Edward and Kandis will be joined by fellow panelist Barbara Lyons, Founder of the Bucks County Mediation and Arbitration Center.

The notable reasons for taking the arbitration route as opposed to heading to the Courthouse have only been exacerbated in recent months. We’ve seen what technology can (and can’t) do, what happens when the courthouse calendar gets further backlogged, and resources are slim. Where is arbitration heading in the legal profession?

Edward and Kandis will be joined by fellow panelists Nelson C. Bellido, Managing Partner of ROIG Lawyers in Miami, Florida; Marcus Wester, Senior Litigation Counsel, Harley-Davidson Motor Company; and Ingeuneal C. Gray, VP, Commercial Division, American Arbitration Association.

This 3-hour CLE will review the history of arbitration and the United State’s growing trend favoring arbitration. The panel, comprised of experienced practitioners and arbitrators, will discuss the preliminary conference, discovery, awards as well as considerations for increasing the efficiency in arbitration.

Edward and Kandis are joined by Mason Avrigian Jr., Post & Schell, Matthew S. Olesh, Obermayer Rebmann Maxwell & Hippel LLP, and Dennis R. Suplee, Schnader Harrison Segal & Lewis LLP.

You can register for the CLE through Pennsylvania Bar Institute’s website: http://www.pbi.org/Meetings/Meeting.aspx?ID=35620

If you are unable to attend but would like to learn more about the subject, please contact Kandis at kkovalsky@KHFlaw.com.

This recent decision has implications for how practitioners understand the court system and arbitration system to usually work, as well as raising already-existent questions about the fairness of arbitration clauses and its applicability for various types of claims.

In a recent decision from the U.S. Court of Appeals for the Third Circuit, we saw a rare event—the court affirmed the district court’s decision to vacate an arbitration award in Monongahela Valley Hospital v. United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union, AFL-CIO, CLC, ___F.3d___ (3d Cir. Dec. 30, 2019). This case exemplified one of the rare situations in which the courts have decided to exercise authority and “correct” arbitration awards that have appeared to be blatantly unfair, which could arise from a variety of reasons. This recent decision has implications for how practitioners understand the court system and arbitration system to usually work, as well as raising already-existent questions about the fairness of arbitration clauses and its applicability for various types of claims.

Monongahela Valley Hospital involved a dispute between the hospital and one of its “bargaining unit” employees who are members of the union under a collective bargaining agreement (CBA). About half of the employees of the hospital are supervisors who are not bargaining unit employees. The CBA governed the relationship between the hospital and the bargaining unit employees. The grievances centered around the hospital’s denial of a unit bargaining employee’s request for vacation due to a non-unit bargaining employee’s request for the same time off. The hospital denied the unit bargaining employee’s request because her supervisor, a nonbargaining unit employee, had requested the same week off and both could not be away at the same time. Using its authority to have the “final” say in the matter, the hospital denied the bargaining unit employee’s request.

The employee brought the grievances to the union, arguing that, under the CBA, the union employees were supposed to be given priority over nonunion employees in scheduling days off, if there were overlapping conflicts. Their dispute ultimately led to arbitration. The arbitrator sustained the grievance, ruling that, “notwithstanding the hospital’s reservation of exclusive rights contained in the CBA relating to the final say in scheduling vacations,” the CBA precluded the hospital from denying senior bargaining unit employees “when there is no operating need.” The phrase “operating need” is not found anywhere in the CBA. Rather, the phrase was inserted by the arbitrator in supporting his decision in favor of the union.

After the arbitrator sustained the union’s grievance and ruled in favor of the union, the hospital filed a complaint with the U.S. District Court for the Western District of Pennsylvania, arguing that the arbitrator disregarded the language of the CBA. More details about the history of the case can be read here in the Third Circuit’s opinion.

Using the words of the famous 1960 United Steelworkers v. Enterprise Wheel & Car U.S. Supreme Court decision, the Third Circuit stated that the arbitrator was not free to dispense “his own brand of industrial justice” through interpreting the agreement in this manner. The court held that the arbitrator exceeded the scope of his authority when he injected the phrase “operating need” restriction into the CBA. The court noted its decision was unusual in that courts typically give a heavy degree of deference to arbitrators.

