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Howsarn humana and bazzle Recent cases that may affect your arbitrationADR practice.

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Howsam, Hupndnd and Bdzzle=Recent Cases that
Mav Affect Your Arbitration/ADR Practice
This article is adapted from a March 1 5 presentation by CPR President and Alternatives
Publisher Thomas J. Stipanowich. His seminar, ”The CPR Top Ten: Recent Decisions that
May Affect Your Arbitration/ADR Practice,“ was
presented i n Orlando, Fla., to the annual partners meeting of national law firm Holland &
Knight. For information on future seminars,
or t o schedule a seminar, contact CPR a t
[email protected] or (212) 949-6490.
Howsam v. Dean Witter Reynolds Inc., 123
U.S. 588 (Oec. 10, 2002)(“U.S. Supreme
Court Is Ready for More Arbitration,” 2 1
Alternatives 8 (January 2003); “Top Court
Puts Arbitration Back on the Docket,” 20
Alternatives 173 (October 2002)).
HOLDING: A National Association of Securities Dealers arbitrator should address the question of eligibility of an investor’s claim under
the six-year rule, which makes claims ineligible for arbitration “where six (6)years have
elapsed from the occurrence or event giving
rise to the dispute.”
IMPLICATIONS:The latest in a series of cases
standing for the principle that while questions of arbitrability generally are for judicial
determination under Section 2 ofthe Federal
Arbitration Agreement, in the absence ofclear
and unmistakable contrary agreement, procedural questions that grow out of the dispute and bear on its final disposition normally
are for the arbitrators. More important, the
decision resolves a Iongstanding conflict
among federal courts regarding the forum for
resolving issues under this particular NASD
Rules provision.
The Supreme Court explained:
The Court has found [FAA Section 2’s
arbitrability language] applicable in the
kind of narrow circumstances where
contractingparties would likely have expected a court to have decided the matter, where they are not likely to have
thought that they had agreed that an
arbitrator would do so, and consequently, where reference of the gateway
dispute to the court avoids the risk of
The author i s president and chief executive office
of the CPR Institute for Dispute Resolution i n New
York, and i s publisher of Alternofives
forcing parties to arbitrate a
matter that they may well not
have agreed to arbitrate.
The Court‘s application of
established FAA principles is
paralleled by the text of the Revised Uniform Arbitration Act.
Moreover, some standard contractual provisions go much further, committing to arbitrators all or many
of the arbitrability issues that would otherwise be the province of courts.
I n re Humana Inc., Managed Care Litigation,
285 F.3d 971 (11th Cir. Mar. 14, 2002); cert.
granted as PaajiCare Health Systems In& K
Book, Docket No. 02-215 (Oct. 15, 2003)(argued Feb. 24, 2003) (“U.S. Supreme Court Is
Ready for More Arbitration,” 21 Alternatives8
(January 2003).
HOLDING: The Eleventh U.S. Circuit Court
of Appeals held that physicians could not be
required to arbitrate their racketeering claims
against managed care companies where the
arbitration agreement barred punitive damages awards.
SPECIFICS: Many physicians and physicians’
groups signed a wide range of arbitration
agreements with various managed care organizations. Physicians filed a nationwide class
action against 10 HMOs in 2000 claiming,
among other things, that the defendants had
conspired not to properly pay claims in violation of the Racketeer-Influenced and Corrupt Organizations Act. 18 U.S.C. $ 1961.
The defendants responded that many of
the plaintiffs had signed arbitration agreements that barred arbitrators from awarding
punitive damages; in some cases, the agreements barred awards of any extra-contractual
damages, including punitive or exemplary
damages. The plaintiffs argued that such provisions were unenforceable because they denied recoveryof treble damages under IUCO.
The Eleventh Circuit, wholly endorsingthe
district court opinion, ruled that although the
physicians were “sophisticated commercial
parties and that the arbitration provisionsshould
be enforced as written, they could not be required to arbitrate their RICO claims where the
arbitration agreement barred awards of punitive damages.
Court has been asked to address
the question of limits on punitive damages or exemplary rernedies in an arbitration provision.
This is the first time the Court
has been squarely confronted
with the issue, which has generated a variety of responses in
the federal circuits.
The Pacificare decision conflicts with
Larry; United Super Inc. v. Werries, 253 E3d
1083 (8th Cir. 2001). In that decision, the
appellate court concluded that “[wlhether a
prospective waiver of punitive damages violates the public policy underlying RICO’s
treble damages provision is a matter for the
arbitrators in the first instance when fashioning an appropriate remedy if a RICO claim is
proven to the arbitrators’ satisfaction.” 253
F.3d a t 1086. Werries was reaffirmed in
Arkcom Digital Corp. u. Xerox C o p , 289 E3d
536 (8th Cir. 2002).
A variety of other holdings implicate similar issues, and take different approaches. For
example, in Investment Partners v. Glamour
Shots Lic. Znc., 298 F.3d 314 (5th Cir. Aug.
