The Nominee and ADR: Circuit Judge Barrett on Arbitration

By Alice Albl

Seventh U.S. Circuit Court of Appeals Judge Amy Coney Barrett, whose nomination hearings before the Senate Judiciary Committee concluded last week, was on the federal circuit court based in South Bend, Ind., for less than three years before being nominated by President Trump for the Supreme Court on Sept. 26.

This small window has not allowed much time for alternative dispute resolution decisions. There are five opinions involving ADR in which Circuit Judge Barrett participated, four authored by the nominee and one on which she served as a panelist. The cases primarily are centered around employment law.

Barrett is a prolific academic, having written extensively about civil procedure, legal construction, evidence rules, and constitutional originalism over her 23-year career. She has taught at her alma mater, Notre Dame Law School, since 2002. See her University of Notre Dame Faculty Directory page at https://bit.ly/34WMa9h.

Barrett did not mention any work focused on ADR in her self-reported “Questionnaire for Nominee to the Supreme Court” to the U.S. Senate. The questionnaire is posted on the Senate Judiciary Committee’s website at https://bit.ly/3jdqBX1.  

Barrett has given several presentations on her time clerking for the late Justice Antonin Scalia. Her style echoes Scalia’s by favoring a narrow, textualist interpretation of the law. See Imre Szalai, “Judge Amy Coney Barrett & the FAA – A Disciple of Scalia,” Outsourcing Justice blog (Setp. 27) (available at https://bit.ly/2H2hb3K). 

On ADR issues, Barrett also has followed in Scalia’s footsteps by demonstrating a distaste for class actions. But she apparently does not share Justice Scalia’s strong views on the progress of ADR. See George H. Friedman, Securities Arbitration Alert blog (Oct. 1) (available at https://bit.ly/3k8QKYc) (in which Friedman covers the cases here and adds discussion of a Legaspy v. FINRA, No. 1:20-cv-04700, in which Barrett joined a panel denying a motion for a temporary restraining order to stop a pandemic-era video arbitration.)

Apart from her ruling in Herrington v. Waterstone Mortgage Corp. (see below), mirroring Scalia’s perspective on class-action suits, Circuit Judge Barrett’s ADR opinions have been filtered through analyses of civil procedure, textualism, and the rules of evidence. Id. All three are topics heavily present in Barrett’s academic writing. See the Senate link above.

The following is an overview of the five ADR-related decisions in which Circuit Judge Amy Coney Barrett participated, four written by the nominee, and one for which she served as a panelist:

  1. Wallace v. Grubhub Holdings Inc., 970 F.3d 798 (7th Cir. 2020) (available at https://bit.ly/33MvFwX).   

In organizing a class-action suit against defendant Grubhub for an alleged violation of the Fair Labor Standards Act–referred to in this post as the FLSA–plaintiff Wallace had to contend with the fact that all members of the class had signed an agreement to settle disputes with the defendant through arbitration.

Wallace requested to have the class recognized as exempt from arbitration under FAA Section 1, normally reserved for interstate transportation workers, because the class members transported food that generally included ingredients brought across state lines. The plaintiff said that the residual clause in the Section 1 exception, “any other class of workers engaged in foreign or interstate commerce,” applied.

The plaintiff’s request was denied by the lower court. In her Seventh Circuit opinion, Barrett similarly rejected the designation. This firmly placed the Seventh Circuit on one side of a debate about the scope of Section 1 as it applies to workers and interstate commerce. See, e.g., Michael S. Kun, “Ninth Circuit Conclusion that Amazon Delivery Drivers Don’t Need to Arbitrate their Claims under FAA’s ‘Transportation Worker’ Exemption Highlights Conflict among Courts,” Wage and Hour Defense Blog Epstein Becker Green (Aug. 24) (available at https://bit.ly/37hpza1), and Kris Olson, “FAA exemption extend to ‘last mile’ drivers,” New England In-House blog (Aug. 24) (available at https://bit.ly/3lZLYNm).

This issue involves the Supreme Court’s decision in Circuit City Stores, Inc. v. Adams, 532 U.S. 105 (2001) (available at https://bit.ly/2HhwYLu), which stated that the Section 1 phrasing—“…nothing herein contained shall apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce”–should only be applicable for “transportation workers,” but left the meaning of “transportation workers” open to interpretation.

The Grubhub delivery workers in the case contested that they were independent contractors, and contended they are employees, in suits around the country.

Some courts have allowed the breadth of “transportation workers” to expand through comparison with the FLSA’s use of the term, or a historical analysis.  See, e.g., Waithaka v. Amazon.com, Inc., 966 F.3d 10 (1st Cir. 2020); Rittman v. Amazon.com, Inc., 971 F.3d 904 (9th Cir. 2020). Circuit Judge Barrett wielded textualism to create a test featuring a narrower version of the term.

Her analysis began with the interpretative canon ejusdem generis as defined by Justice Scalia in his book on statutory interpretation. Antonin Scalia, Reading Law: The Interpretation of Legal Texts 199 (2012) (“Where general words follow an enumeration of two or more things, they apply only to persons or things of the same general kind or class specifically mentioned.”) The canon states that generic terms at the end of lists including specific items should be interpreted to only include things similar to the specific items.

While other courts used ejusdem generis to allow FAA Sec. 1 language to include any workers involved in the “flow” of interstate commerce (see Rittman above), Circuit Judge Barrett tested for whether interstate commerce was a “central part of the class members’ job description.”

The plaintiff’s class did not pass the test, and the exception to arbitration under the FAA did not apply. According to Barrett, even though GrubHub workers delivered goods from other states, or even countries, that interstate aspect was characteristic of the goods and not the role served by the worker. This made them unlike railroad workers and seamen whose jobs focused on “the channels of commerce.”

