Recent Developments in Federal and State Arbitration Law

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1 Recent Developments in Federal and State Arbitration Law by Shelly L. Ewald, Senior Partner Watt Tieder Newsletter, Winter Despite the extensive history and widespread adoption of arbitration as an alternative disputes resolution procedure, the judiciary continues to issue new rulings on procedure and substantive questions of the arbitration process. The past year brought many new procedural and jurisdictional decisions. Procedural Developments Subpoena Power Under the FAA While some circuit courts have restricted an arbitrator s authority to issue subpoenas for depositions or third party pre-hearing document discovery, the United States Court of Appeals for the Second Circuit recently confirmed an arbitrator s power to compel testimony and documents from non-party witnesses at both preliminary and final hearings conducted by a panel. Stolt-Nielsen SA v. Celanese AG, 2005 WL (2d Cir. November 21, 2005). In Stolt-Nielsen, the court held that Section 7 of the FAA authorized a panel to issue a subpoena compelling non-parties to appear and provide testimony and documents to the arbitration panel at a hearing held in connection with the dispute. The court conducted an extensive analysis of the questions of subject matter jurisdiction and the immediate appealability of the district court s refusal to quash a subpoena. The court rejected the respondent s assertions that the claimants and panel had conspired to circumvent the FAA restrictions on pre-hearing, third-party discovery by convening a hearing in advance of the merits hearing. The court expressly declined to decide the issue of whether Section 7 authorizes arbitrators to issue discovery-type subpoenas to those who are not parties to the arbitration, which has been previously rejected by the Third and Fourth Circuit Court of Appeals in Hay Group, Inc. v. E.B.S. Acquisition Corp., 360 F.3d 404 (3d Cir. 2004); Comsat Corp. v. Nat l Sci. Found., 190 F.3d 269 (4th Cir. 1999). Order from AAA Arbitrator Is Binding Upon Issuance In Centurion Air Cargo, Inc. v. United Parcel Service, the United States Court of Appeals for the Eleventh Circuit Court of Appeals held that an AAA arbitrator s order requiring the posting of a bond was binding upon its issuance and did not require affirmation from a court to bring it into effect. Centurion Air Cargo, 420 F.3d 1146 (11 th Cir. 2005). The 1

2 court, concurring with the Fourth and Fifth Circuit Courts of Appeal, held that an arbitrator s order was binding on the parties unless they expressly agreed otherwise and did not require affirmation from a court. Arbitrator Disclosure: State Conflict-of-Interest Disclosure Standards Not Preempted by FAA On October 26, 2005, the California Court of Appeals vacated an arbitration award after finding that the arbitrator did not disclose his employment as a neutral in another case involving the same attorneys, as required by the California disclosure standards. Ovitz v. Schulman, 133 Cal.App.4th 830 (2005). In 2002, California adopted strict ethics standards for arbitrators that require broad disclosures about potential conflicts of interest that could call their neutrality into question. West s Ann. Cal. Codes, Vol. 23, PT.4 (2005), App. To Cal. Rules of Court, Div. VI, pp The California Code of Civil Procedure requires that awards be vacated upon a showing that the arbitrator failed timely to disclose a ground for disqualification. Cal. Code Civ. Proc., The FAA employs a different standard, permitting vacation of an award only on a showing of evident partiality by an arbitrator. 9 U.S.C. 10(a)(2). After receiving an untimely disclosure regarding the arbitrator s role as a neutral in another matter involving the same attorneys, the respondent requested that the AAA disqualify the arbitrator. The AAA refused and the arbitrator issued a final award. The trial court granted the respondent s petition to vacate the award, which was upheld on appeal. The California court held that the California law was not preempted and that the FAA s provisions for vacating awards apply only in federal court not state court. Jurisdiction, Arbitrability and Standard of Review Jurisdiction Over Challenges to Arbitrability Based on Void or Voidable Contracts On December 1, 2005, the United States Supreme Court heard oral argument in Buckeye Check Cashing, Inc. v. John Cardegna (No ), an appeal from the Florida Supreme Court, regarding the jurisdiction of courts and arbitrators over arbitrability and enforcement issues. The separability doctrine, propounded by the Court in Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967), provided that claims of fraud in the inducement of a contract with an arbitration clause would be decided by the arbitrator, but the issue of whether there was an agreement to arbitrate was an issue for the courts. In Buckeye Cashing, the Florida Supreme Court held that courts, not arbitrators, had jurisdiction to examine contracts that are alleged to be void ab initio, before enforcing an 2

