Jurisdiction, Procedure, and the Arbitrator s Role

Transcription

1 Chapter 2 Jurisdiction, Procedure, and the Arbitrator s Role 2-1 JURISDICTION AND THE ARBITRATOR S MINDSET 2-1:1 The Authority to Arbitrate Arbitration is a consensual process. The source of the arbitrator s authority is the agreement of the parties or, in rare instances, a court order, a statute, an ordinance, or another rule of law. This agreement will define the arbitrator s duties insofar as it specifies the issues that he or she has been empowered to resolve. The arbitrator may not exceed this authority 1, nor may the arbitrator render only a partial award :2 Late Applications After Litigation Jurisdiction can be lost if the parties have resorted to litigation so extensively that their actions can be considered a waiver of their right to arbitrate, as the adversary is prejudiced by the late assertion. For example, in In re Pharmacy Benefit Managers Antitrust Litigation, 3 10 months after the complaint was filed a party filed a motion to compel arbitration, which the District Court granted. The Third Circuit applied its six-factor test under 1. N.J.S.A. 2A:23B-23a(4). 2. N.J.S.A. 2A:23B-20d(4); 9 U.S.C. 10(a)(4). 3. In re Pharmacy Benefit Managers Antitrust Litig., MDL No (3d Cir. 2012). New Jersey Arbitration Handbook NJ_Arbitration_Handbook_FullBook.indb 7 2/21/13 8:50:26 PM

2 Chapter 2 Jurisdiction, Procedure, and the Arbitrator s Role Hoxworth v. Blinder, Robinson & Co., Inc. 4 and held that Advance PCS had waived its right to compel arbitration. 5 The six Hoxworth tests for prejudice are: [1] the timeliness or lack thereof of a motion to arbitrate, [2] the degree to which the party seeking to compel arbitration has contested the merits of its opponents claims, [3] whether that party has informed its adversary of the intention to seek arbitration even if it has not yet filed a motion to stay the district court proceedings, [4] the extent of its nonmerits motion practice, [5] its assent to the district court s pretrial orders, and [6] the extent to which both parties have engaged in discovery :3 The Arbitrator Is Usually a Neutral Even before considering the nuts and bolts of arbitration, an arbitrator must approach the process with the mindset of a neutral participant. The revised New Jersey Arbitration Act 7 and all of the procedural rules of the administering organizations, such as the AAA, CPR, and JAMS, 8 require both objective and subjective impartiality. There also must be a complete disclosure of factors leading to potential bias, which requires a complete conflict check for any past or pending matters involving a party and a disclosure of any continuing relationship with the arbitrator or his or her law firm. Also, the arbitrator should disclose any substantial social contact with a party or attorney. The administering organizations have long and detailed checklists that must be completed under oath before an arbitrator is appointed. Candor is a prerequisite to the trust that the arbitrator must obtain from the parties and the attorneys. Remember that complete disclosure, which enables a party to choose to reject the appointment of an arbitrator, is different from an actual disqualifying conflict. The parties and their attorneys can decide 4. Hoxworth v. Blinder, Robinson & Co., Inc., 980 F.2d 912 (3d Cir. 1992). 5. Note that other Circuits apply a different rule. For example, the Fourth Circuit in Rota-McLarty v. Santander Consumer USA, Inc., 2012 WL (4th Cir. Nov. 28, 2012) ordered arbitration after six months of litigation. 6. Hoxworth v. Blinder, Robinson & Co., Inc., 980 F.2d 912, 926 (3d Cir. 1992) (internal citations omitted). 7. N.J.S.A. 2A:23B-1, et seq. 8. See New Jersey Arbitration Handbook 2013 NJ_Arbitration_Handbook_FullBook.indb 8 2/21/13 8:50:27 PM

3 JURISDICTION AND THE ARBITRATOR S MINDSET 2-1 to waive most conflicts. In fact, minor conflicts or relationships are usually waived. Remember, however, that conflicts involving governmental entities cannot be waived. 9 The revised New Jersey Arbitration Act prohibits an individual with a known, direct, and material interest in the outcome or a known, existing and substantial relationship with a party, from serving as the arbitrator where the parties arbitration agreement provides for a neutral arbitrator. 10 The New Jersey Act does, however, permit appointment of party-selected arbitrators who disclose such conflicts, and these conflicts are not disqualifying. 11 The Federal Arbitration Act has no parallel provisions, but it encompasses the conflict issue in 10, which sets forth the bases for vacation of an award under the rubric evident partiality and any other misbehavior by which the rights of any party have been prejudiced. 12 Party-selected arbitrators, notwithstanding a predisposition to the party appointing them, must act in good faith and exercise the arbitrator s responsibilities. 13 Many arbitrators agree that, even after appointment by a party, the arbitrator will refrain from further contacts with the party and attorney and be a true neutral. For example, AAA Commercial Arbitration Rules, R-8(a) 14 provides that the parties may still agree in writing that a partyappointed arbitrator may continue to be a non-neutral. Other rules totally reject partisan arbitrators, even when they permit partisan appointments. 15 This disclosure of conflicts is imperative before the parties appoint an arbitrator. But the duty to disclose does not end there; it carries through until the award. Sometimes, a conflict arises later, and the obligation to report it cannot be ignored, under the pain 9. R.P.C. 1.8(k), (l). 10. N.J.S.A. 2A:23B-11b. 11. N.J.S.A. 2A:23B-11b, c, and d; AAA Commercial Arbitration Rules, R-12 and R-17(a)(3) U.S.C N.J.S.A. 2A:23B-11d. 14. The AAA Rules are reproduced in Appendix CPR International Rules, Article 7; CPR Commercial Rules 7.1 to 7.4. New Jersey Arbitration Handbook NJ_Arbitration_Handbook_FullBook.indb 9 2/21/13 8:50:27 PM