Barrett distinguished the earlier New Prime Inc. v. Oliveira, 139 S.Ct. 532 (2019) (holding that an independent contractor’s contract is a “’contract of employment’ within the FAA Sec. 1 language that excepts such contracts from FAA application), which involved goods in interstate commerce. She wrote that the New Prime distinction between independent contractors and employees wasn’t a part of the case.

Author George Friedman noted last week that Wallace came up at Circuit Judge Barrett’s confirmation hearings.  See his account at “No Surprise Here: Arbitration Comes Up At Coney Barrett Confirmation Hearings,” Securities Arbitration Alert (Oct. 16) (available at https://bit.ly/37gsm3d).

Barrett sat on a panel that issued an opinion on giving notice to employees for a collective-action suit under the FLSA. The panel wrote that when a court considered allowing employees to opt-in to a collective-action FLSA suit, it was the defendant employer’s burden to prove whether those employees were ineligible or already bound to arbitration.

In this case, the plaintiff-employee Bigger brought an action against the defendant-employer Facebook. She alleged that the company should have paid overtime to her position and another, similar role. The plaintiff asked the lower court for authorization to form a collective-action suit. Notice of the suit was to be sent to every individual in the United States who worked in either of the roles. The lower court granted this authorization.

Facebook appealed to the Seventh Circuit, saying the court had erred because most would-be plaintiff employees had already entered arbitration agreements precluding litigation, so giving them notice about the suit would be misinformation. The defendant further argued that an inflated number of employees attempting to enter the collective-action suit would create undue pressure for a settlement.

The Seventh Circuit panel acknowledged the logic of the defendant’s argument but declined its request to deny plaintiff Bigger authorization for the formation of a collective action. Instead, the panel created a set of instructions. After a plaintiff had contested the existence of applicable arbitration agreements, it was the defendant’s responsibility to demonstrate that these agreements not only existed but precluded entrance into the collective action. Proof had to be given for every individual who would be precluded and not receive notice about the collective-action suit.

“Specifically, the court on remand should allow the parties to submit additional evidence on the existence of valid arbitration agreements between Facebook and proposed notice recipients,” wrote Circuit Judge Michael S. Kanne, joined by Supreme Court nominee Barrett and Seventh Circuit Chief Judge Diane P. Wood, adding, “If Facebook proves that certain proposed recipients entered valid arbitration agreements waiving their right to join the action, or if Bigger does not contest that those employees entered such agreements, the court may not authorize notice to those employees.”

In reviewing the enforcement order of a $10 million-plus arbitration award for employees, Circuit Judge Barrett vacated the award entirely. She held for a unanimous panel that “the availability of class or collective arbitration is a threshold question of arbitrability” and therefore, goes to the court, not the arbitrator. In the case, the arbitrator had allowed the plaintiff to pursue a collective action but, as stated in Barrett’s opinion, only the court had the authority to make such a decision.

The defendant argued that, even with the waiver struck, it only agreed to bilateral arbitration, with no consent given to class- or collective-action. Instead, the arbitrator used the rules chosen by the parties to control their arbitration proceedings to justify permitting the plaintiff’s class/collective-action suit. 

Plaintiff Harrington contested the validity of the agreement to arbitrate that she had signed with defendant Waterstone. While the lower court determined that the agreement was valid, it struck a waiver in the contract that barred others from joining the suit. The court gave an order to the arbitrator that the plaintiff “must be allowed to join other employees to her case.” The arbitrator then allowed the plaintiff to proceed with a collective action, in which employees could opt into the matter.

Barrett disagreed with the move. Allowing a class/collective-action was a question of “arbitrability” that bore upon the fundamental terms and legal validity of the arbitration, and was reserved for the court. Although the Seventh Circuit had not previously recognized the authorization of collective action as a question of arbitrability, identifying it this way fell in line with every other circuit court to decide on the matter. See, e.g., Del Webb Communities Inc. v. Carlson, 817 F.3d 867, 877 (4th Cir. 2016), and  Reed Elsevier, Inc. v. Crockett, 734 F.3d 594, 599 (6th Cir. 2013), among others Barrett cites. 

According to Circuit Judge Barrett, “The availability of class or collective arbitration involves a foundational question of arbitrability: whether the potential parties to the arbitration agreed to arbitrate.” She noted that decisions on class/collective-action suits were questions of arbitrability in three different ways. First, they affected who would participate in an arbitration. Second, they affected the scope of an arbitration. Third, these decisions affected the structure of an arbitration. 

The late Justice Antonin Scalia had strong opinions on how class-collective-suits affect the structure of an arbitration, and Barrett devoted most of her attention to this factor. Citing heavily Scalia’s AT&T Mobility LLC v. Concepcion opinion, Barrett reiterated her mentor’s viewpoint, stating that the structural shifts caused by switching to class/collective-action gives up the advantage of informality in an arbitration. AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011). She described this as “reduced efficiency.” 

Barrett concluded her analysis of the structural aspect of class/collective-action arbitration by referencing another Scalia misgiving, that the finality of arbitration increases the risk for defendants when facing potentially thousands of plaintiffs in class/collective-suits. Barrett projected the risk of this finality onto arbitration as a whole, an association that Prof. Szalai of Loyola Law School found contentious.

In his blog, “Outsourcing Justice,” linked above, Szalai wrote that Barrett’s arbitration view would be in good company among the conservative justices of the Supreme Court, saying that, overall, the Court’s arbitration decisions have been critiqued as reflecting “an overly-simplistic manner [that] tend to conceptualize arbitration as a homogeneous process, and they sometimes have flawed assumptions or preconceived notions regarding arbitration.“

Nevertheless, plaintiff Herrington’s case was allowed to continue.  Barrett remanded the case on behalf of the appellate panel to the district court, rather than the arbitrator, to evaluate whether Herrington’s contract with Waterstone permitted class or collective arbitration.

