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) Technorati Tags: arbitration, ADR, law, Supreme Court

Today was a busy day at the U.S. Supreme Court; five opinions were handed down. Others have commented about them all. One of the opinions, however, discusses Federal Arbitration Act (“FAA”) preemption of state administrative proceedings and as such is something we need to mention. The case, Preston vs. Ferrer (link is to .pdf file), involves a dispute between noted television jurist Judge Alex and an attorney who may or may not have been his “talent agent”. Indeed, the substantive question underlying the entire dispute was whether or not Mr. Preston was a talent agent, as that term is used by California’s Talent Agencies Act (which we decline to refer to as TAA, since around here that acronym means Texas Arbitration Act). In short, Preston performed certain services for Judge Alex pursuant to a contract, which contained an arbitration clause. Preston claimed Judge Alex owed him fees under the contract and initiated an arbitration proceeding seeking the fees. In response, Judge Alex argued that Preston had served as a talent agent pursuant to the CTAA, but that he was not licensed as such as required by The Act. That being the case, Judge Alex argued that the contract, including the arbitration clause, was void. Furthermore, he argued that since the CTAA gives the California Labor Commissioner exclusive jurisdiction to determine whether or not someone is a talent agent, the arbitration ought to be stayed pending that determination. In the meantime, the Supreme Court handed down its Buckeye Check Cashing opinion, which more or less eviscerated Judge Alex’s contention that a contract’s voidness allows him to avoid arbitration. Judge Alex, undeterred by this development, argues that a mandatory state administrative proceeding is not addressed by Buckeye. According to Judge Alex, since California has an administrative proceeding which must be followed prior to Judge Alex’s ability to proceed with litigation, that administrative remedy must be exhausted before arbitration can commence. The Supreme Court disagrees. According to this morning’s opinion, the parties’ agreement to arbitrate triggers the FAA, which in turn preempts the CTAA. It is up to the arbitrator, not the Labor Commissioner or the courts, to determine whether or not Mr. Preston was a talent agent, and therefore whether or not his contract with Judge Alex is void. Justice Thomas, as usual, dissented, writing again that he does not feel the FAA ought to pre-empt state-court proceedings. All of this, of course, is made more interesting by the fact that these TV judge shows are all just arbitrations. I wonder if any litigation has arisen out of Judge Alex’s arbitration clause? Perhaps the folks at the Florida Arbitration Blog know. Preston v. Ferrer, 552 U.S. ___ (2008) (Cause No. 06-1463) Technorati Tags: arbitration, law, Supreme Court

About a week ago, the Fifth Circuit handed down an opinion in an Amway distributorship dispute (link is to .pdf file) which rejects, after a decade of arbitration and arbitrability litigation, a claim by Amway that certain disputes had to be arbitrated. As followers of this area are aware, a Fifth Circuit opinion rejecting arbitrability is noteworthy in and of itself. Amway, of course, is a company that sells products through distributors who in turn are expected to recruit other distributors to sell products. Commissions are paid not only on products an individual distributor sells, but also on products distributors recruited by that individual sells. In other words, the real money is made when a distributor creates a network of sub-distributors, who in turn, ideally, then recruit sub-sub distributors. As of 1998, Amway included in its distributorship agreements a specific agreement to arbitrate any disputes between Amway and its distributors, including disputes over the calculation of commissions. Prior to that time, however, Amway’s distributorship agreement did not contain an arbitration clause. Instead, it contained language that required distributors to comply with Amway’s Rules of Conduct, which Amway retained the right to amend at will. In 1997, Amway did in fact amend its Rules to include an arbitration requirement. That same year, in June, a group of Amway distributors had complained to Amway about a variety of issues, including the manner in which their commissions were calculated. Later that year, Amway added the arbitration requirement to its Rules, and in January 1998 the Distributors sued. Amway sought and achieved a litigation stay in favor of arbitration, and Amway ultimately prevailed at arbitration. The distributors, at every step of this process, challenged the case’s arbitrability, arguing that since Amway retained the right to unilaterally amend its Rules, and the Rules contained the arbitration agreement, the agreement was illusory and unenforceable. Last week, the Fifth Circuit, applying Texas law under the FAA, agreed. According to the Fifth Circuit, all of the disputes subject to the arbitration arose prior to the 1997 arbitration Rule. That being the case, since Amway could unilaterally add arbitration to its Rules, it could also unilaterally remove it or change the policy. This distinguishes Amway’s rule from the policy approved of in the Texas Supreme Court’s Halliburton opinion. In that case, once Halliburton’s arbitration policy took effect, Halliburton could not revoke it without providing written notice. Furthermore, that policy did not apply to disputes of which Halliburton had notice prior to the inception of the policy. No such restrictions bound the Amway Plan, at least as of 1997. That being the case, the Fifth Circuit, after ten years of arbitration and related litigation, ruled that the dispute was not in fact arbitrable. An purported agreement to arbitrate is not enforceable in Texas if the party seeking to impose it can amend, modify or revoke it at will. Such an “agreement” would be illusory. It is important to remember, of course, that this analysis must apply specifically to the arbitration agreement, not to the contract between the parties as a whole. All of this, of course, is probably not as exciting as it at first seems. While the very fact that the Fifth Circuit has rejected an arbitrability argument is newsworthy (or at least blogworthy), the precedent is probably not all that helpful for most practitioners. It would be quite easy for a company, like Amway, to avoid the issue that torpedoed Amway by simply copying the approved-of language from Halliburton’s policy which the Amway court distinguished. The opinion does not, in other words, stand for the proposition that companies like Amway and Halliburton cannot impose arbitration on their employees and contractors at will. Instead, it simply seems to say that the imposition cannot be willy-nilly. Which is a distinction that ought to be easily avoided by reasonably careful drafting. Nonetheless, the opinion does perhaps reflect a blossoming trend of greater scrutiny being applied to arbitration, generally, particularly in situations marked by stark disparity of bargaining power between the parties. Morrison, et al. v. Amway, et al., ___ F3d ___ (5th Cir. 2008), Cause No. 06-20138. Technorati Tags: arbitration, ADR, Fifth Circuit, law

In the context of a slightly complicated procedural situation, the Texas Supreme Court made the following ruling earlier today: in a case where a court compels arbitration, the party resisting arbitration files a petition for mandamus challenging arbitration, the petition is denied, the party loses the arbitration, and the party resists confirmation of the award without success, in that case, the party is still able to challenge arbitrability in the final appeal of the judgment confirming the arbitral award. Assuming, of course, that the party did not waive its challenge to arbitrability (which it most certainly did not in this case). In other words, the fact that a court had already denied the petition for mandamus on the arbitrability issue did not deprive the Court of Appeals of jurisdiction over the subsequent appeal of the same issue. The case, by the way, is but the latest installment of the John O’Quinn arbitration against a group of his former clients. Chambers v. O’Quinn, ___ S.W.3d ___ (Tex. 2007) (Cause No. 06-1073). Technorati Tags: arbitration, Texas Supreme Court, law