Indeed, Monongahela Valley Hospital seems like a departure from the recent trend of courts broadening the applicability of arbitration clauses and authority of arbitrators. In last year’s Henry Schein v. Archer & White Sales, 139 S.Ct. 524 (2019), for instance, the court eliminated the “wholly groundless” exception in regard to arbitrability, stating in its unanimous opinion that it was inconsistent with both the Federal Arbitration Act and court precedent. If the parties involved have an agreement that gives the arbitrator authority to decide upon the arbitrability question, a court cannot override that agreement. In other words, it is the arbitrator, not the court, who decides the arbitrability question as long as the arbitration clause provides for it no matter how that seems unfair. In the opinion delivered by Justice Brett Kavanaugh, the court concluded that it is “not at liberty to rewrite the statute passed by Congress and signed by the president,” and that the courts “must respect the parties’ decision as embodied” in their contracts.

The decisions in Epic Systems v. Lewis, 138 S.Ct. 1612 (2018), and Lamps Plus v. Varela, 139 S.Ct. 1407 (2019), also followed the trend of favoring arbitration and limiting judicial review. In Epic Systems (a case concerning the class arbitrability of Fair Labor Standards Act claims), the majority held that the arbitration clause in question did not allow for classwide arbitration and could not be overruled by the courts. Similarly, in Lamps Plus, the majority held that the arbitration agreement did not allow for classwide arbitration, and the courts could not “compel” such. In both of these cases, four justices issued strongly worded dissenting opinions. In Lamps Plus, in particular, the four justices who dissented, each wrote his or her own opinion, showing their strong feelings against the pro-arbitration trend.

Against this background, Monongahela Valley Hospital seems remarkable. Although the decision did not relate to the arbitrability question or similar arbitration scope or breadth question, the case represents a rare situation where the court held the arbitrator exceeded the authority. The Third Circuit and the district court seemed they were sensitive to some harsh criticisms made toward arbitration. For instance, major publications like The New York Times have recently written articles such as “In Arbitration, a ‘Privatization of the Justice System’” that have painted the consequences of arbitration clauses in a harsh light, considering the extreme events that have transpired due to their existence. Other even criticized arbitrators who seem to be in the pocket of the major companies involved in proceedings.

In response to these concerns over arbitration, the House of Representatives passed the Forced Arbitration Injustice Repeal Act (the FAIR ACT) in September 2019. This legislation is meant to prohibit both the forced arbitration of “future employment, consumer, antitrust, or civil rights disputes” and “agreements and practices that interfere with the right of individuals, workers, and small businesses to participate in a joint, class, or collective action related to an employment, consumer, antitrust or civil rights dispute.” See H.R. 1423—Forced Arbitration Injustice Repeal Act for full details on the proposed bill. It has been received in the Senate but not voted on yet. If this legislation were to pass, it would have great implications for many companies, as the presence of forced arbitration clauses in contracts has grown in recent years. Clauses that limit potential disputes to arbitration-only are found in everything from consumer contracts with credit card companies to agreements with healthcare providers.

What Is the Future of Arbitration?

There is no doubt the recent Supreme Court decisions show a strong trend toward favoring arbitration and its applicability. On the other hand, the House of Representatives and certain consumer advocate groups are trying to limit the scope and applicability of arbitration. Until the law changes and the FAIR ACT (or similar) passes, it appears the trend favoring arbitration and its applicability will continue. Until that happens, a case like Monongahela Valley Hospital will likely remain a “rare situation.”

Edward T. Kang is the managing member of Kang Haggerty LLC. He devotes the majority of his practice to business litigation and other litigation involving business entities. Contact him at ekang@khflaw.com.

Reprinted with permission from the January 23, 2020 edition of “The Legal Intelligencer” © 2020 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or reprints@alm.com.

In a recent article I co-authored, I discussed the “wholly groundless” exception to delegation clauses under the Federal Arbitration Act, “Should an Arbitrator Determine Arbitrability Where a Claim Is ‘Wholly Groundless’?” The Legal Intelligencer (July 26, 2018). There, I discussed the circuit split on this issue and that the U.S. Supreme Court would soon decide this issue for good. And the court has.