  • Webb v. Financial Industry Regulatory Authority Inc., 889 F.3d 853 (7th Cir. 2018), (available at https://bit.ly/3iNuh1l).

In writing for the court, Barrett declined to consider the applicability of arbitral immunity. Instead, she determined that the lower court had erred in allowing the case to be heard at all, because it was not within federal jurisdiction.

Plaintiff Webb and a colleague filed suit when a dispute with their former employer could not be resolved in defendant FINRA’s arbitration forum after two-and-a-half years.

The plaintiffs sought damages “in excess of $50,000” in Illinois state court, alleging that the defendant had mismanaged the arbitration—”including failing  to  properly  train  arbitrators,  failing  to  provide  arbitrators  with  appropriate  procedural  mechanisms,  interfering  with  the  arbitrators’  discretion,  and  failing  to  permit  reasonable  discovery.”

The defendant responded by removing to federal court, then moving to have the case dismissed on multiple grounds, including arbitral immunity. This doctrine protects arbitrators from civil liability when performing their duties as neutrals. The lower court decided that the doctrine was applicable and granted the defendant’s motion. Webb v. Fin. Indus. Regulatory Auth., Inc., No. 16-CV-04664 (N.D. Ill.  2017), vacated, 889 F.3d 853 (7th Cir. 2018). The plaintiffs appealed to the Seventh Circuit.

Barrett declined to apply arbitral immunity, but found that the lower court had erred in allowing the case to be heard at all. The damages the plaintiffs sought either could not be recovered under controlling Illinois law, or did not meet the $75,000 minimum amount necessary to grant federal jurisdiction.

The defendant argued that federal jurisdiction was valid because its U.S. Securities and Exchange Commission-approved Code of Arbitration Procedure was involved in the suit. Barrett rebuffed this by echoing the Supreme Court’s rulings in Grable & Sons Metal Products, Inc. v. Darue Engineering  &  Manufacturing,  545  U.S.  308  (2005) and Merrill  Lynch,  Pierce,  Fenner  &  Smith  v.  Manning,  136  S.  Ct.  1562,  1566  (2016), noting that one party having a “federal role” did not necessarily make a case eligible for federal court consideration.

Defendant WeConnect appealed after the lower court stated that it was not a party to plaintiff Goplin’s arbitration agreement. The agreement compelled the plaintiff to arbitrate with another entity, AEI, and not the defendant.

Although defendant WeConnect’s website stated that AEI was a separate entity, it claimed through an employee affidavit that AEI was actually the defendant’s former name. It further asserted that the lower court was mistaken in considering the website, violating rules of judicial notice by performing its own research.

With a short opinion focused on this evidence issue, Circuit Judge Barrett affirmed the lower court determination. The plaintiff had referenced the website in a brief to the court along with several other examples that provided a more convincing case than the defendant’s single affidavit about a human resources document. The defendant had conclusively portrayed itself as separate from the entity mentioned in plaintiff Goplin’s arbitration agreement.

In reporting Goplin, George Friedman of the Securities Arbitration Alert blog noted that Circuit Judge Barrett maintained a narrow focus on the evidentiary issue, and not on arbitration law. See Friedman’s Oct. 1 blog post linked above.

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

Lincoln & ADR: Pepperdine’s Stipanowich Discusses Evolution in Arbitration

By Alice Albl

The second series of New York Law School’s Conversations in Conflict drew to a close Sept. 23 with an interview featuring Pepperdine University Caruso School of Law Prof. Thomas J. Stipanowich.

The discussion centered around the progress of arbitration since the release of Stipanowich’s five-volume treatise on federal arbitration law in the 1990s; his expansive view included advancing the practice with lessons taken from the life of Abraham Lincoln.

Stipanowich’s theories focused on a tension between familiarity and efficiency. In drawing from what they know as lawyers, neutrals in arbitration may bind the process too closely to the establishment of litigation, he explained.

While neutrals may believe that apparently tried-and-true procedures inspired by litigation form the best avenues to successful dispute resolution, this mindset hinders the use of more creative, and potentially more effective, methods.

Instead, Stipanowich invited neutrals to follow in the footsteps of President Lincoln, whom he considered to be a “super functional” arbitrator. Like Lincoln, modern ADR community members should seek to work for the parties’ interests and not a nominal win.

But when Stipanowich began studying arbitration in the 1980s, neutrals weren’t the focus. Back then, arbitration suffered from a lack of procedural structure, most notably missing protocols for discovery and case management, he said.

In the ensuing years arbitrators filled these gaps. Stipanowich described this as the “legalization” of ADR, a process by which neutrals appropriated features from the practice of law into their work.

While legal processes may be effective in arbitration, their familiarity causes them to monopolize the roles they serve. Stipanowich cited examples in both the United States and abroad to demonstrate that the dominant legal processes are not necessarily the best.

Domestically, Stipanowich discussed the double-blind arbitration process used in contracts by the Writers’ Guild of America. Under this process, the disputants’ and arbitrators’ identities are not known to each other. This has the practical purpose of preventing conflict in the industry beyond the dispute, but it may also prove for a more equitable resolution beyond the reach of “legalized” ADR.

Abroad, Stipanowich, who is former president and chief executive officer of the CPR Institute, which publishes this blog, looked to the “multi-lane” duties neutrals performed in other cultures, such as the way German arbitrators help craft settlements or Chinese arbitrators often double as mediators.

U.S. arbitrators seem to be gradually warming to the idea of building multi-lane brands, something that Stipanowich encourages. He praised those who use a variety of roles and techniques to find the true conflict in disputes.

Stipanowich emphasized that finding the true conflict as early as possible will allow a neutral to spend more time balancing resolution with the interests and relationships among parties. After 40 years of study, he has found that this balance is key to success in ADR.

