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Recent Developments in ADR 

Alternative Dispute Resolution Law
Abigail Pessen
Business and Employment Mediation and Arbitration
80 Broad Street, 30th floor
New York, NY  10004
(212) 961-0668

Published in Annual Review of Developments in Business and Corporate Litigation, 2004 edition.  (c) 2004 by the American Bar Association.

Reproduced with permission.  All rights reserved.  This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.


In 2003, a delicate balance was sought by courts struggling to enforce valid agreements to arbitrate while also protecting litigants’ statutory rights and their own judicial obligation to review awards.  Challenges to arbitration concerning class actions, arbitrator selection, arbitration costs, and remedies, were addressed in some instances by severing offending provisions, and by refusing enforcement in others.  The Supreme Court provided some guidance in several significant decisions.  In contrast, litigation concerning mediation was, appropriately, a rarity.

§ 1.2          Supreme Court Docket

A trio of decisions reflected the high Court’s continuing deference to arbitration and to the arbitrator as decider of how the arbitration should be conducted.

Remedy Limitations  Are Not “Gateway” Issues Preventing Arbitration

First to arrive was PacifiCare Health Systems, Inc. v. Book, 123 S.Ct. 1531 (2003).  The Eleventh Circuit had refused to compel arbitration of RICO claims doctors had asserted against their HMO’s, reasoning that arbitration could not completely vindicate the doctors’ statutory rights (including the right to recover treble damages) because the arbitration agreements barred punitive damages. The Supreme Court unanimously reversed, holding that the arbitration agreement’s remedial limitation was neither ripe for determination nor a bar to arbitration.    Whether treble damages under RICO are indeed “punitive damages” -- an assumption the Court questioned -- was not, said the Court, a “gateway” question going to whether the parties had made a valid agreement to arbitrate; therefore it was a matter for the arbitrator, not a court, to decide.  PacifiCare thus offers guidance for analyzing challenges arising from perceived remedial deficiencies in the arbitration agreement.  As discussed infra, the appropriate judicial response to such challenges continues to be a source of some confusion.

The Arbitrator Decides Class Action Treatment

The Court was far more divided in Green Tree Financial Corp. v. Bazzle, 123 S. Ct. 2402 (2003), writing four separate opinions.  In Bazzle, consumers had filed class actions in state court against a commercial lender, and the lender moved to compel arbitration based on its arbitration agreements, which did not directly address the possibility of class-wide relief.  The South Carolina Supreme Court compelled arbitration and certified two classes of consumers, who went on to win large awards which were later confirmed by the court.   The lender challenged the awards, contending that the court’s imposition of classwide arbitration violated the arbitration agreements’ literal terms, and therefore contravened the Federal Arbitration Act (FAA).   A plurality of the Court held that the arbitrator, not the court, should have decided whether class action treatment was permitted under the arbitration agreements, since that is not a “gateway matter” either, i.e. one going to whether the parties agreed to arbitrate a particular matter, but rather, a process question.  Three justices dissented, holding that class action treatment was indeed a gateway question for the court since it determines who will decide the dispute, and that the South Carolina court had answered it erroneously.  Justice Thomas dissented on the ground that, in his view, the FAA does not apply to state court proceedings.  

If practitioners had hoped Bazzle would resolve the conflict between class actions’ advantages and arbitration’s benefits, they were surely disappointed by the absence of any discussion of that broader subject in the court’s opinions.

FAA Reaches Transactions Affecting Commerce

Citizens Bank v. Alafabco, Inc., 123 S.Ct. 2037 (2003), addressed the proper reach of the FAA. A dispute arose between an Alabama bank and an Alabama manufacturing company over the company’s restructured debt; the loan agreement contained an arbitration provision.   When the bank moved to compel arbitration of the dispute pursuant to the FAA, the Alabama court held the FAA inapplicable because the parties’ underlying loan transaction did not “involve commerce” as the statute requires. 9 U.S.C. § 2.   The Supreme Court reversed per curiam, holding that the lower court’s view of Congress’ Commerce Clause power and the FAA’s reach was “improperly cramped.” The term “involving commerce” in the FAA, said the court, is the functional equivalent of the more familiar term “affecting commerce”signalling the broadest permissible exercise of the Commerce Clause, and thus does not require that the transaction be actually “in commerce.”  Under that broad definition, the commercial loan transactions fell comfortably within the FAA’s purview.


§ 1.3          Legislative Developments

The Uniform Mediation Act became law in Nebraska and Illinois in 2003, while Hawaii, Nevada, New Jersey, New Mexico, North Carolina, North Dakota, and Oregon enacted the Revised Uniform Arbitration Act (joining Utah, which adopted it in 2002).   The progress of both statutes is tracked at 

§ 1.4 Employment Arbitration

California Developments

 Duffield Dead Again

In 2002, in Equal Employment Opportunity Commission v. Luce, Forward, Hamilton & Scripps, 303 F.3d 994 (9th Cir. 2002), the Ninth Circuit had appeared finally to concede that its iconoclastic ruling in Duffield v. Robertson Stephens & Co., 144 F.3d 1182 (9th Cir. 1998), holding that Title VII claims could not be subject to arbitration, had been overruled by Circuit City v. Adams, 121 S.Ct. 1302 (2001).

In February, 2003, however, the court agreed to rehear en banc Luce, Forward (Luce II), raising the spectre of Duffield once again. Luce II, at 345 F.3d 742 (9th Cir. 2003), reaffirmed Duffield’s demise, but not at the hand of Circuit City v. Adams.   Instead, the majority held that Duffield had been wrongly decided, because Title VII, as amended in 1991, reflects no Congressional intent to preclude mandatory arbitration of employment discrimination claims.   Accordingly, held Luce II, employers may insist that employees consent to arbitration as a condition of employment.

