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Fifth Circuit Says District Court That Compelled Arbitration Does Not Have Inherent Power to Impose Sanctions on Counsel for Arbitration Misconduct

Introduction

An arbitration panel acting under a broad, unrestricted arbitration agreement can generally impose sanctions on a party. But if a federal district court compels arbitration, and retains jurisdiction, can it impose sanctions on counsel who allegedly misbehave during the arbitration proceedings? On September 13, 2010 the United States Court of Appeals for the Fifth Circuit held 3-0 that the answer is “no,” unless the conduct was in direct defiance or disobedience of the district court’s orders or otherwise threatened the district court’s own judicial authority or proceedings. See Positive Software Solutions Inc. v. New Century Mtg. Corp., No. 09-10355, slip op. (5^th Cir. September 13, 2010).

Background

Positive Software Solutions arose out of arbitration between Positive Software Solutions, Inc. and New Century Mortgage Corp. A district court in Texas compelled arbitration and retained jurisdiction. Positive Software lost, and sought to vacate the award on evident partiality grounds, which were ultimately rejected by the Fifth Circuit en banc. See Positive Software Solutions Inc. v. New Century Mtg. Corp., 476 F.3d 278 (5^th Cir. 2007) (en banc). After the Fifth Circuit remanded the award for confirmation, New Century declared bankruptcy, the parties settled, and the American Arbitration Association administratively closed the proceedings.

As part of the settlement, New Century waived the attorney-client privilege, and turned over to Positive Software its arbitration files, which Positive Software would use in support of a motion in the district court for sanctions against New Century’s arbitration counsel, Ophelia Camiña, a partner at Susman, Godfrey, LLP (“Susman Godfrey”); Susman Godfrey; and Barry Barnett (apparently another lawyer who represented New Century). On March 2008 Positive Software filed its motion for sanctions pursuant to Fed. R. Civ. P. 37, 28 U.S.C. § 1927, and the court’s inherent power.

In February 2009 the district court imposed pursuant to its inherent power $10,000 in sanctions against Camiña, which represented a portion of Positive Software’s attorney fees incurred during arbitration. The district court ruled that the sanctions were for conduct that “took place in connection with the arbitration, not in connection with discovery under the Court’s supervision.”

Camiña appealed, and the Fifth Circuit reversed. Continue Reading »

International Institute for Conflict Prevention and Resolution Publishes Philip J. Loree Jr.’s September 2010 Article on Rent-A-Center, West Inc. v. Jackson

September 12th, 2010 Arbitration Agreements, Arbitration Practice and Procedure, Authority of Arbitrators, Practice and Procedure, United States Supreme Court 3 Comments »

The September 2010 issue of Alternatives to the High Cost of Litigation, the excellent newsletter of the International Institute for Conflict Prevention and Resolution (”CPR”), featured an article I wrote on the United States Supreme Court’s decision in Rent-A-Center, West Inc. v. Jackson, No. 09-497 (June 21, 2010). The article is entitled “Rent-A-Center‘s Roadmap Extends Beyond Contracts. . . To Congress and the Supreme Court’s New Term,” 28 Alternatives 154 (September 2010).

The article discusses Rent-A-Center in detail, explores its implications and argues, among other things, that:

There are divergent opinions on Rent-A-Center‘s significance. Some apparently believe that it heralds the end of alternative dispute resolution as we know it, and others, including Supreme Court guru, Carter G. Phillips — a partner in the Washington, D.C., office of Sidley Austin who was a member of the employer’s Supreme Court legal team — suggest that the opinon is so narrow that it will have little or no meaningful influence on future cases.

Both views have some merit, but neither is 100% on the mark.

28 Alternatives at 168 (citation omitted).

The article is the first of a two-part series. The second part will discuss and critically analyze the Supreme Court’s decision in Granite Rock Co. v. International Brotherhood of Teamsters, No. 08–1214 (June 24, 2010), and will be published in the October 2010 edition of Alternatives.

