The article discusses Granite Rock in detail, and argues, among other things, that:

the Court deliberately dodged consideration of an important factor in the case — a signed contract that potentially could have answered the question — by reflexively applying a procedural rule that forced the court to put the fact aside, instead of remanding for proper consideration.

.  .  .  . 

The tradeoff the Court made when it elevated institutional concerns over deciding a case based on its undisputed facts was not a fair one.  While the Court pointed out that consideration of the belatedly raised argument would have resulted in the Court ruling for the first time on an issue not considered by the Ninth Circuit, and perhaps not one fully briefed, that justification presupposes that consideration of the retroactive CBA would have required intensive analysis of a controversial issue.

But there was no real controversy here.  The plain terms of a fully executed contract clearly and unambiguously contravened the key assumption on which the majority opinion rested:  that there was a formation-date dispute. 

28 Alternatives at 175 & 178.  

The article is the second of a two-part series.  The first part discussed and critically analyzed the Supreme Court’s decision in Rent-A-Center, West Inc. v. Jackson, No. 09-497 (June 21, 2010).  That part was entitled “Rent-A-Center‘s Roadmap Extends Beyond Contracts.  .  .  To Congress and the Supreme Court’s New Term,” 28 Alternatives 154 (September 2010) (blogged here). 

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) (blogged 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 articles.   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.

Section 1028 of the Dodd-Frank Act directs the Bureau to study mandatory, pre-dispute arbitration in contracts under its jurisdiction and report back to Congress.  The agency will then be authorized to either ban or regulate pre-dispute arbitration clauses in contracts under its jurisdiction, provided that the “Bureau finds that such prohibition or imposition of conditions or limitations is in the public interest and for the protection of consumers.”  The Bureau’s findings must “be consistent” with its study. 

Section 921 of the Dodd-Frank Act likewise authorizes the Securities and Exchange Commission (“SEC”) to “prohibit, or impose conditions or limitations on the use of, agreements that require customers or clients of any broker, dealer, or municipal securities dealer to arbitrate any future dispute between them arising under the Federal securities laws, the rules and regulations hereunder, or the rules of a self-regulatory organization if it finds that such prohibition, imposition of conditions, or limitations are in the public interest and for the protection of investors.’’ Section 921 also authorizes the SEC to ban or regulate pre-dispute arbitration in contracts between “customers or clients of any investment adviser.” 

In addition, Section 1414 of the Dodd-Frank bans pre-dispute arbitration in residential mortgages and home-equity loans, and Section 922 renders unenforceable pre-dispute agreements to arbitrate whistleblower claims.

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 Stolt-Nielsen has established for the lower courts a fairly searching standard of review.  Part II (here) explored the legal and practical implications of that standard of review.    

This Part III turns to the other key area that will likely change because of Stolt-Nielsen:  Consolidated reinsurance-arbitration practice. 

As most reinsurance practitioners know, there is a brief history relevant to this subject and that will be the focus of this post.  For to fully understand the implications of Stolt-Nielsen on consolidated reinsurance-arbitration practice, it is necessary to understand how the pre-Stolt-Nielsen practice evolved. 

Parts IV (here) and V (here, here and here) will address how Stolt-Nielsen will likely change consolidated reinsurance-arbitration practice, and what the implications of those changes are to the industry. 

B.   The Traditional Rule:  Consolidation of Arbitration Proceedings is Not Permitted Unless the Parties Consent or an Applicable State Statute Authorizes it

Before the United States Supreme Court decided Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003), the general rule was that courts could not compel consolidated arbitration absent the parties’ consent – if the parties’ contract was silent on consolidated arbitration, then the court could not compel it.  See, e.g., Glencore, Ltd. v. Schnitzer Steel Products, 189 F.2d 264 (2d Cir. 1999); United Kingdom v. Boeing Co., 998 F.2d 68 (2d Cir. 1993); Champ v. Siegal Trading Co., 55 F.3d 269 (7^th Cir. 1995).  At least one exception was recognized:  Courts could compel consolidated arbitration where authorized by state statute.  See New England Energy Inc. v. Keystone Shipping Co., 855 F.2d 1, 3 (1988), cert. denied, 489 U.S. 1077 (1989). 

