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Disclose or Decline

Source: California Lawyer (ADR Advisory)
Date: September 2002

In response to legislation (SB 475) enacted last September, the California Judicial Council had adopted ethics standards for all neutral arbitrators in contractual arbitration who are appointed on or after July 1, 2002

(www.courtinfo.ca.gov/rules/reports/documents/rule04.pdf).

The new rules are significant and controversial: In late July the New York Stock Exchange and the National Association of Securities Dealers filed suit for declaratory relief, claiming that the revised standards are too burdensome and are preempted by the Federal Arbitration Act. NASD Dispute Resolution Inc. v Judicial Council (ND Cal) Civ No. C02-3486.

Though the revised standards increase disclosure requirements, they do not alter existing statutory deadlines: within 10 days from service of the notice of appointment or nomination for disclosure (CCP §1281.9(b)); within 15 days of service of disclosure or failure to disclose for a party to serve notice of disqualification (CCP §1281.91(a), (b)).

The more detailed the disclosure, the longer arbitrators and providers will take to provide the necessary information. The more disclosure there is, the more likely there will be requests to disqualify arbitrators, and the appointment process will necessarily be lengthened.

It is likely that some arbitrators will be more thorough than others and that some will neglect to disclose required matters. Inevitably, matters will come to the attention of the parties during or after the arbitration that arguably should have been disclosed. That creates the opportunity for disqualification during the arbitration process and the likelihood of more frequent petitions to vacate awards for failure to disclose or for evident partiality under Code of Civil Procedure section 1286.2.

The technical requirements for disclosure are detailed and extensive. See Ethics Standards for Neutral Arbitrators in Contractual Arbitration, Cal. Rules of Court, Appendix, Div. IV (Ethics Standards) standard 7 (Disclosure), standard 8 (Disqualification).

There are several unique aspects to the new Ethics Standards. There is an express continuing duty to disclose, applying from service of the notice of proposed nomination or appointment to the conclusion of the arbitration proceeding. Standard 7(e). That will likely lead to more frequent postappointment disqualifications or withdrawals.

Special rules (standard 2(d) and (e)) were adopted for consumer arbitrations that arise from a mandatory predispute clause when the subject matter of the contract is goods or services primarily for personal, family, or household purposes; or employment, health care, or medical malpractice.

Effective January 1, 2003, consumer cases require additional disclosures by the proposed arbitrator and the arbitral provider, such as a financial interest in the party or organization; other cases heard by the provider with the parties or counsel in the present case; and other relationships such as club membership, training, or consulting. Standard 7 (b)(12). One of the additional disclosures required is whether--within the preceding two years--the provider organization has received a "gift, bequest, or favor from a party, a lawyer in the organization, or a law firm with which a lawyer in the arbitration is currently affiliated." Standard 7(b)(12)(A)(iii).

Provider disclosures should be in standard form for each proposed arbitrator. The standards are not intended to assist the parties in picking an arbitrator from a strike list, but they may influence the choice of providers in the present case or later cases.

An organization that imposes arbitration agreements in consumer, employment, or healthcare contracts should assess its provider and the extent of disclosure required based on the totality of its relationship with that provider. The enforceability of imposed agreements may be challenged if business relationships are extensive enough to question the provider's neutrality.

The ethics standards also prohibit an arbitrator from entertaining or accepting offers of employment as a lawyer, expert witness, or consultant from a party or a lawyer for a party in a pending arbitration, at least until the arbitration is concluded. Standard 10(a). Arbitrators may entertain offers of subsequent employment in a nonlegal capacity if they disclose their intentions at the time of appointment. A party to an existing case may then disqualify the proposed arbitrator based on that disclosure. Standards 10(b), 10(c).

In consumer cases, if the arbitrator has made the disclosure required by standard 10(b), the parties have the right not to consent when an offer of subsequent employment is made to the arbitrator and disclosed. Standard 10(d).

Organizations that provide neutrals may have an easier time than individuals at meeting the required standards because they exert more control over the disclosure process. Independent arbitrators serving in nonadministered proceedings are on their own regarding disclosures. Some make extensive disclosures available to the parties, and others do not.

The Judicial Council is seeking comments on these rules until September 6, 2002. As a result the rules adopted this year may be amended.





Richard Chernick, Esq. is an arbitrator, mediator, managing director of the JAMS Arbitration Practice, and coauthor of California Practice Guide-Alternative Dispute Resolution (The Rutter Group, 2001).



© 2002 Richard Chernick. All rights reserved.