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April 15, 2014

Social Media and Neutrals

By Jeffrey T. Zaino, Esq.

Some neutrals avoid social media altogether to avoid any potential conflicts of interest based upon their concern that it could later serve as a basis for vacating an arbitration award pursuant to Section 10 (a) of the Federal Arbitration Act on the grounds of "evident partiality." Being cautious on how to use social media rather than avoiding the medium is a path to consider. Many social media sites, if used correctly, offer an abundance of educational information and a forum for a neutral to effectively and professionally market their services. Social media is here to stay. Many neutrals are full-time without staffs/offices and social media is an important link to the legal community and potential clients.

If you are a neutral, especially an arbitrator, and using LinkedIn and other social media sites, you may want to make a social media disclosure before accepting appointment to a case. The following is a suggested disclosure used by AAA Arbitrator Deborah Masucci:

"I use a number of online professional networks such as LinkedIn and group email systems. I generally accept requests from other professionals to be added to my LinkedIn website but do not maintain a database of all these professional contacts and connections. LinkedIn now features endorsements, which I do not seek and have no control over who may endorse me for different skills. The existence of such links or endorsements does not indicate any depth or relationship other than an online professional connection, similar to connections in professional organizations."

The disclosure should be tailored based on your individual situation, applicable law and any rules of the sponsoring organization or agency.

Jeffrey T. Zaino, Esq., is Vice President for the Commercial Division of the American Arbitration Association in New York.

February 3, 2014

Failure to Keep Track of Time Limitations For Confirmation Has Dire Consequences

By Gerald M. Levine

A recent decision from the Third Department, Bianchi v. Katz, 111 A.D.3d 1012 (2013) is a warning against untimeliness in taking steps to confirm an award. Every procedure has its time limitations. A party seeking to stay an arbitration must make its application within 20 days of service of the demand (CPLR 7503), failing which it "shall thereafter be precluded from objecting that a valid agreement was not made." An application of a party "to vacate or modify an award may be made by a party within ninety days after its delivery to him" (CPLR 7511). If an award is to be confirmed, the application has to be made within a one-year period running from the date the award is delivered to the party (CPLR 7510). Between the bookends there are still other times that have to be obeyed for modifying an award. At the front end all that is lost is that the moving party will have to submit to arbitration, but at the back end all is literally lost: untimeliness renders the award unenforceable.

In Bianchi, the arbitrator issued an award of damages to petitioners, but petitioners' counsel informed the arbitrator of an alleged error in the computation. Respondent's counsel "vehemently" object to any modification. Petitioners' counsel failed to follow up; the arbitrator was not put in a position that it had to act, and did not do so. More than a year later, petitioners applied to the Supreme Court for an order of confirmation of the original arbitration award. Supreme Court denied the petition as untimely, as did the Appellate Division whose reasoning is straight forward. This is not an issue of first impression. An arbitrator's power to modify an award is extremely limited. The procedure is governed by CPLR 7509 and 7511. The Court explained that there are two different limitation periods:

In particular [CPLR 7509] ... provides that a written request for modification must be made within 20 days of the delivery of the original award with written notice to the other parties, that written objections must be served upon the arbitrator and other parties within 10 days of receipt of such notice and that the arbitrator must issue a decision within 30 days of the date of the filing of the objections or the expiration of the time within which to do so.

Absent compliance with the statutory requirements, an arbitrator is without authority to modify an award, although application can still be made to the court (CPLR 7511, the ninety day rule). Petitioners' counsel (whether the original or his successor) struck out on all the time periods. His letter to the arbitrator informing him of an alleged error was sent 34 days after delivery of the original award so there was understandable cause for respondent's "vehemen[ce] objecting to any modification [of it.]" He made no application to the Court. Then, he failed to confirm the award within the one-year statutory period.

Object lessons are hard against counsel who provide the warnings that others learn from. The Appellate Division cites seven cases that in one way or another are concerned with (un)timeliness with one or more of the statutory dates. Bianchi is simply added to the list. The result of missing the first date meant that even if the arbitrator had acted on the request for modification it would have been deemed a nullity, which is probably the reason he took no action after the respondent rebuffed claimant's request for a modification. "Given the noncompliance with CPLR 7509, there is no impact on the statute of limitations set forth in CPLR 7510." The hard lesson is that missing a statutory date that is one of several that has to be obeyed for counsel and the awardee to avoid the ultimate loss of having an unenforceable award.

Gerald M. Levine is a member of Levine Samuel, LLP. He practices in New York City and is on the list of neutrals of the American Arbitration Association. Mr. Levine runs an ADR blog on domain names and cybersquatting at http:www.iplegalcorner.com. He is the author of a forthcoming book in Spring 2014 on domain name arbitration under the Uniform Domain Name Dispute Resolution Policy.

January 8, 2014

A Look Back at AAA Initiatives and Efforts in 2013

By Jeffrey T. Zaino, Esq., - Vice President, Commercial Division

2013 was an exciting and productive year for the American Arbitration Association (AAA). India Johnson became the first female president and under her leadership the AAA implemented eight initiatives that enhance the alternative dispute resolution (ADR) community and process. This article looks back at 2013 and summarizes those important initiatives and efforts.

