ADR Cases

Vol. 19 No. 3

By

Not All State Laws Prohibiting Arbitration Agreements Are Preempted by the FAA

In State of Washington v. James River Ins. Co., 292 P.3d 118 (Wash. 2013), the Supreme Court of Washington affirmed the trial court ruling that a mandatory arbitration clause in an insurance contract was unenforceable under state law. Generally, state statutes prohibiting arbitration agreements are preempted by the Federal Arbitration Act.  However, the court noted that the McCarran-Ferguson Act provides an exception to this general rule when the state statute was enacted “for the purpose of regulating the business of insurance.” Here, the state statute regulates the “business of insurance” directly because it regulates the insured-insurer relationship. Thus the McCarran-Ferguson Act shields the state statute from preemption by the FAA. To read more: http://www.courts.wa.gov/opinions/pdf/876444.opn.pdf.

Challenges to the Formation of a Contract, Rather Than to Its Validity, Must Be Decided by a Court When Determining Arbitrability

In SBRMCOA LLC v. Bayside Resort, Inc., 707 F.3d 267 (3d Cir. 2013), the Third Circuit affirmed in part and vacated in part a District Court’s order to compel arbitration in a contract dispute. The Third Circuit noted that its ruling in Sandvik AB v. Advent Int’l Corp. 220 F.3d 99 (3d Cir. 2000), which drew a distinction between claims that a contract is void, which are not arbitrable, and claims that a contract is voidable, which are arbitrable, is called into question by the intervening Supreme Court decision in Buckeye Check Cashing v. Cardegna, 546 U.S. 440 (2006). In Buckeye, the Supreme Court rejected the void/voidable distinction and held that the correct distinction is between challenges to contract formation and contract validity. To read more: http://www.ca3.uscourts.gov/opinarch/072436p.pdf.

Undisclosed Campaign Contributions by a Party to an Arbitrator’s Judicial Campaign Are Not Evidence of Evident Partiality

In Freeman v. Pittsburgh Glass Works, LLC, 709 F.3d 240 (3d Cir. 2013), the Third Circuit addressed a matter of first impression: whether undisclosed campaign contributions can be proof of evident partiality. The court determined that undisclosed campaign contributions are not evidence of partiality because they are on the public record, the contribution was relatively small and under state law the candidate must create a campaign committee and could not directly solicit funds. In addition, attorneys for the plaintiff in this case contributed five times that of the defendant’s contribution to the arbitrators’ campaign. Furthermore, the court noted that judicial elections are common throughout many states and “to conclude that an arbitrator demonstrates evident partiality simply based on non-disclosure of publically recorded and relatively small campaign contributions would impose too great a burden on the system.” To read more: http://www.ca3.uscourts.gov/opinarch/122026p.pdf.

Nondisclosure of Counsel’s Affiliation with Same ADR Provider As Neutral Arbitrator Is Grounds to Vacate Arbitration Award

In Gray v. Chiu, 151 Cal. Rptr. 3d 791 (Cal. App. 2013), the parties agreed upon a neutral arbitrator, but prior to the hearing the counsel for the defendant affiliated with the same ADR provider organization as a neutral arbitrator without disclosing the relationship. The California Court of Appeals vacated the arbitration award, citing Ethic Standard 8, which requires disclosure of a relationship between the dispute resolution provider and a party or lawyer in the arbitration. To read more: http://www.courts.ca.gov/opinions/documents/B238304.PDF.

Fees Awarded Can Include Costs Incurred in Pre-Dispute Mediation As Long As They Are Reasonable

In Grossman v. Park Fort Washington Ass’n, 151 Cal. Rptr. 3d 48 (Cal. App. 2013), the California Court of Appeals awarded attorneys’ fees, including time spent preparing for mediation, pursuant to the Davis-Stirling Common Interest Development Act. The court noted the strong public policy favoring ADR and determined the dispositive term in the statute is “reasonable.” Thus, absent evidence of unreasonableness, costs expended in pre-litigation ADR may be recovered in an action to enforce the governing documents of a common interest development. To read more: http://www.courts.ca.gov/opinions/documents/F063125.PDF.

Class Arbitration Waiver and Fee-Splitting Provisions Are Not Unconscionable in Light of Supreme Court Precedent

In Muriithi v. Shuttle Express, Inc. ___ F.3d ___, 2013 WL 1287859 (4th Cir. 2013), the Fourth Circuit held that a class arbitration waiver and a fee-splitting provision were not unconscionable under state law in light of Supreme Court rulings in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), and Green Tree Financial v. Randolph, 531 U.S. 79 (2000).  In Concepcion, the Supreme Court held that a class action waiver may not be used to invalidate an otherwise valid arbitration agreement. In Green Tree Financial, the Supreme Court held that a fee-splitting provision may render an arbitration agreement unenforceable if the costs are so prohibitive as to effectively deny an employee access to the arbitral forum. Here, Muriithi failed to provide evidence of the cost of arbitration or his ability to pay and failed to meet the standard in Green Tree Financial.  To read more: http://www.ca4.uscourts.gov/Opinions/Published/111445.P.pdf.

J.D. Hoyle is a law clerk and Matthew Conger is a staff attorney with the ABA Section of Dispute Resolution

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