I. EXISTENCE OF AN AGREEMENT TO ARBITRATE

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1 STATE BAR ANTITRUST SECTION QUARTERLY NEWSLETTER ARTICLE ARBITRATION 2002: DEVELOPMENTS IN THE LAW By Lionel M. Schooler 2002 Clients often wish to pursue efficient, economical ways of resolving complex business matters. Arbitration provides one such mechanism, whether the dispute is contractual or statutory. As the Supreme Court made clear in 1985, Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985), in 1987, Shearson/American Express v. McMahon, 482 U.S. 220 (1987), and in 1991, Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991), even statutory antitrust, RICO and federal employment discrimination claims can properly be the subject of arbitration proceedings. In 2001, the United States Supreme Court, the United States Court of Appeals for the Fifth Circuit, the Texas Supreme Court and the Texas Courts of Appeals all rendered significant decisions assessing the scope and availability of arbitration as a source of alternative dispute resolution. 1 The seminal issues of arbitration that form the framework of this article are: I. Is there an enforceable agreement to arbitrate? II. Which statute governs the arbitration procedures? III. Are there external constraints precluding arbitration? IV. Has a party waived its right to compel arbitration? V. On what basis can an arbitrator s award be overturned? VI. Is there sanctity in the arbitration proceeding? I. EXISTENCE OF AN AGREEMENT TO ARBITRATE The keystone of arbitration jurisprudence is the existence of an enforceable agreement to arbitrate. The judicial focus in 2001 was upon what had been signed, and 1 In this article, FAA refers to the Federal Arbitration Act, 9 U.S.C. 1 et seq.; TAA refers to the Texas Arbitration Act, TEX. CIV. PRAC. &REM. CODE et seq. -1-

2 who had signed it, particularly concentrating upon the arbitrability of disputes involving non-signatories. A. COMPELLING ARBITRATION AGAINST NON-SIGNATORIES In Re FirstMeritBank Identifying enforceable agreements to arbitrate business disputes increasingly requires parties to confront the issue of whether arbitration can be required of a person who has not signed an agreement to arbitrate. In one of its leading arbitration decisions of 2001, 2 the Texas Supreme Court considered such an issue in In Re FirstMeritBank, 52 S.W.3d 749 (Tex. 2001). Mr. and Mrs. De los Santos had purchased a mobile home for their daughter and her husband (Mr. And Mrs. Alvarez), both of whom were over the age of 21. The agreement signed by the parents (but not by the children) contained an arbitration clause, which contained the following language:: the scope of arbitrability is broad and includes, without limitation, contractual, tort, statutory and caselaw claims. Upon delivery of the home, the de los Santoses tried to revoke their acceptance, contending that the home was defective. When this effort proved unsuccessful, the de los Santoses sued under various theories breach of contract, revocation of acceptance, breach of warranty, negligence, fraud, violation of the DTPA, the Fair Debt Collection Practices Act, the Fair Credit Reporting Act and the Equal Credit Opportunity Act. They were joined in their lawsuit by the Alvarezes. The defendants sought to compel arbitration, based upon the contract. The 2 The other being In Re American Homestar of Lancaster, Inc., 50 S.W.3d 480 (Tex. 2001), discussed in Part III. below. -2-

3 Alvarezes objected, contending that they could not be required to arbitrate since they had not signed the contract. The FirstMerit Bank Court rejected this contention, holding that because the Alvarezes had sued on the same contract signed by their parents, indeed because the Alvarezes had made no effort to distinguish their claims at all from those of their parents, they were subject to the contract s terms, including the requirement to arbitrate. 52 S.W.3d at In Re Rangel In In Re Rangel, 45 S.W.3d 783 (Tex.App. Waco 2001, no writ), the Waco Court of Appeals also considered the issue of enforcing an arbitration agreement against a non-signatory. This case involved a home exterminator service contract. The homeowner husband had signed the agreement, but the wife had not. She was identified by the Rangel Court as being 70 years old, with only six years of schooling and poor reading skills. The Court nevertheless held that the wife should be required to arbitrate any claims she had because she was a third-party beneficiary to the contract signed by the husband. B. NON-SIGNATORIES EFFORTS TO COMPEL ARBITRATION Texas Enterprises, Inc. v. Arnold Oil Company In Texas Enterprises, Inc. v. Arnold Oil Company, 59 S.W.3d 244 (Tex.App. San Antonio 2001, no writ), the San Antonio Court of Appeals considered the issue of arbitrability in a matter involving a non-signatory, but from the opposite perspective: whether the non-signatory could compel arbitration. The issue arose in a business dispute involving an oil distribution agreement. Pennzoil and Arnold Oil had originally signed a distribution agreement for Arnold Oil to serve as Pennzoil s distributor. The -3-