Circuit City Redux

Mandatory employment arbitration may now be part of California’s legal landscape, but the agreement to arbitrate must still pass muster under California state law. Electronics giant Circuit City once again challenged the Ninth Circuit to invalidate the latest iteration of its employment arbitration agreement; the court took up the gauntlet.  In Ingle v. Circuit City, 328 F.3d 1165 (9th Cir. 2003), cert. den. 2004 WL 110851, the court  held unconscionable yet another variation of the dogged retailer’s agreement.   The court held that a rebuttable presumption of substantive unconscionability is created under California state law when the arbitration clause’s effect is unilateral rather than bilateral.   In this case, the clause required employees, but not the employer, to arbitrate their claims.   (Courts in other jurisdictions have disagreed, finding sufficient consideration elsewhere for such a requirement.)   The Circuit City clause also prohibited class actions, imposed a one-year statute of limitations, limited remedies, required that the arbitration costs be shared, reserved the employer’s unilateral right to modify or terminate the agreement, and required a $75 arbitration filing fee payable to Circuit City. The court refused to sever the offending provisions because to do so, said the court, would impermissibly transform the court into contract author.  The court also denied that California is violating the FAA by singling out arbitration contracts for heightened scrutiny.

Armendariz Still Rules

In Little v. Auto Stiegler, Inc., 29 Cal.4th 1064 (Sup.Ct. 2003), cert. den. 124 S.Ct. 83, the California Supreme Court upheld its blanket rule requiring employers to pay all arbitration costs, established in Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal.4th 83 (2000), despite Green Tree Financial Corp. v. Randolph, 121 S.Ct. 513 (2000), which adopted a case-by-case approach to prohibitive arbitration costs. The Little court held that the FAA does not require states to comply with federal arbitration cost-sharing standards. The court also held unconscionable an “appellate arbitration” clause in the parties’ arbitration agreement permitting full appeal before an arbitral tribunal of any award exceeding $50,000, at the option of either party, finding that it unfairly advantaged the employer by creating an “even if I lose I win” situation.  After severing that provision  from the agreement, the court compelled arbitration.

Third Circuit Developments

In Spinetti v. Service Corp. Intnat’l., 324 F.3d 212 (3rd Cir. 2003), the court invalidated arbitration agreement provisions that imposed prohibitive costs on the employee and violated the employee’s statutory right to attorney’s fees if s/he prevailed.   The court severed the offending provisions and compelled arbitration, finding no reason to cut down the entire “tree trunk” merely because some branches were sickly.

In Alexander v. Anthony International, L.P., 341 F.3d 256 (3rd Cir. 2003), the entire tree trunk fell. Plaintiff, a crane operator, alleged discrimination.  His employer’s mandatory arbitration agreement contained a 30-day statute of limitations, limited remedies, precluded an attorney’s fee award, and provided that the losing side would pay the prevailing party’s arbitration costs.  The court held the agreement unconscionable, and, unlike Spinetti, sickly to its core.  Noting that under Supreme Court precedent, unconscionability is a basis for non-enforcement of contracts, the court refused to compel arbitration.  The Alexander court was also  troubled by, but did not rule on, the employer’s last-ditch offer to pay arbitration costs only after those costs were challenged.

Sixth Circuit Trends 

In Morrison v. Circuit City Stores, Inc., 317 F.3d 646 (6th Cir. 2003), the court adopted a case-by-case approach to prohibitive arbitration costs, following Green Tree Financial Corp. v. Randolph,supra, 121 S.Ct. 513 (2000).  Comparing employees faced with costly arbitration to Yossarian, Catch-22’s hapless protagonist, the court held that to invalidate a cost-sharing provision, the employee need only show that typical arbitration costs under the challenged provision were likely to deter employees with similar jobs and socioeconomic backgrounds from vindicating their statutory rights.   The court also rejected the option of postponing the cost issue until the arbitration’s completion, concluding that the deterrent effect of high costs would remain despite the possibility of a later reduction.  It also held irrelevant, contrary to the Third and  Eleventh Circuits,  the employer’s belated offer to pay the costs.

The Morrison court also invalidated Circuit City’s limitations on remedies, but upheld its one-year statute of limitations and held other irregularities in the arbitrator selection process curable.   In light of the agreement’s severance provision, the court severed the offending provisions and compelled arbitration.

In McMullen v. Meijer, Inc., 337 F.3d 697 (6th Cir. 2003) (McMullen I), superseded by __ F.3d __, 2004 WL 63421 (McMullen II), the court initially refused enforcement of an arbitration agreement giving the employer exclusive control over a standing panel from which the parties chose an arbitrator.   The court held that the “symbiotic” relationship between panel and employer created a fundamentally biased process which could not fully vindicate employees’ statutory rights. Moreover, said McMullen I, the agreement’s defects were not curable by severance.   However, upon reconsideration in McMullen II, the court agreed to remand the case to consider whether severance could be an option after all.

Other Approaches to Illegal Terms

The Eleventh Circuit took a different approach to a “loser pays” provision in Musnick v. King Motor Co. of Fort Lauderdale, 325 F.3d 1255 (11th Cir. 2003).  Noting that the provision imposed on the employee not a certainty of prohibitive costs, but rather a potential expense if the employer prevailed, the court reasoned that, were that the outcome, the arbitral award could be vacated if it violated the employee’s statutory rights by saddling him with impermissible costs and fees. Notwithstanding the limited grounds for overturning arbitration awards under the FAA, such an award would be in “manifest disregard” of clear and established law and therefore subject to vacatur.  Accordingly, the court compelled arbitration. 

The Musnick court also questioned the survival of its pre-Green Tree holding in Paladino v. Avnet Computer Technologies, Inc., 134 F.3d 1054 (11th Cir. 1998), that employment arbitration cost-sharing provisions are per se unenforceable, in light of Green Tree’s case-by-case approach. Although not overruled, Paladino’s continued viability is now dubious.

In Hadnot v. Bay, Ltd., 344 F.3d 474 (5th Cir. 2003), the Fifth Circuit similarly compelled arbitration despite unlawful restrictions on statutory remedies (banning punitive and exemplary damages) in the arbitration agreement, after severing the invalid provision.

§ 1.5          Consumer Arbitration


The Seventh Circuit compelled arbitration of plaintiffs’ Truth In Lending Act (TILA) claims in Livingston v. Associates Finance, Inc., 339 F.3d 553 (7th Cir. 2003), despite fee and cost sharing provisions and class action ban in the arbitration agreement.  The court noted that the agreement called for fees to be awarded “in accordance with law,” which, under TILA, would prohibit assessing fees against a plaintiff except in rare circumstances.   As the Eleventh Circuit reasoned in Musnick, supra, the Livingston court said that judicial review was sufficient to ensure awards’ compliance with statutory requirements. The class action prohibition was upheld without discussion.

