New Ethical Rules Mirror the Judicial Erosion of the Arbitration Process |
Los Angeles Daily
Journal, June 20, 2002
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Intending to assure the public of integrity in the arbitration process, the Legislature has amended the California Arbitration Act to mandate arbitrator disclosure of "all matters that could cause a person aware of the facts to reasonably entertain a doubt ... of the impartiality of the neutral arbitrator." Code of Civil Procedure Section 1281.9(a). Included within the ambit of gauging arbitrator "impartiality" are the grounds specified for judicial disqualification in Code of Civil Procedure Section 170.1 and the ethical standards adopted under the aegis of the Judicial Council. Section 128L9(a)(1), (2). In delegating authority to prepare arbitrator ethics standards, the Legislature required the Judicial Council to prepare standards currently applicable to judicially ordered arbitration (Code of Civil Procedure Section 1141.18) and to "address the disclosure of interests, relationships or affiliations that may constitute conflicts of interest." Section 1281.85. In response to this directive, the Judicial Council issued ethical guidelines effective July 1, numbered as Division VI of the Appendix to the California Rules of Court. For the most part, these ethical standards track the disclosure language of Section 1281.9, already in effect since 1994. (amended in 1997), and judicial disqualification standards listed in Section 170.1 See Comment to Standard 7. The Legislature amended existing statutory grounds for vacating an arbitration award to add circumstances where the arbitrator fails to timely disclose a known ground for disqualification or is subject to disqualification on ethical grounds. Section 1286.2(a)(6). The Legislature also added Section 1281.91, a statutory recitation of the procedural mechanism establish disqualification. These statutes augur grist for the judicial mill. Does the phrase "person aware of the facts" of potential arbitrator partiality apply to a party in arbitration or anyone with knowledge of the facts, i.e., is the test subjective or objective? What test applies to an arbitrator who discloses facts that "could" cause a person to doubt impartiality? The word "could" connotes potential conduct rather inevitable conduct. What is a "reasonable ... doubt as to impartiality"? Whenever a statute or judicial decision uses the conceptual word "reasonable," the analysis often becomes fact-bound in the context of litigation, particularly in adversarial relationships. Arbitration is no different. To some extent, the rules mirror judicial erosion of the arbitration process. In Armendariz v. Foundation Health Psychcare Services Inc., 24 CaL4th 83(2000), the California Supreme Court imposed rules of discovery in employment-dispute arbitration. The absence of pretrial discovery, or its limited application, had constituted one of the hallmarks of arbitration as a form of alternative dispute resolution designed to reduce the expense of litigation. Courts of Appeal, with some exceptions also have embraced judicial intervention in the arbitration process. Under the rubric of "unconsionability" (Civil Cede Code Section 1670.5), courts have refused to enforce arbitration clauses on substantive and procedural grounds. Adhesive arbitration clauses in contracts are most vulnerable, but courts also have vitiated awards on grounds of lack of mutuality of remedy (Mercuro V. Superior Court, 96 Cal.App.4th 167; Flores V. Transamerica First Inc., 93 Cal.App.4th 846 (2001)) or the "manner in which arbitration is to occur" (Strotz v. Dean Witter Reynolds Inc., 223 Cal.App.3d 216 (1997)). The District of Columbia Court of Appeal introduced a modified form of due process. Cole v. Burns Int'l Security Services, 105 F3d 1465(D.C. Cir. 1997). The 9th Circuit adopted the state law of unconsionability in setting aside awards issued under the Federal Arbitration Act. Circuit City Stores V. Adams, 279 F.3d 889 (9th Cir. 2001); Ticknor v. Choice Hotels Int'l Inc., 265 F.3d 931 (9th Cir. 2001). The Court of Appeal in Szetela v. Discover Bank, 97 Cal. App.4th 1094 (2002), reversed the court order granting a petition to compel arbitration despite an unequivocal statutory provision denying the right to appeal an order granting a petition to compel arbitration (Section 1294). The solution: " treat the appeal as a petition for writ of mandate." The Szetela ruling is not indefensible in the context