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Adapt Preliminary Hearing in Arbitration to Help All Parties

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Adapt Preliminary Hearing in Arbitration to Help All Parties

Source: Daily Journal
Date: September 8, 2004
A recent trend in larger commercial arbitrations is developing a customized process for each case. The key to the process is choosing an arbitrator willing to work with the parties to craft a process designed for the particular case and to manage that process so that the parties can achieve their goal of an effective and efficient resolution.

The principal management tool employed by the arbitrator is the preliminary hearing, the crucial step in structuring the arbitration process. The arbitrator uses the preliminary hearing to determine the parties' goals in the arbitration and to ascertain which process elements will help to achieve those goals. The issues identified at the preliminary hearing and the process choices that the parties might make receive further attention in the remainder of this article.

Nothing drives the cost of litigation more than discovery. The most valuable role an arbitrator can play is persuading the parties to agree on discovery proportional to the complexity of the dispute. Full and timely disclosure of documents and witnesses is the starting point. Close supervision of this process by the arbitrator also sends the message that gamesmanship is not tolerated (and hurts the credibility of the party who crosses that line).

The power of the arbitrator to supervise discovery is expressly provided in most arbitration rules. Revised Uniform Arbitration Act Sections 17(c), (d); American Arbitration Association Rule R-21; JAMS Comprehensive Arbitration Rule 17(c). That power also may include the power to sanction, although the ultimate sanction for discovery abuse or refusal is the right of the arbitrator to draw evidentiary inferences for the incomplete production of evidence.

Arbitrators have considerable power in making discovery determinations and orders, and discovery rulings that may be incorrect are not a ground to vacate an award. Prestige Ford v. Ford Dealers Computer Services Inc., 324 F.3d 391 (5th Cir. 2003); Nationwide Mutual Insurance Co. v. Home Insurance Co., 278 F.3d 621 (6th Cir. 2002).

Parties usually prefer to go to court to address the need for provisional relief, but in some cases the arbitration is a better forum to resolve such issues if timing is not urgent. The need for such relief should be addressed during the preliminary hearing.

Dispositive motions (Revised Uniform Arbitration Act Section 15(b); JAMS Rule and motions in limine should be used sparingly and almost never without extensive discovery. See Schlessinger v. Rosenfeld, Meyer & Susman, 40 Cal.App.4th 1096 (1995); Reed v. Mutual Service Corp., 106 Cal.App.4th 1359 (2003) (National Association of Securities Dealers' six-year limitations period applied to dismiss claim at preliminary conference). Institutionally, the use of dispositive motions is limited because of the rule that a refusal on the part of the arbitrator to hear relevant evidence is a ground for vacatur of the award. Revised Uniform Arbitration Act Section 23(a)(3); Federal Arbitration Act Section 10(a)(3).

Efficiency flies out the window when the hearing is not continuous. Particularly where there is a tripartite panel, calendar conflicts may necessitate delays of months in finding the few extra days needed to complete a hearing. A continuous hearing is not only more efficient for counsel but also more conducive to a decision-making process that is based on the arbitrator's recollection of testimony and argument.

The arbitrator has significant control over scheduling issues: setting, continuing, or refusing to postpone hearings. State Code of Civil Procedure Section 1282.2(a)(1); Prestige Ford v. Ford Dealers Computer Services Inc., 324 F.3d 391 (5th Cir. 2003); JAMS Rule 19(a). Ideally, this power urges the parties to agree on a time and duration for the hearing; however, failing agreement, the arbitrator may order it.

The arbitrator should order not only early exchange of documents for discovery but also later exchange or designation of documents for the hearing. This enables counsel to put together a single, nonduplicative, organized set of exhibits properly marked and in notebooks or other convenient organization that makes them accessible to the arbitrator. (In larger cases, assigning blocks of exhibit numbers and allowing preparation of separate claimant and respondent sets of exhibits may be preferable to requiring a joint exhibit list.)

Objections should be identified on the joint exhibit list or in a separate writing required to be served a few days before the hearing, and exhibits without foundational objection should be admitted without the need of any stipulation or authenticating testimony at the hearing. Relevance issues usually are addressed in argument.

This allows counsel to refer to exhibits or to attach them (selectively) to the pre-hearing brief and to identify them on demonstrative exhibits (see below). Documents in evidence need not be referred to specifically by witnesses if their significance is clear and they are otherwise called to the arbitrator's attention.

Witness exchanges similarly should be required in order to enable proper preparation for cross-examination. Be sure that witnesses who will testify other than in person are identified according to their mode of testimony. This enables early objections, for example, to telephonic testimony of an important witness or arrangements for the witness to have access to certain documents at the time of his or her testimony. The arbitrator also may order appropriate procedures for the cross-examination of witnesses by telephone, including procedures for having documents placed in front of the witness that are not disclosed before the examination.

The procedural order likely will require the exchange of expert reports (if they are intended to be offered during the hearing) in advance of the hearing. If expert testimony is crucial, the arbitrator might propose stipulating to a disclosure and discovery process similar to that in the federal or state discovery rules so that the parties have the opportunity to control access to expert testimony and to be fully prepared to address all expert issues.

