Terra Extraneus

The State Bar of Texas, I guess, will publish absolutely anything. In this instance, the State Bar of Texas published a pamphlet, called it a book, and stuck in a CD to try and justify the nice cover.

Arbitration Road Map, A Guide to Clauses Procedures, and Hearings, Austin 2007, is divided into two parts. Part 1, all 38 pages of it, supposedly deals with general arbitration considerations and Part 2, all 37 pages of it, deals primarily with international arbitration. The third part of the book, pages 78 – 110, contains the appendices, which include sample arbitration clauses. The CD contains the text of the book and is searchable, but the paucity of the book is not improved on the CD.

The book contains a few good points about arbitration law and procedure, but nothing a first year associate could not gather in a day from a standing start. There is little commentary from the practitioners that are named as the authors that would be considered substantive advice from experienced arbitration counsel. I would have expected experienced Texas arbitration counsel commentators to at least be able to tell some good anecdotes, even if they were unable or unwilling to give advice about how to handle the various steps in arbitration proceedings.

While a novice or student faced with an arbitration might find a useful item or two about the arbitration process, experienced arbitration counsel would find this volume a waste of time. Further, there are simply better “road maps” and “guides” and even casebooks already available that do not insult the intelligence of the reader. It is almost as if this book was really the outline for a future book, and was shipped to the printer by mistake.

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Most people that engaged a financial advisor employed by a FINRA (formerly NASD) broker-dealer and all registered representatives signed something containing a mandatory arbitration clause. FINRA announced that for 2007, new arbitration case filings dropped to their lowest level since 1992. That is a staggering concession.

While some political forces have been trying literally forever to abolish or curtail arbitration, arbitration itself may be doing what political power could not do.

I have been handling securities industry arbitrations since 1988 and I have represented broker-dealers, registered representatives, and customers, although few of the latter, and I thought 2007 was a busy year. It seems, however, it was less busy than I realized.

The three years of lesser activity at FINRA Dispute Resolution, 1992, 1998 and 2006, averaged 4,644 case filings annually. 2007 was 70% of that average; 30% below the average of the lowest filing years prior to 2007.

It will be interesting to see if the industry credits one or more allegations of: good returns of 2007, good compliance initiatives, or something else. Could it be that the legal community has figured it out and has revised upward the criteria for case selection to offset the fact that it is a high risk forum?

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I saw an article in Investment News a day or so ago on this topic but after reading the article, could not tell what new event had led to the story. But, it led me to consider that even with a Democratic Congress in its infancy, there have already been bills submitted which would essentially abolish mandatory arbitration. So, the debate over whether FINRA should abolish the practice of mandating one industry arbitrator on each panel of arbitrators is again cutting edge. (FINRA, the Financial Industry Regulatory Authority, is the organization that resulted from the merger of the National Association of Securities Dealers, Inc. and the New York Stock Exchange, Inc.’s regulatory arm.)

The article by Dan Jamieson of Investment News contained the claim that industry arbitrators were the “good guys” because they were harder on industry “ne’er do wells” than public arbitrators.

Sometimes that is true and sometimes it is not.

FINRA provides to litigants a database that contains all of the decisions of every arbitrator proposed for an arbitration. Counsel can study the past decisions of an arbitrator and, if there are enough of them, can also develop a model of the arbitrators’ decision making proclivities that is sometimes predictive. For example, if an arbitrator has never awarded any money, or never an amount seemingly reflective of the claims, after sitting on several panels, it should be pretty clear that they are not likely to do it. Counsel for the aggrieved customer or aggrieved employee should not count on a break through with that arbitrator.

Many lawyers select arbitrators based solely on their respect for the arbitrator. While that is a good criteria, it should not be the only one. The mathematics of past decisions should be equal to or greater than subjective impressions. Half a dozen decisions is usually enough to gauge a prospective arbitrator, but a dozen is much better. Simple math tricks can also help: weighting types of cases, weighting the quality of counsel that have appeared in those past cases, weighting the awards, and dropping highs and lows. The passage of time should be considered; decisions more than a decade old may not truly reflect that an arbitrator has matured or ripened.

Arbitrators that have developed a decisional history that omits monetary awards are more often than not former branch managers. It is not hard to decipher the cause. Branch managers are historically front line cannon fodder for the wirehouses and appear at arbitrations as the company representative. They would not be sitting there, sometimes with their own career or future prospects on the line, if not for a customer or that disgruntled employee. At the very least, if there is an award by the panel, it usually comes off the bottom line of their office, and more directly, out of their bonus. It leaves an impression that is usually indelible. Even after many years of retirement, most former branch managers cannot strike that feeling of déjà vu. While most former or retired branch managers that are experienced arbitrators will deny that their bitter moments in arbitrations of long ago do not impact them in the here and now, their published voting pattern usually reveals something else.