4 agreement contained an arbitration clause. Pennzoil later gave notice to Arnold Oil of its intention to terminate the distributorship in favor of Golden West. Arnold Oil thereafter sued both Pennzoil and Golden West. Pennzoil successfully moved to compel arbitration. 3 Golden West then moved to compel arbitration. Arnold Oil dropped its claims against Pennzoil. The trial court concluded that Golden West was not entitled to compel arbitration of the pending claims because it had no agreement to arbitrate with Arnold Oil (indeed, no agreement at all). On appeal, the Texas Enterprises Court noted that Golden West was seeking to compel arbitration on the basis of equitable estoppel, since it was not a signatory to the distributorship contract in issue. Recognizing that recent cases had authorized a nonsignatory to compel arbitration under the theory of equitable estoppel, 4 the Texas Enterprises Court nevertheless held that Golden West was not entitled to compel arbitration because its actions had not been equitable. 5 In Re Donna Rolland The Austin Court of Appeals also considered the question of a non-signatory s 3 See Pennzoil Co. v. Arnold Oil Co., 30 S.W.3d 494 (Tex.App. San Antonio 2000, no writ). 4 Grigson v. Creative Artists Agency, L.L.C., 210 F.3d 524, 527 (5 th Cir.), cert. denied, 531 U.S (2000) (arbitration required if allegations are substantially interdependent and there is concerted misconduct by the non-signatory and one or more signatories); ANCO Insurance Services of Houston, Inc. v. Romero, 27 S.W.3d 1, 6 (Tex. App. San Antonio 2000, pet. denied) (arbitration required if signatory is relying on terms of written agreement to assert claims against non-signatory). 5 The Austin Court of Appeals in 2001 took up the question of the enforceability of arbitration when the parties have signed an agreement, but not an agreement that contains an arbitration clause within its four corners. Teal Construction Co. v. Darren Casey Interests, Inc., 46 S.W.3d 417 (Tex.App. Austin 2001, no writ). The Teal Construction Court held, in a construction dispute, that the fact that the parties had signed an AIA standard form contract, containing no arbitration clause, had to yield to the parties stated incorporation by reference of the AIA standard form general conditions document as part of their agreement, a document which did contain an arbitration clause. The Court therefore upheld arbitrability of the dispute. -4-

5 enforcement of the right to arbitrate in In Re Donna Rolland, S.W.3d, 2001 Tex. App. LEXIS 8271 (Tex.App. Austin 2001, no writ). Ms. Rolland stored furniture in Michigan with Livernois Moving & Storage when she left Michigan for Texas in The warehouse receipt she signed authorizing the storage contained an arbitration clause. Livernois eventually went out of business, to be succeeded by Potter Warehouse & Transfer Co. Ms. Rolland specifically consented to Potter s take over of its predecessor s contractual responsibilities. Subsequently, Ms. Rolland decided to ship her property to Texas. Potter recommended that she use Wheaton Van Lines for the move. Ms. Rolland retained Wheaton for this purpose. However, when Wheaton delivered her property, it was damaged. She then sued Wheaton and Potter. Both of those parties moved to compel arbitration of the dispute, pursuant to the terms of the original warehouse receipt between Rolland and Livernois. The Rolland Court agreed with Potter s right to compel arbitration, since it was a successor to the original signatory to the agreement, since Ms. Rolland s claims against Potter arose out of the storage relationship identified in the agreement, and since Ms. Rolland had consented to Potter s take over of Livernois contractual responsibilities. However, the Court disagreed with Wheaton s right to compel arbitration. Noting very limited circumstances under which courts have allowed non-signatories to enforce arbitration clauses, the Court held that Wheaton was not a party to the warehouse receipt, did not assume any duties or benefits under it, and was not being sued because of negligent storage, but rather because of negligent transfer and delivery. It therefore concluded that Wheaton could not compel arbitration of Ms. Rolland s claims against it. -5-

