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October 2013 Archives

October 15, 2013

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.

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.

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.

About October 2013

This page contains all entries posted to Resolution Roundtable in October 2013. They are listed from oldest to newest.

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