Alternatives also recently published two other articles I wrote earlier this year, both of which were featured as cover stories: “Stolt-Nielsen Delivers a New FAA Rule — And then Federalizes the Law of Contracts,” 28 Alternatives 121 (June 2010), and “It’s Time for Doctrines: The Supreme Court Wrestles with ‘Severablility’ and the ‘Clear and Unmistakable Standard,” 28 Alternatives 73 (March 2010). (See Loree Reinsurance and Arbitration Law Forum posts here and here.)

Alternatives is a subscription-only publication. Subscription information is available at this page, as well as at the publisher’s, John Wiley & Sons’s, website here.

I would like once again to take this opportunity to thank CPR, and Russ Bleemer, Editor of Alternatives, for their kind assistance and support in featuring my article. CPR is one of the most prestigious ADR organizations in the United States, and, as I have said before, Russ is a very intelligent, dedicated and professional editor with whom it is a pleasure to work.

More on Final Awards: Board of Trustees of the University of Illinois v. Organon Teknika Corp. LLC

August 20th, 2010 Appellate Practice, Arbitration Practice and Procedure, Final Awards, Practice and Procedure, United States Court of Appeals for the Seventh Circuit, functus officio No Comments »

A. Introduction

Regular readers have heard us preach about the importance of knowing arbitration law cold (here), understanding and identifying when an arbitration award is final (here), and being keenly aware of Federal Arbitration Act deadlines (here). The United States Court of Appeals for the Seventh Circuit recently decided a case that illustrates these points well. See Board of Trustees of the University of Illinois v. Organon Teknika Corp. LLC, ___ F.3d ___, slip op. (7^th Cir. July 27, 2010) (Easterbrook, C.J.).

The Court held that, in the circumstances, an arbitration award was final notwithstanding a provision in the award that said the arbitrator reserves his right to change his mind. But there is more to it than that. Continue Reading »

What to Make of the Second Circuit Voiding a Class Action Waiver Under California’s Discover Bank Rule?

July 23rd, 2010 Arbitration Practice and Procedure, California State Courts, Class Action Arbitration, Class Action Waivers, Practice and Procedure, United States Court of Appeals for the Ninth Circuit, United States Court of Appeals for the Second Circuit, United States Supreme Court 5 Comments »

After deciding Stolt-Nielsen, S.A. v. AnimalFeeds, Inc. and Rent-A-Center West v. Jackson, the United States Supreme Court left federal arbitration law at a crossroads. In both cases the Court adhered quite faithfully to its prior Federal Arbitration Act jurisprudence, under which it enforces arbitration agreements according to their terms, without regard to other considerations. In Rent-A-Center the Court implicitly reaffirmed that these pro-enforcement rules apply equally to contracts of adhesion.

We will find out whether the Court intends to continue down the same path when it decides AT&T Mobility v. Concepcion next term, a case that raises the question whether California’s Discover Bank unconscionability rule is pre-empted by the Federal Arbitration Act. That rule deems unconscionable under California law class-action or class-arbitration waivers where: (a) “the waiver is found in a consumer contract of adhesion in a setting in which the disputes between the contracting parties predictably involve small amounts of damages”; and (b) “it is alleged that the party with the superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money. . . .” Discover Bank v. Superior Court, 36 Cal. 4th 148, 162-63 (2005) (citing Cal. Civ. Code § 1668).

The Discover Bank rule is grounded in a California-law principle – embodied in Cal. Civ. Code § 1668 – that “contracts which have for their object, directly or indirectly, to exempt anyone from responsibility for his own fraud. . . are against the policy of the law.” See Cal. Civ. Code § 1668. If a company is allegedly engaging in fraudulent acts designed to cheat numerous consumers out of small amounts of money, a class action or class arbitration waiver may, if enforced, effectively act as an exculpatory provision that insulates the company from the consequences of its small scale, but widespread fraud, because the individual, allegedly defrauded consumers have little incentive to pursue separate actions or arbitrations to recoup trivial amounts of damages. See Discover Bank, 36 Cal. 4th at 162-63. Any contract that had that effect – whether it is a class action waiver in an arbitration clause, an exculpatory agreement or a contract that simply forbids class actions – would be unconscionable under the rule.