Clause Builder

In an effort to make it easier to draft sound arbitration and mediation clauses, the AAA launched an online tool called Clause Builder. This free online tool can be accessed through the AAA's website at www.adr.org and allows for downloading and/or cutting and pasting the clause you draft. Clause Builder walks you through the drafting process so that no important provisions of a sound ADR clause are inadvertently excluded. For example, it contains automatic prompts for types of claims to be arbitrated, scope of discovery, amount of arbitrators, arbitrator selection process, applicable law, and other key considerations.

Administrative Review Council

The Administrative Review Council (ARC) was formed in 2013 to act as an administrative decision making authority for the AAA to resolve certain issues arising on large, complex domestic cases. ARC ensures that case issues are carefully reviewed and resolved at a high level by individuals at the AAA with significant arbitration experience. These individuals serve on a rotating basis and include AAA executives and/or external members such as retired AAA executives. The primary issues before ARC are objections to the neutral, locale disputes, and filing requirement challenges. ARC meets once a week and has the ability to convene an emergency meeting within 24 hours at the request of a party. ARC ruled on approximately 170 disputes in 2013.

Initial Discovery Protocols for Employment Arbitration Cases

With the goal of making the employment arbitration discovery process far more cost effective and efficient, the AAA formed a working group of employment arbitrators and advocates in 2012 to draft protocols based on the discovery protocols being utilized in federal courts nationwide for some employment cases. The Initial Discovery Protocols for Employment Arbitration Cases (Protocols) were drafted and a pilot program commenced in 2013 on large, complex employment arbitration cases in New York. The highlights of the Protocols include:

• Limitation on production to 3 year time period before date of controversy
• Certification of accuracy by counsel or party
• Organization and labeling documents and electronically stored information
• 30 day time limitation on responses
• List of required production by both Claimants and Respondents

New Optional Appellate Arbitration Rules

On November 1, 2013, the AAA introduced new Optional Appellate Arbitration Rules for parties that desire a more comprehensive appeal of an arbitration award within the arbitral process than what exists statutorily. The rules now provide parties with an option of a streamlined and standardized appellate arbitration process. The process can be completed within three months, giving both sides adequate time to submit appellate briefs. The rules permit review of errors of law that are material and prejudicial, and determinations of fact that are clearly erroneous.


In the summer of 2013 the AAA launched ADRCommunity, the first network enabling an entire community of people using or interested in arbitration and mediation to communicate with each other. Anyone interested in ADR is welcome to join this unique network which gives users the ability to find all types of information related to ADR in one central location and access to other people with shared experiences, questions, interests, and recommendations. The network site is located at: https://community.adr.org/welcome.

Updated/Amended AAA Commercial Rules

Following years of listening, studying, and testing, the AAA made a number of significant changes to the AAA Commercial Arbitration Rules . The rules, that went into effect on October 1, 2013, provide a greater definition of process and authority. The following is a summary of some key changes:

Mediation - There is now a mediation step for cases where a claim or counterclaim exceeds $75,000. However, a party can opt out.

Preliminary Hearing - The new preliminary hearing rule provides greater discretion for the arbitrator to conduct preliminary hearings and includes detailed procedures and a preliminary hearing checklist.

Dispositive Motions - This rule provides for the filing of dispositive motions.

Emergency Measures of Protection - Parties can now apply for emergency interim relief before an arbitrator who will be appointed within 24 hours of receipt by AAA of the emergency relief request. The previous rule was optional and had to be agreed to by both parties.

Disclosure - The parties and their representatives are now required to make disclosures about possible conflicts regarding the arbitrator.

Sanctions - Sanctions are now available for abusive or objectionable behavior.

Majority Decision - In the interest of an efficient discovery process and absent an objection by a party, the decision-making authority lies with the panel chair to resolve disputes related to the exchange of information or procedural matters.


The AAA launched Mediation.org in 2013, a comprehensive online resource for all aspects of mediation, built by mediators for mediators and those who need them. Mediation.org is a community of colleagues for mediators, their club, their library, and their forum. Mediators can make their resumes available online, get access to tools of the trade, find trade and academic organizations for continuing education and/or membership, and publish their original articles, and much more.

Online Arbitrator Search Tool

The AAA now offers an online arbitrator search tool. This search tool can be used before the AAA issues a standard list of 10 or 15 arbitrators and allows for much greater access to the AAA panel. The objective is to provide a greater selection of arbitrators and keep the case moving by reducing arbitrator selection time (no striking and ranking of lists). Also, if the parties work together using the online tool, they control the selection process and can immediately advise of disclosures.

Jeffrey T. Zaino, Esq., is Vice President for the Commercial Division of the American Arbitration Association in New York.

December 13, 2013

Lawyers Negotiate All The Time. Why Do They Need Mediators?

By Richard S. Weil

Lawyers often settle cases without using mediators. But sometimes, bringing a neutral into the negotiating process can be beneficial. Here are some of the ways:

1. In litigation, the goal, as Charlie Sheen might say, is - Winning! So when litigators negotiate, they often assert their views in adversarial terms. But the goal of mediation is resolution - getting the other side to say "yes." This allows lawyers to become problem-solvers, and their communications with each other change.

2. Litigators are sometimes wary of suggesting settlement to opposing counsel for fear of appearing weak, or there may be communication problems. In such circumstances, attorneys can exercise the "John Smith gambit" by asking a mediator to contact the other side and see if they are interested in mediating.