3 arbitration clauses. Cardegna v. Buckeye Check Cashing, Inc., 894 So.2d 860 (Fla. 2005). During oral arguments, the justices commented on the distinction between void and voidable contracts, and the impact on the business community and potential differences in state by-state enforcement of arbitration agreements based upon their potential ruling. Non-Signatory Required to Submit to Arbitration Estoppel In In re Weekley Homes, L.P., the Texas Supreme Court considered the doctrine of direct benefits estoppel and held that when a nonparty consistently and knowingly insists that others treat it as a party, it cannot later turn its back on the portions of the contract, such as an arbitration clause, that it finds distasteful. 49 Tex. Sup. Ct. J. 55 (2005). The court noted that it would apply state law and attempt to remain consistent with federal arbitration decisions relying on estoppel to require non-signatories to arbitrate disputes. Non-Signatory Arbitration Rights Arbitrability In Contec Corp. v. Remote Solution Co., Ltd., the United States Court of Appeals for the Second Circuit held that the issue of whether a non-signatory could enforce an arbitration clause was an arbitrability question to be determined by the arbitrator and not the court. Contec Corp., 398 F.3d 205 (2d Cir. 2005). The court noted that the FAA presumes that issues of arbitrability are reserved for the courts, but the presumption is negated where the parties clearly agreed to have an arbitrator decide the issue, in this case, by explicitly incorporating the Commercial Arbitration Rules of the AAA. Contec involved a successor entity to a contract where the original signatory was attempting to avoid the effect of the arbitration clause; therefore, there was no question whether there was an ascent to be bound by the clause. The Second Circuit rejected the decision of the United States Court of Appeals for the Federal Circuit Court of Appeals in Microchip Tech., Inc. v. U.S. 13 Phillips Corp., 367 F.3d 1350 (Fed. Cir. 2004), which held that any question of whether a non-signatory can be compelled to arbitrate is reserved for the courts, not the arbitrator. On November 8, 2005, the United States Court of Appeals for the Tenth Circuit Court of Appeals held that a non-signatory to an enforceable arbitration agreement was not authorized to seek an interlocutory appeal from the denial of a motion to compel arbitration under the Federal Arbitration Act. In Re Universal Service Fund v. Sprint Comm. Co.; AT&T Corp., 428 F.3d 940 (11 th Cir. 2005). In a previous action, the district court had compelled arbitration of the claims of residential customers of MCI. Sprint and AT&T then moved to compel the arbitration of claims of MCI s business customers based on equitable estoppel, as the business customers had agreed to arbitrate with MCI. The district court denied the motion and Sprint and AT&T filed an interlocutory appeal. 3

4 The court held that statutes allowing interlocutory appeals should be narrowly construed and determined that the defendants could not invoke the court s interlocutory appellate jurisdiction. Standard of Review: Circuits Split Over Parties Right to Alter the FAA Standards On October 14, 2005, the U.S. Court of Appeals for the First Circuit Court of Appeals held that contracting parties could alter the standards for judicial review of arbitral awards, but only by explicit contractual language evincing the parties clear intent to subject the arbitration award to a different standard of review. Puerto Rico Telephone Co. v. U.S. Phone Mfg. Corp., 427 F.3d 21 (1st Cir. 2005). The court found that the contractual choice of law provision, stating that the contract would be governed by the laws of the Commonwealth of Puerto Rico, was insufficient to demonstrate that the parties had agreed to judicial review of the award for errors of law as required by Puerto Rican law. On October 31, 2005, the Tenth Circuit Court of Appeals ruled that parties may contractually limit appellate review of arbitration awards because it serves the underlying purpose of the FAA to encourage arbitration and reduce litigation costs. MACTEC, Inc. v. Steven Gorelick, 427 F.3d 821 (10 th Cir. 2005). The arbitration agreement at issue specified that the award rendered by the arbitrator shall be final and nonappealable and may be entered in any court having jurisdiction thereof. The court ruled that a provision that restricted district court review of the award would fail because if the court were empowered to confirm an award, it must retain the ability to vacate the award; however, limiting review beyond the district court was enforceable. These decisions deepen the already existing split between the circuit courts regarding the right to contract for a different standard of review. The Seventh, Eight and Ninth Circuit Courts of appeal have ruled or indicated that they would not allow parties to contract for a different standard of review. Kyocera Corp. v. Prudential-Bache Trade Servs., Inc., 341 F.3d 987 (9 th Cir. 2003)(en banc); UHC Mgmt. Co. v. Computer Scis. Corp., 148 F.3d 992 (8 th Cir. 1998)(indicating without deciding that it would not allow parties to contract for expanded judicial review); Chicago Typographical Union NO. 16 v. Chicago Sun-Times, Inc., 935 F.2d 1501 (7 th Cir. 1991)(construing Taft-Hartley Act, but suggesting that parties cannot contract for vacatur standards different than those set forth in the FAA). The Third, Fifth and Sixth Circuits have ruled that parties are free to contract for a revised standard of review as long as there is clear language authorizing courts to recognize it. Roadway Package Sys., Inc. v. Kayser, 257 F.3d 287 (3d Cir. 2001); 4

5 Gateway Technologies Inc. v. MCI, 64 F.3d 993 (5 th Cir. 1995); Jacada Ltd. v. International Mktg. Strategies, 401 F.3d 701 (6 th Cir. 2005). Interim Remedies New York Enacts Legislation Authorizing Provisional Remedies in International Arbitration Cases On October 4, 2005, Governor Pataki signed legislation granting state courts new authority to issue provisional remedies in international arbitration cases, reversing a longstanding interpretation of state law that restricted such remedies to domestic cases. A.B. 8296, 238 Leg. Sess. (N.Y. October 4, 2005). The new law reverses the judicial interpretation of Civil Practice Law and Rules Section 7502(c), which describes the power of courts to issue provisional remedies. In Cooper v. Ateliers de la Motobecane, 57 N.Y. 2d 408 (1982), the New York Court of Appeals had ruled that New York state courts were permitted to issue provisional remedies only in domestic cases. The new statute will make New York law consistent with the laws of other states and federal and international laws that authorize the issuance of provisional remedies in international arbitrations. Under the new law, states courts are permitted to issue temporary injunctions or attachments in international arbitrations, whether or not the dispute is governed by the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, so long as the relief requested is necessary to protect assets that are key to an eventual award. An arbitration must be commenced within thirty days of issuance of the order of attachment or preliminary injunction. Watt, Tieder, Hoffar & Fitzgerald, L.L.P Greensboro Drive, Suite 100 McLean Virginia