Terra Extraneus

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 Generally, arbitrators have been trained to believe that one arbitration is not precedential in another.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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A new study reported today in On Wall Street confirms what the data on the NASD website has always indicated, that the whole process is tilted toward the brokerages, especially the largest ones. The study reports:

Investors who take on the largest brokerages for big claims — $250,000 or more — recover just 10% to 12% of the amounts for which they ask. For claims of less than $10,000, however, they recovered 30% on average. Against the industry as a whole, the recovery percentage was 34%. For all firms receiving claims greater than $250,000, investors’ recovery percentage was 20%.

According to reporter Tony Chapelle, the study also indicated that in customer claims against the major wirehouses, the customer only wins 38% of the time. That is not surprising given the quality of counsel the major wirehouses can afford, their ongoing influence with panelists they see often, and the sophisitication of inhouse counsel.

What does this mean for registered representatives? It means that things are NOT much better in employment disputes regarding commissions, forfeitures, and similar disputes. It means that arbitration does what it is supposed to do, which is to control the liabilities of the houses, and it means that arbitrators are statistically predictable in their decision making, even if not in every single case.

While I have been able to beat these numbers in my cases, I have often considered that to be more because of the integrity of arbitrators in individual cases rather than trial skills. Nevertheless, any decisional system that favors one side or the other so predictably over time is most assuredly skewed. It should be noted that the numbers shoot up against the smaller houses compared to the major wirehouses.

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