22, 2002), the Fifth Circuit held that it was
for the district court, not the arbitrator, to
decide initially whether available arbitration
remedies were adequate- and proceeded to
the conclusion that a prohibition on punitive damages in arbitration did not extend to
statutory treble damages (“merely a mathematical expansion of the actual damages
calculated by the arbitrator”).
A more interesting question, which the
Court could sidestep when it issues its decision, which is expected before the end of the
term in June, is whether parties to a commercial contract can prospectively waive punitive damages in an executory contract
Another significant development on the
punitive damages front is represented by
Sawtelle v. Wah’ell &Reed, No. 2330 (N.Y.
App. Div. 1st Dep‘t. Feb. 13, 2003). In that
case, a New York appellate division tribunal
vacated the largest punitive damages award
ever made by arbitrators against a Wall Street
firm. The court struck down a $25 million
award made under the FAA, primarily on the
ground that it was grossly disproportionate
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Recent Cases That May Affect Your ArbitratiodADR Practice
(continued from previous page)
to the harm suffered by the plaintiff, a mutual funds broker, and thus “arbitrary and irrational.”
As a basis for its finding under the FAA,
the court applied the standard set out in BMW
o f North America v. Gore, 517 U.S. 559
(1995), which recognizes constitutional limits on the size of punitive awards granted by
judges and juries and holding grossly excessive awards to be a violation of due process.
The court noted, moreover, that because both
parties were in agreement on the rule of proportionality and had specifically informed the
panel of the rule, the disproportionate punitive award also was rendered in manifest disregard of the law.
While some may view Sawtelle as a nose
in the tent for those advocating stronger judicial review of arbitration awards, it seems
clear that if arbitrators have the ability to render punitive awards in exceptional cases then
courts need the ability to rein in extreme and
inappropriate results.
Green Tree Financial Cop. v. Bazzle, 569
S.E.2d 349 (S.C. 2002), cert. granted, Docket
No. 02-634 (Jan. 10, 2003)(to be argued
April 22, 2003)(”U.S. Supreme Court Is
Ready for More Arbitration,” 21 Alternatives
8 (January 2003)).
affirmed damages awards to two classes of plaintiffs in class action arbitrations involving defendant Green Tree Financial Corp. for violations
of the state’s Consumer Protection Code. re-
jecting Green Tree’s argument that class-wide
arbitration of the plaintiffs’ claims was not authorized by the arbitration agreement.
SPECIFICS: Plaintiffs Lynn and Burt Bazzle
and others entered into a standard financing
agreement with Green Tree to cover home
improvements. Plaintiff Daniel Lackey and
others entered into similar agreements for
purchasing mobile homes. The Bazzles later
filed suit against Green Tree, alleging violations of attorney and insurance agent preference provisions of the state Consumer
Protection Code. T h e Bazzlss filed an
amended complaint incorporating class allegations and a motion for class certification;
Green Tree sought an order staying litigation
and compelling arbitration. T h e court
granted class certification; Green Tree continued to pursue its arbitration motions,
which the court granted. In suhsequent orders, the court directed class-wide arbitration
and ordered the class action to proceed on an
opt-out basis.
In a parallel action against Green Tree
under the Consumer Protection Code,
Lackey and other plaintiffs also sought class
certification, and Green Tree sought arbitration. Following a Court of Appeals decision
upholding the enforceability of the arbitration provision, the parties consented to arbitrate before the same arbitrator appointed by
the court to handle the Bazzle action. The
arbitrator then raised the issue of class-action
arbitration and, over Green Tree’s objection,
issued an order directing class-action arbitration. The arbitrator personally oversaw certi-
fication of the plaintiffs’ class and subsequent
class notice.
Both cases proceeded to awards with participation by both sides. In both matters, the
arbitrator found Green Tree liable for violations of the South Carolina consumer protection statute and rendered a multimillion
dollar award to the class, including attorney
fees and costs.
A trial court confirmed both awards and
rejected GreenTree’s motion to vacate. Green
Tree subsequently appealed, and the South
Carolina Supreme Court assumed jurisdiction to hear a consolidated appeal.
T h e South Carolina Supreme Court
quickly disposed of the appellees’ argument
that Green Tree waived its ability to object to
class-wide arbitration by participating in the
process, observing that Green Tree had unsuccessfully sought to avoid the process in
both cases. It also concluded that the due
process rights of absent class members were
sufficiently protected.
The key questions were whether the B a z h
trial court and the arbitrator in the Lackey case
had contractual or legal authority to order the
arbitrations to proceed on a class-wide basis.
