Shall We Have an Adult Conversation About Legitimacy?

[A summary of the keynote address of Jan Paulsson on 2 March 2017 at the Annual Meeting of the CPR Institute at the Biltmore Hotel, Coral Gables, which has also been archived on CPR’s Facebook page.]

By Jan Paulsson

It is difficult to know when history is being made. Important developments tend to be incremental, and perceived only in hindsight. Yet I am willing to wager that we are in the middle of a decade this decade in which the international arbitral process seriously comes to grips with the existential need to secure acknowledgment of its legitimacy. This is not being done, and cannot be done, by individual arbitrators. The exemplary work of 50 is done in silence; the misconduct of one may become a first-page scandal. The heavy lifting must be done by arbitral institutions.

The three evils they must combat are: transparency deficits, entrenchment, and capture. Not all of the hundreds of arbitral institutions who purport to handle international disputes will do their part, because some of them were created and remain dominated by special interests, and like things the way they have them. They have other priorities than ensuring a fair and neutral process. These are not the successful institutions, but it is vital – lest all be tarred with the same brush – that they are recognized by tangible criteria for what they are. The test is not what institutions proclaim, but what they do; does their conduct prove a commitment to fairness and neutrality?

Thirty years ago Professor Hans Smit proposed in the Columbia Journal of Transnational Law (Vol. 25, p 30) that there should be a single global arbitral institution charged with the supervision of the arbitral process. If this could not be achieved by a voluntary process of federation, he suggested that the same goal could be reached by the establishment by the International Chamber of Commerce of a network of conveniently located branches around the world.  Existing institutions would be invited to “merge” into those branches, failing which the ICC would proceed alone. This may not have been a good idea at any time, given the dangers of bureaucratization and monopolistic complacency, not to mention prohibitive cost. And today it is surely an impossibility, given the emergence of a number of deservedly successful and robust institutions in a number of regions of the world. Still, Smit’s idea was founded on the crucial insight that international arbitration will suffer from the misconduct of what one might call its weakest links, and that it is necessary to be very clear about what the criteria of legitimacy are so that waywardness can be exposed by objective measurement.

This is not rocket science. The premise of international arbitration is that all commercial disputes, even those with stakes of billions of dollars, will be decided by three arbitrators, or even a sole arbitrator, and that the outcome is final. Let’s be frank; this is asking for a lot. Losing parties are often extremely unhappy, and quick to think that something has gone seriously wrong. When the institution has not been properly “designed for legitimacy”, the ultimate sad irony may be that each side thinks that its opponent has some occult advantage, and that each side therefore seeks achieve some compensatory secret trump card – even though their reciprocal suspicions had no foundation. This can be something like a death spiral.

Today I have the good fortune of having been asked to address the annual meeting of an organization which is known for having been created not by the service providers, but by consumers of dispute resolution services. How fitting it is therefore that in 2002 CPR took the unique initiative of developing a template for universal best practices suggested as suitable if not essential for any institution anywhere. This was called the CPR/Georgetown Commission’s 2002 Principles for ADR Provider Organizations. Much ground has been covered since then at the individual reforming initiatives of the leading institutions, but it was certainly a step in the right direction.

It seems that I have achieved modest notoriety for expressing doubts about the wisdom of the widespread practice of unilateral appointments of arbitrators. Given how insistently those who disagree with my ideas on this subject distort what I say, I could perhaps be forgiven if I concluded that the propositions I articulate must be very powerful. From where I’m standing today, I cannot tell if this audience is dominated by experienced lawyers or younger ones. Younger audiences are of course idealistic and invariably agree with me.  Older audiences are cynical and set in their ways, and always protest. So obviously I prefer the latter. It’s much more fun.

My opponents say that I want to do away with the fundamental right of parties to name their arbitrators. This is unfair; I do not that at all. In the first place, I believe in the freedom of consenting and informed adults. If arbitrants agree that each of them can name its best friend or favorite lawyer as arbitrator, that’s fine with me as long as everything is out in the open. I’m not sure the result deserves the name “arbitration”, but hey – what’s in a name? Second and more importantly, my animadversions against unilateral appointments have not led me to want to tear down the temple or destroy icons, but just to a modest proposal. Here it is: the default rule should be that if the parties have agreed to a three-member tribunal all three members should be agreed by both sides, or else by an appointing institution. It’s only a default rule, but I suggest it should not be varied by agreement until the dispute has arisen. That day the claimant can measure whether the dispute is going to be civilized or brutal. If the former – and perhaps that will be the case most of the time – it takes only a phone call to agree that each side can name one of the arbitrators in the usual way. If the latter, the claimant may well have reason to rejoice, faced with a bitter clash with a party who wants to break off relations forever and is likely to deploy scorched earth tactics, that the default rule is the one I suggest.

