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Archive for the ‘Arbitrator Selection and Qualification Provisions’ Category

Second Circuit Says Collective Bargaining Agreement’s Arbitration Clause was Mandatory and did not Deprive Union Employee of Due Process

July 17th, 2019 Arbitrability, Arbitration Agreements, Arbitrator Selection and Qualification Provisions, Labor Arbitration, Motion to Compel Arbitration, United States Court of Appeals for the Second Circuit, United States District Court for the Eastern District of New York No Comments »

collective bargaining

Back in 2009 the Author wrote an article on the United States Supreme Court’s decision in 14 Penn Plaza LLC v. Pyett, 556 U.S. 247 (2009), which held “that a collective-bargaining agreement that clearly and unmistakably requires union members to arbitrate ADEA claims is enforceable as a matter of federal law.” 559 U.S. at 274. (See Loree Reins. & Arb. L. Forum Post here.)

On July 2, 2019, the U.S. Court of Appeals for the Second Circuit reversed a district court decision that erroneously applied the Pyett clear and unmistakable standard to the question whether an arbitration clause in a collective bargaining agreement (the “CBA”) was mandatory or permissive. Finding that the CBA imposed mandatory arbitration, the Second Circuit ruled that the clear and unmistakable standard applied only to the question whether the Employee’s statutory claims were within the scope of the CBA’s arbitration agreement (the “Arbitration Agreement”), and not to the mandatory versus permissive question. Abdullayeva v. Attending Homecare Servs. LLC, ___ F.3d ____, No. 18-0651, slip op. at *8-10 (2d Cir. July 2, 2019).

Applying ordinary contract principles to the question whether the Arbitration Agreement was mandatory or permissive, the Court held that it was mandatory. Slip op. at *10-13. Applying Pyett‘s clear and unmistakable standard to the scope question, it held that the Employee’s statutory claims under the Fair Labor Standards Act (“FLSA”) and New York’s Labor Law (“NYLL”) were within the scope of the arbitration clause. Slip op. at *13-14.

Finally, the Court held that the arbitration clause did not deny the Employee of due process of law, rejecting the Employee’s argument that it was deprived of due process because it did not personally participate in the selection of the arbitrator named in the arbitration clause. Slip op. at *14-16.

Background

collective bargaining home health care

The Employer is a provider of home health care services which employs health and personal care workers that serve elderly clients. The Employee was a member of that staff.

The Employee was required to join a Union of home health care workers (the “Union”).

At or about the time when the Employee began work for Employer, the Union and Employer entered into a collective bargaining agreement (the “CBA”).

The CBA contained an “Adjustment of Disputes” provision (the “Arbitration Agreement”) that provided, in pertinent part:

B. The parties [the Union and Attending] further agree a goal of this Agreement is to ensure compliance with all federal, state, and local wage hour law and wage parity statutes. Accordingly, to ensure the uniform administration and interpretation of this Agreement in connection with federal, state, and local wage-hour and wage parity statutes, all claims brought by either the Union or Employees, asserting violations of or arising under the Fair Labor Standards Act . . . , New York Home Care Worker Wage Parity Law, or New York Labor Law (collectively, the “Covered Statutes”), in any manner, shall be subject exclusively, to the grievance and arbitration procedures described below.

1) The statute of limitations to file a grievance concerning the Covered Statutes shall be consistent with the applicable statutory statute of limitations. All such claims if not resolved in the grievance procedure, including class grievances filed by the Union, or mediation as described below shall be submitted to final and binding arbitration before Elliott Shriftman. . . .

. . . .

4) In the event an Employee has requested, in writing, that the Union process a grievance alleging a violation of the Covered Statutes and the Union declines to process a grievance regarding alleged violations of the Covered Statutes, through the grievance/mediation process or to arbitration following the conclusion of mediation, an Employee solely on behalf of himself/herself, may submit their individual claim to mediation, or following the conclusion of mediation, to arbitration. . . .

Slip op. at *3-4 (quoting Arbitration Agreement; emphasis supplied by Court).

On her own behalf, and on behalf of all similarly situated employees, Employee sued Employer in the U.S. District Court for the Eastern District of New York, alleging that Employer had violated the Fair Labor Standards Act (“FLSA”) and provisions of New York’s Labor Law by, among other things, “willfully fail[ing] to pay its workers overtime and spread-of-hours pay. . . .” Slip op. at *4-5.

The Employer moved to compel arbitration, but the district court denied the motion. The district court ruled that the CBA did not require that the Employee’s claims be resolved in arbitration.

The district court reached that conclusion on two alternative grounds. First, the district court ruled that the arbitration agreement “violated the Employer’s due process rights due process rights because the arbitrator had been preselected by the Union and [the Employer] without any input from [the Employee].” Slip op. at *5.

Second, and in any event, the district court held that the arbitration agreement was not mandatory, and that accordingly, the Employer was entitled to bring its claims in federal district court. To that end the district court determined that the Arbitration Agreement was “‘at best ambiguous,’ and does not satisfy the clear and unmistakable test applicable to the assessment of purported waivers of union members’ right to bring statutory claims in court when such waivers are part of a collective bargaining agreement’s arbitration provisions.” Slip op. at *5 (quoting district court decision; other quotation omitted).

The Employer appealed.

The Second Circuit’s Decision

Arbitrability Question 1
Thurgood Marshall U.S. Courthouse, 40 Centre Street, New York, NY 10007

The Second Circuit began by explaining that motions to compel arbitration “ordinarily” present courts with four questions:

(1) whether the parties agreed to arbitrate; (2) the “scope” of the arbitration agreement; (3) whether the plaintiff’s federal statutory claims are “nonarbitrable”; and (4) if some, but not all of the claims in the case are arbitrable, whether to stay the balance of the proceedings pending arbitration.

Slip op. at *6.

But this case presented only the first two questions—whether the parties agreed to arbitrate, and if so, what they agreed to arbitrate. Slip op. at *6.

The “clear and unmistakable” standard for determining whether parties to a collective-bargaining agreement agreed to arbitrate statutory claims was a standard that applied only to the second question, that is, the scope of the arbitration agreement. Slip op. at *8-10. According to the Second Circuit, “[t]he district court framed the sole relevant inquiry as whether ‘[a] clause purporting to require arbitration of a [FLSA] claim that is contained in a collective bargaining agreement’ clearly and unmistakably requires arbitration.” Slip op. at *8 (quoting district court decision).

The district court therefore conflated the first two questions and applied the “clear and unmistakable” standard to both. The district court erred in doing so, said the Second Circuit, because “the clear and unmistakable standard does not reflect disfavor of union-negotiated arbitration agreements[,]” but instead “ensures that employees’ right to bring statutory claims in court is not waived by operation of confusing, “very general” arbitration clauses[,]” which, for example, might be reasonably construed to be limited to claims concerning the construction or application of a collective bargaining agreement, even though they might also be reasonably construed to encompass both contract and statutory claims. Slip op. at *9 (citations and quotations omitted).

