September 30, 2014

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September 30, 2014

September 29, 2014

New American Arbitration Association (AAA)/International Centre for Dispute Resolution (ICDR) Optional Appellate Arbitration Rules – Questions Abound

On November 1, 2013, the American Arbitration Association (AAA) and its international branch, the International Centre for Dispute Resolution (ICDR), introduced new Optional Appellate Arbitration Rules.  As the title indicates, the new “Optional” Appellate Rules only apply where the parties have agreed to use them. Where that is the case, the new rules permit a dissatisfied party to obtain private appellate review of alleged “material and prejudicial” errors of law and/or “clearly erroneous” determinations of fact made by an arbitration panel.  The new AAA/ICDR Appellate Rules are available here.

Private appellate review of arbitration awards is not new.  Other arbitral bodies – most notably, CPR and JAMS  – have offered similar rules for more than a decade.[1]  Alternatively, parties sometimes insert ad hoc appeal procedures in contracts.  Under either approach, the goal is to balance perceived arbitration advantages (efficiency, lower costs, speed and finality), against the risk of aberrant awards.  Without private appellate review, a party convinced that an arbitration “fell off the rails” faces daunting odds in court.  The Federal Arbitration Act (FAA) and its state counterparts authorize courts to step in and “fix” arbitration awards only in narrow circumstances.[2]

Features of the Rules

The new AAA/ICDR Appellate Rules differ in significant ways from the existing CPR and JAMS approaches (which already differ from one another).  The following are among the most important features of the new AAA/ICDR Appellate Rules:

  • Agreement is Required.  Parties must agree to using the AAA/ICDR Appellate Rules, either “by stipulation or in their contract.”  In other words, as their name suggests, applicability of the rules is “opt in,” not automatic.  

  • Exclusion of Consumer Contracts.  An explanatory comment to Rule A-1 states that the Appellate Rules “do not apply to disputes where the arbitration clause is contained in an agreement between individual consumers and businesses,”i.e., to “primarily non-negotiable” consumer contracts involving the purchase of goods and services.  Neither the CPR nor JAMS procedures include that limitation. 

  • Appeal Timetable.  The AAA/ICDR predicts that appeals under its “streamlined” rules will be completed in about three months.  However, steps in the process include thirty days to file an initiating Notice of Appeal, potential cross-appeals, record assembly, panel selection and organization, procedural conference call(s), briefing (including replies), potential oral argument, and time for the appellate panel to issue a written decision.  Several of those deadlines can be extended. 

  • Scope of Briefing.  Before an initial brief is filed, the arbitration appellate panel may require a “detailed specification of issues on appeal,” and may direct the parties to limit their briefing solely to certain areas or issues. 

  • Three-Arbitrator Panel.  Unless the parties agree otherwise, the AAA will propose ten candidates from its newly created AAA Appellate Panel, ultimately whittling that down to a panel of three arbitrators using familiar AAA procedures. 

  • No Oral Argument.  Parties may request oral argument, but unless the tribunal so directs, the appeal will be decided solely upon briefs and the written record.  That approach differs from JAMS (oral argument only if all parties agree) and CPR (oral argument if any party requests) procedures. 

  • Submission of the Record.  The parties are to “cooperate in compiling the record,” which may include transcripts, exhibits, expert reports or other evidence presented in the underlying arbitration, as well as prior briefing.  Unlike JAMS, the AAA/ICDR rules do not bar appeals based upon an incomplete record. 

  • No Remand.  The appellate panel may: (i) adopt the original award; or (ii) issue a new award (which may include parts of the original award).  As under both the CPR and JAMS appellate rules, no remands are permitted.   

Questions Raised

The new AAA/ICDR Appellate Rules raise a host of questions.  Some of the thorniest concern the intersection between private arbitral appeals and the potential for judicial review of arbitral awards under the FAA and its state counterparts.  The following are some (but by no means all) of the questions raised by the new rules:

  • Some arbitration clauses in existing consumer contracts provide for similar arbitral appeals under AAA/ICDR rules.  Does the comment to new Rule A-1 “trump” that contractual intent?  Even if an appellate panel thinks so, will courts agree? 

  • Stated more broadly, are all aspects of the new Appellate Rules binding, or are parties free to modify or contract around them as they wish? 

  • New Rule A-2 purports to “toll” all deadlines contained in the FAA and counterpart state statutes, such as for petitioning a court to confirm, modify, vacate or review a panel’s award.  Can private contracts do that?  Will future federal and state courts uphold AAA/ICDR rules that purport to modify otherwise governing statutory deadlines?[3] 

  • New Rule A-2 also purports to authorize the parties to “agree to stay any already initiated judicial enforcement proceedings.”  But what if the “winning” party will not agree?  Or, despite party agreement, what if the court refuses to grant a stay? 

  • What will happen when parallel proceedings result from one underlying award, for example where a dissatisfied party takes a private appeal, but the satisfied party simultaneously pursues judicial confirmation under the FAA or a state analog? 

  • Likewise, if a dissatisfied party pursues an appeal, should it simultaneously also seek judicial relief under the FAA and/or state arbitration statutes?  What are the risks if it does not? 

  • The new AAA/ICDR Appellate Rules set forth two “grounds” for appeal:  (i) “an error of law that is material and prejudicial” and (ii) “determinations of fact that are clearly erroneous.”  Those grounds are in some respects broader, and in other respects narrower, than the scope of judicial review available under the FAA.  How will courts react to those alternative review standards?[4] 

  • If a party refuses to participate in a private appeal, despite previously contracting to do so, may an adverse party obtain a court order under FAA Section 4 (or a counterpart state arbitration statute) directing the recalcitrant party to participate?[5] 

  • Conversely, may a party to a contract incorporating the new Appellate Rules later disavow that available remedy and leapfrog directly to seeking judicial relief? 