6 C. COMPELLING ARBITRATION UNDER AN ABANDONED AGREEMENT In Re Koch Industries In a suit arising out of alleged damages caused by repairs to a pipeline, In Re Koch Industries, Inc., 49 S.W.3d 439 (Tex.App. San Antonio 2001, no writ), the San Antonio Court of Appeals considered the question whether abandonment of an easement nullified an arbitration clause. The dispute in question focused upon a 1931 agreement granting an easement to the pipeline company s predecessor. The 1931 document contained an arbitration clause concerning dispute resolution of any claim for damages resulting from handling of the pipeline. Prior to the dispute, the successor oil pipeline operator dug up the pipeline and allegedly abandoned the easement. In the ensuing lawsuit, the landowners contended that the alleged abandonment of the easement correspondingly constituted abandonment of the right to arbitration concerning the easement. The Koch Industries Court disagreed. It held that the act of abandonment, without adoption of a subsequent or superseding agreement, did not preclude arbitration under the original easement agreement. It concluded that arbitration was proper because the only abandonment in this case had been of the easement, not the arbitration clause in particular. II. WHICH STATUTE GOVERNS THE ARBITRATION PROCEDURE A. INTRODUCTION Many businesses seek to bring arbitrable disputes within the coverage of the Federal Arbitration Act. 9 U.S.C. 1 et seq. This is so because, among other things, it helps to avoid thorny issues of coverage of arbitrable matters excluded under the Texas -6-

7 Arbitration Act. See TEX. CIV. PRAC. &REM. CODE One way to bring a dispute within the scope of the FAA is to specify that the parties intend that the FAA govern the issue of arbitrability. Cantella & Co. v. Goodwin, 924 S.W.2d 943, 944 (Tex. 1996). Failing that, a party can demonstrate the applicability of the FAA by showing that the transaction in question affects interstate commerce owing to the statutory requirement of the FAA that provides enforcement of written arbitration clauses evidencing a transaction involving commerce. 9 U.S.C. 2; see Jack B. Anglin Co. v. Tipps, 842 S.W.2d 266, (Tex. 1992). 7 B. PROVING AN EFFECT ON INTERSTATE COMMERCE In Re FirstMerit Bank Demonstrating the presence of interstate commerce sufficient to invoke the FAA is typically not an onerous burden. Capital Income Properties LXXX v. Blackmon, Section of the TAA excludes from arbitration the following: (a) This chapter does not apply to: (1) a collective bargaining agreement between an employer and a labor union; (2) an agreement for the acquisition by one or more individuals of property, services, money, or credit in which the total consideration to be furnished by the individual is not more than $50,000, except as provided by Subsection (b); (3) a claim for personal injury, except as provided by Subsection (c); (4) a claim for workers compensation benefits; or (5) an agreement made before January 1, (b) An agreement described by Subsection (a)(2) is subject to this chapter if: (1) the parties to the agreement agree in writing to arbitrate; and (2) the agreement is signed by each party and each party s attorney. (c) A claim described by Subsection (a)(3) is subject to this chapter if: (1) each party to the claim, on the advice of counsel, agrees in writing to arbitrate; and (2) the agreement is signed by each party and each party s attorney. 7 A reference in a contract to the applicability of Texas law does not preclude the application of the FAA or federal law in assessing arbitrability. In Re L & L Kempwood, 9 S.W.3d 125, (Tex. 1999); In Re Valle Redondo, 47 S.W.3d 655 (Tex.App. Corpus Christi 2001, no writ). -7-

