Trends in litigating arbitration: using motions to compel arbitration and motions to vacate arbitration awards.

• Author: Philbin, Donald R., Jr.

ARBITRATION has been used in commercial disputes since at least the 13th century. (1) George Washington included an arbitration provision in his will, (2) and arbitration remains the preferred choice for parties engaging in international transactions (3)--especially those involving foreign direct investment in another country. (4) Litigation in the home courts of the government who owes you money for a dam or power plant is an unattractive option. At home, some states have been hostile to arbitration while others have not. Congress reconciled those differences by adopting the New York approach in the Federal Arbitration Act ("FAA") of 1925. (5) The Supreme Court has interpreted the FAA broadly--Congress invoked the full preemptive power of the Commerce Clause, (6) stated a "national policy favoring arbitration," preempted inconsistent state laws, (7) and separated the arbitration clause from the surrounding contract for purposes of deciding who decides arbitrability. (8)

When court dockets clogged in the 1970s, (9) Chief Justice Burger convened the Pound Conference in 1976 to explore "multi-door courthouse" solutions that offered litigation alternatives. (10) The modern Alternative Dispute Resolution movement grew quickly from Pound. ADR has been well-received generally, and even the criticisms of arbitration are confined to relatively few categories of claims. Indeed, "there is little opposition today to arbitration between sophisticated commercial parties." (11) Still, "litigating arbitration" has been a conspicuous part of the dockets of the United States and State Supreme Courts in recent years. (12) Since written agreements to arbitrate are enforceable "save upon such grounds as exist at law or in equity for the revocation of any contract," (13) litigants have sought to avoid arbitration by raising a variety of common law contract defenses, such as lack of assent, (14) lack of consideration, (15) administrative pre-emption, (16) unconscionability, (17) fraud and duress, (18) and material breach. (19) Beyond litigating arbitration, legislative efforts are pending in Congress and statehouses to expand or curtail the use of arbitration in specific contexts. (20)

This article examines litigation trends associated with the rapid expansion of private arbitration as a dispute resolution mechanism. (21) In particular, this article evaluates the two most common legal measures associated with arbitration proceedings, the Motion to Compel Arbitration, which attempts to enforce arbitration agreements against unwilling participants, and the Motion to Vacate Arbitration Award, which attempts to void the result of a consummated arbitration. This article traces the procedure underlying these motions, discusses trends in case law with respect to each of these motions, and considers the future role of each of these motions in practice.

1. DISPUTE RESOLUTION OPTIONS

   Parties have options in resolving disputes. (22) They range from ignoring a problem (many go away and some get worse) to legislative or constitutional attempts to alter the playing field. Absent agreement between the disputants, litigation is the default mechanism. For the party desiring to avoid litigation, there are a wide number of choices, even within the broad categories of dispute resolution alternatives. (23) Mediation comes in flavors ranging from facilitating open discussions to actively helping parties put deals together and evaluating issues. It may be instructive to take a wide-angled look at some of the dispute resolution options available to parties negotiating deals or picking up the pieces of one that may have gotten off track. Here is a graphical depiction of many dispute resolution options.

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   1. Pre-Dispute Actions

      Arbitration is the focus of this article. There are a host of arbitration providers, and many of these administering agencies have specialized rules for different kinds of disputes. The American Arbitration Association, for example, has multiple sets of rules. (24) So the question facing drafters is not simply whether to leave disputes to the default system or select an alternative, but how each will be modified pre- and postdispute. (25) Parties often elect to use the judicial system and choose to select a particular judicial forum, apply a certain state's substantive law, or agree to waive a jury trial. Recently, arbitration clauses are increasingly added (26) or even included as boilerplate when entering a deal. For example, arbitration agreements are now found in most types of commercial contracts, including in nearly thirty-seven percent of executive employment contracts. (27)

      With the increase in the use of ADR clauses has come criticism of boilerplate contractual terms. An individual arbitration clause was found to be substantively unconscionable in Bexar County, Texas because the billed arbitration costs were three-times the contract price and amounted to 28% of plaintiff's annual household income. (28) Even beyond these cases, some fear that arbitration has become "arbigation," and too expensive by itself. (29)

      Unfortunately, dispute resolution clauses are often lightly negotiated when deals are coming together because no one anticipates that their deal will ever have to be unwound. And research confirms that deal-makers are not the only ones afflicted with optimistic overconfidence early in a relationship. Couples marrying estimate their chances of divorce at zero, even when they know the divorce rate in general hovers between 40-50%. (30) Carefully tailoring ADR clauses to the specific deal may still be one of the most effective ways to avoid costly collateral litigation.