  • Do the new Appellate Rules create a “shadow” set of private appellate courts inconsistent with Art. III federal jurisdiction? 

  • How will courts treat private arbitral tribunals like those authorized by the new AAA/ICDR Appellate Rules where the procedures and permissible grounds for review differ from fundamental appeal rights contained in applicable statestatutes and constitutions?[6]

  • Under the new Appellate Rules, the “final” award is the one issued by the appellate panel.  In a follow-on judicial appeal, what will the Court review – the underlying award, the appellate panel’s “final” award, or some combination of both?  If only the appellate panel’s award, then have the parties been deprived of even such constricted review as is guaranteed under the FAA? 

  • Related, new Rule A-7(c) gives the appeal tribunal authority to “direct or limit the Appellant/Appellee to certain areas or issues.”  If that occurs, how will later judicial review under the FAA be impacted? 

  • New Rule A-19 allows the parties to agree that the appeal tribunal will not issue a written decision.  In that case, what “record” will be presented to an appellate arbitral panel?  Likewise, should one party seek further judicial review under the FAA or its state counterparts, what “record” will be presented to the court ? 

  • If a party loses an appeal, but subsequently seeks FAA or other judicial relief,  how will its ultimate chances of success have been affected? 

  • Does an “arbitration” followed by a private appeal process even constitute a classic “arbitration” within the meaning of the FAA and state analogs?[7]

Overall Takeaways

Drafters and their clients should carefully consider all potential ramifications before proposing or agreeing to a contract provision involving a private appellate process following an arbitration award.  Not only do available approaches differ (CPR, JAMS, AAA/CPLR), the salutary goals of arbitration (efficiency, lower costs, speed and finality), may be undercut by provisions authorizing private appeals.  Moreover, even where parties nonetheless favor the availability or use of such procedures, it is open to considerable debate whether privately contracted procedures can “trump” otherwise applicable statutory deadlines.  Thus, careful attention must still be paid to deadlines and remedies potentially available under the FAA and its state counterparts.


[1]  The CPR optional appellate rules were adopted in 1999 and as amended are available here.  The JAMS optional appellate rules were adopted in 2003 and are available here.

[2]  Grounds available under the FAA for vacating or modifying an arbitral award are largely procedural in nature, limited to proof of: (i) party corruption, fraud or undue means; or (ii) arbitrator misbehavior involving evident partiality, prejudicial misconduct, exceeding their powers or failing to make a final and definite award.  Depending upon how one reads Supreme Court tea leaves, substantive review under the FAA is either non-existent or at best limited to panel decisions demonstrating a “manifest disregard” of the law.  Hall St. Assocs., L.L.C. v. Mattel, Inc., 552 U.S. 576 (U.S. 2008) (available here).

[3] Compare Shait v. The Millenium Broadway Hotel, 2001 U.S. Dist. LEXIS 6575 (S.D.N.Y. 2001) (construing the date of an arbitral appeal decision as the “final” order date), with Olson v. Wexford Clearing Svcs. Corp., 397 F.3d 488 (7th Cir. 2005) (denying tolling of the time limit to file a motion to vacate an arbitration award).

[4] See, e.g., Cofinco, Inc. and Bakrie & Bros., N.V., 395 F. Supp. 613 (S.D.N.Y. 1975) (upholding a private appeal tribunal’s reversal of an arbitration award, but not permitting it to then substitute its judgment (and make up for a too-lean record), and find in favor of the other party); State ex rel. Adams v. Gusweiler, 285 N.E.2d 22 (Ohio 1972) (state arbitration statute authorizes judicial review only, not a private appellate tribunal); but see Chicago Typographical Union No. 16 v. Chicago Sun-Times, Inc., 935 F.2d 1501 (7th Cir. 1991) (“If the parties want, they can contract for an appellate arbitration panel to review the arbitrator’s award).

[5] See Supra Telecom & Info. Sys., Inc., 2002 U.S. Dist. LEXIS 27194 (N.D. Fla. Sept. 20, 2002) (considering a motion to compel appellate arbitration under FAA Section 4; decided on other grounds);In re Hospitality Employment Grp., LLC, 234 S.2d 3d 832 (Tx. Ct. App. 2007) (party may not claim arbitration appeal procedures were unconscionable after failing to raise the issue in the underlying arbitration).

[6] Some states – Pennsylvania, for example – provide both statutory and constitutional rights to appeal, which arguably conflict with any private agreement to restrict the scope of an arbitral appeal See City of Philadelphia v. FOP Lodge No. 5 (Breary), 604 Pa. 267, 985 A.2d 1259 (2009) (requiring all arbitral appeals to allow parties to raise questions of jurisdiction, the regularity of the proceedings, alleged exceedances of arbitral powers and constitutional questions).

[7] See Hall Street Associates, LLC v. Mattel, Inc., 552 U.S. 576 (2008) (“Instead of fighting the text, it makes more sense to see the three provisions, §§ 9-11, as substantiating a national policy favoring arbitration with just the limited review needed to maintain arbitration’s essential virtue of resolving disputes straightaway.  Any other reading opens the door to the full-bore legal and evidentiary appeals that can ‘rende[r] informal arbitration merely a prelude to a more cumbersome and time-consuming judicial review process.’”)

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