3. Mediation promotes settlement by bringing decision-makers directly into the negotiating process. Clients usually are not present when their lawyers negotiate. But in mediation, clients have an opportunity to explain their point of view directly to the opposing decision-maker, and to hear their opponent's perspective. Thus, mediation can give clients a more nuanced view of the case and a better understanding of the other side's objectives, which increases the likelihood of resolution.

4. Scientists have found that the presence of an observer influences the phenomenon being observed. Similarly, in mediation, the mere presence of a neutral can affect the negotiating process. For instance, it is more difficult to maintain an unreasonable position face-to-face in a neutral's presence than in telephone, email or print communications.

5. When a client is unreasonable or unrealistic, the mediator can talk to him or her in ways their attorney sometimes cannot. This can be a big benefit for attorneys, who risk losing clients if they bring up weaknesses in the case. Also, the client may be more willing to hear about the strengths and weaknesses of their case from a neutral party.

6. Parties and counsel frequently have different perceptions of the facts and relevant law. Mediation allows them to explain their point of view to the other side and to gain a clearer understanding of how the other side sees the case, which helps remove impediments to settlement.

7. Mediation can provide an opportunity for parties and lawyers to vent emotions without harming the prospects for settlement. Parties and counsel are sometimes angry at the other side or simply don't like them. By allowing people to express their emotions in caucus, and by giving them an empathetic hearing, mediators can lower the emotional temperature of a case and clear the way for parties to make reasoned decisions on the possible terms of settlement.

8. By listening to clients' stories empathetically, mediators can give clients a "day in court" that is often more satisfying than testifying in an actual court. Clients who feel heard are more likely to settle.

9. When attorneys negotiate, pointing out weaknesses in the opponent's case is often ineffective. Opposing counsel just raise counter-arguments. But a mediator conveying the same information is more likely to be heard.

10. Lawyers will often be more candid and flexible when they deal with a neutral they trust than when they deal directly with each other. They can explore the strengths and weaknesses of their case, focus on their underlying interests and disclose factors unrelated to the lawsuit that affect settlement, such as internal settlement constraints and personality issues. Such frank discussions allow mediators to identify impediments to settlement and deal with them constructively.

11. People forfeit a degree of objectivity when they litigate. They tend to interpret new evidence in ways that confirm their viewpoint; when confronted with information that contradicts their point of view, people tend to ignore, discount or distinguish it. Mediators can correct for both of these human traits by offering unbiased views of the law, evidence, credibility of a story and likely trial outcomes.

12. Mediation can assure confidentiality. Statements made during settlement negotiations are generally privileged when offered to prove liability or damages but are admissible when offered for another purpose. See, for example, Federal Rule of Evidence 408 and New York CPLR section 4547. However, when parties mediate pursuant to a well-drafted confidentiality agreement, statements made during mediation are neither admissible nor discoverable.

13. A mediator can help the parties generate and consider solutions that might not have occurred to them in settlement negotiations. Mediators can present settlement options as their own ideas, which gives lawyers cover to test options and even make concessions without appearing "weak."

14. Even when resolution is not achieved initially, mediators can help parties identify legal and factual issues that need to be addressed and develop efficient plans for resolving them.

Rick Weil mediates business and employment cases in New York

2014 AAA Higginbotham Fellows Program

By Jeffrey T. Zaino

The American Arbitration Association is currently accepting applications for the 2014 AAA Higginbotham Fellows Program. The Fellows Program was established in 2009 to address one of the challenges that the AAA has identified as discouraging diversity in ADR, which is the dearth of opportunities for diverse professionals to become future ADR leaders. Now entering its sixth year, the Fellows Program is showing concrete results with Fellows making gains in the ADR field. Six former Fellows are now on the AAA's Roster of Neutrals and all have been appointed to cases.

The program offers year-round opportunities for the Fellows, including:

• During the program, Fellows will engage with leading ADR practitioners for an intensive week of training, seminars and networking events.

• Invitation to attend AAA educational programs and events held in various
cities throughout the year.

• Mentoring and networking opportunities.

The Fellows Program is a non-paid Fellowship, and is open to up and coming diverse lawyers, neutrals, and other alternative dispute resolution practitioners who have demonstrated an interest and commitment to alternative dispute resolution. The AAA will select approximately 15 participants to participate in the Fellowship. The initial programming will consist of a week long program hosted at the AAA's San Francisco office during the week of May 12, 2014 to coincide with the AAA's Annual Meeting.

The AAA named the program in honor of Judge A. Leon Higginbotham Jr., one of the country's most prominent African-American judges and a highly respected legal scholar and civil rights advocate. Judge Higginbotham was the first African-American judge on the U.S. District Court for the Eastern District of Pennsylvania. He later served as chief judge of the Third Circuit Court of Appeals.

Please note that participation as Fellows does not automatically qualify Fellows for consideration on the AAA's roster of neutrals. Application to the AAA's roster of neutrals is a separate process.

The following is a link to the application materials for the Fellows Program:


The deadline for the application is January 10, 2014.

Jeffrey T. Zaino, Esq., is Vice President for the Labor, Employment and Elections Division of the American Arbitration Association in New York.