For Stipanowich, few could exemplify care for interests and relationships more than Abraham Lincoln. He closed the session by emphasizing the icon’s willingness to look beyond wins and vengeance during the Civil War, instead focusing on a goal of rights and equity. To see beyond the fray toward a fair resolution, Stipanowich says, is what ADR is about.

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Recordings of NYLS’s Conversations in Conflict Resolution series are being posted at the school’s Alternative Dispute Resolution Skills Program at https://bit.ly/32A3aAP.  

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

[END]

Supreme Court Rejects Decade-Old Class Arbitration Employment Discrimination Case

By Cristina Carvajal

A contentious employment discrimination case now focusing on whether an arbitrator is within her authority to bind a class of employees who did not affirmatively opt-in or consent to class arbitration will not resurface now at the Supreme Court.

This morning, in its first 2020-2021 term order list (available at https://bit.ly/3la3Y72), declined to hear Jock v. Sterling Jewelers Inc., 942 F.3d 617 (2d Cir. 2019) (available at https://bit.ly/30yP3eZ).

The Second Circuit decision in the case last year will return the case to federal district court in New York for more proceedings ahead of arbitration in the 12-year-old-case.

The nation’s top Court today denied cert in Sterling Jewelers Inc. v. Jock, No. 1382 (Supreme Court case page available at https://bit.ly/3lgflL2). While the opt-in is the issue most recently litigated, the Court considered and rejected today a petition by the national jewelry chain on an event broader question presented,

Whether an arbitrator may compel class arbitration—binding the parties and absent class members—without finding actual consent, and instead based only on a finding that the agreement does not unambiguously prohibit class arbitration and should be construed against the drafter.

The employment case’s gender-based discrimination claim was first filed in 2008 by then-present and former women Sterling Jewelers employees. All workers were required to sign its Resolve agreement subject to American Arbitration Association rules, which included a mandatory arbitration clause, as well as a litigation waiver. For more, see Anne Muenchinger, “Still No Arbitration: In Its latest Jock decision, Second Circuit Reverses for More Contract Interpretation,” 38 Alternatives 77 (2020) (available at https://bit.ly/2GuxplA).

Not only has this case been moved from New York’s Southern U.S. District Court to the Second U.S. Circuit Court of Appeals four times, but today’s rejection was its second at the Supreme Court. Today’s decision puts the case back on a road to the case’s arbitrator, former New York Southern District magistrate Kathleen A. Roberts, now a JAMS Inc. neutral in the firm’s New York office.

David Bouffard, vice president of corporate affairs at Signet Jewelers Ltd.in Akron, Ohio, notes in a statement,

While we respect the Court’s decision, we believe the claims in this matter are without merit and are not substantiated the relevant facts and statistics. We will continue to vigorously defend against these claims, which do not accurately reflect our company or our culture. Indeed, we have long been committed to fostering a culture of respect, integrity, diversity, and inclusion where all employees feel safe, supported, and empowered—this is a tenet of who we are. In particular, Signet is a recognized leader among companies for gender diversity, with women filling 74% of store management positions and gender parity in both the C-Suite and Board of Directors. Under the leadership of our CEO, Gina Drosos, we continue to champion diversity and inclusion as a strategic priority, as we have been honored to be included on the Bloomberg Gender Equality Index for two consecutive years.

Plaintiffs’ attorney, Joseph M. Sellers, a Washington, D.C., partner in Cohen Milstein Sellers & Toll, declined to comment on the cert denial.

In its latest decision last year, the Second Circuit reversed the lower court’s judgment and held “that the arbitrator was within her authority in purporting to bind the absent class members to class proceedings because, by signing the operative arbitration agreement, the absent class members no less than the parties, bargained for the arbitrator’s construction of their agreement with respect to class arbitrability.” Jock v. Sterling Jewelers Inc., 942 F.3d 617 (2d Cir. 2019) (available at https://bit.ly/30yP3eZ).

The Second Circuit referred to its previous decisions as Jock I, Jock II and Jock III. (For more on the case’s knotty procedural history, see the Alternatives’ link above). Noting that a court’s standard of review of arbitrator decisions is highly deferential, the unanimous panel in the opinion written by Circuit Judge Peter W. Hall reasoned that the arbitration agreement’s incorporation of the AAA Rules, in particular the Supplementary Rules which give an arbitrator authority to decide if an arbitration clause permits class arbitration, makes it clear that the arbitrator can decide on the question of class arbitrability.

The panel further noted the arbitration agreement itself provides that “’[q]uestions of arbitrability’ and ‘procedural questions’ shall be decided by the arbitrator.” Id.at 624.

The decision underscored that while in Jock II the panel pointed out that Jock I did not address “whether the arbitrator had the power to bind absent class members to class arbitration given that they . . . never consented to the arbitrator determining whether class arbitration was permissible under the agreement in the first place.” (Quoting an earlier decision in the case.)

That fact, however, was not a basis to alter the Second Circuit’s analysis given that class actions in arbitration and courts may bind absent class members as part of mandatory or opt-out classes.

 The Second Circuit noted that its “use of ‘consent’ as shorthand” left unclear “the possibility that the absent class members consented in a different way to the arbitrator’s authority to decide class arbitrability.” Id.at 626.

In remanding the case, the Second Circuit left open for the District Court to decide “whether the arbitrator exceeded her authority in certifying an opt-out, as opposed to a mandatory, class for injunctive and declaratory relief.” The Second Circuit already reversed an affirmative determination on that issue, but in the 2019 decision, the panel states that the lower court may revisit the issue “after allowing the parties an opportunity to present renewed argument in light of any subsequent developments in the law.”

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The author, a third-year student at the City University of New York School of Law, is a Fall 2020 CPR Institute student intern.  Alternatives to the High Cost of Litigation editor Russ Bleemer assisted with reporting for this post.

