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
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.
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
For years, litigators considered arbitration to be a safe haven to avoid punitive damages. That thinking may change given the recent decision inGroceman 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.
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.