The Second Circuit said “we ask not whether the parties clearly and unmistakably agreed to arbitrate, but whether, once we have established that an agreement exists, that agreement clearly and unmistakably encompasses the plaintiff’s statutory claims.” Slip op. at *9-10. “The clear and unmistakable standard,” the Court explained, is “therefore. . . specific to the scope question and has no bearing on whether there is an agreement to arbitrate in the first instance.” Slip op. at *10.

Having clarified how the clear and unmistakable standard is supposed to be applied, the Court addressed whether the arbitration agreement was permissive or mandatory, and if mandatory, whether statutory claims were  clearly and unmistakably within its scope. The Court held that the arbitration agreement was mandatory and clearly and unmistakably encompassed the statutory claims. Slip op. at *9.

Collective Bargaining Agreement’s Arbitration Clause is Mandatory

 The Court concluded that “[t]he Union was legally authorized to negotiate collective bargaining agreements on [the Employee’s] behalf[,]” citing 29 U.S.C. § 159(a), which provides that unions “selected for purposes of collective bargaining by the majority of the employees shall be the exclusive representatives of all the employees. . . for the purposes of collective bargaining. . . .” 29 U.S.C. § 159(a). The Employee was, accordingly, bound by the CBA, including the Arbitration Agreement.  

The Court next determined that the Arbitration Agreement, when construed as a whole, unambiguously imposed mandatory arbitration on the Employee, not simply an option to arbitrate or litigate. That provision, said the Court, “states that its goal is to ‘ensure the uniform administration and interpretation of [the CBA],’ and that the means by which it will achieve that goal is to require that all claims under the Covered Statutes, brought by the Union or employees, ‘be subject exclusively . . . to the grievance and arbitration procedures described below.” Slip op. at *11 (quoting Arbitration Agreement; emphasis added by Court). The Provision further “states that ‘all [claims under the Covered Statutes,] if not resolved in the grievance procedure, . . . shall be submitted to final and binding arbitration.’” Slip op. at *11-12. “On its face,” said the Court, “this language simply does not allow an employee to choose to proceed in a judicial forum.” Slip op. at *12.

The Court explained why it concluded the district court’s interpretation of the arbitration agreement was incorrect. The district court had “focused on subsection (4) of [the Arbitration Agreement][,]” which “states that where an employee has requested that ‘the Union process a grievance alleging a violation of the Covered Statutes,’ but the Union has declined to process that grievance, the employee ‘may submit [this] individual claim to mediation, or following the conclusion of mediation, to arbitration.’” Slip op. at *12 (quoting Arbitration Agreement; emphasis supplied by Court). The district court interpreted “‘may’. . . to mean that employees can ‘choose whether to arbitrate’ or pursue their claims in court.” Slip op. at *12 (quoting district court decision).

But the Second Circuit disagreed. Subsection (4) of the Dispute Resolution Provision, said the Court, “is best read as clarifying that when the Union declines to process particular grievances on employees’ behalf, aggrieved employees have two options[:]” “They ‘may’ either (1) submit their claims to meditation and arbitration or (2) abandon the claims entirely.” Slip op. at *12.

The Court said that its interpretation of “may” “makes sense of the provision in isolation but also in the context of the entire agreement.” Slip op. at *12-13 (quotation and citations omitted).

Interpreting “may” differently “is to bring subsection (4) into conflict with the rest of Article 8(B), which. . . manifestly reflects an intent to require arbitration.” Slip op. at *13. The district court’s interpretation, said the Court, “makes little sense in light of [subsection 1 of the Arbitration Agreement]’s requirement that ‘all [claims under the Covered Statutes,] if not resolved in the grievance procedure . . . shall be submitted to final and binding arbitration” Slip op. at *13 (quoting Arbitration Agreement; emphasis supplied by Court).

Collective Bargaining Agreement’s Arbitration Clause Clearly and Unmistakably Encompasses Statutory Claims

Having concluded the arbitration agreement was mandatory, the Court turned to whether the Employee’s statutory claims were within the scope of that agreement. The Court held that the Arbitration Agreement clearly and unmistakably encompassed those claims, and consequently, the Employee was required to arbitrate those claims.  

The Second Circuit explained “that both this Circuit and other sister circuits have interpreted the clear and unmistakable standard to require specific references in the [collective bargaining agreement] either to the statutes in question or to statutory causes of action generally.” Slip op. at *13 (quotation and citation omitted).

The Court explained that a “vague directive” such as “‘any disputes . . . shall be subject to’ a grievance and arbitration procedure. . .” does not suffice, but that, here, the Arbitration Agreement “specifically cites. . . statutes. . . .” including “the FLSA, the New York Home Care Worker Wage Parity Law, and [New York’s Labor Law], and requires claims under those statutes to proceed pursuant to [the Arbitration Agreement]’s grievance and arbitration procedures.” Slip op. at *14 (citations and quotations omitted). The Arbitration Agreement thus clearly and unmistakably required arbitration of those statutory claims.  

The Employee’s brought claims under the FLSA and the NYLL, those claims are clearly and unambiguously within the scope of the Arbitration Agreement, and consequently, the Employee was required to arbitrate those claims. Slip op. at *14.  

The Arbitration Agreement does not Deny the Employee Due Process of Law   

The district court concluded that the Arbitration Agreement denied the Employee “due process because ‘the worker apparently has no part in the selection of the arbitrator.’” Slip op. at *14-15. The Second Circuit disagreed.

The Employee was a member of the Union, and under applicable law, including 29 U.S.C. § 159(a), the “Union had authority to negotiate on behalf of Abdullayeva, and so the fact that she did not personally participate in the selection of the arbitrator does not violate due process.” See slip op. at *15. As the U.S. Supreme Court explained in Pyett, “unions ‘may agree to the inclusion of an arbitration provision in a collective-bargaining agreement in return for other concessions from the employer.’” Slip op. at *15 (quoting Pyett, 556 U.S. at 257). And “‘courts must rigorously enforce arbitration agreements according to their terms, including terms that specify with whom [the parties] choose to arbitrate their disputes.’” Slip op. at *15 (quoting American Exp. Co. v. Italian Colors Restaurant, 570 U.S. 228, 233 (2013) (emphasis in original; citation omitted).

The Union was the Employer’s representative “authorized to negotiate ‘conditions of employment,’ including arbitration clauses, with the Employer on behalf of [the Employer’s employees].” The Arbitration Agreement, “including its proviso that ‘claims. . . shall be submitted to final and binding arbitration before Elliot Shriftman,’ was the product of the Union’s negotiation with [the Employer].” Slip op. at *15-16.

New York law requires that “arbitration procedures must generally conform to the ‘due process right of notice and opportunity to defend.’” Slip op. at *16 (quoting Beckman v. Greentree Sec., Inc., 87 N.Y.2d 566, 570 (1996)). But the Employee did “not argue that [the Arbitration Agreement’s] procedures are lacking in notice, or that the selected arbitrator is biased or would conduct arbitration proceedings in bad faith.” Slip op. at *16.

