Ninth Circuit Vacates “Completely Irrational” Arbitration Award

While judicial enforcement of arbitrators’ decisions is an essential centerpiece of arbitration law and practice, the Ninth Circuit Court of Appeals recently vacated the district court opinion in Aspic Eng’g & Constr. Co. v. ECC Centcom Constructors, 2019 WL 333339 (9th Cir. Jan. 28, 2019), finding that the arbitrator issued a “completely irrational” award. The Ninth Circuit opinion is unusual in the extent to which it relies on labor arbitration precedents to vacate a non-labor arbitration award.

The underlying dispute in Aspic was between a subcontractor hired to construct facilities in Afghanistan and the general contractor. The sub alleged the GC owed the sub a significant amount and the arbitrator agreed despite the fact the sub failed to perform material provisions of the underlying contract. By ruling for the subcontractor despite these failings, the arbitrator exceeded his authority, according to the Ninth Circuit.

Aspic correctly noted that, under the Federal Arbitration Act, it “may vacate an arbitration award where, among other reasons, ‘the arbitrators exceeded their powers.’” Aspic Eng’g & Constr. Co., 2019 WL 333339 at 8. The Ninth Circuit said that, “arbitrators ‘exceed their powers’ when the award is ‘completely irrational’ or exhibits a ‘manifest disregard of the law.’”

However, the Ninth Circuit cited labor arbitration cases for the proposition that an award is completely irrational when it “fails to draw its essence from the agreement.’” Ninth Circuit labor arbitration case law says a rational award must not “disregard contract provisions to achieve a desired result.” 2019 Wl 3333339 at 11. According the Ninth Circuit, a rational award would consider the terms of the contract as written. The arbitrator cannot “improperly stray[] from the plain text of the contract.”

The court also echoed a sentiment initially made by Liz Kramer of Stinson Leonard Street seven years ago: “we have become an arbitration nation.”

For more in depth coverage, see Liz Kramer’s Arbitration Nation blog here.

California Supreme Court Vacates Arbitration Award and Refuses to Enforce Arbitration Clause in Void Contract

The California Supreme Court held that a law firm’s failure to disclose to the firm’s client the firm’s conflict of interest violated Rules of Professional Conduct and thus rendered the firm’s engagement agreement with its client, including the arbitration clause, unenforceable in its entirety.

This decision is interesting for:

1. applying state arbitration law rather than the Federal Arbitration Act;
2. vacating an arbitration award on the merits; and
3. not applying the separability doctrine of Prima Paint v. Flood & Conklin (1967) 388 U.S. 395.

On the first of these topics, the court said: “the parties’ agreement calls for application of California law, including the CAA, and both parties agree that the CAA governs. This case thus presents no question concerning application of the Federal Arbitration Act, 9 United States Code section 1 et seq. (See Volt Info. Sciences v. Leland Stanford Jr. U. (1989) 489 U.S. 468, 470; Cronus Investments, Inc. v. Concierge Services (2005) 35 Cal.4th 376, 387.)”

On the second, the court said: a court may vacate an arbitration award when “[t]he arbitrators exceeded their powers and the award cannot be corrected without affecting the merits of the

decision upon the controversy submitted.” (Code Civ. Proc., § 1286.2, subd. (a)(4) (section 1286.2(a)(4)).) And: “the merits of an arbitral award are not generally subject to judicial review, but ... “the rules which give finality to the arbitrator’s determination of ordinary questions of fact or of law are inapplicable where the issue of illegality of the entire transaction is raised in a proceeding for the enforcement of the arbitrator’s award.”

Law 360 discusses the case

The Centrist Case Against Current (Conservative) Arbitration Law

The Centrist Case Against Current (Conservative) Arbitration Law is my article just published in the Florida Law Review. 

In The Politics of Arbitration Law and Centrist Proposals for Reform, published in the Harvard Journal on Legislation, I explained how issues surrounding consumer and other adhesive arbitration agreements became divisive along predictable political lines (progressives vs. conservatives) and proposed an intermediate (or centrist) position to resolve those issues. However, The Politics of Arbitration Law did not argue the case for my proposals. It left those arguments for this Article, which makes the case against current (conservative) arbitration law, and a third article, which will make the case against progressive proposals to reform arbitration law. In other words, this Article stands out from the many other articles critiquing current arbitration law because this Article’s critique comes from a centrist, rather than progressive, perspective. For that reason, this Article’s critique may be more likely than progressive critiques to gain traction with lawmakers. 

