Lou Chang publishes a bi-monthly ADR e-newsletter with arbitration and mediation news, case notes, ADR training events and mediation information developments around the country and the world collected by Mediate.com. Here are some of the recent editions of the newsletter. If you’d like to receive future editions of Lou Chang’s e-newsletter, please send Lou an email. You can also use the “Contact Lou” form on this website.
Employment Agreements and Collective Bargaining Agreements need to be clear in identifying the scope of claims that are intended to be covered by arbitration agreements.
In 2009, the U.S. Supreme Court rulIed that parties could agree in their CBAs to include statutory and other claims within the scope of their agreement to arbitrate. The inclusion of such claims must be explicit, clear and unmistakable. 14 Penn Plaza LLC v. Pyett (2009); 556 U.S. 247, 254; 129 S. Ct. 1456; 173 L.Ed.2d 398.
A recent illustrative case is Cortez v. Doty Bros. Equip. Co., 15 Cal. App. 5th 1 (2017). In the case, employees under a collective bargaining agreement brought class action claims asserting that the employer violated state wage and labor law and unfair competition laws. The Court reviewed the CBA and determined that some, but not all, of the alleged state wage and labor law claims were specifically referenced in the arbitration agreement and thus were subject to arbitration. However, the statutory unfair competition claims and certain of the alleged state wage and labor law claims were not within the scope of the arbitration agreement and thus were not subject to arbitration.
On the issue whether class claims could be asserted, the Court ruled that:
Absent language in the arbitration provision itself or extrinsic evidence establishing the parties’ agreement to arbitrate classwide claims, only individual claims may be arbitrated. Silence on the issue may not be construed as agreement.
Finding the CBA silent with regard to the consideration of class claims, the Court ruled that the claims could not be arbitrated on a class action basis.
Courts permit challenges to arbitration agreements. Courts differ on what is sufficient to warrant declaring an arbitration agreement void.
Hawaii appellate court completely embraces the interpretation of arbitration clauses as being “unconscionable” using the analytical rubric of substantive and procedural unconscionability.
In Narayan v. Ritz-Carlton Development Co. 135 Hawaii 327) (2015) “(Narayan I”), the Hawaii Supreme Court invalidated an arbitration agreement in a condominium purchase contractual agreement, finding it to be both substantively and procedurally unconscionable. The US Supreme Court overturned the Hawaii Supreme Court and remanded with direction to follow the ruling in the Direct TV case which held that contracts with arbitration provisions must be treated with equal footing as other types of contracts. Upon remand, the Hawaii Supreme Court in Narayan II (SCAP-13-0002732) July 14, 2017 reaffirmed its rulings in Narayan I that the arbitration provisions addressed therein were unconscionable under long standing Hawaii contract law.
Note to arbitration practitioners:
Because courts will differ in their assessments and standards as to what is substantively or procedurally unconscionable, counsels who advise clients and draft contracts with arbitration clauses need to:
Unconscionability of arbitration agreement in employment contract
A California Court of Appeals refused to compel arbitration in an employment agreement finding the arbitration provisions in an employment agreement procedurally and substantively unconscionable. In Baxter v. Genworth North America Corporation, (Oct. 26, 2017), the employee was required to sign employment documents as a condition of continued employment. The employment document contained a private employer dispute resolution process similar to the multi-step grievance provisions commonly found in collective bargaining agreements. Under the provisions, employees with a dispute were required to proceed with an internal grievance step of conferring with a supervisor and HR, followed by a second step conference with a company manager and HR before proceeding with the third step of mediation followed by arbitration as a fourth and final step.