Thus, “the challenged portion of the [Arbitration Agreement], which simply ‘specifies with whom’ arbitration will be conducted in accordance with established Supreme Court precedent, does not violate due process.” Slip op. at *16 (quoting American Exp. Co., 570 U.S. at 233).

Photo Acknowledgements

The photos featured in this post were licensed from Yay Images and are subject to copyright protection under applicable law.  

Confluence of the Arcane: Headings Clauses, Arbitration Law and Reinsurance

November 28th, 2016 Arbitrability, Arbitration Agreements, Arbitrator Selection and Qualification Provisions, Contract Interpretation, Reinsurance Contracts, Uncategorized, United States Court of Appeals for the Second Circuit Comments Off on Confluence of the Arcane: Headings Clauses, Arbitration Law and Reinsurance

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Introduction

A Headings Clause typically provides that contract provision headings and captions are for reference purposes only, and do not negate, modify or otherwise affect the provisions to which they relate. While arguments can be made for or against Headings Clauses, they are fairly common in commercial contracts.

Contract dispute outcomes rarely turn on the interpretation or application of these clauses. But on November 16, 2016, the U.S. Court of Appeals for the Second Circuit decided Infrassure, Ltd. v. First Mutual Trasp. Assur. Co., No. 16-306, slip op. (2d Cir. 2016) (summary order), which not only turned on the meaning and application of a headings clause, but did so in the context of an arbitration-law dispute in a reinsurance case. A confluence of the arcane, indeed!

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Infrassure: Background

Infrassure was a dispute between the parties to a facultative reinsurance contract. The facultative reinsurance contract (the “Certificate”) contained two different arbitration clauses. One was in the body of the pre-printed contract (the “Form Arbitration Clause”). The other was in Endorsement No. 2 (the “Endorsement No. 2 Arbitration Clause”). Endorsement No. 2 was titled “LONDON ARBITRATION AND GOVERNING LAW (UK AND BERMUDA INSURERS ONLY).”

The Form Arbitration Clause provided for arbitration of “any dispute arising out of the interpretation, performance or breach of this Certificate.” It designated a specific set of arbitration rules to govern the arbitration, and provided that “[a]ll arbitrators will be disinterested active or former officers of insurance or reinsurance companies.”

The Endorsement No. 2 Arbitration Clause provided for arbitration of “[a]ny dispute, controversy or claim arising out of or relating to this agreement or the breach, termination or invalidity thereof,” and prescribed different arbitration rules. It did not require arbitrators to be active or former officers of insurance or reinsurance companies.

Which Arbitration Clause Applies?

The parties disputed which arbitration clause applied. Reinsurer Infrassure, Ltd. (“Infrassure” or the “Reinsurer”), argued for the Form Arbitration Clause, with its more stringent arbitrator qualification requirements. Cedent First Mutual Transportation Assurance Company (“First Mutual” or the  “Cedent”), a New York State captive insurer of the Metropolitan Transportation Authority, apparently wanted to appoint (or nominate) arbitrators or arbitrator candidates who were not current or former officers or directors of insurance or reinsurance companies. It therefore argued that the Endorsement 2 Arbitration Clause applied.

Infrassure, which is a Swiss company, argued that the Endorsement No. 2 Arbitration Clause did not apply because the title of the endorsement contained the parenthetical limitation “(UK and Bermuda Insurers only)” (the “Parenthetical Limitation”). It asserted in the alternative that the Endorsement No. 2 Arbitration Clause should be construed to impose the same arbitrator qualification criteria as the Form Arbitration Clause imposed.

The Headings Clause

Headings ClauseFirst Mutual argued that the Certificate’s headings clause (the “Headings Clause,” which the Court refers to as the “Titles Clause”) rendered inapplicable the Parenthetical Limitation. The Headings Clause stated: “The several titles of the various paragraphs of this Certificate (and endorsements … attached hereto) are inserted solely for convenience of reference and will not be deemed in any way to limit or affect the provisions to which they relate.”

“This argument [was] thin,” observed the Court, but a reported opinion was in order, because the dispute “requires us to construe wording that apparently has not been construed before, and that is in a contract that may share features with other standard forms and endorsements.” Slip op. at 4.

Court Holds that Headings Clause did Not Strip the U.K.-and-Bermuda-Insurer-only Limitation on the Scope of Endorsement No. 2

The Court, in an opinion by Circuit Judge Dennis Jacobs (an esteemed member of the reinsurance bar before he was appointed to the Second Circuit), held that the Headings Clause was “unambiguous,” but did not negate the Parenthetical Limitation, even though that limitation appeared in the heading or title of Endorsement No. 2.

The Parenthetical Limitation, said the Court, “is not part of the title itself, though it shares the same line and bolded format.” The Heading Clause’s “purpose.  .  .  is not to strip away an express indication as to the context in which a particular provision operative, but to ensure that the text of a provision is not discounted or altered by the words of its  heading.” Slip op. at 4.

Court finds Further Support for its Conclusion by Applying First Mutual’s Heading Clause Interpretation to other Contract Provisions

The Court found confirmation of the accuracy of its conclusion “by consulting other [Certificate] provisions,” including “critical” ones, which would “would have no meaning at all if the Titles Clause were mechanically applied.” Id.

To illustrate, the Court referred to paragraph 14 of the Certificate, which, states:

Program Policy Limits

Various as per the attached schedule.

Id. (emphasis in original)

The Court observed that applying the Ceding Company’s interpretation of the Headings Clause to Paragraph 14 would reduce that paragraph to “the cryptic provision, ‘Various as per the attached schedule.’” Id. The “heading ‘Program Policy Limits,’ instructs the reader that the phrase ‘Various as per the attached schedule refers to program policy limits, as opposed to some other concern of the reinsurance agreement.” Id. That heading, said the Court, does not purport to contradict, alter or otherwise ambiguate the text that follows, but explains what the otherwise contextually ambiguous (indeed, meaningless) text was intended to mean in the context of the whole contract.

According to the Court, “other provisions beside Paragraph 14 likewise would be rendered meaningless if the [Headings Clause] were applied in the way pressed by First Mutual.” Slip op. at 4.

Given the Court’s holding, it was unnecessary to consider Infrassure’s alternative argument that the arbitrator selection provisions of the Form Arbitration Agreement should be made part of the Endorsement No. 2 Arbitration Agreement. All the Court had to say about this argument was “we need not reach [it], which  is just as well for well for Infrassure.” Slip op. at 5.

 

Photo Acknowledgements:

All photos used in the text portion of this post are licensed from Yay Images and are subject to copyright protection under applicable law. The Yay Images abbreviations of the photographer’s name for each of the three images, in order of their appearance, are:

Image 1: VIPDesignUSA

Image 2: steheap

Image 3: speedfighter

 

 

 

SCOTUS Denies Americo and Jupiter Medical Cert. Petitions: All Eyes now on DIRECTV. . . .