I welcome comments directed to ware@ku.edu

The Politics of Arbitration Law and Centrist Proposals for Reform

My latest article, The Politics of Arbitration Law and Centrist Proposals for Reform, is in the Harvard Journal on Legislation. Stephen J. Ware, The Politics of Arbitration Law and Centrist Proposals for Reform, 53 Harvard J. on Legislation 711 (2016).

The abstract:

Arbitration law in the United States is far more controversial when applied
to individuals than to businesses. While enforcement of arbitration agreements
between businesses sometimes raises legal issues that divide courts, those issues
tend to interest only scholars, lawyers, and other specialists in the field of arbitration.
In contrast, enforcement of arbitration agreements between a business
and an individual (such as a consumer or employee) raises legal issues that
interest many members of Congress and various interest groups, all of whom
have taken positions on significant proposals for law reform. The Consumer
Financial Protection Bureau has extensively researched and reported on consumer
arbitration agreements and is expected to issue a rule regulating, or even
prohibiting, such agreements.

This Article both explains how issues surrounding consumer and other adhesive
arbitration agreements became divisive along predictable political lines
and introduces a framework to understand and compare various positions on
them. This new framework arrays on a continuum five positions on the level of
consent the law should require before enforcing an arbitration agreement
against an individual. Progressives generally would require higher levels of
consent than arbitration law currently requires, while conservatives generally
defend current arbitration law’s low standards of consent.

This Article proposes a centrist position. It joins progressives in rejecting
overbroad enforcement of adhesive arbitration agreements due to conservative supported
anomalies in arbitration law’s treatment of contract-law defenses, legally-
erroneous decisions, and class actions. Once these anomalies are fixed,
though, this Article joins conservatives in defending general enforcement of adhesive
arbitration agreements under contract law’s standards of consent because
adhesive arbitration agreements should—contrary to progressive opinions—be
as generally enforceable as other adhesion contracts. This Article briefly concludes
by proposing language for a rule the Consumer Financial Protection Bureau
could adopt to enact the reforms advocated in this Article.

NY Times Keeps Criticizing Adhesive Arbitration Agreements

Today's criticism goes beyond yesterday's criticism in arguing that the process of arbitration is biased in favor of businesses and against individual consumers and employees.

The Times asserts that arbitration’s “rules tend to favor businesses, and judges and juries have been replaced by arbitrators who commonly consider the companies their clients.” That’s quite a strong allegation and one that I think most arbitrators would dispute. Arbitrators are supposed to be neutral and a ground for vacating an arbitration award is evident partiality of the arbitrator.

Good commentary on the NY Times articles by North Carolina Law Professor Mark Weidemaier

The Politics of Arbitration Law and Centrist Proposals for Reform

The Politics of Arbitration Law and Centrist Proposals for Reform is a new paper of mine, just posted. I welcome comments and suggestions to ware@ku.edu

The abstract:

Arbitration law in the United States is far more controversial when applied to individuals than to businesses. While enforcement of arbitration agreements between businesses sometimes raises legal issues that divide courts, those issues tend to interest only scholars, lawyers, and other specialists in the field of arbitration. In contrast, enforcement of arbitration agreements between a business and an individual (such as a consumer or employee) raises legal issues that interest many members of Congress and various interest groups — all of whom have taken positions on significant proposals for law reform. The Consumer Financial Protection Bureau has extensively researched and reported on consumer arbitration agreements and is expected to issue a rule regulating, or even prohibiting, such agreements.

This Article both explains how issues surrounding consumer and other adhesive arbitration agreements became divisive along predictable political lines and introduces a framework to understand and compare various positions on them. This new framework arrays on a continuum five positions on the level of consent the law should require before enforcing an arbitration agreement against an individual. Progressives generally would require higher levels of consent than arbitration law currently requires, while conservatives generally defend current arbitration law’s low standards of consent.

This Article proposes an intermediate (or centrist) position. It joins progressives in rejecting conservative-supported anomalies that enforce adhesive arbitration agreements more broadly than other adhesion contracts on the three important topics: contract-law defenses, correcting legally-erroneous decisions, and class actions. Once these anomalies are fixed though, adhesive arbitration agreements should — contrary to progressives — be as generally enforceable as other adhesion contracts. In other words, this Article joins conservatives in defending general enforcement of adhesive arbitration agreements under contract law’s standards of consent. The Article briefly concludes with the language of a rule the CFPB could adopt to enact into law the reforms advocated in this Article

Objecting to Appointment of Arbitrators and Postponing Arbitral Hearings

California case summarized by California Arbitration and Mediation involving the arbitration organization, Alternative Resolution Centers (ARC), and mentioning another one: ADR, Services, Inc.,  California's options for arbitration extend beyond the American Arbitration Association and JAMS. 

