Disputing

Prof. Rau sent the following comments to Karl in response to our thoughts about his recent article on Hall Street v. Mattel. They are helpful, and they raise a question for our readers, that is, for lawyers in the trenches in Texas. The [unedited] comments follow:

Two points, one small, one rather larger: I’m not entirely sure that parties do still have the option of using arbitration to generate “an agreed statement of facts” so that they can bring an action on such an agreed statement: After all, an “award,” to have legal effect, has to pretend to be dispositive, and after Hall Street, it seems that any “award” would be entitled to full confirmation—-notwithstanding the wishes of the parties and notwithstanding the presence of egregious legal error. (I was suggesting that since the parties could always, on their own, agree on a statement of facts, and then submit it to the court, an arbitration award, entered into pursuant to an agreement of the parties, should be treated the same way—that’s the point made by Justice Breyer in oral argument, but he was, alas, in the dissent, and I fear that ship has sailed.)

Here’s something that’s more important: What does appear to be still open to the parties is to hire a retired judge as a private arbitrator, tailor the procedure as they wish, invoke the state’s “Rent-a-Judge” statute, and then have full review on errors of law, just like from a trial court, in the court of appeals. I’d be very curious to hear from your readers how many people have ever taken advantage of this statute—and, as I suspect the anser is “few,” to learn why more people don’t feel comfortable in using it.

A couple weeks ago, Prof. Rau over at the law school (with whom Karl has co-spoken about arbitration at a number of CLE programs) sent us a copy of his recent dissection of the Hall Street vs. Mattel Supreme Court opinion (link is to .pdf file), about which we blogged when it came out. The Professor, ahem, is not impressed with either the result or the handiwork:

What truly appalled me about Hall Street, however, is not so much the unfortunate result, but rather the grotesque deficiencies in craftsmanship, in rhetoric, in argument. What we have, to be precise, is a remarkably inept and amateurish performance: A hapless law student would merit a C- for this (Neither Life nor the Law should be graded on a “curve,” although our students — and the Justices’ clerks who were students so recently — are accustomed to benefiting from that more generous treatment).

Alan Rau, “Fear of Freedom,” American Review of International Arbitration, Spring 2008. Given the obvious pleasure and skill with which Rau insults the U.S. Supreme Court, we are reluctant to dip our toe into this discussion, but, according to footnote 102 of his paper, blogs “are hardly intended as treasures of deliberate, judicious, thoughtful reflection,” so we trust that he’ll hold us to a lesser standard than Justice Souter (of whom he is doubly disappointed, given that they both attended Harvard Law School).

Indisputably, the ADR Prof Blog, has already commented on the article and praised Prof. Rau’s writing style, which can be described as candid, or perhaps unfettered by the normal conventions of academic journal writing (”the Hall Street opinion must, then, represent a new low in context-free, policy-free, abstract, non-functional decision-making”). Rau, in other words, calls em like he sees em, and he has published an outright mockery of the Hall Street opinion that would be an entertaining read even for those who have not devoted years of thought to the question of whether or not it makes sense to be able to write a customized standard of review into an arbitration clause (presumably - Karl and I actually wrote an entire CLE paper about this issue back in early 2005 - that paper, of course, is now “wrong,” based on Hall Street - so this actually is an issue we’ve thought about for years).

At any rate, as readers of this blog know, Hall Street held that parties cannot write customized standards of review into arbitration clauses; the only permitted bases for vacating an arbitral award under the FAA are those set out in the statute. Prior to that opinion, the Fifth Circuit had allowed parties to contract for arbitral appeals, on the basis that arbitration is a creature of contract, and if parties are allowed to decide the scope of possible disputes that they will arbitrate, then they ought to be allowed to decide whether or not the eventual arbitral award will be appealable. This was the subject of our 2005 CLE paper, and it is, of course, no longer the law.

Prof. Rau, to use his own analogy, performs a careful dissection of Justice Souter’s opinion which is liberally sprinkled with footnotes to sources such as Samuel Johnson, Gerald Dworkin, Francis Jeffrey and Elias Canetti. One remarkable footnote (No. 60) spends more than a page debunking a claim from Justice Stevens’ dissent (the overall substance of which Rau actually thinks is correct) by revealing that the sources Stevens cites for a proposition in fact say the opposite:

How morbidly fascinating I find this process of tracking ignorance to its lair, of discovering one lame and empty assertion that turns out to be supported only by another. This is of course a classic illustration of the perpetuation of error by serial citation — a common problem notably with “student articles” — but I am reminded above all of Brueghel’s chilling version in Naples of the parable of the blind leading the blind. And what a revelation, that one can not only spout any kind of historical nonsense with impunity, but even be rewarded with recognition at the highest levels.

