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The conventional wisdom is that binding arbitration is fast, cheap, simple and sure — at least compared to litigation. Recently, however, many lawyers have begun to question whether it really does cut time, money and complication. Among regular users, everyone seems to have a horror story. But at least when a client’s contract includes an arbitration clause, an attorney knows that disputes will be arbitrated and the results will be final. Or will they? During the last year or two, parties seem to be challenging with greater frequency orders to compel arbitration, and they seem to be succeeding more often. Efforts to modify or overturn awards also seem more common and, though still quite rare, they sometimes prevail. Several high-profile cases have raised questions about the state of the law, but a recent, lesser-known case illustrates how unpredictable arbitration can be. It was an automobile insurance dispute, and it sounded simple enough. In 1999, Pennsylvania resident Laverne Green was injured in an accident with an uninsured motorist. The Hartford Insurance Co. paid her $15,000, the maximum under her policy. But Green had a beef. Two years earlier, Green had taken over her ex-husband’s policy, and she claimed that the company had never given her an opportunity to raise her coverage to the same $100,000 provided for bodily injury. Green wanted the company to pay the $85,000 difference. At this point, the case veered into the unexpected. The contract had an arbitration clause, but Hartford didn’t invoke it. The company went to federal court with a motion for declaratory judgment. Green was the one who argued for arbitration. When District Judge Eduardo Robreno ordered the parties to arbitrate, Hartford appealed to the 3d U.S. Circuit Court of Appeals, which affirmed Robreno’s order. In May 2003, nearly four years after the accident, the arbitration panel found for Green. Hartford appealed to Robreno and moved for summary judgment. The judge concluded that the second time around there was an issue he could decide. “[T]he first case involved who should decide the issue … the arbitrators or the court,” Robreno wrote in his opinion last month, “while the second case involves, by contrast, whether the court has the power to review the arbitrators’ decision, and if so, what are the merits of the dispute.” Hartford Ins. Co. of the Midwest v. Green No. 03-3368 (E.D. Pa.) He had the authority to review the award, the judge reasoned, because Green’s argument was essentially that her policy was “contrary to legislative mandate or public policy”-exceptions to the general rule granting arbitrators final say. Robreno ruled that Hartford had no duty to ask if Green wanted to change the policy, and she never requested a change. So in the end, the same judge who sent the parties to arbitration in the first place vacated the arbitration award and granted Hartford’s motion for summary judgment. It wasn’t swift. It wasn’t simple. And it was anything but certain. SCANT STATITSTICS Statistics on this subject are hard to find, and most of the evidence is anecdotal. But Richard Ryder, editor and publisher of the Securities Arbitration Commentator newsletter, is convinced that litigation challenging arbitration is on the rise — and not just in securities cases. “My sense is that some of the judicial resistance to reviewing the work of arbitrators is fading, and some courts are reacting to the idea that arbitrators don’t usually provide explanations,” he said. “I think some judges are taking the viewpoint: ‘I’m not going to rubber-stamp this award. If the arbitrator isn’t going to tell me his reasoning, let me take a close look at it.’ “Courts are used to following the law,” Ryder continued, “and I think there’s professional difficulty with some judges in letting arbitrators make errors when it comes to the law, and trusting to their commercial expertise and business sophistication. Instead they’re holding arbitrators to the same standard that courts are held to. That was never intended, and there’s a great deal of case law that says that’s beyond the court’s review. “But it’s still true,” he added, “that awards are rarely overturned.” NEW YORK CASES A lawyer and arbitrator himself, Ryder once directed the national arbitration program of NASD (formerly National Association of Securities Dealers). In a recent issue of his newsletter, he cited the association’s 2003 statistics on vacaturs. Though they excluded challenges brought by customers who lost (which might raise the number significantly), they still showed parties attempted to overturn awards in 7 percent of the cases. Eliminating awards without monetary damages, the rate doubled. Of those that were decided, 28 percent of the challenges succeeded. “That is a high incidence of vacaturs … and it surprised us,” he wrote. Three large arbitration awards were reduced or thrown out by New York judges within 18 months. In February 2003, an appellate court vacated a $27 million arbitration award to a mutual fund broker who was fired and allegedly defamed by his employer. A trial court essentially left it intact, including $25 million in punitive damages. But the appellate court found that the punitive ratio of nearly 25-to-1 far exceeded the U.S. Supreme Court’s guidelines, in “manifest disregard of the law.” “In agreeing to arbitration,” the panel ruled, the defendant “did not waive its right to the protection of any constitutional and statutory constraints on the award of punitive damages.” The lawyer representing the brokerage firm called the decision “a landmark.” As far as he knew, it was the first to apply constitutional standards for punitives to an arbitration award. Sawtelle v. Waddell & Reed Inc., 754 N.Y.S.2d 264. In October 2002, the