4 Chapter 2 Jurisdiction, Procedure, and the Arbitrator s Role of the award being attacked. A false or misleading statement can subject an attorney to disciplinary charges. 16 Note that the disciplinary rules require the neutral arbitrator to inform the parties that the neutral is not representing them. 17 Pursuant to N.J.S.A. 2A:23B-23a(2), an award may be vacated where the court finds evident partiality by an arbitrator; corruption by an arbitrator; or misconduct by an arbitrator prejudicing the rights of a party to the arbitration proceeding. As noted above, there is similar language in the Federal Arbitration Act. 18 As nondisclosure of a material relationship between the arbitrator and a party may be a basis for rejection of the final award, the arbitrator should disclose everything. The practitioner should demand nothing less. Fairness and impartiality are not mere catchwords. Both the arbitrator and counsel should demonstrate to all that they are the premier guidelines under which the arbitration is being conducted. Much that the arbitrator will do is a matter of arbitration style, which will be discussed later. 19 The proceedings can be tightly structured or relaxed. They can be conducted with little or generous participation by the arbitrator. They can be conducted humorously or sternly. But there is no option where fairness and impartiality are concerned never forget this. 2-1:4 Jurisdiction to Decide Jurisdiction May the Arbitrator Hear This Case? One of the most difficult problems in arbitration is determining the existence and extent of the authority of the arbitrator. If one of the parties challenges the enforceability of the contract that contains the arbitration clause under which the arbitrator is appointed or even just the enforceability of the arbitration clause itself who is to determine these questions: the arbitrator or a judge? There are good arguments on both sides of these questions. 16. R.P.C. 7.1(a)(1). 17. R.P.C. 2.4(b) U.S.C. 10(a)(2) and (3). 19. See Chapter New Jersey Arbitration Handbook 2013 NJ_Arbitration_Handbook_FullBook.indb 10 2/21/13 8:50:27 PM

5 JURISDICTION AND THE ARBITRATOR S MINDSET 2-1 The U.S. Supreme Court discussed the issue at length in two cases, Rent-A-Center, West, Inc. v. Jackson 20 and Prima Paint Corp. v. Flood & Conklin Manufacturing Co. 21 In the earlier case, Prima Paint, the Court determined that a claim that the contract was void because of fraudulent inducement would be a proper subject for arbitration, as there was no question that the arbitration clause within the contract was not separately subject to a dispute. 22 The Court relied on 4 of the Federal Arbitration Act, which imposes arbitration where the making of the Agreement for arbitration is not an issue. 23 Rent-A-Center is the more difficult case to understand, as the challenge did relate to the arbitration clause, specifically asserting that there was a fraudulent inducement to agree to arbitration. Earlier case law assumed that jurisdiction to resolve this issue would reside in a court rather than with an arbitrator. But in Rent- A-Center, the party contesting the entire agreement did not assert that the arbitration clause was separately induced fraudulently, but instead asserted that a fraud was inherent to the contract as a whole. 24 The majority of the Court found this to be a fatal defect in establishing judicial jurisdiction, and arbitration prevailed. 25 Although the dissenters seem to present the more compelling argument, the majority opinion must be accepted. Without a separate express challenge to the arbitration clause, a court is without jurisdiction to determine its validity, and the entire matter is to be submitted to arbitration. The Court established the principle that the parties intended to submit arbitrability issues to the courts unless there is clear and unmistakable intent to arbitrate this issue. 26 There still are interpretive problems because of the apparently contrary principle that there is a presumption of arbitrability where a validly formed and enforceable arbitration 20. Rent-A-Center, West, Inc. v. Jackson, 130 S. Ct (2010). 21. Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967). 22. Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 406 (1967) U.S.C Rent-A-Center, West, Inc. v. Jackson, 130 S. Ct. 2772, 2780 (2010). 25. Rent-A-Center, West, Inc. v. Jackson, 130 S. Ct. 2772, 2781 (2010). 26. First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944 (1995). New Jersey Arbitration Handbook NJ_Arbitration_Handbook_FullBook.indb 11 2/21/13 8:50:27 PM