The South Carolina Supreme Court‘s analysis
confronted two conflicting lines of authority
among federal and state courts. The Seventh
Circuit ruled that courts lack authority to order class-wide arbitration under FAA Section
4,which requires courts to compel arbitration
in “accordance with the terms” of the parties’
agreement, unless the parties so provide in their
agreement. See Champ v. Siege1 Zading Co.,
55 E3d 269 (7th Cir. 1995).
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The Seventh Circuit supported its argument by drawing an analogy for class-wide
arbitration to decisions dealing with the authority of courts to consolidate actions under separate arbitration agreements in the
same proceeding. At least three other federal
circuits (the Second, Sixth, and Eighth) have
refused to order consolidationwhen the agreement is silent regarding consolidation. The
Seventh Circuit and other courts espoused
the principle that the FAA calls upon courts
to act with fidelity to the agreement, even if
the result is procedural inefficiency.
The South Carolina court,however, elected
to follow the path of Blue Cross u. Superior
Court, 67 Cal. App. 4th 42 (Cal. Ct. App.
1998), cert. denied, 527 U.S. 1003 (1999),
upholding judicial authority to direct classwide arbitration. After pointing out the potential prejudice to prospective class members
of proceeding separately against a party with
much greater resources because of arbitration
clauses in adhesion contracts, the court noted
that the Blue Cross tribunal concluded that the
FAA did not preclude application of a classwide arbitration rule by a state court.
Bhe Cross, in hct, held that FAA Section 4
on motions to compel arbitration-the nexus
of much contrary federal authority-was not
even applicable to state courts,a point the South
Carolina court found to be at least debatable.
While the FAA would prevail over state procedural rules in direct conflict with the FAA objectives-namely, enforcementof agreements to
arbitrate-a state precedent allowing class-wide
arbitration did not present such a conflict.
The court reviewed state authority favoring the arbitration of disputes, the rule that
ambiguities should be construed against the
drafting party, and courts’ authority to consolidate multiple arbitrations in a single proceeding in appropriate cases despite the silence
ofthe parties’ agreement. It then reasoned that
the court could rely on independent state
grounds to permit class-wide arbitration, construing the “ambiguity” created by the
contract’s silence as to the matter against the
drafting party, Green Tree. This was reinforced, said the court, by state pro-consolidation precedents.
The court concluded that class-wide arbitration may be ordered when the arbitration
agreement is silent where such action would
serve the goals of efficiency and equity, and
would not result in prejudice.
Under the circumstances, the court could
not say that the court’s decision to certify a
class-wide arbitration was an abuse of discretion. Nor could it vacate the arbitrator‘s rul-
ing in the Lackey case under the limited
grounds permitted by the FAA in reviewing
arbitration awards.
continues over the particulars of federal policy
governing employment arbitration.
IMPLICATIONS: In Southland C o p u. Keating,
465 U.S. 1 (1984, the U.S. Supreme Court
failed to accept the opportunity to address
the concept of class-wide arbitration. Now
the issue is squarely before it, along with a
chance to address two conflicting lines of
As recent revisions to the Uniform Arbitration Act and existing statutes in some states
suggest, the mere fact that parties have not
addressed the handling of multiparty disputes
in an arbitration clause does not necessarily
convey a mutual intent to deny consolidation of arbitrations involving the same events
and resulting factual and legal issues.
The Court also may take the opportunity
to clarify the application of FAA Section 4 to
state courts.
Jing v. AT&J, 319 F.3d 1126 (9th Cir.
Feb. 11, 2003)(”Appeals Court Upholds
Bar t o Arbitration,“ 2 1 Alternatives 23 (February 2003)).
EEOC v. Wafle House Inc., 122 S.Ct. 754
(2002) (”Case #1: Supreme Court Clarifies
Arbitration Limits,” 20 Alternatives 9 (January 2002); “After Wofle House, Arbitration
Gets ’New Trilogy’ of Employment Law,” 20
Alternatives 17 (Februaly 2002)).
HOLDING: Because the U.S. Equal Employment Opportunity Commission was not a
party to the arbitration agreement at issue in
the case and had interests independent of
those of an aggrieved employee, the agency
could file suit seeking individual relief for the
employee, such as back pay, grant pay, reinstatement or damages-even though the employee had signed a binding arbitration
IMPLICATIONS: The decision made clear that
no private agreement can prevent the EEOC
from addressing patterns and practices of discrimination, or from seeking injunctive relief. Even if an individual employee is subject
to arbitration, the EEOC can seek individual
relief on behalf of that individual in court.
At the same time, the Court recognized
that employers may rely on doctrines such as
res judicata, mootness or mitigation as defenses in EEOC suits where claims have been
settled or resolved through arbitration.
Interestingly, four of the six justices who
joined in the majority opinion, citing Circuit
CipStoresZnc. v.Adarns, 532U.S. 105 (2001),
for the proposition that the FAA applies to
statutory employment discrimination claims,
dissented in Circuit City. However, the debate
HOLDING: Various elements of the AT&T
Customer Service Agreement for long-distance customers, including provisions barring
class actions, requiring confidentiality regarding arbitrations, and splitting arbitrator fees,
were held unconscionable.
