Arbitration: Case Studies

Terms:

Res Judicata:
This is the rule which says that a matter or case which has been previously settled in final form by a court of law is conclusive and prevents further action on the same matter or case.

Ex Parte:
An ex parte communication is a communication with one party only, i.e., without the opposing party to the case being present. In most situations, ex parte communication between a decision maker (e.g., judge, arbitrator, etc) and one party to the case is impermissible.

Toll:
To toll a statute is to temporarily suspend the counting of time for purposes of that statute. For example, if one has 1 year in which to file a certain cause of action, but that time period is tolled while a party is actively engaged in the armed services, a party might spend several years in the army and still be able to file the claim.

Precedent:
Precedent refers to a decision by a court which establishes a rule of law which must be followed by other courts. The Supreme Court of the United States is the only court whose decisions establish precedent for every other court in the nation. Circuit Court decisions establish precedent, and are therefore binding, for the District Courts within their jurisdictions. State court decisions are never binding outside of their state. A decision which does not serve as precedent for another court may nonetheless be persuasive to that other court.

Writ of Certiorari:
A writ is court order. When a party applies for a writ of certiorari from the Supreme Court, that party is asking the court to review its case on appeal. If the certiorari is granted, the Court hears the case, otherwise certiorari is denied (by far the more common result – the Court hears only a small fraction of the cases submitted to it each year).

"Unconscionable" Contract:
A contract which is so outrageous or immoral that it shocks the sensibilities of the courts.

Class Action:
An action in which a representative plaintiff sues or a representative defendant is sued on behalf of a class of plaintiffs or defendants who have the same interests in the litigation as their representative, and whose rights or liabilities can be more efficiently determined as a group than in a series of individual suits.

Introduction

The following recent case studies are not intended to comprise a complete picture of arbitration law as it stands today. Rather, these are samplings culled from various courts and jurisdictions which, when taken as a whole, should give you a general sense for the type of issues which may arise during, and as a result of, arbitration. The issues which stem from arbitration are as many and as varied as those which may stem from a court proceeding, and after years of practice new issues may continue to surprise attorneys and their legal assistants.

The first three cases are all Connecticut case and are listed in chronological order beginning with the most recent.

The Arizona case ( Schoneberger v. Oelze) addresses the question of what constitutes a signed arbitration agreement.

The last three cases deal with recent litigation in the Circuit Courts and the Supreme Court over the enforceability of mandatory arbitration clauses.

Please bear in mind that the predictive value of these cases is severely limited because there is little consensus among federal or state courts on many of the issues covered. Nonetheless, these cases will hopefully prove helpful as a jumping-off point for a legal assistant seeking to do research on the wide array of issues which stem from arbitration proceedings and arbitration clauses.

Case 1:
Lasalla v. Doctor’s Assoc. , 2005 Conn. Super. LEXIS 1 (2005)

The defendant in this case is the franchiser of the popular Subway sandwich shops, for whom the plaintiff had agreed to develop several properties. The original contract was agreed to in 1986. the plaintiff’s compensation was based on a calculation which took into account revenues and other factors, and was then subject to a “modifier” which resulted in the final compensation amount. The original dispute concerned interpretation of this modifier. As per the arbitration agreement in the contract, the plaintiff commenced arbitration proceedings with the American Arbitration Association. The initial arbitration resulted in an award which was duly confirmed by a Connecticut Superior Court in June of 2002.

Following the court confirmation of the award the parties continued to dispute over what essentially seems to be the same issue. See Lasalla at 2 and 5. In November of 2002, the plaintiff commenced the arbitration proceedings which gave rise to this case.

The issue was whether the arbitrator in the second arbitration was compelled to apply the doctrine of res judicata in those circumstances in which a court of law would be compelled to apply it. The answer was, essentially, “sometimes.” The Connecticut court held that arbitration awards must be given the same effect as court decisions in a later civil action. That is, in a later court proceeding, the arbitration award is seen as having finally resolved the matter, in accordance with the doctrine of res judicata. However, that same arbitration award will not necessarily be given the same status of finality in a later arbitration proceeding. Even if the original arbitration agreement contained a contractual provision that the award would hold such protected status in future arbitrations, a later arbitrator is not necessarily bound by the prior award. Therefore, the arbitrator in the second arbitration need not apply res judicata to the original arbitration award.