We will not attempt to summarize his article here; instead, we will simply note that anyone who finds this blog remotely interesting should read it. What we will do, though, is point out a couple practical lessons those of us fussing about these things can learn from the Professor.

First of all, notwithstanding Hall Street, it is probably still possible to achieve the result that the Hall Street parties wanted. The Hall Street arbitration clause basically allowed for judicial review of the arbitral award to correct legal error (which is in fact exactly what had happened in the case). In Texas, as Prof. Rau notes, it is possible to submit a dispute to the Court for trial upon an agreed statement of facts. Tex. R. Civ. P. 263. That being the case, parties who wish to maintain some appeal of legal issues could, frankly, save a few bucks by only referring factual issues to arbitration, and then using the facts determined by the arbitrator as the agreed facts to submit to the Court. The trial court’s ruling on those facts would be subject to appeal. Furthermore, as Prof. Rau notes, this system would enjoy the bonus of having the appellate review performed by courts of appeals, rather than by trial courts. In any event, the point remains that while Hall Street and the FAA clearly restrict any attempts to expand judicial review of an award, nothing precludes parties from restricting the scope of whatever potential disputes they want to refer to arbitration. That being the case, parties can simply leave certain aspects of their case to the courts from the beginning.

Prof. Rau also spends some time discussing the state of the law with respect to “non-statutory” grounds for vacatur (manifest disregard for the law and public policy), even going as far as to cite to a blog (his first such citation, according to the note). The point he makes here is a critical one. Lost in the discussion about alternative theories for vacatur is the statutory requirement that the arbitrator not exceed his or her authority. Arbitrators draw their power from contracts, so, again, even if parties cannot craft alternative standards of review for their arbitrable disputes, they certainly can take care when setting forth the arbitrator’s authority. As to public policy as a means of vacatur, Rau dismisses concerns that Hall Street limits it. According to Rau, “vacatur for public policy is a necessary fail safe, universally understood in every legal system as a ground — ’statutory’ or ‘non statutory’ — for refusing to honor an award. However rarely successful, it must somehow be made to fit within the architecture of our law of arbitration.”

Earlier this morning, the Florida Arbitration Blog, a blog we read regularly and think highly of, posted a fairly critical review of an article in the Defense Research Institute’s magazine that apparently laments the pervasive use of mandatory arbitration as an assault on the jury system. Since the DRI does not allow non-members access to its magazine, Florida Arbitration Blog could not share a link to the article itself. Since we are not members of DRI, we have not read the article but instead rely on FAB’s summary.

At any rate, this interests us because the offending article was written by “the Texas representative to the [DRI]” (who was un-named in the review). The Florida review was more critical of the article’s tone than its content:

In the April 2008 of the publication, “For the Defense,” the Texas representative to the Defense Research Institute claims that arbitation and ADR “meant simply ambush your adversary and steal his cattle, wife and daughters, and be done with it.” This anachronistic sentence is probably meant to be more Texan than misogenistic, but it is an interesting viewpoint coming from a DRI representative.

Taken out of context, it is impossible for us to evaluate whether or not the quoted language was fairly reflective of the piece as a whole, but we do take some issue with FAB’s critique of the DRI article.

The Florida Blog acknowledged that the concerns at the root of the article are in fact widespread (if, in their opinion, overstated); the blog seemed more worried about the forum for the discussion than the substance. According to the Florida Blog, the article in question was apparently out of line because it raised concerns about the pervasiveness of binding arbitration in a publication aimed at lawyers who are often hired by clients who put this system in place in the first place, who are often charged with enforcing arbitration clauses, and who simultaneously offer advice on how to enforce arbitration clauses. I actually find it refreshing that DRI has vocal representative members interested in the long-term affects of a policy which, arguably, implicates the jury system as a whole, a system which is in fact fundamental to American representative democracy.

