CPR’s website at this link.)

The June Alternatives article discusses how the agency’s research into arbitration’s effects on consumers—a voluminous 728-page report conducted over a three-year period that was released in March 2015–led to last month’s proposal.

Agency representatives, including Cordray, emphasized that the CFPB is not proposing to ban pre-dispute arbitration agreements. The key agency goal is to allow consumer class actions that the waivers have cut off.

The Albuquerque panel discussion of arbitration practice experts included three consumer advocates who congratulated the agency, and three business representatives who criticized it and suggested alternative paths–assuming what has become, for some of the panel, traditional public roles in a short period of regulatory time.

The debate continues in Alternatives in the special combined summer July/August issue, which will be available by July 14 HERE. In “Between the Lines: How the CFPB Will Police Financial Services Arbitration,” we examine the specifics of the proposal, including the mandatory language that the CFPB wants included in consumer financial services arbitration agreements.

Following the June report linked above, the new article wades through the 377-page proposal and accompanying report to highlight how the class action moves will affect arbitration parties, providers, contract drafters, neutrals and tribunals.

It will focus on the details in the CFPB’s proposal and report absent from generalized coverage of the CFPB’s move—minutiae to most, but parts of the proposal that are essential to arbitration practitioners and providers’ businesses, and which are drawing comments this summer.

Russ Bleemer edits the CPR Institute-published Alternatives to the High Cost of Litigation.

How Patent Arbitration Fits in a Post-Grant World

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

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

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

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

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

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

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

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

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

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

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

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

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

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

By Russ Bleemer

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

By Russ Bleemer

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

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

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

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

Or so it seemed.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Litigation Financiers: Explain Yourselves!

Litigation Financiers: Explain Yourselves!

By Russ Bleemer

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

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

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

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

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

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

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

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

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

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

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

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

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

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

CPR’s World ADR Tour Continues

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

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

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

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

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