Consider the fact that the original arbitration was confirmed by a court in June of 2002. Assuming the arbitration proceedings were commenced just a few months prior, that still means over three years have passed since arbitration was originally commenced. In this case, has arbitration actually saved the parties any time, money, or aggravation?

Case 2:
Gordon v. Amica Mutual Insurance Company , 2004 Conn. Super LEXIS 3409 (2004)

This was an arbitration in which the “party arbitrator” system was used (see Chapter 7) and resulted in a procedural impropriety which resulted in the court vacating the arbitration award.

The plaintiffs’ home in Glastonbury, which lies on the banks of the Connecticut river, was accidentally flooded in March of 2002. When the parties failed to agree on an appraisal amount for the damages, the appraisal arbitration clause of the insurance policy kicked in. The clause read as follows:

“If you and we fail to agree on the amount of the loss…each party will choose a competent appraiser…. The two appraisers will choose an umpire. If they cannot agree upon an umpire within 15 days, . . . The appraisers will separately set the amount of the loss. If they fail to agree, they will submit their differences to the umpire. A decision agreed to by any two will set the amount of the loss.” Gordon at 2.

In the Fall of 2003 the appraisers selected by each party inspected the property but could not agree on the amount of loss. Mr. Martin Woods was then selected by the two appraisers to act as umpire.

It is the conduct of the umpire, Woods, which was fatal to the ultimate arbitration award. According to the court, the insurance company’s adjuster spoke with Woods prior to Woods being selected as the umpire, and the fact that this conversation took place was not disclosed until the court case following the arbitration. In addition, Woods conducted his own investigation into the damages, which is not itself extraordinary. The fact that he did not disclose these actions, however, was unusual, as the party appraisers would usually be told by the neutral of any additional investigation undertaken.

The court did not find that Woods was necessarily biased as an umpire, and actually wrote in the decision that this was “a fairly close case.” Gordon at 12. The court did ultimately find, however, that the ex parte conversations were adequate to constitute misconduct such that the award must be set aside, despite the fact that the nature of the conversations themselves were not shown to be prejudicial.

The judge in Gordon cited the Connecticut arbitration statute, which closely follows the UAA as discussed in Chapter 7. Conn. Gen. Stat. § 52-418 (2004) (a) (3) orders a court to vacate an arbitration award “if the arbitrators have been guilty of misconduct in… any other action by which the rights of any party have been prejudiced.” It is this catch-all provision which allowed the judge to hand down the decision in favor of the plaintiff in this case.

In reading Gordon, is there enough evidence of “misconduct” on Woods' part to warrant the triggering of the catch-all provision and vacating the arbitration award? The provision does hold that there must be misconduct “by which the rights of any party have been prejudiced.” Were the Gordons’ rights shown to have been prejudiced here, or is it there mere possibility of such, upon which the court relies in its decision?

Case 3:
Sultar v. Merrill Lynch, 2004 Conn. Super. LEXIS 3003 (2004)

Although there are several areas of interest in this case, it is most instructive for us in terms of the Federal Arbitration Act’s §12 time limit on filings of a “motion to vacate, modify, or correct an award.” The ability to seek court intervention in an arbitration award exists both for state versions of the UAA and for the FAA. The FAA in § 12 allows for three months in which to file. If not careful, a party might assume that in every case one therefore has three months in which to file a motion objecting to an arbitration award. Sultar and his co-plaintiffs, however, found out the hard way that “assumptions” in law cause nothing but heartache.

Arbitration in this case was commenced in early 2003. On July 29, the defendant moved to dismiss the arbitration due to the plaintiffs’ failure to comply with a discovery order. Because the plaintiffs continually failed to comply with the arbitration panel’s discovery orders, the panel granted the defendant’s motion and dismissed the arbitration on December 23, 2003. The panel did leave the door open for Sultar et al., by indicating that it would entertain a motion to vacate the dismissal if the plaintiffs could prove they had complied with the discovery orders.

When the plaintiffs took no such action, the arbitrators issued an award on February 20, 2004 confirming the dismissal.

On March 12th, almost a month after the dismissal was confirmed, the Sultars moved to vacate the order of dismissal. This motion was made to the arbitration panel. A month later, on April 15th, the arbitration panel denied the motion to vacate. Another month passed before the Sultars filed with the appropriate Connecticut court on May 14, 2004, asking the court to vacate the arbitration panel’s dismissal.