May 19th, 2015 American Arbitration Association, Appellate Practice, Arbitrability, Arbitration Agreements, Arbitration as a Matter of Consent, Arbitration Practice and Procedure, Arbitration Provider Rules, Arbitrator Selection and Qualification Provisions, Awards, Choice-of-Law Provisions, Class Action Arbitration, Class Action Waivers, Confirmation of Awards, Consent to Class Arbitration, Contract Interpretation, FAA Preemption of State Law, Federal Arbitration Act Enforcement Litigation Procedure, Judicial Review of Arbitration Awards, State Courts, United States Supreme Court Comments Off on SCOTUS Denies Americo and Jupiter Medical Cert. Petitions: All Eyes now on DIRECTV. . . .

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On March 28, 2015 we reported (here) that the U.S. Supreme Court (“SCOTUS”) had asked for a response to the petition for certiorari in Americo Life, Inc. v. Myer, 440 S.W.3d 18 (Tex. 2014). In Americo the Texas Supreme Court held that an arbitration award had to be vacated because it was made by a panel not constituted according to the parties’ agreement. The parties’ agreement, among other things, incorporated the American Arbitration Association (the “AAA”)’s rules, which at the time the parties entered into the contract followed the traditional, industry arbitration rule that party-appointed arbitrators may be partial, under the control of the appointing party or both. But by the time the dispute arose the AAA Rules had been amended to provide that the parties are presumed to intend to require parties to appoint only neutral arbitrators—that is, arbitrators that are both impartial and independent.

Five Justices of the nine-member Texas Court determined that the parties had agreed that party-appointed arbitrators need not be impartial, only independent. Because the AAA had, contrary to the parties’ agreement, disqualified the challenging party’s first-choice arbitrator on partiality grounds, the panel that rendered the award was not properly constituted and thus exceeded its powers. See 440 S.W.3d at 25. (Copies of our Americo posts are here and here.)

yay-12776482As reported here and here, the losing party requested Supreme  Court review to determine whether the Texas Supreme Court should have deferred to the AAA’s decision on disqualification rather than independently determining whether the parties intended to require party-appointed arbitrators to be neutral. The petition argues that there is a split in the circuits on the issue.

On Monday, May 18, 2015, SCOTUS denied the petition for certiorari.  (You can access the Court’s May 18, 2015 Order List here.)

On Monday May 4, 2015, SCOTUS also denied the petition for certiorari in another Federal Arbitration Act case, Jupiter Medical Center, Inc. v. Visiting Nurse Assoc., No. 14-944, which was decided by the Florida Supreme Court. (You can access the Court’s May 4, 2015 Order List here.) Jupiter Medical Center, like Americo, concerned a post-award challenge under Section 10(a)(4) of the Federal Arbitration Act, and also like Americo, was decided by a state supreme court. In Jupiter Medical, however, the Florida Supreme Court rejected the post-award challenge.

yay-5257980-digitalSupreme Court watchers interested in arbitration cases will have to get their fix next term from DIRECTV v. Imburgia, which we discussed here. Will SCOTUS hold that the California intermediate Court did not give effect to the presumption of arbitrability? Will SCOTUS go even further and explain that, just as a statute cannot be interpreted “‘to destroy itself,'” AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740, 1748 (2011) (quoting  American Telephone & Telegraph Co. v. Central Office Telephone, Inc., 524 U.S. 214, 227-228 (1998) (quotation omitted)), so too cannot state law contract interpretation rules be applied in a way that would destroy an arbitration agreement to which the Federal Arbitration Act applies? Cf. Volt Info. Sciences, Inc. v. Trustees of Leland Stanford Junior Univ., 489 U.S. 468,  (1989) (“The question remains whether, assuming the choice-of-law clause meant what the Court of Appeal found it to mean, application of Cal. Civ. Proc. Code Ann. § 1281.2(c) is nonetheless pre-empted by the FAA to the extent it is used to stay arbitration under this contract involving interstate commerce.  .  .  . [because] “it would undermine the goals and policies of the FAA.”)

Stay tuned for DIRECTV.  .  .  .

 

Photo Acknowledgements:

All photos used in the text portion of this post are licensed from Yay Images and are subject to copyright protection under applicable law. Text has been added to image 2 (counting from top to bottom). Hover your mouse pointer over any image to view the Yay Images abbreviation of the photographer’s name.

All Eyes on Americo. . . .SCOTUS Expected to Rule on Petition for Certiorari at Upcoming May 14, 2015 Conference

May 12th, 2015 American Arbitration Association, Appellate Practice, Arbitrability, Arbitration Agreements, Arbitration as a Matter of Consent, Arbitration Practice and Procedure, Arbitration Provider Rules, Arbitrator Selection and Qualification Provisions, Awards, Confirmation of Awards, Contract Interpretation, Evident Partiality, Judicial Review of Arbitration Awards, State Courts Comments Off on All Eyes on Americo. . . .SCOTUS Expected to Rule on Petition for Certiorari at Upcoming May 14, 2015 Conference

yay-677327-digitalOn March 28, 2015 we reported (here) that the U.S. Supreme Court had asked for a response to the petition for certiorari in Americo Life, Inc. v. Myer, 440 S.W.3d 18 (Tex. 2014). In Americo the Texas Supreme Court held that an arbitration award had to be vacated because it was made by a panel not constituted according to the parties’ agreement. The parties’ agreement, among other things, incorporated the American Arbitration Association (the “AAA”)’s rules, which at the time the parties entered into the contract followed the traditional, industry arbitration principle that party-appointed arbitrators may be partial, under the control of the appointing party or both. But by the time the dispute arose the AAA Rules had been amended to provide that the parties are presumed to intend that appointed arbitrators must be neutral.

Five Justices of the nine-member Court determined that the parties had agreed that party-appointed arbitrators need not be impartial, only independent. Because the AAA had, contrary to the parties’ agreement, disqualified the challenging party’s first-choice arbitrator on partiality grounds, the panel that rendered the award was not properly constituted and thus exceeded its powers. See 440 S.W.3d at 25. (Copies of our Americo posts are here and here.)

yay-34842-e1424841353823The losing party is requesting Supreme  Court review to determine whether the Texas Supreme Court should have deferred to the AAA’s decision on disqualification rather than independently determining whether the parties intended to require party-appointed arbitrators to be neutral. The petition argues that there is a split in the circuits on the issue.

At this week’s May 14, 2015 conference, the Court will presumably decide whether or not to grant certiorari.