I have written at length about the disadvantages of the practice of unilateral appointments and will not go through them here. (See The Idea of Arbitration, Oxford University Press, Sections 5.4 and 9.4.) All experienced practitioners in the international field know what it is like when unilateral nominees misbehave, or when losing parties suspect undue influence. It’s an on-going concern, and I am not mollified by the “if it ain’t broke thesis.” Things may be tolerable most of the time, but most of the time is not good enough.

This was brought home to me when I read the heart-felt account published a couple of weeks ago of the experience of a lawyer participating in his first ICSID arbitration. I do not know him, but I am certainly aware that he is a prominent fixture of several decades’ standing in the Miami legal community. Indeed his office is only a mile away from the beautiful hotel where we are meeting now.  I will call him Mr X.  His account is interesting precisely because this is a sophisticated and articulate lawyer who discovers a process with which he is not familiar and feels compelled to express serious concerns. We do well to take the concerns of such thoughtful individuals to heart. I do know the two other arbitrators involved in the case, with whom I have participated in more arbitrations I can count. From what one can read in the award and the dissenting opinion, my only sources of information about this case, all three arbitrators behaved perfectly honorably and none should be embarrassed if I named them, but I will not do so since but I would find it a distraction to personalize a matter which I am using only as an illustration of what I believe to be a frequently recurrent and seriously troubling unease, maybe even a malaise.

Here’s the story in a nutshell. The case involved Costa Rica, which is all I have to say to enable anyone here with a laptop to learn as much as I know about the case.  From the parties’ point of view, the case was over in March 2014, when the parties filed post-hearing briefs.  After that date, the process seems (to the uninitiated reader) to have entered a black box, as the next recorded event is a challenge by the claimant, like a bolt out of the blue, to all three members of the arbitral tribunal. This dramatic event occurred in June 2015. You heard me: a year and three months later which the parties were presumably waiting passively, if with mounting impatience, for the award to come out. Something was obviously not right. We do know that the claimant’s complaint was based on the fact that the Tribunal’s legal secretary, a lawyer on the ICSID staff who as part of their function are present during deliberations and typically assist in such useful ways as retrieving documents from a voluminous file which the arbitrators are unlikely to transport in its entirety to the place of arbitration from their various home offices, had left ICSID’s employ to join the law firm representing the respondent. In other words, the claimant was complaining about a form (I might perhaps venture to say a mild form) of capture.

The challenge was dismissed nine months later in accordance with the relevant rules and practice. I say nothing about that.  The arbitrators, thus confirmed in their function, went about their duty to render a final award, which they did a few weeks ago, in January.  It turned out to be one of those cases where a number of issues  were decided 2-to-1, with each of the co-arbitrators finding himself either part of the majority or in dissent, and the presiding arbitrator always part of the majority. Mr X wrote the dissent which captured my attention. The first thing to say about it is that it is entirely respectful of the other arbitrators, with whom Mr X writes that he was “honored” to serve. He explained in lucid terms some significant differences of substance with respect to which he was disappointed to find himself in disagreement. Such things happen; reasonable people differ. But then we get to the troubling passages.

Mr X notes that “the period that followed the hearing was delayed by the embarrassing and unnecessary issues caused by the change in employment of the Panel secretary and other issues related to the impartiality of the panel.” What these “other issues” involved is not specified, and the challenge decision itself has not been published as far as I know. I have seen press articles referring to information to the effect that these issues had to do with the prior relations between the presiding arbitrator and the other co-arbitrator; such complaints are frequently raised by losing parties, sometimes on quite flimsy grounds, but let’s not pay heed to gossip or speculation or anonymous sources. Mr X then goes on to write that “I choose not to add any further comment on the issue of the secretary’s employment, but do wish to address the issue of the constitution of the panel and the issues of conflicts and impartiality.”

What Mr X then has to say is notably that “the arrangement whereby two of the panel members are selected by the parties to the agreement creates an uncomfortable aura of conflict which permeates, in my view, the proceedings” and that, although “I have worked hard to neutralize his factor as I am sure my esteemed [co-arbitrator] colleague has done”, the only panelist who did not have “an inherent conflict” was the chairman. Mr X concluded that the “appointment by a party of a judge to rule on the party’s claim creates an unnecessary barrier to pure objectivity” and recommended that ICSID consider prohibiting the practice of unilateral appointments.