The employee brought suit alleging discrimination and violation of labor code provisions and the employer sought to compel arbitration. The Court applied the substantive and procedural unconscionability analysis and invalidated the arbitration provisions. The Court stated and ruled that:
In the case, the Court found numerous arbitration related provisions to be substantively unconscionable, including the following:
With the passage of Act 187, the arbitration landscape in Hawaii is changed, but not that different. Hopefully, the legislation firmly establishes that an arbitrator’s failure to disclose some information of a past, present or future relationship or dealing with a party (party, principal, counsel, partner, witness, fellow arbitrator) involved in an arbitration matter will not mandatorily lead to vacature of an arbitrator’s decision unless the undisclosed relationship or dealing is material and substantial.
Arbitrators must still make a good faith inquiry and disclose all potential dealings and relationships that might cause a party to be concerned about the impartiality of the arbitrator. Your inquiry and disclosure should also include any personal social, civic, community, business, professional and social media participation that you may have. The old guidance of “when in doubt, disclose, disclose, disclose!” is still good advice. Let the parties have the final say as to whether they are comfortable with placing the decision making authority into your hands.
In Narayan v. AOAO Kapalua Bay Condominium, (No. SCAP-16-0000588) (“Narayan II”), the Hawaii Supreme Court sought to “clarify the scope of relationships that require disclosure.” The case thus give good guidance to arbitrators and arbitration practitioners as to the kinds of relationships and dealings that are pertinent and which should be disclosed.
I digested the Narayan II case in some detail in the July, 2017 edition of this newsletter. You can also access it in the newsletter section of my website, LouChang.com.
Advocates should still do their diligence in vetting the integrity, background and qualifications of potential arbitrators. Do your investigation early and completely. Include personal, family, firm and internet search information, Don’t be reluctant to ask questions of your prospective arbitrator to gather all information that may be pertinent to your client’s and your interests. Provide all information to your client so that they may participate in and be comfortable with the critical decision of selecting the arbitrator for their matter. If your investigation presents information indicating some possible omission in the disclosure information provided by the arbitrator, resist the temptation to withhold such information as a possible post arbitration shot to overturn an adverse decision and get a “second bite at the apple”. The better practice is to put all such information on the table so that all participants in the arbitration process can act to maintain the integrity and practicality of the arbitration process.
On June 15, 2017, the Hawaii Supreme Court issued its decision in Narayan v. AOAO Kapalua Bay Condominium, (No. SCAP-16-0000588) (“Narayan II”) which stated that:
relationships that are “more than trivial” must be disclosed and that “de minimis” relationships and interests and connections between a party and an arbitrator which are “long past, attenuated, or insubstantial” need not be disclosed under HRS Sec. 658A-12. A court must consider the “substantive nature” of the relationship at issue to determine whether it would give a reasonable impression of partiality.” Determining whether a relationship is “substantive” may involve the “consideration of several factors, including but not limited to the directness of the connection (or the degrees of separation) between the arbitrator and either party, as well as the type of connection or activity at issue, and its timing relative to the arbitration proceedings.
Courts will need to define more clearly the kinds of past dealings and relationships that are “more than trivial” or “de mimimus”. As the Courts do so, arbitrators and advocates will have clearer guidance on this issue and more stability in the arbitration process will be restored.
Arbitration Case Roundup: Some recent cases ruling on arbitration issues of interest:
Ninth Circuit rules that where an employment contract arbitration agreement is ambiguous as to whether class arbitration is permitted, such ambiguity will be ruled against the drafter.
In Varela v. Lamps Plus, Inc., 2017 WL 3309944 (Aug. 3, 2017), the 9th Circuit held that employees could bring their claims related to a data breach as a class action in arbitration. The employees had first brought their class claims to federal court, and the employer moved to compel individual arbitration. The district court found the arbitration agreement was valid, but ambiguous about whether class actions were waived. Construing that ambiguity against the employer who drafted the agreement, the district court ordered class arbitration. On appeal, the 9th Circuit affirmed the finding of ambiguity, sending the class to arbitration as a group. One judge issued a two sentence dissent, noting “we should not allow Varela to enlist us in this palpable evasion of Stolt-Nielsen…” (Reported by Liz Kramer of Stinson Leonard Street LLP.)