[END]

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

By Alice Albl

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[END]

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.

U.S. Supreme Court Grants Cert to Decide “Who Decides” “Independent Contractor” Employment Arbitration Case

Kantor Photo (8-2012)By Mark Kantor

On February 26, the US Supreme Court granted certiorari to hear New Prime Inc. v. Oliveira, Case No. 17-340, a 1st US Circuit Court of Appeals decision in which the appeals court ruled on two questions: (1) Whether, under a contractual arrangement where the parties have delegated arbitrability questions to the arbitration, a court facing a motion to compel arbitration must first decide whether the US Federal Arbitration Act (FAA) covers or excludes the dispute or instead leave that question to be decided first by the arbitrators and (2) does the provision of Sec. 1 of the FAA excluding contracts of employment of transportation workers  from arbitration apply to an agreement that purports to establish an independent contractor relationship rather than an employer-employee relationship.

This case raises two questions of first impression in this circuit. First, when a federal district court is confronted with a motion to compel arbitration under the Federal Arbitration Act (FAA or Act), 9 U.S.C. §§ 1-16, in a case where the parties have delegated questions of arbitrability to the arbitrator, must the court first determine whether the FAA applies or must it grant the motion and let the arbitrator determine the applicability of the Act? We hold that the applicability of the FAA is a threshold question for the court to determine before compelling arbitration under the Act. Second, we must decide whether a provision of the FAA that exempts contracts of employment of transportation workers from the Act’s coverage, see id. § 1 (the § 1 exemption), applies to a transportation-worker agreement that establishes or purports to establish an independent-contractor relationship. We answer this question in the affirmative.

Oral argument in the matter will occur during the Fall term of the Supreme Court.

The underlying contractual agreements are easily summarized (footnotes omitted):

Among the documents Oliveira signed was an Independent Contractor Operating Agreement (the contract) between Prime and Hallmark.3 The contract specified that the relationship between the parties was that “of carrier and independent contractor and not an employer/employee relationship” and that “[Oliveira is] and shall be deemed for all purposes to be an independent contractor, not an employee of Prime.”4 Additionally, under the contract, Oliveira retained the rights to provide transportation services to companies besides Prime,5 refuse to haul any load offered by Prime, and determine his own driving times and delivery routes. The contract also obligated Oliveira to pay all operating and maintenance expenses, including taxes, incurred in connection with his use of the truck leased from Success. Finally, the contract contained an arbitration clause under which the parties agreed to arbitrate “any disputes arising under, arising out of or relating to [the contract], . . . including the arbitrability of disputes between the parties.”6

Ultimately, Oliveira filed a class action in US District Court against Prime notwithstanding the arbitration clause.  Oliveira alleged that Prime violated the Fair Labor Standards Act (FLSA), 29 U.S.C. §§ 201-219, as well as the Missouri minimum-wage statute, by failing to pay its truck drivers minimum wage. Oliveira also asserted a class claim for breach of contract or unjust enrichment and an individual claim for violation of Maine labor statutes.  Prime moved to compel arbitration under the FAA.

The provision of the FAA at issue in this dispute is Section 1, which excludes from the coverage of the FAA “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.”

Section 1 of the FAA provides that the Act shall not apply “to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” Id. § 1. The Supreme Court has interpreted this section to “exempt[] from the FAA . . . contracts of employment of transportation workers.”

On the “who decides” issue, the Court of Appeals held in New Prime Inc. v. Oliveira that the courts, rather than the arbitrators, are the proper place to decide whether these disputes are covered by, or exempted from, the FAA.  Having decided the “who decides” question to place the resolution in the courts, the appellate judges then concluded that, on the particular facts of the case, “a transportation-worker agreement that establishes or purports to establish an independent-contractor relationship is a contract of employment under § 1,” and thus excluded from the FAA.

Given the dramatic increase in “independent contractor” agreements in the workplace over the last decades, this case may determine whether a large variety of labor disputes are heard in court or may instead be subjected to mandatory arbitration agreements.  The Scotusblog.com case page with the appellate decision and cert filings is here – http://www.scotusblog.com/case-files/cases/new-prime-inc-v-oliveira/.

 

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.

Subpoenas to Arbitrators Quashed for Lack of Clear Evidence of Impropriety

Kantor Photo (8-2012)By Mark Kantor

Last week, a Magistrate Judge in the US District Court of the Eastern District of North Carolina quashed document subpoenas served on three arbitrators seeking evidence of alleged non-disclosures of relationships with counsel in connection with a FINRA securities arbitration award.  In In the Matter of Arbitration Between Shepherd, et al., v. LPL Financial LLC, No. 5:17-CV-150-D (Order, Nov. 1, 2017), Magistrate Judge Robert Jones decided that the failure by one arbitrator, Lynne T. Albert, to disclose in the current arbitration two previous arbitrations where counsel for the arbitration defendants had represented parties before her, did not constitute “clear evidence of impropriety” justifying post-award discovery from the arbitrator.  Moreover, Magistrate Judge Jones additionally rejected petitioner Shepherd’s effort to seek discovery by means of document subpoenas addressed to the two other arbitrators, Richard J. Igou and Richard S. Zaifert, which petitioner Shepherd sought to justify not on grounds of “impropriety” but rather because “the alleged impropriety by Albert makes it necessary to “double-check” the other two panelists for additional nondisclosures.”  This decision is yet another in the string of Federal court rulings rejecting aggressive efforts by disappointed parties to extend the “evident partiality” standard under the US Federal Arbitration Act for vacatur of awards due to arbitrator misconduct, as well as reiterating a high hurdle that must be met before the court will permit discovery from an arbitrator.

