Prior to deciding whether a client's potential claims are covered by an arbitration agreement, counsel should confirm whether the actual phrasing of the provision establishing the scope of arbitration has been interpreted by a court. Counsel also needs to ascertain whether there are any enforceable prohibitions regarding arbitration of statutory claims. If it is determined that all contractual, tort, and/or statutory claims may not be governed by an arbitration agreement, counsel will have to prepare the client for the possibility of concurrent proceedings in different forums. See KPMG LLP v. Cocchi, 132 S. Ct. 23 (2011). ("When a complaint contains both arbitrable and non-arbitrable claims, the Federal Arbitration Act requires courts to 'compel arbitration of pendent arbitrable claims when one of the parties files a motion to compel, even where the result would be the possibly inefficient maintenance of separate proceedings in different forums.'")
Use of a Specific Set of ADR Provider Rules
The Supreme Court has reiterated on numerous occasions the "fundamental principle that arbitration is a matter of contract." Rent-A-Center, West, Inc. v. Jackson, 130 S. Ct. 2772 (2010). Imposition of a specific set of ADR Provider rules requires mutual agreement of the parties. If the parties cannot agree upon a set of ADR provider rules, the arbitration will be governed by the procedures as set out in the arbitration agreement—unless the agreement is silent concerning an essential procedural step (such as, what happens if the other side refuses to participate?). If the parties are unable to resolve a procedural impasse, the dispute will have to be submitted to a court of competent jurisdiction.
If the contract involves interstate commerce, federal law preempts state statutes and the Federal Arbitration Act (FAA) applies unless the agreement provides that the arbitration shall be conducted in accordance with state law. If the FAA governs the arbitration but is silent concerning the procedural impediment, the court may look to the arbitration statute of the state in which the hearing will be conducted. Volt Info Sciences v. Leland Stanford Jr. U, 489 U.S. 468 (1989). (The court held that the FAA permitted procedures taken from a state arbitration statute be used as a gap-filler when neither the arbitration agreement nor the FAA addressed the particular proceeding at issue.)
What if the specified set of ADR provider rules and a choice-of-law provision contained in the same agreement are in conflict? In 2009 the Eighth Circuit addressed this issue. Applying the Supreme Court's holding in Preston v. Ferrer, 128 S.Ct. 978 (2008), the court held that "an arbitration provision's incorporation of the AAA rules supersedes a choice-of-law provision." (Fallo v. High-Tech Inst., 559 F.3d 874).
If an arbitral forum's rules are expressly incorporated into the arbitration agreement, an arbitrator's manifest disregard of the rules may serve as a basis for vacatur. Kashner Davidson Securities Corp. v. Mscisz, 531 F.3d 68 (2008). Prior to appointment of an arbitrator not affiliated with the named arbitral forum, always confirm in writing that the prospective arbitrator is aware of, understands, and agrees to be bound by the designated rules. If a state's arbitration statute governs the proceeding, familiarize yourself with the statutorily mandated requirements to avoid vacatur of the award. Bates v. McQueen, 270 Va. 95, 613 S.E. 2d 566 (2005) (arbitration award vacated when ad hoc arbitrator failed as ordered by the court to conduct the arbitration in accordance with the Virginia Uniform Arbitration Act).
Badly Drafted Customized Procedures
Courts are routinely asked to interpret badly drafted arbitration agreements—typically during a motion to either compel arbitration or vacate an award. Lowry Assumption, LLC v. Am. Int'l Specialty Lines Ins. Co., No. 10-02901 (D. Colo. April 5, 2011) (the court, finding that language in the arbitration clause—disputes "may be submitted" and any party "may commence such arbitration"—did not clearly establish whether arbitration was permissive or mandatory denied the motion to compel arbitration)—but see Promega Corporation v. Life Technologies Corporation, No. 11-1263 (Fed Cir. Mar. 28, 2012) (the Court found that use of the term "may" invoke arbitration rendered the provision permissive, but once commenced by a party participation in arbitration became mandatory); and Ganier v. Inglewood Homes, Inc., 944 So. 2d 753 (La. Ct. App. 2006) (finding that use of alternative words—such as "final determination"—did not evidence a clear intent by the parties to arbitrate, the court denied the motion to stay litigation).
If you are presented with a customized clause and the language is ambiguous, consider consulting with an ADR expert before commencing arbitration. This will provide you the opportunity to address any serious procedural issues with your client and the other side before incurring the costs of either an appeal or a flawed arbitration.
Conditions Precedent or Filing Deadlines
Arbitration agreements may include requirements that the parties engage in either negotiation and/or mediation before commencing arbitration. Failing to satisfy mandatory preconditions may result in a court finding that an arbitrator lacks jurisdiction to decide the issue of arbitrability because the arbitration clause itself "has not been triggered." In re Pisces Foods, 228 S.W. 3d 349 (Tex. App. Austin May 2007). In the worst-case scenario the award may be vacated due to a failure to meet pre-arbitration conditions. Republic of Argentina v. BG Group PLC, 665 F.3d 1363 (DC Cir. Jan. 17, 2012). (The court vacated a $185 million arbitral award because the tribunal failed to comply with certain preconditions set out in a bilateral investment treaty.) (The Supreme Court granted certiorari and oral arguments were held on December 2, 2013.)
To address this growing problem, AAA included a new filing requirement in the revisions to the Commercial Arbitration Rules effective October 1, 2013. Rule R-4(c) makes it the responsibility of the filing party to ensure that any conditions precedent or filing deadlines have been met prior to filing for arbitration. If a disagreement arises as to whether a condition precedent or filing deadline has been met, the parties are to submit the issue to the arbitrator for resolution.
