ABA COMMITTEE ON CORPORATE COUNSEL
ADR AND ANTITRUST SUBCOMMITTEES
I. WHAT IS ADR?
Mediation and Arbitration are traditional methods of Alternative
Dispute Resolution (“ADR”). Parties may agree to use mediation and/orarbitration after a controversy has arisen, or may mandate it for
disagreements which may arise in the future by including a
mediation/arbitration clause in a contract, such as a franchise or
distributorship agreement. Mediation and arbitration fill the area between
negotiation and litigation as methods of resolving disputes.
In a mediation, a mediator meets with the parties, usually in both
group and individual sessions, and makes non-binding suggestions as to how
they might resolve their controversy. If the parties cannot resolve their
dispute by mediation, they may proceed to traditional legal means or may
move to arbitration.
Arbitration need not be preceded by mediation. Usually, the result of
arbitration is binding. Arbitrators are either selected directly by the parties
or are designated by an arbitration agency, such as the American
Arbitration Association (AAA). One or more arbitrators may serve on a
panel. The panel acts as both judge and jury in hearing the dispute and
issues a decision called an arbitration award. The award is final and
binding upon the parties and can be confirmed by a court and enforced as
a judgment. An award is rarely susceptible to reversal or modification on
review.
II. WHY ADR?
ADR, particularly mediation, has advantages over litigation.
Particularly, in the mediation setting these include:
– Time and expense are reduced.
– The parties may enjoy increased control over the process and
outcome.
– The parties have improved communications, more opportunities
to deal with underlying issues, less tension, greater understanding
and trust, and less destructiveness than other processes.
– Both reasonable and unreasonable expectations of the parties can
be addressed.
– Complex issues among multiple parties may be addressed more
easily.
– More settlement options may be created through discussion,
avoiding a zero-sum approach.
– If settlement is achieved, there is generally a higher degree of
commitment to the settlement.
– The process teaches dispute resolution skills, providing the
parties a basis for future negotiations and a continuing
relationship.
Business executives largely favor ADR. A recent survey by >Business
Week< magazine found that 97% of the respondents favored greater use
of ADR. On related issues, 91% endorsed judicial screening, 83% support
loser pays winner’s costs, 49% favored restriction of pre-trial discovery,
28% endorsed the restriction on the use of expert witnesses, and 28%
favored increased spending on courts, apparently to speed resolution of
disputes.
III. ISSUES TO SPOT IN USING ADR
Since ADR is a consensual device, the participants write the rules. In
this respect, committing to ADR is much like writing a will or an estate
plan. Particularly when the process is mandated in a contract, such as a
franchise or distributorship agreement, it is important to anticipate how
disputes will arise and how they may be most easily solved. Some terms
may be included, some are prohibited, and where aspects are not covered
by the writing, state or federal statutes or arbitration agency rules often fill
in the blanks. Leaving more “blanks” gives others more opportunity to “fill
in” your rules. Set forth below are some general issues to consider, with
information about some recent cases in these areas. Because of its
consensual nature, mediation produces little litigation of issues when
compared to arbitration.
A. RIGHT TO ARBITRATE/MEDIATE
Arbitration is strongly favored, and courts often go to lengths to
enforce agreements to arbitrate. Any doubts as to the right to
arbitrate should be resolved in favor of arbitration; the policy of
the law is to favor enforcement of arbitration agreements.
>Moses H. Cone Memorial Hospital v. Mercury Construction<,
460 U.S. 1, 24-25, 103 S.Ct. 927 (1983); >AT&T Technologies v.
Communication Workers of America<, 475 U.S. 643, 650, 106
S.Ct. 1415 (1986); >Charles J. Rounds Co. v. Joint Council of
Teamsters No. 42<, 4 Cal. 3d 888, 892, 95 Cal. Rptr. 53 (1971);
>Keating v. Superior Court<, 31 Cal. 3d 384, 83 Cal. Rptr. 360
(1982); >Conejo Valley Unified School District v. Williams
Blurock and Partners, Inc.<, 111 Cal. App. 3d 983, 990, 169 Cal.
Rptr. 102 (1980).