The Magistrate Judge first concluded that the proper standard for permitting post-award discovery from an arbitrator was “clear evidence of impropriety,” rather than the lesser general standard from Federal Rules of Civil Procedure 26(b)(1) that the information sought was “relevant to any party’s claim or defense and proportional to the needs of the case” (footnotes omitted).

the weight of persuasive case law demands a heightened showing of “clear evidence of impropriety” to obtain discovery from a non-party arbitrator. See Lucent Techs. Inc. v. Tatung Co., 379 F.3d 24, 32 (2d Cir. 2004) (concluding discovery into potential arbitrator bias was not appropriate where the party “has not presented the ‘clear evidence of impropriety’ we have held necessary before granting post-award discovery into potential arbitrator bias.”) (citing Andros v. Marc Rich & Co., A.G., 579 F.2d 691, 702 (2d Cir. 1978)); Van Pelt v. UBS Fin. Servs., No. 3:05-CV-477, 2006 WL 1698861, at * 2 (W.D.N.C. June 14, 2006) (applying the clear evidence of impropriety standard and denying discovery of an arbitrator’s employment records to determine whether he failed to disclose a material fact); see also TransAtlantic Lines LLC v. Am. Steamship Owners Mut. Prat. & Indem. Ass’n, Inc., 253 F. Supp. 3d 725 (S.D.N.Y. 2017)(“In order to take discovery from the ADR panel itself, a litigant must present ‘clear evidence of impropriety,’ such as bias or corruption.”) (citation omitted).

Arguing in the alternative, Shepherd also asserted that arbitrator Albert’s alleged non-disclosures constituted the requisite “clear evidence.”  Magistrate Judge Jones was unmoved.

Plaintiffs argue they have presented clear evidence of impropriety based on Albert’s two nondisclosures. …  The Second Circuit’s decision in the Andros case is instructive here. The Andros court determined that an arbitrator’s undisclosed professional relationship with one of the parties was insufficient to establish clear evidence of impropriety and did not justify discovery into the issue. …  The arbitrator in Andros knew the president of one of the companies involved in the arbitration, as both men previously served on 19 arbitration panels together. …  Despite claims by the opposing side that the president and arbitrator were “close personal friends,” the lower court found the relationship was professional in nature because the interactions were limited to arbitration panels and other social functions related to arbitrations. ….  Moreover, the arbitrator had no financial stake or other interest in the outcome of the arbitration. … Based on these facts, the Second Circuit affirmed the lower court’s decision and found no “clear evidence of impropriety” was presented to support an evidentiary hearing, to compel discovery, or to vacate the ruling.

The Judge considered the instant dispute to be similar to the 2nd Circuit Andros case.  The contact between Albert and the counsel in the other two arbitrations was, he wrote, “strictly professional.”  Further, the FINRA arbitration award was unanimous, and thus any “interactions” between Albert and the counsel had no impact on the result.  And, in any event, Albert eventually disclosed the “interactions” six months before petitioners chose to allege that the conduct constituted impropriety.

Similarly here, the undisclosed relationship is strictly professional-a lawyer appearing before an arbitrator-and the circumstances surrounding Albert’s nondisclosures do not give the impression of clear impropriety: Plaintiffs won the Underlying Arbitration with a unanimous award from all three panelists, including Albert…; and instead of exhibiting behavior consistent with wrongdoing, such as hiding her interactions with Defense Counsel, Albert disclosed this relationship in the June and July 2016 Arbitrations almost six months before Plaintiffs first alleged any impropriety by the Arbitrators in the Underlying Arbitration….

At bottom, “[t]o allow discovery of an arbitrator under these circumstances would “encourage the losing party to every arbitration to conduct a background investigation of each of the arbitrators in an effort to uncover evidence of a former relationship” and “increase the cost and undermine the finality of arbitration, contrary to the purpose of the United States Arbitration Act of making arbitration a swift, inexpensive, and effective substitute for judicial dispute resolution.””  Accordingly, Judge Jones quashed the subpoena addressed to arbitrator Albert.

The Judge then dealt shortly with Shepherd’s further subpoenas seeking documents from the other two arbitrators to “double-check” for possible non-disclosures (“Such reasoning is in direct conflict with a policy favoring the finality of arbitration and does not establish the requisite clear evidence of impropriety”).

With respect to Igou and Zaifert, Plaintiffs present no evidence of impropriety, but rather argue that the alleged impropriety by Albert makes it necessary to “double-check” the other two panelists for additional nondisclosures. …. Such reasoning is in direct conflict with a policy favoring the finality of arbitration and does not establish the requisite clear evidence of impropriety to justify the discovery sought from Igou and Zaifert.

Mark Kantor is a CPR Distinguished Neutral and a regular contributor to CPR Speaks. 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.

Judicial Reforms in Poland – Context and Controversy

By Maciej Jóźwiak

After November 2015, when the right-wing party, Law and Justice (PiS), won the parliamentary elections and obtained majority in the Polish Parliament, a number of judicial reforms were commenced that stirred-up dramatic controversy in Poland and in Europe. The reforms covered the two key Polish judicial institutions – the Constitutional Tribunal and the Supreme Court. The Government also introduced changes in the law regarding state courts and prosecutors.

This play called “judicial reforms” started with an amendment which combined the roles of the General Prosecutor and the Minister of Justice. Currently these two positions are handled by one man. The amendment granted to a politician (the Ministry of Justice) the right to be involved in and to supervise all penal ongoing proceedings, either conducted by a prosecutor or before the court. This amendment restored a legal status of these positions changed in March 2010 by the previous government, established by the Civil Platform (PO).

The second act in the reform drama was the amendment to the Act on the Constitutional Tribunal. The reform itself was initiated by the previous government. On 8 October 2015, PO introduced a new law regulating the nomination procedure of the Constitutional Tribunal judges. Under this law the previously tenured Parliament was entitled to nominate two additional constitutional judges (two more than the standard three) for the next nine years. The Act, however, has been sent to the Constitutional Tribunal for a determination as to whether it is constitutional. In the meantime, the President of Poland, who won the election as the representative of PiS, refused to swear-in all five judges.

