Archive for the ‘Arbitration’ Category

Arbitration Insight #18

THE APPELLATE COURT REVISTS BENJAMIN, WEILL & MAZUR V. KORS

A few months ago or last December (see Arbitration Insight No. 16), I discussed Benjamin, Weill & Mazer v. Kors (2010) 189 Cal.App.4th 126 (BW&M), which held that part-time lawyer-arbitrators should disclose their legal involvement in business interests that are similar to the facts of the matter to be arbitrated. In BW&M, one of the arbitrators in a mandatory fee arbitration (MFA) failed to advise the aggrieved former client that he was representing a large law firm in a case before the California Supreme Court involving an attorney fee dispute and was also representing another major law firm in an action for attorney malpractice and related torts.

The BM&W decision was inconsistent with Haworth v. Superior Court (2010) 50 Cal.4th 372 which had held only two months earlier that the appearance-of-partiality standard concerning arbitrator recusal should not be broader than the same standard applicable to judicial recusal. More specifically, Haworth found, in part, that “The arbitrator cannot reasonably be expected to identify and disclose all events in the arbitrator’s past, including those not connected to the parties, the facts, or the issues in controversy, that conceivably might cause a party to prefer another arbitrator.” (At p. 394.)

BW&M distinguished Haworth because, it reasoned, an arbitrator’s non-disclosures of concurrent business interests similar to a party’s interests could never occur in judicial matters, as they do private arbitration. Thus, it held that arbitrators must disclose their ties to the business world “to the extent these relationships are substantial and involve financial considerations creating an impression of possible bias …” What BW&M failed to recognize is that sitting judges, although not practicing law, may also have commercial ties, such as stock or building ownership or an interest in a business, that may be both substantial and factually similar to the cases before them but, under present appearance-of-partiality standards, need not be disclosed. Therefore, upon analysis, BW&M’s stated need for more disclosures in arbitrations than in the courts does not stand up to scrutiny.

Shortly after issuing the above decision, the BW&M court, on its own motion, ordered a rehearing as to two issues: whether the trial court had improperly merged a MFA dispute into a binding California Arbitration Act (CAA) proceeding and whether the disclosure requirements under the CAA are applicable to non-binding MFA arbitrations. The parties’ additional briefing (which concluded in December 2010) gives the appellate court an opportunity to revise its original holding, which surely would have caused the Supreme Court to either depublish it or grant a hearing to review its controversial analysis.

 

Judge Michael D. Marcus (Ret.)

ADR Services, Inc.

1900 Avenue of the Stars, Suite 250

Los Angeles, California 90067

(310) 201-0010

 

Copyright Michael D. Marcus, February 2011

 

Please visit my website at www.marcusmediation.com for information about my mediation and arbitration background and experience. Copies of my previous Mediation Messages and Arbitration Insights are available by going to the articles link on the website.

 

 

Arbitration Insight No. 17

UPDATE CONCERNING ARBITRATOR DISCLOSURES OF CONFLICTS

Two recent cases involving arbitrator failure to disclose potential conflicts, each with its own focus, are the subject of this Arbitration Insight.

In La Serena Properties v. Weisbach (2010) 186 Cal.App.4th 893, the American Arbitration Association and its arbitrator successfully demurred to a complaint for damages by an arbitration party who alleged that the AAA and the arbitrator had not disclosed the extent of the arbitrator’s relationship with counsel for the opposing party, including that the arbitrator had a relationship with that attorney’s sister. The appellate court affirmed the judgment, finding that common law judicial immunity, which had been extended by Stasz v. Schwab (2004) 121 Cal.App.4th 420 to claimed acts of bias by arbitrators, also applied to an arbitrator’s failure to make adequate disclosures of potential conflicts of interest. (At pp. 603-604.)

Because of arbitral immunity, La Serena Properties concluded that the exclusive remedy for an arbitrator’s failure to disclose a potential disqualifying fact is to set aside the award. (At p. 907; see also Code of Civil Procedure section 1286.2(a)(6)(A) providing that a reviewing court “shall vacate the award if the court determines . . . [a]n arbitrator making the award . . . failed to disclose within the time required for disclosure a ground for disqualification of which the arbitrator was then aware.”)

