Category: ADR

Strategic Use of Arbitration Provisions in Nonprofits’ Contracts

In the nonprofit sector, organizations often face unique legal challenges that require efficient and cost-effective dispute resolution mechanisms. Arbitration provisions in contracts can offer nonprofits a strategic advantage by providing a streamlined process for resolving disputes. Below, we explore the benefits and strategic considerations for incorporating arbitration clauses in contracts, drawing on recent developments and case law.

Background and Legal Basis

Arbitration is increasingly favored in the business context for its efficiency, cost-effectiveness, and confidentiality. Unlike traditional litigation, arbitration generally allows parties to resolve disputes more quickly and with less expense, which is particularly beneficial for nonprofits operating on limited budgets. The process is also private, protecting sensitive information related to donors and beneficiaries, avoiding potential adverse publicity and reputational harm, and has less risk of unpredictability like a “run-away” jury verdict.

The Federal Arbitration Act (FAA), enacted in 1925, provides the foundational legal framework for arbitration in the United States. As a result, arbitration agreements involving interstate or foreign commerce are enforceable and binding. The FAA’s core principle is to support a national policy favoring arbitration, overcoming historical resistance in some areas.

The Uniform Arbitration Act and its revised version offer a model statute adopted by most states to ensure the enforceability of arbitration agreements, even in the face of state laws that may be hostile to arbitration.

Under these arbitration statutes, federal or state courts may be involved both before or after arbitration. First, the courts are empowered to order parties to arbitrate where an enforceable arbitration agreement exists. Second, the courts may conduct a substantially limited review of an arbitration award and may enter judgment on the award or, in some cases, vacate the award or order further arbitration proceedings.

Federal Court Jurisdiction

Most trial lawyers prefer federal courts. However, the FAA does not automatically confer federal court jurisdiction over arbitration matters. Federal court jurisdiction requires a federal question or diversity of citizenship between the parties. When one of the arbitrating parties is structured as an LLC or non-corporate entity, determining diversity can be complex because it is based on the citizenship of the individuals or corporations that ultimately own the entity, regardless of how many layers are in the ownership structure. Thus, as a practical matter, many arbitration matters are decided within state courts.

Arbitration Rules

There is no requirement that an arbitration agreement select an arbitration organization to administer the arbitration. Private arbitration, where the parties self-administer the matter, is possible but increasingly rare. Instead, there are two major arbitration organizations in the United States and many smaller ones. The two major organizations are the American Arbitration Association (AAA) and the Judicial Arbitration and Mediation Services (JAMS). Each organization has several sets of arbitration rules focused on the nature of the dispute. For example, there are rules for general commercial disputes, expedited cases, and larger, more complex matters. Selecting the applicable rules is an important consideration when drafting an arbitration provision.

Drafting Arbitration Clauses

When drafting arbitration clauses, clarity and precision are paramount; otherwise, you risk entering into litigation to interpret the clause. At the very least, the arbitration clause should cover the when, where, which, and how details of the arbitration process. Nonprofits should consider whether to use broad or narrow clauses. Broad clauses cover all disputes arising from or relating to the contract, while narrow clauses limit arbitration to specific issues. Sample clauses are available from the AAA and JAMS that provide templates for structuring effective arbitration agreements. These clauses should specify the rules governing arbitration, the number of arbitrators, and the location of proceedings, among other issues.

Deemed Arbitration Clauses

Courts have found other contractual clauses to be arbitration clauses and subjected them to the requirements for arbitration. For example, a real estate contract that included a procedure involving three experts to determine the actual square footage development potential of a property to be sold was deemed an arbitration clause. Thus, when the parties disagreed as to the determination by the experts, the court performed only the substantially limited review used to review arbitration awards, not a broader review that would allow reversal for mistakes or law or fact.

Conclusion

For nonprofits, arbitration provisions offer a strategic tool for managing disputes efficiently and confidentially. However, nonprofits should carefully draft effective arbitration clauses that align with their operational needs and legal obligations. Thoughtful consideration of the scope, rules, and procedural requirements will ensure that arbitration serves as a valuable mechanism for dispute resolution.

© 2024 ArentFox Schiff LLP
For more news on Arbitration Provisions, visit the NLR ADR, Arbitration, & Mediation section.

California Arbitration Roundup: Employers Are 3-1 For Favorable Arbitration Rulings

California employers received mostly good news this past month on the arbitration front, with a trio of pro-employer arbitration-related rulings.  The California Supreme Court’s recent ruling invalidating an employer’s arbitration agreement (discussed below) is a notable exception.

California Supreme Court Invalidates Employer’s Arbitration Agreement As Unconscionable.