Some stepped ADR agreements fail to specify deadlines for completion of each step. When confronted with an open-ended, multistep ADR process, counsel needs to fully document efforts by his or her client to comply with the preconditions prior to commencing arbitration.
Third Parties or Non-Signatories
What if your client wants to commence arbitration against an individual or entity who did not sign the arbitration agreement? It is well settled that third parties or non-signatories to a written arbitration agreement can be compelled to arbitrate, or can compel a signatory to arbitrate, under traditional principles of state contract law: incorporation by reference, agency, assumption, ratification, third-party beneficiary, alter-ego/veil-piercing, or equitable estoppel See e.g., Thomson-CSF, S.A. v. Am. Arbitration Ass'n, 64 F.3d 773 (2nd Cir.1995).
U.S. courts rarely bind non-signatory or subsidiary companies of a signatory company under the "group of companies" doctrine See Promega Corp., vs. Life Technologies Corp.,No. 2011-1263 (Fed. Cir. March 28, 2012). (The court ordered the subsidiary to arbitration and the parent to litigation to resolve claims involving the same plaintiff.) Arbitrators, however, have been known to bind non-signatories or subsidiary companies under the "group of companies" doctrine if the non-signatory or the subsidiary were somehow actively involved in the negotiation, performance, or termination of the contract, including the arbitration agreement See Dow Chemical v. Isover Saint-Gobain, ICC award (1982), confirmed by the Paris Court of Appeals.
Disagreements concerning whether a non-signatory or third party has standing to participate in or compel arbitration can be resolved by the arbitrator provided the arbitrator has been granted the authority to resolve such issues. AAA's Construction Arbitration Rules provide for the appointment of an R-7 arbitrator to address joinder of third parties or non-signatories to an existing arbitration. Absent agreement of the parties, an R-7 arbitrator shall not be the arbitrator appointed to decide the merits of the case and the R-7 arbitrator shall allocate responsibility for arbitrator compensation among the parties, subject to reapportionment in the final arbitration award. AAA's Commercial Arbitration Rules are silent concerning joinder of parties.
Unauthorized Practice of Law
AAA's Construction Arbitration Rules provide that any party may participate by counsel, or by any representative of that party's choosing, unless such choice is prohibited by applicable law. This is essentially the same standard as used in AAA's Commercial Arbitration Rules, but the language has been changed to more clearly define who may not be authorized to serve as a party's designated representative. AAA's rules, however, do not take precedence over the opinions of state bar associations on this issue.
The vast majority of states permit attorneys to represent parties in arbitrations that take place in states where they are not admitted. Some state's bar associations, however, have determined that representing parties in arbitration constitutes the practice of law. These states have strict requirements about whether attorneys not admitted in that state may enter the state to represent a party during arbitration. The states with such requirements include California, Connecticut, Florida, and Michigan.
AAA routinely inserts language into letters for cases being heard in states with strict UPL requirements when an out-of-state attorney or non-attorney is designated as a party's representative. AAA, however, will not decide whether a party's designated representative is or is not prohibited by applicable law from serving. Objections to a party's designated representative are referred to the arbitrator for determination.
Prior to agreeing to represent a client in arbitration conducted in a state where one is not licensed, counsel is advised to ascertain whether that state has imposed restrictions or requirements on such representation by out of state attorneys.
Failure of a Party to Pay
Just because the parties executed an arbitration agreement does not mean they will pay their share of either the filing fees or the neutral compensation after a dispute arises. If a party refuses to comply with the payment arrangements specified in either the arbitration agreement or the applicable ADR provider rules, courts have upheld decisions by arbitrators to proceed in one of four ways:
• suspend the proceeding until payment is made;
• order one party to advance the nonpaying party's share of the arbitration costs and then award them back in the final award;
• hold the nonpaying party in default under its arbitration agreement and terminate the arbitration in favor of litigation; or
• conduct an abbreviated hearing that is commensurate with the financial resources available and provides all parties the opportunity to present material and relevant evidence.
Courts have also weighed in on the issue of nonpayment. In Brandifino v. Cryptometrics Inc., (27 Misc3d 513, 896 NYS2d 623 (Sup Ct Winchester County, Feb. 24, 2010), the former employer refused to pay its share of the costs of arbitration. The former employee sought permission to avoid arbitration because of the refusal to adhere to the cost-sharing provisions in the arbitration agreement. The court ordered that the arbitration be stayed pending payment by the deadline set by the court; failure to pay would result in waiver of the right to arbitrate.
Revisions to the AAA's Commercial Arbitration Rules (R-57) effective October 1, 2013, now mirror provisions in the AAA's Construction Rules (R-56) that specifically grant to the arbitrator the authority to limit the nonpaying party's ability to assert or pursue its claim. In no event, however, may the arbitrator prevent the nonpaying party from defending a claim or counterclaim. The arbitrator must provide the nonpaying party with the opportunity to respond prior to making any such determination. In the event the arbitrator limits the participation of the nonpaying party, the arbitrator shall require that the paying party that is making a claim submit such evidence as the arbitrator may require for the making of an award.
Clients expect attorneys to recognize the existence of potential impediments before their arbitration goes off the tracks. Although arbitration is used by almost every legal specialty, ADR is not a required course in most law schools. So how does a young lawyer gain the knowledge necessary to adequately represent his or her clients? One way is to become an active member of the Section of Litigation's ADR Committee.
Keywords: ADR, litigation, arbitration, conditions precedent, unauthorized practice of law