Courts generally took for granted that they — not arbitrators — had the power to decide whether the parties agreed to consolidated proceedings.  Where the parties’ arbitration clauses were ambiguous, the court would make the call on whether the parties agreed to consolidation.  See Connecticut General Life Ins. v. Sun Life Assur., 210 F.3d 771, 774 (7th Cir. 2000) (Posner, J.). 

Since, as a practical matter, most reinsurance arbitration clauses are silent — not ambiguous — on the subject of consolidated arbitration, courts did not often compel consolidated arbitration.  That doesn’t mean there were few or no consolidated arbitrations — parties would not infrequently agree to them post-dispute (a good example is the London Market, where the company and Lloyds’ Market (or Equitas) would often agree to a consolidated proceeding in which one law firm would represent all (or virtually all) solvent slip participants).  

C.   The GreenTree Financial Corp. v. Bazzle Rule:  Arbitrators Get to Decide Whether the Parties Agreed to Consolidated Arbitration, Even Where the Parties’ Contracts are Silent on that Score

The legal landscape on consolidated arbitration changed fairly dramatically shortly after the United States Supreme Court decided Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003).  Bazzle was an appeal from a judgment of the South Carolina Supreme Court concerning two, separate consumer class action arbitrations in which Green Tree Financial Corp. (“Green Tree”) was the sole defendant. The South Carolina Supreme Court held that: (1) the arbitration clauses in the materially identical form contracts between each individual consumer class member and Green Tree were silent on whether the arbitration might be heard as a class action; and (2) in the circumstances, South Carolina law interprets the contracts as permitting class arbitration. The Supreme Court granted certiorari to determine whether that holding was consistent with the Federal Arbitration Act:  Specifically, the Court set out to decide whether imposing class arbitration on parties whose contracts were silent on that point was consistent with the Federal Arbitration Act.

Based on a plurality opinion written by Associate Justice Stephen G. Breyer, and joined by Associate Justices David H. Souter, Antonin Scalia, and Ruth Bader Ginsburg, and an opinion by Associate Justice John Paul Stevens concurring in the judgment, the Court vacated the South Carolina Supreme Court’s judgment, and remanded the case to the arbitrator to determine whether the arbitration agreements prohibited class action arbitration or were, as the South Carolina Supreme Court concluded, silent on that point.

The Bazzle arbitration clauses stated, in pertinent part, that:

All disputes, claims or controversies arising from or relating to this contract or the relationships which result from this contract shall be resolved by binding arbitration by one arbitrator selected by us with consent of you. . . . . The parties agree and understand that the arbitrator shall have all powers provided by the law and the contract. These powers shall include all legal and equitable remedies, including, but not limited to, money damages, declaratory relief, and injunctive relief.

The Plurality Opinion

Green Tree argued that the arbitration clauses prohibited class arbitration. The four-Justice plurality said this raised a “preliminary question” that must be dealt with “at the outset, for if [Green Tree] is right, then the South Carolina court’s holding is flawed on its own terms; that court neither said nor implied that it would have authorized class arbitration had the parties’ arbitration agreement forbidden it.”  The plurality concluded that whether the contracts prohibited class arbitration was a “disputed issue of contract interpretation.” 539 U.S. at 450:

The class arbitrator was ‘selected by’ Green Tree ‘with consent of’ Green Tree’s customers, the named plaintiffs. And insofar as the other class members agreed to proceed in class arbitration, they consented as well.

Of course, Green Tree did not independently select this arbitrator to arbitrate its disputes with the other class members. But whether the contracts contain this additional requirement is a question that the literal terms of the contracts do not decide. The contracts simply say (I) ‘selected by us [Green Tree].’ And that is literally what occurred. The contracts do not say (II) ‘selected by us [Green Tree] to arbitrate this dispute and no other (even identical) dispute with another customer.’ The question whether (I) in fact implicitly means (II) is the question at issue: Do the contracts forbid class arbitration? Given the broad authority the contracts elsewhere bestow upon the arbitrator. . . (the contracts grant to the arbitrator ‘all powers,’ including certain equitable powers ‘provided by the law and the contract’), the answer to this question is not completely obvious.