US Supreme Court overrules Kentucky Supreme Court “clear statement” rule.
In cases involving wrongful death claims against a nursing home, the nursing home sought to compel the arbitration of such claims based upon an arbitration agreement contained in the nursing home service contract. The Kentucky Supreme Court had ruled that the power of attorney instruments used by family members to place their loved ones in the care of the nursing home were not valid to authorize the agents to sign an arbitration agreement, ruling that such authorization of an agent failed to clearly state that the power of attorney included the ability to agree to arbitration of claims.
In Kindred Nursing Centers L.P. v. Clark, No. 16–32, 581 U.S. ___ (2017), the US Supreme Court ruled that Kentucky's clear-statement rule violated the FAA's principle of equal treatment. The Supreme Court reasoned that the FAA makes arbitration agreements "valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2. In so doing, the FAA establishes an equal-treatment principle by which a court may invalidate an arbitration agreement based on generally applicable contract defenses but not based on legal rules that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue. Accordingly, the FAA preempts any state rule that, on its face, discriminates against arbitration as well as any rule that covertly accomplishes the same objective by disfavoring contracts that have the defining features of an arbitration agreement. By requiring an explicit statement before an agent can relinquish a principal's right to go to court and receive a jury trial, Kentucky's clear-statement rule hinged on the primary characteristic of an arbitration agreement. Therefore, the court concluded that the rule failed to put arbitration agreements on an equal plane with other contracts and, thus, violated the FAA. (Reported by David Zaslowsky and Grant Hanessian of Baker McKenzie.)
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Hawaii arbitration statute amended to make vacature for arbitrator non-disclosure permissive where Court finds such non-disclosure to be substantial and material.
On July 11, 2017, Governor Ige signed SB 314, SD1, HD1, CD1 which became Act 187 of the 2017 Legislature. Act 187 amends HRS 658A- 12 of the RUAA to require a finding that an arbitrator’s non-disclosed relationship or dealing is substantial and material and makes it permissive (“may”) rather than mandatory (“must”) for a reviewing court to conclude that it is appropriate to vacate an arbitrator’s decision.
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Hawaii Supreme Court issues third decision on arbitration vacature due to arbitrator non-disclosure.
On June 15, 2017, the Hawaii Supreme Court issued its decision in Narayan v. AOAO Kapalua Bay Condominium, (No. SCAP-16-0000588) (“Narayan II”). In the case, the Court attempts to clarify its earlier rulings in Nordic PCL Construction, Inc. v. LPIHGC, LLC, 136 Hawai’I 29, 358 P. 3d 1 (2015)(“Nordic”) and 137 Hawai‘i 1, 364 P.3d 518 (2015) (“Madamba”).
In Narayan II, the Hawaii Supreme Court states its intent is to “clarify the scope of relationships that require disclosure.” In Narayan II, the arbitrator, a retired Circuit Court judge, made disclosures noting that the counsels involved in the arbitration case had appeared before her during her years on the Circuit Court bench. She disclosed her social membership in a golfing country club, her participation in various civic and community organizations and that she had no prior involvement or relationship with the parties to the arbitration. After conducting the arbitration proceedings and rendering her decision in favor of condominium association and against the condominium owners, the losing parties appealed the arbitration decision.
The Court, citing its earlier Madamba decision, reiterated that a court must vacate an arbitration award if there was evident partiality by an arbitrator appointed to serve as a neutral. The Court stated that:
Evident partiality may be found in two situations: when an arbitrator fails to make necessary disclosures to the parties, or when additional facts show actual bias or improper motive, even if the arbitrator makes the necessary disclosures.