The Florida Blog, while acknowledging an increasing criticism of over-use of the arbitration process, says that “I am unaware of any serious suggestion that arbitration was intended ‘curtail or do away with the jury system.’” This seems to me to be a bit of a dodge. Any given arbitration clause is, of course, specifically designed to do away with the possibility of a jury trial with respect to the transaction to which the clause relates. Every case that is arbitrated curtails the jury system to some extent. Here in Texas, as this blog has tried to objectively report, the caselaw has been overwhelmingly pro-arbitration. That being the case, it does seem important to carefully consider the implications. In other words, whether or not arbitration as a construct was “intended” to curtail the jury system, it is in fact curtailing the jury system to some degree. We ought to be curious to what degree, and we ought to discuss whether or not, and to what extent, this is a big deal.

Again, I have not had the opportunity to read the article in question, so I do not know if the Texas DRI representative’s language was over the top, as suggested by the Florida Arbitration Blog. I do know, though, that a discussion among the bar (even the defense bar) about the long-term ramifications of commonplace binding arbitration is something we consider to be of vital importance. To that end, we hate to see an involved lawyer get criticized for raising the issue, even if the manner in which Texans sometimes write ruffles some feathers for its apparent “anachronism.”

Karl recently presented a new paper on discovery in arbitration proceedings at the State Bar’s Advanced Evidence and Discovery Course in Houston and San Antonio. Since we get lots of requests for these papers, we’ve now created a permanent page for all of them on our main website. Help yourself. Remember, though, that the law changes quickly, and parts of even the most recent papers are outdated and, in some cases, flat out wrong. By way of example, Hall Street vs. Mattel makes an entire section of our main arbitration paper exactly wrong. Even so, though, we hope these are helpful.

Lately, we’ve been getting some requests to add a feature to the blog that allows for email subscription. So, you now ought to see a link in the sidebar which claims to provide just that service. If it works as promised, subscribers ought to get an email each day delivering content, if and to the extent new content has been generated that day. Hope this helps. As always, please do not hesitate to email or call us directly with any questions, or if this does not work for some reason.

Well, it took a couple weeks, but the Texas Supreme Court has reverted to its pre-Perry Homes stance on the circumstances in which a party may or may not waive its right to compel arbitration. On Friday, while we were otherwise indisposed and unable to blog, the Texas Supreme Court found that a party’s decision to remove a case to federal court (and then agree to a remand back to state court) did not “substantially invoke the judicial process” and thus did not waive that party’s right to later invoke an arbitration clause.

The per curiam opinion adds little to what, before Perry Homes, we would have said was the clearly established position of a Supreme Court that had never, to our knowledge, stepped in to find waiver. The opinion is in fact quite similar to the Bank One opinion we blogged about last February. In both cases, the Supreme Court overruled trial courts and courts of appeals that had found that something other than sheer quantity of activity can be a gauge of substantial invocation of the litigation process. In both Bank One and Friday’s Citigroup case, in other words, it was the nature of the party’s action that had caused waiver, not the sheer bulk of action that had taken place; in Bank One, it was a motion for new trial, while in Citigroup it was a removal, both actions that specifically invoked a court’s jurisdiction.

For the second time now, the Supreme Court has sent a clear signal that it frankly does not care what type of activity a putative waivor takes when considering whether that activity invokes the judicial process. In other words, according to the Court, requesting a court to assume jurisdiction over the case somehow does not “invoke the judicial process”. The only factor that the Supreme Court has considered in these cases is the question of how many depositions had been taken, how many motions had been filed and how close to trial were the parties when the motion to compel arbitration is filed.

In re: Citigroup, ___ S.W.3d ___ (Tex. 2008) (Cause No. 06-0886).

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I picked the wrong week to go on vacation. While I was on an airplane coming back from France, the Texas Supreme Court issued its long-awaited opinion in the Perry Homes Case. The Texas legal blogosphere has already been all over it, and the Supreme Court of Texas Blog has posted a nice recap of the commentary.

At the risk of coming to the party late, we’ll still offer some comments on Friday’s opinion. Robert and Jane Cull bought a house from Perry Homes that was apparently a lemon. According to the majority opinion, the Culls filed lawsuits against Parry Homes and a couple third-party warranty providers who requested, but apparently did not insist on, arbitration. After discovery had been completed at the district court level, indeed some four days prior to the beginning of trial in the case, the Culls invoked the arbitration clause and successfully moved to have the trial abated in favor of arbitration. The defendants objected on the basis that the Culls had waived their right to arbitrate.

About a year later, the Culls won their arbitration. The Defendants in the case sought vacatur of the award on the basis that the Culls had waived their right to invoke the arbitration clause by waiting until the eve of trial to attempt to do so. The trial court and the Court of Appeals sided with the Culls, finding that no waiver had occurred. A majority of the Texas Supreme Court disagreed.