This is not the occasion to discuss the feasibility or even desirability of such a prohibition, particularly in the case of ICSID since its rules are constrained by the text of the international treaty by which it was created. My point is rather to insist that this measured but heart-felt comment is one that all institutes and arbitrants should take to heart, recognize as not being an isolated phenomenon, and take as a compelling reason to consider ways in which this kind of unease can be alleviated.

I think I have heard and examined at length in writing all conceivable arguments against my suggestion that we move away from the practice of unilateral appointments as a default rule, and I challenge any one of you to a debate because I am confident that I will prevail. Prevail, that is, except if you make the one argument which is Kryptonite and will defeat me every time. Here is how you win the argument: you look me in the eye and say “I don’t trust the institution, and so as long as I can name one of the arbitrators I feel that I will reduce the risk of a runaway tribunal doing something crazy – but unappealable.”

That argument is indeed made, like it or not. Decent arbitral institution cannot fail to realize that it is a disappointing and sobering message, indeed something of an indictment. They must absorb this reality, and do try to do two things about it. The Big Thing is to earn such trust that this kind of worry about a runaway tribunal evaporates. The Little Thing is far easier, and may in practical terms be just about as good. It is to focus on the involvement of the parties in the selection of arbitrators, and to attend to the numerous adaptations and refinements that may take the edge off the disadvantages of what one might call unreconstructed unilateralism.

The CPR Institute took a noteworthy step in this direction with the well-known Rule 5.4 of its Rules for Administrated Arbitration of International Disputes, for which it deservedly won a prize as the best innovation of 2016 [from Global Arbitration Review]. It introduces what CPR calls a “screened selection process,” which allows parties to choose among proposed arbitrators but in a manner designed to keep the ultimately appointed panel members from knowing individual parties’ preferences. We need to see how this works in practice, and how similar initiatives function elsewhere. There will always, believe me, be attempts to game the system. If I may put it as a paradox, the only thing that must be constant is the readiness to change as we learn. The poacher never rests; neither can the gamekeeper…

But this is not enough. Institutions should not only be inventive themselves, but encourage parties to be inventive as well. Most often this concerns the parties’ lawyers. Why are we lawyers, so unbelievably inventive in argument, stuck in the mud when it comes to patterns of process? Can’t we all agree that in ideal circumstances an arbitral tribunal should operate as a team, and not as three sole arbitrators cobbling together something of dubious coherence that achieves an unappealable result but does not deserve to be called “consensus?” If we agree want cohesive tribunals capable of producing greater quality than their individual members, aren’t presiding arbitrators the captain of those teams? Why not give them an important role in the constitution of the team – perhaps identifying a number of individuals they find compatible, or complementary, and asking the parties to rank them. (This, by the way, seems to be a more likely route to diversity than to expect it from unilateral appointments by parties whose entire focus in making appointments is to win the case. The presiding arbitrator might say “I’m comfortable with the industrial context, but would like a member of the tribunal to be conversant with public international law; then we’ll be all set so the third member can be someone less experienced whom I believe will make a solid contribution and who merits the experience and exposure.”) Or how about each side giving the presiding arbitrator a list from which to chose each co-arbitrator on the basis of compatibility? Or even, when full confidence reigns, go all the way and allow the presiding arbitrator simply to come up with the two others, constrained by nothing except perhaps observations by the parties as to what kind of qualities or experience the case calls for?

Parties have also been known to achieve quite surprising things – if only they will pick up the phone and try. I have observed an interesting dynamic when two lawyers with a minimum of mutual respect agree (between themselves) to give each a right of veto with respect to the unilateral nominees, maybe once or twice. A cynic might say that the result will be that each will immediately propose wholly unacceptable names and then move on – but I say that such is not the unavoidable result, and no harm trying.  Or how about saying “If I appoint A, whom will you appoint? Are you saying B? Oh, no, then I’d appoint C.  What’s that, you like A? Well then, think of someone other than B”.

The possibilities are limited only by our imagination, and it is urgent that we unleash our capacity for innovation. As we have heard this morning from Noah Hanft as he enters his third year of leadership of the CPR, he and his staff are determined to give fresh impetus to the vigorous improvement of the dispute resolution process in all of its forms, and it behooves all of us to take a sympathetic interest in their efforts, which can only benefit all who believe that legitimacy in the resolution of disputes should not be negotiable.

Jan Paulsson is a founding partner of Three Crowns LLP, a specialist international arbitration firm. He holds the Michael Klein Distinguished Scholar Chair as professor of law at the University of Miami. 