The Eleventh Circuit also upheld arbitration of TILA claims, in Anders v. Hometown Mortgage Services, Inc., 346 F.3d 1024 (11th Cir. 2003). After rejecting plaintiff’s “prohibitive cost” challenge as inadequately vague under Green Tree, the court held that the arbitration agreement’s limitations on permissible remedies, while plainly in violation of TILA, should not defeat arbitration of the dispute. Further distancing itself from Paladino, supra, 134 F.3d 1054, the court chose not to invalidate and sever the remedies provisions, but instead to leave determination of those provisions to the arbitrator, since they are not “gateway” questions that the parties would expect the court to decide.   

Interestingly, Anders made no mention of the Supreme Court’s recent PacifiCare and Bazzle rulings, supra, which support its “let the arbitrator decide” approach.

“Loser Pays” held Unconscionable by Arbitrator

In Bob Schultz Motors, Inc. v. Kawasaki Motors Corp.,334 F.3d 721 (8th Cir. 2003), reh. en banc den., __F.3d __, cert. den. 2004 WL 76703, arbitration of the parties’ decade-long car dealership dispute was compelled despite Schultz’s challenge to the “loser pays” fee-shifting provision in their arbitration clause.  The arbitrator found in favor of Kawasaki on the merits, but refused to implement the fee-shifting provision, finding it unconscionable.   Both sides challenged the award, but the Eighth Circuit upheld it, holding the arbitrator the proper decision-maker of the contract’s terms, and his decision reviewable only for manifest disregard of the law.

Money Now, Terms Later

In O’Quin v. Verizon Wireless, 256 F.Supp.2d 512 (M.D.La. 2003), a district court in Louisiana granted Verizon’s motion to compel arbitration based on the arbitration agreement included with the consumer’s telephone handset packaging.  Describing the situation as  “money now, terms later,” the court held that acceptance of the product also constituted acceptance of the arbitration agreement, noting that the product was returnable had the consumer objected to arbitration.   The court also upheld the agreement’s terms requiring shared arbitration costs and barring class actions, because the costs had not been shown to be “prohibitive” under Green Tree, supra, and class actions were similarly prohibited under Louisiana’s consumer protection statute.


In Waters v. Earthlink, Inc., 2003 WL 22461542, __ F.3d __ (1st Cir. 2003) (not for publication), the court refused to compel arbitration of customers’ lawsuits against the internet provider, because Earthlink failed to demonstrate that customers had in fact agreed to arbitrate.   In contrast to the “bill stuffer” or package insert, Earthlink’s arbitration agreement was posted on the internet, but no evidence established that customers had seen it or, accepted it.   Accordingly, discovery was permitted on this issue.

Magnuson-Moss Warranty Act

Disagreeing with Fifth and Eleventh Circuit rulings reported on last year, Rickard v. Teynor’s Homes, Inc., 279 F.Supp.2d 910 (N.D. Ohio 2003), held that binding arbitration of a homeowner’s written warranty claims brought under the Magnuson-Moss Warranty Act (MMWA) is precluded by FTC regulations, because those regulations permit only non-binding dispute resolution processes.   The plaintiff also sought to prevent arbitration of her additional claims, citing prohibitive costs. While agreeing that under Green Tree, supra, prohibitive arbitration costs might render the arbitration agreement unconscionable, the court found plaintiff’s proof inadequate, and gave her the opportunity to submit additional documentation.

Bill Stuffers and Class Actions

In Mandel v. Household Bank (Nevada), 129 Cal. Rptr.2d 380 (Ca. 2003), review granted, 132 Cal.Rptr.2d 525, consumers unsuccessfully challenged the arbitration agreement included in their credit card statements.   Applying Nevada law, the court held that a binding agreement to arbitrate was created by cardholders’ continued use of their cards after receiving notification of the new provision.   However, akin to last year’s ruling in Szetela v. Discover Bank, 97 Cal.App.4th 1094 (2002), cert. den. 123 S.Ct. 1258 (2003), the court found the provision’s class action ban unconscionable because of the unfair advantage it would give the bank and the incentive provided by such a ban to engage in questionable practices.  The agreement’s caveat that class actions could be utilized if both sides agreed was held an illusory protection.  Therefore, as in Szetela, the Mandel court severed the class action ban and compelled arbitration.

In contrast, another California state court upheld a “bill stuffer” arbitration agreement banning class actions, in Discover Bank v. Superior Court, 105 Cal.App.4th 326 (2003), review granted, 132 Cal.Rptr.2d 526.  The court cautioned that singling out arbitration contracts for heightened scrutiny violates the FAA.   California’s Supreme Court is thus poised to address the tension between arbitration and the class action device.  Stay tuned.

In Pedcor Management Co. v. Nations Personnel of Texas, Inc., 343 F.3d 355 (5th Cir. 2003), the Fifth Circuit reversed the lower court’s order (made pre- Green Tree v. Bazzle, supra) granting class-wide relief in an arbitration of ERISA claims.  The appellate court held that under Bazzle, the arbitrator, not the court, decides whether to certify a class, when the arbitration contract is silent on the issue.

In AutoNation USA Corp. v. Leroy, 105 S.W.3d 190 (Tx.Ct.Apps. 2003), the court upheld the arbitration agreement contained in a used car dealer’s Purchase Contract, holding it applicable to disputes arising under the related Retail Installment Contract.  That arbitration would prevent class action litigation did not render the arbitration agreement unconscionable, said the court, because class actions are a waivable procedural device. Moreover, the court noted that class-wide arbitration might be an option.

“People should read their mail”

In a mailing to cardholders, Sears amended its credit card agreements to include a mandatory arbitration provision which stated that Sears would advance all arbitration costs, and explicitly prohibited participation in any class action.  In Hutcherson v. Sears, Roebuck & Co., 342 Ill.App.3d 109 (Ill. App.2003), app. den. 205 Ill.2d 582 (2003), the Illinois court found no procedural unconscionability, holding that the new provision was clearly described in Sears’ mailing. Moreover, the class action ban was not unconscionable because, said the court, pro-arbitration policy considerations trump the procedural utility of class actions.  Finally, because Sears agreed to advance the arbitration costs, consumers’ rights could be vindicated in arbitration without the need for class action treatment.