In Fensterstock v. Education Finance Partners, No. 09-1562-cv, slip op. (2d Cir. July 12, 2010), the United States Court of Appeals for the Second Circuit suggested one path that the United States Supreme Court might take on Discover Bank preemption. In an interesting opinion, Senior Circuit Judge Amalya Lyle Kearse, joined by Circuit Judges José A. Cabranes and Chester J. Straub, held that the Discover Bank rule was not preempted by the Federal Arbitration Act. According to the Second Circuit, California’s Discover Bank rule “’places arbitration agreements on the exact same footing as contracts that bar class action litigation outside the context of arbitration,’” and for that reason the rule is not preempted by the Act. Slip op. at 16-17 (quoting Shroyer v. New Cingular Wireless Serv., Inc., 498 F.3d 976, 990 (9^th Cir. 2007) (emphasis in original)).

On first blush the Second Circuit’s decision seems reasonable. But there are some important issues lurking beneath the surface that the Supreme Court will need to address when it decides AT&T Mobility. Continue Reading »

How Will Stolt-Nielsen, S.A. v. Animalfeeds Int’l Corp. Change Reinsurance Arbitration Practice?

July 20th, 2010 Arbitration Practice and Procedure, Consolidation of Arbitration Proceedings, Practice and Procedure, Reinsurance Arbitration, United States Supreme Court 1 Comment »

Part V.C

A. Introduction

As was evident from Parts V.A and V.B (here and here), Stolt-Nielsen has dramatically changed the legal landscape on consolidated arbitration. In this Part V.C. we explore the practical and strategic implications of that change.

B. Reinsurers Will Likely Regain the Tactical Advantage They Had Pre-Bazzle

For the last several years since Bazzle, cedents and reinsurers have treated consolidation of arbitration proceedings largely as a given. Courts would usually delegate the consolidation question to the arbitrators, and, in turn, arbitrators would usually order consolidation. After a while, consolidation became something that the parties frequently agreed upon, because in most cases there was little or no point in opposing it. (See Part III, here.)

The advent of large, consolidated proceedings redounded mostly to the cedents’ benefit. In the consumer-class-arbitration context, the theme is usually the many against the one — the consumers versus the company. But in reinsurance arbitration the tables are turned, and the theme is usually the one against the many – the cedent versus the reinsurers participating in one or more treaties.

Consolidated arbitration allowed a cedent to, among other things, aggregate its claims against several reinsurers participating in a multi-year treaty program. Without consolidated arbitration the dollar amounts associated with each claim might be too small to warrant a serious collection effort. But the ability to aggregate ensured that even relatively small balances could be pursued.

Collections were fairly straightforward, and reinsurers who might otherwise have multiple chances before multiple panels to assert certain defenses were forced to make their arguments before a single arbitration panel. The ability of cedents to compel consolidated arbitration probably contributed to reinsurers settling certain claims that they might otherwise have disputed.

Now that courts may be the gatekeepers when a party demands consolidated arbitration, and now that the Supreme Court has imposed some fairly strict standards for establishing consent to class or consolidated arbitration, reinsurers probably have regained the tactical advantage. And the strategy adapted may well be of the “divide and conquer” variety – reinsurers may in appropriate cases force the cedent to commence multiple proceedings and, among other things, obtain multiple bites at the apple on their defenses before multiple panels. Continue Reading »

Introducing Guest Blogger John (Jay) McCauley

June 23rd, 2010 Arbitrability, Arbitration Practice and Procedure, Authority of Arbitrators, Guest Posts, Practice and Procedure, Unconscionability, United States Supreme Court 1 Comment »

Today we are pleased and honored to feature an article by our good friend John (Jay) McCauley, a distinguished arbitrator, mediator, attorney and professor of arbitration law. Jay’s article is entitled “A Commercial Arbitrator’s Take on Rent-A-Center v. Jackson,” and can be found here.

Jay debunks the media hype surrounding the United States Supreme Court’s recent decision in Rent-A-Center v. Jackson, ___ U.S. ___, slip op. (June 21, 2010), and argues (persuasively) that the case is a reasonable, natural and modest interpretation of the Court’s prior Federal Arbitration Act jurisprudence. With one minor caveat we agree wholeheartedly with his insightful and pragmatic view of the case.