The arbitrator has the power to appoint a neutral expert or to establish other procedures for the taking of expert testimony. For example, competing experts can be ordered to meet and confer before their testimony and to create a list of agreed and disputed issues if that aids in the assessment of their testimony.

Anything that will help the arbitrator sort and understand the early testimony before he or she is familiar with all the facts is crucial. A timeline or chronology and organization chart of a corporate party are often helpful. On specific issues during the hearing, such materials can be employed to assist important witnesses in organizing or summarizing complex facts and in depicting relationships among important events.

In discussing damages, demonstrative exhibits can be used to summarize and clarify damage theories and proof. Exhibit references should be included on all such exhibits to tie the assertions to the record so that the demonstrative exhibit is useful to the arbitrator in writing the award. Demonstrative exhibits intended to be used during the opening statement should be ordered exchanged before the opening statement.

If remedies other than or in addition to compensatory damages are possible, bifurcating liability and damages may be a good idea in order to permit full exploration of available remedies after the initial liability determination has been made. This is particularly true in joint venture, partnership dissolution and other proceedings where nonmonetary remedies are important. See Advanced Micro Devices Inc. v. Intel Corp., 9 Cal.4th 362 (1994) (arbitrator may grant a remedy that a court could not have, so long as it is consistent with the parties' agreement); Ajida Technologies Inc. v. Roos Instruments Inc., 87 Cal.App.4th 534 (2001) (accord). The American Arbitration Association and JAMS rules are consistent with this grant of authority. America Arbitration Association Rule R-43(a); JAMS Rule 24(c).

Many agreements provide for the shifting of fees and costs in favor of the prevailing party. This determination is often bifurcated from the main hearing and determined after the issuance of an interim award. This procedure assures that a final award does not issue omitting consideration of the fee-and-cost issue inadvertently. There is extensive law on the issue of arbitrators' power to award fees and costs. See California Practice Guide - Alternative Dispute Resolution, Rutter Group 2002.

Pre-hearing briefs are commonly filed and usually have more influence on the decision-making process than post-hearing submissions. Post-hearing briefs are sometimes necessary in addition to final argument, particularly after lengthy hearings and when counsel wish to use a transcript to present specific evidentiary support for legal positions.

But post-hearing briefing always delays the prompt submission of the matter to the arbitrator for decision; having the matter submitted immediately after argument is sometimes preferable so that the deliberation may occur and the award can be prepared while the testimony is fresh in the arbitrators' memory. The arbitrator is the best judge of which process will be most conducive to effective decision making.

Where issues are bifurcated, the arbitrator may issue an interim award reflecting the determination of the issues heard in Phase I and then schedule a hearing on the bifurcated issue, such as the amount of attorney fees and costs or punitive damages. The interim award in such circumstances is not subject to confirmation or vacatur.

The arbitrator also has the authority in certain cases to hear and determine part of the case and issue a partial final award intending both that the award be reviewed by a court and that the parties return to arbitration thereafter for further proceedings. See Hightower v. Superior Court (O'Dowd), 86 Cal.App.4th 1415 (2001); Metallgesellschaft A.G. v. M/V Capitan Constante, 790 F.2d 280 (2nd Cir. 1986). The sequencing of the case is in the arbitrator's control and is an essential tool where complex remedial relief is required.

The arbitrator also might propose use of alternative formats for the award, such as high-low or baseball (parties each submit a proposed resolution; arbitrator must select one or the other). Such a choice should be embodied in an order so that the reviewing court understands the arbitrator's authority. In appropriate cases, the parties also might consider med-arb or arb-med formats (arbitrator acts as mediator before or after the arbitration hearing; in the latter case the award is sealed and opened only if the mediation is not successful).

Arbitration awards are reviewed by courts on a limited basis under the Federal Arbitration Act and the California Arbitration Act. State Code of Civil Procedure Section 1286; 9 U.S.C. Sections 9-11. See, e.g., Moncharsh v. Heily & Blase, 3 Cal.4th 1 (1992).

California courts do not permit enhanced review. Crowell v. Downey Community Hospital, 95 Cal.App.4th 730 (2002); Oakland-Alameda County Coliseum Authority v. CC Partners, 101 Cal.App.4th 635 (2002). Federal circuits are split on whether enhanced review is permissible under the Federal Arbitration Act. See Kyocera Corp. v. Prudential-Bache Trade Services Inc., 341 F.3d 987 (9th Cir. 2003) (no enhanced review by agreement; reviewing other circuit cases to the contrary).

Federal courts are also split on whether parties may by agreement limit judicial review of an arbitration award. See Hoeft v. MVI Group Inc., 343 F.3d 57 (2nd Cir. 2003) (agreement unenforceable).

As an alternative review process, one might consider tripartite panels and/or internal review processes such as the JAMS optional appeal procedure. They present no legal issues and may be more reliable than a clause that a court needs to interpret and apply, perhaps over the objection of the winning side.

Where parties and arbitrators approach the design and effectuation of the arbitration proceeding as a partnership, where all participants have an interest in achieving a process that is best suited to the particular case, and where the arbitrator is a skilled manager of the arbitration, even the most complex arbitration can present the opportunity for an effective exercise in quality decision making.

Richard Chernick is an arbitrator and mediator and is managing director of the JAMS arbitration practice. He co-wrote California Practice Guide -- Alternative Dispute Resolution.

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