AT & T Agreement Held Unconscionable

In contrast to Hutcherson and Discover Bank, supra, Ting v. AT&T Corp., 319 F.3d 1126 (9th Cir. 2003), cert. den. 124 S.Ct. 53, affirmed the district court’s decision noted here last year. The Ninth Circuit rejected AT&T’s contention that the Federal Communications Act preempts California state law governing the validity of AT&T’s customer contracts. The court then held the arbitration provisions of those contracts unconscionable under California law: procedurally, because offered on a “take it or leave it” basis, and substantively, by barring class actions, entailing prohibitive costs, and insisting on confidentiality, which, said the court, creates an uneven playing field for customers. Moreover, the court firmly denied that California is singling out arbitration contracts as unconscionable in violation of the FAA.




§ 1.6 Post-Arbitration Issues

§ 1.6.1 Courts Reject Altered Standards for Review of Awards

 In Kyocera Inc. v. Prudential-Bache Trade Services, Inc., 341 F.3d 987 (en banc), cert. den. 124 S.Ct. 980, a dispute arose between parties to a licensing agreement. They went to arbitration, and LaPine, the licensor, was awarded roughly a quarter of a billion dollars.  Kyocera then sought vacatur, as provided in the arbitration agreement, for insufficient evidence for the panel’s factual findings and erroneous conclusions of law.  A divided panel of the Ninth Circuit, in LaPine I, 130 F.3d 884 (1997), had previously upheld the  expanded standard of review, albeit with misgivings, one judge on the panel opining that had the parties required the court to review the award by studying the entrails of a dead fowl, or some other arbitrary procedure, he would not have upheld it. The district court then re-examined the award under the heightened standard and again confirmed it, despite finding one erroneous legal conclusion, and the Ninth Circuit affirmed, 299 F.3d 769 (2002) (LaPine II). Kyocera then sought rehearing en banc, which produced the 2003 decision.  The court again confirmed the award, but in a remarkable reversal, held that private litigants may not dictate to courts the standard for reviewing arbitation awards. Accordingly, the court severed the expanded review provision in the parties’ arbitration agreement and proceeded to review the award under the criteria set forth in the FAA.

In Schoch v. InfoUSA, Inc., 341 F.3d 785 (8th Cir. 2003), an executive prevailed in an arbitration against his former company and the company sought vacatur under the arbitration agreement’s heightened standard of review.   The court found the agreement’s review provision inconclusive and ambiguous, but in dicta doubted the enforceability of heightened review provisions, even if crystal clear.   As the court phrased it, the arbitration process was not intended to create a system of “junior varsity trial courts.”   InfoUSA’s petition for certiorari was pending at press time.

In Hoeft v. MVL Group, Inc., 343 F.3d 57 (2d Cir. 2003), the parties’ arbitration agreement reduced to nil judicial review of the arbitral award resolving the parties’ dispute.  The court refused to enforce the provision, holding that parties’ freedom to craft their arbitration agreements has its limits.   Declining to serve as a rubber stamp, the court noted that under the FAA, awards must, at a minimum, be untainted by bias or corruption, and satisfy the FAA’s additional criteria to warrant judicial confirmation.

The Hoeft court also criticized the district court’s decision allowing a depositon of the arbitrator concerning his decision-making process.  Such inquiry was “forbidden terrain,” said the court, and could turn arbitration into “only the starting-point in the dispute resolution process. . .”

A majority of the Circuits have now rejected litigants’ attempts to alter judicial standards for reviewing arbitral awards; the Third and Fifth Circuits have permitted alterations.   Although clarification by the Supreme Court is needed,  InfoUSA, supra, may not be the ideal vehicle since the heightened review clause in that case was not unequivocal.


§ 1.6.2  Manifest Disregard

A $25 million punitive damage award was vacated by a New York appellate court.  In Sawtelle v. Waddell & Reed, Inc., 754 N.Y.S.2d 264 (N.Y.A.D. 2003), the court held that the arbitrators’ enormous punitive damage award was “grossly excessive” under the principles of BMW of North America v. Gore, 116 S.Ct. 1589, which held that  disproportionate punitive damage awards made in court proceedings violate due process.  Acknowledging that due process concerns are not implicated in arbitration, the Sawtelle court nonetheless held Gore’s guidelines applicable to determine whether the arbitral award was grossly excessive, and thus irrational, and found the award indeed irrational and  in “manifest disregard” of the law governing punitive damages.

The same court reinstated, in State of New York v. Phillip Morris Inc., 308 A.D.2d 57(N.Y.A.D. 2003), lv. to appeal den., __N.E.2d __ (2003), a huge attorney’s fee award that the lower court had vacated as excessive, holding that the lower court lacked jurisdiction to investigate whether the award -- part of a tobacco litigation class action settlement which  had already been approved by another judge -- was in the state’s best interests.

In GMS Group, LLC v. Benderson, 326 F.3d 75 (2d Cir. 2003), when a customer alleging 10b-5 violations by his securities broker prevailed in arbitration, the broker grasped at language in a much-discussed decision, Halligan v. Piper Jaffray, Inc., 148 F.3d 197 (2d Cir. 1998), to argue that heightened scrutiny of awards is appropriate where statutory rights, such as rights under the Securities Exchange Act, are involved.   The court rejected that argument, stressing that Halligan concerned federal employment statutes which implicate special societal concerns, and moreover, that the court’s traditional test for manifest disregard  had not been enlarged by Halligan.

In Hardy v. Walsh Manning Securities, 341 F.3d 126 (2d Cir. 2003), the court remanded an “irrational” award to the arbitrators for clarification, while insisting that “[w]e are emphatically opening no floodgates here.”   The panel of NASD arbitrators had awarded a customer $2 million against his broker’s supervisor and the brokerage firm “based upon the principles of respondeat superior;”  however, the supervisor was not an officer of the firm and therefore as a matter of law not subject to liability under respondeat superior.   Given that the doctrine had been thoroughly briefed to the arbitrators and that liability was not based on the supervisor’s primary wrongdoing, the award was deemed irrational.