   2. Post-Dispute Arbitration

      Adapting to changing needs or hoping to control costs, counsel often must negotiate and guide parties through customized processes on an ad hoc basis after a dispute arises. This option appears tempting because of the parties' mutual interest in controlling the course of litigation. Parties may elect to settle their dispute using a less expensive regional arbitration provider or tee a couple of issues up for a quick summary judgment motion or bench trial, even though their contract calls for use of a standard arbitration provider. (31) However Hall Street Associates v. Mattel, (32) has shown the limits to this approach. In Hall Street, companies in the middle of a federal court trial over environmental damage to leased premises decided to arbitrate a single issue and return to court if they thought the arbitrator misapplied the law. The Supreme Court subsequently limited their ability to provide contractually for such expanded judicial review, even though expanded review had been recognized in the First, Third, Fifth and Sixth Circuits when the parties crafted their provision. (33) Hall Street Associates has clearly had "the effect of further restricting the role of federal courts in the arbitration process." (34) By concluding "that [section][section] 10 and 11 provide the exclusive regimes for review under the FAA," (35) the Court raised serious questions about whether "manifest disregard of the law" survived as a ground for vacatur, placing counsel on notice that even mutually agreed upon arbitration provisions remain subject to the constraints of the FAA.

2. AVOIDING AND ENFORCING ARBITRATION

   Arbitration litigation has two main pressure points: (1) arbitrability--is the asserted claim covered by an arbitration clause to which no defenses have been sustained; and (2) award confirmation--are there statutory reasons why the award should be vacated or modified?

   1. Before Arbitration Begins (Motions to Compel)

      If the parties have entered into an agreement containing an arbitration clause that encompasses the dispute (or, if a third-party is claiming the benefits of a contract containing such a clause in many instances), the burden generally shifts to the party seeking to avoid arbitration to prove a defense. Appendix A uses representative Texas state precedent to illustrate some of the available defenses and their success rates at different levels of appeal. (36) If the party seeking to compel arbitration demonstrates that a valid agreement to arbitrate exists, and the party seeking to avoid arbitration does not present a valid defense, a motion to compel arbitration will be granted, and any legal proceedings will generally be stayed pending the conclusion of arbitration.

      1. Interlocutory Appeals of Orders Denying Motions to Compel

         The methods for appealing the grant or denial of a motion to compel have historically been convoluted in some jurisdictions, though state legislatures have recently begun the process of streamlining their arbitration appellate procedure. (37) At the risk of oversimplification, interlocutory appeal is available under the FAA for a denial of a Motion to Compel Arbitration. Congress added a ban on interlocutory appeals of orders compelling arbitration in 1988 to "prevent arbitration from bogging down in preliminary appeals." (38) Since the FAA has been interpreted as the full exercise of the Commerce Clause and to preempt inconsistent state statutes, most appeals arise under the FAA. Because the FAA does not confer independent subject-matter jurisdiction on the federal courts absent diversity of parties or another independent jurisdictional ground, state courts are generally left to interpret the federal statute.

      2. Standard of Review of Motions to Compel Arbitration

         Though the FAA and state arbitration laws are not identical, they generally agree on the court's limited role in deciding issues of arbitrability. (39) Judicial review under the FAA is limited to determining (1) whether a valid arbitration agreement exists between the parties before the court, and (2) whether the scope of the agreement encompasses the claims raised. (40) In deciding the former question, courts apply state law principles regarding the formation of contracts. (41) Accordingly, courts look to state...