Our view of the decision may differ very slightly in that we believe that its scope is broader than the holding might suggest. Jay is absolutely correct when he says that the decision permits parties to challenge delegation agreements (agreements to arbitrate arbitrability) on unconscionability grounds. He says that there may be “dozens” of grounds on which to make such a challenge, and we think he is right about that, too.

But we think that it will be very difficult to mount a successful challenge specifically directed at a delegation agreement. And if we are right about that, then the practical effect of the decision will be that delegation agreements will usually be enforced, enabling arbitrators to decide most unconscionability challenges. The scope of the decision is, in our view, therefore quite broad.

We nevertheless agree with Jay that the decision makes perfect sense in light of the Court’s prior Federal Arbitration Act jurisprudence, and apart from our caveat about the decision’s scope, we are otherwise on the same page as Jay. Of course, it may turn out that challenges to delegation agreements prove more successful than we think they will.

Jay is an American-Arbitration-Association certified arbitrator and mediator, and serves on the AAA’s Large Complex Case Panel. He is a Fellow of the College of Commercial Arbitrators and a Distinguished Fellow of the International Academy of Mediators. He offers arbitrator and mediator services through Judicate West and Professional Mediation Associates.

Jay also serves as an adjunct professor of arbitration law at Pepperdine Law School, the University of Missouri-Kansas City Law School and the Werner Institute of Creighton Law School. An AV-rated attorney, he is a member of the California bar and is admitted to practice before the United States Supreme Court. He is listed in “Best Lawyers in America” for ADR, and in “Southern California Super Lawyers,” also for ADR. You can visit his website here.

We hope you enjoy Jay’s article.

Guest Post: A Commercial Arbitrator’s Take on Rent-A-Center v. Jackson

June 23rd, 2010 Arbitrability, Arbitration Practice and Procedure, Authority of Arbitrators, Practice and Procedure, Unconscionability, United States Supreme Court 3 Comments »

By John (Jay) McCauley

Despite all the alarmist reaction already showing up in the press, the holding in Rent-A-Center v. Jackson, ___ U.S. ___, slip op. (June 21, 2010) is both modest and predictable. Arbitration agreements always do one thing: take decisions from judges and give them to arbitrators. Ever since 1925, such agreements have always been enforced to exactly the same extent as any other agreement is enforced. Not less so, but also not more so. Are they enforced even when the decision in question is the “gateway” decision of whether the parties must arbitrate their dispute? Yes, as long as the agreement delegating even that decision to the arbitrator is explicit and unmistakeable. Is that news? No. See, e.g., First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995) (dictum).

Should it matter that this delegation language is physically located within the challenged arbitration agreement itself? No. (If the answer were “Yes,” any contract drafter could “solve” the problem by plucking out the delegation provision and pasting it onto another sheet of paper to be separately executed as the “delegation agreement.”) What does matter is whether the challenge brought against the arbitration agreement is the kind that goes to the enforceability of the delegation provision itself. Are there such challenges in theory? Sure, dozens of them. Does that fact put severe brakes on the implications of the Rent-a-Center holding for other cases? Yes, that’s the point. Were there any such challenges in the Rent-a-Center case? No. None whatsoever. As the Court noted, the party challenging arbitration in this particular case did not even attempt to raise one. Would the Court have been open to listening to such a challenge? Yes. Not just by implication. It expressly said it would.

Some of the alarmist commentary stands on the cynical premise that law is pure politics, such that the statement “the outcome of this case is pro-business” is thought to serve as a principled basis the court should have used to distinguish the precedent it is required to honor. Some of these commentaries, remarkably enough, even come from lawyers.

The more sophisticated of the alarmist commentaries made a more sophisticated mistake. They took the way Justice Scalia framed the issue in the first sentence of the decision, and leaped to the conclusion that that sentence could serve as the entire holding.

Justice Scalia said: “We consider whether. . . a district court may decide a claim that an arbitration agreement is unconscionable, where the agreement explicitly assigns that decision to the arbitrator.”

His answer (the holding) was not exactly “It may not.” His answer was really, “It may not, unless, of course, the provision assigning the decision to the arbitrator is itself subject to any challenge whatsoever (including unconscionability) recognizable to anyone familiar with the common law of contracts.

