In a prior e-Alert, the Commercial Litigation practice outlined the issues confronting your business when deciding whether to enter into a contractual arbitration agreement. The alert noted that an important issue to consider is the typically non-appealable nature of an arbitration award. It has become increasingly apparent that there can be a downside to the finality of arbitration that does not necessarily exist in litigation. An arbitrator may misinterpret or misapply the operative law, and, in some cases, may manifestly disregard the law. Even so, parties rarely succeed on motions to vacate an arbitration award. Under the Federal Arbitration Act (FAA), a court may only review an arbitration award under very limited circumstances, such as to ensure there was no fraud in procuring the award and no bias, corruption or misconduct by the arbitrator. Courts will generally defer to an arbitrator's findings of fact and application of law. Many businesses sacrifice litigation's robust appellate review for the efficiency and finality associated with arbitration. However, the New American Arbitration Association (AAA) rules, adopted November 1, 2013, now provide a mechanism for appealing arbitration rulings within the confines of the AAA, before taking the issues to court.
The new AAA Optional Appellate Arbitration Rules present a process for appealing an underlying award to an appellate arbitration panel when there is "an error of law that is material and prejudicial," or "determinations of fact that are clearly erroneous." To be effective, the AAA Appellate Rules must be agreed upon by both parties in the arbitration agreement. Thus, for the AAA Appellate Rules to apply the rules must be reflected in the contractual arbitration provision or both parties must stipulate to the use of the new rules.
While the new AAA Appellate Rules allow for appeals, some types of contracts are omitted in the new provision. The majority of commercial disputes involving arbitration clauses contained in consumer contracts (i.e., "primarily non-negotiable" contracts) between individual consumers and businesses concerning the purchase of goods or services are excluded under the new AAA Appellate Rules.
If your contract falls within the New AAA Appellate Rules, before agreeing to include these rules in your contract, you must first note that the AAA Appellate Rules require certain fees be borne by the appellant, in addition to legal fees for preparation of appellate briefs and paperwork. The party seeking to appeal the arbitration award must pay a non-refundable $6,000 administrative fee, which presumably does not include the actual filing fee for the appeal. An additional $6,000 administrative fee must be paid by any party filing a cross-appeal. The AAA Appellate Rules expressly provide that these fees do not include the fees and costs of the Appellate Tribunal. Additionally, the Appellant may be responsible for a host of other fees and costs associated with the proceeding.
The AAA Appellate Rules maintain the entire appeal process can be completed within 30 calendar days. While this tight schedule promotes reaching a final decision quickly, depending on the complexity of your dispute, your counsel may have little time to prepare an effective briefing or an oral argument. The appeal tribunal may proceed with the appeal process without the presence of the parties or may rule on its own un-defined "jurisdiction," including any objections with respect to the "existence, scope or validity of the arbitration agreement." Alternatively, the tribunal may dismiss an appeal in its entirety if it determines the appeal has no jurisdiction, thereby rendering the underlying award final and frustrating an appellant's efforts. Finally, the AAA Appellate Rules provide no option for remand. Under the rules, the tribunal may either adopt the original award, or issue a new award.
The new AAA Appellate Rules have already raised many questions, including:
Whether the parties can contract to accept or reject certain rules;
What is the interplay between the FAA, state law, and the AAA Appellate Rules;
Is there judicial review of the AAA appellate tribunal's decision;
Can the parties contract to alter deadlines set within the thirty-day track for the process; and
If the parties agree to not have the appellate tribunal issue a written decision, what "record" would be presented to a court?
Before including the AAA Appellate Rules in arbitration provisions, businesses should consider that parties have been including private, appellate review of arbitration decisions for years governed by mutually agreed upon rules. If appellate review of a decision is a must, you still consider the substantive and cost advantages appellate review in litigation can provide as an alternative.
As we advised in our prior e-Alert, counsel crafting the language of your arbitration agreement should be sure to consult your litigation counsel on whether the litigation option, the AAA Appellate option or arbitration without appeal is the preferred approach.