VACATING LEGALLY-ERRONEOUS ARBITRATION AWARDS

My latest article, which is being published at 6 Yearbook on Arbitration and Mediation 56 (2014).

Abstract: In the United States, arbitrators’ decisions are legally binding. Courts generally confirm and enforce, rather than vacate, arbitration awards. Suppose, however, that the arbitration award is very different from the judgment a court would have rendered had the dispute been litigated, rather than arbitrated. And suppose this is because the arbitrator did not correctly apply the law. If the party that lost in arbitration (the party that would have done better with a correct application of law) asks a court to vacate the award because it is legally erroneous, will the court vacate or confirm the award? And does the answer depend on:

• Whether the parties formed their agreement to arbitrate before or after the dispute arose?
• Whether the agreement’s terms ask courts to vacate or confirm legally-erroneous arbitration awards?
• Whether the arbitrator did not try to apply the law or tried to apply it but did so incorrectly?
• Whether the law the arbitrator did not correctly apply is well-established or in doubt? Simple or complex?
• Whether the law the arbitrator did not correctly apply is mandatory law (binding on the parties despite a contract term to the contrary) or default law the parties may contract around?

These questions are the subject of this article. I suggest that arbitration law in the United States has answered these questions differently over time and that these changes in legal doctrine roughly divide into four eras. Unfortunately, recent Supreme Court cases have left much uncertainty on the fundamental question whether arbitration awards must apply the law correctly to avoid vacatur.

American Arbitration Association Consumer Arbitration

More good work by my University of Kansas School of Law faculty colleague, Christopher R. Drahozal.  Professor Drahozal is serving as a Special Advisor to the Consumer Financial Protection Bureau on its study of arbitration clauses in consumer financial services contracts.

His abstract:

This chapter has provided an overview of consumer arbitrations administered by the American Arbitration Association, the largest administrator of consumer arbitrations. It does not, of course, purport to resolve the ongoing debate over arbitration and access to justice. A consumer’s incentive to bring a claim (and an attorneys’ incentive to take a case) depend on the costs of the process and the expected outcome in the forum. With the recent amendments to its consumer arbitration rules, the AAA reduced the cost to consumers of bringing claims in arbitration, both by lowering the upfront fees and by largely precluding reallocation of fees to consumers in the award. The expected outcome in arbitration (in particular, relative to the expected outcome in court) presents a much more difficult question because limits to available data preclude comparison of similarly-situated complainants. More research remains to be done.

Part of what I like about this chapter’s review of empirical studies is that it points out when selection effects make it hard to draw conclusions from the data.

Arbitration of Stockholder Disputes

Claudia H Allen, of Katten Muchin Rosenman LLP, has written Bylaws Mandating Arbitration of StockholderDisputes? forthcoming in the Delaware Journal of Corporate Law.

The abstract reads as follows:

Would a board-adopted bylaw mandating arbitration of stockholder disputes and eliminating the right to pursue such claims on a class action basis be enforceable? That question came to the fore as a result of late June 2013 decisions from the United States Supreme Court and the Delaware Court of Chancery, which, when read together, suggest that the answer to this question is yes. In American Express Co. v. Italian Colors Restaurant, the United States Supreme Court, interpreting the Federal Arbitration Act, upheld a mandatory arbitration provision, including a class action waiver, in a commercial contract. The decision focused upon the arbitration provision as a contract subject to the FAA. Next, the Delaware Court of Chancery rendered its opinion in Boilermakers Local 154 Retirement Fund v. Chevron Corp. The decision, which emphasized that bylaws are contracts between a corporation and its stockholders, upheld the validity of bylaws adopted by the boards of Chevron Corporation and FedEx Corporation requiring that intra-corporate disputes be litigated exclusively in Delaware courts. Subsequent United States Supreme Court and Delaware Supreme Court decisions addressing forum selection and the board’s power to adopt bylaws have only strengthened the argument.

In addition to complementing each other, both American Express and Boilermakers address a similar issue, namely, the explosion in class action and derivative litigation that settles primarily for attorneys’ fees, most commonly in the context of mergers and acquisitions. Stockholders ultimately bear the costs of such litigation. Class actions and derivative lawsuits are forms of representative litigation, in which named plaintiffs seek to act on behalf of a class of stockholders or the corporation itself. The plaintiffs are customarily represented by attorneys on a contingent fee basis, making the lawyer the “real party in interest in these cases.” If mandatory arbitration bylaws barring class actions were enforceable, the logical outcome would be a marked decline in class actions, since the alleged existence of a class is a principal driver of attorneys’ fees.

This Article examines the legal and policy issues raised by arbitration bylaws, whether adopting such bylaws would be attractive to public companies, likely reaction from stockholders and opportunities for private ordering. Since arbitration is a creature of contract, this article argues that there are opportunities for corporations to craft bylaws that take into account company-specific issues, while responding to many likely criticisms. However, the inherent bias of some stockholders and corporations against arbitration is likely to make experimentation in this area slow and difficult.

California Appeals Court Holds Arbitration Clause Unconscionable

 Sabia v. Orange County Metro Realty, Inc., No. B243141 (2nd Dist. Div. 8 June 18, 2014) summarized by California Mediation and Arbitraiion.

Vacating Arbitration Awards

Liz Kramer reports an Alabama Supreme Court justice's statement: “further reflection has caused me to question whether arbitrators who willfully ignore applicable state law are not, in fact, ‘exceeding their power’ or acting ‘beyond their authority’ within the contemplation of” Federal Arbitration Act Section 10(a)(4).

Venue of Actions To Enjoin Arbitration

A Compelling Case for Streamlining Venue of Actions To Enjoin Arbitration, by Jason W. Burge & Lara K. Richards, in the Tulane Law Review.

"A circuit split has developed regarding whether federal courts have the power to compel arbitrations in districts outside their own, stemming from § 4 of the Federal Arbitration Act’s conflicting permissive versus mandatory venue provisions. There are likewise conflicting opinions regarding whether a federal court can enjoin an arbitration pending in another district. This Article explores the disparate decisions on these issues, arguing that venue for an action to enjoin arbitration should be limited to the district where arbitration is pending in order to promote judicial efficiency, to prevent forum shopping, to avoid inconsistent rulings, and to funnel parties quickly to arbitration."

10th Circuit Holds Unsigned Arbitration Agreement Unenforceable

Bellman v. i3Carbon, LLC, 2014 WL 2210739 (10th Cir. May 29, 2014), discussed by Liz Kramer

The court writes "Defendants argue that Plaintiffs manifested their acceptance of the
Operating Agreement, and specifically the arbitration provision, when they
invested in i3Carbon following receipt of the approximately 200-page
Investment Binder. However, the Operating Agreement included in the
Investment Binder did not have Plaintiffs’ names on it and did not indicate that
Plaintiffs were expected to sign it. Moreover, Plaintiffs have submitted
uncontroverted evidence that (1) i3Carbon never requested that they sign the
Operating Agreement or agree to its provisions, and (2) Plaintiffs, in fact, did
not sign the Operating Agreement."

California Arbitrator Disclosure

California Mediation and Arbitration summarizes recent case applying California statute on arbitrator disclosure:

"Though Code of Civ. Proc., section 1281.9 requires disclosure of “any professional or significant personal relationship” [between arbitrator and party or lawyer], evolving case law doesn’t require disclosure of any professional relationship.  Pointing to rules that are concerned about only two years of relationships (Ethics Stds., std. 7(d)(8)(A), Code of Civ. Proc., section 170.1(a)(2)), the Court concluded a five year old relationship did not need to be disclosed."