6 Chapter 2 Jurisdiction, Procedure, and the Arbitrator s Role agreement is ambiguous about whether it covers the dispute at hand. 27 Another issue in this area is the jurisdiction of an arbitrator or court to determine which specific items in the parties dispute are arbitrable. First Options of Chicago, Inc. v. Kaplan 28 established the rule in this area. The arbitrability of issues is a matter for a court rather than the arbitrators to determine, unless the arbitration provision shows a clear and unmistakable intent of the parties to present this question of arbitrability to the arbitrators. 29 This is the rule under federal law also. This issue was presented and determined in strong language in Nitro-Lift Technologies. L.L.C. v. Howard 30 near the end of The Court held: An arbitration provision is severable from the remainder of the contract, and its validity is subject to initial court determination, but the validity of the remainder of the contract (if the arbitration provision is valid) is for the arbitrator to decide. When state law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward: The conflicting rule is displaced by the FAA. Hence, it is for the arbitrator to decide in the first instance whether the covenants not to compete are valid as a matter of applicable state law. 31 In New Jersey, the revised New Jersey Arbitration Act is clear: The court shall decide whether an agreement to arbitrate exists or a controversy is subject to an Agreement to arbitrate Granite Rock Co. v. International Bhd. of Teamsters, 130 S. Ct. 2847, 2857 (2010). 28. First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995). 29. First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, (1995). As just noted, however, in Granite Rock Co. v. International Bhd. of Teamsters, 130 S. Ct. 2847, 2853 (2010), the Supreme Court stated that a court, rather than an arbitrator, must also determine whether an underlining contract containing the arbitration clause is viable or void. This allocation appears to contradict the underlying principle of Rent-A-Center, West, Inc. v. Jackson, 130 S. Ct (2010), and Buckeye Check Cashing Inc. v. Cardegna, 546 U.S. 440 (2006), which apparently gave substantial authority to arbitrators to decide these very issues. The best that can be said is that this area of the law is still in a state of formation with only some clear broad rules and very unclear fine gradations. 30. Nitro-Lift Techs., L.L.C. v. Howard, 2012 U.S. LEXIS 8897 (Nov. 26, 2012). 31. Nitro-Lift Techs., L.L.C. v. Howard, 2012 U.S. LEXIS 8897, **6-8 (Nov. 26, 2012). 32. N.J.S.A. 2A:23B-6b. 12 New Jersey Arbitration Handbook 2013 NJ_Arbitration_Handbook_FullBook.indb 12 2/21/13 8:50:27 PM

7 JURISDICTION AND THE ARBITRATOR S MINDSET 2-1 Note that this issue has become moot in most arbitrations administered by major agencies, such as the AAA, CPR, and JAMS. 33 This is done in a somewhat circuitous manner. The institutional arbitration agreements, submitting the matters for resolution under the rules of these organizations, adopt their rules by reference. The rules of each of the organizations provide that the arbitrators are to rule on all issues of arbitrability. Thus, the parties, by accepting the agreement, have been deemed by the courts that have considered this issue to have expressly agreed that arbitrability will be a matter for the arbitrator rather than the courts. Where this issue arises in a private (non-administered) arbitration, the participants should carefully check the underlying agreements and rules that govern the arbitration to see if this jurisdiction is waived. If the practitioner and the parties wish to avoid a later judicial challenge to the arbitrator s decision on the basis that the issue was not arbitrable, all might take the expedient step of having a stipulation on the record at the commencement of the proceeding that all issues submitted to the arbitrator, including the issue of arbitrability, are proper matters in the arbitration. An arbitrator may also ask the parties whether they will agree to be bound by the rules of the AAA, CPR, JAMS, or another organization, even if they are opting for private resolution of the case. Another jurisdictional issue is whether all required conditions precedent to the arbitration have been satisfied. The revised New Jersey Arbitration Act specifically permits the arbitrator to make this determination. 34 Of course, if there is an order of a court of competent jurisdiction precluding or staying the arbitration, all must obey this order. The same is true of a judicial determination of jurisdiction. A court s final order trumps the arbitrator s power to proceed or to question jurisdiction. Realize, however, that the mere existence of a challenge in court does not require a suspension of the arbitration. The revised New Jersey Arbitration Act specifically permits the arbitration to continue pending final 33. See N.J.S.A. 2A:23B-6c. New Jersey Arbitration Handbook NJ_Arbitration_Handbook_FullBook.indb 13 2/21/13 8:50:28 PM

8 Chapter 2 Jurisdiction, Procedure, and the Arbitrator s Role resolution by the court of any challenge to the arbitration unless the court otherwise orders. 35 It is not unheard of for the arbitrator and judge to confer concerning procedural matters. Remember, however, that the arbitrator may not engage in any substantive discussions with the judge, which could influence the arbitrator s decision or the judge s, and the best practice is to have the arbitrator make a record of the discussion with the judge and inform the attorneys, unless he or she is directly ordered by the judge not to do so. A judge may seek the arbitrator s cooperation to withhold the taking of testimony on certain issues until a decision can be rendered by the court, or the arbitrator may seek to determine from the judge when decisions might be expected on certain issues for the scheduling of related or unrelated evidentiary hearings. On occasion, it is not improper to schedule joint hearings with the court where arguments or even witnesses relate to issues presented to both the arbitrator and judge where duplication of the hearings could affect the timeliness of the decisions and the expense borne by the parties. 36 As noted earlier, and notwithstanding the 1995 First Options decision, courts regularly leave procedural questions or matters of little substance to the arbitrator to decide. Further, as noted earlier, there must be a specific challenge to the arbitration clause for the arbitrator to be deprived of jurisdiction. The jurisdiction issue was again reviewed in 2011 and 2012 by the U.S. Supreme Court in KPMG, LLP v. Cocchi, 37 AT&T Mobility LLC v. Concepcion, 38 and Marmet Health Care Center, Inc. v. Brown. 39 Note that 9 U.S.C. 2 states unequivocally that, when a written provision in a contract that is governed by the Commerce Clause provides for arbitration, it shall be valid, irrevocable, and 35. N.J.S.A. 2A:23B-6d. 36. This could be difficult when a jury is involved, as evidentiary rulings could properly be quite different, since the arbitrator is not bound by the rules of evidence. But with a bench trial, the arbitrator and the judge could agree to consider only what each deems admissible. The author had the opportunity to participate in such a joint hearing on claims of the reasonableness of proposed settlements in parallel judicial and arbitrated class actions in Florida. The witnesses and counsel appeared before both of us in court, and we thereafter rendered our separate decisions. 37. KPMG, LLP v. Cocchi, 132 S. Ct. 23 (2011). 38. AT&T Mobility LLC v. Concepcion, 131 S. Ct (2011). 39. Marmet Health Care Ctr., Inc. v. Brown, 132 S. Ct (2012). 14 New Jersey Arbitration Handbook 2013 NJ_Arbitration_Handbook_FullBook.indb 14 2/21/13 8:50:28 PM

