« Anti-class-action clause was unconscionable | Main | Contract deprived appellate court of jurisdiction »

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.

My view:

• 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.

	Web www.LawMemo.com  This form will search the LawMemo web site. It does not include the Caselaw Database.