Arbitration Law – One Issue Settled, Another Issue Still Percolating

Monday, March 19, 2012 - 14:33

The Editor interviews Michael S. Oberman, Partner in the Litigation Department and Head of the Alternative Dispute Resolution Practice at Kramer Levin Naftalis & Frankel LLP.

Editor: Mr. Oberman, will you give our readers some idea of your professional background?

Oberman: I have been at Kramer Levin since September 1973, where I am now a litigation partner and head of our ADR Practice Group. Previously, I clerked for Judge Milton Pollack in the Southern District of New York after graduating from Columbia College and Harvard Law School.

Editor: Please describe your practice over the course of your career.

Oberman: My practice has focused on complex civil and commercial litigation as well as copyright litigation. Many of my commercial cases have involved a business relationship that did not work out as the parties hoped it would, leading to claims such as breach of contract, breach of fiduciary duty, and/or tortious interference. I’ve represented a number of plaintiffs, but more often defendants, in a wide array of industries – including media and entertainment, electronics and technology, real estate, professional services, corporate governance, and private equity – both in court and in arbitration.

Recently, I was lead counsel in the successful defense against a claim of breach of a distribution agreement seeking over $125 million in damages that consumed 20 days of arbitration hearings. The award was ultimately upheld this past November by the New York Court of Appeals. I have also defended securities law class actions and derivative actions. Most of the copyright cases have related to musical works, but I have also had cases involving video games, motion pictures, visual works of art, and computer software.

Since 1989, I’ve served on the Executive Committee of the Commercial and Federal Litigation Section of the New York State Bar Association (“NYSBA”) and was that Section’s first delegate to the NYSBA House of Delegates. I also served four terms on the Copyright & Literary Property Committee of the New York City Bar Association. And, what is most pertinent to this interview, I am a Fellow of the College of Commercial Arbitrators (and a member of its Education Committee), as well as a member of the Dispute Resolution Sections of the NYSBA and of the American Bar Association.

Editor: Please tell us about the case that was recently decided by the New York Court of Appeals.

Oberman: It started out as an ordinary commercial dispute. A company called U.S. Electronics (“USE” for short) and our firm’s client, Sirius XM Radio Inc., entered into non-exclusive agreements allowing USE to distribute radios capable of receiving Sirius’s subscription satellite radio service. Before long, neither party was happy in the relationship, with each side blaming the other for why things were not working out as they’d hoped. In May 2006, USE commenced an arbitration with the American Arbitration Association, alleging that Sirius improperly favored a competing distributor (DEI) over USE. The parties selected three neutral arbitrators, and William S. Sessions, a former federal court judge and a former director of the FBI, was appointed chairman. The panel conducted 20 days of hearings. On August 27, 2008, the AAA delivered the panel’s unanimous 149-page award, dismissing all of USE’s claims and denying USE any recovery of damages.

Editor: How did this arbitration end up in the New York Court of Appeals?

Oberman: While parties speak of “final and binding arbitration,” the Federal Arbitration Act (“FAA”) does provide very narrow grounds for judicial review of arbitration awards issued in cases affecting interstate commerce. In November 2008, USE filed a petition in the Supreme Court for the State of New York, New York County, seeking to vacate the award; Sirius cross-moved to confirm the award. USE invoked the FAA ground of “evident partiality.” USE alleged that Chairman Sessions failed to disclose that his son, Pete, a member of Congress, twice made statements in support of the then-pending merger between Sirius and XM Satellite Radio Inc. USE also contended that the chairman failed to disclose that his son was a close political ally of Rep. Darrell Issa (R-CA), the founder – and still a director and major shareholder – of DEI (the competing distributor). USE argued that these allegations proved that the chairman was partial to Sirius. On July 7, 2009, the court entered judgment denying the petition and confirming the award. Justice Ira Gammerman found that USE had failed to show evident partiality under the “reasonable person” standard formulated by the U.S. Court of Appeals for the Second Circuit for evident partiality – namely, that a reasonable person “would have to conclude” that an arbitrator was partial to one party to the arbitration. USE appealed to the Appellate Division-First Department, which unanimously affirmed the judgment in May 2010. But – as the Court of Appeals ultimately noted – the legal standard applied by the Appellate Division could not be “gleaned from federal precedent.” And this probably explains why, on November 18, 2010, the Court of Appeals granted leave to appeal.

Editor: So what happened before the New York Court of Appeals?