One cannot really fault the court of appeals and the trial court for finding no waiver. On numerous occasions in the past, we have blogged about the extremely onerous standard that Texas Courts, particularly the Supreme Court, have applied when considering whether or not a party has waived its right to arbitrate. In this case, however, after noting that it has never found waiver before so it was a bit unclear as to what factors might support such a finding, the Court lays out an admittedly fact-specific framework for arbitration waiver analysis in Texas.

In this case, the Culls had initially filed a 79-page objection to arbitration, complaining that the American Arbitration Association was “incompetent” and “biased”. Next, they conducted extensive discovery and filed five motions to compel. Finally, after 14 months of discovery, they moved to compel arbitration on the eve of trial. Even given the high burden set out by previous Texas Supreme Court opinions on this issue, these facts certainly seem to support waiver, if such a thing exists in Texas.

So, one would think this would have been a fairly ho-hum opinion, noteworthy only in that it is the first Texas Supreme Court opinion that does not come down in favor of arbitration since we’ve been following closely. However, the case has gotten a tremendous amount of press, and criticism from those who one would normally expect to applaud an opinion finding waiver in this context, because the winner, Perry Homes, is a big supporter of many of the justices on the Court. In other words, say the critics, the first time this Texas Supreme Court ever wrote a word opposing an arbitration, it did so to erase a large judgment against a major financial backer. Whether or not that is a valid political criticism is beyond the scope of this blog. However, we do note that the facts in this case support waiver, and that the case is a landmark one if only because it is an outlier. It is possible, in Texas, to waive one’s right to arbitrate, after all.

Perry Homes v. Cull, ___ S.W.3d ___ (Tex. 2008), Cause No. 05-0882.

PS: we will address issues raised by the dissents and by other bloggers when time allows. In the meantime, I need to wade through the piles of emails and mail that accumulated while I was out.

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Karl and I just got the following email from sometime contributor Glen Wilkerson about Hall Street v. Mattel, a recent U.S. Supreme Court opinion that many, including us, have blogged about. Glen’s comments are copied below without edits (with permission, of course):

Dear Colleague:

The US Supreme Court handed down an arbitration opinion on March 25, 2008, in
Hall Street Associates, L.L.C. v. Mattel, Inc., 28 S. Ct. 1396 (U.S. March 25, 2008).

The case has, in my view, great implications - - certainly for practitioners
in Texas.

The reasons are:

(a) the Court holds that the scope of judicial review under the FAA is
exclusive – AND - - the parties may not modify the specific scope of the FAA judicial
review provisions by contract;

(b) we all know that the reach of the FAA in Texas through the Texas
Supreme Court decisions is vast;

(c) hence in any case implicated under the FAA even in Texas state court -
- a party who LOSES an arbitration and seeks review under a case governed by the FAA in
state court will face this opinion being cited by the prevailing party as limiting the
scope of “judicial review” EVEN IF the underlying contract granted a wider scope of
judicial review;

(d) the “exclusivity” arguments on arbitration under the FAA has a vague
scope - - i.e. what OTHER parts of the negotiated arbitration agreement that may
“deviate” from the FAA will be held to be barred by the FAA - - a conclusion that could
be outcome determinative and definitely contrary to the expectations of the parties.

Conclusion: Very huge trap for the unwary. One that DRAFTERS may not have considered.

THIS IS A BRIEF SUMMARY OF THE CASE (see entire case for details)

Parties had an arbitration clause. The clause states that “[t]he United States
District Court for the District of Oregon may enter judgment upon any award, either by
confirming the award or by vacating, modifying or correcting the award. The Court shall
vacate, modify or correct any award: (i) where the arbitrator’s findings of facts are
not supported by substantial evidence, or (ii) where the arbitrator’s conclusions of
law are erroneous.”

On appeal to the District Court, the trial court found that arbitrator had made
a legal error and sent it back. Ultimately the winner in arbitration contended that
“legal error” was not a proper ground under the FAA EVEN THOUGH the contract permitted
“legal error” review.

That is, the winner at arbitration said: you can only obtain vacatur on the
EXACT grounds of the FAA - - the main ground being “manifest disregard of law” - - not
the same as “legal error”.

The opinion was 7 to 3.

The holding was: the FAA “scope of judicial review” provisions were EXCLUSIVE.

THUS - - the parties contractual agreement is of no force and is essentially
VOID.