§ 1.6.3  Other Grounds for Vacatur


In Baxter International, Inc. v. Abbott Laboratories, 315 F.3d. 829 (7th Cir. 2003), reh. en banc den. 325 F.3d 954, cert. den. 124 S.Ct. 387, Baxter, the inventor of sevoflurane, an anesthetic, arbitrated a dispute with Abbott Laboratories, which held an exclusive license from Baxter to sell sevoflurane, arising from Baxter’s acquisition and intent to sell a competing product.   Abbott won an award keeping the competing product off the market until Baxter’s patent expired in 2006.   Baxter argued that the award sanctioned a per se violation of § 1 of the Sherman Act, and should therefore be vacated on the ground that arbitrators may not command parties to violate rules of law.   The court disagreed, noting that since the Supreme Court in Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 105 S.Ct. 3346 (1985), has held international arbitration of antitrust disputes appropriate, judicial review of antitrust awards is no broader than review of other arbitral awards.   Moreover, said the court, if the public interest is harmed by the award, the government may take action to obtain relief.  A vigorous dissent opined that the court had abdicated judicial responsibility and was plainly entitled to refuse enforcement of an award on public policy grounds.


In a case of first impression in Alabama, the court established criteria for vacating an arbitral award based on bias.  In Waverlee Homes, Inc. v. McMichael, 855 So.2d 493 (Sup. Ala. 2003), consumers claiming defects in their mobile home won a large award in an arbitration against the manufacturer.   The manufacturer then sought to vacate the award, claiming it was biased due to an undisclosed relationship between the arbitrator and plaintiffs’ attorney.  Applying the Supreme Court’s test in Commonwealth Coatings Corp. v. Continental Casualty Co., 89 S.Ct. 337 (1968), the Alabama court adopted a “reasonable impression of partiality” standard, requiring that the partiality alleged be “direct, definite, and capable of demonstration, rather than remote, uncertain and speculative.”  The case was remanded for an evidentiary hearing.


Arbitral Immunity

In Blue Cross Blue Shield of Texas v. Juneau, 114 S.W.3d 126 (Tx.Ct.Apps. 2003),  Healthcor, a health care provider, prevailed in an arbitration proceeding against Blue Cross. In addition to seeking vacatur of the award, Blue Cross sued Juneau, one of the arbitrators, for damages resulting from Juneau’s failure to disclose that he had worked in the same firm as Healthcor’s lawyer for a period of time.   Juneau claimed that he had made the disclosure as soon as the lawyer joined in Healthcor’s representation; he also asserted arbitral immunity.   In a case of first impression, the court recognized immunity for arbitrators, ruling that arbitral immunity, much like judicial immunity, is necessary to encourage arbitration and insulate the process from endless attack.

§ 1.7          Procedural Issues

§ 1.7.1  Barriers and Defenses to Arbitration

 Mental Incapacity

In Spahr v. Secco, 330 F.3d 1266 (10th Cir. 2003), an elderly man suffering from Alzheimer’s disease was defrauded by a rogue broker at his brokerage firm.  His account agreement with the brokerage firm contained an arbitration clause, raising an issue of first impression in the Tenth Circuit: should court or arbitrator decide whether mental incapacity rendered the agreement to arbitrate unenforceable? The court was mindful that under Prima Paint Corp. v. Flood & Conklin Mfg., 87 S.Ct. 1801 (1967), courts decide challenges to the making of the arbitration clause, to prevent the  arbitration of disputes that parties had not agreed to arbitrate, while arbitrators decide challenges to the making of contracts as a whole.  However, the Spahr court observed that whether a person’s mental incapacity impacted only his agreement to arbitrate or, conversely, the entire contract, was impossible to parse, and therefore concluded that Prima Paint could not apply to such a case.  The arbitration agreement was held unenforceable.


The Sixth Circuit held, in Fazio v. Lehman Brothers, Inc., 340 F.3d 386 (6th Cir. 2003), that customer claims arising out of a massive fraud committed by Cleveland stockbroker Frank Gruttadauria should be arbitrated as required by the customers’ brokerage account agreements.  The court held that under Prima Paint, supra, so long as customers had not been fraudulently induced to enter into their arbitration agreements, arbitration should proceed.  The lower court had held that the broker’s gigantic thefts had rendered the customers’ accounts fictitious, and accordingly the disputes not “account-related,” thus preventing arbitration.  The Sixth Circuit disagreed, noting that criminal activity such as churning is routinely the subject of arbitration, and that broker fraud was not unforeseeable conduct that customers would not have expected to arbitrate.   Moreover, the court rejected the customers’ contention that the arbitration agreements were unconscionable under Ohio law. However, the case was remanded to determine whether in particular instances, account agreement signatures had been forged, thereby negating an agreement to arbitrate.


In American Heritage Life Insurance Co. v. Lang, 321 F.3d 533 (5th Cir. 2003), rehearing en banc den., 65 Fed. Appx. 511, the plaintiff, who was illiterate, signed four separate stand-alone arbitration agreements in connection with loans and insurance he obtained; he then challenged arbitration, contending that there had been no meeting of the minds or, alternatively, that he was fraudulently induced to sign the agreements and had not known what he was signing.   The Lang court held that under Prima Paint, whether Lang had been fraudulently induced to sign the agreements was a matter for the court, not the arbitrator, to decide, because the alleged fraud was specifically directed at the stand-alone arbitration agreement and put in doubt whether a valid agreement to arbitrate existed.   The case was remanded for an evidentiary hearing.

Tribal Exhaustion

In Gaming World International, Ltd. v. White Earth Band of Chippewa Indians, 317 F.3d 840 (8th Cir. 2003), the parties had a contract to build a casino.  The contract provided for arbitration and for a limited waiver of tribal immunity.  The casino foundered and the Chippewa tribe commenced a proceeding in the tribal court to cancel the contract. Gaming World then asked the federal court to compel arbitration in accordance with the contract.  The court held that under the doctrine of tribal exhaustion, the tribal court must be given the opportunity to adjudicate the contract’s validity, before arbitration may be compelled.


In Matter of Mintze, 2003 WL 22701020 (E.D.Pa. 2003), a Chapter 13 debtor commenced an adversary, core proceeding in the Bankruptcy Court to rescind her home equity loan.  The lender then moved to compel arbitration pursuant to the loan contract’s arbitration clause.  The court exercised its discretion to refuse enforcement of the arbitration agreement, and the district court affirmed, holding that arbitration must give way to the bankruptcy court’s important interest in litigating the loan rescission, to preserve assets and protect all creditors.