On Jan. 8, writing for a unanimous court in his first written opinion, Justice Brett Kavanaugh held that the wholly groundless exception to arbitrability is inconsistent with the FAA and, therefore, no such exception exists, see Henry Schein v. Archer & White Sales, ___ S.Ct. ___, 2019 WL 122164 (Jan. 8, 2019). The court held “when the parties’ contract delegates the arbitrability question to an arbitrator, a court may not override the contract, even if the court thinks that the arbitrability claim is wholly groundless.” In concluding this, the court stated, “the act contains no ‘wholly groundless’ exception, and we may not engraft our own exceptions onto the statutory text.”

Arbitration, whether compulsory or voluntary, is commonplace these days as a less expensive and more efficient resolution to litigation than trial. Litigators in Pennsylvania are familiar with the Court of Common Pleas Compulsory Arbitration Program for cases with an amount in controversy of $50,000 or less. For cases with a larger amount in controversy, parties will often agree to arbitrate with a company offering a private arbitrator, such as AAA, JAMS and ADR Options.

In cases involving international disputes, the arbitration venues commonly found in contract include, the London Court of International Arbitration (LCIA), Hong Kong International Arbitration Centre (HKIAC), Swiss Chamber’s Arbitration Institution (SCAI), Singapore International Arbitration Centre (SIAC), German Institution of Arbitration (DIS), Stockholm Chamber of Commerce (SCC), Vienna International Arbitration Center (VIAC), International Centre for Settlement of Investment Disputes (ICSID), and the International Court of Arbitration for the International Chamber of Commerce (ICC).

The number of international arbitrations has been increasing due largely to the growing number of courts in foreign countries recognizing and enforcing foreign arbitral awards. An ICC arbitral award, for instance, can now be enforced in China, where its courts refused to recognize and enforce foreign arbitral awards against its citizens on many occasions.  It is becoming increasingly likely for practitioners to face a dispute over a contract providing for arbitration before one of these international forums. This is true even with smaller cases involving an amount in controversy under $50,000.

For example, in 2015, one-third of the 801 cases filed with the ICC were of a value less than $2 million. In 2016, this trend continued as the number of cases arising from the finance and insurance sector grew to match the number of cases relating to the construction and engineering sector, which has historically led to the highest percentage of ICC cases. In 2016, two-fifths of the disputes involved sums below $5 million. In 2016, the ICC also saw a record increase of 20 percent in its caseload, whereas in the years between 2012-2015, there was a 1 to 3 percent steady increase.

On March 1, 2017, in response to the growing demand in the market for international arbitration, particularly in smaller cases, the ICC implemented a revised set of arbitration rules (2017 ICC Rules). The 2017 ICC Rules address the ICC’s reputation and potential of being overly expensive and bureaucratic–issues becoming increasingly problematic in a market with a high demand for quick, cost-efficient resolution of relatively small claims. This article examines ICC arbitration under the 2017 ICC Rules.

The Expedited Procedure Under the 2017 ICC Rules

The most significant change reflected in the 2017 ICC Rules is the introduction of the Expedited Procedure. The Expedited Procedure mandates that a sole arbitrator shall render an arbitral award within six months after a limited establishment of the facts and optionally without a hearing. Many other leading arbitration tribunals also provide for expedited procedures, including SCAI, SIAC and HKIAC, while some institutions have yet to respond to the market (e.g., LCIA).

As stated in Article 30 and Appendix VI of the 2017 ICC Rules, the Expedited Procedure automatically applies to ICC arbitrations with an amount in controversy equal to or less than $2 million, unless explicitly excluded by the arbitration agreement, provided that the arbitration agreement was executed after March 1, 2017. Where the amount in controversy exceeds $2 million, the parties can agree to opt-in to the Expedited Procedure. If the parties do not want to apply the expedited procedure where its application is automatic, they can opt out. Where the parties’ agreement predates the implementation of the 2017 ICC Rules, the parties can agree to opt-in to the expedited procedure.

The key features of the expedited procedure are:

• There shall be a sole arbitrator, even where the parties’ agreement provides for a three-arbitrator tribunal, except in exceptional circumstances;

• The tribunal may limit the number, length and scope of written submissions, expert reports, and witness evidence;

• The default procedure is that the tribunal may decide the dispute solely based on documents submitted by the parties and without a hearing or examination of experts or witnesses. Alternatively, the tribunal can hold hearings via telephone or video conference; and

• The tribunal must render its final award within six months of the case management conference, which must take place within 15 days after the date on which the file is transmitted to the tribunal.