Compelling Arbitration of Nonsignatories Where Benefit is Directly Traceable to the Agreement Containing the Arbitration Clause

By Gerald M. Levine

A nonsignatory to an arbitration agreement is not generally subject to it and cannot be compelled to submit to the proceedings, but there are equitable circumstances that may warrant a different result. MAG Portfolio Consultant, GMBH v. Merlin Biomed Group LLC, 268 F.3d 58, 61 (2d Cir. 2001). The MAG court identified five theories under which a nonsignatory to an arbitration agreement may still be bound by it: "1) incorporation by reference; 2) assumption; 3) agency; 4) veil-piercing/alter ego; and 5) estoppel." With regard to the fifth theory, estoppel is based on a finding that the nonsignatory received a direct benefit: "a nonsignatory may be compelled to arbitrate where the nonsignatory 'knowingly exploits' the benefits of an agreement containing an arbitration clause, and receives benefits flowing directly from the agreement."

There are two concepts expressed in the MAG court decision, namely "knowingly exploits" and "benefits flowing directly from" that support compelling a nonsignatory to submit to arbitration. Importantly, both concepts require that the "knowing exploitation" and the "receiving benefits" flow directly from the agreement containing the arbitration clause. The theory does not extend to nonsignatories receiving benefits indirectly, which means from a business relationship independent of the agreement containing the arbitration clause. Distinguishing direct from indirect requires a discriminating analysis as illustrated in the case of Belzberg v. Verus Investments Holding Inc., 2013 NY Slip Op 06729 (October 17, 2013) which landed in all three levels of our judicial system. The New York Court of Appeals properly notes in Belzberg that "it can be difficult to distinguish between [direct and indirect benefits]." It notes further that it is an issue federal courts have "grappled with," citing to several decisions that "provide[] useful guidance on how to apply the theory."

The difficulty noted by the Court of Appeals in Belzberg is dramatized by the different results from the motion court and the Appellate Division. The motion court concluded after an oral hearing that petitioner (the party sought to be added to the arbitration) "did not receive a benefit which flowed directly from the [agreement that contained the arbitration clause]." The appellate division unanimously reversed and held that petitioner received a direct benefit in a unanimous decision of the five member panel. The court held that because "Belzberg knowingly exploited and directly benefitted from the Verus-Jefferies customer agreement, he should be estopped from avoiding the agreement's obligation to arbitrate," 93 AD3d 713 (1st Dept. 2012). The Court of Appeals (with Justice Abdus-Salaam not taking part because she had been a member of the Appellate Division panel) concluded otherwise and reversed the Appellate Division. Counting the trial justice who ordered arbitration permanently stayed against petitioner, the score was seven judges to five in petitioner's favor. Petitioner walked away with profits from the transaction while Verus and Jefferies (the parties to the arbitration agreement) were left with tax obligations.

The Court of Appeals' decision rests as it noted on decisions from the Second Circuit and district courts within the Circuit analyzing a variety of factual circumstances brought on by parties seeking to compel or resisting arbitration. The outcome in these decisions depends upon the documented source of a party's benefit. Arbitration may be compelled even if the party did not execute the agreement containing the arbitration clause. Thus, in Deloitte Noraudit A/S v. Deloitte Haskins & Sells, U.S., 9 F.3d 1060, 1064 (2d Cir. 1993) the Court held that the resisting party was estopped from denying its obligation because it "knowingly accepted the benefits of the Agreement" by operating under "the trade name 'Deloitte' in exchange for compliance with the dictates of the agreement." In a more recent decision by the resisting party,13-CV-00872 (EDNY 2013) the district court concluded that although plaintiff was a nonsignatory it nevertheless derived a direct benefit "from the agreements in the form of liens on the used cars." These rulings to compel arbitration rest on the proposition that the resisting party is not relieved of obligations that can be said to be the quid pro quo for future benefits. Carvant cites approvingly Lee v. Grandcor Med. Sys., Inc., 702 F.Supp. 252, 255 (D. Colo. 1988) ("A third party beneficiary must accept a contract's burdens along with its benefits.").

In contrast, an indirect benefit "derive[s] from a business relationship independent of the contract containing the arbitration provision." Lang v. First Am. Tit, Ins. Co., 12-CV-266S (WDNY 2012). In Lang, the Plaintiff's benefit involved securing a refinanced mortgage it derived from the "mere fact of the contractual relationship between the lender and Defendant, the existence of which was a condition of [the lender] refinancing Plaintiffs' mortgage." The underlying agreement incorporated the New York State approved policy rates. The court held "plaintiffs' ability to secure a refinanced mortgage from a lender" was "incidental" to the lender title policy and independent of the "'contractual relationship' between the lender and Defendant [title insurer]."

Belzberg's benefit was also indirect because it too was incidental. However, the factual circumstances were complicated by Belzberg's actions in directing the underlying transaction. Both the Appellate Division and the Court of Appeals commented unfavorably on Belzberg's conduct. The Appellate Division expressed its critical view in noting the inconsistencies of Belzberg's written and oral testimony: "Belzberg's contradictory statements on these material issues cast doubt on his present claim that the loan came from Winton and not him, and warrant our rejection of his factual characterization of the money transfer." This clearly raised an ethical question which the Appellate Division transposed into a basis for compelling arbitration, but the described conduct is not the key to compelling arbitration. It may be true that "Belzberg's use of the profits attributed to Winton's original investment may breach his duty or some role assumed on behalf of Winton, or otherwise constitute an opportunistic self serving exercise of his position with Winton." However, the critical fact in Belzberg's favor was that "the use of such monies does not flow from the Jefferies-Verus agreement [that contained the arbitration clause]." Opportunism is not "[t]he guiding principle." Rather:

[t]he guiding principle is whether the benefit gained by the nonsignatory is one that can be traced directly to the agreement containing the arbitration clause. The mere existence of an agreement with attendant circumstances that prove advantageous to the nonsignatory would not constitute the type of direct benefits justifying compelling arbitration by a nonparty to the underlying contract.