Public policy endorses arbitration as a speedy and inexpensive
means of dispute resolution. >Valsan Partners, Ltd. Partnership
v. Calcor Space Facility, Inc.<, 25 Cal. App. 4th 809, 30 Cal.
Rptr. 2d 785 (1994); >Slaught v. Bencomo Roofing Co.<, 25 Cal.
App. 4th 744, 30 Cal. Rptr. 2d 618 (1994). As a result, courts will
closely scrutinize any claim of exemption or waiver of arbitration,
and indulge every intendment, so as to give effect to arbitration proceedings. >Keating v. Superior Court<, 31 Cal. 3d 584, 183
Cal. Rptr. 360 (1982).
A claim that a party was “tricked or defrauded” into agreeing to
arbitrate, generally requires a factual showing to the court that
the party did not know they were making an agreement at all.
The fact that a party understood they were entering into a
relationship (e.g., opening an account) indicates they knew they
were changing their legal relations and were entering an
agreement. >Clark v. Prudential Securities, Inc.<, 40 Cal. App.
4th 766, 47 Cal. Rptr. 2d 63 (1995). This case contains a good
short summary of California cases enforcing arbitration under
Federal Arbitration Act (FAA), and how procedural
gamesmanship such as claims of fraud should not be permitted to
undermine the advantages of arbitration.
Under the FAA, when there is doubt as to whether a dispute is
within an arbitration agreement, whether the arbitrability of a
dispute is to be settled by a court or the arbitrator is a question
of contract. The parties can agree to “arbitrate arbitrability” but
such an agreement is not presumed, “there must be clear and
unmistakable evidence that they did so.” Ordinary state rules of
contract interpretation apply. This is opposite of the assumptions
that apply to the question of whether an issue is within the scope
of an arbitration agreement, in which all presumptions apply to
broadly impose arbitration. >First Options of Chicago, Inc. v.
Kaplan<, __ U.S. __, 115 S.Ct. 1920 (1995).
Franchise agreement and lease disputes were “inextricably
intertwined” so that an unlawful detainer action should be subject
to the arbitration agreement contained in the franchise agreement
even though the lease did not have an arbitration agreement.
>Pioneer Take Out Corp. V. Bhavsar<, 209 Cal. App. 3d 1353,
257 Cal. Rptr. 749 (1989).
Contracts can incorporate terms of other contracts by reference,
if they do so clearly and unambiguously. This can include
arbitration agreements, incorporated by general reference, such
as making a subcontractor “bound by all of the terms and
conditions” of a principal contract that includes arbitration.
>Slaught v. Bencomo Roofing Co.<, 25 Cal. App. 4th 744, 30
Cal. Rptr. 2d 618 (1994).
Where parties have separate contractual relationships, involving
separate enterprises and most importantly separate commercial risks, an arbitration clause which governs one contractual
relationship cannot be imposed in the other relationship.
>Marsch v. Williams<, 23 Cal. App. 4th 238, 28 Cal. Rptr. 2d
402 (1994).
California arbitration law has some substantial pitfalls for parties
wishing to enforce arbitration over the objection of their
opponent. A common tactic of filing a complaint or cross-
complaint that adds a “third party” who has not agreed to
arbitrate can throw a substantial obstacle onto the road to
1281.2 provides that, in such circumstances involving “third
parties” who have not agreed to arbitrate, the court has many
discretionary options, including: (1) ordering arbitration of the
entire controversy among all parties; (2) ordering arbitration of
the controversy between the parties who have agreed to arbitrate,
while staying the action against the other parties; (3) severing
issues between the arbitrating parties the non-arbitrating
parties; or (4) denying arbitration entirely.
Even if a franchise or distribution agreement did not include an
arbitration term, one can be added by subsequent agreement. In
fact, an agreement to arbitrate can be made even after a dispute
has arisen. “[A] written agreement to submit to arbitration an
existing controversy or a controversy thereafter arising is valid,
1281. Where parties “have not previously agreed to arbitrate a
dispute, they may agree to do so” by evidencing an intent to
commence an arbitration. >Blatt v. Farley<, 226 Cal.App.3d 621,
626, 276 Cal.Rptr. 612 (1990).