These features reduce the cost and time of ICC arbitration. Before the 2017 ICC Rules, the time it took to obtain an award had been a source of frustration. By way of comparison, the median duration of an arbitration conducted by a sole arbitrator in the LCIA, which does not have an expedited procedure, is 15 months.

The Logistics of ICC Arbitration

ICC arbitration can be used for the settlement of international, cross-border disputes no matter how small the amount in dispute. In matters proceeding under the expedited procedure, a sole arbitrator will be appointed by the ICC court. The appointment of a sole arbitrator is intended to reduce the costs and to accelerate the proceedings. In matters not proceeding under the ICC expedited procedure, disputes are resolved by either one or three arbitrators, depending on the parties’ agreement. Where the parties have agreed that the dispute shall be resolved by three arbitrators, each party shall nominate one arbitrator for confirmation. The third arbitrator, who will act as president of the arbitral tribunal, is appointed by the ICC court. The parties’ nominations shall be made in the request and answer.

In 2016, 1,411 arbitrators were appointed or confirmed. These arbitrators were drawn from 76 nationalities. The most frequent nationalities of arbitrators appointed or confirmed were UK, United States, Switzerland, France, Germany and Brazil, in that order.

The place of arbitration is fixed by the ICC court unless agreed to by the parties. In 2016, ICC arbitrations were held in 106 cities in 60 countries across the world. Where lawyers are drafting agreements that provide for ICC arbitration or any international arbitrations, this is an important point to consider.

Commencement of ICC Arbitration

A party can commence ICC arbitration by submitting a request for arbitration to the secretariat. This can be done by mail, courier, hand delivery, e-mail or facsimile and can be delivered to ICC’s New York office (SICANA Inc.) at 140 East 45^th St., New York, NY 10017. The secretariat also maintains headquarters in Paris, France, and offices in Hong Kong, China.

ICC does not require requests for arbitration to be in any particular form, but the required information for submission is similar to that found in a typical arbitration demand form before AAA. The date on which the request for arbitration is received by the secretariat of the ICC court is the date of commencement of the arbitration. After acknowledging receipt of a request, the secretariat will notify the respondent party or parties. It will also inform the claimant(s) that it has done so and indicate the date of receipt of the request. Although the request is filed in New York (or Paris or Hong Kong), the arbitration will proceed in the location provided by the parties’ agreement.

Within thirty days from receiving the request for arbitration from the secretariat, the respondent must submit an answer and assert any counterclaims. The claimant shall submit a reply to any counterclaim within 30 days from receipt of the counterclaims communicated by the secretariat. Requests for an extension of time to respond may be made to the secretariat.

Costs of ICC Arbitration

The fee schedule for ICC arbitration under the expedited procedure is lower than for a nonexpedited case. Under the expedited procedure, the cost of arbitration, including administrative expenses and arbitrator’s fees, is 20 percent lower compared to the regular procedure. For the party commencing the ICC arbitration process, a nonrefundable $5,000 filing fee is required. This payment is, however, credited to the claimant’s portion of the advance on costs, which is to be paid equally by the claimant and respondent and is fixed upon or soon after an answer is filed. The claimant may also be responsible for a provisional advance, which is set after the request for arbitration, and is also credited toward the claimant’s portion.

The amount of administrative expenses is based on the amount in controversy. For example, if the amount in controversy is between $200,001 and $500,000, the amount of administrative expenses is $8,485.00, plus 2.25 percent of the amount in question over the $200,000 threshold. Similarly, the amount of the arbitrator’s fees depends on the amount in controversy. In setting the arbitrator’s fees, the court also considers the diligence and efficiency of the arbitrator, the time spent, the rapidity of the proceedings, the complexity of the dispute and the timeliness of the submission of the draft award.

Under the 2017 ICC Rules, if an arbitrator has acted expeditiously, the ICC court may increase the arbitrator’s fees. The ICC court may reduce the fees or arbitrators who submit their draft awards late, by 5 percent to 10 percent for draft awards up to 7 months late, by 10 percent to 20 percent for draft awards up to 10 months late, and by 20 percent or more for draft awards over 10 months late.