Some of the most respected arbitrators are often the first struck from a prospective panel by students of their decisional histories. What would improve the standing of industry arbitrators is more stringent disclosures, including things such as the number of times the industry arbitrator has testified, the number of times they have acted as a company designee in litigation and arbitration, and clearer disclosures about whether they have ever suffered a professional or monetary set back because of an arbitrated claim. The current system of disclosures needs a tune up and bolt tightening.

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California courts have been narrowing the enforceability of arbitration agreements in adhesion contracts, especially in employment contracts used by employers with numerous at will employees.

The problem is caused because of the inability of the average employee in the United States, or anywhere, to read the foregoing sentence and understand words like “adhesion,” and even words like “at will” and “arbitration.” Employees that go to work for employers of numerous employees often have employment handbooks or sign employment documents, like applications, that contain arbitration clauses. However, from now on, in California, if the employment documents contain a clause purporting to strip the employee of the right to bring a class action, the clause is void. Further, no arbitration clause that depends upon a prohibition of a class action can trump the right to bring a class action. Lisa Murphy v Check ‘N Go of California, Inc., Cal. App., A114442, October 17, 2007. To read this decision, you can find it here.
This opinion is one of a numerous series of cases that have defined the substantive or procedural unconscionability of arbitration clauses.

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While most arbitrators are thoughtful people of deep consideration, to remain so they must never lose sight of the fact that their deductive powers are not evidence and things are not always as they seem. That is especially true when trying to use the facts of a case not in front of the arbitrators to decide the one that actually is in front of them.

The United States Court of Appeals for the 9th Circuit issued an opinion last week in Collins v. D. R. Horton, Inc. holding that arbitrators can rely upon what in Oklahoma is now called claim preclusion and issue preclusion, more generally known as collateral estoppel and res judicata. In the case before the 9th Circuit, however, the court was actually affirming an arbitration award in which the panel declined to give determinative weight to a federal trial court verdict because it was on appeal. The 9th Circuit pointed out that the arbitration panel could have deemed the federal court verdict preclusive rather than disregarded it because it was on appeal.

However, this ruling does not reach the far different question of whether the outcome in one arbitration can be used by a subsequent arbitrator or panel to determine the outcome in the latter arbitration. Generally, arbitrators have been trained to believe that one arbitration is not precedential in another. The 9th Circuit did not change that axiom.

Arbitrators of the thoughtful type will continue to apply collateral estoppel, claim or issue preclusion, with great care, even if the prior verdict comes from a court. Unless the arbitrator studies the pleadings from the prior case minutely to determine if there is an identity of issues or claims, and sometimes the transcript as well, it should not be assumed the issue before the arbitrator was, indeed, tried. [Hat tip to Professor Ross Runkel and his Employment Law daily reports].

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In an effort to fulfill continuing legal education requirements for one of the states in which I’m licensed, I listened to a two hour panel discussion on this topic. I was struck by the seeming unwillingness of the panelists to actually answer the question. It seemed that the trial lawyers involved were afraid of losing the court system and its importance to their business success, rather than stepping back and looking at trends to see if arbitration might swallow the hallowed jury system.

For example, the panel did not consider the observation they themselves were making, that apparently fewer civil cases were being filed in their state, but that large municipal areas still could not produce a faster jury trial docket. Clearly, such circumstances confirmed that the civil trial system in their state was still under funded. The third branch of government, the court system, still gets less than 1% of all governmental revenues. As a result, the court system does not have the resources to modernize, to create new systems, or to adapt to the post-modern economy.

Arbitration, on the other hand, which is privately funded, can adapt to any type of dispute, anywhere at any time. Its rules can be changed by agreement of the parties to a dispute on the spot. If the parties cannot agree, they can argue to the panel the need for adaptation and the panel can adapt the proceedings to the dispute or simply default to whatever rules are at hand. Courts have no such flexibility.

With these two advantages, private resources versus limited public resources, and adaptability versus rigidity of process, arbitration will eclipse the civil jury trial system wherever contracts govern. Only strangers, without contracts or with contracts that do not contain arbitration clauses, will be left in the court system to work out their disputes.

Trial lawyers might not like it; but, the weight of history during the last quarter century is inescapable.

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