539 U.S. at 451 (emphasis in original).

The plurality also decided that this disputed issue of contract interpretation fell within the scope of the parties’ broad arbitration agreement:

The parties agreed to submit to the arbitrator ‘[a]ll disputes, claims or controversies arising from or relating to this contract or the relationships which result from this contract.’ And the dispute about what the arbitration contract in each case means (i.e., whether it forbids the use of class arbitration procedures) is a dispute “relating to this contract” and the resulting “relationships.” Hence the parties seem to have agreed that an arbitrator, not a judge would answer the relevant question. And if there is doubt about that matter – about the scope of arbitrable issues – we should resolve that doubt in favor of arbitration.

539 U.S. at 451-52 (citations and quotations omitted).

The plurality also stated that it did not consider the issue to be one of arbitrability, which is for the court to decide unless the parties clearly and unmistakably agree otherwise.  Rather, it was one of procedural arbitrability, which is ordinarily for the arbitrators to decide under a broad arbitration agreement. While “courts assume that the parties intended courts, not arbitrators” to decide certain “gateway matters, such as whether the parties have a valid arbitration agreement at all or whether a concededly binding arbitration clause applies to a certain type of controversy,” the Court found that the issue did not fall into “this narrow exception.” 539 U.S. at 452 (citations omitted).  According to the Court, “the relevant question . . . is what kind of arbitration proceeding the parties agreed to:”

That question does not concern a state statute or judicial procedures. It concerns contract interpretation and arbitration procedures. Arbitrators are well situated to answer that question. Given these considerations, along with the arbitration contracts’ sweeping language concerning the scope of the questions committed to arbitration, this matter of contract interpretation should be for the arbitrator, not the courts, to decide.

539 U.S. at 452-53 (citations omitted).

Justice Stevens’ Concurring Opinion

In a concurring opinion, Justice Stevens said he believed that “the decision to conduct class-action arbitration was correct as a matter of law, and because petitioner has merely challenged the merits of that decision without claiming that it was made by the wrong decision maker, there is no need to remand the case to correct that possible error.”  He would have simply affirmed the judgment of the South Carolina Supreme Court but recognized that were he to “adhere to [his]. . . preferred disposition of the case, . . . there would be no controlling judgment of the Court.  To “avoid that outcome, and because” the plurality opinion “expresse[d] a view of the case close to . . . [his] own,” he concurred in the judgment. 539 U.S. at 455 (citations omitted).

D.   Courts Construe Bazzle as Requiring Arbitrators to Decide Whether Parties Consented to Consolidated Reinsurance-Arbitration Proceedings

Although the reasoning of the plurality opinion was endorsed by only four Justices, a number of courts interpreted Justice Stevens’ concurrence as endorsing the plurality’s rationale that an arbitrator should decide whether class or consolidated arbitration was appropriate.  See, e.g., Certain Underwriters at Lloyds v. Westchester Fire Ins. Co., 489 F.3d 580, 586 n.2 (3rd Cir. 2007) (citing cases); but see Employers Ins. Co. of Wausau v. Century Indem. Co., 443 F.3d 573, 580-81 (7th Cir. 2006) (holding that Bazzle’s allocation-of-power rationale was endorsed by only four Justices, but that consolidation was a procedural matter presumptively for the arbitrators to decide). 

Given that reinsurance disputes frequently involve multiple contracts and/or multiple parties, parties sought consolidated reinsurance arbitration, arguing that Bazzle and Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79 (2002) – the procedural arbitrability decision on which Bazzle heavily relied – established that consolidation was a procedural issue that was presumptively for the arbitrators to decide, even when the parties’ agreements were silent on consolidation.  And courts generally accepted that argument and turned consolidation questions over to arbitrators.  See, e.g., Westchester Fire, 489 F.3d at 590.  In turn, the arbitrators frequently (if not always) concluded that the parties had consented to consolidation, even if their agreements were silent on that point.     

So it came to be generally accepted that:  (a) arbitrators were presumptively authorized to decide whether the parties agreed to consolidated arbitration, even when it was undisputed that there was no such agreement; and (b) arbitrators would routinely order consolidated arbitration.  Accordingly, parties that ordinarily would have resisted consolidated arbitration began to agree to it, rather than incur the costs associated with unsuccessfully challenging it. 

But on June 15, 2009 the Supreme Court granted certiorari in Stolt-Nielsen to decide the question that the Court initially set out to decide in Bazzle:  “Whether imposing class arbitration on parties whose arbitration clauses are silent on that issue is consistent with the Federal Arbitration Act, 9 U.S.C. §§ 1 et seq.”  And when on April 27, 2010 the Supreme Court answered that question in the negative, it changed, at least to some degree, consolidated arbitration practice. 