The Connecticut Arbitration Act which permits motions to vacate an arbitration award have been interpreted in the past by that state’s court to require such filings within 30 days after the notice of the award. This would mean that Sultar had to file with the court no later than 30 days after the February 20th confirmation by the panel of the dismissal. Without bothering to count calendar days, we can clearly establish that more than 30 days had passed between February 20th and the May14th court motion.

The plaintiffs’ attorney can certainly count (we would hope!), so how can they file the May 14th motion with a straight face? There are two arguments, both of which the court rejects.

First, the thinking is that the 30 day time limit was tolled by the motion filed with the arbitration panel, and that the count-down re-commenced only with the panel's rejection of the motion. The common law rules of tolling, we are told by the court, do not apply here, so the time period ran continuously, beginning on February 20th and ending 30 days later.

Second, the argument could be made that the FAA applies here, and therefore the three month time limit in §12 also applies. Even if the FAA applies, however, the Connecticut court is careful to point out that the FAA does not preempt state jurisdiction over the claim and the procedural aspects of the FAA control only in federal court, not in state court. See Sultar at 7, citing Atlantic Painting & Contracting, Inc. v. Nashville Bridge Co., 670 S.W.2d 841, 846 (Ky. 1984).

The crucial lesson to learn from this case is that when satisfying time limits for motions under a state arbitration act or under the FAA, one must take great care to understand which set of procedural rules apply and precisely how those procedural rules have been interpreted by the controlling courts. Otherwise, as here, the decision to play nice and take part in the very arbitration you initiated might come too late, and therefore at a very high cost.

Case 4:
Schoneberger v. Oelze, 208 Ariz. 591 (Ct. App. 2004)

In 1995 the United States Supreme Court made clear that mandatory arbitration agreements can be enforced by federal law. See Allied-Bruce Terminix Companies v. Dobson, 513 U.S. 265 (1995). Similarly, state courts generally enforce arbitration agreements. Many states have legislation to that effect, including Arizona (Arizona Revised Statutes § 12-1501). In order to be enforced, however, the agreement must actually be an agreement…

In this Arizona case, an action was brought against trustees by beneficiaries of trusts established by their parents. The trusts included arbitration provisions which were quite comprehensive. See Schoneberger at 593.

The plaintiffs were sisters who claimed that the trustees had fraudulently concealed their mismanagement and dissipation of the trust assets, and demanded an accounting. The trustees, naturally, denied any wrongdoing. Further, they demanded that the claim be addressed through arbitration as provided for under the trust agreement.

There is little doubt that under Arizona law the matter would have to be sent to arbitration if there is a binding arbitration agreement. The trial court, however, found that the “trust agreement” in which the arbitration clause was found did not constitute a written contract whereby the beneficiary daughters had agreed to settle disputes in arbitration rather than in a court of law.

On appeal, the trustees argued that the mere absences of the daughters’ signatures on the trust agreement should not “permit them to escape enforcement of the arbitration provisions contained in the Trust agreements.” Schoneberger at 594 (quoting trustee defendants).

The trustees argued from the theory of third-party beneficiary as well as the theory of promissory estoppel (both beyond the scope of our discussion here), yet the court continuously indicated that the lack of a written contract made the arbitration provisions unenforceable as far as the beneficiary daughters were concerned.

One cannot help but wonder to what extent, if any, the sympathetic position of the plaintiffs played a role in the court’s decision. Nonetheless, little can be said to contradict the argument that the girls did not enter into any contractual relationship with anyone, and one would therefore be hard pressed to insist on their adherence to the terms of some “agreement” to which they were not parties.

Case 5:
Ting v. AT&T, 319 F.3d 1126 (6th Cir., 2003)

In the District Court case overturned here (182 F. Supp 2d 902, 2002), we are provided with a detailed discussion of the contractual arbitration clause in dispute here. The story will sound familiar to those few who actually read the contracts sent by credit card companies and phone companies.

The normal way in which consumers are notified of changes in the contracts (often called “Customer Service Agreement,” or CSA, which does sound much less threatening than “Contract Outlining Rights and Obligations”) is via junk-mail-like mailings. A letter will come to you from your phone company with clear notices that “no action need be taken” and that “prices and services are in no way affected,” but that enclosed is a CSA, which happens to be written in a font size somewhere in the single digits and on the thinnest paper known to mankind.