SPECIFICS: After the Federal Communications Commission ended a requirement that
long-distance rates and terms of service be
set in accordancewith specified tariffs, it made
telecommunications companies enter into
service contracts with their customers regarding interstate long-distance service. AT&T
included consumer services agreements, or
CSAs, with bills and other mailings to customers to comply with the new rules.
AT&T’s CSA included provisions requiring customers to submit disputes to binding
arbitration; placing limits on damages and
the time for bringing a claim; splitting arbitrators’ fees 50/50;barring class actions, and
requiring customers to keep arbitration proceedings confidential.
Customer Darcy Ting, on behalf of herself and others similarly situated, and San
Francisco nonprofit Consumer Action, filed
suit against AT&T, saying that the CSA violated California’s Consumer Legal Remedies
Act and the state’s Unfair Practices Act by,
among other things, prohibiting customers
from seeking relief as a class. The district
court enjoined enforcement of various CSA
provisions under the California Legal Remedies Act (CLRA) and on unconscionability
The Ninth Circuit found that the district court’s determination that the California laws were not preempted by the Federal
Communications Act injunction, under a
“clearly erroneous standard.” First, the appeals court determined that the Federal
Communications Act did not preempt state
law addressing the formation or elements of
long-distance contracts, and that the California consumer legal remedies and unconscionability laws did not undermine the
accomplishment and execution of the federal law, particularly in the new “de-tariffed,”
market-based environment.
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Recent Cases That May
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ADR Practice
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The court emphasized the lower court’s
extensive fact findings, noting that AT&T
presented no evidence that the legal remedies
or class-action limits would produce lower
charges to customers. It affirmed the district
court’s determination that the state legal remedies provisions did not constitute an unreasonable discrimination affecting AT&T’s
rates, terms or conditions in contravention
of federal law. The appellate court, however,
also found that the CLRA, as a consumer statute, was preempted by the FAA because it
was not a statute of “general application.”
The Ninth Circuit, however, had no such
difficulty with the unconscionability analysis. Addressing the issue de novo, the appellate court reviewed and affirmed the lower
court’s finding that the limits on remedies,
barring of dass actions and confidentiality
requirements were unconscionable.
The court easily found adhesive elementsa standardized contract drafted by a party of
superior bargaining strength on a take-it-orleave it basis. AT&T had told customers that
all providers had adopted arbitration provisions-supporting a finding of procedural
unconscionability. The court observed that
AT&T had conducted a market study that
indicated most customers would stop reading and discard mailings after reading an initial reference to the new CSA.
Three provisions were found to be substantively unconscionable:
I . T h e no-class-action provision was
“manifestly one-sided and would “heighten
the repeat-player effect.”
2. The requirement that fees be shared
imposes on
some consumers costs greater
than those a complainant would bear if he or
she would file the same complaint in court.”
Although the application of unconscionability principles to fee-splitting appears to be a
doctrine that only applies to arbitration, and
therefore arguably adverse to the FAA, a number of courts have stated that parties agreeing
to arbitrate statutory claims still are entitled
to the basic procedural and remedial protections needed to vindicate their statutory
rights. The court also argued that all is permissible under the banner of unconscionability, since it applies to contracts generally
and does not single out arbitration agree-
ments. See Doctori Assocs. Inc.
517 U.S. 681 (1996).
3. The requirement that arbitrations were
to remain confidential favored the company
over individuals,since a gag order would make
ir difficult for plaintiffs to mitigate the advantages the company enjoys as a repeat player
handling the same claims in arbitration.
IMPLICATIONS: Ting‘s determination that the
Federal Communications Act does not preempt state contact and consumer protection
laws is directly contrary to Roome? v. ATdT
Covp., 309 F.3d 404 (7th Cir. 2002)-setting
the stage for potential U.S. Supreme Court
review. The decision is consistent with a number of recent decisions addressing special due
process standards for consumer or employment contracts.
The federal preemption analysis presents
interesting questions. Why did the Ninth
Circuit so easily find that the CLRA was preempted by the FAA just because it was a consumer statute, given the fact that it applies
across the board whether or not an arbitration agreement is present? Another interesting proposition is that since unconscionability
applies to all contracts and not just arbitration agreements, it does not run afoul of the
FAA. There are circumstances, however, in
which the issues are unique to arbitration
Finally, how far might a court go in reforming an arbitration clause rather than
simply refusing to enforce terms? At least
one court has considered the possibility of
structuring a class action in a private setting. This, of course, requires considerable
judicial resources over and above that normally associated with enforcement of arbitration agreements.
University Commons-Urbana Ltd. v. Universal Constructors Inc., 304 F.3d 1331 (11th
Ck., Sept. 13, 2002).
HOLDING: A district court decision confirming a construction arbitration award in favor
of University Commons is vacated and the
case remanded for an evidentiary hearing in
order to make findings of fact and conclusions of law as to the partiality of the chair of
the arbitration panel.