9 GOVERNING LAW 2-2 enforceable. Under KPMG, AT&T Mobility, and Marmet Health Care Center, a state statute, rule or decision that bars or limits arbitration in such an instance must yield. Under the FAA, such a case may be challenged only on state equitable grounds that would permit the revocation of the contract, but as stated in Marmet Health Care Center such grounds for unenforceability cannot be arbitration-specific. 2-2 GOVERNING LAW 2-2:1 In General The arbitration agreement will usually specify the law that will govern the arbitration. An arbitrator is not free to disregard this designation and apply the law of his or her home state, or any general law the arbitrator may recall. For instance, a New Jersey agreement may require the arbitrator to apply the governing law of New York or Florida, and New Jersey courts have upheld any reasonable choice-of-law provision. A company distributing its products throughout the country may require arbitration and may even permit the arbitration in any state where the product may be alleged to have caused damage. But the company usually wants to be sure that there is a consistent standard being applied to its liability and thus may choose to have the law of a single state governing all of the arbitrations, no matter where the hearing is held. This is also often true with the chosen procedure, such as the AAA Commercial Arbitration Rules. The arbitrator should not be led astray by assertions of home-state law or procedure if this conflicts with the agreement. Where the agreement is silent or the choice of law clause is found unenforceable, the arbitrator may not arbitrarily pick a state whose law will be applied. Rather, it is best to follow the Restatement (Second) of Conflict of Laws 187 and apply the law of the jurisdiction with the most significant contacts with the transaction, including that jurisdiction s conflict of law principles. 2-2:2 Review of an Arbitrator s Application of the Law There is, however, a quirk to the requirement that the arbitrator must apply particular governing law. In all but a few states, a simple mistake in the law is not a ground to overturn an arbitrator s New Jersey Arbitration Handbook NJ_Arbitration_Handbook_FullBook.indb 15 2/21/13 8:50:28 PM

10 Chapter 2 Jurisdiction, Procedure, and the Arbitrator s Role decision on this question. He or she can be wrong as to the law to be applied, but, if the law has been applied in good faith, the decision will usually stand. In many states, however, and under the misbehavior and imperfect execut[ion] provisions of the Federal Arbitration Act, 40 if the arbitrator has recognized the correct law but consciously or manifestly disregarded it, the decision can be overturned. This will depend upon the court that hears the issue. Federal courts are split, and New Jersey courts are bound to follow separate precedent. The U.S. Supreme Court in Hall Street Associates L.L.C. v. Mattel, Inc. 41 held that vacation of an award by the courts under the FAA for an arbitrator s simple mistake in the law is not permissible, even if this standard is explicit in the parties agreement. The Court left open manifest disregard of the law, insofar as this error may fall within 10 of the FAA. 42 The Court also did not rule out a proceeding under a state arbitration act, specifically chosen by the parties to govern the proceedings, which permits a review as contracted for by the parties. 43 The Court noted that [t]he FAA is not the only way into court for parties wanting review of arbitration awards: they may contemplate enforcement under state statutory or common law, for example, where judicial review of different scope is arguable. 44 In New Jersey, however, there is a more stringent rule. Even a manifest disregard of the law is not a ground for overturning an arbitration award, unless the agreement so provides. The agreement also may provide for a lower standard, such as a mere incorrect legal decision. But absent such a contractual standard, legal error is not a ground for vacation. As to the finality of the arbitration award, any New Jersey arbitrator and counsel must read Tretina Printing, Inc. v. Fitzpatrick & Associates, Inc., 45 which sets forth the standards in full. In Tretina, the New Jersey Supreme Court overturned its own then-recent precedent, Perini v. Greate Bay Hotel & U.S.C. 10(a)(3) and (4). 41. Hall Street Assocs. L.L.C. v. Mattel, Inc., 552 U.S. 576 (2008). 42. Hall Street Assocs. L.L.C. v. Mattel, Inc., 552 U.S. 576, (2008). 43. Hall Street Assocs. L.L.C. v. Mattel, Inc., 552 U.S. 576, (2008). 44. Hall Street Assocs. L.L.C. v. Mattel, Inc., 552 U.S. 576, 590 (2008). 45. Tretina Printing, Inc. v. Fitzpatrick & Assocs., Inc., 135 N.J. 349 (1994). 16 New Jersey Arbitration Handbook 2013 NJ_Arbitration_Handbook_FullBook.indb 16 2/21/13 8:50:28 PM

