California Mediation and Arbitration

Arbitration, FINRA, Rules: Ninth Circuit Reverses District Court's Denial Of Bank's Motion For Prelim Injunction Against Arbitration By FINRA

Bank Likely To Succeed On Merits As To Whether It, Or Its Corporate Trust Department, Was A "Municipal Securities Dealer" Subject To FINRA Arbitration. 

    If your eyes begin to glaze over when reading about the Financial Industry Regulatory Authority (FINRA), Municipal Securities Rulemaking Board (MSRB) rules, conduit municipal bonds, indenture trustees, Institutional Investment Departments (IIDs), Corporate Trust Departments (CTDs), and the Securities Exchange Act of 1934, then this case is not your meat. But if you are interested in FINRA arbitration and a close reading of rules, perhaps this case is meant for you. The case is BOKF, NA v. Estes, et al., No. 18-15369 (9th Cir.  5/2/19) (Berzon, J., Friedlan, Dominguez).

    The panel held that the Bank of Oklahoma, National Association (BOKF) was likely to succeed on the merits by showing that it and its CTD were not a "municipal securities dealer" and thus not compelled to arbitrate with a group of unhappy municipal bond holders. The Bank's IID was registered as a municipal securities dealer, but the bank, and the CTD were not registered. The CTD did not buy or sell bonds for its own account or for any other division of the bank. Nor was the bank, as a whole, a municipal securities dealer on the basis that one of its component parts, the IID, was a dealer. Conclusion: reverse the district court's denial of the bank's motion for a preliminary injunctions against arbitration. This is all based on a close reading of some very technical rules.

 

 

Rules: California's New Rules Of Professional Conduct Include Rules Pertaining To Mediators And Arbitrators

The Current Rules Of Professional Conduct Became Effective On November 1, 2018.

    The following new rules pertain to arbitrators, mediators, or other third party neutrals:

    Rule 1.12 Former Judge, Arbitrator, Mediator, or Other Third-Party Neutral;

    Rule 2.4 Lawyer as Third-Party Neutral;

    Rule 2.4.1 Lawyer as Temporary Judge, Referee, or Court-Appointed Arbitrator.

    Rule 1.12(a) provides that lawyers shall not represent anyone in connection with a matter in which the lawyer "participated personally and substantially" as a judge, arbitrator, mediator, or other third-party neutrals, "unless all parties to the proceeding give informed written consent," and except as stated in paragraph (d).

    Whereas Rule 1.12(a) applies to representation, Rule 1.12(b) applies to employment. If the lawyer participates "personally and substantially" as a judge, arbitrator, mediator, or other third-party neutral, the lawyer can't seek employment from any person involved as a party or as a lawyer for a party. However, judicial staff attorneys and law clerks can seek such employment, but only with the permission of the court.

    Rule 1.12(c) disqualifies other attorneys in a law firm if one of the attorneys is disqualified from representation by paragraph (a), unless:

        "(1) the prohibition does not arise from the lawyer's service as a mediator or settlement judge;

        (2) the prohibited lawyer is timely screened from any participation in the matter and is apportioned no part of the fee therefrom; and

        (3) written notice is promptly given to the parties and any appropriate tribunal to enable them to ascertain compliance with the provisions of this         rule."

    Rule 1.12(d) provides that an arbitrator "selected as a partisan of a party in a multimember arbitration panel is not prohibited from subsequently representing that party." Evidently the partisan arbitrator is expected to remain partisan.

    A Comment to Rule 1.12 points out that "[o]ther law or codes of ethics governing third-arty neutrals may impose more stringent standards of personal or imputed disqualification. (See rule 2.4.)."

    . . . which brings us to Rule 2.4, "Lawyer as a Third-Party Neutral." The lawyer serving as a third-party neutral must inform unrepresented parties that he is not representing them, and if the lawyer believes the unrepresented party does not understand the lawyer's role, then the lawyer must explain the difference between the lawyer as a third-party neutral and as an advocate. 

    Rule 2.4.1 provides that the lawyer acting as temporary judge, referee, or court-appointed arbitrator is subject to canon 6D of the California Code of Judicial Ethics, allowing the State Bar to discipline lawyers who violate the Code of Judicial Ethics while acting in a judicial capacity. 