SPECIFICS: University Commons, an Illinois-based partnership formed by Capstone
Development Corp., a Birmingham, Ma.based builder of campus housing, contracted
with Universal to build an apartment com-
plex near the University of Illinois at the Urbana-Champaign campus. After significant
problems and delays, Capstone terminated
Universal’s contract on the basis of alleged
material breach. Capstone hired Capstone
Building, a company with significant common ownership, to complete the job.
University Commons filed a demand for
arbitration with the American Arbitration
Association. A panel of arbitrators was appointed with Edward Myerson, a Birmingham, Ala., attorney, as chairman. At no time
leading up to the hearings did Meyerson disclose any involvement with the parties, the
witnesses, or counsel, or make any other disclosure of a potential conflict of interest.
At the hearings’ commencement,Meyerson
acknowledged that he had worked with and
on opposite sides from the attorneys and law
firms on both sides of the matter. During the
arbitration, Meyerson indicated that he had
conversations with Capstone Building about
doing future legal work. Also, at the time
Capstone Development’s construction manager appeared as a witness, Meyerson acknowledged that he had met the man previously.
After an arbitration award of more than $2
million, and interest, to UniversityCommons,
Universal and its surety filed a petition to vacate, and sought discovery from University and
its law firm regarding Meyerson’s potential
conflicts of interest. After the court directed
limited discovery, University Commons and
its law firm declined most of Universal’s requests for admissions and documents. The
court subsequently determined that its initial
discovery order was incorrect, and confirmed
the arbitration award.
O n appeal, Universal sought to overturn
the district court’s opinion on two bases: (1)
manifest disregard for the law by the arbitrators, and (2) Meyerson’s previous contacts
with University, its law firm, and project
manager, establishing evident partiality.
A three-judge Eleventh Circuit panel
quickly disposed of the first ground, explaining that “to manifestly disregard the law, one
must be conscious of the law and deliberately
ignore it.”The absence of a proceeding; transcript or any rationale in the “bare bones”
award meant that the court had no indication of the arbitration panel’s reasons for
reaching their award, and no basis for concluding that the panel had acted in manifest
disregard of the law.
There was, however, a prima facie case that
Meyerson was “evidently partial” in accordance with the provisions of FAA Section
lO(a)(2).The court noted that arbitration law
sets up “the simple requirement that arbitrators disclose to the parties any dealing that
might create an impression of possible bias,”
citing CommonwealthCoatings C o p v, Contl
IMPLICATIONS: Arbitrator nondisclosure is
probably the most common ground for motions to vacate. This decision. while laying
out and applying the current law in a cogent
fashion, recognizes the practical realities of
Having contracted for partisan
arbitrators, it seems, parties must
take their chances that procedures
will be significantly less pristine.
Cas. Co., 393 S. Ct. 145, 149 (1969), and
that this basic principle is paralleled by arbitration procedures such as the AAA’s.
In the Eleventh Circuit, an arbitration
award may be vacated on evident partiality
grounds on the basis of an actual conflict, or
when “the arbitrator knows of, but fails to disclose, information that would lead a reasonable person to believe that a potential conflict
exists.” Gianelli Money Purchme Plan d Trust
u. ADM Investor Sews. Inc., 146 F.3d 1309,
1312 (11th Cir. 1998).The partiality alleged
“must be direct, definite and capable of demonstration rather than remote, uncertain and
speculative.”Middlesex Mut. Ins. Co. u. Levine,
675 F.2d 1197, 1202 (11th Cir. 1982).
The court also indicated that in examining the interactions, it might use different
standards depending on whether they occurred prior to or during the same time as
the instant arbitration. Finally, the court acknowledged that “familiaritydue to confluent
areas of expertise does not indicate bias,” and
may, in the absence of an ongoing business
relationship, “be an asset” to an arbitrator.
Scott v. Prudential Sec. Inc., 141 E3d 1007,
1016 (11th Cir. 1998).
T h e court proceeded to find that
Meyerson’s concurrent appearance as cocounsel with one of University Commons’
representatives in the arbitration established
prima facie proof of partiality, as did his meeting with Capstone Building, the completion
contractor that shared significant common
ownership with Capstone Development, during the course of arbitration to discuss potential business. It vacated the district court
decision confirming the arbitration award and
directed further factfinding on the question
of partiality.
modern legal specialty practice and its importance in arbitration. The opinion also
makes it clear that blanket statements regarding relationships are insufficient to cover concurrent relationships or connections, at least
those involving pecuniary interests. Moreover,
the duty to disclose is a continuing one.
Delta Mine Holding Co. v. AFC Coal Propert i e s h c . , 280 F.3d 815 (8th Cir. 2001), cert.
denied, 123 5. Ct. 87 (Oct. 7, 2002)(”Review Denied in Party Arbitrator Case,” 20
Alternatives 52 (March 2002)).