In OTO LLC v. Ken Kho, the California Supreme Court ruled that an Oakland Toyota dealership’s arbitration agreement with a former employee was unenforceable and was so unfair and one-sided that it was procedurally and substantively unconscionable.  “Arbitration is premised on the parties’ mutual consent, not coercion, and the manner of the agreement’s imposition here raises serious concerns on that score,” the majority opinion said.

In 2013, Ken Kho, then an employee of the dealership, One Toyota, was asked to sign several documents, including an arbitration agreement.  Kho signed it, and was later terminated.

The California Supreme Court acknowledged that California and federal laws strongly favor arbitration. However, the Court considered the following factors in determining that One Toyota’s arbitration agreement was unconscionable:

  • The arbitration agreement purported to waive Kho’s right to file a wage claim with the Labor Commissioner and to have a “Berman” hearing before the Labor Commissioner (while not dispositive, the Court noted that this remains a significant factor in considering unconscionability of employee arbitration agreements);

  • The agreement was presented to Kho in his workspace, along with other employment-related documents;

  • Neither its contents nor its significance was explained;

  • Kho was required to sign the agreement to keep the job he had held for three years;

  • Because One Toyota used a piece-rate compensation system, any time Kho spent reviewing the agreement would have reduced his pay;

  • A low-level employee (a porter) presented the agreement to Kho, “creating the impression that no request for an explanation was expected and any such request would be unavailing”;

  • By having the porter wait for the documents, One Toyota conveyed an expectation that Kho sign them immediately, without examination or consultation with counsel;

  • There was no indication that the porter had the knowledge or authority to explain the terms of the agreement;

  • Kho was not given a copy of the agreement he had signed;

  • The agreement was written in an extremely small font in the form of a “single dense paragraph” of 51 lines, and the text was “visually impenetrable” and “challenge[d] the limits of legibility”;

  • The sentences were complex, filled with statutory references and legal jargon;

  • Kho was not offered a version to read in his native language (while the Court noted this factor, it did not consider it because it did not know Kho’s English proficiency);

  • The arbitration agreement did not make clear One Toyota’s obligation to pay arbitration-related costs (and rather cited to statutory provisions and referenced legal precedent; the Court noted “It would have been nearly impossible to understand the contract’s meaning without legal training and access to the many statutes it references. Kho had neither.”);

  • One Toyota’s agreement did not mention how to bring a dispute to arbitration, nor did it suggest where that information might be found (e.g., by citing to a commercial arbitration provider such as JAMS or AAA); and

  • One Toyota’s arbitration process was complicated to navigate and would likely require an attorney, making it cost-prohibitive for Kho.

The Court concluded that “[w]e have not said no arbitration could provide an appropriate forum for resolution of Kho’s wage claim, but only that this particular arbitral process, forced upon Kho under especially oppressive circumstances and erecting new barriers to the vindication of his rights, is unconscionable.”

Employers would thus be well-advised to revisit their employee arbitration agreements to ensure that they do not contain any of the defects discussed by the Supreme Court in the Kho case.

NLRB Upholds Employer Conduct Related to Mandatory Arbitration Agreements

In Cordúa Restaurants, Inc., 368 NLRB No. 43 (2019), the National Labor Relations Board (NLRB) addressed the lawfulness of employer conduct surrounding mandatory arbitration agreements for the first time since the U.S. Supreme Court’s 2018 decision in Epic Systems v. Lewis, where the Court held that mandatory arbitration agreements do not violate the National Labor Relations Act (NLRA) (see here).  In Cordua Restaurants, the NLRB ruled in part that employers are not prohibited under the NLRA from: (1) informing employees that failing or refusing to sign a mandatory arbitration agreement will result in their discharge; and (2) promulgating mandatory arbitration agreements in response to employees opting in to a collective action under the Fair Labor Standards Act or state wage-and-hour laws.

The NLRB’s decision in Cordua Restaurants is a natural extension of the Supreme Court’s analysis and ruling in Epic Systems.  There, the Court held that Congress, when passing the Federal Arbitration Act (FAA) in 1925, instructed courts to enforce arbitration agreements as written.  Since the passage of the FAA predates the NLRA by ten years, and since the NLRA says nothing about overruling the FAA, the NLRB could not, under the guise of enforcing the NLRA, rule that an arbitration agreement that otherwise is lawful on its face violates the NLRA.  This decision by the NLRB is further evidence of that agency’s retreat from past policies advanced by the NLRB in the prior administration and likely will not be overruled.

California Court of Appeals Compels Employee to Arbitrate Claims Even Though He Filed Suit Before Signing Arbitration Agreement

In Quiroz Franco v. Greystone Ridge Condominium, the California Court of Appeals compelled an employee to arbitrate his claims against his employer even though the employee filed his lawsuit two days before he signed an arbitration agreement.  The Court held that the arbitration agreement was clear in that it required arbitration of any claims and that it did not contain any restriction based on when a claim was filed.