11 GOVERNING LAW 2-2 Casino, Inc., 46 and incorporated the following quotation from an earlier concurring opinion of Chief Justice Wilentz in Perini: Basically, arbitration awards may be vacated only for fraud, corruption, or similar wrongdoing on the part of the arbitrators. [They] can be corrected or modified only for very specifically defined mistakes as set forth in [N.J.S.A. 2A:24-9]. If the arbitrators decide a matter not even submitted to them, that matter can be excluded from the award. For those who think the parties are entitled to a greater share of justice, and that such justice exists only in the care of the court, I would hold that the parties are free to expand the scope of judicial review by providing for such expansion in their contract; that they may, for example, specifically provide that the arbitrators shall render their decision only in conformance with New Jersey law, and that such awards may be reversed either for mere errors of New Jersey law, substantial errors, or gross errors of New Jersey law and define therein what they mean by that. I doubt if many will. And if they do, they should abandon arbitration and go directly to the law courts. 47 Note that the Chief Justice failed to recognize the many other benefits of arbitration, such as choice of the arbitrator, control over discovery, relaxation of evidence rules, and the like. His focus on appeals raising legal errors was somewhat myopic. The lateradopted New Jersey version of the revised Uniform Arbitration Act even contains a provision permitting appeals, if such an option is chosen by the parties. A properly drafted New Jersey arbitration provision should contain the legal-error standard chosen by the parties (or drafter). Absent such a designation, legal error, without more, is not a ground for overturning an arbitration award governed by New Jersey law. 46. Perini v. Greate Bay Hotel & Casino, Inc., 129 N.J. 479 (1992). 47. Tretina Printing, Inc. v. Fitzpatrick & Assocs., Inc., 135 N.J. 349, 358 (1994), quoting Perini v. Greate Bay Hotel & Casino, Inc., 129 N.J. 479, (1992). New Jersey Arbitration Handbook NJ_Arbitration_Handbook_FullBook.indb 17 2/21/13 8:50:28 PM

12 Chapter 2 Jurisdiction, Procedure, and the Arbitrator s Role 2-2:3 New Jersey s Two Governing Statutes New Jersey has parallel statutes governing arbitration. The first, N.J.S.A. 2A:23B-1, et seq., the revised New Jersey Arbitration Act, is a slightly modified version of the Revised Uniform Arbitration Act. The second is N.J.S.A. 2A:23A-1, et seq., the Alternative Procedure for Dispute Resolution Act (APDRA), in which the arbitrator is called an umpire. This latter statute was enacted in response to an earlier arbitration statute that had greatly limited comprehensive and adaptive arbitration and precluded review of an award for misapplication of the law, even when both parties sought such review. The APDRA provides a general ground for reversal that is not found in other Acts. Under N.J.S.A. 2A:23A-13c(5), a reversal can be based upon the umpire s committing prejudicial error by erroneously applying law to the issues and facts presented for alternative resolution. The later-adopted New Jersey version of the Revised Uniform Arbitration Act (1993) did not add a specific provision on the subject of manifest disregard of the law, and the New Jersey Supreme Court has not yet interpreted its language to yield a contrary result. Therefore, counsel must realize that the revised New Jersey Arbitration Act is quite liberal in that it permits the parties to choose an appeal from the arbitration award, but the parties must actually specify that they want an appeal, and insert an enhanced legal review standard, or some other direction governing their dispute. Without such a direction, the constraints of N.J.S.A. 2A:23B-23, which are similar to those of 10 of the FAA, will control the legal standards for vacation of an award. This more liberal review standard is now available under the 2003 Arbitration Act through the parties agreement to expand judicial review. The 2003 Act specifically provides: [N]othing in this act shall preclude the parties from expanding the scope of judicial review of an award by expressly providing for such expansion in a record. 48 As this has been corrected in the 2003 Arbitration Act, the APDRA has fallen into disuse. 48. N.J.S.A. 2A:23B-4c. ( Record is defined as a writing or information that is electronically stored and retrievable. N.J.S.A. 2A:23B-1.) 18 New Jersey Arbitration Handbook 2013 NJ_Arbitration_Handbook_FullBook.indb 18 2/21/13 8:50:29 PM