In our March 28, 2015 post (here) we argued  that Americo‘s unique facts make it poor candidate for certiorari. At the time the parties agreed to arbitrate, the AAA rules “provided that ‘[u]nless the parties agree otherwise, an arbitrator selected unilaterally by one party is a party-appointed arbitrator and not subject to disqualification pursuant to Section 19.'” 440 S.W.3d at 23 (quoting AAA Commercial Rule § 12 (1996)). Section 19 permitted the AAA to disqualify neutral arbitrators for partiality, but, under Section 12, absent an agreement to the contrary, party-appointed arbitrators were not subject to disqualification under Rule 19. When the AAA Rules were amended to reverse the traditional presumption about partiality of party-appointed arbitrators, the Rules were also amended to authorize the AAA to determine whether party-appointed arbitrators were neutral.

yay-8590418-digitalThis is one of those (relatively rare) cases where a question of arbitrability—that is, whether the parties agreed to delegate to the AAA the authority to make a final and binding determination on whether a party-appointed arbitrator may be disqualified—is intertwined so inextricably with the merits of the dispute alleged to be arbitrable that, for all intents and purposes, the arbitrability and merits questions are identical. In other words, the AAA’s authority to disqualify turns on whether the parties agreed to neutral or non-neutral party-appointed arbitrators–the precise issue the petition claims the AAA should itself decide. In situations like these, the court cannot abdicate its duty to determine arbitrability, even if that means deciding some or all of the disputes that are alleged to be arbitrable. See, generally, Litton Financial Printing Div. v. National Labor Relations Board, 501 U.S. 190, 208-09 (1991).

Of course, the Supreme Court may believe otherwise, or may have other reasons for wanting  to grant certiorari.  But in any event, we’ll probably know by Monday, May 18, 2015 whether the Court will take the case.

 

Photo Acknowledgements:

All photos used in the text portion of this post are licensed from Yay Images and are subject to copyright protection under applicable law. Text has been added to images 1 and 3 (counting from top to bottom). Hover your mouse pointer over any image to view the Yay Images abbreviation of the photographer’s name.

The Fifth Circuit’s PoolRe Decision: Captives, Insurance, Reinsurance, Arbitration, Multiple Parties, Multiple Contracts, Conflicting Arbitration Agreements: Does it Get any Better than this?! (Part II)

April 21st, 2015 Appellate Practice, Arbitration Agreements, Arbitration as a Matter of Consent, Arbitration Practice and Procedure, Arbitration Provider Rules, Arbitration Risks, Arbitrator Selection and Qualification Provisions, Authority of Arbitrators, Awards, Captive Insurance Companies, Grounds for Vacatur, Judicial Review of Arbitration Awards, Making Decisions about Arbitration, Managing Dispute Risks, Practice and Procedure, Small and Medium-Sized Business Arbitration Risk, Small Business B-2-B Arbitration, United States Court of Appeals for the Fifth Circuit Comments Off on The Fifth Circuit’s PoolRe Decision: Captives, Insurance, Reinsurance, Arbitration, Multiple Parties, Multiple Contracts, Conflicting Arbitration Agreements: Does it Get any Better than this?! (Part II)

Part II

Analysis of the Pool Re Decision

If you read Part I you know the arbitration program in PoolRe case was, to put it mildly, inadequate to meet the needs of the multi-party, multi-contract dispute that arose out of the parties’ legal relationships. Perhaps the saving grace is that the both the district court and the Fifth Circuit Court of Appeals vacated the award, which is what Sections 5 and 10 of the  Federal Arbitration Act require.

yay-12688786 - WavebreakmediaThe Fifth Circuit addressed whether the district court erred by: (a) vacating the arbitration award on the ground the arbitrator exceeded his powers; (b) vacating the entire award; and (c) denying the motion to compel arbitration of the Phase II Claims. Finding no error, the Fifth Circuit affirmed the district court’s judgment in its entirety.

The District Court Correctly Concluded that the Arbitrator Exceeded his Powers

 

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The Fifth Circuit held that the arbitrator exceeded his powers because the Arbitrator: (a) was not properly appointed under the terms of the Reinsurance Agreement’s arbitrator selection provisions, which required him to be “selected by the Anguilla, B.W.I. Director of Insurance;” and (b) decided the dispute under the American Arbitration Association’s rules when the Reinsurance Agreement required arbitration under International Chamber of Commerce (“ICC”) Rules.

Arbitrator not Selected as Required by the Reinsurance Agreement’s Arbitrator Selection Provisions

 

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The district court held vacatur was required  because the Arbitrator “was not ‘the actual decisionmaker that [PoolRe and the Captives] selected as an integral part of their agreement.'” Slip op. at 9 (quoting district court). The Fifth Circuit held that “the district court properly vacated the arbitrator’s award with regard to the claims against PoolRe[,]” because the Arbitrator “was appointed in the manner provided in the [Engagement Agreement’s] Billing Guidelines — to which PoolRe was not a party — but was appointed in a manner contrary to that provided in the Reinsurance Agreements between PoolRe and the Captives, which required ‘select[ion] by the Anguilla, B.W.I. Director of Insurance.'” Slip op. at 10-11. The Capstone Entities “submitted [their] original arbitration demand to [the Arbitrator][,]” but “PoolRe,” said the Court, “only intervened in that arbitration after [the  Anguilla Financial Services Commission] notified Pool Re that no Director of Insurance existed.” Slip op. at 10-11. The Arbitrator thus “had not been ‘selected according to the contract specified method’.  .  .  when he  decided the dispute between Pool Re and the Captives.” Slip op. at 11 (quoting Bulko v. Morgan Stanley DW Inc., 450 F.3d 622, 625 ((5th Cir. 2006)).

The Fifth Circuit’s decision is fully consistent with the Federal Arbitration Act, under which “arbitration is a matter of consent, not coercion.” Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 678-80 (2010) (citation and quotations omitted). Courts are supposed to enforce arbitration agreements according to their terms, and among the most important terms of an arbitration agreement are those concerning arbitrator selection. See Lefkovitz v. Wagner, 395 F.3d 773, 780 (2005) (Posner, J.) (“Selection of the decision maker by or with the consent of the parties is the cornerstone of the arbitral process.”); see, e.g., 9 U.S.C. § 5 (“If in the agreement provision be made for a method of naming or appointing an arbitrator or arbitrators or an umpire, such method shall be followed.  .  .  .”); Convention on the Recognition and Enforcement of Foreign Arbitral Awards, Art. V(1)(d), June 10, 1958, 21 U.S.T. 2519, T.I.A.S. No. 6997 (a/k/a the “New York Convention”) (implemented by 9 U.S.C. §§ 201, et. seq.) (award subject to challenge where “[t]he composition of the arbitral authority or the arbitral procedure was not in accordance with the agreement of the parties”); Stolt-Nielsen, 559 U.S. at 668, 670 (one of the FAA’s “rules of fundamental importance” is parties “may choose who will resolve specific disputes”) (emphasis added; citations omitted); Encyclopaedia Universalis S.A. v. Encyclopaedia Brittanica, Inc., 403 F.3d 85, 91-92 (2d Cir. 2005) (vacating award by panel not convened in accordance with parties’ agreement); Cargill Rice, Inc. v. Empresa Nicaraguense Dealimentos Basicos, 25 F.3d 223, 226 (4th Cir. 1994) (same); Avis Rent A Car Sys., Inc. v. Garage Employees Union, 791 F.2d 22, 25 (2d Cir. 1986) (same).

