ADR in Missouri: A Year in Review
By James R. Keller
Thanks to a plethora of groundbreaking decisions in 2001
from the Eighth Circuit Court of Appeals and Missouri's appellate courts,
mediators and arbitrators (sometimes collectively called neutrals) now enjoy
unprecedented power. Generally, trends
in the law are measured in years to decades, but not so in the field of
Alternative Dispute Resolution (ADR).
Almost overnight the courts have decided to defer virtually all
authority to the neutrals.
This article examines several of these significant
cases. While each one has punch and
impact, together they reveal just how important the new player in litigation
has become. Make no mistake about it,
ADR has come of age.
The Eighth Circuit
Mediation
Sanctions
Some trial lawyers still grouse that mediation is a waste of
time, a step necessary only because the trial court "makes you" participate,
and thus one that can be largely ignored.
Such thinking will no longer be tolerated, at least in federal court,
given the Eighth Circuit's decision in Wick
v. Morgan's Food, Inc., Case No. 00-2776 (8th Cir. 2001),
decided November 5.
The Eighth Circuit upheld a trial judge's decision to
sanction a corporate party and its outside trial counsel for their failure to
participate in "good faith" in court-ordered non-binding mediation. The mediation occurred pursuant to E.D. Mo.
L.R. 6.01 to .05, which requires this process after filing the lawsuit and as a
necessary prerequisite before trial.
The sanctions were $1,390 against the party and $1,390
against its trial counsel (to cover the cost of the ADR and attorneys fees for
opposing counsel) and another $1,500 against the party, payable to the Clerk.
This $1,500 covered the trial lawyer's failure to prepare a written memorandum
for the mediator summarizing the disputed facts and outlining its position on
liability and damages, and its failure to send a corporate representative to
the mediation with authority to settle in excess of $500. The mediator reported these events to the
trial judge, who after a hearing imposed the sanctions.
Whether or not specifically intended, the trial judge's
controversial decision-now blessed by the Eighth Circuit-literally forces all
trial lawyers and their clients to take mediation very seriously. The consequences are too high now to do
otherwise. What should be of greater
concern to most lawyers is not the trial judge's decision but why it had to be
made at all. Mediation works. The proof is in the numbers. The success rate in federal court in St.
Louis, for example, despite the skewed result in Wick, is nearly 58 percent in resolving disputes within twenty days
after the conference with the mediator.
Granted, there are cases destined for trial. Those lawyers legitimately convinced that
theirs is such a lawsuit might consider selecting a mediator who can evaluate
the merits of the case and stimulate a frank discussion about its strengths and
weaknesses. Even just one astute
observation could justify the mediator's fee several times over, and better yet
plant the seed for a later settlement.
Successful mediation is not limited to settlement in the first twenty
days.
The lesson from Wick
is clear: to proceed in federal court, participate in good faith in
mediation. Mediators have a legal and
moral responsibility to report obstructionistic conduct. And when they do, the judges, following the
lead in Wick, are poised to deploy
their own formidable power to support the mediator and keep everyone in
line.
Arbitration
The Agreement to Arbitrate
Arbitration starts with an agreement to arbitrate. Unlike mediation, the process is
binding. The arbitrator's decision,
once confirmed as a judgment, carries the same force as a judgment rendered in
a traditional trial court.
In two recent cases, the Eighth Circuit has decided,
contrary to precedent from other jurisdictions, a court's role in the
arbitration process is limited to determining whether a valid agreement to
arbitrate exists. Once this is
resolved, the arbitrators will decide "all other issues" including matters that
typically fall within the court's purview, such as whether the parties'
agreement, which excludes recovery of punitive damages, violates public policy
and is unenforceable. The cases are Larry's United Super, Inc. v. Werries,
253 F.3d 1083 (8th Cir. 2001), decided June 13, and Gannon v. Circuit City Stores, 262 F.3d
677 (8th Cir. 2001), decided August 17.
These cases offer an unqualified and unabashed vote of
confidence to arbitrators, and more importantly, recognize their authority as
both judge and jury. In fact, their
power is greater, for an arbitrator's decision, while sometimes second-guessed,
is seldom overturned.