Arbitration of Trust Disputes, Telephonic Hearing, and Whether Arbitrator Exceeded Powers

All this in an interesting recent 8th Circuit case, Brown v. Brown-Thill.

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.

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).

California's Ethics Standards for Neutral Arbitrators in Contractual Arbitration

California's Ethics Standards for Neutral Arbitrators in Contractual Arbitration

California's Ethics Standards for Neutral Arbitrators in Contractual Arbitration are important because our largest state is a leader in arbitration and these are both rules of ethics and rules of law.  They are made rules of law by California Code of Civil Procedure section 1281.85.

California's Ethics Standards for Neutral Arbitrators in Contractual Arbitration have recently been amended.

Manifest Disregard of Law Still a Ground for Vacating Arbitration Awards?

Since the Supreme Court's 2008 Hall Street decision courts have been divided on whether "manifest disregard of the law" is still a ground for vacating arbitration award.  This recent sixth circuit case leaves us still wondering. 

Oxford Health Plans v. Sutter

The Supreme Court case of Oxford Health Plans v. Sutter is well analyzed by Brian Farkas of Goetz Fitzpatrick LLP, who rightly says: "Two developing areas of law collided in a single case this term, as the Supreme Court considered both the finality of arbitral awards and the ability to form class actions in the context of an arbitration agreement. The Supreme Court in Oxford Health Plans LLC v. Sutter reaffirmed the principle that an arbitrator's decisions are largely immune from judicial review."

I know Brian Farkas to be very capable because I worked with him when he was Editor-in-Chief of the Cardozo Journal of Conflict Resolution and I published an article in that journal.

Ninth Circuit Refuses to Enforce Agreement Narrowing Grounds for Vacating Arbitration Award

"In the Hall Street decision in 2008, SCOTUS held that parties could not contractually enlarge Section 10 of the Federal Arbitration Act by agreeing that a court could vacate the arbitration award for reasons not found in that section.  This week, the Ninth Circuit held that parties also cannot contractually restrict Section 10 by providing for 'binding, non-appealable arbitration,'” explains Liz Kramer in one of her characteristically good analyses.  "This decision is important in that it protects consumers and other parties without negotiating power from arbitration agreements that write out even the minimal appeal bases in Section 10."

The Ninth Circuit opinion in In re Wal-Mart Wage and Hour Employment Practices Litig., __ F.3d __, 2013 WL 6605350 (9th Cir. Dec. 17, 2013) is here.  CPR's commentary by Bette Shifman is here.

I wonder if parties can get around this ruling to some extent (and in effect narrow some of the grounds for vacatur) by agreeing to arbitrate pursuant to the law of a state with arbitration law that has narrower grounds for vacatur than FAA section 10.  See the California supreme court's Cable Connections case and the Texas supreme court's Nafta Traders case.

“Manifest Disregard of the Law” is Alive and Well and Vacating Arbitrations

Good analysis by Liz Kramer of recent Fourth Circuit case

I address the manifest disregard ground here and in this law review article

Privatizing Law Through Arbitration

Default Rules from Mandatory Rules: Privatizing Law Through Arbitration

This Article considers the extent to which the creation of law has been privatized through arbitration. It suggests that, under Supreme Court cases and other current legal doctrine, vast areas of law are privatizable and that this degree of privatization is possible only through arbitration. The implications of this point are separated along the familiar line between mandatory rules of law and default rules. The first implication is that arbitration jeopardizes mandatory rules of law. To preserve the mandatory effect of these rules, the Supreme Court must make a choice. The Court must either reverse its decisions that claims arising under otherwise mandatory rules are arbitrable, or require de novo judicial review of arbitrators' legal rulings on such claims. The second implication is that claims arising under default rules should be arbitrable and completely free from judicial review for errors of law. The arbitration of claims arising under default rules presents an opportunity to privatize the creation of vast areas of law. It is an opportunity to create private legal systems of unwritten norms, written rules, and the precedents of private courts.