 

 

Gorsuch on Arbitration

By Russ Bleemer

A review of the arbitration opinions involving Tenth U.S. Circuit Court Judge Neil M. Gorsuch, who last night was nominated to fill the U.S. Supreme Court vacancy, doesn’t provide a definitive indication on how his arbitration votes might fall if the U.S. Senate approves of his nomination.

The 49-year-old Gorsuch, who has been on the Tenth Circuit bench since President George W. Bush nominated him and he was confirmed by the Senate in 2006, has participated in appellate panels that have backed awards, compelled arbitration and reversed a failure to compel arbitration.

But the narrow scope of arbitration cases in which the circuit judge has participated, and the issues on which the cases were decided, don’t show a pronounced tilt toward business or consumers.

Adherence to Contract Law Principles, Combined with Customary View of FAA

In his most arbitration-centric decision, Gorsuch’s preferred path is adherence to contract law principles, combined with a customary view of the Federal Arbitration Act among federal judges.

“Everyone knows the Federal Arbitration Act favors arbitration,” Gorsuch wrote in the opening to Howard v. Ferrellgas Partners, No. 13-3061 (10th Cir. April 8, 2014)(available at http://bit.ly/2jTm6Wi), but, he emphasized, “before the Act’s heavy hand in favor of arbitration swings into play, the parties themselves must agree to have their disputes arbitrated.”

He continued, “While Congress has chosen to preempt state laws that aim to channel disputes into litigation rather than arbitration, even under the FAA it remains a ‘fundamental principle’ that ‘arbitration is a matter of contract,’ not something to be foisted on the parties at all costs.”

Possible Role in Employment Contract Class Action Waiver Cases

There is little in the 38 arbitration opinions that the Tenth Circuit website produces in a search of Gorsuch’s work—mostly incidental mentions–that rises to the level of significance of the preemption of state law and class waiver issues that have steadily appeared at the U.S. Supreme Court in its recent history.

But if confirmed quickly, Gorsuch could find himself participating in the decisions on three cases taken by the Court on Jan. 13 that will be argued together this term, and will settle whether employees can be required as a condition of employment to arbitrate their workplace disputes individually, while waiving their rights to a class process.

The long-simmering group of cases is a clash between the National Labor Relations Act and the Federal Arbitration Act, and an extension to the employment arena of the leading class waiver/mandatory arbitration case in consumer contracts, AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), which Gorsuch was quoting directly in the passage above.

Arbitration watchers who want to try to handicap the Court’s path likely will need to become acquainted with Gorsuch’s by now well-publicized animosity toward the so-called Chevron Doctrine, in which the U.S. Supreme Court has backed deference to administrative agency determinations.  See Chevron v. National Resources Defense Council, 467 U.S. 837 (1984)(available at http://bit.ly/1EirXXt).

In an immigration law decision last year, Gutierrez-Brizuela v. Lynch, No. 14-9585  (Aug. 23, 2016)(available at http://bit.ly/2kPDvh5), Gorsuch blasted Chevron in a concurrence, writing that its deference to the executive branch agencies in derogation of legislative power runs counter to the Constitution’s separation of powers checks-and-balance system.

The issue could control the arbitration outcome in the three employment arbitration cases at the Court, which currently are being briefed and not yet scheduled for oral argument. They emanate from a January 2012 opinion by the National Labor Relations Board.

In one of the three cases, the Board itself is a party, appealing a Fifth Circuit decision which overturned its earlier administrative decision. See NLRB v. Murphy Oil USA Inc., No. No. 16-307 (U.S. Supreme Court case page is available here: http://bit.ly/2kOPxal. Scotusblog’s page including briefs and a link to the Fifth Circuit opinion is available here: http://bit.ly/2kPvTyi).

If the Chevron Doctrine doesn’t figure in a Gorsuch view of the current arbitration cases, the NLRB’s moves to preserve class actions by forbidding mandatory arbitration may be another hot button for the former U.S. Supreme Court clerk.

Gorsuch on Class Actions

Gorsuch has problems with class actions in securities cases.  When he was in private practice, he wrote that “economic incentives unique to securities litigation encourage class action lawyers to bring meritless claims and prompt corporate defendants to pay dearly to settle such claims.” Neil M. Gorsuch and Paul B. Matey, “Settlements in Securities Fraud Class Actions: Improving Investor Protection,” Critical Legal Issues–Working Paper Series No. 128 (Washington Legal Foundation April 2005)(available at http://bit.ly/2kTBDCZ).

Two Opinions, One Dissent

Despite involvement as a panel member in cases producing about a dozen opinions or orders, the Howard case discussed above is one of only three arbitration writings exclusively by Gorsuch in his decade-long tenure on the court.  One of the three is a dissent.