8 S.W.2d 22, 23 (Tex. 1992). The decision by the Texas Supreme Court in FirstMerit Bank, discussed above in Part I., also focused upon whether the FAA governed the agreement to arbitrate. The de los Santoses specifically challenged the FAA s applicability, contending that their purchase of a manufactured home in Texas did not involve interstate commerce. The FirstMerit Bank Court rejected this contention. It held that the test was not whether the transaction was in interstate commerce, but rather whether the contract related to interstate commerce. 52 S.W.3d at 754. Using that guideline, it found that in this transaction, the loan in question was made from an Ohio bank, there were several payments sent to Ohio, and notices received from Ohio. It also found that the parties had agreed in the contract that the loan in question involved interstate commerce, specifically invoking the FAA. On this basis, the Court held that the FAA governed the question of arbitrability of the dispute. 8 C. FEDERAL COURT JURISDICTION TO CONSIDER MOTIONS TO COMPEL ARBITRATION Rio Grande Underwriters, Inc. v. Pitts Farms, Inc. The Texas Supreme Court made clear, in Jack B. Anglin Co. v. Tipps, 842 S.W.2d 266 (Tex. 1992), that a Texas court would be empowered to consider the question of arbitrability, whether that question arose under the TAA or the FAA. Nevertheless, a party to a business dispute has the right to move to compel arbitration in federal court. The critical jurisdictional fact to remember is that the FAA is not itself a source of subject matter jurisdiction. Therefore, a party seeking relief in federal court, whether by 8 Without explaining its reasoning, the Austin Court of Appeals, in the Teal Construction case mentioned above, declined to apply the FAA to the dispute before it. That case involved a San Antonio based company which owned real property in San Marcos and which had hired a Houston company to construct apartments on San Marcos property. See 46 S.W.3d at 420 & n

9 filing a suit to compel arbitration, or by removing a lawsuit to federal court for that purpose, must first demonstrate the presence of subject matter jurisdiction. The United States Court of Appeals reiterated this fundamental principle of FAA jurisprudence in Rio Grande Underwriters, Inc. v. Pitts Farms, Inc., F.3d, 2001 U.S. App. LEXIS (5 th Cir. Dec. 18, 2001). Rebuffing arguments by an insurance underwriter seeking to compel arbitration after being sued by an onion grower over failure to procure crop insurance, the Pitts Farms Court held that no federal question was presented, nor was any state law claim presented implicating a federal statute completely pre-empting it so as to justify invocation of federal jurisdiction. The Court therefore upheld the dismissal of the suit and declined to order arbitration. D. FAA PREEMPTION OPE International, L.P. v. Chet Morrison Contractors, Inc. The FAA can make a dispute arbitrable which might otherwise not be arbitrable under applicable state law, based upon the Supremacy Clause, U.S. Const. Art. VI, and the preemption of conflicting state law by the FAA. See Doctor s Associates, Inc. v. Casarotto, 517 U.S. 681, (1996); Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265, (1995). In 2001, the Fifth Circuit took up the question of FAA preemption in a construction dispute. OPE International, L.P. v. Chet Morrison Contractors, Inc., 258 F.3d 443 (5 th Cir. 2001). OPE (a Texas limited partnership) hired CMC ( a Louisiana corporation) to fabricate a deck structure in Louisiana. The parties signed a written agreement which called for arbitration, provided for Houston as the forum and Texas as the situs for choice of law purposes. The contract also called for CMC to waive its rights -9-

10 and remedies under a Louisiana statute which rendered null and void and unenforceable any contract clause involving a construction project in Louisiana which required arbitration of any dispute under such contract to be resolved in a forum outside of this state or requiring their interpretation to be governed by the laws of another jurisdiction. 9 Evaluating the impact of a collision between this statute and the FAA (the parties having undisputedly engaged in a transaction involving interstate commerce), the OPE International Court held that the Louisiana statute was preempted, and that the case was properly arbitrable under the FAA in accordance with the terms of the contract. E. SCOPE OF FAA IN EMPLOYMENT DISPUTES Circuit City v. Adams Finally, in a leading arbitration decision during its Term, the United States Supreme Court issued its opinion in Circuit City v. Adams, 532 U.S. 105 (2001). That case involved an employment dispute. The employer included in the employment application the statement that all employment disputes were to be resolved by arbitration. After Mr. Adams was hired, he filed a state-law employment discrimination action against the company. The company responded by suing in federal court to enjoin the state-court action and to compel arbitration pursuant to the Federal Arbitration Act (FAA). The question thus presented for consideration by the Supreme Court was whether the FAA governed this matter and, if so, whether it was arbitrable. The issue arose because of the peculiar language adopted by Congress in enacting 9 Texas has a similar statute, see TEX. BUS. &COMM. CODE 35.52, which makes such contractual provisions voidable. -10-