    The distinction between 2.4 and 2.4.1 is that the first rule applies to the lawyer acting in a non-judicial functions whereas rule 2.4.1 refers to the lawyer acting in a judicial function. Thus, Rule 2.4 pertains to lawyers serving as third-party neutrals in a mediation, settlement conference, or arbitration pursuant to an arbitration agreement, whereas Rule 2.4.1 applies to judges, referees or court-appointed arbitrators.

    

 

Arbitration, Rules: Senate Republicans Strike Down New Rule That Would Have Allowed Suits Against Financial Institutions In Lieu Of Arbitration

The Congressional Vote Furthers De-Regulation Of Wall Street.

        In a NYT article entitled, "Consumer Bureau Loses Fight to Allow More Class-Action Suits," Jessica Silver-Greenberg reports about the October 24, 2017 vote in the Senate to roll back a rule written by the consumer bureau and previously intended to go into effect in 2019.   The 51 to 50 Senate vote, in which VP Pence broke the tie, will allow financial institutions to continue to channel consumer complaints into arbitration.  The roll-back, which is part of a wave of Republican efforts to deregulate, was favored by financial institutions, the Treasury Department, and the US Chamber of Commerce.

        The US consumer bureau, consumer advocates, and plaintiff class-action attorneys have opposed the ubiquitous enforcement of arbitration clauses.

        I posted on November 1, 2015 that Jessica Silver-Greenberg and Robert Gebeloff were authoring a series of special reports in the NYT critical about the use of arbitration clauses to avoid enforcement of plaintiff rights through class-action lawsuits.

        

Arbitration, Consumers, Delegation, Gateway Issues, Unconscionability: Fifth District Vacates Parts Of Trial Court Order About Unconscionability And Arbitrability, And Upholds Delegation Clause Sending Consumer Dispute To JAMS Arbitrator

Enforceable Delegation Provision Means The Buck Does Not Stop With Court, But Gets Passed To Arbitrator.

        Aanderud v. Superior Court (Vivint Solar Developer, LLC, Real Party In Interest), F073277 (5th Dist.  7/26/17) (Gomes, Hill, Meehan), is worth reading for its analysis of how a delegation provision is applied to a consumer arbitration, where the individual stakes are low, but the cost of entry to arbitration may be high for the consumer. 

        The Aanderuds brought individual and class action claims against Vivint Solar, in connection with their entry into a 20-year solar power purchase agreement with Vivint Solar.  The trial court granted Vivint Solar's petition to compel arbitration, ordered the Aanderuds to submit their individual claims to arbitration, and dismissing class claims without prejudice.

        The Court of Appeal disagreed in part with the trial court's order, because a delegation clause, if enforceable, required the arbitrator, not the trial court, to resolve substantive issues.  Therefore, the Court of Appeal addressed the dispositive issue: whether the delegation of issues to the arbitrator was valid.  The Aanderuds contended that the delegation clause was not enforceable, because it was not clear and unmistakable and because it was unconscionable.  The Court of Appeal, however, disagreed, finding the delegation clause enforceable.

        The most interesting part of the analysis addressed the Aanderud's contention that the delegation clause was unconscionable in the context of consumer arbitration, because it was prohibitively expensive for the Aanderuds to arbitrate their consumer claim.  The Court of Appeal, however, believed that under JAMS rules for consumer arbitrations, "the Aanderuds' fees will most likely be limited to $250 . . . "  (Query: Does "most likely" contain a negative pregnant?)  The Aanderuds, however, argued that because the arbitration did not satisfy all 10 requirements under JAMS rules for JAMS to arbitrate a consumer dispute, JAMS might proceed under other than consumer rules, requiring the parties to pay pro rata costs, including a $1,200 filing fee, a  $5,000 retainer, and arbitrator's fees ranging from $5,000 to $8,500 per day.

        The Court of Appeal, however, concluded that the merits of the Aanderuds' contention regarding the sharing of expenses are for the arbitrator to decide, "as their contentions go to the 'scope and applicability' of the arbitration provision."  