The ICC website offers a “cost calculator” that helps forecast the likely costs of ICC arbitrations: https://iccwbo.org/dispute-resolution-services/arbitration/costs-and-payments/cost-calculator/

Conclusion

In 2016, 966 new cases were filed with the ICC, representing 3,099 parties from 137 countries and territories with cases from North America more than doubling and with the United States being the most frequent country of parties filing cases. By implementing the 2017 ICC Rules, the ICC has responded to the demand of today’s international market. Practitioners must too respond by understanding ICC arbitration no matter where they practice, as the chances of it arising are greater than ever.

Reprinted with permission from the January 5th edition of The Legal Intelligencer”© 2018 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or reprints@alm.com.

Griswold purchased an $8.4 million life insurance policy in January of 2006, establishing a Lincoln T. Griswold Irrevocable Trust for the “sole and exclusive purpose” of maintaining ownership of the policy. Shortly thereafter the formation of the Trust, Griswold formed a limited liability partnership in Georgia, Griswold LLP, as the sole beneficiary of the policy. Upon the receipt of the proceeds from the life insurance policy, this limited liability partnership would be dissolved, and the trustee would then liquidate the property, satisfy the claims of creditors, and distribute remaining property to the partners. At the completion of this task, the trustee would file a “Cancellation of the Election to Become a Limited Liability Partnership” to terminate the partnership.

Concurrently, in January of 2006, the Trust sought the assistance of Mid-Atlantic Financial to identify and select a life-settlement broker to assist in the sale of Griswold’s life insurance policy. Mid-Atlantic appointed Kevin McGarrey, who was the individual that procured the life insurance policy for Griswold.

In March 2008, McGarrey located Coventry First LLC in Pennsylvania and proceeded to try and sell the policy to Coventry. It was alleged that during this time, McGarrey formed a “Secret Agreement” with Coventry that promised to pay McGarrey an increased commission of $145,000, as opposed to the acceptable commission of $84,000, if McGarrey prevented the search of future bids and did not pursue competitive buyers.

Without any further bids due to this secret agreement, Griswold sold his policy for $1.675 million to Coventry, $1.53 million for Coventry and $145,000 for McGarrey’s commission, although the broker compensation was not disclosed to the Trust or Griswold. Thereafter, the Griswold LLP was dissolved.

In 2010, Griswold learned of Coventry’s fraud and sued, both in his individual capacity and as the former majority partner of Griswold LLP. Coventry sought to dismiss or to proceed to arbitration as per the arbitration clause included within the purchase agreement. Griswold argued the arbitration clause was not applicable to his claim, and the District Court agreed..

Coventry’s main argument stood on the basis of “equitable estoppel,” in that although Griswold was not a direct signatory of the purchase agreement, because he had “indirectly” benefited from the sale, he should be held bound by the terms of the agreement. Thus, Griswold should be forced into arbitration through the terms of the contract. The doctrine of equitable estoppel prevents a nonsignatory from “cherry-picking” the provisions of a contract, and restricts their ability to “turn their back” on provisions of a contract they would rather not accept.

Affirming the District Court’s decision, the Third Circuit held that, because the Secret McGarrey Agreement, which initiated the fraud in the first place, began before and separately from the execution of the purchase agreement, the arbitration clause contained in the purchase agreement could not be enforced against Griswold. The secret agreement had never been incorporated into the purchase agreement, and thus Defendants are restricted from compelling arbitration upon Plaintiffs.

This decision serves as a reminder that, while courts would generally uphold and enforce an arbitration clause, they will not hesitate from refusing to enforce such a clause when it is used unfairly to force a party into arbitration for a tort claim that arises independently from the document containing the arbitration clause.

Class Arbitration Confusion

In an opinion issued on January 17^th in the Fidelity matter, U.S. District Judge Peter Sheridan noted that the development of the law on class arbitrations had caused the parties’ filing to “resemble a ping pong match.”  The Fidelity court ultimately ruled that there had to be consent among all parties involved in order to enforce class arbitration, and that questions of arbitrability are “gateway” issues for the courts, while indicating the Supreme Court’s position that arbitration is ineffective in class matters.  As such, the Fidelity court ordered an evidentiary hearing to determine whether the parties had consented to class treatment.