HOLDING: District court‘s vacarur of two arbitration awards on the basis of evident partiality on the part of a party arbitrator on a
tripartite arbitration panel is reversed and remanded with directions to confirm both
SPECIFICS: Delta Mine entered into two
leases of AFC property at sites in Illinois for
coal mining. A dispute arose regarding the
lease terminations. Two three-arbitrator panels were established, one for each lease site. In
accordance with the contract, Delta xnd AFC
each selected a mining engineer as their party
arbitrator for both matters; these party arbitrators selected different chairs for the two
In one case, the neutral arbitrator and
Delta Mine’sparty arbitrator ruled that Delta
Mine could terminate its lease. In the other
matter, the neutral ruled that Delta Mine
could terminate, but awarded an offset to
AFC; the AFC party arbitrator concurred
with the offset but dissented from the termination award; the Delta Mine party arbitrator concurred with the termination but
dissented from the offset.
A Missouri district court vacated both
decisions upon AFC’s motion, citing misconduct by Delta Mine’s party arbitrator. The
court‘s decision was based on findings that
the Delta Mine arbitrator failed to disclose
his extensive consulting relationship with
Delta Mine and its attorneys, which involved
the arbitrator and several members of his staff
in preparing witnesses, developing exhibits,
and otherwise helping Delta Mine prepare
its case.
An Eighth Circuit panel overturned the
order to vacate and sent the case back with
orders to confirm both awards. The appellate
court determined that:
1, AFC, after becoming aware of a potential undisclosed conflict on the part of Delta
Mine’s arbitrator, failed to raise the issue before the arbitrators in a sufficient manner-even though it requested the arbitrator’s
2. In any event, the removal request was
appropriately denied by the arbitration panel
because it should have been understood since
the party-arbitrator is deemed to have the
same degree of “evident partiality as an officer, employee, or attorney of Delta Mine.”
3, Finally, the arbitrator’s nondisclosure
was not shown to have a prejudicial impact
on the awards-the neutral arbitrators dealt
with the party arbitrators as advocates for
their parties’ positions.
IMPLICATIONS: Despite repeated complaints
from many practitioners and judges, tripartite panels featuring less-than-neutral party
arbitrators remain a feature of the U.S. arbitration landscape. Although recent efforts
such as the passage of a Revised Uniform
Arbitration Act and pending changes to the
Code of Ethics for Arbitrators in Cornmercia1 Disputes may bring about a change in
the disclosure requirements affecting party
arbitrators, domestic tripartite procedures
remain a world apart where seemingly anything goes. Having contracted for partisan
arbitrators, it seems, parties must take their
chances that procedures will be significantly
less pristine.
As presented by this decision, the partyarbitrator is no different from a party or counsel. While this may be the practical result in
many cases involving tripartite panels, even
the old Code of Ethics for Arbitrators in
Commercial Disputes (applicable in these
proceedings) seems to embody a less vociferous model- namely, “predisposed but open
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Recent Cases That May
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minded.”The Eighth Circuit, however, made
clear that it did not view the code as controlling the issue of vacatur under the FAA, and
seems to say that one should always assume a
party arbitrator is nothing more than a creature of his or her party in the absence of specific agreement to the contrary.
The Eighth Circuit’s insistence on proof
of a specific prejudicial nexus between nondisclosure and the resulting award is 180 degrees from the approach of the U.S. Supreme
Court in the seminal evident partiality opinion, Commonwealth Coatings, which stands
for the proposition that the failure to disclose
certain relationships or facts may in itself be
sufficient ground for vacatur. Commonwealth
Coatings C o p u, Cont’l Cas. Co., 393 S. Ct.
145, 149 (1969). Delta Mine would appear
to limit that landmark holding to the conduct of neutral arbitrators.
Kyocera Cop. v. Prudential-Bache Trade Svcs.
Inc., 314 F.3d 1003 (9th Cir. Dec. 17,
2002)(“Kyocera Case W i l l Continue as Rehearing Is Granted,” 21 Alternatives 5 (January 2003).
HOLDING: The most recent decision by a
three-judge panel in this long-running case,
which stands for the principle that parties may
expand the scope of arbitration award judicial review, is vacated. The full Ninth Circuit
was expected to hear arguments March 25,
but at the last minute, as Alternatives went to
press, the court ordered the parties to re-brief
the case on the key issue involving the ability
of parties to agree to a less-deferential review
standard than that provided by the Federal
Arbitration Act.
SPECIFICS: This controversy lends itself to a
1985- LaPine Technology Co. and Kyocera
Corp. enter into two contracts for the sale of
disc drives between the two parties and a technology firm in which both had invested. The
contract provides for enhanced judicial review
of any arbitration award:
“The Court shall vacate, modify or
correct any award: (i) based upon any
of the grounds referred to in the Federal Arbitration Act, (ii) where the arbitrators’ findings of fact are not
supported by substantial evidence, or
(iii) where the arbitrators’ conclusions
of law are erroneous.”
1986- Litigation ensues.