Arbitrator Exceeded his Powers by Deciding the Disputes between Pool Re and the Captives under the AAA Rules Rather than under the ICC Rules

 

 

The Fifth Circuit also held that the Arbitrator exceeded his powers by deciding the disputes between Pool Re and the Captives under the AAA Rules because the Reinsurance Agreements required “all disputes [to] ‘be submitted for biding, final, and nonappealable arbitration to the [ICC] under and in accordance with its then prevailing ICC Rules of Arbitration.'” Slip op. at 10-11. The Court explained that it “interpret[s] clauses providing for arbitration in accordance with a particular set of rules as forum selection clauses.” Slip op. at 10-11 (quotation and citations omitted). And “[i]f the parties’ agreement specifies that the laws and procedures of a particular forums shall govern any arbitration between them, that forum-selection clause  is an important part of the arbitration agreement, and, therefore, the court need not compel arbitration in a substitute forum if the designated forum becomes unavailable.” Slip op. at 11 (quotations and citations omitted). By applying the “the AAA rules [instead  of the ICC Rules] to the dispute[,]” the Arbitrator “acted contrary to an express contractual provision,” and therefore exceeded his powers within the meaning of Section 10(a)(4) of the Federal Arbitration Act. Slip op. at 11 (quotation, citation and brackets omitted). Continue Reading »

The Fifth Circuit’s PoolRe Decision: Captives, Insurance, Reinsurance, Arbitration, Multiple Parties, Multiple Contracts, Conflicting Arbitration Agreements: Does it Get any Better than this?!

April 17th, 2015 Appellate Practice, Arbitrability, Arbitration Agreements, Arbitration as a Matter of Consent, Arbitration Practice and Procedure, Arbitration Provider Rules, Arbitration Risks, Arbitrator Selection and Qualification Provisions, Authority of Arbitrators, Awards, Captive Insurance Companies, Confirmation of Awards, Consolidation of Arbitration Proceedings, Contract Interpretation, Dispute Risk - Frequency and Severity, Drafting Arbitration Agreements, Federal Courts, Grounds for Vacatur, Making Decisions about Arbitration, Managing Dispute Risks, Outcome Risk, Practice and Procedure, Reinsurance Arbitration, Small and Medium-Sized Business Arbitration Risk, Small Business B-2-B Arbitration, United States Court of Appeals for the Fifth Circuit Comments Off on The Fifth Circuit’s PoolRe Decision: Captives, Insurance, Reinsurance, Arbitration, Multiple Parties, Multiple Contracts, Conflicting Arbitration Agreements: Does it Get any Better than this?!

Part I: PoolRe Introduction and Background

 Introduction

yay-4463438-digitalArbitration offers rough justice on the merits. Arbitrators have broad discretion not only in deciding the dispute but in fashioning remedies. Skilled, experienced and responsible arbitrators can cut through all sorts of legal and contractual “red tape” to resolve a dispute, applying just enough gloss on the law and the contract to make things work in a businesslike fashion while remaining true to the “essence of the agreement.”  Applied just so, that kind of rough justice is sometimes exactly what the parties need to make their agreement work, and in some cases, preserve (or even improve) their commercial relationship going forward. And it is not something that Court adjudication necessarily—or even ordinarily—can achieve.

But rough justice does not govern whether the parties agreed to arbitrate, who’s bound by an arbitration agreement and whether the parties agreed to delegate authority to a particular arbitrator or to follow a particular method of arbitrator selection as set forth in the parties’ agreement. Those questions are governed principally by state contract law and—particularly when multiple agreements and multiple parties are involved, or the question concerns whether an arbitrator was validly appointed—they frequently must be decided by courts, even if some or all of the parties have clearly and unmistakably agreed to submit arbitrability questions to arbitration.

Details, Details.  .  .

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Details always matter, but they are all the more important when a dispute will presumably be decided under state contract law rules and principles by a decision maker whose decisions—unlike those of an arbitrator—are often subject to independent review by an appellate court. Courts generally do not (or at least are not supposed to) substitute rough justice, pragmatism or equity in place of contract law, which is not always so flexible. The casebooks are littered with examples where doing so might arguably have achieved a more desirable outcome but doing so could not be squared with contract rules and principals in a way that befitted higher-court precedent and the circumstances apparently did not warrant departure from precedent.

The U.S. Court of Appeals for the Fifth Circuit’s decision in PoolRe Ins. Corp. v. Organizational Strategies, Inc., No. 14-20433, slip op. (5th Cir. April 7, 2015), is a case where the parties apparently lost sight of some important details in their apparent haste to do a deal that unfortunately went sour. Then, an arbitrator appointed under one of the contracts compounded the problem by making an award that could not even arguably be squared with the clear terms of one of the contracts’ arbitration agreements.

 

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The parties that were probably best positioned to ensure that the arbitration agreements in the various service-provider and reinsurance contracts probably lost the most, and perhaps to some extent at least, there’s some poetic justice to that. They claimed the clients breached their service contracts, the clients said the service providers breached the contracts and independent legal duties and the arbitrator ruled in favor of the service providers. The district court, as we’ll see, properly vacated the award and the Fifth Circuit affirmed.  Now the parties are essentially back at square one, albeit much worse for the wear in terms of legal expenses and protracted delay.

The facts and procedural history of the case is somewhat complex, but critically important. Not only do they drive the outcome but they read like a primer on what not to do when attempting to devise a cost-effective arbitration program for disputes that may involve multiple parties and interrelated and interdependent contracts. And they demonstrate pretty starkly some of the consequences that parties can suffer when: (a) they do not properly structure their agreement; and (b) end up with an arbitrator who is not be as savvy as he or she might otherwise be about scope of authority (or simply makes a bad call about it).

We do not mean to suggest that the Arbitrator in this case was in any way incompetent or otherwise blameworthy. To err is human, and even if the arbitrator had made the best permissible decision possible under the circumstances, the parties would still be exposed to the consequences of  having not properly structured their arbitration agreements. The arbitrator’s missteps certainly exacerbated the problem, but such things are foreseeable risks that the parties could have managed by, for example, agreeing to an arbitration agreement that was drafted in simple, unambiguous  terms governing what is supposed to happen in the event of a multi-contract, multi-party dispute like the one at issue. Such disputes were foreseeable, as they are in any relatively complex transaction involving multiple parties and multiple interrelated contracts.

