california's top court: this isn't hall street, so judicial review is ok

AlternativesTO THE HIGH COST OF LITIGATION

INTERNATIONAL INSTITUTE FOR CONFLICT PREVENTION & RESOLUTION VOL. 26 NO. 9 OCTOBER 2008

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TO THE HIGH COST OF LITIGATION

Publishers:Kathleen A. BryanInternational Institute for Conflict Prevention and Resolution

Susan E. Lewis John Wiley & Sons, Inc.

Editor: Russ BleemerJossey-Bass Editor: David FamianoProduction Editor: Ross Horowitz

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vOL. 26 NO. 9 OCTOBer 2008 aLTerNaTIveS 175

Published online in Wiley InterScience (www.interscience.wiley.com).Alternatives DOI: 10.1002/alt

CaLIfOrNIa’S TOP COurT: ThIS ISN’T HALL STREET, SO JuDICIaL revIeW IS OK

That was fast.While the U.S. Supreme Court left

only a sliver of a legal basis that potentially would allow parties to contract for height-ened arbitration award judicial review in its March Hall Street Associates decision, an influential state supreme court has wasted no time in defining a loophole and ruling that parties can allow their awards to be re-viewed in courts via a contract provision.

Less than six months after Hall Street Associates L.L.C. V. Mattel Inc., No. 06–989 (March 25, 2008)(available at www.supremecourtus.gov/opinions/07pdf/06-989.pdf), the California Supreme Court has created an exception to the categori-cal Hall Street Associates rule that the Federal Arbitration Act won’t allow ju-dicial review of arbitration awards. Cable Connection Inc., et al. v. DirecTV Inc., No. S147767 (Aug. 25, 2008) (available at www.courtinfo.ca.gov/opinions/docu-ments/S147767.PDF).

California contract drafters will be div-ing back into their form files and meeting with clients to go over the return of an option that some attorneys have said pro-vided assurances against runaway awards. “It has come up already,” says Los Angeles attorney Michael E. Bauman, who repre-sented DirecTV in its winning argument. “We are advising clients on the proper language that needs to be included, and at the same time exploring with clients the implications of including such a clause.”

In Cable Connection, the Court picks up on the U.S. Supreme Court’s Hall Street Associates aside that there may be another way to view arbitration judicial re-view, perhaps under civil procedure rules, other than the FAA.

In an opinion written by Associate Justice Carol A. Corrigan, the Court held that the “California rule is that the parties may obtain judicial review of the merits by express agreement. There is a statutory as well as a contractual basis for this rule; one of the grounds for review of an arbitration award is that ‘[t]he arbitrators exceeded

their powers.’ ([California Arbitration Act in the Code of Civil Procedure] §§ 1286.2, subd. (a)(4), 1286.6, subd. (b).)”

Even though the nation’s top court slightly left open the possibility for judicial review in Hall Street Associates, it didn’t

look like contract drafters would need to worry about writing in such provisions any time soon.

The U.S. Supreme Court had raised the possibility that heightening arbitra-tion award review might be allowed in a roundabout manner. Nine days after the Hall Street Associates oral arguments in Washington last November, the Court is-sued an order to the parties asking for a re-briefing on the issue—specifically, whether there was authority outside the FAA under which a party may enforce a provision for judicial review of an arbitration award.

The Court issued the re-briefing order because the arbitration arose during the

case, which involved litigation over clean-ing up toxic waste in an Oregon site that Mattel leased from Hall Street Associates. Most arbitrations begin with contract pro-visions agreed to at the beginning of a deal, not after litigation has started. The Court suggested that such contract provisions could be enforceable under procedural rules, stemming from courts’ case manage-ment activity.

Even with the extra briefing, the na-tion’s top court passed on whether review could emanate from civil procedure rules or statutes other than the FAA.

But in Cable Connection in August, the California Supreme Court cited its seminal case of Moncharsh v. Heily & Blase, 3 Cal.4th 1 (1992) (available with sign-up at http://login.findlaw.com/scripts/callaw?dest=ca/cal4th/3/1.html), in casting aside Hall Street Associates under certain circumstances.

“Here,” Justice Corrigan writes in her 5-2 majority opinion, “the parties agreed that ‘[t]he arbitrators shall not have the power to commit errors of law or legal reasoning, and the award may be vacated or corrected on appeal to a court of com-petent jurisdiction for any such error.’” Continuing, she declares, “This contract provision is enforceable under state law[.]”

The opinion concludes that the award—and judicial review of the award—is governed by state law because the parties proceeded in state court, even though the arbitration was governed by federal proce-dural law.