On 19 November 2015, PiS introduced a reparation Act which allowed the newly tenured Parliament to again nominate five constitutional judges, three already nominated by the previous Parliament and two new ones. Moreover, under this Act, the tenure of the President and the vice-President of the Constitutional Tribunal was terminated. The whole process of the introduction by the Parliament, the signing by the President and the entering into force of the reparation Act took no longer then one week. Under the new reparation Act, five new judges were nominated on 2 December and four of them were sworn-in by the President at night, between 2 and 3 December 2016.

On 3 December, the Constitutional Tribunal issued a judgment concerning the amendment Act introduced by PO. In its judgment, the Tribunal decided that three of the nominees were appointed properly but the appointment of the other two was unconstitutional. The government refused to publish this judgment. On 9 of December 2016, the Constitutional Tribunal ruled that the provisions of the reparation Act regarding nomination of the three already appointed judges and the termination of the tenure of the President and vice-President of the Tribunal were unconstitutional. The government refused to publish this judgment as well.

After 9 of December 2016 two additional amendments acts were introduced by PiS. Both were analyzed by the Tribunal and neither was declared constitutional. Neither judgment of the Constitutional Tribunal regarding these amendments was published by the government.

The second act of the reforms focused on the Supreme Court and the National Judicial Council. The amendment to the Act on the Supreme Court was introduced by PiS, together with an amendment to the Act of the National Judicial Council and the Act of the System for the State Courts.

The two key changes at the Supreme Court concerned: (i) a default retirement of all the Supreme Court judges, with the exclusion of those who are indicated by the Minister of Justice, and (ii) an appointment of a new chamber in the Supreme Court, dedicated to hearing disciplinary actions against judges.

The amendment of the law concerning the National Judicial Council focused on the politicians having more influence on this judicial body by establishing the new chamber of the Council, made up of Parliament’s representatives. This new chamber would have the right to veto all decisions taken by the “old chamber,” where inter alia sit judges as well as representatives of government and the representative of the president, among others.

And finally, we in the audience saw the Act of the System for the State Courts, which contained the following changes: (i) the power of the Ministry of Justice to call off and nominate new presidents of the state courts was established; (ii) cases were allocated between the judges based on their “weight” which is established by the Ministry of Justice; (iii) a case would have to be examined by the same judge from beginning to end; and (iv) the Act distinguished the age of retirement between male and female judges.

The proposals described herein have raised crucial constitutional doubts and even inspired a series of street protests by Polish citizens in many cities all over Poland.

The President of Poland decided to veto two of those acts (the Act of the Supreme Court and the Act of the National Judicial Council) and has signed the third one. The Act of the System for the State Courts comes into force 14 days after being published.

The drama, however, continues. The President has announced that he will prepare and present his own proposal of the amendments to the Act on the Supreme Court and the National Judicial Council within a couple of months. Thus, we are still waiting for an epilogue.

These reforms were introduced to improve the judicial system in Poland. As it was presented, the new law was intended to speed up proceedings, making the system more transparent and understandable for citizens. Instead, however, the reforms have made the judicial system more dependent upon politicians.

In times where certainty of the independent judicial system is one of the most important factors for business development, the situation in Poland is being viewed by some with worry. To minimize the risk of adverse influence of these recent legislative changes on business, many entrepreneurs are opting to include arbitration clauses in their contracts. Despite some formal requirements for arbitration clauses under the Polish law, arbitration and other ADR methods may offer just the calming influence needed to counter the dramatic recent changes in the Polish judicial system.

Maciej Jóźwiak is an attorney at law on the dispute resolution team at Wierzbowski Eversheds Sutherland. He can be reached at maciej.jozwiak@eversheds-sutherland.pl

CPR Appoints New Cyber Panel Ahead of Anticipated Increase in Data Security Disputes

By Kate Wilford, Hogan Lovells (London)

The International Institute for Conflict Prevention and Resolution, a New York-based organisation offering Alternative Dispute Resolution (ADR) services, has recently announced the launch of a new specialised panel of neutrals, commissioned to deal with cybersecurity disputes. The Cyber Panel is composed of experts in cyber-related areas such as data breaches and subsequent insurance claims. In a press release, Noah Hanft, President of CPR, described the new panel as guiding the “critical effort” by businesses to “prevent and/or resolve cyber-related disputes in a manner that best protects operations, customers and reputation” due to attacks now occurring with increased frequency and sophistication.

CPR’s decision to establish a specialist cyber panel addresses a perceived need for arbitrators and mediators with relevant expertise, given that data protection and security breaches are regarded as an increasingly common cause of technology, media, and telecommunications (TMT) disputes, and therefore a significant growth area for commercial dispute resolution. According to the 2016 International Dispute Resolution survey on TMT disputes conducted by the School of International Arbitration at Queen Mary University of London, respondents predicted a 191% increase in disputes related to data/system security breaches, the largest growth area identified by the survey.  Despite the fact that only 9% of respondents had encountered such disputes over the last five years, 79% of respondents thought that they were either likely or very likely to arise over the next five years. The survey also suggested that data breaches are most often caused by employee action, followed by malicious third party attacks, with both being more common than breaches caused by system failures.

Given the significant reputational and financial damage that can result from a data security breach, it is crucial to resolve subsequent disputes through the use of a reliable procedure which is tailored to the wider commercial context. This is why TMT companies are increasingly often turning to international arbitration which, as the survey shows, was respondents’ preferred mechanism for resolving disputes in the sector. Compared to the 43% of respondents who expressed a preference for arbitration, only 15% chose court litigation as their most favoured option. However, at present, litigation remains the most used mechanism in practice, used in relation to 44% of TMT disputes over the last five years. In that regard, the authors of the survey add that many of these disputes arise from contracts which were concluded long before arbitration grew in popularity and consequently, they do not include an arbitration clause. If this is true, we are likely to witness a significant increase in the number of TMT arbitrations. Indeed, 82% of respondents believed that there was likely to be a general increase in TMT arbitrations.