Of course, the result does not preclude prosecuting claims actionable in a court of law; it merely postpones the reckoning on the grounds suggested by the Court of Appeals. Merely setting the transaction in motion and benefitting from an independent agreement is not a sufficient basis for applying the estoppel theory, even if there is a sense that the party is getting away with something.

Gerald M. Levine is a member of Levine Samuel, LLP. He practices in New York City and is on the list of neutrals of the American Arbitration Association. Mr. Levine runs an ADR blog on domain names and cybersquatting at http:www.iplegalcorner.com. He is the author of a forthcoming book in Spring 2014 on domain name arbitration under the Uniform Domain Name Dispute Resolution Policy.

October 30, 2013

New Optional Appellate Arbitration Rules

By Jeffrey T. Zaino

As of November 1, 2013, the American Arbitration Association will offer the Optional Appellate Arbitration Rules. These new rules provide parties with the option of a streamlined and standardized appellate arbitration process. The features of arbitration as a cost-effective and expedited dispute resolution process are maintained in the rules as well.

These new rules provide for an appeal within the arbitration process. The appellate arbitral panel applies a standard of review that is similar to the standard applied by an appellate court when reviewing a trial court's decision. Because case law from the Supreme Court of the United States clarified that parties are limited in their ability to modify the narrow grounds for court review of an arbitration award, the Optional Appellate Arbitration Rules were developed for the types of large, complex cases where the parties agree that the ability to appeal is particularly important.

Quick Facts about the Optional Appellate Arbitration Rules

• The Appellate Rules will apply only when there is an agreement of the parties, either by contract or stipulation.

• Parties are permitted to appeal on the grounds that the underlying award is based on errors of law that are material and prejudicial and/or on determinations of fact that are clearly erroneous.

• Appeals will be determined upon the written documents submitted by the parties with no oral argument, unless the appeal tribunal directs otherwise.

• The Optional Appellate Arbitration Rules anticipate a process that can be completed in about three months.

• The Appellate Panel consists of former federal and state judges and other arbitrators with strong appellate backgrounds.

• Parties may provide for the AAA's/ICDR's Optional Appellate Arbitration Rules whether or not the underlying award was conducted pursuant to the AAA's or ICDR's rules.

Selected Provisions of the Optional Appellate Arbitration Rules

Agreement of the Parties: Utilization of these rules is predicated upon agreement of the parties, either by contract or stipulation. A party may not unilaterally appeal an arbitration award under the Optional Appellate Arbitration Rules absent such agreement with the other party. The Introduction to the Optional Appellate Arbitration Rules provides sample language for inclusion in the parties' agreement.

Appeal Tribunal's Decision:
The appeal tribunal may (1) adopt the underlying award as its own, or (2) substitute its own award for the underlying award (incorporating those aspects of the underlying award that are not vacated or modified); or (3) request additional information and notify the parties of the tribunal's exercise of an option to extend the time to render a decision, not to exceed thirty (30) days. The appeal tribunal may not order a new arbitration hearing or send the case back to the original arbitrator(s) for corrections or further review.

Appellate Arbitrator Panel:
The appeal tribunal will be selected from the AAA's Appellate Panel that consists of former federal and state judges and other arbitrators with strong appellate backgrounds. A panel of three appellate arbitrators will be appointed unless the parties agree to utilize a single arbitrator.

Effect of Filing Notice of Appeal on Underlying Award: Upon the filing of a Notice of Appeal under the Optional Appellate Arbitration Rules, the parties agree that the underlying award will not be considered final for purposes of any court actions to modify, enforce, correct or vacate the underlying award, and the time period for commencement of judicial enforcement proceedings is tolled during the pendency of the appeal. The parties also agree to stay any already-initiated judicial enforcement proceedings until the conclusion of the appeal process.

Sample Clause: The Optional Appellate Arbitration Rules provide sample appellate clause language for inclusion in the parties' agreement. Parties should consider requiring the underlying award to be a reasoned award. Parties should consider what type of record of the underlying arbitration they would like to have in place for the purposes of any appeal.

Standard of Review: The Optional Appellate Arbitration Rules permit a party to appeal on the grounds that the underlying award is based upon (1) an error of law that is material and prejudicial; or (2) determinations of fact that are clearly erroneous.

Jeffrey T. Zaino, Esq., is Vice President for the Labor, Employment and Elections Division of the American Arbitration Association in New York.

October 15, 2013

Initial Discovery Protocols For Employment Arbitration Cases: Pilot Project Highlights

By Jeffrey T. Zaino

In fall 2012, the American Arbitration Association (AAA) brought together a working group to tailor initial discovery protocols for employment arbitration cases. These protocols were based on a pilot project on early discovery initiated in the federal courts (Initial Discovery Protocols for Employment Cases Alleging Adverse Action) that were intended to "encourage parties and their counsel to exchange the most relevant information and documents early in the case, to assist in framing the issues to be resolved and to plan for more efficient and targeted discovery."

The AAA is now initiating its Pilot Project on the AAA Initial Discovery Protocols for Employment Arbitration Casesin the Northeast. Participation is voluntary, and subject to amendment by a designated arbitrator in consultation with the parties.

