Contemporary US Commercial Arbitration Meets Ancient Chinese Curse
Source: Canadian Arbitration and Mediation Journal
Date: Fall/Winter 2012
Hon. Curtis E. von Kann (Ret.)
28 Canadian Arbitration and Mediation Journal Since Congress enacted the Federal Arbi- tration Act (“FAA”) in 1925, the percent- age of business-to-business disputes re- solved through arbitration rather than litigation has been steadily rising. How- ever, in the 1970’s and 80’s, there was a dramatic increase in the number, complex- ity and dollar value of these arbitrations. More of the biggest corporate battles were being fought out before arbitrators rather than judges. The causes for this develop- ment were many including, a growing backlog of cases in state and federal courts, an explosion in discovery costs, some frighteningly large jury verdicts for com- pensatory and punitive damages, and growing stables of respected, experienced arbitrators at JAMS, AAA, and other pro- viders. The shift from litigation to arbitra- tion became so great that a few years ago a federal judge I know said to me “I have no doubt that you have a more interesting civil docket than I do.” Generally pleased with this shift of com- mercial disputes to arbitration, many com- panies started including in their adhesion contracts with employees, consumers, bank borrowers, utility customers, cell phone users, etc. etc. small print clauses that said the parties agreed to give up their rights to go to court and would instead ar- bitrate all their disputes. Plaintiff trial law- yers attacked these clauses, contending that Contemporary US Commercial Arbitration Meets Ancient Chinese Curse: May you Live in Exciting Times. 1 forcing the little guy to give up his consti- tutionally protected right of jury trial was unconscionable, against public policy and unenforceable. The courts agreed if the clauses were patently unfair, for example, by providing that only the company would choose the arbitrator, or that the hearing would take place at the company’s home office rather than where the employee/con- sumer lived or worked, or that there would be no discovery, or that the hefty arbitra- tion fess would be split 50-50, or that the relief available in arbitration would be less extensive than a court could have decreed. However, so long as the process prescribed by these mandatory arbitration clauses was fair and even-handed, the court generally upheld them. Emboldened by this victory, US compa- nies began arguing that mandatory arbi- tration could only be conducted on an in- dividual, not a class, basis, either because the company- written clause expressly said so or because a clause which was silent about class arbitration should be presumed to preclude it. Here again, the courts largely rejected the trial lawyers’ attacks. Reason- ing that a class action is a markedly differ- ent process than resolution of an individual claim, the courts held that it was not un- conscionable for these mandatory clauses to expressly prohibit class arbitration and that, where the clause was silent, it should be construed to bar class arbitration un- less it was very clear that the parties in- tended to permit it. Facing the possible disappearance of all class proceedings in employment and con- sumer cases, with their potential for huge fee awards and tremendous settlement le- verage, and having been repeatedly re- buffed in court, the trial lawyers turned their attention, vast resources, and numer- ous political IOU’s toward Congress and mounted a major effort to have mandatory arbitration clauses outlawed legislatively. Here, their outcries fell on fertile ground. Over the last several years many bills have been introduced banning such clauses in particular industries. More significantly, the so-called Fairness in Arbitration Act, introduced a few years ago, would ban all pre-dispute arbitration clauses in consumer and employment cases; only arbitration clauses freely entered into after the dispute arose would be enforceable. Many of us in the commercial arbitration world were sympathetic to the notion that consumers and employees ought to have some protection from adhesion contracts that forced them to arbitrate rather than liti- gate. And because, as a practical matter, consumers and employees with small claims have little chance of finding lawyers to sue for them, and studies suggested that these little guys, on av- erage, were doing as well or better in arbitration than they had in litigation, many thought the best solution was for Congress to require that all mandatory ar- Honorable Curtis von Kann These are indeed exciting and somewhat worrisome times in US commercial arbitration. To understand why this is so, we need to turn the clock back a little to see how we got to where we are. In the interests of time, I will simplify the history a bit.29 Le Journal canadien d'arbitrage et de médiation bitration clauses meet the minimum due process standards that had been voluntar- ily adopted by JAMS and AAA. Even an outright ban on pre-dispute arbi- tration