The Court thus discussed these two categories of evident partiality, cases of “actual bias” and cases of “nondisclosure”. The Nordic and Madamba cases provided little guidance as to what kinds of “dealings” and “relationships”, if not disclosed, were sufficient to warrant a court’s conclusion that an arbitrator was “evidently partial” and thus mandate a reviewing court to vacate the arbitrator’s decision. In Narayan II, the Court states that relationships that are “more than trivial” must be disclosed and that “de minimis” relationships and interests and connections between a party and an arbitrator which are “long past, attenuated, or insubstantial” need not be disclosed under HRS Sec. 658A-12. A court must consider the “substantive nature” of the relationship at issue to determine whether it would give a reasonable impression of partiality.” Determining whether a relationship is “substantive” may involve the “consideration of several factors, including but not limited to the directness of the connection (or the degrees of separation) between the arbitrator and either party, as well as the type of connection or activity at issue, and its timing relative to the arbitration proceedings.”
The Court provides standards of review to determine when an arbitrator’s “relationships” and “dealings” are sufficiently material and relevant connections so as to warrant the vacature of an arbitrator’s decision if not disclosed. The Court does this by citing with approval a number of cases from other jurisdictions that dealt with the issue of an arbitrator’s non-disclosure in an arbitration case.
The Court provides the following guidelines:
Where the relationship involves an exchange of money or other consideration, it is likely to require disclosure, particularly if the exchange was recent or ongoing during the arbitration. See, e.g., Britz, Inc. v. Alfa-Laval Food & Dairy Co., 40 Cal. Rptr. 2d 700, 707 (Cal. App. 1995). In Britz, the arbitrator failed to disclose that he was employed by one of the party counsel’s law firms as an expert witness in a separate matter.
Business relationships and financial dealings will also tend to weigh in favor of disclosure, depending on the weight of other considerations, including the regularity and recency of the dealings, the length of the relationship, and the extent of pecuniary interest involved.
In Narayan II, the appellants asserted that the arbitrator had made an insufficient disclosure and sought vacature of her arbitration decision. The appellants asserted that the arbitrator failed to disclose that:
Upon applying its articulated standards of review, the Court ruled that an arbitrator did not need to disclose “ongoing or past instances in which she served as a neutral and .. . a non-attorney witness appeared before her in another matter…. The mere fact that an arbitrator has observed a witness in a prior proceeding and therefore may have “had an opportunity to evaluate the person and form an opinion as to the person’s credibility[,]” without more, is not a “relationship” that requires disclosure.”
With respect to the arbitrator’s prior service as a neutral for an attorney in unrelated matters, the Court concluded that: “The mere fact that [the attorney], an expert witness in this case, had been an attorney in two cases where he appeared before the Arbitrator, without more, is not a “relationship” that creates a reasonable impression of partiality. It was therefore not clearly erroneous for the circuit court to conclude that the Arbitrator’s undisclosed contacts with [the attorney] did not give a reasonable impression of partiality.’
The Court also ruled that the arbitrator’s service as a neutral for the developer’s law firm “in unrelated matters does not have a sufficient nexus to this arbitration…. There is no actual direct connection between [the law firm] and the parties, counsel, witnesses, and Arbitrator in this arbitration…. [T]he theory that a positive outcome for the AOAO would lead to a future appointment for the Arbitrator in the Developer Action is “contingent, attenuated, and merely potential.”
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U.S. Supreme Court upholds enforceability of nursing home arbitration agreement signed by a holder of a general power of attorney.
In Kindred Nursing Centers LP v. Clark, (U.S. Supreme Court, May 15, 2017, slip opinion), the Supreme Court overturned a Kentucky Supreme Court ruling that had nullified an agreement to arbitrate signed by a family member who held a general power of attorney which provided that the agent had “full power . . . to transact, handle, and dispose of all matters affecting me and/or my estate in any possible way,” including the power to “draw, make, and sign in my name any and all . . .contracts, deeds, or agreements.” The individual’s estate filed suit claiming that substandard care from the nursing home caused the individual’s death. The nursing home sought to compel arbitration.