The decision also finds that the arbi-tration panel in the case misapplied Cali-fornia law and the American Arbitration Association’s rules in deciding that class arbitration is a substantive right under California law, and that AAA rules allow it unless the arbitration clause forbids it. The Court sent the matter back to the arbitra-tors “for reconsideration under the proper legal standards.”

The Cable Connection arbitration panel by now is used to being second-guessed. Its finding that the silent dealer contracts still authorized class-action arbitration—over a dissent saying that the dealer agreements

aDr BrIefS • aDr BrIefS • aDr BrIefS


Not So Fast…

The decision: You can contract for

judicial review of your arbitration

award in California, according to

the state Supreme Court.

But…but…: Yes, the U.S. Supreme

Court forbid this in March in

Hall Street Associates under the

Federal Arbitration Act. Turns

out that the Court’s suggestion

that there is a possible non-FAA

basis for judicial review provisions

wasn’t too hard to find after all.

What now? An attorney in the

California case says you and

your clients need to consider a

provision in the next arbitration

contract. What states will fol-

low California’s lead?

vOL. 26 NO. 9 OCTOBer 2008176 aLTerNaTIveS


at issue contemplated only individual ar-bitrations—was vacated by a Los Angeles County Superior Court judge. The judge agreed with DirecTV that the majority had overstepped the tribunal’s boundaries on the class action issue, and that the award’s errors were subject to judicial review.

An appeals court reversed, holding that the trial court exceeded its jurisdiction by reviewing the arbitration decision’s mer-its. The appellate panel then severed the judicial review provision and confirmed the award.

In August, the state Supreme Court reversed again, sending the case back to the arbitrators, at least for now. One of the parties will have to write to the American Arbitration Association to reconstitute the panel, and the parties’ attorneys both say that they have not yet done so.

Plaintiffs’ attorney Daniel A. Osborn, of New York’s Beattie and Osborn, says he isn’t sure what his next step will be. He says that the Court rejected the basis for the class arbitration certification his clients

sought and originally were awarded.Now, he says, “We don’t have any case

law to rely on. The ordinary principles of contract construction [don’t] permit or prohibit” the class actions. “So what would probably happen is that DirecTV would probably argue that you have to read a new term into the contract,” he says.

Among the options that Osborn says the plaintiffs are mulling is proceeding with a parallel action now on hold in an Oklahoma state court. There won’t be a petition to the U.S. Supreme Court for Cable Connection, he says.

Associate Justice Corrigan and the California Supreme Court have “gutted ar-bitration,” says Osborn, declaring that the opinion’s reasoning was based on “throw-away lines” in Moncharsh and Hall Street Associates. “It’s simply not appropriate to rely on one sentence from this case, and one sentence from that case, and then say that the [U.S. Supreme] Court gave us this opening to do something else.”

“They were not bound by Hall Street Associates,” counters DirecTV attorney Mi-

chael Bauman, a Kirkland & Ellis LLP partner. “If two parties agree that they want review for errors and the arbitrator has no power to make errors, there is no reason not to enforce that contract in Cali-fornia. It’s neutral because it is beneficial to both plaintiffs and defendants.”

DirecTV has been fighting for years with its Cable Connection dealers, who charged in 2001 that the satellite televi-sion provider withheld commissions and assessed improper charges. The state Su-preme Court reversal sent the case back to the arbitrators for the class determination. The opinion reasserts Moncharsh, which held that without a limiting clause, awards’ merits are not reviewable except as pro-vided by statute.

The Corrigan Cable Connection opin-ion, in analyzing the California Arbitra-tion Act’s legislative intent, doesn’t allow a broad merits review, but instead permits a narrower, tailored examination when the parties specify the basis in their contracts–and as defined by statutory limits.

First, the California opinion rejects the idea that Hall Street Associates preempts the state law under which it allows judicial re-view. The “Hall Street holding is restricted to proceedings to review arbitration awards under the FAA,” writes Corrigan, “and does not require state law to conform with its limitations. Furthermore, a reading of the [California Arbitration Act] that per-mits the enforcement of agreements for merits review is fully consistent with the FAA ‘policy guaranteeing the enforcement of private contractual arrangements.’”

Then, proceeding with the statutory and Moncharsh analysis, the opinion says that to avoid the general rule that merits aren’t subject to judicial review, “the par-ties must clearly agree that legal errors are an excess of arbitral authority that is reviewable by the courts.”

The parties did that in Cable Con-nection, according to the opinion, with the result that they don’t have the tradi-tional expectations of finality associated with arbitration. Associate Justice Corrigan writes:

We do not decide here whether one

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Car

toon

by

John

Cha

se

“We have a name for it… Post negotiation stress syndrome.”

or the other of these clauses alone, or some different formulation, would be sufficient to confer an expanded scope of review. However, we emphasize that parties seeking to allow judicial review of the merits, and to avoid an additional dispute over the scope of review, would be well advised to provide for that re-view explicitly and unambiguously.