same court affirmed a trial court’s vacatur of a $28 million award to an investment house that claimed a biotech company owed it money. A trial court reviewing the award found that the firm had failed to provide “any competent evidence” supporting the panel’s decision. The appeals court affirmed and ruled that the investment house couldn’t seek lost profits, which effectively ended its case, and removed the arbitration panel over questions involving conflicts of interest. Sands Brothers & Co. v. Generex Pharm. Inc., Slip Op. No. 077711 (N.Y. App. Div.). The Sands trial judge also reduced another award from $5.6 million to less than $400,000 “based upon the arbitration panel’s irrational refusal to even consider the applicable law.” In re UBS Warburg v. Auerbach, Pollack & Richardson, Slip Op. No. 50017U (New York Co., N.Y., Sup. Ct.). These decisions left some New York lawyers wondering whether they are now obligated to appeal arbitration losses. Ryder noted that recent cases in California, Florida and in the 2nd and 6th U.S. Circuit Courts of Appeals also reflect judicial activism in response to arbitration decisions. ‘MANDATORY’ CASES UNDER FIRE’ The cases that have attracted the most passion and fury are mandatory employment agreements that require employees to arbitrate all disputes. Close behind are so-called consumer contracts of adhesion. These are sometimes included in the small print of credit card statements or product information. Consumers may only learn that they have “agreed” to arbitrate when they try to sue. “There’s an enormous amount of litigation over whether an award is valid and whether arbitration should be compelled,” said plaintiffs’ employment lawyer Cliff Palefsky, a ferocious opponent of mandatory arbitration. Challenges in court have “increased exponentially,” said Palefsky of San Francisco’s McGuinn, Hillsman & Palefsky. “I love ADR,” he said, referring to arbitration, mediation and other forms of alternative dispute resolution. “I use ADR more than anyone I know. But the mere act of making it mandatory undermines the perception of fairness that’s necessary.” When one side makes the rules and chooses the arbitrators, he said, it’s an invitation to abuse. “When people don’t have confidence going in, they won’t have confidence going out.” Consumers and employees seem to be enjoying some success in challenging arbitration, several lawyers said, by arguing that mandatory agreements weren’t entered into knowingly and voluntarily and are “unconscionable.” An article in April’s Corporate Counsel, a sister publication of the NLJ, suggested that many employers are rethinking mandatory arbitration, and that enthusiasm for the policy has waned. Michael Weber, managing partner in the New York office of employment specialists Littler Mendelson of San Francisco, acknowledged that some employers have been disillusioned by the legal challenges in what is a relatively new area of the law, and by the tendency of arbitrators to “I don’t want to say split the baby — but they tend to find something for everybody.” He’s seen his share of problems, he said, including a sexual harassment arbitration he handled in South Carolina that took three years to resolve and cost three times what it would have cost to litigate. Still, Weber believes court challenges are subsiding. “I would bet 99 out of 100 arbitrations are not overturned,” he said. “But the plaintiffs’ bar is not talking about those. The plaintiffs’ bar doesn’t like arbitration because it limits recovery. They want to get before a jury and say how badly their client was treated.” Challenges often result from poorly drafted agreements, he said, like ones that require employees to foot half the bill, which were found to be unenforceable. But an experienced lawyer can draft one that’s “bulletproof,” he said. Stephen Ware, a law professor at Kansas University who has written extensively on this subject, said even the term “mandatory arbitration” raises his hackles. They’re not mandatory, and are more accurately “predispute arbitration agreements” because, he wrote, “the consumer or employee has a choice to do business or not.” Though trial lawyers portray themselves as champions of “the little guy,” that’s not the whole story, he said in an interview. When they focus on the interests of their clients, they may believe those interests are aligned with all consumers or employees, but in Ware’s view they’re wrong. “Anything that costs businesses money, like losing a lawsuit or paying a lawyer to fight a lawsuit, is ultimately passed on to consumers in higher prices. So if arbitration reduces those costs, it likely benefits consumers as a whole while hurting some few consumers who, say, win a small award in arbitration when they might have won a big award in litigation.” He acknowledged that more awards are being overturned, though he believes the numbers are still small. Front-end challenges, on the other hand, are much more common and more often successful. But without statistics, it’s hard to know. “We see the broken arbitration decisions” in the media, he noted, while successful ones often go unreported. Still, the success of the system isn’t based on the percentage of agreements enforced by courts. There are agreements that are “unconscionable,” he acknowledged, and they deserve to be thrown out. Richard Naimark, senior vice president of the American Arbitration Association, agreed that in the relatively new consumer and employment areas, court involvement can be salutary. “Until the law is settled,” he predicted, “you’ll see more court decisions because it cries out for settling by the courts. I see it as a healthy evolutionary process.” New York Law Journal reporter Tamara Loomis contributed to this article.

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