The Kentucky court articulated and applied a “clear statement” principle holding that powers of attorney by their terms must expressly provide that the holders of the powers of attorney are empowered to enter into arbitration agreements because agreements to arbitrate obviate the “sacred” and “inviolate” rights of individuals to their access to courts and their rights to a jury trial as provided for by the Kentucky constitution.
The U.S. Supreme Court in a 7-1 decision (Justice Thomas dissenting) observed that:
“The FAA makes arbitration agreements “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. §2. That statutory provision establishes an equal-treatment principle: A court may invalidate an arbitration agreement based on “generally applicable contract defenses” like fraud or unconscionability, but not on legal rules that “apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue.”
AT&T Mobility LLC v. Concepcion, 563 U. S. 333,
The Supreme Court explained that the FAA thus preempts any state rule that discriminates on its face against arbitration—for example, a “law prohibit[ing] outright the arbitration of a particular type of claim.” It also prohibits any rule that covertly accomplishes the same objective by disfavoring contracts that have the defining features of arbitration agreements. The Supreme Court determined that the Kentucky Supreme Court decision impeded the ability of attorneys-in-fact to enter into arbitration agreements. By doing so, the court “flouted the FAA’s command to place those agreements on an equal footing with all other contracts.” Accordingly, the U.S. Supreme Court reversed the Kentucky Supreme Court and upheld the enforceability of the agreement to arbitrate made by the holder of the general power of attorney.
Hawaii Legislature acts to restore practicality and efficiency to the practice of arbitration. Legislative measure awaits decision by the Governor.
In two recent decisions, Nordic PCL Construction, Inc. v. LPIHGC, LLC, 136 Hawai’I 29, 358 P. 3d 1 (2015) (the “Nordic” case) and Noel Madamba Contracting LLC v. Romero, 137 Hawai‘i 1, 364 P.3d 518 (2015) (the “Madamba” case), the Hawaii Supreme Court ruled that an arbitrator’s nondisclosure of information that a “reasonable person” might find likely to affect the arbitrator’s impartiality constitutes “evident partiality” as a matter of law. Upon finding “evident partiality”, the Court ruled that a reviewing court must vacate the arbitrator’s decision and award: a) whether or not the undisclosed information is material or substantial; b) without an opportunity for rebuttal; and c) without a showing of any actual or unfair bias or impact upon the arbitration process. Those two decisions have significantly damaged the efficiency, practicality and finality of the arbitration process.
As a practical result, these rulings make commercial arbitration, especially the larger cases, multi-round litigations. The traditional perceived benefits of arbitration as being fast, efficient and final are lost as a consequence. Parties who lose in an arbitration are virtually encouraged to seek judicial vacature by commencing an action and conducting discovery or extensive Google searches in the hopes of finding some element of arbitrator participation or involvement in prior matters that was not disclosed, however insignificant, in order to obtain vacature of the arbitration decision.
In response to concerns expressed by arbitrators, advocates and arbitration practitioners, the Hawaii Legislature has passed SB 314 SD1, HD1, CD1 and sent the measure to the Governor for his review and consideration. The measure seeks to amend HRS Section 658A-12 by providing for a trial court review and decision as to whether an arbitrator failed to disclose information reflecting that the arbitrator had a direct and material personal or financial interest in the outcome of the arbitration or that the arbitrator had an existing or past substantial relationship with any of the parties to the agreement to arbitrate or the arbitration proceeding, their counsel or representatives, a witness, or another arbitrator. If the trial court determines that the non-disclosed information is material or substantial, the court may order vacature.
Hopefully, the measure will be approved by the Governor and the new amendment to Ch. 658A will restore practicality, efficiency and finality to and reduce the potential for game playing in the arbitration process.