Highlights of the AAA Initial Discovery Protocols include:
• Limitation on production to a 3-year time period before the date of the matter(s) in controversy, unless otherwise specified;
• Certification of accuracy by counsel or a party;
• Organization and labeling of documents and electronically stored information;
• 30-day time limitation on responses.

Required Production

By both Claimants and Respondents:

• All communications between the parties (including other formal claims or charges) concerning the factual allegations or claims at issue in the arbitration;

• Documents concerning the formation, terms and conditions, and termination of the employment relationship;

• Documents concerning any application for (and receipt of) unemployment benefits and/or disability benefits.

By Claimant:

• Diary, journal and calendar entries by the claimant, and current resume;

• Documents concerning job search efforts and communications with potential employers;

• Identification of persons who have or may haveknowledge of the facts concerning the claims or defenses;

• Description of categories and amounts of damages.

By Respondent:

• Claimant's personnel file and, if not included, performance evaluations and formal discipline reports or write-ups;

• Documents relied upon to make the employment decision(s) at issue;

• Relevant job descriptions, compensation and benefits documents, and workplace policies or guidelines;

• Table of contents and index of any employee handbook, code of conduct, or policy manual in effect;

• Documents concerning investigation(s) of any relevant complaint(s) about or made by the claimant;

• Identification of claimant's supervisor(s) and/or manager(s), other individual(s) involved in making the adverse action decision or with knowledge of the facts concerning the claims or defenses.

Jeffrey T. Zaino, Esq., is Vice President for the Labor, Employment and Elections Division of the American Arbitration Association in New York.

Appellate Reversals of Orders on Arbitrators Exceeding the Scope of Their Authority

By Gerald M. Levine

Parties in two recent cases, one in the Appellate Division, 1st Department and the other in the 2nd Circuit have been disappointed by decisions reversing trial court orders to vacate awards on the grounds that the arbitrators exceeded the scopes of their authority. The results illustrate two points: (1) the difficulty in vacating awards; and, (2) strategic missteps by counsel in presenting their evidence.

In Caruso v. Viridian Network, LLC, 2013 NY Slip Op. 05780 (9-10-2013) the Appellate Division reversed the trial term's order vacating an arbitration award and remanding the case to a new arbitrator. Petitioner complained she was excluded from certain portions of the arbitration proceedings (approximately 5% of the proceedings). There was no dispute that the arbitrator had "exceeded the scope of his authority" (CPLR §7511(b)(iii), as well as violated Rule 23 of the American Arbitration's Commercial Arbitration Rules, but the Appellate Division held that "the exclusion [was] harmless error, since the result would have been the same had she been present." The arbitrator had found that "petitioner was fired for her repeated, and severe, violation of the conflict of interest provisions of her contract." Although not fully detailed, the arbitrator had also sanctioned petitioner's counsel "for violating the confidentiality order." Thus, in reversing the vacatur despite a finding that the arbitrator had exceeded the scope of his authority, the Appellate Court in Caruso set a high bar for vacating an award: Procedural error cannot trump affirmative findings in favor of the confirming party where the arbitrator's challenged act was not so "imperfectly executed" as to warrant vacatur.

In the Second Circuit case, LJL 33rd Street Associates, LLC v. Pitcairn Properties Inc. 11-5425-cv (7-31-2013) the Court was presented with two issues: the arbitrator's refusal to receive hearsay evidence and the scope of his authority. LJL 33rd involved a dispute between parties who were the equity owners of a limited liability company whose sole asset was a luxury high-rise apartment complex in Manhattan. Their underlying agreement contained a contingency that triggered plaintiff's right to purchase defendant's interest in the property. The arbitration followed plaintiff's election to exercise its right. Plaintiff contended that the arbitrator was required to decide both the "Stated Value" of the property (essentially its fair market value) and the "Purchase Price" to be paid by plaintiff for defendant's interest (defined as the fair market value minus liabilities). The arbitrator determined Stated Value, but refused to determine the Purchase Price, putting plaintiff in the rare position of moving to confirm one branch of the award and vacate another. Defendant also moved to vacate the award on the grounds that the arbitrator had excluded evidence on the issue of Stated Value.

On the issue of Purchase Price, the problem for plaintiff was the limited scope of the arbitrator's authority. The Court of Appeals found that the parties "elected arbitration of narrow precisely specified issues" by virtue of an arbitration clause that read:

In rendering such decision and award, the arbitrators shall not add to, subtract from or otherwise modify the provisions of the Agreement and may only determine the issue or question present as their award.

The arbitrator had determined that the Purchase Price was not within his jurisdiction, a finding which the district court upheld. However, the district court vacated the arbitrator's determination of fair market value based on its conclusion that the arbitrator had violated the Federal Arbitration Act by excluding certain evidence offered by defendant. The Court of Appeals affirmed the district court's order on the issue of the arbitrator's authority, but disagreed with the district court that the arbitrator's exclusion of evidence violated Section 10(a)(3) of the FAA - "refusing to hear evidence pertinent and material to the controversy."