13 GOVERNING PROCEDURE 2-3 Note, however, that most users of arbitration do not want appeals, even for legal error; such procedures are forbidden under the FAA, even if the parties have agreed to the contrary, under most state statutes, and even under the 2003 New Jersey Arbitration Act, if the parties are silent about appeals. 2-2:4 Revised Court Rules The rules governing appeals of orders in the New Jersey courts compelling arbitration were updated, effective September 4, An order compelling arbitration may be appealed as of right under New Jersey Court Rule 2:2-3(a). An application to stay such an order in the event of an appeal to the Appellate Division must be first made to the trial judge, who must grant the stay, except in exceptional circumstances, according to Rule 2:9-1(c). Although the jurisdiction over the judicial matter remains in the trial court (an exception to the usual rule in Rule 2:9-1(a)), motions to review the trial judge s actions may be made to the Appellate Division under Rule 2:9-1(c). 2-3 GOVERNING PROCEDURE The parties may choose the procedure that the arbitrator will employ. It may be that of the AAA, CPR, JAMS, the revised New Jersey Arbitration Act, the New Jersey Procedure for Alternative Dispute Resolution Act (APDRA), or any other. But what must be recognized is that the governing procedure is different from the governing law. A shorthand principle is that the law tells the arbitrator what may be done, and the procedure tells how to do it. There is some overlap, in that a law may include some of its own procedure, and some procedural rules fill in gaps in the law. For example, discovery 49 may be controlled by statute, procedural rules or case law. The sure remedy is to read the arbitration agreement carefully and then study the governing law along with the procedural rules and any case law that governs them. 49. See 3-1:3. New Jersey Arbitration Handbook NJ_Arbitration_Handbook_FullBook.indb 19 2/21/13 8:50:29 PM

14 Chapter 2 Jurisdiction, Procedure, and the Arbitrator s Role 2-4 CLASS ACTIONS IN ARBITRATION Class actions in arbitration have been eroded in 2010 and 2011 by close decisions of the U.S. Supreme Court. In 2003, the Court had apparently settled the question of whether there could properly be class actions resolved by arbitration. In Green Tree Financial Corp. v. Bazzle, 50 the Court determined that arbitration was a proper forum for class actions. The AAA promulgated Supplementary Rules for Class Arbitrations (AAA Supplementary Rules), effective October 8, 2003 (and updated as to fees as of January 1, 2010). 51 These Rules mirrored the Bazzle opinion and the federal rules governing class actions, with minor differences. As directed by Bazzle, the AAA Supplementary Rules provide for a three-stage adjudication. 52 When a class action has been authorized, Rule 3 of the AAA Supplementary Rules provides that the arbitrator must first determine whether the arbitration clause can be construed to permit a class adjudication; this determination is called a Clause Construction Award. The matter is then stayed for up to 30 days to permit an application for judicial review of the Clause Construction Award. In making his or her determination, the arbitrator may be faced with a silent clause. In such a case, the arbitrator would hold a hearing and make a determination based upon Bazzle and the applicable state law. In the words of Justice Breyer: We are faced at the outset with a problem concerning the contracts silence. Are the contracts in fact silent, or do they forbid class arbitration as petitioner Green Tree Financial Corp. contends? Given the South Carolina Supreme Court s holding, it is important to resolve that question. But we cannot do so, not simply because it is a matter of state law, but also because it is a matter for the arbitrator to decide. Because the record suggests that the parties have not yet received an arbitrator s decision on that question of contract interpretation, we vacate the judgment of the South Carolina Supreme Court 50. Green Tree Fin. Corp. v. Bazzle, 539 U.S. 444 (2003). 51. The AAA Supplementary Rules are reproduced in Appendix AAA Supplementary Rules for Class Arbitrations, R New Jersey Arbitration Handbook 2013 NJ_Arbitration_Handbook_FullBook.indb 20 2/21/13 8:50:29 PM

15 CLASS ACTIONS IN ARBITRATION 2-4 and remand the case so that this question may be resolved in arbitration. 53 Note the dichotomy presented in Bazzle. There was no rejection of class actions unless specifically permitted by the agreement. Rather, there was an authorization for class actions unless prohibited by the agreement. The agreement may, however, have required proof of circumstances and a view of state law, as some states prohibit a restriction of class actions in consumer situations while other states severely limit class actions. This principle, however, was overruled by the U.S. Supreme Court in Stolt-Nielsen, S.A. v. AnimalFeeds International Corp., 54 which reconsidered most of the Bazzle principles. After Stolt-Nielsen, unless there is an express grant of authority to the arbitrator to decide the matter on a class basis, the arbitrator is without power to do so. The Court left open for another day the issue of consumer cases, where the only effective remedy is adjudication on a class basis. 55 Next, in AT&T Mobility LLC v. Concepcion, 56 the Supreme Court closed the door to class arbitrations even for uneconomic consumer claims, often called negative value cases. The result of Concepcion will be that no judicial remedy class action or otherwise will be available, as the courts will enforce non-negotiable consumer agreements that require individual arbitration of all such claims, and, at least where the FAA applies, the arbitration now requires a case-by-case resolution. There are, perhaps, small windows left open (a) where the defendant does not provide the somewhat consumer-friendly review and fee remedies provided by AT&T in the agreement adjudicated in Concepcion, (b) where the agreement is governed by a state arbitration act and the state does not follow the Concepcion rationale, or (c) where the parties have expressly permitted class arbitrations in their agreements. Concepcion was a usual 5-4 Supreme Court decision. The majority extrapolated from a facially consumer-friendly arbitration 53. Green Tree Fin. Corp. v. Bazzle, 539 U.S. 444, 447 (2003) (emphasis added). 54. Stolt-Nielsen, S.A. v. AnimalFeeds Int l Corp., 130 S. Ct.1758 (2010). 55. For Justice Ginsburg s discussion of this issue, see her dissent in Stolt-Nielsen, S.A. v. AnimalFeeds Int l Corp., 130 S. Ct.1758, (2010). 56. AT&T Mobility LLC v. Concepcion, 131 S. Ct (2011). New Jersey Arbitration Handbook NJ_Arbitration_Handbook_FullBook.indb 21 2/21/13 8:50:29 PM