        The upshot is a disposition that grants in part and denies in part the Aanderuds' petition to the Court of Appeal.  Because the delegation clause is held to be effective, the Court of Appeal vacates parts of the trial court's order finding the arbitration agreement was not unconscionable, finding all claims are arbitrable, and finding the Aanderuds could only arbitrate in their individual capacity.  However, the case will go to arbitration, and now the arbitrator will have to decide issues the trial court should not have decided.

        COMMENT:  The Court of Appeal agreed that the arbitration agreement was procedurally unconscionable, but did not believe that substantive unconscionability existed.  The Court's reasoning regarding the Aanderuds' contention that the delegation clause was invalid, in part because the allocation of expenses was unfair, seems somewhat circular.  By leaving it up to the arbitrator to decide the issue, the Court of Appeal seems to be punting, leaving it up to the arbitrator to address an aspect of unconscionability.  And, the enforceability of the delegation clause turns on whether it is unconscionable, such that if it is unconscionable, then decisions could not be delegated to the arbitrator.  Here, the Court of Appeal has finessed the issue by the the deft application of labels, explaining that "[t]he merits of the Aanderuds' contention [regarding arbitration expenses] are for the arbitrator, not us, to decide, as their contentions go to the  'scope and applicability' of the arbitration  provision."  Thus, the Court of Appeal views the argument about the potential for unfair application of the cost rules not as an issue of ambiguity or of unfairness, but as an issue concerning the "scope and applicability" of the arbitration  provision.  Problem solved?

 

 

 

        

Arbitration, Delegation, AAA Rules, Gateway Issues: Agreement To Conduct Arbitration Under AAA Rules Constitutes Clear And Unmistakable Evidence of Intent That Arbitrator Decides Whether To Permit Arbitration Of Class Claims

Incorporation By Reference Of AAA Rules Is The Key Here.

      Plaintiffs, who worked as armed security guards, brought an employment class action against their employers Universal Protection Service, LP and Universal Services of America, Inc. (UPS).  After the trial court denied UPS’ motion to compel individual arbitration, while staying the suit pending arbitration, UPS sought a writ of mandamus in order to compel individual arbitration.  As the Court of Appeal framed the issue, “We agree with UPS that the issue to be decided is whether the arbitration agreement in this case clearly and unmistakably vested the arbitrator with the power to decide whether the agreement authorizes class arbitration.” Universal Protection Services, LP v. Superior Court of Yolo County (Michael Parnow, et al., Real Parties in Interest), C078557 (3d Dist. August 18, 2015) (Duarte, Raye, Robie) (published).

     The arbitration agreement was broadly written, requiring arbitration of most disputes, including this one, before the AAA.  The key to an answer about individual arbitration here is that the arbitration agreement incorporated by reference the Rules of the AAA, and the AAA Supplementary Rules for Class Arbitration apply “to any dispute arising out of an agreement that provides for arbitration pursuant to any of the rules of the [AAA] where a party submits a dispute to arbitration on behalf of or against a class or purported class, and shall supplement any other applicable AAA rules.”  The Rules further delegate to the arbitrator the task of deciding whether a class arbitration can proceed.

     Bottom line:  the parties’ “agreement to conduct their arbitration under the AAA Rules constitutes clear and unmistakable evidence of their shared intent that the arbitrator decide whether it permits arbitration of class claims.”  Therefore, the Court of Appeal denied the employers’ writ petition.

     COMMENT:  The case neatly analyzes how other cases are either in agreement, or have missed the target regarding the effect of incorporation by reference.  The battle in this case may be far from over, because the AAA Rules also require that “the arbitrator shall determine as a threshold matter, in a reasoned, partial final award on the construction of the arbitration clause, whether the applicable arbitration clause permits the arbitration to proceed on behalf of or against a class. . . “ Under the Rules, the arbitrator must then stay proceedings for a period of at least 30 days to permit any party to move a court to confirm or vacate the “Clause Construction Award.”