In reversing the district court's order for partial vacatur, the Court of Appeals pointedly laid fault with defendant's strategic decision in proffering only hearsay evidence, which consisted of an asset summary report, a valuation of the property, a letter, and a non-binding "letter of intent" to purchase the property. Defendant's submissions posited that the Stated Value was as much as 20% higher than that testified to by the appraiser retained to make the appraisal. In siding with the defendant, the district court held that "the arbitrator's decision to exclude this evidence constituted illegal 'misconduct'." Section 10(a)(3) of the FAA provides that "a reviewing court may vacate an arbitration award 'where the arbitrator [is] ... guilty of misconduct in ... refusing to hear evidence pertinent and material to the controversy." In the district court's view, this exclusion "prevented Pitcairn from effectively demonstrating" that the property had a higher market value than the arbitrator determined.

While "it is indisputably correct [in the words of the Court of Appeals] that arbitrators are not bound by the rules of evidence and may consider hearsay, it does not follow that arbitrators are prohibited from excluding hearsay." Instead of calling the "makers of the exhibits as witnesses," Pitcairn offered only the fruits of their work. Although, the Court noted, "Pitcairn may well have been harmed by the exclusion of its exhibits," the harm was self-created. If counsel's strategy in offering only the exhibits was to keep the makers away from cross-examination, it backfired. The court cited Rule 31(b) from the American Arbitration Association's Commercial Arbitration Rules that "[t]he arbitrator shall determine the admissibility, relevance, and materiality of the evidence offered and may exclude evidence deemed by the arbitrator to be cumulative or irrelevant." By denying plaintiff the "opportunity to test the makers' conclusions by cross-examination" counsel's decision not to call the makers created risk inherent in offering hearsay evidence, that it will be deemed inadmissible.

Two lessons can be gleaned from the Court of Appeals' decision in LJL 33rd: (1) parties are bound by the jurisdictional scope they agreed to; and (2) self-created problems "can[not] be considered unfair" where, as in this case, the moving party "could have cured the problem simply by calling the makers of the exhibits as witnesses." On neither issue did the arbitrator 's determination constitute "illegal misconduct" or "impair the 'fundamental fairness' of the proceeding."

Gerald M. Levine is a member of Levine Samuel, LLP. He practices in New York City and is on the list of neutrals of the American Arbitration Association. Mr. Levine runs an ADR blog on domain names and cybersquatting at http://www.udrpcommentaries.com.

September 18, 2013

Supreme Court Holds That Class Actions Can Be Prohibited Through Arbitration Clauses

By Brian Farkas

Last term, the Supreme Court continued its intensifying focus on class action arbitration. American Express Co. v. Italian Colors Restaurant, decided on June 20, 2013, limited the ability of plaintiffs to use class procedures after agreeing to one-on-one arbitration--even when the costs of such individual arbitrations would greatly exceed the potential recovery by any single plaintiff. The Supreme Court has now made it clear that the Federal Arbitration Act (FAA) allows parties to prohibit class procedures entirely through an arbitration clause. Some have already called the decision a blow to consumers and small businesses, while others have praised it for honoring the freedom of contract principles on which arbitration is traditionally based.

The underlying controversy began in 2003, when Italian Colors--a family-style Italian restaurant in Oakland, California--signed a standard Card Acceptance Agreement with American Express in order to be able to accept AmEx credit cards from customers. Like most of AmEx's merchant agreements, this agreement included two important stipulations: First, if Italian Colors wanted to be able to take AmEx credit cards, they also had to take AmEx debit cards (which result in high fees for merchants). Second, any dispute that arose would be settled by arbitration. This arbitration clause included a line that "[t]here shall be no right or authority for any claims to be arbitrated on a class action basis"--in other words, plaintiffs could not join together and arbitrate against AmEx as a class.

Later that year, Italian Colors and other small businesses decided to challenge AmEx's debit card requirement, claiming that it was an antitrust violation. Specifically, they claimed that AmEx violated Section 1 of the Sherman Act by "us[ing] its monopoly power in the market for charge cards to force merchants to accept [debit] cards at rates approximately 30% higher than the fees for competing credit cards."

The Southern District of New York (SDNY) initially agreed to join the claims together to form a class action. But AmEx insisted that any dispute by the plaintiffs needed to be handled by one-on-one arbitration, and not by class action. The company moved to compel individual arbitrations. Such individual arbitrations, however, would impose prohibitive costs on the plaintiff merchants. The attorneys and experts needed to prove their individual antitrust claims would greatly exceed the maximum recovery for any individual business. Indeed, the merchants estimated the costs of proving each antitrust claim would be at least several hundred thousand dollars, compared to potential recoveries of roughly $12,000-$38,000. Any business--especially a small family restaurant--would never jump into such a money pit. Therefore, individual arbitrations would render the merchants effectively unable to vindicate their federal statutory rights under the Sherman Act.

The district court ultimately sided with AmEx's motion to dismiss, emphasizing the traditional supremacy afforded to waivers under the FAA. But the Second Circuit reversed that determination, holding that the prohibitive costs the merchants would face for individual arbitration rendered the class action waiver in the Card Acceptance Agreement unenforceable. The panel, which included then-Second Circuit judge Sonia Sotomayor, also noted that the waiver effectively insulates AmEx from civil antitrust liability--a troubling result.

In a 5-3 decision [http://www.supremecourt.gov/opinions/12pdf/12-133_19m1.pdf], the Supreme Court sided with American Express and reversed the Second Circuit. (Justice Sotomayor recused herself because of her earlier involvement with the case). The majority opinion, written by Justice Scalia and joined by Chief Justice Roberts and Justices Alito, Kennedy and Thomas, rejected the theory that class actions must remain available to claimants to ensure that they have sufficient financial incentive to prosecute federal statutory claims. Italian Colors, the Court reasons, voluntarily entered into a contract containing a bilateral arbitration provision; it cannot escape that clause merely because the claim it now wishes to bring is economically unfeasible.