Ultimately, if one reads in far enough (sadly, I often do skim through these…ahh…that’s the life) one finds the opt-out clause.

Great! You don’t need to agree to this new CSA (i.e., contract) which we ’ve sent you…hmmm…how does that work? Oh – stop using the service immediately and call the toll-free number below. In other words, if you don’t like the new deal you can find yourself another phone carrier, or credit card company, or whatever.

This is relevant to our examination of arbitration, because one of the major clauses in these contracts concerns what happens after a conflict or dispute arises. Typically, and generally found to be enforceable, the clause will require that the party bringing a claim (consumer or provider) must do so through arbitration. Generally, these clauses are non-problematic.

The difficulty arises only when companies overstep their bounds and present consumers with an even worse deal. AT&T in this case, included in their contract that there could be no class action arbitration brought against them. By continuing to use their services and not calling the toll-free number, consumers were deemed to have agreed with this clause.

The ultimate result of this clause was therefore to prevent any class action from being brought against AT&T. After all, any dispute must be arbitrated, and class action arbitration is not allowed under the contract, so no dispute can give rise to a class action.

Footnote 4 in Ting:

Section 7, captioned "Dispute Resolution," sets forth procedures for resolving customer disputes. In approximately eight-point font (replicated below), section 7(a) provides in part: 

THIS SECTION PROVIDES FOR RESOLUTION OF DISPUTES THROUGH FINAL AND BINDING ARBITRATION BEFORE A NEUTRAL ARBITRATOR INSTEAD OF IN A COURT BY A JUDGE OR JURY OR THROUGH A CLASS ACTION. YOU CONTINUE TO HAVE CERTAIN RIGHTS TO OBTAIN RELIEF FROM A FEDERAL OR STATE REGULATORY AGENCY.

NO DISPUTE MAY BE JOINED WITH ANOTHER LAWSUIT, OR IN AN ARBITRATION WITH A DISPUTE OF ANY OTHER PERSON, OR RESOLVED ON A CLASS-WIDE BASIS. THE ARBITRATOR MAY NOT AWARD DAMAGES THAT ARE NOT EXPRESSLY AUTHORIZED BY THIS AGREEMENT AND MAY NOT AWARD PUNITIVE DAMAGES OR ATTORNEYS' FEES UNLESS SUCH DAMAGES ARE EXPRESSLY AUTHORIZED BY A STATUTE. YOU AND AT&T BOTH WAIVE ANY CLAIMS FOR AN AWARD OF DAMAGES THAT ARE EXCLUDED UNDER THIS AGREEMENT.

Prior to Ting, another Circuit Court had ruled that a customer’s continued use of AT&T’s services constituted acceptance to their arbitration clause. Boomer v. AT&T Corp., 309 F.3d 404 (7 th Cir., 2002). Because Circuit Court decisions do not establish binding precedent for other Circuit Courts, the 6th Circuit in Ting was free to disagree with the Boomer decision.

So consumers living within the jurisdiction of the7 th Circuit (Illinois, Indian, & Wisconsin) are bound by the mandatory arbitration clause prohibiting class actions, while those within the jurisdiction of the 6th Circuit (Michigan, Ohio, Kentucky, and Tennessee) are not. Despite this split in the Circuits, the Supreme Court refused to grant certiorari on the Ting case.

Case 6:
Iberia Credit Bureau, Inc. v. Cingular Wireless LLC , 379 F.3d 159 (5th Cir. 2004)

In another Circuit Court case, involving a group of telephone companies, we find a different issue being addressed. In Iberia Credit, the contractual clause which Cingular customers agreed to by signing the service agreement read (in part) as follows:

[I]nstead of suing in court, CINGULAR and you agree to arbitrate any and all disputes and claims (including but not limited to claims based on or arising from an alleged tort) arising out of or relating to this Agreement.

This clause, along with the Sprint clause litigated in the action raised issues either addressed elsewhere in these materials or issues not relevant to our current purpose. The real difficulty comes with the Centennial arbitration clause:

Dispute Resolution; Waiver of Trial by Jury; Waiver of Class Actions-Please read this section carefully. It affects rights that you may otherwise have. It provides for resolution of most disputes through arbitration instead of court trials and class actions. . . . You agree that instead of suing in court, you will arbitrate any and all disputes and claims arising out of this Agreement or the Service. Even if applicable law provides otherwise, you and we each waive our right to a trial by jury and to participate in class actions. . . . By this agreement, both you and we are waiving certain rights to litigate disputes in court. If for any reason this arbitration clause is deemed inapplicable or invalid, you and we both waive, to the fullest extent allowed by law, any claims to recover punitive or exemplary damages and any right to pursue any claims on a class or consolidated basis or in a representative capacity. Iberia Credit at 168.