Cable Connection attorney Daniel Os-born says that his problem with decision is that “employers, banks, [and] credit card companies will put this language in these arbitration agreements, and the little guy would get screwed. The big employer will appeal every time it gets a decision it doesn’t like. We’re in that situation in this case. We can now go back and ‘litigate’ in the front of the [American Arbitration As-sociation], but every decision it makes will be subject to appeal by DirecTV.”

Upholding the agreement advances ADR, according to the opinion, “by en-abling private parties to choose procedures with which they are comfortable.”

DirecTV’s attorney Michael Bauman says that Associate Justice Corrigan’s preci-sion in singling out the specific “legal er-rors” standard for judicial review, and the broader statement suggesting a different limit may past muster for judicial review, likely will spark future tests. For example, says Bauman, “It’s arguable that the same [standard allowing review] would apply where the contract said the award must be supported by ‘substantial evidence.’”

“Clients,” says Bauman, “need to think the way about judicial review as the way they think about whether to use three ar-bitrators or one arbitrator.” He adds, “Any arbitration clause needs to be tailored to achieve specifically the outcomes the client wants.”

Associate Justice Marvin R. Baxter con-curred in the case, emphasizing in a sepa-rate opinion that “parties to an arbitration agreement may not contractually secure an arbitrary method of review.” He concludes by reserving judgment “as to what if any limitation may exist with regard to such agreements, particularly when they pur-port to require fragmented review of the

individual issues that are part and parcel of the arbitrable controversy.”

Associate Justice Carlos R. Moreno didn’t join the majority opinion, but wrote separately, both concurring and dissenting with the majority. He agrees that judicial review may be broadened under Mon-charsh, but he disagrees “that parties may oblige courts to undertake fullscale [sic] judicial review of legal error in arbitration awards,” stating that the scope is more circumscribed by the Legislature.

Moreno notes that the statute allows an arbitration agreement to compel a court to vacate an award where an arbitrator ad-dresses legal questions arbitrarily and un-reasonably, “such as departing from clearly defined contract terms.”

But he warns that where an arbitrator’s view of a legal question isn’t “clearly errone-ous—for example, when he or she reason-ably answers a legal question in which there is no settled precedent, the statute does not authorize a court to vacate an arbitrator’s award merely because it disagrees with the arbitrator’s conclusions, no matter what the arbitration agreement provides.”

Moreno, joined by Chief Justice Ron-ald M. George, would have affirmed the Court of Appeal judgment in the case.

“There obviously are limits,” says Mi-chael Bauman, who explains that, for

example, he believes that “substantial evi-dence” would be an acceptable arbitration award judicial review standard. “But,” he concludes, “the California Supreme Court allowed the freedom to contract for the process they want, and they will enforce that, and I think it’s a great outcome.”

Says Daniel Osborn, “All of the reasons for arbitration have been eviscerated by this ruling. It’s not faster, it’s not cheaper, it’s not final and it’s not expeditious.” Q

* * *

This ADR Brief is adapted, updated, and expanded from an item that appeared on the CPR Institute’s website on Aug. 25.

N.J.’S TOP COurT WON’T rOLL BaCK CONDuCT ruLe’S aDr ImPaCT

The New Jersey Supreme Court has declined to roll back its local version of Rule of Professional Conduct Rule 5.5, on multi-jurisdictional practice, despite a recommendation by its own profes-sional responsibility rules committee to amend it to exclude alternative dispute resolution matters.

The result is that non-New Jersey practitioners are still required to regis-ter with the state when participating in ADR matters, or enlist local counsel, in the wake of a 2007 opinion by another Court committee.

That opinion appears to require unad-mitted corporate attorney-representatives to register, pro hac vice-style, when in-volved in New Jersey arbitrations, me-diations, and even negotiations. At a mini-mum, the requirement is an inconvenience for general counsel and corporate officials with law licenses elsewhere. For the ADR hardcore, it runs counter to strongly held beliefs that parties determine their future at the bargaining table, and, accordingly, should be able to determine who their representative is.


(continued on next page)



‘The big employer

will appeal every

time it gets a

decision it doesn’t

like. We’re in

that situation in

this case.’


vOL. 26 NO. 9 OCTOBer 2008178 aLTerNaTIveS

Though it passed on dealing with multi-jurisdictional practice, the Court in July slightly softened the effects of the 2007 opinion by its Committee on the Unauthorized Practice of Law by amend-ing another Court rule. In its biennial court rules review, the Court changed New Jersey Rule of Professional Conduct 1:27-2 by redefining the scope of limited representation to allow corporate attorneys to represent officers, directors, and other employees as well as the company itself.