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The mess that is described in the balance of this post could have  been avoided had some or all of the parties: (a) understood that their dispute resolution system needed the attention of a skilled and experienced arbitration lawyer; and (b) were willing to invest the modest sum needed to make that possible. Apparently the parties did not appreciate the risks they faced or, if they did, they made a conscious decision to ignore them, perhaps finding it preferable to avoid paying a few extra thousand dollars up front, roll the dice and hope that all would turn out well (and certainly not as it did).

Perhaps one might wonder what the odds were that an underlying dispute like the one at issue would arise. Nobody knows the precise answer, of course, but we’d have to say there was a meaningful risk in view of the nature and structure of the transaction. And given the rather obvious and dramatic disparity between the two arbitration agreements, the risk that Federal Arbitration Act enforcement proceedings would be necessary was likewise meaningful and fairly easy to foresee.

Suppose the risk was 1 in 6—that is, there was approximately a 17% chance that the parties would spend hundreds of thousands of dollars and spend at least an additional year or more embroiled in Federal Arbitration Act enforcement litigation centered on issues collateral to the merits. If we’re talking about a single round roll of a single die, with the idea being to avoid one possible outcome (represented by a whole number ranging from one to six), then that’s about as minimal a risk as could be measured (since there are only six possible outcomes). It also happens to be the same risk one would accept were one to play a round of Russian Roulette with a six-round revolver and a single bullet.

The point is that it is not just a matter of assessing the odds; severity of potential outcomes obviously drives risk assessment and management decisions as well. Most responsible corporate officers and directors aren’t going to take on a Russian-Roulette type risk (i.e., a “bet-the-company” risk) unless they have no choice, and if they must take the risk, they do what they reasonably can to minimize the odds the undesirable outcome will materialize and to mitigate any loss incurred if it does.

Here, the outcome that could have been avoided was very costly—though presumably not a death knell for either party— whereas the cost of substantially decreasing the likelihood of that outcome would probably have been less than a percentage point of the loss.

What would you have done?

Continue Reading »

United States Supreme Court Requests Response to Petition for Certiorari in Texas Party-Appointed Arbitrator Qualification Case

March 28th, 2015 American Arbitration Association, Appellate Practice, Arbitrability, Arbitration Agreements, Arbitration Practice and Procedure, Arbitration Provider Rules, Arbitrator Selection and Qualification Provisions, Authority of Arbitrators, Awards, Contract Interpretation, Evident Partiality, Grounds for Vacatur, Judicial Review of Arbitration Awards, State Arbitration Law, State Courts, Texas Supreme Court, United States Supreme Court Comments Off on United States Supreme Court Requests Response to Petition for Certiorari in Texas Party-Appointed Arbitrator Qualification Case

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On June 20, 2014 the Texas Supreme Court held in Americo Life, Inc. v. Myer, 440 S.W.3d 18 (Tex. 2014), that an arbitration award had to be vacated because it was made by a panel not constituted according to the parties’ agreement. The parties’ agreement, among other things, incorporated the American Arbitration Association (the “AAA”)’s rules, which at the time the parties entered into the contract followed the traditional, industry arbitration principle that party-appointed arbitrators may be partial, under the control of the appointing party or both. But by the time the dispute arose the AAA Rules had been amended to provide that the parties are presumed to intend that appointed arbitrators must be neutral.

Five Justices of the nine-member Court determined that the parties had agreed that party-appointed arbitrators need not be impartial, only independent. Because the AAA had, contrary to the parties’ agreement, disqualified the challenging party’s first-choice arbitrator on partiality grounds, the panel that rendered the award was not properly constituted and thus exceeded its powers. See 440 S.W.3d at 25. (Copies of our Americo posts are here and here.)

The losing party has petitioned the United States Supreme Court for a writ of certiorari, arguing that the Court should determine whether the Court should have deferred to the AAA’s decision on disqualification rather than independently determining whether the parties intended to require party-appointed arbitrators to be neutral. Continue Reading »

Small Business B-2-B Arbitration Part II.B.2(C): Other Structural Aspects of Pre-Dispute Arbitration Agreements—Who will the Arbitrators be?  

November 13th, 2014 Arbitration Agreements, Arbitration and Mediation FAQs, Arbitration as a Matter of Consent, Arbitration Practice and Procedure, Arbitrator Selection and Qualification Provisions, Drafting Arbitration Agreements, Making Decisions about Arbitration, Nuts & Bolts, Nuts & Bolts: Arbitration, Small Business B-2-B Arbitration, United States Supreme Court Comments Off on Small Business B-2-B Arbitration Part II.B.2(C): Other Structural Aspects of Pre-Dispute Arbitration Agreements—Who will the Arbitrators be?  

In Part II.B.2(A) we identified three key structural aspects of pre-dispute B-2-B arbitration, and discussed the first two in that and a subsequent post. This Part II.B.2(C) wraps up our discussion of arbitration-agreement structure by briefly examining a topic that is at least as important as the scope of the agreement: who the decision makers will be and how they will be selected.

As one renowned jurist put it, “selection of the decision maker by or with the consent of the parties is the cornerstone of the arbitral process.”[1] Arbitration allows the parties considerable input into the selection of who the decision makers will be, something that can make it a very attractive alternative to litigation for one or both of the parties. Parties who do not opt out of the court system are left with the luck of draw.

Savvy users of arbitration—and for that matter, most persons with dispute resolution experience in judicial or arbitral forums or both—know that decision makers, whether randomly assigned or selected, are not fungible commodities. Were they fungible, let alone commodities, there would likely be little or no controversy surrounding appointments to the United States Supreme Court.

But differences in judicial philosophy do not have to be based on so-called “liberal,” “moderate” or “conservative” views to be important, and perhaps even outcome-determinative. For example, the composition of a three-judge appellate panel can in many cases significantly influence the outcome of an appeal in many civil cases involving any number of legal and policy issues that are not the subject of discussion, let alone controversy, in the mainstream media.

Presumably many lawyers who argue appeals before three-judge panels (including the author) would scream “halleluiah!” had they the opportunity to select even one member of a three-judge appeals panel—or even if each party got to select one, leaving those two to select a third.

But time and time again, we see situations where parties who could have that opportunity—in the arbitration context, that is— had they negotiated it, or who could have at least participated meaningfully in the selection of one or more arbitrators had they exercised their contract rights with due diligence, end up having little if any meaningful input into the selection process. That type of lost opportunity usually redounds to their detriment, especially when their counterparts not only negotiate arbitrator selection provisions that suit their purposes, but also fully and wisely exercise their arbitrator selection rights. Continue Reading »

Americo Part II: Sometimes Hard Cases Make Good Law

September 3rd, 2014 American Arbitration Association, Appellate Practice, Arbitration Agreements, Arbitration as a Matter of Consent, Arbitration Practice and Procedure, Arbitration Provider Rules, Arbitrator Selection and Qualification Provisions, Authority of Arbitrators, Awards, Confirmation of Awards, State Courts, Texas Supreme Court Comments Off on Americo Part II: Sometimes Hard Cases Make Good Law

 

Introduction

On August 5, 2014 we critiqued (here) the Texas Supreme Court’s June 20, 2014 decision in Americo Life, Inc. v. Myer, ___ S.W.3d __, No. 12-0739, slip op. (Tex. June 20, 2014), which held that an arbitration award had to be vacated because it was made by a panel not constituted according to the parties’ agreement. Five Justices of the nine-member Court determined that the parties had agreed that party-appointed arbitrators need not be impartial, only independent. Because the American Arbitration Association (the “AAA”) had, contrary to the parties’ agreement, disqualified the challenging party’s first-choice arbitrator on partiality grounds, the panel that rendered the award was not properly constituted and thus exceeded its powers. See slip op. at 10.   