Arbitration/Rules/Fees: Court Of Appeal Affirms Denial Of Request For Attorney’s Fees As AAA Rules Were Insufficient Basis For Fee Entitlement

AAA Clause Does Not Contain Required Prevailing Party Language Necessary For Fee Recover Under Civ. Code section 1717

     In Fujian Peak Group, Inc. v. Huang, No. D063296 (4th Dist. Div. 1 May 15, 2014) (Huffman, McConnell, O’Rourke) (unpublished), defendant Huang was deleted from an arbitration award because he had neither been served nor had he consented to arbitration.  Denied a request to recover his attorney’s fees, he appealed – unsuccessfully.

     While there were several grounds for denying Huang’s request for fees, the most relevant one to the subject of arbitration is that AAA rule-43 did not include “prevailing party” language that would allow for fee recovery under Civ. Code section 1717 principles of reciprocity.  Under AAA rule 43(d), the award could include an award of attorney fees if all parties have requested such an award or it is authorized by law or their arbitration agreement.  Here, because the arbitration clause also did “not contain the required prevailing party language” applicable to the individual defendant/appellant, the AAA rules alone could not authorize fee recovery.

     Affirmed. 

Arbitration/Deadlines: After Time Ran Out To Modify Arbitration Award, Plaintiff Could Still Seek To Amend Judgment To Add Additional Party

Plaintiff Finds Way Around JAMS Deadline

     The next case illustrates the fundamental point that an arbitration award is not the same as a judgment, and that even after the time has expired under the governing arbitration rules to amend the award, it may still be possible to amend the judgment confirming the award.  Butler v. Lyons & Wolivar, Inc., Case No. G04766 (4th Dist. Div. 3 March 3, 2014) (Fybel, Rylaarsdam, Aronson) (unpublished).

     Plaintiff Butler arbitrated with his franchisor, the investigation firm Lyons & Wolivar Investigatins (Lyons), obtaining a net award of $512,244.67 against Lyons.  So far, pretty good for Plaintiff.  But when Plaintiff petitioned to confirm the arbitration award against both Lyons and its successor corporation, LWI, Inc. (LWI), the trial court refused to confirm the award against LWI, because the award only named Lyons.

     So Plaintiff went back to the arbitrator to seek “clarification” that the award included LWI.  Now the deadline in JAMS Rule 24 kicked in:  the arbitrator had lost any power to modify the Final Award, because that award was more than 30 days old.

      California Rule of Civil Procedure, section 187 came to the rescue:  “Under section 187, the court has the authority to amend a judgment to add additional judgment debtors.”  NEC Electronics Inc. v. Hurt, 208 Cal.App.3d 772, 778 (1989).

      The Court of Appeal complimented Defendants for correctly setting forth “the law regarding judicial review of arbitration awards.”  But then the Court retracted its compliment by pointing out that judicial review of an arbitration award is not the same as judicial review of a judgment – and here, the only issue was the correctness of the trial court’s order amending the judgment. 

     Judgment affirmed – also affirming the adage that “there’s more than one way to skin a cat.”

Arbitration/Rules: Amendments To Ethics Standards For Neutral Arbitrators In Contractual Arbitration

Ethics Standards 2, 3, 7, 8, 12, 16 and 17 are amended, effective July 1, 2014

     Matthew Bender’s Rules of Court Special Update (December 2013) explains that Ethics Standards for Neutral Arbitrators in Contractual Arbitration, Standards 2, 3, 7, 8, 12, 16, and 17 are:

“amended to:  (1) codify the holdings in decisions on the inapplicability of the standards to arbitrators in securities arbitrations and on the time for disclosures when an arbitrator is appointed by the court; (2) require new disclosures about financial interests a party or attorney in the arbitration has in an administering arbitration provider provider or the provider has in a party or attorney and about any disciplinary action taken against an arbitrator by a professional licensing agency; (3) clarify required disclosures about associations in the private practice of law and other professional relationships between an arbitrator’s spouse or domestic partner and a lawyer in the arbitration; (4) require arbitrators in consumer arbitrations to inform the parties in a pending arbitration of any offer of employment from a party or attorney for a party in that arbitration; and (5) prohibit arbitrators from soliciting appointment as an arbitrator in a specific case or specific cases.”

     I was particularly pleased to see the addition of the following language to Standard 16, requiring disclosures in writing of the terms and conditions of the arbitrator’s compensation:  “any requirements regarding advance deposit of fees; and any practice concerning situations in which a party fails to timely pay the arbitrator’s fees, including whether the arbitrator will or may stop the arbitration proceedings.” 