16 Chapter 2 Jurisdiction, Procedure, and the Arbitrator s Role appeal procedure in the AT&T Agreement (which provides for review of claim denials) to an apparently general rule forbidding all consumer class arbitrations, even where no such procedure exists. The Court weighed a class action s beneficial (but expensive) ability to resolve all of these small consumer claims collectively against defendants being foreclosed from obtaining a case-by-case analysis of the merits of each claim. 57 The majority determined that the class arbitration remedy was defective and violated the FAA. 58 According to the Court s analysis, the Federal Arbitration Act precludes any state law to the contrary. 59 As New Jersey s pre-concepcion law was similar to California s, which was overturned in Concepcion (both states had not found class action waivers unconscionable per se but of questionable validity in low-value consumer cases), it was only a matter of time until New Jersey s more humane rule would fall. The Third Circuit in Litman v. Cellco Partnership, 60 quickly held that individualized arbitration is inconsistent with and preempted by the FAA. This was reconfirmed in Homa v. American Express Company, 61 which overturned the court s earlier decision to the contrary. 62 Later, the Third Circuit backed off a bit by upholding a class action where the District Court had found a contractual basis for it. The Circuit stated that no magic words are necessary to show a contractual intent to permit class consideration of a dispute. In Sutter v. Oxford Health Plans, 63 one in a series of class disputes by health care professionals to reform insurers claims-processing practices, the Court stated that Stolt-Nielsen did not establish a bright line rule that class arbitration is allowed only under an 57. AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740, (2011). 58. AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740, 1753 (2011). 59. AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740, 1753 (2011). 60. Litman v. Cellco Partnership, 655 F. 3d 225 (3d Cir. 2011), cert. denied, 1332 S. Ct (2012). 61. Homa v. American Express Co., 2012 WL (3d Cir. Aug. 22, 2012) 62. Homa v. American Express Co., 558 F.3d 225 (3d Cir. 2009). Remember, however, that if the matter is governed by the revised New Jersey Arbitration Act rather than by the FAA, the Concepcion bar may not apply. 63. Sutter v. Oxford Health Plans, 675 F.3d 215 (3d Cir. 2012), petition for cert. granted. 22 New Jersey Arbitration Handbook 2013 NJ_Arbitration_Handbook_FullBook.indb 22 2/21/13 8:50:29 PM

17 CLASS ACTIONS IN ARBITRATION 2-4 arbitration agreement that incants class arbitration or otherwise expressly provides for aggregate procedures. 64 Under the Supreme Court s decisions, consumers can apparently be safely cheated out of small sums of money with civil impunity. A consumer s sole remedy now lies with law enforcement authorities or possibly with an attorney general s injunctive enforcement powers. As a personal critique of Concepcion: the majority in Concepcion failed to meet the dissent s analysis of the situation where the few complaining consumers will be paid the small amount due (on the squeaky wheel theory), but the myriad of non-complaining consumers who are not told of the improper charges or other potential claims will get nothing. No attorney can afford to provide representation on a case-by-case basis because, when the claim is made, the small payment will be made, leaving no basis for a fee. The Court only looked at and approved AT&T s apparently consumer-friendly appellate procedure, but this internal appeal process provision will probably never be triggered. (Perhaps if this process is not present, illusory as it is, there could still be an opening for class arbitration, as this process appeared to be so important to the majority.) Justice Breyer, in his dissent, recognized this clear flaw in the majority s logic and stated: In general agreements that forbid the consolidation of claims can lead small-dollar claimants to abandon their claims rather than to litigate. I suspect that it is true even here, for as the Court of Appeals recognized, AT&T can avoid the $7,500 payout (the payout that supposedly makes the Concepcions arbitration worthwhile) simply by paying the claim s face value, such that the maximum gain to a customer for the hassle of arbitrating a $30.22 dispute is still just $ Laster v. AT&T Mobility LLC, 584 F.3d 849, 855, 856 (CA9 2009). 64. Sutter v. Oxford Health Plans, 675 F.3d 215, 222 (3d Cir. 2012), petition for cert. granted. New Jersey Arbitration Handbook NJ_Arbitration_Handbook_FullBook.indb 23 2/21/13 8:50:30 PM