11 the FAA in Section 1 of the FAA excludes from coverage contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce. Mr. Adams contended that this exclusionary language precluded the FAA s applying to an employment dispute of an individual employed in interstate commerce. The Supreme Court had previously held, in Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991), that federal employment discrimination claims were subject to arbitration under the FAA. It expanded that principle to include state claims of the kind at issue in Adams, holding that the exclusionary language of Section 1 of the FAA would be narrowly construed so as to exempt from FAA coverage only employment contracts of transportation workers. 10 III. EXTERNAL CONSTRAINTS PRECLUDING ARBITRATION In Re American Homestar of Lancaster, Inc. Occasionally, even where parties have signed an agreement to arbitrate, there are external constraints precluding arbitration. The Texas Supreme Court considered one such potential constraint -- the so-called Magnuson-Moss Warranty Act, 15 U.S.C ( MMWA ) -- in In Re American Homestar of Lancaster, Inc., 50 S.W.3d 480 (Tex. 2001). The underlying dispute arose out of the purchase of a manufactured home, 10 As this article was going to press, the United States Supreme Court issued another important arbitration decision, EEOC v. Waffle House, Inc., U.S., 2002 U.S. LEXIS 489 (U.S. Jan. 15, 2002). The Court in that case ruled, by a vote of 6-3, that the statutory commands directing the Equal Employment Opportunity Commission to investigate and combat employment discrimination superseded the rights of employers and employees to resort exclusively to arbitration as a means to resolve employment discrimination disputes. The Supreme Court held that the EEOC had the authority to initiate judicial proceedings and seek statutory relief under the employment discrimination laws regardless of whether employers and employees had privately agreed to arbitrate pursuant to the FAA. -11-

12 whereby the purchasers contended there were defects in the manufacture of the home. In the ensuing litigation, the manufacturer sought to compel arbitration. The purchasers challenged arbitration on the basis of the alleged preclusive effect of the MMWA. That statute states in part that warrantors and consumers may agree to resort to informal dispute settlement mechanisms in any case involving a dispute over a written warranty before proceeding to file any civil action. The purchasers contended that this statutory language precluded arbitration. While some courts had found that the wording of the MMWA prohibits enforcing binding arbitration agreements, 11 the American Homestar Court declined to follow such authorities. Instead, based upon its view of the United States Supreme Court s strong support for arbitration -- essentially requiring nothing less than a contrary congressional command to override the mandate of the FAA the American Homestar Court upheld the right of the manufacturer to compel arbitration of the claims in issue, holding that there was no such contrary congressional command in the MMWA. 13 IV. WAIVER OF THE RIGHT TO ARBITRATE Even in situations where parties have signed valid and enforceable arbitration agreements, and the dispute in question is within the scope of such an agreement under the federal or Texas arbitration statutes, a party seeking arbitration may under certain 11 Wilson v. Waverlee Homes, Inc., 127 F.3d 40 (11 th Cir. 1997); Boyd v. Homes of Legend, Inc., 981 F.Supp. 1423, 1440 (M.D. Ala. 1997). 12 McMahon, supra, 482 U.S. at In In Re Donna Rolland, discussed in more detail in Part I. above, the party opposing arbitration in a dispute involving shipping and transfer of goods contended that the Carmack Amendment, 49 U.S.C and 14708, which governs a motor carrier s liability for transports, precluded arbitration. The Rolland Court identified this issue but did not specifically address it, holding instead that arbitration was available for the party properly raising it. -12-