clauses might have been OK had it been limited to adhesion contracts. How- ever, the Fairness in Arbitration Act was so broadly written that it would have pre- cluded pre-dispute arbitration clauses in most commercial contracts as well. For this reason, the AAA, Chamber of Congress, and others lobbied Congress to exclude commercial arbitration from the reach of the Act, and its scope was indeed scaled back somewhat in subsequent versions of the bill. Because Congress has been effec- tively deadlocked since 2010 due to di- vided control of the House and Senate, the Arbitration Fairness Act has not yet passed. However, it remains pending, with over 100 sponsors, and whether it will pass, and what effect it might have on commercial arbitration, is far from clear. Meanwhile, back in the commercial arbi- tration arena, there were other troubling developments. With many very big cases being decided by arbitration, leaving many well-heeled losers in their wake, creative entrepreneurial lawyers soon realized that there were big bucks to be had from those losers if they could find ways to overturn those awards. Thus was born a new legal cottage industry- the Award Terminators. These diabolical demons of destruction have thus far concentrated their efforts chiefly on three avenues of attack. First were attempts to have arbitration clauses declare that, in addition to the four narrow grounds for vacatur provided by the FAA –namely, fraud or corruption, evi- dent partiality of the arbitrators, failure to receive material evidence or to postpone a hearing on good cause shown, or arbitra- tors exceeding their powers – federal courts could also vacate awards for fac- tual or legal errors of the arbitrator. At least in the US, the hallmark of commercial ar- bitration had always been finality, the no- tion that parties, having chosen their deci- sion-makers, have to abide by their decisions and could not engage in the broad appellate review available in court. The expansion of FAA review to include errors of fact or law would have eviscerated such Finality. In the case of Hall Street Associ- ates v. Mattel, the US Supreme Court held that the FAA’s grounds for vacatur could not be expanded by private agreement, thus blocking this avenue of attack in federal courts, although not in state courts, which were free to adopt a different interpreta- tion of their own state arbitration laws. The second avenue of attack pursued by the Award Terminators was trying to ex- pand the historic doctrine of manifest dis- regard of law. For many decades some courts had held that the FAA vacatur grounds of arbitrators “exceeding their powers” included cases in which the arbi- trator said, in effect, “I know that the law requires X result in this case but I am go- ing to disregard the law and decree what I happen to think is the proper outcome.” Seizing on this doctrine, the Terminators argued that, when an arbitrator made a clear error of law in her award, she had effectively disregarded the law and should be subject to vacatur for such an error. Again, in the Hall Street case, the Supreme Court seemed to say that manifest disre- gard of the law was not a ground for vaca- tur under the FAA, though, again, state courts might interpret their own state arbi- tration statues differently. However, be- cause the Supreme Court’s language was not as precise as it might have been, lower federal courts have been uncertain whether the doctrine retains any vitality and the Circuit Courts of Appeal are now split on that question, a conflict the Supreme Court will have to resolve soon. The third avenue of attack utilized by the Terminators has been to claim that the ar- bitrator made insufficient disclosures at the outset or during the course of the arbitration. When the alleged failure of disclosure involved some prior contact with a party, lawyer, law firm, or wit- ness, the courts have generally rejected the challenge on grounds that the informa- tion not disclosed could not have led a rea- sonable person to question the arbitrator’s neutrality. However, there have been some highly publicized cases 2 in which courts have vacated awards, and named and ex- coriated the arbitrator, for failure to dis- close a connection that was simply too close for the court to stomach. And recently, some awards have been chal- lenged on grounds that the arbitrator failed to disclose something about his or her “life experiences” which might raise a question about impartiality. For example, in an ar- bitration in which a woman complained that her employment had been terminated in retaliation for having reported sexual harassment by her supervisor, the arbitrator was challenged for fail- ure to reveal that years earlier, while a sitting judge, he had been disciplined for sexual harassment. In another arbi- tration, involving the equitable distri- bution of considerable property in con- nection with a highly contentious divorce, the arbitrator failed to reveal that he too had been through a highly contentious di- vorce and a bitter fight about division