The Americo award was not a legitimate by product of the parties’ arbitration agreement, and so, ruled the majority, it had to be vacated. The majority resisted a temptation that the four dissenting Justices apparently could not: “interpreting” the parties’ agreement in a hyper-technical fashion to justify confirming the award, even though that outcome, as desirable as it might otherwise seem, would have required the majority to reach a conclusion about party intent that was, at best, implausible.

Make no mistake about it, the Texas Supreme Court was faced with a tough case, and we think the majority made the right call.  Had a similar issue been presented in a garden-variety contract interpretation case, we doubt it would have been such a tough case and would not be particularly surprised if the outcome would have been unanimous, not split.

What made the case so tough was that this was not only an arbitration case, but one where the interpretive issue was justiciable only at the post-award stage. The law says that should make so difference and that, in any event, subject to a few special arbitration-law rules, the Federal Arbitration Act (the “FAA”) requires courts to put arbitration agreements on the same footing as all other contracts. But in post-award practice there a number of objective and subjective considerations that not infrequently result in courts reaching decisions in favor of confirming awards based on very doubtful, and sometimes, as here, implausible, conclusions about party intent.

That did not happen in Americo, and strange as it may seem, the majority’s decision that the award had to be vacated was a very pro-arbitration decision. A majority of the Justices enforced the parties’ arbitration agreement, which is the whole point of the FAA. And by doing so, they made arbitration all the more an attractive alternative to litigation.

Today’s post examines in greater detail what transpired in Americo, including the reasoning the majority and dissent articulated in support of their conclusions, and concludes with a few parting observations.  Continue Reading »

Faithful to the “First Principle” of Arbitration Law, the Texas Supreme Court Shores up the “Cornerstone of the Arbitral Process”

August 5th, 2014 American Arbitration Association, Appellate Practice, Arbitration Agreements, Arbitration as a Matter of Consent, Arbitration Practice and Procedure, Arbitration Provider Rules, Arbitrator Selection and Qualification Provisions, Authority of Arbitrators, Awards, Confirmation of Awards, Contract Interpretation, Drafting Arbitration Agreements, Grounds for Vacatur, Judicial Review of Arbitration Awards, Party-Appointed Arbitrators, Practice and Procedure, State Courts, Texas Supreme Court Comments Off on Faithful to the “First Principle” of Arbitration Law, the Texas Supreme Court Shores up the “Cornerstone of the Arbitral Process”

Introduction  

Anyone versed in arbitration-law basics knows that “arbitration is a matter of consent, not coercion.” Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 678-80 (2010) (citation and quotations omitted). That is the “first principle” of arbitration law (the “First Principle”) set forth in the Steelworkers’ Trilogy.[1] See, e.g., Granite Rock Co. v. International Brotherhood of Teamsters, 561 U.S. 287, 295 & n.7, 294 n.6 (2010); AT&T Technologies, Inc. v. Communications Workers, 475 U. S. 643, 648 (1986).

The First Principle is integrally intertwined with “the central or primary purpose of the [Federal Arbitration Act (“FAA”)][,]” which is “to ensure that  private agreements to arbitrate are enforced according to their terms.” Stolt-Nielsen, 559 U.S. at 679 (citations and quotations omitted). To “enforce” an arbitration agreement “courts and arbitrators must give effect to the contractual rights and expectations of the parties.” Id. When courts do not give effect to the parties’ contractual rights and expectations, they violate the First Principle.

Courts and arbitrators are supposed to apply the First Principle faithfully and rigorously whenever  they interpret or apply material arbitration-agreement-terms, and in “doing so [they] must  not lose sight of the purpose of the exercise: to give effect to the intent of the parties.” See Stolt-Nielsen, 559 U.S. at 679-81. And if that admonition applies with special force in any particular context, it would be in the interpretation and enforcement of arbitrator selection and qualification provisions.

Arbitrator selection provisions are what Circuit Court Judge Richard A. Posner once dubbed the “cornerstone” of the parties’ agreement: “Selection of the decision maker by or with the consent of the parties is the cornerstone of the arbitral process.” Lefkovitz v. Wagner, 395 F.3d 773, 780 (2005) (Posner, J.); see, e.g., 9 U.S.C. § 5 (“If in the agreement provision be made for a method of naming or appointing an arbitrator or arbitrators or an umpire, such method shall be followed.  .  .  .”); Convention on the Recognition and Enforcement of Foreign Arbitral Awards, Art. V(1)(d), June 10, 1958, 21 U.S.T. 2519, T.I.A.S. No. 6997 (a/k/a the “New York Convention”) (implemented by 9 U.S.C. §§ 201, et. seq.) (award subject to challenge where “[t]he composition of the arbitral authority or the arbitral procedure was not in accordance with the agreement of the parties”); Stolt-Nielsen, 559 U.S. at 668, 670 (one of the FAA’s “rules of fundamental importance” is parties “may choose who will resolve specific disputes”) (emphasis added; citations omitted); Encyclopaedia Universalis S.A. v. Encyclopaedia Brittanica, Inc., 403 F.3d 85, 91-92 (2d Cir. 2005) (vacating award by panel not convened in accordance with parties’ agreement); Cargill Rice, Inc. v. Empresa Nicaraguense Dealimentos Basicos, 25 F.3d 223, 226 (4th Cir. 1994) (same); Avis Rent A Car Sys., Inc. v. Garage Employees Union, 791 F.2d 22, 25 (2d Cir. 1986) (same).

Americo Life, Inc. v. Myer

On June 20, 2014, a divided Texas Supreme Court in Americo Life, Inc. v. Myer, ___ S.W.3d __, No. 12-0739, slip op. (Tex. June 20, 2014), adhered to and correctly applied the First Principle by holding that an arbitration award had to be vacated because it was made by a panel not constituted according to the parties’ agreement.  Five Justices of the nine-member Court determined that the parties had agreed that party-appointed arbitrators need not be impartial, only independent. Because the American Arbitration Association (the “AAA”) had, contrary to the parties’ agreement, disqualified the challenging party’s first-choice arbitrator on partiality grounds, the panel that rendered the award was not properly constituted and thus exceeded its powers. See Slip op. at 10. Continue Reading »