1987- A federal district court grants Kyoceras
motion to enforce the parties’ arbitration
1994-After an arbitration process extending
over four years, with hundreds of facdindings
and conclusions of law, 15,000 pages of hearing transcripts, and 72 boxes of documentary
evidence, an ICC arbitration panel renders a
final $257 million award against Kyocera.
Kyocera seeks to have the award vacated.
1997-After the initial award is confirmed by
a federal district courr under FAA standards,
Kyocera appeals. The Ninth Circuit determines that the parties’ original agreement for
enhanced scrutiny of the award is enforceable, reverses the district court award and remands the case for review in accordance with
the contractual standard. La Pine E*chnology
Corp. u. Kyocera Corp., 130 E3d 884 (9th Cir.
The district court subsequently finds no errors of law in the award, and determines that
conclusionswere amply supported by the facts,
but vacates one finding on the basis that the
accounting record showed an operating loss for
LaPine rather than an operating profit as found
by the tribunal. The court “remands”to the arbitrators to consider the effect of the vacated
finding on the damage award. The arbitrators
determine there is no impact on the damages.
The subsequent award is confirmed by the
district court and Kyocera’s motion to vacate
is denied.
July 2002 - Kyocera appeals, citing numerous bases for vacating or modifying the award.
Among other things, it argues that if any finding is unsupported by substantial evidence,
the entire award must be vacated, and that
the court erred in remanding to the arbitration panel, which was no longer operational
after issuing the award.
A three-judge Ninth Circuit panel affirms
the district COUK ruling, examining at great
length the district court‘s review ofthe arbitration panel’s efforts and thereby reviewing the
latter’s factual and legal determinations regarding contract formation, causation,damages and
offset, as well as Kyocera’s claim that it was
excused from performance under California
law. The panel considered the attorneys fees
awarded the appellee, as well as interest.
It determined that it was within the power
of the district court to vacate a single finding
of fact rather than the whole award, and that
the court had power to remand the award to
the arbitrators for “clarification” under applicable precedent. Kyocera COT.u. Prudential-Bache Trade Services Inc., 299 E3d 769
(9th Cir. 2002).
- The panel’s decision is vacated pending a rehearing en banc by the
Ninth Circuit. After scheduling the case for
late March, the court pulled the case and ordered rebriefing, posing the issues widely and
indicating that the 1997 issues would be reexamined. On the Ninth Circuit Web site, the
court states that the issues are: “Following
remand in prior appeal LaPine Tech. Corp. v.
Kyocera, 130 E3d 884 (9th Cir.1997), did the
district court err by confirming an award by
an Arbitration Tribunal of the International
Chamber of Commerce in favor of Prudential-Bache Trade Corp., LaPine Technology
Corp. and LaPine Holding Company, on
their claims that Kyocera Corporation
breached a contract to manufacture and deliver certain computer disk drives?May a contract between private parties bind a federal
court to apply a less deferential standard of
review than the standard specified in the Federal Arbitration Act?”
December 2002
IMPLICATIONS: The ability of parties to expand the scope of judicial review of arbitration awards has generated widely varying
responses by federal and state courts. This
case, which has become the jarndyce ZJ.
Jarndyce of commercial arbitration, underlines the serious practical implications of a
decision to experiment with a private-public
hybrid. The debacle that resulted from drafting choices implicates questions of judicial
resources and illustrates several of the procedural issues- including precision in setting
standards of review, and the handling of a
remand -that drafters of these kinds of provisions ignore at their peril. While many practitioners may question whether expanded
post-award procedures are ever wise in arbitration, the decision provides a good argument for alternatives, including private
appellate processes. See, e.g., the CPR Arbitration Appeal Procedure at
The Ninth Circuit‘s last-minute order for
re-briefing suggests that the appellate court
may wish to reconsider its earlier statement
of support for contractual expansion ofjudicial review under the FAA. A concise discussion ofpertinent legal and practical issues may
be found in “Commercial Arbitration At Its
Best -Final Report of the CPR Commission O n The Future Of Arbitration” (Thomas J. Stipanowich & Peter Kaskell, eds.
2001), Ch. 7.
Kemiron Atlantic Inc. v. Aguakem Int?, 290
F.3d 1287 (11th Cir. 2002).
HOLDING: A district court order denying a
motion to stay a suit for breach of sales contract, unjust enrichment, and declaratory relief is affirmed where neither party requested
mediation, a preliminary step in the parties’
dispute resolution agreement.
SPECIFICS: When Aguakem failed to make
full payment to Kemiron under a contract
for the sale of chemicals, Kemiron sued
Aguakem for breach of contract and unjust
enrichment and sought a declaratory judgment. The contract contained a dispute resolution clause that provided “the parties shall
be free to [engage in] the prompt and effective adjustment of any ... differences ... under friendly and courteous circumstances.”