B. PARTIES TO THE PROCEEDING
Both California and Federal courts hold that a person who is
alleged to have acted as an “agent” of a party to an arbitration
agreement can enforce the right to arbitrate, in the same manner
as the putative principal. In >Dryer v. Los Angeles Rams<, 40
Cal. 3d 406, 220 Cal.Rptr. 807 (1985), the California Supreme
Court ordered a plaintiff to arbitrate with individual defendants
who had not signed the arbitration agreement that was the subject
of plaintiff’s claims against his employer, the Rams. Dryer’s
allegation that the non-signatory individual defendants were the
“owners, operators, managing agents and in control of” the Rams
was sufficient to empower the individuals to compel arbitration.
>See also Izzy v. Mesquite Country Club<, 186 Cal. App. 3d
1309, 231 Cal. Rptr. 315 (1986); >Thomas v. Perry<, 200 Cal. App. 3d 510, 246 Cal. Rptr. 156 (1988); and >Pritzker v. Merrill
Lynch, Pierce, Fenner & Smith<, 7 F.3d 1110 (3rd. Cir. 1993).
C. ISSUES TO BE DETERMINED
An arbitration agreement that broadly states that all disputes
between the parties will be arbitrated, necessarily includes
statute of limitations issues. The apparent passage of the
statute of limitations is neither a waiver of arbitration rights
nor a basis for revocation of the agreement. The arbitrator is
to determine whether there was a failure to file the arbitration
claim within the statute of limitations. >Kennedy, Cabot & Co.
v. National Association of Security Dealers, Inc.<, 96 Daily
Journal D.A.R. 475 (Cal. Ct. App. 1996)
Res judicata and collateral estoppel doctrines apply not only to
judicial proceedings but also to arbitration proceedings. Although
the arbitrator derives his power solely from the arbitration
agreement and has no power to decide issues not submitted, case
law indicates that arbitrating parties are obliged to present all
matters within the scope of the arbitration, related to the subject
matter and relevant to the issues. >Thibodeau v. Crum<, 4 Cal.
App. 4th 749, 6 Cal. Rptr. 2d 27 (1992).
D. SELECTION OF THE FORM OF THE PROCEEDING
1. Mediation
a. Early Neutral Evaluation
b. Case Management
c. Summary Jury Trial
d. Mini-Trial
e. Pure Mediation
f. Settlement Conference
g. Binding Mediation
2. Arbitration
a. Non-Binding Arbitration
b. Baseball Arbitration
c. Night Baseball
d. Binding Arbitration
E. CASE ADMINISTRATION
1. Handcrafted — Parties Agree on the Rules
2. JAMSEndispute
a. JAMS RulesTailored Proceeding
b. Panelist Selection
c. Fee Selection
3. AAA
a. Formal Rules for Various Types of Disputes
b. Fee Calculation
4. Judicial Reference
a. Referee for Some or All Issues
b. Particular Issues of the Controversy
(1) Discovery
(2) Questions of Fact
F. APPLICABLE LAW
1. Arbitration Procedures
a. Federal Arbitration Act
The Federal Arbitration Act (FAA) can be applied whenever a contract including an arbitration agreement
“affects interstate commerce.” >Allied-Bruce Terminex
Company v. Dobson<, __U.S.__, 115 S.Ct. 834, 836-39
(1995). The parties need not contemplate that interstate
commerce will be affected by their transactions; all that
is required is that the transactions involved ultimately
did affect interstate commerce. > Id. < at 841. The
standard of “affecting interstate commerce” is by far the
broadest and easiest federal jurisdictional threshold to
cross. As the Ninth Circuit has held, “[T]he ‘affects
commerce’ jurisdictional obstacle is very low indeed.
* * * If the [party] uses items that have moved through
interstate commerce at some point in their lives, or
serves persons from out of state, or engages in activity
that, even if purely local, would alter the relationships of
an interstate market, the ‘affects commerce’ requirement
is satisfied.” >Equal Opportunity Employment Comm.
v. Ratliff<, 906 F.2d 1314, 1316 (9th Cir. 1990).