The majority pointed to the language of the FAA, which was "enacted... in response to widespread judicial hostility to arbitration." 9 U.S.C. §2 describes the intent of Congress: "A written provision in any... contract evidencing [the desire] to settle by arbitration a controversy... shall be valid, irrevocable, and enforceable." Justice Scalia writes that "consistent with that text, courts must 'rigorously enforce' arbitration agreements according to their terms." Prohibitively high costs, the majority held, are not a sufficient basis for a court to overrule an arbitration clause that forbids class actions. Nothing in federal antitrust law guarantees plaintiffs "an affordable procedural path to the vindication of every claim." The decision rejected the notion that "effective vindication" of statutory claims must be possible, noting that the doctrine "originated as [mere] dictum" in prior cases and that it has never been applied in any particular case. Arbitration is a matter of contract, and the Court found no basis "to reject the waiver of class arbitration here."

The majority rested much of its decision on AT&T Mobility v. Concepcion [http://www.supremecourt.gov/opinions/10pdf/09-893.pdf], its 2011 case that, according to Justice Scalia, "specifically rejected the argument that class arbitration was necessary to prosecute claims 'that might otherwise slip through the legal system.'" That case held that under the FAA, California courts must enforce arbitration agreements even if the agreement requires that consumer complaints be arbitrated individually instead of on a class basis.

Justice Scalia concludes by highlighting a potential danger of the Second Circuit's "effective vindication" scheme: If the parties had to litigate "the legal requirements for success on the merits claim-by-claim and theory-by-theory, the evidence necessary to meet those requirements, the cost of developing that evidence, and the damages that would be recovered... [then these litigation] hurdles would undoubtedly destroy the prospect of speedy resolution that arbitration... was meant to secure. The FAA does not sanction such a judicially created superstructure." In other words, the notion of "effective vindication" could easily turn a speedy arbitration into a litigious mess.

Justice Kagan penned a fiery dissent, joined by Justices Ginsburg and Breyer. In one of the more memorable opening paragraphs of the term, Kagan summarized the case as follows: "The monopolist gets to use its monopoly power to insist on a contract effectively depriving its victims of all legal recourse. And here is the nutshell version of today's opinion, admirably flaunted rather than camouflaged: Too darn bad." If the arbitration clause is enforceable, the dissent continues, "AmEx has insulated itself from antitrust liability--even if it has in fact violated the law."

The dissent instead endorses the Second Circuit's concept of effective vindication. The effective vindication doctrine, Justice Kagan writes, "bars applying such a clause when... it operates to confer immunity from potentially meritorious federal claims. In so doing, the rule reconciles the [FAA] with all the rest of federal law." The arbitration clause used by AmEx, the dissent explains, has virtually the same effect as an exculpatory clause banning whole categories of liability for one of the parties. Justice Kagan attacks the conservative majority for allowing its apparent contempt for class actions to color its interpretation of this case: "To a hammer, everything looks like a nail. And to a Court bent on diminishing the usefulness of Rule 23, everything looks like a class action, ready to be dismantled." In the hands of the majority, she continues "arbitration threatens to become... a mechanism easily made to block the vindication of meritorious federal claims and insulate wrongdoers from liability."

The decision has already been met with criticism from many academics, consumer groups, and lawyers. Some writers have warned[http://cardozojcr.com/wp-content/uploads/2013/05/CAC307.pdf] that the decision could allow larger corporations to evade statutory responsibilities, or at least limit civil liability, by inserting a simple arbitration clause into a contract. Italian Colors is just the latest in a string of cases that have shown the Court's general favor for binding arbitration and general disfavor for class actions. This very term, Justice Kagan wrote for a unanimous court in Oxford Health Plans LLC v. Sutter [http://www.supremecourt.gov/opinions/12pdf/12-135_e1p3.pdf], which held that when an arbitrator determines that the parties to an arbitration intended to authorize class-wide arbitration, that determination survives judicial review under § 10(a)(4) of the FAA. By contrast, the Court has decided numerous cases against the certification of classes--most famously, perhaps, the 2011 case of Wal-Mart v. Dukes [http://www.supremecourt.gov/opinions/10pdf/10-277.pdf] in which the Court prohibited the certification of 1.5 million female workers suing Wal-Mart for sex discrimination.

The Italian Colors case took a full decade to wind its way through the federal courts--so long that Alan Carlson, the restaurant's owner, long ago stopped following the case's progress. He only heard about the Supreme Court decision from a customer [http://www.eastbayexpress.com/oakland/supreme-court-rules-against-italian-colors-in-amex-suit/Content?oid=3619448]. There is surely some irony in the fact that arbitration exists, in part, to ensure the rapid resolution of disputes. As this case demonstrates, the Supreme Court continues to interpret the FAA to prevent bilateral arbitral claims from getting ensnared in protracted class actions--indeed, to prevent situations just like this one.

Brian Farkas is an associate at the New York office of Goetz Fitzpatrick LLP. He holds his B.A. from Vassar College, and his J.D. from Cardozo School of Law, where he was editor-in-chief of the Cardozo Journal of Conflict Resolution.