In general, the survey suggests that TMT companies may require more confidence in international arbitration in order to make this theoretical preference a reality. One way in which this could be addressed is by increasing the number of arbitrators with specialist knowledge of the sector and the specific issues in dispute. This approach appears to correspond with the views of the respondents to the Queen Mary University of London survey, which identified the technical expertise of the decision maker as an important aspect when deciding on a dispute resolution mechanism, as well as decision makers. In light of this conclusion, it was a logical step for CPR, which already has a series of specialist panels in other areas, to appoint a specialised Cyber Panel which may appeal to parties faced with disputes relating from data security breaches. More generally, there seems to be a wide consensus that cybersecurity-related arbitration is going to be an area of future growth.

Kate Wilford is a Senior Associate in Hogan Lovells’ London office. She represents international companies in large-scale, international commercial disputes. Her practice focuses on international arbitration (most frequently under the ICC, LCIA and UNCITRAL rules) and associated court litigation, including challenges to and enforcement of arbitral awards. Ms. Wilford’s full bio can be accessed HERE.

This post was originally published at http://www.hldataprotection.com/2017/08/articles/cybersecurity-data-breaches/cpr-appoints-new-cyber-panel-ahead-of-anticipated-increase-in-data-security-disputes – the Hogan Lovells Chronicle of Data Protection blog. It was also republished on the firm’s international arbitration blog, ARBlog and is republished here with permission.

Insurer Appeals Evident Partiality Finding That Overturns Arbitration Award

By Ugonna Kanu

A New York federal court has overturned an arbitration award brought against Lloyd’s of London underwriters on the ground of evident partiality of one of the tribunal members who failed to disclose his relationship with the respondent, Florida-based Insurance Company of Americas.

ICA has filed an appeal from a decision vacating the award in favor of Lloyd’s to the Second U.S. Circuit Court of Appeals. ICA claimed that New York U.S. District Court Judge Vernon S. Broderick confused the need for its party arbitrator’s “disinterestedness” with the need to be impartial.

ICA filed its brief July 20.

Broderick’s decision in Certain Underwriting Members at Lloyd’s of London v. Ins. Co. of the Americas, Case No: 1:16-cv-00323 (March 31)(available at http://bit.ly/2uIGkqY), was based on the evidence that the party-appointed arbitrator failed to disclose his relationship with the party that appointed him even after several opportunities were provided for such disclosure.

Broderick found that the “undisclosed relationships are significant enough to demonstrate evident partiality,” and vacated the award requiring Lloyd’s-represented reinsurance contracts to pay excess claims on two injury cases insured by ICA.

ICA argued that that “the only arbitrator qualification” for its tribunal pick “is that he be disinterested, which . . . means solely [a lack of] financial or other personal stake in the outcome.”

ICA also contended that other circuit courts “have found that evident partiality standards either do not apply or are even more relaxed in the case of party appointed arbitrators in tripartite industry arbitrations.”

District Court Judge Broderick adopted the evident partiality test set out in Three S Del., Inc. v. DataQuick Info. Sys., Inc., 492 F.3d 520, 530 (4th Cir. 2007(available at http://bit.ly/2vasPRv), to determine this case. The test includes four factors: the extent of the arbitrator’s personal interest in the proceedings; how direct the arbitrator’s relationship is with the party he was alleged to favor; the connection of the relationship to the arbitrator; “and the proximity in time between the relationship and the arbitration proceeding.”

In the case, the arbitrator and the ICA not only share the same building, but also the same suite. ICA’s treasurer and secretary, also a director of the company, is additionally the chief financial officer of the arbitrator’s company. The arbitrator had a business connection between the ICA president and others whose names were repeatedly mentioned during the arbitration, providing the arbitrator an ample opportunity to disclose, which he didn’t.

Finally, when the arbitrator was expressly asked of his business relationship with ICA, he said he had none.

Applying these factors, the federal district court held that the non-disclosure demonstrates evident partiality and is sufficient ground to vacate the award, which the court viewed a nondomestic award under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, better known as the New York Convention.

The reasoning, according to the opinion, was that, considering the relationship between the arbitrator and ICA, “a reasonable person would have to conclude that [the] arbitrator who failed to disclose under such circumstances was partial to one side.”  Applied Indus. Materials Corp. v. Ovalar Makine Ticaret Ve Sanayi, A.S., 492 F.3d 132, 137 (2d Cir. 2007).

The opinion, however, noted that Lucent Techs. Inc v. Tatung Co., 379 F.3d 24, 28, 30 (2d Cir. 2004) held that the court didn’t “establish a per se rule requiring vacatur of an award whenever an undisclosed relationship is discovered.”

The appeal was filed on April 20. In its July brief asking the Second Circuit to reinstate the award, ICA returns to the distinction between disinterestedness and neutrality.

“The only neutrality requirement was disinterestedness—the lack of personal or financial stake in the outcome,” the brief noted, adding: “But the district court did not vacate the award on the ground that the party-appointed arbitrator failed to disclose matters that would require a reasonable person to conclude that the arbitrator had a financial or personal interest in the outcome. It vacated based on relationships that were irrelevant to the disinterestedness requirement.”

The ICA brief asking the Second Circuit to consider the case emphasized that “there is no evidence that the arbitrator had a personal or financial interest in the outcome.”

The author is an attorney in Nigeria who has just completed her L.L.M. in Dispute Resolution at the University of Missouri-Columbia School of Law.  She is a CPR Institute 2017 summer intern.