Failing settlement in this fashion, the agreement provided that “the matter shall be mediated within fifteen (15) days after receipt
of notice. ...” Finally, the contract provided
that “[iln the event the dispute cannot be
settled through mediation, the parties shall
submit the matter to arbitration within ten
[ 101 days after receipt of notice. . ..”
Aguakem’s motion to stay Kemiron’s suit
pending arbitration pursuant to the FAA was
denied by the district court on the basis that
there was no duty to arbitrate until the parties
had first mediated their dispute, followed by a
notice by a party of the intention to arbitrate.
Reviewing the district court’s determination de
novo, the Eleventh Circuit panel also concluded
that the agreement to arbitratewas “conditioned
by the plain language” of the provision requiring mediation before arbitration.
IMPLICATIONS: The growing use of multistep
clauses has confronted federal and state courts
with questions relating to compliancewith preliminary steps to arbitration. Their response
has been anything but uniform. For example,
in Wellborn Clinic v. MedQuist Inc., 301 F.3d
634 (7th Cir. Aug. 29, 2002), a court ruled
that a party’s failure to follow contractually
mandated requirements to enter into goodfaith negotiations and provide timely notice
did not undermine the enforceability of the
arbitrationagreement.The courtexplained that
the purpose of the preliminary step was “to
encourage successful negotiations so that neither litigation nor arbitration will be neces-
sary, not to prefer the courts to an arbitrator if
informal discussions break down.”
Kemivon is questionable in several respects.
There is no specific agreement language supporting the conclusion that the prescribed preliminaries were “conditions precedent” to arbitration requiring denial of the enforcement
of the arbitration agreement. Contrast HIM
PortlandLLCv. Dewto Buikhrs Inc., 2002 US.
App. Lexis 659 (1st Cir., Jan. 17,2003) (reaching a similar result where contract-specifiedmediation was a condition precedent to arbitration). Its decision undermines the strong FAA
policy supporting broad enforceability of arbitration agreements and seemingly ignores
recent SupremeCourt directives respecting the
relative spheres of courts and arbitrators with
respect to arbitrability determinations. See
Howsam above. See also Thomas J.
Stipanowich, “Contract and Conflict Management,” 2001 Wis. L. Rev. 831, 865-866
(2001). The ironic result of the decision is that
the parties end up in litigation, which seems
far indeed from the spirit oftheir original agreement. Perhaps on remand the district court
will pressure them to mediate!
Dluhos v. Strasberg, Docket No. 01-3713,
2003 WL 360964 (3d Cir. Feb. 20, 2003)
(technical amendments filed Feb. 25,2003)
HOLDING: District court affirmanceofapanel’s
award in a dispute resolution procedure under
the Internet Corporation for Assigned Names
and Numbers’ (Icann) Uniform Domain
Name Dispute Resolution Policy (UDRP) is
inappropriate under the FAA. The order is reversed and remanded for de novo review of
award under the AnticybersquattingConsumer
Protection Act.
plaint in federal court, all the defendants filed
motions to dismiss for failure to state a claim.
The court granted the defendants’ motions,
and proceeded to review NAF’s decision under the grounds provided in FAA Section
1O(a) and the “manifest disregard standard.
The court upheld NAF’s decision.
The appeals court reversed, determining
that the UDRP’s unique contractual arrangement, which does not prevent any party from
filing suit before, during or after the dispute
resolution proceedings, renders the FAA’sprovisions for limited, post-award judicial action
inapplicable. Moreover, because a trademark
holder or a holder’s representative need not
use the UDRP procedure before going to
court, the notion of judicial compulsion to
arbitrate prior to judicial review, and the notion of a stay of litigation pending completion of arbitration, are inapposite.
IMPLICATIONS: What is arbitration for the
purposes of statutory enforcement?The FAA
and state statutes give precious little guidance,
and courts have taken a variety of approaches
to address the issue; some decisions have even
applied such statutes to the enforcement of
mediation agreements! See generallyThomas
J. Stipanowich, “Contract and Conflict Management,” 2001 Wis. L. Rev. 831, 858-865.
Dluhos, while establishing no all-purpose
test, lays out some reasonable boundaries for
FAA application. If a given procedure is not
within the purview of the FAA or state arbitration statute, there may be significant questions regarding the natute of review to be
accorded the decision. Here, a specific statute provided a hook for judicial action. dh
SPECIFICS: After plaintiff Dluhos registered
the domain name, interests representing the estate of actor and acting coach Lee Strasbergfiled a complaint with
provider National Arbitration Forum under
the terms of the Icann UDRP procedure, alleging that the name was “identical or confusingly similar to” an estate-owned
trademark. Dluhos filed a letter of limited appearance before NAF to contest jurisdiction,
and announced an intent to file suit in federal court challenging the constitutionality of
the process, which he did.
Proceeding without Dluhos’ participation,
the NAF panel issued an award directing that
the domain name registered by Dluhos be
transferred to the Strasberg estate. After
Dluhos filed an amended, broad-based com-
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