Arbitration Agreements Survive Employment
Termination
The Eighth Circuit also decided that an arbitration
agreement is important enough that it still is viable after an employee no
longer works for the employer and their agreement has terminated. The case is Lyster v. Ryan's Family Steak Houses, 239 F.3d 943 (8th Cir. 2001).
The agreement provided that all claims the plaintiff might
have against her employer, which otherwise could have been pursued in state or
federal court, had to be arbitrated.
The court broadly construed this language to allow arbitration even when
the employee did not follow the requirements for claim submission with the
Equal Employment Opportunity Commission (EEOC) or the Missouri Commission on
Human Rights (MCHR). These may have
been strong legal defenses, under other circumstances, but they carried no
weight in this case.
Missouri's Appellate Courts
Punitive Damages
For years, litigators considered
arbitration to be a safe haven to avoid punitive damages. That thinking may change given the recent
decision in Groceman v. Pulte Homes
Corp., Case No. 59110, (Mo. App.
W.D. 2001), decided August 21.
The Western District has upheld an arbitrator's award of punitive
damages.
The case involved a contract dispute
(with fraud allegations) over the construction of a house, alleged to have
several structural defects, including roof deflection, inadequate rafters, and
ceiling cracks. On its face, this case
hardly seemed to be the kind that would muster any serious concern that
punitive damages were a realistic possibility, especially since it was in
arbitration. The arbitrator-appointed
by the court-awarded $50,000 in actual damages and another $50,000 in punitive
damages against the contractor.
The unhappy contractor tried to
overturn the punitive damage award by arguing to Missouri's appellate court
that the award demonstrated a "manifest disregard of the law." It is difficult to overturn an arbitrator's
award because the statutory grounds to do so are narrow, generally requiring
severe arbitrator misconduct such as fraud or corruption.
The case had proceeded under the
Federal Arbitration Act, which unlike Missouri's Uniform Arbitration Act
(Chapter 435 R.S.Mo.), allows for an award to be attacked on the ground of "manifest disregard of the law". To succeed, however, the contractor had to
prove that the arbitrator correctly understood the law but then chose to ignore
it. This is not easy.
Given this high burden, the appellate court left in place
the punitive damage award, even though the arbitrator "did not clearly
delineate the law applied or the analysis used." Moreover, the court noted that an arbitrator does not even have
to explain his or her decision. While
the arbitrator in Pulte did provide
some reasoning, it was not enough to convince the court that it could overturn
the award of punitive damages. Without
more, the court had no choice but to confirm.
Ironically, the safest way for an arbitrator to protect his
or her decision is to say nothing about it.
Some parties request in advance that the arbitrator set forth the
reasons for the decision in the award.
Organizations such as the American Arbitration Association (AAA) provide
in their rules that the parties can jointly request a written, reasoned
opinion, thereby avoiding the problem presented in this case. See, for example,
R-44 of AAA's Commercial Dispute Resolution Procedures, effective September 1,
2000. Generally, parties do not make
the request, as it increases the cost of the arbitration by forcing the
arbitrator to spend more time and savvy arbitrators know how to prepare an
award that will withstand judicial scrutiny anyway. Thus, a well-constructed award serves mostly to offer some
guidance about the arbitrator's thought process.
Probably few arbitrators will consider this case to be a
catalyst to start awarding punitive damages. Its real importance is that if punitive damages are appropriate,
an arbitrator now has court support for her decision and absent a showing that
the arbitrator "manifestly disregarded the law," it will be upheld by the
courts. This case, while drastic, should not dissuade parties from
using arbitration, but rather reaffirm the importance of carefully selecting
the arbitrator.
Discovery
One of the still most unknown areas
of arbitrator power is whether depositions can and should be ordered, when at
least one party objects. In CPK/Kupper Parker Communication, Inc. v. Hart,
51 S.W.3d 881 (Mo.App. E.D. 2001), decided July 31, the court made clear that
an arbitrator's decision about discovery-including whether and how many
depositions will occur-rests with the arbitrator, period. Citing United
Paperworks International Union, AFL-CIO v. Misco, Inc., 484 U.S. 29 (1987),
the Court held that "courts thus do not sit to hear claims of factual or legal
error by an arbitrator as an appellate court does in reviewing decisions of
lower courts." Id. at 38. The Court can
determine the validity of an agreement to arbitrate, but as discussed earlier
in this article, that is all.