of property. While the incidence of vacatur for failures of disclosure is still relatively low, it is growing, reminding us of the wise advice “Disclose, Disclose, Disclose.” It rarely gets you bumped from a case, but withholding something can get you pub- licly humiliated if some judge later thinks it ought to have been disclosed. Finally, I turn to what is perhaps the most worrisome development in US commercial arbitration. I mentioned earlier that, ini- tially, US companies reported being very happy with the commercial arbitration pro- cess. However, over the past decade, there has been a mounting chorus of complaints that commercial arbitration has become just as slow and costly as litigation. That is certainly possible since, as big commer- cial cases migrated from litigation to arbi- tration, so did the big case litigators who generally wanted to conduct the arbitra- tions in the same way, and bill the same amounts, as when the cases were in litiga- tion. What is surprising here is the response to this phenomenon announced by many smart in-house counsel, i.e., “arbitrations are now costing my company just as much, and taking just as long, as litigations, so we have decided to litigate rather than ar- bitrate our cases.” Say what? If the aver- age cost and cycle time for commercial arbitrations and commercial litigations are indeed the same, something that has not been empirically demonstrated to date,30 Canadian Arbitration and Mediation Journal then, cost and delay cannot serve as a ra- tional basis for choosing one process over the other. Instead, a rational client would presumably choose arbitration for cases that demanded its particular benefits, e.g., the right to pick the decision makers, the rules, the procedures, the time and loca- tion of the hearing, and whether or not the decision will include a statement of rea- sons; privacy; and finality, and would choose litigation for cases that demanded its particular benefits- a public decision, a legal precedent, a right of appeal, and ju- dicial contempt power to enforce sub- poena, injunctions, decrees of specific per- formance, etc. Nevertheless, whether rational or not, the growing list of companies who said they were abandoning commercial arbitration due to its costs and delays spurred action from many of us who believe that such arbitration is often a very favorable pro- cess for resolving commercial disputes, and also one in which we make our living. In 2009, as President of the College of Commercial Arbitrators, I convened in Washington, DC a day long National Sum- mit on Commercial Arbitration. Present were distinguished representatives of the four major constituencies involved in such arbitration, namely, in-house counsel, out- side counsel, arbitration providers and ar- bitrators. There was broad consensus that all four constituencies bore some respon- sibility for increased arbitration costs and delays and that all four had a role to play in reducing those excesses. I was particu- larly pleased to hear many in-house attor- neys from major companies publicly state that, to a large extent, they had allowed this problem to develop. One such attor- ney said “We are primarily to blame for this problem. In these big arbitrations, we have given the keys to the litigators, who naturally conduct the arbitrations just like litigations.” Following the Summit, former CPR Presi- dent Thomas Stipanowich, AAA arbitra- tor Deborah Rothman, and I took the tran- script of the Summit, and other suggestions submitted by various stakeholders, and wrote what was entitled “The College of Commercial Arbitrators’ Protocols for Expeditious, Cost-effective Arbitration.” After analyzing the various causes of the problem, this document prescribed for each constituency a dozen or so steps they each could take to dramatically reduce cost and delay in commercial arbitration. The steps proposed were hardly radical; rather we sought to pull together in one place worth- while ideas that had been circulating in various forums for several years. Time pre- cludes us from discussing all these steps, but to give you a flavor of the document, let me mention a few. For Business Users and In-House Counsel, the Protocols rec- ommend that companies include in their arbitration clauses limits on discovery and motions, that they select outside counsel for arbitration (not litigation) expertise and select arbitrators who are proven case man- agers, that they set limits on the time and money they are prepared to devote to the arbitration, and that in-house counsel stay actively involved throughout the arbitra- tion to monitor compliance with those lim- its. Outside Counsel are urged to recognize and exploit the differences between arbi- tration and litigation, to cooperate with opposing counsel on scheduling and pro- cedural matters, to limit discovery to what is truly needed, to keep arbitrators in- formed about case progress, and to enlist their help promptly when needed. Arbitra- tion Providers should offer users a wide range of arbitration models