Oberman: The case (U.S. Electronics v. Sirius Satellite Radio) arrived at the Court of Appeals without controlling precedent from the Supreme Court of the United States on the meaning of “evident partiality” under the FAA. This absence of controlling precedent has resulted in lots of litigation over the meaning of “evident partiality.” The N.Y. Court of Appeals was faced with an unresolved question of what standard New York state courts should apply when faced with “evident partiality” challenges under the FAA. The court could decide to follow the Second Circuit’s standard if it found it persuasive, but was not required to do so.

Editor: Do you mean that the Supreme Court had never addressed “evident partiality”?

Oberman: No. The Supreme Court considered “evident partiality” once in 1968, in Commonwealth Coatings Corp. v. Continental Casualty Co. However, the minimum of five of the nine justices were unable to agree upon a majority opinion deciding the case. This resulted in 40 years of debate among the lower federal courts and also state courts on whether the plurality opinion of Justice Black (agreed to by four justices) or the concurring opinion of Justice White (joined by two justices) should be followed. And through this process, a variety of formulations was spawned. The brief we filed for Sirius (which is posted on my webpage) included a 30-page survey of the case law on evident partiality, showing the various formulations applied by all 12 of the regional federal circuits and the highest courts of 10 states.

Editor: How did the New York Court of Appeals come out?

Oberman: The court observed that the Second Circuit had a well-developed body of case law applying its “reasonable person” standard, and the New York court adopted that standard for when New York state courts are called upon to apply the FAA. So this issue is now settled. Applying the standard, the court affirmed the Appellate Division’s order. By harmonizing the law applied in New York state courts with the law applied within the Second Circuit for “evident partiality,” the New York court avoided the situation where parties would maneuver to get into the court that had the more advantageous standard for its side. And, in February of this year, the Second Circuit issued an opinion in Scandinavian Reinsurance Co. v. St. Paul Fire & Marine Ins. Co., which provides an especially clear presentation of the “reasonable person” standard.

Editor: Are there other current examples where parties are litigating an issue of arbitration law not yet settled?

Oberman: I’ll offer one issue that might be getting closer to clear guidance – still working its way through the courts after almost a decade. The Supreme Court’s 2003 opinion in Green Tree Financial Corp. v. Bazzle was widely read as permitting class actions in arbitration when the parties’ arbitration agreement could be construed by the arbitrator as intending class arbitration (even if the agreement made no express mention of class arbitration). Before long, arbitration providers like the AAA promulgated rules for class arbitrations, and class actions in arbitration – which had been a rarity – suddenly were being filed often, particularly consumer class actions and employment class actions.

Editor: Did the Supreme Court respond to this trend?

Oberman: It has issued several decisions since Bazzle. In 2009, Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp. held that where the parties agree that their agreement was “silent” on whether class arbitration should be permitted, an arbitrator could not find that the agreement permitted class action. This was initially seen as cutting off class arbitrations unless an agreement expressly provided for it. However, a number of courts have read Stolt-Nielsen narrowly, as applying only to cases where the parties stipulate that their agreement is silent as to class arbitration and as allowing an arbitrator to find that the parties intended class arbitration absent such a stipulation. Meanwhile, after Bazzle, many employers and companies dealing with consumers (among others) were including in their arbitration provisions a class action waiver – that is, a clause that provides all disputes will be resolved by bilateral arbitration between, say, a bank and a credit card consumer, and that the consumer waives any right to seek a class action. Some courts – particularly state courts – began to find that class action waivers in this situation were unconscionable and therefore unenforceable. Then, in 2011, the Supreme Court held in AT&T Mobility LLC v. Concepcion that the FAA preempts state law that singles out arbitration agreements and voids class action waivers in them. Concepcion was seen by The New York Times as “a devastating blow to consumer rights,” yet some courts are not finding that Concepcion protects all class action waivers. For example, in In re American Express Merchants’ Litigation (decided on February 1, 2012), the Second Circuit ruled that a class action waiver was unenforceable in the context of federal antitrust claims where record evidence proved that the proposed class members as a practical matter would not pay for the litigation and expert fees required to individually vindicate their statutory rights given the modest amount each one might recover. And some state courts are reading Concepcion narrowly.

Editor: Where does the class arbitration issue now stand?

Oberman: On February 21, 2012, the Supreme Court took the rare step of granting review of a decision from the Supreme Court of Appeals of West Virginia that found a class action waiver to be unenforceable, and simultaneously vacating the state court’s decision without full briefing and oral argument before the U.S. Supreme Court. That case – Marmet Health Care Center v. Brown – proclaimed that state courts “may not contradict or fail to implement” an interpretation of federal law by the U.S. Supreme Court. We will have to watch in the coming months how this strong message is received.

 

Please email the interviewee at moberman@kramerlevin.com with questions about this interview.