The lesson of Johnson v. Gruma Corp. (9th Cir. 2010) 614 F.3d 1062 is different from that of La Serena Properties. Johnson involved a long-running proceeding in which the arbitrator did not disclose that his wife had been a former law partner of Gruma’s attorney. Gruma prevailed in the matter. The case began in 2002; the attorney in question did not enter the matter until 2007 and the arbitrator’s wife had been the attorney’s partner at Paul Hastings from 1997-1999. Applying California law, the Ninth Circuit held that the arbitrator had made all required disclosures when he was chosen to preside in 2002. It was then found that the arbitrator’s supplemental disclosures in 2007, in which he did not mention his wife’s former connection to Paul Hastings or the current lawyer, were sufficient because the applicable rules did not require such information. The Court noted that neither California Judicial Council Standard for Neutral Arbitrators in Contractual Arbitration 7(d)(2)(C) nor standard 7(d)(8)(C) applied because the former requires disclosure about the arbitrator’s spouse when that person is “currently associated in the private practice of law with a lawyer in the arbitration” and the latter standard requires disclosure about the arbitrator’s family when any immediate member “within the preceding two years, was an employee of or an expert witness or a consultant for a lawyer in the arbitration.” (At p. 1068; emphasis included.)

Johnson also found that the appearance of partiality disclosure rule in standard 7(d)(14)(A) was not applicable because the professional relationship between the arbitrator’s wife and the Paul Hastings’ lawyer had ended eight years before the lawyer began to represent Gruma. (At pp. 1068-1069.) Lastly, Johnson held that the appellant had waived standard 7(d)(3), which requires disclosure if “[t]he arbitrator or a member of the arbitrator’s immediate family has or has had a significant personal relationship with any party or lawyer for a party,” by not raising the issue at the trial level or in his appellate papers. (At p. 1069.)

La Serena Properties and Johnson provide the cautionary tale that the disclosure of conflict rules applicable to arbitrators sometimes work in strange and mysterious ways: to paraphrase the Rolling Stones, “You can’t always get what you want in arbitration, and if you try sometime you might get what you need.”

Judge Michael D. Marcus (Ret.)

ADR Services, Inc.

1900 Avenue of the Stars, Suite 250

Los Angeles, California 90067

(310) 201-0010

Copyright Michael D. Marcus, February 2011

Arbitration Insight No. 16

APPEARANCE-OF-PARTIALITY DISCLOSURES BY ARBITRATORS

Two very recent cases discuss the parameters of an arbitrator’s obligation to disclose “matters that could cause a person aware of the facts to reasonably entertain a doubt that the … neutral arbitrator would be able to be impartial.” (Code of Civil Procedure section 1281.9, subdivision (a).) Haworth v. Superior Court (2010) 50 Cal.4th 372 is important because it holds that the above appearance-of-partiality standard concerning arbitrator recusal should not be broader than the same standard applicable to judicial recusal. Benjamin, Weill & Mazer v. Kors (2010) A125732 (BW&M), decided just last week, is more fact specific, holding that part-time lawyer-arbitrators should disclose their legal involvement in business interests that are similar to the facts of the matter to be arbitrated.

In Haworth, the trial court vacated an arbitration award for a doctor involving  a female patient’s claim that the doctor had been negligent in performing plastic surgery to her lip because the arbitrator, a retired judge, had failed to disclose that, 10 years earlier, he had been publicly censured for making statements to court employees, which created “an overall courtroom environment where discussion of sex and improper ethnic and racial comments were customary.” The Supreme Court held that the arbitrator was not required to disclose the censure because nothing in its background facts would suggest to a reasonable person that the retired judge could not be fair to female litigants. Moreover, “None of the conduct or comments for which (the) judge … was censured involved litigants or occurred in the courtroom while court was in session.” (Id. at p. 390.) And, “Unlike cases in which evidence of gender bias has required disqualification of a judge, the subject matter of this arbitration was not such that the circumstance of gender was material, or that gender stereotyping was likely to enter into the decision made by the arbitrators.” (Id. at p. 391.)

