U.S. Supreme Court finds Federal Arbitration Act states exclusive grounds for review of arbitration awards

A split U.S. Supreme Court ruled yesterday that the grounds for vacatur and modification of arbitration awards stated in the Federal Arbitration Act (FAA) at 9 U.S.C. sec. 9-11, are exclusive for parties seeking expedited review under the FAA.

The parties in Hall Street Associates, L.L.C. v. Mattel, Inc., proposed to arbitrate Hall Street’s claim for indemnification after Mattel’s right to terminate its lease was decided at a bench trial. The District Court approved and entered the parties' arbitration agreement as an order. The agreement required the court to vacate, modify, or correct any award if the arbitrator's conclusions of law were erroneous. In its ruling the Supreme Court noted that its holding decided “nothing about other possible avenues for judicial enforcement of awards.” It remanded the case for consideration of “independent issues.” The Court said that because the arbitration agreement was submitted to the District Court and adopted as an order, there was some question whether it should be treated as an exercise of the District Court's authority to manage its cases under Federal Rule of Civil Procedure 16.

U.S. Supreme Court: Federal Arbitration Act preempts state law

In a case widely followed because one of the parties is television personality "Judge Alex" Ferrer, the U.S. Supreme Court today bolstered the federal policy favoring arbitration.  The court held in Preston v. Ferrer that, where a contract provides for arbitration of disputes, a state cannot require that an administrative agency initially determine the contract's validity.  The Federal Arbitration Act preempts California's Talent Agencies Act to the extent that the state statute directs the state labor commissioner to determine the validity of a talent agency agreement, where that agreement includes an arbitration clause.

Washington Court of Appeals won't enforce a one-sided arbitration agreement

Although Washington law favors arbitration, the Washington Court of Appeals made clear this week that it will not enforce an arbitration agreement that lacks neutrality.  In Rodriguez v. Windemere Real Estate/Wall Street, Inc.  a real estate agent sued his brokerage, a franchisee of Windemere Real Estate Services (WRES), for unpaid commissions.  The brokerage moved to compel arbitration pursuant to a brokerage/sales associate agreement between the parties that required all disputes to be resolved through arbitration. The agreement entitled WRES to select the three-person arbitration panel from its “family” of owners, brokers, managers and sales associates, all of whom had contractual and financial ties to the company. On these facts, the court found the process lacked neutrality and was, therefore, unenforceable.

Oregon Court of Appeals on wrongful initiation of civil proceedings

If one person sues another without cause and with malice, the target of the lawsuit may have a tort claim for wrongful initiation of civil proceedings.  The Oregon Court of Appeals last week issued an opinion that may open the door to more such claims where the underlying lawsuit is resolved by a settlement and dismissal.

In Perry v. Rein, the court weighed in on a dispute in which a lawyer had been sued for his alleged role in a scam.  Following settlement and dismissal of that claim, the defendant sued the lawyer who prosecuted that first action, for wrongful initiation of civil proceedings.  One of the elements of such a claim is the termination of the first proceeding in favor of the party now suing for wrongful initiation.  The defendant in the second action obtained summary judgment on the ground that the settlement and voluntary dismissal in the first case showed that it was not terminated in the opposing party's favor.   The Court of Appeals reversed, holding, among other things, that it cannot be presumed that a dismissal associated with a settlement defeats a subsequent claim for wrongful initiation of civil proceedings. 

Governor signs bill limiting non-competition agreements

Earlier this week Gov. Ted Kulongoski signed into law Senate Bill 248, which significantly restricts Oregon employers' ability to require employee non-competition and arbitration agreements.  The new law applies to agreements entered into beginning January 1, 2008.  See our earlier coverage of the legislation, including a description of its key elements, here.

Washington Supreme Court: Arbitration awards do not collect pre-judgment interest from the date of the award

Today Washington's Supreme Court ruled that arbitration awards are not 'liquidated' until reduced to judgment and are therefore not subject to pre-judgment interest from the date of award.  In Washington Dep't of Corrections v. Fluor Daniel Inc., Fluor Daniels argued that it was entitled to pre-judgment interest from the date an arbiration award was entered in its favor to the date the award was reduced to judgment.  The Court disagreed, analogizing arbitration awards to jury awards that can be modified prior to being reduced to judgment.  The Court was careful to point out that it did not address whether the underlying damages had been liquidated and subject to pre-judgment interest.

Justice Sanders issued a dissenting opinion.

Oregon legislature curtails employee non-competition and arbitration agreements

At the end of its 2007 session, the Oregon legislature passed a bill that imposes significant new restrictions on employee arbitration and non-competition agreements.  If the governor signs Senate Bill 248 into law, both arbitration and non-competition agreements between employers and employees will be unenforceable unless (1) the employer informs the employee of the agreement by a written offer received at least two weeks before the first day of employment, or (2) the agreement is entered into upon subsequent bona fide advancement of the employee. 

In addition, aside from some restrictions specific to the broadcast industry, non-competition agreements will not be enforceable at all unless

• the employee is exempt from overtime pay under ORS 653.020(3),
• the employee has access to trade secrets or other competitively sensitive business information, and
• the employee's annual gross compensation at termination exceeds the median family income for a four-person family under Census Bureau guidelines. 

The bill provides that non-competition agreements will not be enforceable for a period longer than two years.

The new law says that the foregoing restrictions do not apply to employee or customer nonsolicitation agreements.  But it is unlikely that courts would uphold such nonsolicitation agreements where the employer is unable to show a protectable interest or that the restrictions as to time and/or scope are reasonable.

The new law will apply to arbitration and non-competition agreements entered into on or after January 1, 2008.