When FAA applies, it should be used to compel
arbitration even in a proceeding in a state court. >Main
v. Merrill, Lynch, Pierce, Fenner & Smith<, 67 Cal.
App. 3d 19, 24, 136 Cal. Rptr. 378 (1977).
State and federal courts have concurrent jurisdiction
under the FAA. >Southland Corp. v. Keating<, 465
U.S. 1, 15-16, 104 S.Ct. 852 (1984).
The FAA is often a more attractive vehicle to reach
arbitration. There is no provision under the FAA like 1281.2,
discussed above, which provides the court with options when a
“third party” is added. Under the FAA, and the court is
required to send all parties who have agreed to arbitrate
into arbitration, and stay any conflicting litigation
regardless of whether it involves third parties.
b. State Law
1280, >et seq.<
2. Choice of Law
Some complex issues can arise when the parties include some
form of “choice of law” term in a contract that “affects
interstate commerce.” In >Volt Information Services v. Board of Trustees<, 489 U.S. 468, 109 S.Ct. 1248 (1989), the
trial court found that parties to a contract that “affected
commerce” had nevertheless intended to select California
procedural as well as substantive law, because of a “choice of
law” term that was not very specific. The procedural law of
a state generally includes its arbitration laws. The U.S.
Supreme Court decided that such an agreement is binding as
the party’s agreement to override the application of the FAA
and instead apply state arbitration law. The U.S. Supreme
Court found that the provisions of California Code of Civil
1281.2 are not so hostile to arbitration that they are preempted
by the FAA. >See also Mastrobuono v.Shearson Lehman Hutton<,
__ U.S. __, 115 S.Ct. 1212 (1995); >Todd Shipyards Corp.
v. Cunard Line, Ltd.<, 943 F.2d 1056, 1062 (1991); and
>J. Alexander Securities, Inc. v. Mendez<, 17 Cal. App. 4th
1083, 21 Cal. Rptr. 2d 826 (1993).
1281.2, the FAA and the case authority as to choice of law
can create some very intricate analyses and difficult questions
that often must be litigated before the parties can even get
to arbitration. >See< “Flow Chart Analysis” attached.
G. VENUE
Effective January 1, 1995, California has rendered unenforceable
forum-selection clauses that mandate venue in another state for
a dispute under a franchise agreement involving a franchised
California business. Most multi-state franchisors include in their
agreements a provision establishing venue for disputes in their
home state. California ‘s prevents California franchisees from
being forced to litigate claims arising out of their franchise
agreements out-of-state. The statute does not address choice-of-
law provisions. It does not seek to preclude transfer of an action
involving a California franchise to an out-of-state court under the
doctrine of forum non conveniens. Cal. Bus. & Prof. Code
20040.5.
Whether the Federal Arbitration Act preempts a state law that
declares void the designation of an out-of-state venue in an
arbitration clause is unclear. One U.S. District Court has held
that such a state law is preempted. >Alphagraphics Franchising,
Inc. v. Whaler Graphics, Inc.<, 840 F.Supp. 708 (D. Ariz. 1993)
Venue of a motion to compel arbitration is in the district specified in agreement as the venue for the arbitration.
>Bosworth v. Ehvenreich<, 823 F.Supp. 1175, 1180 (D.N.J.
1993).
H. CONFIDENTIALITY
1. Information learned in the process
2. Creating confidential settlements
a. Mediation v. Arbitration
I. COMPOSITION OF THE PANEL
The Kaiser HMO’s service agreements require arbitration of all
claims under a program which Kaiser administers from an
admittedly “adversarial” perspective. Each side chooses an
arbitrator. These two must agree on a third “neutral” arbitrator.
Kaiser allegedly uses its knowledge of previous rulings and its
control of its own party arbitrator to control selection of the
neutral arbitrator. The First District Court of Appeal in San
Francisco rejected charges of unconscionability and fraud directed
at the arbitration program. The California Supreme Court has
recently granted review of this decision. >Engalla v. Permanente
Medical Group, Inc.<, 37 Cal. App. 4th 497 (1995), modified and
rehearing denied, 37 Cal. App. 4th 1576.