The “Seamen” Exemption

In Brown v. Nabors Offshore Corp., 339 F.3d 391 (5th Cir. 2003), a roustabout was injured working on a jack-up rig which was not engaged in interstate commerce.  When he filed suit under the Jones Act, his employer sought to compel arbitration, contending that the FAA’s language exempting from arbitration “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce” exempts only those seamen “engaged in interstate commerce.”  The court rejected that construction, holding that Circuit City v. Adams had conclusively established that all seamen, engaged in interstate commerce or not, are exempt from the FAA’s reach.


In Saint Agnes Medical Center v. PacifiCare of California, 2003 WL 22965484, __ Cal. Rptr.3d__ (Sup.Ct. 2003), California’s high court overturned forty-year old precedent to hold that repudiating a contract does not categorically preclude seeking to arbitrate under that contract.   The court noted that its contrary ruling in Bertero v. Superior Court, 30 Cal.Rptr. 719 (1963), preceded Prima Paint, supra, 87 S.Ct. 1801 (1967), which held that arbitration clauses are separable from the contracts in which they are embedded, and therefore that challenges to a contract’s overall validity on fraudulent inducement, duress, or other grounds do not preclude arbitration  unless the arbitration clause itself is alleged to be invalid. Applying Prima Paint’s reasoning, the Saint Agnes court concluded that repudiation of a contract is not inconsistent with invoking arbitration under its (separable) arbitration clause.   Moreover, a party claiming that the right to arbitrate has been waived by litigating in court or other conduct, must show prejudice, which Saint Agnes failed to do.

In Restoration Preservation Masonry, Inc. v. Grove Europe Ltd., 325 F.3d 54 (1st Cir. 2003), defendants were held to have waived their right to arbitrate when they did not remove their case from state court and seek to compel arbitration until the eve of trial, four years after litigation had begun.   The First Circuit affirmed the lower court’s waiver finding and accordingly was able to sidestep a thorny procedural Catch-22 in the case - - when the district court found waiver, it remanded the case to state court, and such remand orders are not appealable under 28 U.S.C. 1447(d).

Contract Must be Read as a Whole

In Westmoreland Coal Co. v. Entech, Inc.,100 N.Y.2d 352 (Ct.Apps. 2003), Westmoreland purchased all of Entech’s coal mining subsidiaries’ stock.  The stock purchase agreement provided for purchase price adjustments keyed to Entech’s future financial statements, which Entech warranted would comply with GAAP (generally accepted accounting principles), and contained an ADR provision for determining purchase price adjustments.  The contract also provided that either party could seek indemnity in court for a breach of warranty.   Westmoreland eventually claimed entitlement to an additional $74 million in purchase price adjustments, contending that many of Entech’s asset values did not comply with GAAP, and invoked the contract’s ADR provision. Entech argued that the dispute belonged in court.   The Court of Appeals agreed with Entech: reading the contract as a whole, Westmoreland’s claim was essentially one for breach of representations and warranties, and such a claim, according to the contract, was intended to be litigated in court.

§ 1.7.2 Other Procedural Issues

Rooker –Feldman

In Pieper v. American Arbitration Association, Inc., 336 F.3d 458 (6th Cir. 2003), an Ohio state court compelled Pieper to arbitrate his dispute with business associates.  Pieper then asked the federal court to enjoin the AAA from conducting the arbitration.  The Sixth Circuit declined, holding that the Rooker-Feldman doctrine bars federal courts from reviewing state court judgments and from re-litigating claims that are “inextricably intertwined” with issues litigated in the state court proceeding.  (Pieper could have, but failed to appeal the state court ruling in state court.)  Pieper’s attempt to avoid Rooker-Feldman by contending that it applies only to rulings of a state’s highest court, was rejected.  Pieper’s petition for certiorari was pending at press time.

Immediate Appeal

In Bombardier Corp. v. National Railroad Passenger Corp., 333 F.3d 250 (D.C.Cir. 2003), a dispute arose between Amtrak and Bombardier, the manufacturer of the Acela trains, resulting in Bombardier commencing a lawsuit against Amtrak.   Amtrak moved to dismiss, contending that by failing to engage in dispute resolution as required under the parties’ contract, Bombardier had failed to satisfy a condition precedent to suit.   The district court denied the motion, and Amtrak sought to take an immediate appeal under FAA § 16, which generally permits immediate appeal from orders hostile to arbitration.  The Court of Appeals dismissed the appeal, holding that FAA § 16 was inapplicable because Amtrak was not seeking to compel arbitration, but rather, to end the litigation entirely due to the alleged failure to adhere to the contract’s dispute resolution requirements.


In Brayman Construction Corp. v. Home Insurance Co., 319 F.3d 622 (3rd Cir. 2003), Brayman bought a workers compensation insurance policy that contained a retrospective premium agreement (RPA); the RPA required additional premium payments in the event that a covered claim led to a judgment or settlement. When the insurer demanded additional premiums on a claim that Brayman had disputed, Brayman sued the insurer for bad faith, and the insurer sought to compel arbitration under the policy’s arbitration clause.  Brayman opposed arbitration, contending that under Pennsylvania case law, only state courts may decide insurance bad faith claims.   The appellate court rejected that contention, holding that the Pennsylvania law contravened the FAA and accordingly was preempted by it.

Cyberspace ADR Not Binding on Courts

The Second and Third Circuits both addressed the internet’s dispute resolution process.  In Dluhos v. Strasberg, 321 F.3d 365 (3rd Cir. 2003), Dluhos registered the domain name of; Strasberg’s representatives successfully challenged the registration in proceedings brought under the internet’s Uniform Domain Name Dispute Resolution Policy (UDRP). Dluhos simultaneously commenced an action against Strasberg under the Anticybersquatting Consumer Protection Act (ACPA) and other statutes to vacate the UDRP order transferring the domain name to Strasberg.   The district court refused to vacate the UDRP order, applying the FAA’s standards for reviewing arbitral awards.   The Court of Appeals reversed, holding that the UDRP procedures do not constitute “arbitration” governed by the FAA, because the procedures are not intended to replace formal litigation and indeed, plainly contemplate such litigation.   Accordingly, the UDRP outcome was not entitled to the “warm blanket” of deference afforded by the FAA to true arbitral awards, and the district court was directed to “review the [UDRP] award  de novo.”