In Part IV (here) we discuss Stolt-Nielsen’s rationale for ruling that class arbitration could not be imposed in the face of the parties’ silence, and how the Court’s ruling may affect consolidated reinsurance-arbitration practice. 

Editor’s Note:  Here’s a list of links for Parts I through V of our Stolt-Nielsen reinsurance-arbitration series: 

Part I, Part II, Part III, Part IV, Part V.A, Part V. B, and Part V. C

Richard’s quote was “The 9th Circuit’s decision flies in the face of virtually every well-reasoned decision on arbitrability and jurisdiction[.]”  I could not agree with him more. 

For those of you that do not know Richard, he has decades of experience in the arbitration, mediation and ADR fields and is a contributing author to Elkouri & Elkouri, How Arbitration Works (6th Ed.).   His practice includes acting as a neutral arbitrator or mediator, serving on construction dispute boards, and representing clients in domestic and international arbitration-law-related matters.   Recently he represented Dub Herring Ford Lincoln-Mercury, Inc. before the United States Supreme Court as an amicus curiae in Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., which was decided on April 27, 2010. 

My more modest sound bite was: “There’s a lot of attention being paid to this case because it’s very frequent that you have challenges to arbitration agreements on unconscionability grounds made by employees and consumers.” 

The Supreme Court is expected to issue its decision in this controversial case by the end of this term in late June.  We believe there is a good chance that at least five members of the Court will vote for a reversal, but that outcome is by no means a foregone conclusion.  Whatever the result, you will certainly hear about it here at the Forum.

Section 10(a)(1) is an excellent expression of how Section 10 is designed to provide relief in situations where putting a court’s  imprimatur on an award would deprive one of the parties of the benefit of its freely-bargained-for arbitration agreement.   It says that corruption, fraud, or undue means in the procurement of an award, whether perpetrated by the arbitrators or a party, spoils the award (assuming the aggrieved party timely moves to vacate).  There is nothing particularly controversial about that; we suspect few would contend that parties who agree to arbitrate impliedly consent to arbitration resulting in an award procured through outright chicanery.    

The burden for obtaining relief under Section 10(a)(1) is heavy.  Fraud and corruption are serious allegations, to say the least.  And “undue means” has been construed to be a bird of the same feather:  Like fraud and corruption it requires “proof of intentional misconduct” or “bad faith,” and “connotes behavior that is immoral if not illegal. . . .”  See, e.g., PaineWebber Group, Inc. v. Zinsmeyer Trusts P’ship,  187 F.3d 988, 991 (8th Cir. 1999) (quotations and citations omitted).   Given the gravity of all of this, three requirements must generally be satisfied to make out a claim under Section 10(a)(1):  “(1) clear and convincing evidence of fraud [, corruption or undue means][;] (2) that the fraud [, corruption or undue means] materially relates to an issue involved in the arbitration[;] and (3) that due diligence would not have prompted the discovery of the fraud [corruption or undue means] during or prior to the arbitration.”   Int’l Bhd. of Teamsters, Local 519 v. United Parcel Serv., Inc., 335 F.3d 497, 503 (6th Cir. 2003); see, e.g., Bonar v. Dean Witter Reynolds, Inc., 835 F.2d 1378, 1383 ( 11th Cir .1988).

Section 10(a)(1) says that the “award” must be “procured” by the fraud, corruption or undue means, and that suggests a causal nexus between the proscribed conduct and the award.  While the conduct must “materially relate to an issue in the arbitration,” must it also be outcome determinative?  In other words, must the party seeking relief show that the award would have been different but for alleged fraud, corruption or undue means, or is it enough to show that it tainted the proceedings simply because it related materially to one of the issues at stake? 

The circuits are split on this point.  Some courts require the challenger to show that the corruption, fraud or undue means “caused the award to be given.”  See, e.g.,  A.G. Edwards & Sons, Inc. v. McCullough, 967 F.2d 1401, 1403 (9^th Cir. 1992).  Others say that the challenger is not required to “establish that the result of the proceedings would have been different had the fraud [, corruption, or undue means]  not occurred.”  See, e.g., Bonar, 835 F.2d at 1383.   