13 circumstances be found to have waived the right to arbitrate. Recent decisions by the Texas Supreme Court -- Prudential Securities, Inc. v. Marshall, 909 S.W.2d 896 (Tex. 1995); EZ Pawn Corp. v. Mancias, 934 S.W.2d 87 (Tex. 1996); and In Re Bruce Terminix, 988 S.W.2d 702 (Tex. 1998) -- have effectively shriveled the waiver defense. 14 Where once a mere delay in demanding arbitration was sufficient to justify waiver, Marble Slab Creamery, Inc. v. Wesic, Inc., 823 S.W.2d 436 (Tex.App. Houston [14 th Dist.] 1992, no writ), now even delay does not constitute waiver unless there is actual prejudice to the opposing party. Pepe Int l Dev. Co. v. Pub Brewing Co., 915 S.W.2d 925, 931 (Tex. App. Houston [1st Dist.] 1996, no writ). Waiver is found only when the party seeking arbitration has substantially invoked the judicial process to the detriment of the opposing party. The party opposing arbitration bears a heavy burden of proof to establish that the other party has waived its arbitration rights. The weight of the burden was demonstrated in the Austin Court of Appeals decision in the In Re Rolland case discussed in Part I. above. The Rolland Court noted that one of the defendants, Wheaton, had answered the lawsuit, sought removal of the case to federal court, served discovery requests upon the plaintiff, moved to strike some of the plaintiff s pleadings, and pursued a motion for summary judgment through a hearing. Nevertheless, the Court characterized these actions as an aggressive defense that did not go beyond a defensive posture. It concluded that such actions did not prejudice the plaintiff, even though Wheaton waited more than one year after suit was filed to seek to compel arbitration. 14 See Subway Equipment Leasing Corp. v. Doctor s Associates, Inc., 169 F.3d 324 (5 th Cir. 1999); but see Sedillo v. Campbell, 5 S.W.3d 824 (Tex.App. Houston [14 th Dist.] 1999, no pet. h.). -13-

14 V. WHEN CAN AN ARBITRATOR S AWARD BE OVERTURNED? A. INTRODUCTION Adhering to the view that the courts should not second guess arbitrators, and that final and binding arbitration is intended to end lawsuits, not begin them, the FAA and the TAA both accord special status to arbitration awards. For example, the TAA provides four bases for vacating an arbitration award: (1) it was the product of corruption, fraud, or other undue means; (2) the parties' rights were prejudiced by the evident partiality of one appointed as a neutral arbitrator, the arbitrator's corruption, misconduct, or willful misbehavior; (3) the arbitrator exceeded his powers, refused to postpone the hearing after a showing of sufficient cause, refused to hear evidence material to the controversy, or conducted the hearing contrary to applicable law and in a manner that substantially prejudiced the rights of a party; or (4) there was no agreement to arbitrate. 15 The TAA provides three bases for modifying an arbitration award: (1) it contains evident miscalculations of numbers or an evident mistake in the description of a person, thing, or property referred to in the award; (2) the arbitrator awarded on matters not submitted to him, and the award may be corrected without affecting the merits; or (3) there is an error in form, not affecting the merits. 16 In 2001, continuing a trend from prior years, several courts considered challenges to arbitration awards. B. STATUTORYBASIS FOR OVERTURNING AN AWARD CVN Group, Inc. v. Delgado 15 TAA TAA

15 The Austin Court of Appeals considered a challenge to an arbitrator s award in CVN Group, Inc. v. Delgado, 47 S.W.3d 157 (Tex.App. Austin 2001, no writ). The Court initially noted the very narrow and deferential standard of review applicable to arbitrator s awards cited above. 47 S.W.3d at 161 citing TAA and ; Daniewicz v. Thermo Instrument Systems, Inc., 992 S.W.2d 713, 716 (Tex.App. Austin 1999, pet. denied). In Delgado, a construction dispute, the contractor prevailed in arbitration and sought to confirm the award in its favor both as to damages and as to the validity of its mechanics and materialmen s lien. The trial court reduced the damage award and declared the lien invalid. The arbitration (as described by the appellate opinion) was a documents only proceeding without oral testimony. The arbitrator did not make any factual findings, but the trial court did. Nevertheless, the Court of Appeals found that the trial court s actions in modifying the damages constituted an impermissible evidentiary review by the trial court in a manner not authorized by statute. It therefore reversed the trial court s ruling on damages. On the question of the validity of the lien, however, the Court of Appeals held that the contractor had failed to demonstrate compliance with Texas constitutional and statutory law about the fixing of a lien on homestead and, therefore, that the trial court had correctly voided the lien initially awarded by the arbitrator. C. CONTRACTUAL BASIS FOR EXPANDING SCOPE OFREVIEW OF AN AWARD Hughes Training, Inc. and Raytheon Company v. Cook The United States Court of Appeals for the Fifth Circuit considered in 2001 the -15-