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Two Trial Court Rulings on Arbitrator Non-disclosures and Evident Partiality
On March 3, 2017, Circuit Court Judge Jeannette Castagnetti issued findings of fact and conclusions of law in two cases vacating arbitration decisions due to insufficient disclosures by arbitrators. In AOAO The Palm Villas at Mauna Lani Resorts v. CONSTRX LTD et. al. (“Palm Villas”), the Court concluded that prior and undisclosed relationships between the arbitrator and a party’s counsel and law firm demonstrates a reasonable impression of partiality warranting vacatur of the arbitrator’s award.
In Palm Villas, the Court concluded that the arbitrator’s failure to disclose that she had been appointed to serve as an arbitrator in a matter by one of the party’s attorney’s law firm eight days before being appointed to serve as arbitrator in the Palm Villas matter created an impression of possible bias. The Court discussed how the party’s law firm was a “frequent flyer”, “repeat player” or “steady customer” of the arbitrator and was not with the other party’s law firm and insufficient disclosure of the nature of past dealings supported the conclusion of evident partiality. Evidence of any actual bias was not necessary.
The Palm Villas case in now being appealed.
Also on March 3, 2017, Judge Castagnetti issued findings of fact and conclusions of law in the Nordic PCL Construction, Inc. v. LPIHGC, LLC (“Nordic”) case. In the Nordic case, the Court concluded that the arbitrator’s failure to disclose that one of the law firms involved in the arbitration case had also represented the arbitrator in his capacity as Trustee of a large local trust was a fact that a reasonable person would view as likely to affect the arbitrator’s impartiality and required vacatur of the arbitrator’s award. The fact that one of the managers of Nordic knew that the arbitrator was a trustee of the trust and one of the partners in the law firm that represented Nordic had a brother in law that worked for the local trust was not sufficient to constitute notice to Nordic of the arbitrator’s potential conflicting relationship with the trust and its attorneys.
The Nordic case also presented the ”repeat player”, “steady customer” dynamic. In the Nordic arbitration, three law firms were involved as attorneys for arbitration parties. During the pendency of the arbitration, attorneys from two of the law firms engaged the arbitrator to serve as mediator in three unrelated matters. The Court concluded that the arbitrator’s failure to disclose the three concurrent engagements to provide services as mediator created a reasonable impression of partiality warranting vacatur of the arbitrator’s award. Apparently, it was not consequential that during the pendency of the arbitration, the third law firm had also attempted to but did not succeed in engaging the arbitrator to serve as a mediator in an unrelated matter.
The Nordic case appears headed back to arbitration.
Highlights from March 29, 2017 Forum on Arbitration Vacatur Rulings: ramifications and recommendations
The HSBA ADR and Litigation Sections, ACR Hawaii and the Center for Alternative Dispute Resolution sponsored a forum session to discuss the ramifications and recommendations following the Hawaii Supreme Court’s rulings in the Nordic and Madamba cases concerning the vacatur of arbitration decisions where there is insufficient arbitrator disclosures of potential conflicts of interest. In the Madamba case, the Court ruled that the “failure to meet disclosure requirements under HRS § 658A-12(a) or (b) is equivalent to, or constitutes, ‘evident partiality’ as a matter of law” and that “a potential conflict of interest creates evident partiality warranting vacature even when no actual bias is present.”
Advocates, arbitrators, retired judges and mediators engaged in a thoughtful and robust discussion sharing concerns and ideas for keeping the arbitration process a useful, fair, productive efficient and economical one. It was noted that the Court’s rulings have served to make arbitrators far more deliberate and careful to make more complete disclosures of existing or past relationships, dealings and interactions that may potential be found to be suggestive of potential partiality. To that extent the case rulings have resulted in a healthy improvement of the arbitration process.
However, the rulings and the lack of clarity as to what kinds of “relationships” or “dealings” are sufficient to amount to “evident partiality” have also caused many damaging and troubling ramifications to the practice of arbitration. Such ramifications include the following:
Recommendations for what parties, advocates and arbitrators can do to mitigate some of these concerns were discussed. They included:
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