Section 10(a)(1) is probably the least commonly invoked ground for vacating an arbitration award.  That said, it provides an important safety valve to address rare, but extremely important cases where an award is the product of  corruption, perjured testimony or other egregious misconduct, and where the challenger was unable to address the problem before the arbitrators. 

The next installment of this series shall address a more commonly invoked ground for vacatur:  evident partiality.

Stay tuned….

On November 2, 2009 Kyriaki Karadelis of the U.K.-based trade publication Global Arbitration Review (“GAR”)  (website here) wrote what I thought was a concise and insightful article on the case.  And we would have said that even if she had not quoted some of our comments in her article!  But she did, and we’re flattered by that. 

With Global Arbitration Review’s permission, and with the required copyright disclaimer, we have posted the article as a “Slide Share Presentation” in my LinkedIn profile, which you can view by clicking here.  Also posted there (again with GAR’s permission and the required disclaimer) is a Global Arbitration Review Article on the United States Court of Appeals for the Second Circuit’s decision in  ReliaStar Life Ins. Co. v. EMC National Life Co., ___ F.3d ___, ___ (2009) (Raggi, J.) (blogged here and here), in which the United States Court of Appeals for the Second Circuit held that an arbitration panel was authorized to award under the bad faith exception to the American Rule attorney and arbitrator fees to a ceding company in a case where the parties had agreed that “[e]ach party shall bear the expense of its own arbitrator.  .  .  and related outside attorneys’ fees, and shall jointly and equally bear with the other party the expenses of the third arbitrator.”  We reported on GAR’s article concerning ReliaStar case here, which also quotes some of our comments on that case. 

We ask our readership to remember that GAR is a subscription-only publication and that it has copyrights in these posted materials.  GAR has authorized us to post them online and distribute them for marketing purposes, but that authorization does not extend to others not similarly situated.  Please do the right thing and respect GAR’s copyrights – GAR has to make a living just like the rest of us!     

I met Peter through the LinkedIn Commercial and Industry Arbitration Group (learn about the group here).   He’s a Visiting Assistant Professor at the University of Detroit Mercy Law School, where he teaches Contracts and Core Concepts.  He also teaches U.S. Contract Law at the University of Windsor and the Universiteit van Amsterdam.  He is currently on leave from the Case Western University School of Law, where he has been on the faculty since January 1996.  He’s a very smart, creative guy who is devoted to the law, critical analysis of important legal issues, and, even more importantly, legal education.    

Prior to entering the academic world, Peter spent eleven years immersed in the practice of commercial litigation in New York City, most recently as a partner in the New York City office of Akin Gump Strauss Hauer & Feld LLP.  He graduated with his J.D. from the University of Michigan Law School in 1984 and his A.B. in Ancient Greek and Latin from Brown University in 1981.

Since August 2008, Peter has written a blog, Ruling Imagination: Law and Creativity, that explores the ways law affects creative endeavors and the ways creativity informs the practice of law.  Prior to Ruling Imagination, he authored What is Fair Use?, a blog he wrote in connection with an assignment in one of his legal writing classes in which his students drafted cross-motions for summary judgment for a copyright infringement lawsuit.  Just this month Peter has also begun a blog, 1L Contracts, in which he intends to explore issues connected with the law of contracts as they arise through the coming academic year in his Contracts class at Detroit Mercy.

Peter recently wrote a two-part guest post for Disputing concerning class action waivers and mandatory arbitration agreements in consumer, online arbitration agreements, and whether courts should enforce such agreements.  (Available here and here)  That guest post discussed, among other things, the Massachussets Supreme Judicial Court’s decision in Feeney v. Dell Inc., ___ Mass. ___, slip op. (July 2, 2009),  which we had covered in two earlier posts, here and here.   

To make a long story short, Peter took the liberty of critiquing our critical analysis of Feeney in a detailed comment, complete with citations.  (Here)  I promptly contacted him and suggested that he turn his comment into a guest-blog post to which we would respond.  He graciously agreed to do that. 

So today we offer Peter’s guest-post, “The Argument for Judicial Power to Void Mandatory Arbitration Agreements and Class Action Waivers on State Public Policy Grounds,” which shall be followed in the not too distant future by our response, “The Argument Against Judicial Power to Void Mandatory Arbitration Agreements and Class Action Waivers on State Public Policy Grounds.”   Wherever you might come out on this controversial issue, we hope that you enjoy both posts.