Contract deprived appellate court of jurisdiction
October 28, 2005 by Ross Runkel at LawMemo
An arbitration agreement provided that a court judgment entered on an arbitration award was nonappealable. The 10th Circuit holds that this deprives the appellate court of jurisdiction.
MACTEC v. Gorelick (10th Cir 10/26/2005).
On the other hand, that same court previously held that parties cannot expand the level of appellate review through their contract.
My view: There is no statutory bar to having the parties agree to eliminate appellate review of a judgment confirming an award. Therefore, the parties are free to have such an agreement.
Nondisclosure voids arbitration award
October 27, 2005 by Ross Runkel at LawMemo
An employee who lost in an employer-employee arbitration got the award set aside because the arbitrator did not comply with California's stringent disclosure rules. Ovitz v. Schulman (California Ct App 10/26/2005).
Catherine Schulman had an arbitration agreement with her employer. After she left (resigned or fired, depending on whom you ask), the employer filed an arbitration demand with the American Arbitration Association (AAA).
- The parties agreed on an arbitrator "subject to all of the disclosure requirements imposed" by the AAA and the California Code of Civil Procedure.
- Later, the parties agreed that "judicial review shall be limited as provided by California Code of Civil Procedure Section 1286.2 or other applicable law."
- As it turned out, the arbitrator's disclosure form failed to meet the requirements of the California Ethics Standards for Neutral Arbitrators in Contractual Arbitration.
Meanwhile, the case went before the arbitrator who issued an award in favor of the employer for about $1.5 million plus another $1.8 million in attorney fees and costs.
Schulman petitioned the court to vacate the award on the ground that the arbitrator failed to comply with California's disclosure rules. The trial court vacated the award, and the Court of Appeal affirmed.
Two key holdings:
- The arbitrator's nondisclosure triggers a statute that requires a court to vacate any award issued by the arbitrator. No discretion.
- California's law on automatically vacating an award is not preempted by the Federal Arbitration Act (FAA) provisions which state the grounds for vacating an award. Three reasons:
- The relevant FAA sections (Sections 10 and 12) apply only to federal district courts, and not to state courts at all.
- The California statute is not inconsistent with the FAA's purpose; it neither limits the use of arbitration nor discourages the use of arbitration; it does not reflect a hostility toward arbitration.
- The parties agreed to California disclosure rules and also agreed to judicial review under California law.
- I think a good case can be made that the California disclosure rules themselves discourage the use of arbitration. Even more so when the statute requires that the award be overturned even though there was no actual bias on the part of the arbitrator.
- The outcome of the case is correct for one simple reason. The parties agreed on the disclosure rules and agreed on the California rules for judicial review of the award. Those agreements were made after the dispute arose, and everybody had their eyes wide open.
Anti-class-action clause was unconscionable
October 21, 2005 by Ross Runkel at LawMemo
A franchise agreement contained an agreement to arbitrate disputes, and specifically barred class action arbitrations. The California Court of Appeal now says such a ban on class actions is unconscionable. Not only that, the court ordered that the individual claims be consolidated. Independent Association of Mailbox Center Owners v. Superior Court (Mail Boxes Etc., USA) (California Ct App; decided 09/16/2005; ordered published 10/13/2005).
I thought the opinion was bit cavalier in its unconscionability analysis. Typically this is a fact-specific inquiry. However, the court's reasoning seemed to be that franchisees are similar to employees and consumers, so they sort of automatically qualify for unconscionability protection. Just a bit too patronizing for my taste.
No agreement for enhanced judicial review
October 20, 2005 by Ross Runkel at LawMemo
Circuit courts are split on the issue of whether parties to an arbitration agreement can agree on a broader form of judicial review than what the Federal Arbitration Act (FAA) provides.
The 1st Circuit has now announced that it is in the "yes they can" camp. Puerto Rico Telephone v. U.S. Phone Manufacturing (1st Cir 10/14/2005.
However, such an agreement must be clearly made.
When the parties simply agree to use the law of a particular state (and that state's law allows an enlarged form of review), that's not enough. It's not clear enough.
Cost-shifting clause is severed
October 07, 2005 by Ross Runkel at LawMemo
(1) When will a cost-shifting clause in an arbitration agreement be unlawful? (2) If unlawful, does the whole agreement go down in flames?
Federal circuit courts handle the first question a number of ways. One way is to consider whether such a provision is unconscionable as a matter of state law. Another way, quite popular among federal courts, is to apply federal law - interpreting what the US Supreme Court has said about the Federal Arbitration Act (FAA). Courts split three ways on the federal law question. Here are my shorthand versions of these three ways:
- If the cost to the employee would include either unreasonable costs or any of the arbitrator's fees or expenses, then the clause is unlawful. Example: Cole v. Burns International Security Services, 105 F.3d 1465 (D.C. Cir. 1997); Armendariz v. Foundation Health Psychcare Services, 6 P.3d 669 (Cal. 2000).
My view on this: Cannot be supported either by the text of the FAA or the language of Supreme Court cases. The California case is based on California law.
- If the employee can prove that the actual costs, in the context of the employee's actual income and savings, will be a substantial hurdle, then the clause is unlawful. Bradford v. Rockwell Semiconductor Systems, Inc., 238 F.3d 549 (4th Cir. 2001), and cases collected.
- If the clause would deter a substantial number of similarly situated litigants, then the clause is unlawful. Example: Morrison v. Circuit City Stores, 317 F3d 646 (6th Cir en banc 01/30/2003).
Scovill v. WSYX/ABC (6th Cir 10/06/2005) is an example of the third method. However, the court ruled that the whole arbitration agreement does not get thrown out. It gets severed (the agreement had a severance clause), and then the employee is ordered to arbitrate without the cost-shifting clause.
- The trial court estimated the arbitration costs would be at least $15,310, based on a filing fee of $3,250, a service fee of $1,250, arbitrator's fees ($1,260 per day) for a four-day hearing plus another 4 1/2 days of motions, discovery, and decision-making.
- The cost was weighed against the individual's situation: recently lost his job, uncertain future income, children to support, no large savings.
My view: The 6th Circuit is pretending to analyze "similarly situated litigants," but it really simply looks at the specific facts for the litigant at hand, and assumes they are typical.
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