In finding that a reasonable person would not entertain a doubt about the former judge’s impartiality as an arbitrator, Haworth acknowledged that, while some of the policies applicable to judicial disclosure may differ from those applicable to arbitrator disclosure, “we find no reason to interpret the appearance-of-partiality rule more broadly in the context of arbitrator disclosure than in the context of judicial recusal … It may be appropriate for an arbitrator to resolve doubts in favor of disclosure, but the arbitrator has no legal duty to do so.” (Id. at p. 393.) “The disclosure requirements … are intended only to ensure the impartiality of the neutral arbitrator. (Citation.) They are not intended to mandate disclosure of all matters that a party might wish to consider in deciding whether to oppose or accept the selection of an arbitrator.” (Ibid.)

Presciently, Haworth also provided that “The arbitrator cannot reasonably be expected to identify and disclose all events in the arbitrator’s past, including those not connected to the parties, the facts, or the issues in controversy, that conceivably might cause a party to prefer another arbitrator. Such a broad interpretation of the appearance-of-partiality rule could subject arbitration awards to after-the-fact attacks by losing parties searching for potential disqualifying information only after an adverse decision has been made. …. Such a result would undermine the finality of arbitrations without contributing to the fairness of arbitration proceedings.” (Id. at pp. 394-395.)

Two months later, BW&M attempts to carve out an exception to Haworth’s holding that arbitrator disclosures need not include facts not connected to the parties or the issues in controversy. In BW&M, the chief arbitrator in a three-person panel, which awarded a law firm its legal fees against a former client, had not disclosed that he was representing a large law firm in a case before the California Supreme Court involving an attorney fee dispute and was representing another major law firm in an action for attorney malpractice and related torts. The appellate court reversed the trial court’s order confirming the award and ordered that it be vacated because these non-disclosures concerned “matters that could cause a person aware of the facts to reasonably entertain a doubt that [the arbitrator] would be able to be impartial.”

BW&M distinguished Haworth because, it reasoned, the arbitrator’s non-disclosures of concurrent business interests similar to the parties’ interests could never occur in judicial matters, as they do private arbitration. Thus, it held that arbitrators must disclose their ties to the business world “to the extent these relationships are substantial and involve financial considerations creating an impression of possible bias …” What BW&M fails to recognize is that sitting judges, although not practicing law, may also have commercial ties, such as stock ownership or an interest in a business, that may be both substantial and factually similar to the cases before them but, under present appearance-of-partiality standards, need not be disclosed. Therefore, upon analysis, BW&M’s stated need for more disclosures in arbitrations than in the courts does not stand up to scrutiny.  

Judge Michael D. Marcus (Ret.)
ADR Services, Inc.
1900 Avenue of the Stars, Suite 250
Los Angeles, California 90067
(310) 201-0010

Copyright Michael D. Marcus, October 2010

Arbitration Insight No. 15

MONCHARSH, ARMENDARIZ AND, NOW, PEARSON DENTAL SUPPLIES

Eighteen years ago, Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1 held that an arbitration award cannot be vacated because of errors of law. Moncharsh recognized, however, “that there may be some limited and exceptional circumstances justifying judicial review of an arbitrator’s decision” such as when “granting finality to an arbitrator’s decision would be inconsistent with the protection of a party’s statutory rights.” (Id at p. 32.) Because that issue did not arise in that case, Moncharsh did not develop the exception.

Eight years after Moncharsh, and consistent with the dicta in that case, the Supreme Court indicated that the scope of judicial review may be somewhat greater in the case of a mandatory employment arbitration agreement that encompasses an employee’s unwaivable statutory rights. (Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 106–107.) Then, two years ago, the Court held that parties could expressly provide in an arbitration agreement for expanded judicial review. (Cable Connection, Inc. v. DIRECTV, Inc. (2008) 44 Cal.4th 1334, 1340.)

In April of this year, in Pearson Dental Supplies, Inc. v. Superior Court (2010) 48 Cal.4th 665, the Court made another inroad into the concept of limited judicial review of arbitration awards, holding that an error of law by an arbitrator in a FEHA case, where the employee was subject to a mandatory arbitration agreement, can be reviewed by the trial court.

In Pearson, the employer-employee relationship included a written agreement which provided that any covered dispute “must be submitted to binding arbitration within one year from the date the dispute arose or the employee or Pearson first became aware of the facts giving rise to the dispute.” At the subsequent arbitration, the arbitrator, without explaining his reasoning, granted the employer’s motion for summary judgment because of the plaintiff’s failure to timely submit his claim to binding arbitration. The trial court vacated the award, concluding that the arbitrator had misapplied the relevant tolling statute. The Court of Appeal, while agreeing with the trial court that the arbitrator had erred, held nonetheless that such error was not a valid basis for vacating an arbitration award and reversed the trial court.