To which I would only add the not very dramatic commentary: “Nothing very remarkable about that.”

EDITOR’S NOTE: John (Jay) McCauley is an American-Arbitration-Association certified arbitrator and mediator, and serves on the AAA’s Large Complex Case Panel. He is a Fellow of the College of Commercial Arbitrators and a Distinguished Fellow of the International Academy of Mediators. He offers arbitrator and mediator services through Judicate West and Professional Mediation Associates.

Our post introducing Jay is here.

The United States Supreme Court Adopts Severability Analysis in Rent-A-Center v. Jackson

June 21st, 2010 Arbitrability, Arbitration Practice and Procedure, Authority of Arbitrators, Class Action Arbitration, Class Action Waivers, Practice and Procedure, Unconscionability, United States Court of Appeals for the Ninth Circuit, United States Supreme Court No Comments »

Yesterday the United States Supreme Court decided Rent-A-Center West v. Jackson, ___ U.S. ___, slip op. (June 21, 2010). Rent-A-Center raised the question whether “a district court may decide a claim that an arbitration agreement is unconscionable, where the agreement explicitly assigns that decision to the arbitrator.” The United States Court of Appeals for the Ninth Circuit had said “yes,” but the Supreme Court said “no.”

In a 5-4 opinion by Associate Justice Antonin Scalia, joined in by Chief Justice John G. Roberts, Jr. and Associate Justices Anthony M. Kennedy, Clarence Thomas and Samuel A. Alito, Jr , the Court held that the employee had to arbitrate its claim that certain provisions of an arbitration agreement were allegedly unconscionable because the parties clearly and unmistakably agreed to arbitrate arbitrability questions, and the employee did not specifically claim that that agreement was unconscionable. The Court said that the parties’ clear and unmistakable agreement to arbitrate arbitrability was, as a matter of federal law, severable from the other provisions of the arbitration agreement, including the ones the employee said were unconscionable.

Prior to the decision we had advocated in the Forum (here and here), and in our cover story published in the March 2010 issue of Alternatives to the High Cost of Litigation (blogged here), that the Court should resolve the case in favor of Rent-A-Center using a severability analysis of sorts derived from Buckeye Check Cashing v. Cardegna, 546 U.S. ___ (2006) and Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967). And that’s exactly what happened, even though neither side advocated or addressed the severability argument before the Court, a point made by Associate Justice Stevens’ dissenting opinion, which was joined in by Associate Justices Ruth Bader Ginsburg, Stephen G. Breyer and Sonia Sotomayor. See Dissenting Op. at 1. (The district court’s analysis, however, which was reversed by the Ninth Circuit, was, according to the Court, consistent with the Buckeye Check Cashing and Prima Paint severability principle. See Slip op. at 9.) Continue Reading »

How Will Stolt-Nielsen, S.A. v. Animalfeeds Int’l Corp. Change Reinsurance Arbitration Practice?

June 18th, 2010 Arbitrability, Arbitration Practice and Procedure, Authority of Arbitrators, Class Action Arbitration, Consolidation of Arbitration Proceedings, Practice and Procedure, United States Supreme Court 5 Comments »

Part V.A

A. Introduction

In this Part V.A of our consolidated-reinsurance-arbitration series, we delve into Stolt-Nielsen’s legal implications on consolidated reinsurance-arbitration practice, focusing on how courts are likely to decide the allocation-of-power question: Who gets to decide whether the parties consented to consolidated arbitration? In Part V.B we shall examine Stolt-Nielsen’s other specific legal and practical implications, focusing on what a party will likely need to show to obtain consolidated arbitration and how frequently consolidated arbitration is likely to be granted after Stolt-Nielsen.

B. Who Gets to Decide Whether the Parties Consented to Consolidated Arbitration?

Readers will recall from Part III (here) that courts interpreted Bazzle as governing the allocation-of-power issue. Now that the Court has said Bazzle never commanded a majority on that issue, and that it remains open, courts must reconsider it not only in the class-, but in the consolidated-arbitration context.