In the case, Quiroz Franco, the employee, was given an arbitration agreement on March 9, 2018, and a Spanish translation shortly thereafter.  On March 19, 2018, he filed a lawsuit against his employer, alleging harassment, discrimination, and wage and hour claims among others.  On March 21, 2018, Quiroz Franco handed in his signed arbitration form, which the employer used to attempt to compel him to arbitrate. The lower court ruled that the claims in the employee’s suit started to accrue before he signed the arbitration agreement, so arbitration couldn’t be compelled.  The employer appealed and the Court of Appeal overturned the lower court’s decision.

California Court of Appeals Rules that Unfair Competition Law Claims Are Arbitrable

In Clifford v. Quest Software Inc., the California Court of Appeals addressed whether an employee’s claim against his employer for unfair competition under Business and Professions Code section 17200 (the UCL) was arbitrable, ruling that it was.  The employee brought various wage and hour claims against his employer, and the employer moved to compel arbitration based on the parties’ arbitration agreement.  The trial court granted the motion in part and ordered to arbitration every cause of action except the employee’s UCL claim, which the court concluded was not arbitrable.  The Court of Appeals reversed, holding that the employee’s UCL claim was subject to arbitration along with his other causes of action—more good news for California employers.

© 2019 Mitchell Silberberg & Knupp LLP

Fifth Circuit Judge Blocks Rule That Would Ban Arbitration in Nursing Home Disputes

nursing home arbitrationA federal district court recently issued a preliminary injunction barring enforcement of a rule prohibiting the use of pre-dispute arbitration agreements with patients in long-term care facilities that participate in Medicare and Medicaid programs.

The new rule, promulgated by the Centers for Medicare and Medicaid Services (CMS), would have taken effect on November 28, 2016. It would have prohibited (1) entering into pre-dispute arbitration agreements and, (2) requiring the signing of an arbitration agreement as a condition of admission. The injunction was granted by U.S. District Court Judge Michael P. Mills, who sits in the Northern District of Mississippi, at the request of members of the nursing home industry to stop the rule from taking effect while it is being challenged in court. In their lawsuit, the American Health Care Association and four other state and local health care groups are claiming that CMS and the Department of Health and Human Services are overstepping their authority in issuing the rule. Specifically, the plaintiffs contend that Congress has repeatedly rejected legislation to invalidate arbitration agreements, and further argue that the rule isn’t necessary to protect the health and safety of nursing home residents.

In entering his order, Judge Mills did concede that the CMS rule does appear to be based on “sound public policy.” As some residents of nursing homes suffering from ailments such as dementia and the like might not have the capacity to grasp what an arbitration agreement entails, in addition to the fact that there is stress upon nursing home residents and their families that is inherent to the admissions process, it can be argued that arbitration and the nursing home admissions process do not belong together.

However, in granting the injunction, Judge Mills stated that, as sympathetic as the court may be to the public policy considerations that motivated the rule, it is not willing to allow the federal agency to overstep its executive authority and “engage in a rather unprecedented exercise of agency power. The court is unwilling to play a role in countenancing the incremental ‘creep’ of federal agency authority beyond that envisioned by the U.S. Constitution.”

The nursing home industry has said that arbitration offers a less costly alternative to court. Facilitating more lawsuits, the industry has said, could drive up costs, forcing some nursing homes to close. Lawyers representing residents, however, state that people being admitted to nursing homes are often at the most stressful juncture of their lives, and are not equipped or capable of understanding what it is they are being asked to sign. Regardless of whether one believes striking down the rule would help the nursing home industry reduce its legal costs, or that the rule assists the families of nursing home residents in getting justice, it is clear that the court’s grant of the injunction as well as the impending decision in the underlying case will have an impact upon the future of the nursing home industry.

ARTICLE BY Amee Lakhani of Heyl, Royster, Voelker & Allen, P.C.

© 2016 Heyl, Royster, Voelker & Allen, P.C

Are they Worth Price of Paper They're Printed On? – Ubersization of Arbitration Clauses

Arbitration has long been treated as an inferior method of resolving disputes, despite pronouncements to the contrary from the U.S. Supreme Court. However, arbitration does serve a purpose. The process is less formalized, so it moves much faster than the court system. That means less disruption to business. It’s also less expensive than bringing a civil action, making it easier for individuals to assert their rights or air their grievances. For these reasons and more, many businesses have incorporated arbitration provisions into their contracts and handbooks. The Federal Arbitration Act was enacted in 1925, yet these types of contractual agreements to arbitrate still get shot down in certain courts and by certain administrative authorities.more

Drivers v. Uber – The Arbitration Dispute

In Uber’s California litigation, Judge Chen has examined various aspects of the arbitration provisions contained in the various versions of Uber’s agreements with its drivers.  The 2013 Agreement and the 2014 Agreement shared several key features:

(1) all disputes not exempted from the scope of arbitration were subject to resolution by final and binding arbitration;

(2) arbitration could proceed only on an individual basis, not by class;

(3) the delegation clause in the provision stated that “disputes arising out of or relating to the interpretation or application of this Arbitration Provision, including the enforceability, revocability or validity of the Arbitration Provision or any portion of the Arbitration Provision” shall be decided by the arbitrator; and,

(4) an opt-out clause allowed drivers to avoid the arbitration clause.