18 Chapter 2 Jurisdiction, Procedure, and the Arbitrator s Role What rational lawyer would have signed on to represent the Concepcions in litigation for the possibility of fees stemming from a $30.22 claim? See, e.g., Carnegie v. Household Int l, Inc., 376 F.3d 656, 661 (CA7 2004) ( The realistic alternative to a class action is not 17 million individual suits, but zero individual suits, as only a lunatic or a fanatic sues for $30 ). In California s perfectly rational view, non-class arbitration over such sums will also sometimes have the effect of depriving claimants of their claims (say, for example, where claiming the $30.22 were to involve filling out many forms that require technical legal knowledge or waiting at great length while a call is placed on hold). Discover Bank [v. Superior Ct., 36 Cal. 4th 148 (2005)] sets forth circumstances in which the California courts believe that the terms of consumer contracts can be manipulated to insulate an agreement s author from liability for its own frauds by deliberately cheat[ing] large numbers of consumers out of individually small sums of money. 36 Cal. 4th, at , 113 P. 3d, at Why is this kind of decision weighing the pros and cons of all class proceedings alike not California s to make? 65 The only effective remedy remaining is legislative, by way of an amendment to the FAA or by a new statute permitting class arbitrations in consumer cases. In the interim, consumers are left without an effective means of civil redress where the FAA applies. 66 In the few cases where there is an express agreement (or possibly where there is no economical review procedure), or where state law permitting class actions governs, a class action may proceed. There is then a second level of adjudication in an arbitrated class 65. AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740, (2011) (Breyer, J. dissenting). 66. Perhaps the best analysis of these Supreme Court decisions is an article by Pepperdine Law School Professor Thomas J. Stipanowich, The Third Arbitration Trilogy: Stolt-Nielsen, Rent-A-Center, Concepcion and the Future of American Arbitration, Am. Rev. Int l Arb. (2011), (last visited Feb. 20, 2013). 24 New Jersey Arbitration Handbook 2013 NJ_Arbitration_Handbook_FullBook.indb 24 2/21/13 8:50:30 PM

19 CONSOLIDATED ARBITRATIONS 2-5 action. This involves the usual class certification considerations of numerosity, communality, typicality, representation, similarity of agreement, issue predominance, and superiority over other methods of adjudication. 67 These rules codify the suggested procedures found in Green Tree Financial Corp. v. Bazzle. After a class determination in favor of the action, the arbitrator must again grant a 30-day stay to permit judicial review. The hearings on the issues raised in these initial two stages of rulings can be lengthy in some cases, and in others there can be little dispute or even a stipulation. Note, however, that the arbitrator need not wait for the eventual resolution of the court cases after the initial stays. Any continuing stay by the arbitrator after this 30-day period is discretionary. 68 Experience shows, however, that if there is no extension of the stay by the arbitrator, the court will impose one. The third and last stage of the proceedings is the hearing on the merits of the case, after class members receive notice of their opportunity to opt out of the proceedings. The arbitrator can create sub-classes to be afforded different relief as the facts may warrant. Claims can be bifurcated for class purposes, leaving others for resolution after the common claims are determined. Often, damages issues are bifurcated to be individually assessed after a class determination on liability is concluded. If the case is settled, voluntarily dismissed, or compromised after the class certification, the arbitrator must hold a fairness hearing after notice to the class with a new opportunity for class members to opt out and hear all objections to the settlement. Unlike other arbitrations, class action arbitrations are public, absent special circumstances. The hearings, orders and filings are open to the public. 2-5 CONSOLIDATED ARBITRATIONS The revised New Jersey Arbitration Act specifically permits the consolidation of arbitrations, but only by order of a court See AAA Supplementary Rules for Class Arbitrations, R. 4. (Compare with Fed. R. Civ. P. 23 and N.J. Ct. R. 4:32-1, 4:32-2.) 68. See AAA Supplementary Rules for Class Arbitrations, R. 3 ( [T]he arbitrator may stay further proceedings, or some part of them, until the arbitrator is informed of the ruling of the court. ) (emphasis added). 69. N.J.S.A. 2A:23B-10. New Jersey Arbitration Handbook NJ_Arbitration_Handbook_FullBook.indb 25 2/21/13 8:50:30 PM

20 Chapter 2 Jurisdiction, Procedure, and the Arbitrator s Role There is no mention of consolidation by order of the arbitrator. However, if a single arbitrator has been selected by multiple parties when there are similar or interrelated issues to be determined and no objections, there should be no impediment to consolidating the proceedings. Consolidation is expressly included in the CPR Rules for Non- Administered Arbitration, R. 9.3a, as one of the procedural matters to be covered by the pre-hearing conference. There is no reference in the AAA Commercial Arbitration Rules, but the AAA Construction Industry Arbitration Rules provide for the appointment of a single arbitrator for multiple claims to decide upon a process of consolidation or joinder that can be ordered, even in the absence of the parties consolidation agreement. 70 The New Jersey Act expressly permits consolidation, except where the parties have agreed to the contrary. 71 Where there is an objection, the safest course of conduct would be to obtain a court order. Even without such an order, however, the power of the arbitrator to control the procedure should permit a de facto consolidation by combining the hearings of the related matters. Where there is a failure to satisfy the now-stringent prerequisites for a class action, there should be no impediment against a consolidation or joinder of multiple cases for the hearing of overlapping issues or claims by or against discrete parties. Claims can be bifurcated and tried on a consolidated basis, leaving other matters to be heard separately. Care must be taken to ensure that there is proper proof of each separate claim or defense. 70. AAA Construction Industry Arbitration Rules, R N.J.S.A. 2A:23B New Jersey Arbitration Handbook 2013 NJ_Arbitration_Handbook_FullBook.indb 26 2/21/13 8:50:30 PM