The Tenth Circuit website revealed Gorsuch’s opinions, and orders with judgments, but didn’t produce unpublished opinions in which Gorsuch may have participated.

In Howard, Gorsuch wrote that the customarily swift determination by a lower court of whether the parties in the suit agreed to arbitration didn’t take place—fast or slow.

The plaintiff had filed a class action for overcharges against the propane supplier defendant.  The defense asked for arbitration, and Gorsuch described how the lower court botched its inquiry.  He first noted that the district court, “[u]nsure whether [defendant] Ferrellgas had shown an agreement to arbitrate in its initial motion, . . . entertained discovery and further motions practice.”

The trial court, Gorsuch reported, found “too many unresolved factual questions remained and proceeded to invite yet more discovery followed by yet more motions practice.”

Nearly a year and half after the defendant filed its motion to compel arbitration, the district court, Gorsuch wrote, “issued an order in which it found that material disputes of fact still prevented it from saying for certain whether or not the parties had agreed to arbitrate. But rather than proceeding to resolve the conflicting factual accounts through trial as the Act requires, the court entered an order denying arbitration outright.” [Emphasis is Circuit Judge Gorsuch’s.]

“That was error,” continued Gorsuch, exhibiting his breezy writing style in an area dry even by circuit law standards, explaining, “In these circumstances, the [Federal Arbitration] Act’s summary trial can look a lot like summary judgment. But when, as in this case, a quick look at the case suggests material disputes of fact do exist on the question whether the parties agreed to arbitrate, round after round of discovery and motions practice isn’t the answer. Parties should not have to endure years of waiting and exhaust legions of photocopiers in discovery and motions practice merely to learn where their dispute will be heard. The Act requires courts process the venue question quickly so the parties can get on with the merits of their dispute in the right forum. It calls for a summary trial—not death by discovery.”

Then, Gorsuch spread the blame around for arbitration disaster.  “Of course, the parties here didn’t exactly help themselves,” he wrote, adding, “They were anything but quick to seek the trial promised by the Act. In fact, they seemed content enough to haggle along together in the usual way of contemporary civil litigation, all about discovery disputes and motions practice and with only the most glancing consideration given to the possibility of trial.”

The case is a war over a contract, and whether and when it took effect.  Gorsuch explained that it was unclear from the record whether an oral contract for the propane tank and initial delivery was followed by a written contract for future deliveries containing the arbitration clause—and restricting it to the subsequent deliveries.

Regardless, Gorsuch–joined by his two fellow appeals panel members–ruled that with material facts in dispute, the district court should have proceeded to a trial on whether an arbitration agreement existed, and should not have denied the request to arbitration.

He wrote that the Federal Arbitration Act should have shown the path to the case’s resolution.  “We appreciate both sides’ evident frustration at how long this case has lingered at the transom without having entered either the door into arbitration or litigation,” Gorsuch concluded, adding, “It’s understandable that everyone might want us to give the case a firm nudge (one way or the other) so the parties’ dispute can finally progress past preliminary venue questions to the merits. But unresolved material disputes of fact block our way—disputes that could and should have been resolved years ago according to the procedures the FAA provides.”

Taking a Broader FAA View

Gorsuch took a broader FAA view in a dissent in a 2-1 Tenth Circuit arbitration case, Ragab v. Howard, No. 15-1444 (Nov. 21, 2016)(available at http://bit.ly/2gCL3pn).  The dissent—in a case where his panel affirmed a lower court’s ruling that conflicting arbitration agreements in six contracts between two parties should not be arbitrated because there was no meeting of the minds as to conducting the arbitration—appears to be is his most demonstrative view of the FAA’s effect on state laws.

Gorsuch strongly rejects the majority’s use of a New Jersey case that struck arbitration where multiple contracts conflicted on the terms of arbitration.  He notes that the New Jersey ruling had little application to Colorado laws, but also explains that it may not pass muster with the Supreme Court for its disregard of the FAA.

The New Jersey ruling, he explains, was a deep dive into the state’s consumer protection laws, in a case where the Tenth Circuit Colorado plaintiff more closely resembled a merchant.  But he noted that federal preemption is a big issue:  “Whether or not the FAA would preempt New Jersey’s special ‘extra clarity’ rule for certain kinds of arbitration agreements, that possibility undoubtedly exists and seems to me to counsel against endorsing it without a good deal more careful investigation than the parties offer us in this case.”