In Storey v. Cello Holdings, L.L.C., 347 F.3d 370 (2d Cir. 2003), the Second Circuit further limited the impact of UDRP rulings on subsequent litigation. Proceedings under the UDRP had transferred the domain name from Storey to Cello.  Storey then brought an action under the ACPA seeking to reclaim his right to the name.  Storey argued that the UDRP ruling should be considered void on res judicata grounds (due to a prior litigation between the parties), while Cello contended that the UDRP ruling was dispositive. In sorting through the procedural tangle, the court rejected both positions, and  held that the UDRP explicitly permits “two bites at the apple.”  Since UDRP proceedings are non-binding and plainly contemplate an independent action under the ACPA, said the court, extending Dluhos, they are entitled to no deference or appellate-like review at all.

Collateral Estoppel Effect of Prior Arbitration

In Postlewaite v. McGraw-Hill, Inc., 333 F.3d 42 (2d Cir. 2003),  collateral estoppel was invoked by McGraw-Hill in a royalty dispute with authors.   McGraw-Hill contended that a previously confirmed arbitration award, which contained no explanation, necessarily established facts precluding the authors from re-litigating the point.  The Second Circuit disagreed, noting that parties asserting issue preclusion based on arbitration awards bear a heavy burden, since they must establish with “clarity and certainty” that the issue was necessarily decided in the prior proceeding.   Here the court could not conclude from the award that the arbitrators had necessarily made the factual finding asserted by McGraw-Hill.


Court, Not Arbitrator, Decides Preclusive Effect of Prior Judgment

In Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Benjamin, 1 A.D.3d 39 (N.Y.A.D. 2003), a New York appellate court barred arbitrators from determining the preclusive effect of a prior judgment.  Benjamin got divorced from Amy Clayton in a Connecticut action that distributed their assets.  Benjamin then commenced an NASD arbitration against Clayton and Merrill Lynch, claiming that they had mismanaged a joint brokerage account and wasted marital assets. In a case of first impression, the lower court granted Clayton’s and Merrill Lynch’s motion to stay the arbitration on the ground of res judicata, and the appellate court affirmed, rejecting Benjamin’s contention that under New York law, that determination must be made by the arbitrator.  Noting that New York public policy considerations exempt certain subjects from arbitration, namely, child custody and visitation, the disqualification and discipline of attorneys, and the enforcement of state antitrust law, the court added to that list the determination of court judgments’ preclusive effect on subsequent arbitrations.  Courts have a legitimate interest in protecting their judgments, said Benjamin, and do not want them transformed into “advisory opinions.”   However, arbitrators remain welcome to determine the preclusive effect of prior arbitration awards, and whether issue preclusion (collateral estoppel) is warranted.

In Collins v. D. R. Horton, Inc., 252 F.Supp.2d 936 (D.Ariz. 2003), the plaintiff sought to extend Benjamin’s rationale to require judicial rather than arbitral determination of a jury verdict’s collateral estoppel effect on an employment arbitration.  In a case of first impression in the Ninth Circuit, the court refused, holding that issue preclusion is simply a component of the dispute to be decided by the arbitrator like any other.

Choice of Law

In Cap Gemini Ernst & Young, U.S., L.L.C.  v. Nackel, 346 F.3d 360 (2d Cir. 2003), a California employee filed suit against his employer in California claiming unlawful retaliation.  The employer then sought to compel arbitration in New York under the parties’ arbitration agreement; the employee argued that the agreement was unconscionable.  The New York district court compelled arbitration but stayed the action rather than dismissing it, apparently to simplify confirmation of an award later.  When the employee appealed from the stay, the Second Circuit doubted the appealability under FAA § 16 of a non-final order compelling arbitration.  Although ultimately deciding that the appeal could be heard, the court warned the district courts that, in the future, orders compelling arbitration would be immediately appealable only if embodied in final orders of dismissal, not stays.

As to the merits, the court stated that an arbitration agreement’s unconscionability under state law must be determined before compelling arbitration, and noted that the Cap Gemini agreement might be unconscionable under California law. Although the arbitration agreement specified that New York law would apply to any dispute without regard to New York’s conflict of laws rules, the court held that parties’ choice of law provisions may be disregarded when the most significant contacts with the disputed matter are in another state.  Accordingly, the case was remanded  for further fact-finding with respect to the parties’ contacts and consideration of the unconscionability issue.

In Stawski Distributing Co., Inc. v. Browary Zywiec S.A., 349 F.3d 1023 (7th Cir. 2003), the Seventh Circuit agreed with Nackel’s reasoning that the parties’ choice of law provision in an arbitration agreement was not binding on the court. The arbitration agreement in Stawski was not a stand- alone document as required by the Illinois Beer Industry Fair Dealing Act (Beer Act), but instead was included in the parties’ beer distributorship contract; it also required arbitration in Poland and the application of Polish law, which also contravened the Beer Act.  Applying reasoning described by the appellate court as “novel,” the district court refused to compel arbitration, ruling that the 21st Amendment upholds Illinois’ right to restrict arbitration involving liquor. Reversing, the Seventh Circuit held that the Beer Act discriminated against arbitration agreements in violation of the FAA, and received no comfort from the 21st Amendment, which merely allows states to restrict liquor imports.   Accordingly, the court upheld the agreement to arbitrate in Poland, but invalidated the choice of law provision, holding that Illinois is entitled to insist on application of its own law to Illinois distributorships.

Amount in Controversy

In Sirotsky v. New York Stock Exchange, 347 F.3d 985 (7th Cir. 2003), Sirotsky lost in a NYSE arbitration against her broker in which she had sought $242,000; accordingly, the Stock Exchange assessed forum fees of $4,800 against her.   Sirotsky sought to vacate the award in Illinois state court based on the fact that her adversary’s lawyer had not been licensed in Illinois; the broker removed based on diversity jurisdiction, which requires a minimum of  $75,000 in controversy.   The case was then remanded due to inadequacy of the jurisdictional amount, based on Sirotsky’s contention that only the forum fees were at issue.   Judge Posner, in rare form, held that in a suit challenging an arbitration award, the amount in controversy includes the amount at stake in the arbitration, so long as the plaintiff is seeking to re-open the arbitration.   He also rejected Sirotsky’s challenge based on the unlicensed attorney, finding that it violated no rule of the NYSE; that said, the judge observed that if a party brought a pit bull to an arbitration to intimidate the arbitrators, it would run afoul of the FAA’s prohibition of awards procured by “undue means.”