     I have seen an arbitration shut down after a party received an adverse ruling, and refused to advance or pay any more money to the arbitrator.  The new disclosure required by Standard 16 likely won’t affect the how arbitrators react to non-payment, but at least all the parties and their attorneys will be informed and participate with eyes wide open, knowing that non-payment will probably result in a halt to arbitration, unless one party is willing to foot the entire bill.

Arbitration/Rules: AAA Adopts Optional Appellate Arbitration Rules Effective November 1, 2013

Grounds For Appeal Go Beyond Those Allowed By Existing State And Federal Statutes

     Perhaps the greatest risk with arbitration is that errors of fact and law are not grounds for appeal.  The American Arbitration Association has now addressed that risk by adopting Optional Appellate Arbitration Rules effective November 1, 2013.

     These optional rules expand the grounds for appealing an Underlying Award to include, “(1) an error of law that is material and prejudicial; or (2) determinations of fact that are clearly erroneous.”

     Parties seeking to appeal an Underlying Award obtained from the AAA arbitrator must file a Notice of Appeal within 30 days of the date of the Underlying Award, a filing fee, a copy of the applicable arbitration agreement providing for appeal of the Underlying Award, and a copy of the Underlying Award. The AAA provides sample language for an arbitration agreement that anticipates appellate review by an AAA tribunal.  Without such an agreement, a party still cannot unilaterally appeal.

     The appellate tribunal will have three arbitrators, unless the parties agree to one arbitrator, and will have broad power to rule on the scope of its own jurisdiction.

     While providing an added safeguard against errors of fact and law, the optional rules will add a new layer of expense and time, thereby narrowing the gap between arbitration and litigation in court.  But choosing the arbitration appellate option may well be worth it, on a case-by-case basis, especially in large-scale commercial arbitration.

Arbitration/Vacatur: “Manifest Disregard Of The Law” Is Manifestly Not A Ground For Vacating Arbitration Award Under California Law

 

Second District Division 2 Concludes That Arbitrator Did Not Disregard Choice Of Law Provision

     Roller Bearing Company of America (RBC) manufacturers roller bearing assembly parts and Honeywell International use them in engines it manufacturers.  Roller Bearing Company of America, Inc. v. Honeywell International, Inc., Case No. BS127074 (2nd Dist. Div. 2 August 23, 2012) (Chavez, J.) (unpublished) is a contract dispute between the two companies.  The arbitrator issued a ruling in favor of Honeywell in this breach of contract dispute, the judgment confirmed the award, and RBC appealed.

    

Inspector at the Fafnir Bearing Company inspecting large roller bearing which will probably end up in an Army tank.  1943.  Gordon Parks, photographer.  Library of Congress.

      The main issue in the case was whether the arbitrator disregarded a New York choice of law provision in order to consider inadmissible parol and extrinsic evidence to contradict the terms of the contract.  Honeywell argued that the arbitrator’s disregard of the parties’ contractual choice of law provision constituted “manifest disregard of the law.

     We posted on August 21, 2012 about Comerica Bank v. Howsam, et al. Case No. B232749 (2^nd Dist. Div. 5 August 20, 2012) (Turner, P.J., author)(partially published) , explaining that “manifest disregard of law” is not a ground for vacating an arbitrator’s award in California.  The grounds for vacatur are set forth in Cal. Code Civ. Proc. section 1286.2, and “manifest disregard of the law” is not one of those grounds.  The court concluded the same here, but then treated the argument as one that the arbitrator “exceeded the scope of his authority” by refusing to apply New York law governing parol evidence and integrated contracts.  The different label placed on the argument allowed the court to consider whether it provided a basis for vacating the award.  However, the court then concluded that the argument the arbitrator had disregarded New York law was “flatly contradicted” by the record.  The arbitrator had considered extrinsic evidence to interpret ambiguity, something permitted under New York law and the law of most states.

    RBC’s argument that the arbitrator admitted inadmissible parol and extrinsic evidence was “simply another way of saying that the arbitrator committed legal error.”  But legal error is not a ground for vacating an arbitration award. 

     Judgment affirmed.