He wrote that with six of the parties’ interrelated commercial agreements containing arbitration clauses, and other circumstances, “In my view, parties to a commercial deal could have hardly demonstrated with greater clarity an intention to arbitrate their disputes and I see no way we might lawfully rescue them from their choice.”

Procedural holes are frequently filled by the parties, he explained, in providing “two easy workarounds that I believe would be more consistent with the parties’ expressed purposes than the course my colleagues chart.”

Additional Arbitration Work

Gorsuch was the author of one additional unanimous panel order and judgment on the Tenth Circuit’s website that backed a lower court’s refusal to compel arbitration for a former top executive who was fired by a pharmaceutical company. Genberg v. Porter, No. 13-1140 (May 12, 2014)(available at http://bit.ly/2kpuRs7).

The bulk of Gorsuch’s arbitration work appearing on the Tenth Circuit website, at www.ca10.uscourts.gov, was as part of a panel where others wrote the opinion or order. Among the opinions, Gorsuch joined his fellow circuit judges in backing a lower court ruling that a suit by a union under the Railway Labor Act  belonged in mandatory arbitration (BMWE v. BNSF Railway, No. 12-3061 (March 2, 2010)(available at http://bit.ly/2kpIwif).

In addition, he participated in panels in the following cases but didn’t write the unanimous opinion or order and judgment:

  • An order noting that an arbitration acts as a res judicata bar against a subsequent suit related to the wrongful discharge suit by an ex-Department of Veterans Affairs employee, backing a Merits Systems Protection Board order. Johnson v. DOVA, No. 14-9619 (May 22, 2015)(available at http://bit.ly/2kOYaBK).
  • An order strongly backing a major defense contractor’s mandatory arbitration clause contained in its employment dispute resolution program. Pennington v. Northrop Grumman Space & Mission Systems Corp., No. 07-2250 (March 14, 2008)(available at http://bit.ly/2jTh49F).
  • An affirmance of a Colorado court that overturned an arbitration award against a company which claimed that an arbitration notice presented by its Chinese business partner didn’t put the company on notice of a deadline it missed to participate in the ADR process. CEEG (Shanghai) Solar Science v. Lumos, No. 15-1256 (July 19, 2016)(available at http://bit.ly/2kOUorT).
  • An nonprecedential order and judgment as to arbitration backing a lower court that refused to compel arbitration, noting that the defendants seeking ADR didn’t establish that an arbitration agreement existed. Bellman v. i3Carbon, No. 12-1275 (May 2, 2014)(available at http://bit.ly/2kp3FJT).
  • An order, also nonprecedential as to the FAA, sending a case to arbitration and entitling the party to attorneys’ fees and costs “incurred in enforcing its right to arbitrate.” The order reversed a federal district court denial of arbitration. The winning defendant in the Tenth Circuit was a builder that sold the plaintiffs two condominiums with a mediation and arbitration clause in the sales agreement. Lamkin v. Morinda Properties Weight Parc, No. 11-4022 (Sept. 19, 2011)(available at http://bit.ly/2jTdKeS).
  • A case affirming dismissal of an employee’s wrongful termination suit after it had been arbitrated, citing claims preclusion under the arbitration award. Lewis v. Circuit City Stores, 05-3383 (Aug. 31, 2007)(available at http://bit.ly/2keVY6J).
  • A decision reversing two federal district court denials of arbitration against an employer charged by workers with violations of the Fair Labor Standards Act and an Oklahoma labor law, focusing on the scope of an arbitration clause, but in the remand order asking the lower court to consider whether the arbitration agreement preserves FLSA rights. Sanchez v. Nitro Lift Technologies, 12-7046 (Aug. 8, 2014)(available at http://bit.ly/2kT2Ple).
  • A determination that one of “two factually distinct injuries” related to a commercial contract fell under an arbitration clause, reversing in part a magistrate judge and a federal district court which had found that the case couldn’t be arbitrated. Chelsea Family Pharmacy PLLC v. Medco Health Solutions Inc., No. 08-5103 (June 2, 2009)(available at http://bit.ly/2jtiefT).

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

*Updated at 12 p.m.

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

AFTER THE VETO: The Current State of Employment Arbitration in Brazil

By Cristiane Ordonez and Colin McGeough, CPR Legal Interns

According to an article published by José Pastore, a professor at FEA-University of São Paulo, Brazil’s National Congress voted to approve the use of arbitration for the arbitration of employment disputes, but Brazilian President, Dilma Rousseff, reacted to the legislation by banning employment arbitration via her veto power. Pastore and others in Brazil advocate strongly in favor of ADR of employment disputes.

