Arbitration Nullification – Be Ready for this Defense Strategy

Defendants typically favor arbitration for several reasons. Plaintiffs typically fear arbitration, or at a minimum, view the process with a high degree of skepticism. Both attitudes are unjustified most of the time, especially when the parties have agreed to use institutional ADR shops like AAA or JAMS. This article discusses some of the misguided views common to defendants, how defendants utilize these misguided views to develop their defense strategies around them in the arbitration hearing, and how plaintiffs/claimants should exploit these strategies and bring them into view for the arbitrator.

Based on my experience, the primary reasons defendants in litigation prefer to enforce arbitration agreements are the following: (1) the defendant regularly arbitrates with a certain arbitrator and believe it has repeat business appeal to that arbitrator, while the plaintiff/claimant might be viewed as a transient customer; (2) the personality and personal views of the arbitrator will predominate over a the unbiased evaluation of the evidence; and (3) the defendant pretends the controlling law either doesn’t exist or is inapplicable to the facts of the case, and attempts to confuse the arbitrator with a barrage of policy arguments, misstatements of the law, and dubious albeit convincing sounding reasons the law doesn’t apply to the case.

We have begun to refer to the third approach as “arbitration nullification” and even use this term in opening and closing statements to warn the arbitrator that the other side is going to ask you to ignore the law and accept its arguments as the fair and right thing to do. A defendant who adopts this strategy is in essence asking the arbitrator to nullify the law and pick the side she likes best. While there are countless horror stories of claimants losing arbitrations when the facts and the law were on their side, as if the arbitrator picked the winner despite the law, we have found that most arbitrators work diligently to understand and apply the applicable law.

This is the reason we have found it helpful to forewarn the arbitrator during opening statements that the other side is likely going to ask them to ignore the law. While this might seem an obvious thing to do, some lawyers I have spoken with believe they will offend an arbitrator by passively accusing her of either incompetence or corruption. Don’t worry about it. You have a job to do as an advocate, and no part of that job includes preserving the arbitrator’s ego at the expense of your client’s case. Be bold and tell them they are going to be subjected to manipulation. It works.

Here is an example: in a recent FLSA arbitration, it became clear to me and my co-counsel that the respondent was going to proceed to an arbitration hearing without offering anything to settle the case. The law and facts were clearly on our side, so we correctly assumed the respondents counsel was going to take the arbitration nullification approach. We were correct. The respondent’s attorney and his witnesses spent the better part of three days attempting to confuse the arbitrator with a dazzling presentation of “nothing to see here; please don’t look at the law.” They argued the FLSA was old, that it was inapplicable to businesses like that of the respondent, and that respondent somehow contracted around this nearly 90-year-old remedial federal statute. They threw everything at the wall to avoid talking about the FLSA and the economic realities test.

We presented our evidence in a fashion that proved the elements of our FLSA claim. We hit solidly on each factor of the economic realities test. And, in closing, we harped the notion that the other side spent three days griping about issues that should be heard by Congress instead of a tribunal charged with the task of determining whether the respondent violated the FLSA, and not whether the FLSA should be amended or cease to exist. We made it clear the job of the arbitrator was to find whether the respondent violated the FLSA, and not concern herself over the question of whether the FLSA is a good and fair law to businesses. It worked.

But what do you do if this strategy doesn’t work? What do you do when you read the arbitrator’s opinion pouring your client out and you determine there was no legal or factual basis for the arbitrator’s conclusions? There is a path to a reversal of the decision. However, you must file suit in federal court and meet a difficult standard to undo the bad result. And a “bad result” is not good enough for the federal court appeal. The litigant must present evidence of specific conduct to have a chance at vacating the arbitration award.

The Federal Arbitration Act § 10(a) provides four limited bases for vacating an arbitration award. The grounds for reversal have been described as “grudgingly narrow” (Eljer Mfg. Inc. v. Kowin Dev. Corp., 14 F.3d 1250, 1253 (7th Cir. 1994)). The advocate for vacatur must show: (1) the award was procured by corruption, fraud or undue means; (2) there was evident partiality or corruption by the arbitrators; (3) there was arbitral misconduct, such as refusal to hear material evidence; or (4) the arbitrators exceeded their powers, or so imperfectly executed their powers that they failed to render a mutual, final and definite award.

The fourth statutory ground, arbitrators exceeding their powers, is the most common. This standard is based on the fundamental principle that the FAA ensures enforcement of the terms of the parties’ agreement to arbitrate. See, e.g., Mastrobuono v. Shearson Lehman Hutton Inc., 514 U.S. 52, 57 (1995); Volt Info. Sciences Inc. v. Board of Trustees, 489 U.S. 468, 476, 478-79 (1989). Courts have vacated arbitral awards under the “exceeded powers” standard where the arbitrators’ decision addressed issues not submitted to arbitration (Roadway Package Sys. Inc. v. Kayser, 257 F.3d 287, 300-01 (3d Cir. 2001)), involved parties or transactions outside the scope of the arbitration clause (Eljer , 14 F.3d at 1256-57) or awarded remedies barred by the agreement (Coast Trading Co. Inc. v. Pacific Molasses Co., 681 F.2d 1195, 1198 (9th Cir. 1982)).

There are also non-statutory grounds for vacatur, all of which involve some review, albeit extremely narrow, of the merits. The most common non-statutory approach is centered around a “manifest disregard of the law.” This standard was born out of the opinion Wilko v. Swan (346 U.S. 427 (1953), overruled on other grounds) and in Rodriguez de Quijas v. Shearson/American Express Inc . (490 U.S. 477 (1989)), and was endorsed by the Supreme Court in First Options of Chicago Inc. v. Kaplan, 514 U.S. 938, 942 (1995) (“parties [are] bound by [an] arbitrator’s decision not in ‘manifest disregard’ of the law”). Many district and circuit courts have looked unfavorably at manifest disregard as an unnecessary adjunct to the FAA. Courts have found that manifest disregard is essentially synonymous with the FAA’s exceeded powers basis.

Typically, courts hold that the governing law must be clearly established and that the arbitrators must be aware of the law, but nonetheless choose to disregard it. E.g., Montes v. Shearson Lehman Bros. Inc., 128 F.3d 1456, 1461 (11th Cir. 1997); Westerbeke Corp. v. Daihatsu Motor Co. Ltd., 304 F.3d 200 (2d Cir. 2002). Not surprisingly, motions to vacate based on this standard are rarely successful. The 2d U.S. Circuit Court of Appeals recently surveyed the 48 cases since 1960 in which it considered manifest-disregard claims, and noted that arbitral awards were vacated in only four of those cases, and three of those had other possible bases for vacatur. Duferco Int’l Steel Trading v. T. Klaveness Shipping A/S, 333 F.3d 383, 389 (2d Cir. 2003).

In sum, tell the arbitrator what you expect the other side will do, much in the same way you would with a jury during opening statements. However, be more direct and detailed about how the respondent will attempt to misrepresent the law and/or insist the arbitrator should not be or is not bound to it. It may seem like you are accusing the respondent of embarking on a lie campaign, but don’t worry about offending anyone. If you fail to prime the tribunal on the concept of arbitration nullification, you will be wishing you had while you are attempting to clear the smoke screen on your last hearing day, when it might be too late.