But the new limited-practice license rule stops well short of the Court’s Profes-sional Responsibility Rules Committee’s Feb. 25 recommendation that New Jersey’s version of Rule 5.5 excludes ADR repre-sentation registration. That change would have allowed companies to choose whom-ever they want for ADR representatives.

The Court’s hands-off approach to the multi-jurisdictional practice rule also ig-nored the professional responsibility com-mittee’s other suggested RPC. 5.5 chang-es, which included eliminating the state’s RPC 1:27 limited license. Bar groups cited in the professional responsibility rules committee report sought to align New Jersey’s multi-jurisdictional practice with an American Bar Association model rule that is less restrictive.

This means that not only are the re-strictive RPC 5.5 registration requirements still on the books, but so is the extra bite related to ADR practice from the UPL committee’s Opinion 43, issued on Janu-ary 2007.

That opinion, titled “Out-of-State At-torney Representing Party Before Panel of the American Arbitration Association in New Jersey” (available at www.judiciary.state.nj.us/notices/ethics/UPLC_Opinion-43supplementingop28.pdf.), has worried ADR providers and multi-jurisdictional practice experts because it extends attor-ney registration requirements to in-house counsel working on behalf of their compa-nies, apparently even in private matters.

The opinion focuses on a seemingly run-of-the-mill arbitration case, where an out-of-state attorney wanted to appear before a New Jersey AAA panel “to present

evidence and argue questions of substan-tive law on behalf of a client with a claim against a former employer for breach of an employment contract.”

But the opinion dug deep into ADR representation issues, spreading registra-tion requirements to mediation:

. . . [T]he question has been posed whether a multi-jurisdictional practi-tioner may represent an existing out-of-state client in mediation in New Jersey. The Committee finds that this

is akin to arbitration and that an out-of-state attorney may participate in mediation and may prepare an order for the court reflecting a memorandum of understanding/agreement reached in mediation, provided that the out-of-state attorney has satisfied the require-ments of RPC 5.5.

As a result of the opinion, an already tough New Jersey version of a rule that has been attacked as protectionist also raised constitutional issues and cross-border tax implications. See “N.J. Court Commit-tee Requires Most Out-of-State Lawyers to Register for ADR,” 25 Alternatives 61 (March 2007). ADR providers, fearing be-

ing placed in the role of enforcer at ADR sessions or stuck with reporting noncom-pliance, strongly objected. Id.

And so did the Court’s Professional Responsibility Rules Committee, at least in part. In its February report to the Court, the committee let stand some of the New Jersey RPC 5.5 provisions, but it encouraged clari-fying and eliminating the registration form requirement for ADR practice.

Still, some of the broader effects of the multi-jurisdictional practice requirements arguably made some ADR practice for non-N.J. attorneys subject to state regula-tion, and the Court received comments about the committee’s recommendation.

Those comments may have given the Court pause this summer. Court spokes-woman Winnie Comfort told the New Jersey Law Journal on July 12 that the Court had “held the committee’s proposal for further discussion,” suggesting that a broader RPC 5.5 inquiry may be coming.

One of the commenters who told the Court that the suggested changes didn’t go far enough in protecting ADR processes, Hanan Isaacs, a Princeton, N.J., lawyer-neutral long active in public and private ADR initiatives in the state, says that the Court’s apparent caution is a good thing. “I’m glad the court is taking the time to review it because they obvi-ously want to get it right,” says Isaacs.

He says that the move—the second time the Court has postponed action related to the RPC 5.5 ADR situation and asked for a longer look—shows the heightened im-portance ADR now has in the legal system. Not only is it used as a broad case resolution tool for the court system, Isaacs points out, but “they also are getting it right for retired judges and justices who want to get out of the system, can’t practice law in state court, but they presumably want to represent people in arbitration and mediation.”

This “enlightened self interest,” says Isaacs, is good news for the legal system, and ADR practice.

Meantime, the change to R. 1:27, as well as most of the other rule changes, took effect on Sept. 1. Q

DOI 10.1002/alt.20246

(For bulk reprints of this article, please call (201) 748-8789.)


Representation Quandary

The question: Who represents your

company in negotiations and

ADR in New Jersey?

The answer: If it’s an attorney,

he or she better be admitted or

registered in New Jersey.

The problem: That state’s multi-

jurisdictional practice rules. A

committee recommended taking

ADR out of the rules’ reach. The

state Supreme Court declined, at

least for now.

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california's top court: this isn't hall street, so judicial review is ok

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