After the initial approval by the National Congress, employment arbitration was limited to directors and managers who agreed to use arbitration as their preferred dispute resolution method; however, according to Pastore, Brazil’s President banned even the limited use of employment arbitration because of the position of the Ministry of Labor. In short, the Ministry of Labor argued that the use of arbitration for some would lead to discrimination against others. Pastore also mentions, in his article, that the Ministry of Labor took issue with the reference to “managers” and “directors” because the Ministry felt those terms were strangers to Brazil’s legislation. In opposition to that, Pastore points out that the Labor Code, Civil Code, and others have those words present within their paragraphs, and any issue with “managers” and “directors” should not have been taken so seriously.

One of the largest frustrations from the veto seems to come from the idea that employment arbitration could have had such a positive effect on employment courts, the parties, and the judiciary system in Brazil. It could have, and likely would have, offered a quicker and more simplified method of dispute resolution than litigation because non-arbitral court disputes often have additional costs and longer proceedings that can span many months or even years.

Another disappointment comes with the veto as well, one that involves Brazil not having the benefit of being on par with so many other developed countries that have laws that use and allow employment arbitration. Pastore discusses the laws of the United States, various countries of the EU and Asia, and Australia and New Zealand. Furthermore, Pastore shows that 97% of collective agreements to settle employment disputes in the US opt for arbitration. Pastore’s theory, as we understand it, is that the use of employment arbitration by developed countries will cause these types of arbitrations to spread to Latin American countries too. Many Brazilians, including Pastore, hoped it would have happened by now, but the President’s veto has delayed such progress.

It must be said that Pastore also stresses the importance of parties having the autonomy to choose arbitration rather than being forced to litigate all employment disputes, or in fact having mandatory arbitrations. Allowing parties to choose between litigation and arbitration affords many more benefits than it does detriments because every dispute is different and party choice allows for different methods of conflict resolution that will best fit the needs of a party’s case. However, Pastore urges the use of arbitration as an option because non-arbitral proceedings are often transactions of “sealed packages.”  In other words, claimants ask for one thing, respondents offer another, and a judge ends up settling the dispute by ordering something completely different.

It is hard to believe, in the eyes of Pastore, that Brazil’s President and Labor Courts would ban an alternative dispute method (arbitration) for employment disputes because the courts are crowded, and both the courts and parties are suffering from high litigation costs. As mentioned earlier, Pastore believes the veto needs to be reviewed and the issue solved as quickly as possible.

Cristiane is a Brazilian attorney serving as a fellow of CPR, a Florida accredited mediator and a mediator and conciliator working in Brazil.  Colin is a summer legal intern at CPR, a rising 3L at New York Law School, and President of New York Law School’s Dispute Resolution Team.

THE NEUTRAL’S NOTEPAD: Consider Expanded Use of Written Witness Statements

With this post, The CPR Institute introduces a new “CPR Speaks” series feature in which members of our esteemed panel of neutrals will periodically contribute their thoughts on developments and best practices in dispute resolution.

THE NEUTRAL’S NOTEPAD: U.S. Advocates and Arbitrators Should Consider an Expanded Use of Written Witness Statements in U.S. Domestic Arbitration

BenderRay-41309-06By Raymond G. Bender

One technique for creating efficiencies in arbitration is submitting the direct testimony of fact witnesses in writing rather than orally.  Written witness statements provide detailed testimony a witness would offer (including references to relevant documents) if questioned live.  The written testimony is signed by the witness, its truth and accuracy is sworn to or affirmed, and the statements are exchanged in advance of the hearing.  Each witness providing a written statement appears at the hearing for cross-examination by opposing counsel and questioning by the tribunal.

Written witness statements can afford material advantages in arbitration.  For example, as lengthy oral testimony becomes unnecessary, written testimony can save days or even weeks (in a complex case).  Exchanging witness statements in advance also permits opposing counsel to prepare fully for cross-examination. In fact, exchanging witness testimony prior to hearing permits all of the participants in the hearing—counsel and arbitrators alike—to focus before hearing on the key issues in dispute, formulate pertinent questions for the witness, and conduct a more efficient and streamlined proceeding.  Moreover, witness statements can obviate or lessen the need for depositions since opposing counsel will have advanced notice of a witness’ direct testimony.  Finally, written statements can serve an important fact-finding function when depositions are disallowed or limited to key witnesses.

Why are written witness statements so common in international arbitration, but not as prevalent in U.S. domestic arbitration?  Some U.S. counsel and arbitrators may be unfamiliar with the technique, particularly if they serve exclusively in U.S. domestic proceedings where oral testimony is the norm.  Others may believe that drawbacks associated with witness statements outweigh the advantages.