and rules (in- cluding fast track arbitration with no dis- covery or motions), should insist that their panelists have training in manag- ing cases efficiently, and should col- lect and make available to users infor- mation on how well particular arbitrators perform that function. Fi- nally the Protocols recommend that Ar- bitrators obtain training in managing commercial arbitration, that they insist on cooperation and professionalism between counsel, that they actively shape and manage the arbitration from start to finish and schedule consecutive hearings days whenever possible, and that they be readily available to counsel when needed to resolve procedural problems and keep the arbitration on track. If I were asked “what is the single most important recommendation in the Proto- cols,” I would say that it is for companies to include in their arbitration clauses an absolute deadline by which the arbitration must be concluded. British civil servant and wit Cyril Northcote Parkinson taught us 50 years ago, in Parkinson’s Law, that “work expands to fill the amount of time available for its completion.” I might add that this is particularly true where the workers, counsel and arbitrators, are paid on an hourly basis. The fastest trial court in the US federal system is the Eastern District of Virginia which sets virtually all cases, no matter how com- plex, for trial about six months after the complaint is filed and hardly ever grants continuances. When counsel are given a strict and tight deadline like that, they find ways to eliminate the peripheral discovery and issues and get promptly to the core of the dispute. At our Summit, the Deputy General Counsel of Bechtel, who supervised some of the most complex arbitrations in the world, said she has never seen a commercial case that could not have been fairly and properly arbitrated within one year. Thus, I would love to see all companies recite in their arbitration clauses a requirement that all cases involving, say, $10 million or less be concluded within six months from ser- vice of the arbitration demand and all other cases within twelve months and that the arbitrators are empowered to so schedule and manage the case as to assure compli- ance with those deadlines. So the big question now is whether these kinds of measures will be adopted and will save the day. Can the commercial arbitra- tion ship be righted at this point and re- turned to its prior status as the preferred forum for complex commercial dispute or is it going to sink under the weight of its own excesses? I am not sure of the answer to that question. Over the past year, many commercial arbitrators have told me that they have recently experienced significant decreases in their caseloads. Such a falloff might be attributable, at least in part, to faltering Economy and to the increasing number of cases that settle in mediation before they can proceed to either arbitra- tion or litigation. More disturbing is a 2011 survey by Cornell University of Fortune 1000 com- panies. In 1997, 85% of those companies31 Le Journal canadien d'arbitrage et de médiation that responded to the survey reported us- ing arbitration in commercial contracts at least once in the prior three years. In 2011, only 60% of the survey respondents so re- porting, a drop of nearly 1/3. Reasons given for not using arbitration included, besides high costs, no right of appeal, a concern that arbitrators will not follow the law, and the perception that arbitrators often split the baby (something repeatedly disproved in AAA studies). On the other hand, there are indications that publications like the Protocols are finding a receptive audience. More than 10,000 copies have been distributed all over the country and Fellows of the Col- lege have touted them at more than 100 conferences and professional programs, garnering broadly favorable reactions. Last year the Protocols won awards from both the ABA and CPR and they are now avail- able for download from the websites of all the Summit sponsors, namely, JAMS, AAA, ABA, CPR, and the Chartered In- stitute of Architects, as well as the College’s own website (www.thecca.net). Last fall, Thomas Sager, the General Coun- sel of DuPont, sent a copy of the Proto- cols to the general counsel of all Fortune 1000 companies along with a letter urging that they implement them at their compa- nies just as he has done at DuPont. Last week, while speaking at an ABA program in Washington, DC, I was told by the Deputy General Counsel of Viacom that his company believes commercial arbitra- tion is definitely worth saving and that his company is implementing the Protocols. Being an optimist, I am hopeful that we are about to witness the redemption of commercial arbitration rather than its de- mise. But that will require major efforts by all of us to turn the juggernaught of cost and delay away from its present course toward the shoals of despair and into the bright sunlight of expeditious and eco- nomical arbitration proceedings. I hope you will all join in that effort. With nearly 