1. Differing Choices for MediationArbitration?
2. Number
3. Qualifications
a. Retired Judge
b. Professional Mediator
c. Lawyer
d. Lay Person
J. CONDUCT OF THE PROCEEDINGS
1. Court-like or informal
Summary adjudication motions can be heard in AAA
arbitrations, in the discretion of the arbitrator. If such
procedures were not permitted in arbitration, it could take
longer to get an adjudication in an arbitration than in a court
action, because a full evidentiary hearing would always be
required even when there are no disputed facts; such an
anomaly is to be avoided. The procedures used must be such
as to afford the party opposing the motion a fair opportunity
to present its position. >Schlessinger v. Rosenfeld, Meyer &
Susman<, 95 Daily Journal D.A.R. 16112 (Cal. Ct. App.
1995).
2. Discovery
a. Under State Law
b. Under AAA Rules
3. Schedule of Proceedings
4. Rules of Evidence
a. Generally Not Enforced
b. Use Agreement
5. Record of Proceedings
K. AVAILABLE REMEDIES
1. Injunctive Relief
Provisional remedies can usually be obtained without waiver
1281.8.
2. Punitive Damages
NY law prohibits arbitrators from awarding punitive damages, and NY law was the “choice of law” per contract.
Still, this only designated the substantive law to be applied
by the arbitrators, it does not preclude the arbitrators from
awarding punitive damages. That is controlled by the scope
of the arbitration provided in the agreement. Here, broad
general language was sufficient to empower arbitrators to
award punitives. >Alexander Securities, Inc. v. Mendez<
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[tlt_header important=”3″]TABLE OF CONTENTS[/tlt_header]
I. WHAT IS ADR?
II. WHY ADR?
III. ISSUES TO SPOT IN USING ADR
A. RIGHT TO ARBITRATE/MEDIATE
B. PARTIES TO THE PROCEEDING
C. ISSUES TO BE DETERMINED
D. SELECTION OF THE FORM OF THE PROCEEDING
1. Mediation
a. Early Neutral Evaluation
b. Case Management
c. Summary Jury Trial
d. Mini-Trial
e. Pure Mediation
f. Settlement Conference
g. Binding Mediation
2. Arbitration
a. Non-Binding Arbitration
b. Baseball Arbitration
c. Night Baseball
d. Binding Arbitration
E. CASE ADMINISTRATION
1. Handcrafted — Parties Agree on the Rules
2. JAMSEndispute
a. JAMS RulesTailored Proceeding
b. Panelist Selection
c. Fee Selection
3. AAA
a. Formal Rules for Various Types of Disputes
b. Fee Calculation
4. Judicial Reference
a. Referee for Some or All Issues
b. Particular Issues of the Controversy
(1) Discovery
(2) Questions of Fact
F. APPLICABLE LAW
1. Arbitration Procedures
a. Federal Arbitration Act b. State Law
2. Choice of Law
G. VENUE
H. CONFIDENTIALITY
1. Information learned in the process
2. Creating confidential settlements
a. Mediation v. Arbitration
I. COMPOSITION OF THE PANEL
1. Differing Choices for MediationArbitration?
2. Number
3. Qualifications
a. Retired Judge
b. Professional Mediator
c. Lawyer
d. Lay Person
J. CONDUCT OF THE PROCEEDINGS
1. Court-like or informal
2. Discovery
a. Under State Law
b. Under AAA Rules
3. Schedule of Proceedings
4. Rules of Evidence
a. Generally Not Enforced
b. Use Agreement
5. Record of Proceedings
K. AVAILABLE REMEDIES
1. Injunctive Relief
2. Punitive Damages
L. ENTRY OF THE AWARD
1. Form
a. Findings and Conclusions – Yes or No
b. Timing of Issuance of Award
2. Parties Bound
M. REVIEW
N. FEES & EXPENSES
1. Prevailing Party Provision
2. Shifting of Arbitration Expenses
IV. BIOGRAPHICAL SKETCHES OF PANEL