16 question of the proper review of an arbitrator s award in Hughes Training, Inc. and Raytheon Company v. Cook, 254 F.3d 588 (5 th Cir. 2001), when the parties had contractually agreed to a different standard of review than that called for by statute. When Ms. Cook began working for Hughes Training, she signed a mutual agreement to arbitrate claims. The agreement stated in pertinent part as follows: Arbitration under [the] Agreement may be compelled and enforced according to the Federal Arbitration Act (9 U.S.C. 1 et seq.) and shall be conducted in accordance with the EPRP [(Employee Problem Resolution Procedures)] Arbitration Procedure. The Employment Problem Resolution Procedures contained the following terms relating to an appeal from an arbitration award: Either party may bring an action in any court of competent jurisdiction to compel arbitration under this Agreement, to enforce an arbitration award, and to vacate an arbitration award. However, in actions seeking to vacate an award, the standard of review to be applied to the arbitrator s findings of fact and conclusions of law will be the same as that applied by an appellate court reviewing a decision of a trial court sitting without a jury. 17 Later, a dispute arose over Ms. Cook s employment. She and her husband filed suit in state court; she filed claims alleging intentional infliction of emotional distress and violation of Title VII of the 1964 Civil Rights Act, and her husband sued for loss of consortium. The employer successfully obtained an order compelling arbitration of these claims. On the merits, the arbitrator sided with the Cooks, awarding damages on the common law claims. The employer sought to vacate this award on the basis that the arbitrator s award could not stand under the agreed principles of review F.3d at 590 (Emphasis Added). -16-

17 While (as noted above) the review of an arbitrator s award conforms to a very narrow standard, Antwine v. Prudential Bache Securities, Inc., 899 F.2d 410, 413 (5 th Cir. 1990), the Fifth Circuit found in Cook that parties can structure an arbitration agreement as they see fit, Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 57 (1995), and that expanding judicial review beyond what the FAA provides is one such permitted alternative structure. Cook, 254 F.3d at 591 citing Gateway Technologies, Inc. v. MCI Telecommunications Corp., 64 F.3d 993, 997 (5 th Cir. 1995). In this case, the Cook Court held that the agreement provided for an expanded judicial review of the arbitration award, because the portion of the agreement governing procedure was not subsumed by the parties contractual reference to the FAA. 18 Applying the broader standard of review, the Cook Court found that the behavior complained of by Ms. Cook in this case did not rise to the level necessary to justify an award of damages for intentional infliction of emotional distress. It therefore affirmed vacating of the arbitrator s award. VI. SANCTITY OF THE ARBITRATION PROCEEDING Henderson v. Wellmann Addressing an unusual but nevertheless important point about the sanctity of arbitration proceedings, the Houston First Court of Appeals, in Henderson v. Wellmann, 43 S.W.3d 591 (Tex.App. Houston [1 st Dist.] 2001, no writ), evaluated a claim for libel 18 In doing so, it rejected an argument frequently espoused in disputes between parties of dissimilar bargaining power, that the contract requiring arbitration was void because it was a contract of adhesion, In re Oakwood Mobile Homes, Inc., 987 S.W.2d 571, 574 (Tex. 1999), holding that contracts between persons of unequal bargaining strength are not automatically void, but rather only unenforceable if demonstrated to be unconscionable by the party challenging enforceability. Id. -17-

18 and slander (among other claims filed by the plaintiff). In that case, a fired employee complained about the actions of a co-worker. The co-worker testified in an internal advisory arbitration proceeding conducted by the plaintiff s employer. Subsequently, the plaintiff sued the co-worker, alleging that her testimony during the internal arbitration proceeding was defamatory. The Henderson Court rejected the efforts by the fired employee to sue for defamation on the basis of the co-worker s testimony at the arbitration proceeding, concluding that the arbitration was a quasi-judicial proceeding at which any statements were absolutely privileged. Henderson, 43S.W.3dat620citing James v. Brown, 637 S.W.2d 914, (Tex. 1982); Reagan v. Guardian Life Ins. Co., 166 S.W.2d 909, 912 (Tex. 1942). Lionel M. Schooler is a partner in the Houston office of Jackson Walker L.L.P. -18-