For example, some may feel that lawyers draft witness statements and the testimony therefore is not as spontaneous or genuine as when a witness testifies live.  A witness also might rely too heavily on the lawyer and not review the testimony carefully or completely.

However, when preparing witnesses for oral testimony, attorneys also typically assist and invite them to rehearse their hearing presentations.  Attorneys have a duty to admonish witnesses concerning the truth and accuracy of their testimony—whether they testify orally or in writing—and to highlight the need to defend the testimony under cross-examination and arbitrator questioning.  Witnesses also sign and/or swear or attest to their written testimony, and such formalities signal that witness statements need to be truthful and accurate and not approached in a careless manner.

Another potential concern about written versus oral direct testimony is that the tribunal’s first exposure to the witness would be on cross-examination.  No lawyer wants arbitrators to observe a witness initially in a defensive posture under questioning by opposing counsel.

This concern can be addressed by permitting counsel offering the witness to conduct a brief direct examination (e.g., 15 to 30 minutes), depending on the nature and size of the testimony and the case.  This lets the tribunal hear from the witness in his or her own words.  Such abbreviated direct examination could include background information on the witness and/or a summary of key aspects of the witness’ written testimony.   This direct testimony should be relatively brief so as not to frustrate a fundamental purpose for using written witness statements, i.e., to achieve efficiency and cost-savings.

A final potential concern is that using written statements prevents arbitrators from evaluating a witness’ credibility on direct examination.

There normally are sufficient opportunities for a tribunal to assess witness credibility other than on direct examination—most critically during cross-examination, but also on re-direct, and during questioning by the tribunal as well.  Moreover, permitting an abbreviated direct exam before a witness is cross-examined, as discussed above, affords yet another window for arbitrators to assess witness credibility.

Granted, written witness statements may not be an optimal solution for every witness or in every case.  For example, where believability of a key witness or witnesses may influence the outcome in an arbitration, presenting the witness’ direct testimony live may be preferable to using a written witness statement.

Additionally, any decision to present the direct testimony of fact witnesses in written or oral form ultimately should reside with the parties and counsel. Arbitration still is a creature of party agreement, and arbitrators in U.S. domestic arbitration should never compel the use of one technique over the other.

However, here are some general practice tips that arbitrators might keep in mind, not only to help ensure that counsel consider the full range of their options, but to utilize written direct testimony, if they so choose, in an optimal way:

  • Arbitrators should encourage written witness statements where appropriate and highlight the benefits surrounding their use.  Including witness statements as an item on the preliminary hearing agenda, and having an open discussion of the pros and cons during the preliminary hearing itself, can expose the technique to counsel otherwise unfamiliar with it.
  • Arbitrators should condition the use of written direct testimony on the witness’s attendance at hearing for cross-examination and questioning by the tribunal (unless all parties and the tribunal agree to waive a witness’ appearance).  Cross-examination of witnesses generally is considered a fundamental right in the U.S. (and in other common law jurisdictions) and this right should be safeguarded when written witness statements are used.
  • Arbitrators should permit sponsoring counsel to question the witness briefly on direct examination (e.g., to summarize key points) so the witness can “warm to the seat” before being turned over for cross-examination.  This procedure lets the witness become comfortable in the arbitral setting and also allows the tribunal to observe witness credibility (albeit briefly) on direct examination.
  • U.S. arbitrators should review witness statements in preparation for the hearing, listen attentively during examination by counsel and, if appropriate, pose follow-up questions to the witness to clarify relevant facts, gain insight as to witness credibility, or achieve a better understanding of the case.

In conclusion, greater reflection and dialogue on written witness statements should give U.S. counsel and arbitrators an enhanced appreciation for their use in U.S. domestic arbitration. U.S. arbitration proceedings would surely benefit from this development.

Raymond Bender is a full-time commercial Arbitrator in domestic and international disputes.  He is a member of the CPR Panel of Distinguished Neutral Arbitrators for Washington, D.C., Technology, and Cross-Border Disputes; the American Arbitration Association’s Roster of Commercial Arbitrators for Washington, D.C., Technology, and Large, Complex Cases; the International Center for Dispute Resolution (ICDR) Panel of International Arbitrators; and the Silicon Valley Arbitration and Mediation Center’s List of the World’s Leading Technology Neutrals.  He also has served in International Chamber of Commerce (ICC) and ad hoc arbitrations.  Mr. Bender is an Adjunct Professor at the Washington College of Law, American University, Washington D.C., where he teaches Alternative Dispute Resolution Law, and serves on the Arbitration Faculty of the International Law Institute.