The Supreme Court held both that the arbitrator had erred in ruling that the employee’s claim was time-barred and that the error, where the employee was subject to a  mandatory arbitration agreement, deprived the employee of a hearing on the merits of an unwaivable statutory employment claim. (Id. at pp. 669-670.)

Pearson also held that, for “such judicial review to be successfully accomplished, an arbitrator in a FEHA case must issue a written arbitration decision that will reveal, however briefly, the essential findings and conclusions on which the award is based.” (Id. at p. 678.)

In summary, Pearson holds, in part, that (1) arbitrators in FEHA cases must issue awards which reveal “the essential findings and conclusions on which the award is based” and (2) that such awards, where the employee is subject to a mandatory arbitration agreement, can be reviewed by the trial court for legal error. However, in a non-FEHA arbitration, Moncharsh still applies except where the parties have expressly provided for expanded judicial review.

Judge Michael D. Marcus (Ret.)
ADR Services, Inc.
1900 Avenue of the Stars, Suite 250
Los Angeles, California 90067
(310) 201-0010

Copyright Michael D. Marcus, June 2010

Arbitration Article No. 14

PARTIES MAY EXPRESSLY AGREE TO JUDICIAL REVIEW OF AN ARBITRATION AWARD

Cable Connection, Inc. v. DIRECTV, Inc. (2008) 44 Cal.4th 1334, which holds that parties to an arbitration may expressly agree to obtain judicial review of an arbitration award, is also significant because it presages a potential change in the Supreme Court’s strong preference that arbitrations be subject only to minimal court supervision or interference. (See, for example, Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 11 holding that “It is the general rule that, with narrow (statutory) exceptions, an arbitrator’s decision cannot be reviewed for errors of fact or law.”)
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Arbitration Article No. 13

EQUITABLE DEFENSES AND WRITTEN FINDINGS

In a further extension of an arbitrator’s powers, Gueyffier v. Ann Summers, Ltd. (2008) 43 Cal.4th 1179 holds that arbitrators do not exceed their authority when they apply equitable defenses to excuse a party from performing a material condition of an agreement that provides the arbitrator may not modify or change any of the agreement’s material provisions.
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Arbitration Article No. 12

THE TIMING OF AN ARBITRATOR’S DISCLOSURE OBLIGATIONS

Neutral arbitrators in contractual arbitrations are required, pursuant to Code of Civil Procedure section 1281.9, subd. (a), to disclose, within 10 calendar days of service of their proposed nomination or appointment (section 1281.9, subd. (b)), “all matters that could cause a person aware of the facts to reasonably entertain a doubt that the proposed neutral arbitrator would be able to be impartial.”
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Arbitration Article No. 11

THE FEDERAL ARBITRATION ACT AND LOCAL ARBITRATIONS

The U.S. Supreme Court’s recent holding in Preston v. Ferrer (2008) 128 S.Ct. 978 that the Federal Arbitration Act (9 U.S.C. § 1 et seq.) (FAA) (fn. 1) supersedes state laws that lodge primary jurisdiction of contractual arbitration questions in judicial or administrative forums shall have a substantial impact on who decides arbitral issues in California. (The FAA rests on Congress’s authority under the Commerce Clause “for the application, in state as well as federal courts, of federal substantive law regarding
arbitration.” [Id. at p. 981].)
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Arbitration Article No. 10

THE PRELIMINARY HEARING

The preliminary hearing (also known as an arbitration management conference) is an essential first step in assuring that the arbitration process proceeds smoothly. The following may be discussed at this session:
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Arbitration Article No. 9

A LIMITATIONS DEFENSE IS FOR ARBITRATORS TO DECIDE

Recently decided Wagner Construction Company v. Pacific Mechanical Corporation (2007) 41 Cal.4th 19 held that a statute of limitations defense in contractual arbitrations is for the arbitrator and not the court to decide. The opinion is more useful for the primer it provides on the waiver of arbitrable rights. It also threw out a one-liner that presages a further Supreme Court decision as to arbitration procedure.
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