The concept of unconscionability was briefly touched upon in the materials covering the valid drafting of negotiated settlement agreements (Chapter 4). The essential claim in Iberia Credit was that the mandatory arbitration clause in the Centennial cellular phone contract was unconscionable, and therefore unenforceable. Iberia Credit at 165.

Interestingly, in Footnote 6, the court points out that plaintiffs and defendants have proceeded under the assumption that the question of unconscionability is to be addressed by the court rather than by the arbitrator, and the court says that it “will therefore proceed on the same basis.”

According to the court, the FAA “puts arbitration agreements on the same footing as other contracts,” and therefore traditional defenses to contract, such as unconscionability, can be used to invalidate an arbitration agreement without running afoul of the FAA. Iberia Credit at 166, quoting Doctor’s Assocs. V. Casarotto, 517 U.S. 681, 687 (1996).

The question is therefore whether the Centennial arbitration clause is unconscionable. If so, it will be unenforceable.

The Iberia Credit court stated, at 169, that the “one-sidedness of the duty to arbitrate raises a serious question as to the clause's validity,” and ultimately found that the one-sidedness was sufficiently extreme so as to render the arbitration clause unenforceable.

Crucial here was Centennial’s choice of language. “You agree that instead of suing in court, you will arbitrate any and all disputes and claims,” is the only time that “you” is used by itself, and the remainder of the paragraph refers to “you and we.” Because this language requires customers bring an action solely through arbitration, but would allow Centennial to bring an action in court or arbitrate, at their discretion, there is a distinctly one-sided lack of mutuality, which ultimately proved fatal to Centennial’s argument.

Case 7:
Green Tree Fin. Corp. v. Bazzle , 539 U.S. 444 (2003)

In this Supreme Court case, Bazzle and others entered into separate agreements with Green Tree in South Carolina. The agreements included arbitration clauses which were to be governed by the FAA. When suits were filed against Green Tree alleging violation of South Carolina law, and the plaintiffs moved for class certification (i.e., sought to turn it into a class action), Green Tree asked the court to compel arbitration.

The class action was arbitrated, per the court’s instruction, and the arbitrator’s award (which gave damages and attorney’s fees to the plaintiffs) was confirmed by the court. Green Tree, which had initially sought to compel the arbitration and had selected the arbitrator (with the consent of the Bazzles) now appealed the court’s decision to confirm the arbitration and claimed that the class action arbitration was not legally allowed. There was also some court involvement with the other groups of plaintiffs in the case, who were initially not compelled to arbitrate under the same Green Tree contract.

Recall that in Iberia Credit, decided approximately one year after Green Tree, the 5th Circuit noted that the parties simply assumed that the issue of unconscionability was one for the court rather than something to be decided by the arbitrator. The Iberia Credit court cited conflicting cases from the 5th and 11th Circuits on who should address such issues. Clearly, then, the Supreme Court’s decision in Green Tree did not settle the matter for all questions, even though the Court held that whether or not the contracts prohibit class action arbitration must be decided by an arbitrator.

Iberia Credit, therefore, might raise some questions as to how far reaching this Supreme Court holding really is. Is it limited to questions concerning class action arbitration prohibitions in contracts? If it does not reach the question of unconscionability in arbitration clauses, is that because it should be left to courts to decide on issue of public policy? This latter reconciliation of the two cases seems preferable.

These two cases (Iberia Credit and Green Tree), however, should give you some sense for the difficulties practitioners today face. How do we know what will render an arbitration clause unenforceable? How do we know which issues will be settled by a court and which may be addressed in arbitration? How can we confidently draft contracts containing arbitration agreements?

In most cases these questions can be answered without too much difficulty. As a general rule, arbitration clauses which are clearly agreed to, and which compel both parties to arbitrate simple disputes will be enforced by the courts. On the other hand, clauses which are hidden, clauses which are excessively one-sided, and clauses which are excessively prohibitory (e.g., prohibit class actions) are highly questionable and the attempt to avoid costly litigation might result in more delay and expense than would have resulted from an initial court proceeding.

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