All Writs Act

In American Honda Motor Co., Inc., Dealerships Relations Litigation, 315 F.3d 417 (4th Cir. 2003), cert. den. 124 S.Ct. 75, the court upheld its jurisdiction under the All Writs Act, 28 U.S.C. § 1651(a), to enjoin enforcement of an arbitral award confirmed in California state court proceedings.   The court cautioned that the All Writs Act may not be used as an “end run” around the Anti-Injunction Act, which prevents federal courts from enjoining state court proceedings except under limited circumstances, including to protect or effectuate its judgments.   Nonetheless, because the arbitral award had been obtained by misrepresentations to the arbitrator concerning the Honda Multidistrict litigation and contravened the settlement of that litigation, the court upheld the injunction.

Statute of Limitations: “May” Means “Must”

In Photopaint Technologies, LLC v. Smartlens Corp., 335 F.3d 152 (2d Cir. 2003), the Second Circuit reversed a decision noted in last year’s chapter.  In a case of first impression, the court adopted the lower court’s holding, contrary to Fourth and Eighth Circuit rulings, that FAA § 9 creates a one-year statute of limitations for confirming an award in a summary proceeding, despite the statute’s use of the normally permissive word “may.” However, the court then held, contrary to the ruling below, that the one-year limitation had been tolled by the parties’ conduct.

Party Arbitrations

In Encyclopaedia Universalis, S.A. v. Encyclopaedia Britannica, Inc., __F.Supp.2d __ , 2003 WL 22881820 (S.D.N.Y. 2003), the parties’ licensing agreement provided that in the event of a dispute, each party would appoint an arbitrator to a “Board of Arbitration.”  If these two arbitrators disagreed, the contract provided that they choose a third, neutral arbitrator, but if unable to agree on the third arbitrator, the international tribunal designated to administer the arbitration would appoint one.   When a dispute did arise, Encyclopaedia Universalis (EUSA) and Encyclopaedia Britannica (EB) each appointed arbitrators, but before conferring about the selection of the third arbitrator, EUSA’s arbitrator sought the appointment of the third arbitrator from the tribunal, over the protests of EB’s arbitrator.  The tribunal appointed a third arbitrator, departing from the appointment procedures specified in the contract.   EB’s arbitrator refused to participate in the ensuing arbitration, which proceeded in his absence and culminated in an award in favor of EUSA.   The court refused to confirm the award, holding that the premature and irregular appointment of the third arbitrator in violation of the contract had fatally tainted the proceeding. 


In Simpson v. Socialist People’s Libyan Arab Jamahiriya, 326 F.3d 230 (D.C.Cir. 2003), an American woman who was forcibly removed from a cruise ship and held captive for months by Libyans, sued Libya in federal court seeking damages for her ordeal.  Libya moved to dismiss the complaint, claiming immunity under the Foreign Sovereign Immunities Act (FSIA).   The district court denied the motion, noting that the FSIA denies immunity to state sponsors of terrorism such as Libya for acts of torture and hostage taking, on condition that they be afforded an opportunity to arbitrate if the alleged wrongdoing occurred in the foreign state.   The district court held that Simpson’s offer to arbitrate, made after filing her complaint but before Libya’s time to answer expired, was reasonable and timely. The court of appeals agreed.  However, the court held that Simpson failed to state a claim for torture, and permitted her to amend the complaint in an effort to state a claim for having been held hostage.





§ 1.8          Mediation

A federal court in Illinois denied plaintiffs’ motion to appoint a mediator in African-American Slave Descendants’ Litigation, 272 F.Supp.2d 755 (N.D.Ill. 2003).  The court first observed that although the federal ADR Act of 1998 permits district courts to establish mandatory mediation programs, the local rules for the Northern District of Illinois opted only for voluntary mediation.  The court acknowledged that it had inherent power to appoint a mediator, but declined to do so in light of defendants’ opposition.  (Their motion to dismiss, since granted, __ F.Supp.2d__, was pending.)

A mediator was compelled to testify regarding the finality of a settlement reached in court-annexed mediation, in New Horizon Financial Services,LLC v. First Financial Equities, Inc., 278 F.Supp.2d 259 (D.Conn.2003). The mediator had reported the case settled.  The court interpreted Connecticut’s mediation confidentiality statute as allowing mediators to testify in the interest of justice, and held that the interest of justice in enforcing settlement agreements outweighed the interest in preserving mediator neutrality.   Following the mediator’s testimony, the court issued a subsequent decision, reported at 2003 WL 22004255, enforcing the settlement.   The mediator testified that he conducted more than 100 mediations a year, had no independent recollection of this one, and relied on his notes to infer that the settlement had been finalized.

In George v. McClure, 2003 WL 356152, __ F.Supp.2d__ (M.D.N.C. 2003), plaintiff claimed that the defendant had made misrepresentations and submitted false affidavits in their court-ordered mediation, on which plaintiff relied in agreeing to a settlement that he now wished to undo.   The court held that under well-established principles, judgments (including those incorporating settlements) may be challenged in  independent actions only on the ground of extrinsic fraud, whereas the fraud alleged by plaintiff was intrinsic fraud.   Moreover, said the court, misrepresentations in a mediation, even where the mediation has been court-ordered, do not constitute fraud upon the court.

In Marland v. Safeway, Inc., 2003 WL 135647 (4th Cir. 2003) (not for publication), the court held that no cause of action for damages exists for a party’s refusal to mediate.  However, specific performance of an agreement to mediate may be obtained.

Finally, in United States Fidelity & Guaranty Co. v. Dick Corporation, 215 F.R.D. 503 (W.D.Pa. 2003), discovery was sought of documents comprising the settlement of a previous dispute concerning the Pittsburgh Pirates’ new stadium construction;  Pennsylvania’s mediation privilege was invoked to resist the discovery demand.   The stadium dispute had gone to mediation for one day, which did not produce a settlement; several months later, with no further assistance from the mediator, settlement was achieved by further direct negotiations among the parties.   The court held that the settlement documents were not protected by the mediation statute, because the statute protects only those communications made in a process involving a third-party mediator.  Here, the nexus between the mediator and the later settlement was too attenuated.   Practice tip:  keep the mediator in the loop!

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