Consolidated arbitrations, like class arbitrations, raise two types of questions: Common-dispute and party-consent questions. We think that courts will likely conclude that both are questions of arbitrability for the court to decide in the first instance, unless the parties clearly and unmistakably agree otherwise. Arbitrators may play a role in resolving contractual ambiguities identified by the court.

1. Who Gets to Decide Common-Dispute Questions?

All consolidated-arbitration questions concern whether at least one arbitration agreement encompasses not only disputes concerning one, but all other contracts at issue. We call this the “common-dispute” question.

In some consolidated-arbitration disputes the “common dispute” question is the only one presented. Suppose reinsurer R enters into two treaties with cedent C, Contracts A and B, each of which incept on the same date and are in force for one year. Contract A’s limits are $1 million per occurrence excess a $500,000 retention. Contract B has per occurrence limits of $2 million excess of $1.5 million. Both contain broad arbitration clauses under which the parties agreed to arbitrate “any dispute arising out of or relating to this contract.” Continue Reading »

How Will Stolt-Nielsen, S.A. v. Animalfeeds Int’l Corp. Change Reinsurance Arbitration Practice?

June 8th, 2010 Arbitrability, Arbitration Practice and Procedure, Authority of Arbitrators, Class Action Arbitration, Consolidation of Arbitration Proceedings, Practice and Procedure, Reinsurance Arbitration, United States Supreme Court 6 Comments »

Part IV

A. Introduction

In Part I (here) we explained why the standard for challenging an award based on its outcome is important in reinsurance arbitration practice. And, after briefly reviewing pre-Stolt-Nielsen law on outcome-based standards of review, we explained how the Court has established for itself and the lower courts a fairly searching standard of review. Part II (here) explored the legal and practical implications of that standard of review.

Part III (here) turned to the other key area that will likely change because of Stolt-Nielsen — consolidated reinsurance-arbitration practice — and discussed the state of consolidation law pre-Stolt-Nielsen. This Part IV discusses Stolt-Nielsen’s rationale for finding that imposing class arbitration on parties whose agreements are silent on that point is inconsistent with the Federal Arbitration Act, and explores how the Court’s ruling may affect consolidated reinsurance-arbitration practice in general.

B. The Supreme Court’s Decides that Imposing Class Arbitration on Parties whose Contracts are Silent on that Score is Inconsistent with the Federal Arbitration Act

When we last left Stolt-Nielsen, the Court had determined that the arbitrators exceeded their authority by issuing an award that was based on their own notions of public policy gleaned from other arbitral decisions imposing class arbitration in the face of silence. When a court vacates an award it has to decide whether to remand the matter to the arbitrators, for Section 10(b) of the Federal Arbitration Act authorizes a court to “direct a rehearing by the arbitrators.” The Court decided not to remand, because “there can be only one possible outcome on the facts,” that is, where the parties’ contracts are undisputedly silent on class arbitration, save for the parties’ agreement to a broad arbitration clause. The Court then set about to explain why that was so. Continue Reading »

Archive for the ‘Practice and Procedure’ Category

Fifth Circuit Says District Court That Compelled Arbitration Does Not Have Inherent Power to Impose Sanctions on Counsel for Arbitration Misconduct

International Institute for Conflict Prevention and Resolution Publishes Philip J. Loree Jr.’s September 2010 Article on Rent-A-Center, West Inc. v. Jackson

More on Final Awards: Board of Trustees of the University of Illinois v. Organon Teknika Corp. LLC

What to Make of the Second Circuit Voiding a Class Action Waiver Under California’s Discover Bank Rule?

How Will Stolt-Nielsen, S.A. v. Animalfeeds Int’l Corp. Change Reinsurance Arbitration Practice?

Introducing Guest Blogger John (Jay) McCauley

Guest Post: A Commercial Arbitrator’s Take on Rent-A-Center v. Jackson

The United States Supreme Court Adopts Severability Analysis in Rent-A-Center v. Jackson

How Will Stolt-Nielsen, S.A. v. Animalfeeds Int’l Corp. Change Reinsurance Arbitration Practice?

How Will Stolt-Nielsen, S.A. v. Animalfeeds Int’l Corp. Change Reinsurance Arbitration Practice?

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