At issue was whether the arbitrator
should have granted a party's request for twenty depositions, even though the
arbitration agreement appeared to limit the number to three. The court declined the opportunity to
monitor arbitration, administered under AAA's rules, and held instead that such
power rested with the neutrals, including when a party desires discovery that
an arbitrator has denied. Accordingly,
the court held:
If Missouri allowed
every alleged misinterpretation of an arbitration agreement by an arbitrator to
be litigated and appealed arbitrations would be a mere prelude to litigation
and would, in the end, prove more time-consuming and expensive than
litigation. The order of the circuit
court is quashed because it had no jurisdiction to reverse an arbitrator's
denial of a request to take depositions.
Id.
at 886.
Courts Favor Arbitration Over
Waiver of Arbitration
Even though there is a binding
arbitration agreement, the parties, through their actions, often proceed in
other directions, as if the arbitration agreement did not exist. This is what happened in McIntosh v. Tenet Health Systems, 48
S.W.3d 85 (Mo.App. E.D. 2001), decided June 12.
The parties clearly had an
arbitration agreement that provided for dispute resolution through AAA. In the underlying litigation, an employee
sued Tenet for alleged wrongful termination and breach of contract and also
requested that the trial court compel arbitration, or in the alternative,
promptly hear the case. The employee
then filed a demand for arbitration with AAA, and while a hearing was set, the
employee's lawsuit proceeded toward trial.
Tenet moved to stay the lawsuit
pending arbitration. The employee
responded by withdrawing its demand for arbitration. He argued that various actions by the employer following
discharge constituted a waiver of its rights to arbitrate, including an alleged
failure to provide a meaningful grievance process.
The trial court determined that
Tenet, the employer, waived its right to arbitrate under the Federal
Arbitration Act. Upon appeal, the
appellate court reversed, finding there was no waiver, that the parties had
mutually agreed to submit their dispute to arbitration with AAA, and that this
"constitutes an enforceable contract." Id.
at 89.
The appellate court noted that waiver
of a right to arbitrate occurs when 1) the party had knowledge of the existing
right to arbitrate, 2) acted inconsistently with that right, and 3) prejudiced
the party opposing arbitration. There
is a strong presumption, however, against such a waiver and any "doubts as to
whether a party has waived its right to arbitrate must be resolved in favor of
arbitration." Id. The court concluded
that mere delays in seeking to compel arbitration do not constitute a
waiver.
Courts Enforce Statutory
Requirement to Arbitrate
In early 2001, the Supreme Court of
Missouri upheld the constitutionality of 226.095 R.S.Mo., a 1999 statute that
requires the Missouri State Highway Commission to submit to arbitration before
a panel of three when requested by a plaintiff who has a negligence action
against the Commission. The case is Murray v. Missouri Highway and Transp.,
37 S.W.3d 228 (Mo. 2001), decided January 31.
The Supreme Court considered two
cases, consolidated for its opinion, both personal injury (one involving a
death) due to car accidents. In a
reversal of positions from the norm, the plaintiffs wanted arbitration and the
Commission wanted a traditional trial.
The appeal involved statutory and constitutional attacks against
226.095. Missouri's Supreme Court
found the statute to be constitutional, even when the Commission has not agreed
to arbitration. The court determined
that the Missouri legislature has spoken, and by law, a plaintiff can have
arbitration. This case paves the way
for the Missouri legislature to enact similar statutes requiring other agencies
of government to accept arbitration.
James R. Keller is a
partner at HERZOG, CREBS & McGHEE, LLP, St. Louis, Missouri, where he
concentrates on business litigation and construction law. He also is a neutral/arbitrator with the
American Arbitration Association and a court-certified mediator in state and
federal courts.