The majority claims that reading the FAA as “exclusive” substantiates “. . . .
. . . a national policy favoring arbitration with just the limited review needed to
maintain arbitration’s essential virtue of resolving disputes straightaway.”

Stevens, in dissent, put the issue succinctly.

“Today, however, the Court holds that the FAA does not merely authorize the vacation or
enforcement of awards on specified grounds, but also FORBIDS enforcement of perfectly
reasonable judicial review provisions in arbitration agreements fairly negotiated by
the parties and approved by the district court. Because this result conflicts with the
primary purpose of the FAA and ignores the historical context in which the Act was
passed, I respectfully dissent.” (Emphasis Added)

Glen M. Wilkerson
Davis & Wilkerson, P.C.
wilkerson@dwlaw.com
(512) 482 0614

Today, the Texas Supreme Court handed down nineteen (19) opinions. None of them, however, has anything to do with arbitration. One of them, though, resolved an issue which has divided the courts of appeals and with which we had to grapple not too long ago. Since we have not been blogging much lately (we’ve been working a lot), we thought we’d mention it.

As of today, Rule 202 no longer allows the pre-lawsuit deposition of a physician to investigate a potential health care liability claim. In 2003, the Texas Legislature re-codified the law governing medical malpractice litigation and added a number of new provisions intended to make such claims more difficult to pursue. One of them, Section 74.351 of the Civil Practice & Remedies Code, precludes depositions in these cases until after the Plaintiff has satisfied his or her expert report requirement. Since the expert report requirement is not triggered until the lawsuit is filed, and since the whole point of Rule 202 depositions is that they take place pre-suit, no Rule 202 deposition of a physician will take place, in the real world, after the expert report has been submitted. Health care providers, therefore, have argued since 2003 that Rule 202 depositions are not available in claims against them.

Of course, Chapter 74 applies to health care liability claims. Since there is no lawsuit when Rule 202 depositions are requested, some lawyers (us included) and some courts of appeals have argued that Chapter 74’s requirements simply do not apply in the Rule 202 context; they have not yet been triggered. Not so, according to the Supreme Court. Chapter 74 uses the term “cause of action” generally, writes Justice Brister. One’s cause of action arises before the lawsuit is filed, so no lawsuit need be filed for Chapter 74 to apply. All that is required is that the injury have taken place.

In re: Jack Jordan, M.D., ___ S.W.3d ___ (Tex. 2008) (Cause No. 06-0369).

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Almost three years ago, we started monitoring the rapidly developing law of arbitration by way of a CLE paper Karl presented to a State Bar seminar in Dallas. That paper was called Standards of Review as Applied to Arbitral Decisions, and at its conclusion we advised seminar attendees and other readers that even though arbitral awards were for most intents and purposes not appealable, nothing prevented parties, in the Fifth Circuit anyway, from crafting their own standards of review and grounds for appeal of arbitral awards. Since arbitration is a creature of contract, the argument went, parties should be able to contract for an appeal.

Yesterday, in Hall Street v. Mattel (link is to .pdf file), the United States Supreme Court slammed the door on that option, rendering our prior paper dangerously wrong in the event anyone finds a copy on the internet or at a law library and refers to it. As of today, the Federal Arbitration Act provides the exclusive standards a court may employ when deciding whether to confirm an arbitral award or vacate it. Our paper, in the non-dangerously wrong sections, explains those standards.

Interestingly, the Court does not on the face of the opinion preclude the continued use of the manifest disregard standard for reviewing arbitral awards that federal courts have employed under the FAA. This standard, of course, is not found in the FAA, so Hall Street’s logic probably ought to eviscerate it as well, but the Court specifically does not do so. Instead, the opinion muses that manifest disregard may simply be a shorthand method of referring to explicit statutory grounds for vacatur in the aggregate. In any event, it is a question of trees falling in an abandoned forest (to abuse a metaphor), since manifest disregard is almost never actually found, in the Fifth Circuit anyway.

Finally, the other interesting point about the Hall Street opinion is its exclusive applicability to FAA cases. The Court makes a point to note that its rule does not apply to state laws governing the review of arbitral awards. That being the case, in a pure Texas Arbitration Act case one can argue that Hall Street does not apply. This may well become another entry on the short list of important reasons a lawyer needs to consider whether she wants the TAA or the FAA to apply to the consideration of an arbitral award.

Hall Street Associates v. Mattel, Inc., ___ U.S. ___ (2008) (Cause No. 06-989)

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