Court of Appeals upholds mandatory arbitration in employment contract

This week the Oregon Court of Appeals reversed the trial court's finding of unconscionability and upheld a mandatory arbitration clause in an employment contract, sending an employee's discrimination and other claims to an arbitrator instead of a jury.  Upon initial employment with the defendant, plaintiff signed an agreement to arbitrate all disputes rather than file suit in civil court.  Both federal and Oregon law favor arbitration, but the enforceability of any arbitration agreement in Oregon is governed by Oregon contract law.  "Unconscionability" is one defense to the enforcement of contracts in Oregon.  The test for "unconscionability" has two parts, one procedural and the other substantive.  A contract is procedurally unconscionable, and therefore not enforceable, if there is "oppression" or "surprise" in the "conditions of contract formation," but unequal bargaining power alone is insufficient for a finding of procedural unconscionability.  A contract is substantively unconscionable if the "terms" of the contract are "unreasonably" one-sided, such that their "effect" makes the parties' respective obligations "so unbalanced as to be unconscionable."

The Court reviewed the terms of the arbitration ageement in light of the foregoing, and held that the agreement was enforceable, sending the case back to be litigated in the agreed-upon arbitration forum.  In doing so, the Court noted that the agreement did not unfairly impair the employee's rights because it provided for the same law as would have applied in court, and for many of the same procedures followed by the courts.  Further, the agreeement did not impose restrictions on the type or amount of recovery that could be awarded by the arbitrator; did not exclude punitive damages or attorney fees; did not impose unreasonable limits on discovery or admissible evidence; and did not impose tight deadlines on the filing of claims.  To read the entire opinion in Motsinger v. Lithia Rose-FT, Inc., click here.

Class action prohibition in arbitration agreements: Be careful what you ask for

For years now, courts have enforced mandatory arbitration provisions in consumer and employment agreements.  The usual mandatory arbitration provision in a consumer or employment contract provides that all disputes of any kind shall be decided not in court, but by an arbitrator.  Early on, it was assumed that mandatory arbitration could only resolve individual suits.  More recently, however, plaintiffs have pursued class actions in arbitration, and many arbitration services today provide for class action arbitrations.  As a result, some companies and employers have responded by including within the arbitration clause a prohibition on class actions. 

According to plaintiffs' lawyers, combining the mandatory arbitral forum for dispute resolution with a prohibition on class actions, effectively eliminates the class action mechanism for mass resolution of, often, small-value claims that individual claimants would not otherwise pursue.  Some courts are beginning to agree, finding that a prohibition on class actions is "unconscionable" and, therefore, not enforceable.  See Riensche v. Cingular Wireless in which a Washington federal district court determined that the prohibition against class actions was "unconscionable" and denied the defendant's motion to compel arbitration.  An Oregon Court of Appeals case decided today similarly held that a prohibition on class actions, in part, rendered the otherwise mandatory arbitration agreement unenforceable.  See Vasquez-Lopez v. Beneficial Oregon, Inc. 

In both of these cases, the courts threw out the entire arbitration agreement, and the plaintiffs were allowed to litigate in court, an outcome the defendant had sought to avoid with the arbitration agreement in the first instance.  In other cases, the courts have struck the specific prohibition on  class actions, but otherwise upheld the arbitration agreement.  This leaves the defendant in the untenable position of facing a class action with a single arbitrator without the many procedural protections afforded to defendants in civil court. 

While it may be tempting to push the limits of mandatory arbitration as a way to rein in costly and protracted litigation, one should proceed with caution and seek competent counsel in defining the parameters of such agreements.

Parties can't be forced to mediate disputes, according to the California Court of Appeals

A court can't require a litigant to participate in mediation and pay the mediator's hourly fee, according to a case issued last week by the California Court of Appeals.  California has adopted laws allowing courts to order certain cases into mediation, and courts also commonly allow parties voluntarily to attempt to settle cases with the assistance of a mediator.  In  Jeld-Wen, Inc. v. Superior Court, the trial court in a multi-party construction defect case issued a case management order requiring that the parties participate in settlement conferences with a mediator, for a maximum of 100 hours.  The parties were ordered to pay the mediators' fee of $500 per hour.  When Jeld-Wen, which denied liability in the case, refused to attend a mediation session, the court issued an order compelling its participation and imposing monetary sanctions.

On review, the California Court of Appeals held that mediation is always voluntary, and a trial court has no authority to force a party to attend and pay for mediation.  "While trial courts may try to cajole the parties in complex actions into stipulating to private mediation, [the parties] cannot be forced or coerced over the threat of sanctions into attending and paying for private mediation, as this is antithetical to the entire concept of mediation."

Oregon establishes a "commercial court" specially for business disputes

Thanks to a pilot program that became effective on October 1, parties to business litigation in Oregon can now receive specialized treatment in their own "commercial court."  The novel program operates under the auspices of the Lane County Circuit Court.  The commercial court is designed to handle complex disputes that would be burdensome to the regular court docket.  According to the program's Operating Statement, the commercial court will provide judges and litigants with mechanisms for "fair, efficient and expeditious management of commercial and business litigation." 
The court's features include assignment of each case to a judge with special expertise for all proceedings, and the posting of written decisions in commercial cases on the court's web site.  Parties whose cases are assigned to the court must agree to participate in early alternative dispute resolution efforts, and to make an effort to conduct limited-issue discovery for the purpose of early dispositive motions or settlement. 
Cases pending outside of Lane County may under certain circumstances be transferred to the program by a motion for change of venue.
At a conference yesterday sponsored by the Oregon Law Institute, new Chief Justice Paul J. De Muniz described the commercial court program as one of his initiatives to ensure that Oregon has a competent judicial system on which the business community and the public at large can rely.