of the contractual clause prohibiting litigation of a class action in that case, but the opinion arguably suggests a judicial attitude of displeasure with the process of arbitration. Statutory authority to appeal an order granting a petition to compel arbitration is limited, and, unless the court resorts to a writ of mandate, a dissatisfied party must await confirmation of the award and judgment. Mandate serves as the procedural remedy to challenge the validity and enforceability of an arbitration clause on grounds " as exists for the revocation of any contract." Section 1281.1. The disqualification statutes focus on the arbitrator and are applicable neither to revocation of contract nor to any other statutory ground to refuse enforcement of an arbitration clause, i.e., waiver or collateral litigation. Presumably, the inability to challenge asserted "partiality" of an arbitrator before arbitration constitutes an "inadequate remedy at law," another basis for mandate, but at the expense and delay necessarily incurred. Critics of arbitration have cited abuses of the process-and not without justification in some instances. Unfair and questionable arbitration clauses are inexcusable and deserve condemnation. Consumers and employees suffer from disproportionate bargaining power in non-negotiated contracts. But the vast majority of decisional law, federal and state, invalidates substantively or procedurally unfair arbitration clauses in those two categories. The amended disclosure statute and the adoption of ethical standards respond to none of these concerns. Ethical guidelines are undoubtedly aimed at the "repeat player" syndrome by alerting parties to the background of an arbitrator. Congressional and California state legislators originally enacted the Federal and California Arbitration Acts to resolve commercial conflicts between business entities. Parties chose arbitrators already known for their expertise in an industry and familiar with business and trade practices. Judicial expansion of the scope of arbitrators led to the arbitration of a wide variety of disputes unrelated to the need for these traits. It is an interesting paradox that arbitrators originally chosen for their familiarity with the parties and expertise in the subject matter of the dispute are now potentially disqualified for the same reasons. The new ethical rules of the California Arbitration Act do not apply in federal court. 9 U.S.C. Sections 1-16. Federal rules govern the arbitration, no comparable disclosure statute applies and disqualification of an arbitrator on ethical grounds is not a basis to vacate an award. 9 U.S.C. Section 10: Delta Mines Holding Co. v. AFC Coal Properties Inc., 280 F.3d 815 (8th Cir. 2001). " Evident Partiality" of an arbitrator constitutes a ground to vacate an award, but the standard is difficult to achieve. 9 U.S.C. Section 10 (a) (2). An additional challenge to the disclosure statutes is the unequivocal decision by the U.S. Supreme Court that the state legislatures cannot single out arbitration for disparate treatment. Doctor's Assocs. Inc. v. Casarotto, 517 U.S. 681 (1986). Arguably, comprehensive arbitrator disclosure statutes impermissibly burden the arbitration process. But because California already provides disqualification rules applicable to judges (Code of Civil Procedure Section 170) and to arbitrators practicing under Section 1141.18, this argument may lack merit. The pre-emptive effect of the Federal Arbitration Act, Southland v. Keating, 465 U.S. 1 (1984), prevents state legislators from carving out specific categories of contracts immune to arbitration. But without regulation or oversight, the background of an arbitrator became paramount. Casting ethics in extensive disclosure requirements presumably levels the playing field and provides information comparable to knowledge of parties arbitrating business and industry disputes. But the ambiguity of the California disclosure statute suggests inhibition of he arbitration process that offers-not always successfully-an expedient, inexpensive and final result. Recriminations against arbitration are as inevitable as inexplicable
jury verdicts. But the public is undoubtedly entitled to an impartial
decision maker and a fair process, whether in court or in arbitration. But in another sense, composing ethical standards for arbitrators in a Rules of Court format permits the Judicial Council the flexibility to amend and respond to future complications more easily than would legislation. *** |