May 2, 2007
Not the End of the Road
Judges' reluctance to alter arbitration awards hasn't stopped some aggrieved parties from asking them for review. Now, three court cases—two of which are before the California Supreme Court—could encourage a lot more post-arbitration filings. By Claire Cooper
Edited by Martin Lasden
Experts see an increase in post-arbitration litigation.
For more than two decades now, judges have been reluctant to alter arbitration awards because of the limits placed on judicial review by state and federal arbitration acts and a series of restrictive appellate decisions. But that hasn't stopped aggrieved parties from going to court to contest awards or seek declarations that harsh arbitration provisions are unenforceable. Indeed, some experts say they've noticed an uptick in such challenges in recent years.
Several factors could explain the trend: the ubiquity of boilerplate arbitration provisions, which now appear routinely in contracts for everything from employment to health care to vacation cruises; greater willingness among judges to step in when big businesses impose arbitration provisions on consumers or employees on a take-it-or-leave-it basis; the enormous financial stakes in many business-to-business arbitrations; and the increasing complexity of arbitration law.
Now, three cases?two before the California Supreme Court and one before the Ninth Circuit?could make post-arbitration litigation even more common.
In Cable Connection Inc. v. DIRECTV, Inc. (No. S147767) the state's highest court must decide whether the parties to a commercial arbitration agreement may contractually expand the trial court's jurisdiction so that it can review an arbitration agreement for errors of law. A long line of precedents now bars judges from reviewing arbitration decisions for legal errors in most types of cases. But front-end agreements to permit various forms of "enhanced review" have grown popular among parties who want to build more safeguards into complex arbitrations, even though such agreements have been unenforceable both in California and in Ninth Circuit jurisdictions, says Richard Chernick, vice president and managing director of JAMS.
In Federici v. Gursey Schneider & Co. (No. S147905) the state Supreme Court will decide whether an arbitration provision amounted to an "unconscionable and unenforceable" contract because, among other things, it made an arbitrator's findings res judicata in court only if the findings favored one of the parties?in this case an accounting firm that's being sued by a customer.
And in the Ninth Circuit case, Strobel v. Morgan Stanley Dean Witter (No. 06-56817), the court will review a district judge's finding that an arbitration panel acted with "manifest disregard of governing law" when it awarded only $5,000 in compensatory damages to an elderly woman who lost more than $280,000 because of an investment firm's malfeasance. The arbitrators then ordered the woman to pay more than $10,000 in arbitration forum fees.
The Federal Arbitration Act's short list of grounds for reversing arbitration awards includes fraud and other gross procedural defects, but not ordinary legal error. (See Moncharsh v. Heily & Blase, 3 Cal 4th 1 (1992).) And though most jurisdictions have recognized "manifest disregard" as a ground for vacating the award of an arbitrator who purposely disregards public law rights, such challenges rarely succeed. In fact, of the 49 manifest-disregard challenges filed in the Ninth Circuit since 1961, only 1 prevailed, according to research by the Wood Group, which represented Morgan Stanley in the Strobel arbitration.
Still, post-arbitration success rates do vary widely from court to court, and they are much higher in state than in federal court, according to a national survey of 182 cases that was recently published in the American Bar Association's Dispute Resolution Magazine. (Lawrence R. Mills, et al., Vacating Arbitration Awards, Disp. Resol. Mag., Summer 2005, at 23.) Excluding collective bargaining and certain other categories, the survey found a vacatur rate of 25.9 percent among state courts versus a 9.7 percent rate at the federal level. It also noted that in three states?California, Connecticut, and New York?a litigant's chance of obtaining vacatur was 30 percent, while in the other 47 states it was only 21 percent. All this suggests that, as with so many other legal trends, California is at the cutting edge of the post-arbitration phenomenon.