40 years as a trial lawyer, judge and neutral, Judge von Kann has experience in virtually every field of civil law and disputes. He literally wrote the book on business arbi- tration as editor-in-chief of the CCA’s Guide to Best Practices in Commercial Arbitration. Judge von Kann has arbitrated and mediated an impressive array of disputes in locations throughout the United States and abroad. Depuis que le Congrès a promulgué la Federal Arbitration Act (FAA) en 1925, le pourcentage de différends entre entrepri- ses résolus par le biais de l’arbitrage plu- tôt que par procédures judiciaires n’a cessé de croître. Cependant, dans les années 1970 et 1980, le nombre de tels arbitra- ges, leur complexité et leur coût ont connu une augmentation exponentielle. La ma- L ’arbitrage commercial contemporain aux États-Unis soumis à une malédiction chinoise : « Puissiez-vous vivre à une époque passionnante ». 1 Honorable Curtis von Kann jeure partie des différends d’envergure entre entreprises ont été disputés devant des arbitres et non des juges. Les rai- sons d’une telle situation sont nom- breuses : accroissement du nombre de cas non réglés devant les tribunaux de l’État et les tribunaux fédéraux, explo- sion des coûts des enquêtes préalables, des verdicts de jury effroyablement lourds eu égard aux dommages-intérêts compen- satoires et punitifs, des cohortes d’arbitres respectés et expérimentés auprès de four- nisseurs de services de résolution extrajudicaire des conflits comme les or- ganismes Judicial and Mediation Services, Inc. (JAMS) ou l’American Arbitration Association (AAA). Le passage à l’arbi- trage a pris une telle ampleur qu’un juge fédéral que je connais m’a dit, il y a quel- ques années : « Je suis persuadé que vous avez plus de dossiers d’affaires civiles in- téressants que moi ». En général, le fait que les différends com- 1 REMARKS AT THE APRIL 26, 2012 ANNUAL GENERAL MEETING OF THE TORONTO COMMERCIAL ARBITRATION SOCIETY 2 In the seminal case of Commonwealth Coatings Corp. v. Continental Casualty Co., 393 U.S. 145 (1968), the United States Supreme Court held that failure of an arbitra- tor to disclose a material relationship with one of the parties constitutes “evident partiality” under Federal Arbitration Act § 10(a)(2) requiring vacatur of the arbitra- tion award. In subsequent cases, federal and state courts have tried to determine what kinds of relationships are “material” enough to warrant vacatur of an award. See, for example, Applied Industrial Materials Corp. v. Ovalur Makine Ticaret Ve Sanayi, 492 F3d. 132 (2 nd Cir. 2007) (award vacated where arbitrator failed to disclose discus- sions between his company and the parent company of a party and arbitration agree- ment forbade service “where the arbitrator or the arbitrator’s current employer has a direct or indirect interest in the outcome of the arbitration”); Crow Construction Co. v. Jeffrey M. Brown Associates Inc., 264 F. Supp 2d 217 (E.D. Pa. 2003) (award va- cated for failure to disclose that one arbitrator had served in another case as a media- tor for a party and two arbitrators had previously served as arbitrators for a party); Dealer Computer Services, Inc. v. Michael Motor Co., Inc., No. H-10-2132 (S.D. Tex. Dec. 2010) (award in favor of plaintiff vacated where arbitrator had disclosed that she had previously served on an arbitration panel that considered dispute between plaintiff and another party but did not disclose that the cases involved similar contract provisions and the same plaintiff law firm, and several witnesses, including the damages expert, were the same); J.D. Edwards World Solutions Co. v. Estes, Inc.. 91 S.W.3d 836 (Tex. App. 2002) (award vacated where neutral party-appointed arbitrator failed to disclose his and his law firm’s relationship with the appointing party; Amoco C.T. Co. v. Occi- dental Petroleum Corp., 343 S.W.3d 837 (Tex. App. 2011) (award vacated where arbi- trator failed to disclose that the firm in which he became “of counsel” during the pre- hearing stage of arbitration represented a corporate affiliate of the prevailing party and where that affiliate and its CEO were involved in the transaction underlying the arbitra- tion); Benjamin, Weill & Mazer v. Cors, 189 Cal. App. 4th 126 (2010) (award in favor of plaintiff law firm for unpaid legal bills vacated because arbitrator failed to reveal that his practice focused on representing lawyers in litigation with former clients). A particu- larly scathing opinion is Karlseng v. Cooke, 2011 WL 2536504 (Tex. App. June 2011) in which arbitrator failed to disclose a substantial personal, social and professional rela- tionship with lead counsel for the prevailing party and arbitrator and lead counsel pre- sented themselves at commencement of the arbitration as complete strangers. Aux États-Unis, l’arbitrage commercial est marqué par des périodes passionnantes et d’autres qui sont plus préoccupantes. Pour comprendre pourquoi il en est ainsi, nous devons retourner en arrière. Pour des ques- tions de temps, je vais résumer les faits.