In separate litigation, the Court had Uber revise the opt-out provision to make it more conspicuous and less onerous on the drivers.  Because the 2013 Agreement contained the original opt-out provision, it did not stand a chance of being found enforceable.  In later 2014 and 2015 Agreements,  Uber included the provision in boldface and ALL CAPS with text larger than the provisions around it.  Language also was added to explain the significance of arbitration and the right to opt-out.  Additionally, to exercise that right now, a driver need only send an email to Uber stating his/her name and the desire to opt-out (although he/she could send a letter by regular mail, overnight delivery, or hand-delivery, too).  As a result, when the Court certified a class on September 1, 2015, those drivers who failed to opt-out of the provision were excluded from the class.  However, in December, the Court found the arbitration agreements were unenforceable on California public policy grounds, irrespective of the opt-out provision, thus dramatically increasing the size of the class.

Meanwhile, delegation clauses, like the one set forth under (3) above, seem to cause consternation in courts across the nation.  Even the U.S. Supreme Court has recognized that courts are the typical adjudicators of whether the parties have agreed to arbitrate in the first instance.  Because a delegation clause puts this determination in the hands of the arbitrator instead, it must be clear and unmistakable.  In Uber’s case, the clause was clear, but it was made ambiguous because it conflicted with other clauses contained in the Agreements.  For instance, a separate clause in Uber’s 2013 and 2014 driver agreements stated that the state and federal courts in San Francisco had exclusive jurisdiction over any disputes, actions, or claims arising out of the Agreement.  While Uber argued that the forum selection clause reserving jurisdiction in San Francisco courts was for any disputes found not subject to arbitration, Judge Chen did not buy into that argument.  He felt the clauses conflicted, and since the courts would have to apply rules of construction to resolve the ambiguity created by the competing clauses, that meant that the delegation clause was not clear and unmistakable, and therefore, was unenforceable.

The arbitration provision in Uber’s 2013 and 2014 Agreements also addressed responsibility for payment of the arbitrator’s fees.  It provided that if applicable law did not require Uber to pay for all of the costs and fees of arbitration, then the costs would be apportioned between the parties as required by law.  Judge Chen found that because the delegation clause would force drivers to pay exorbitant fees just to arbitrate whether or not their substantive disputes even belonged before the arbitrator in the first place, when drivers would not have to pay a court to make that determination, such a clause deprived drivers of any forum for their claims.

The arbitration provision contained three additional unfavorable terms which Judge Chen found were not sufficiently highlighted for the drivers’ attention.  For one, the confidentiality clause precluded the parties from disclosing the existence, contents, or results of any arbitration.  For another, the intellectual property carve-out clause excluded intellectual property disputes from arbitration – something the Court found favored Uber.  Finally, the unilateral modification clause permitted Uber to unilaterally modify the terms of the agreement without notice to the drivers.  As a result of all of the foregoing issues, the Court found the agreements to arbitrate were unconscionable.  Thus, Judge Chen refused to enforce them.

Can an enforceable arbitration agreement even be written? 

Arbitration agreements are evaluated on a case-by-case basis.  While many are still disfavored, as I mentioned earlier, they are more likely to be upheld if they are not unconscionable.  The procedural component of the unconscionability analysis usually deals with the formation of the agreement itself.  This includes the characteristics of the parties (e.g., age, literacy, sophistication), the manner and circumstances under which the contract was executed, and whether terms of the agreement are hidden or complex, among other things.  The substantive component looks at the unfairness of the agreement.  Judge Chen, acknowledging that the issue wasn’t fully settled, nevertheless evaluated the arbitration provision through the lens of an employer/employee relationship.  Let me provide some tips that make arbitration agreements more likely to be upheld by courts in the employment context.

  • Keep your agreement to arbitrate in a separate document requiring a separate acknowledgement.

  • While the agreement may cover all workplace disputes between the parties, do not preclude employees from filing charges with state or federal administrative agencies, like the EEOC.

  • If you reserve the right to modify or discontinue the arbitration clause, include a requirement that notice will be given to employees and that the modification or rescission will be applied prospectively.

  • Since cost is a big issue for courts reviewing these agreements, make sure the employee will only be required to pay what the arbitrator finds is reasonable should the employee lose, or make sure the costs to pursue arbitration are not more costly than those to bring a lawsuit.

  • The remedies available in arbitration should be similar to those available in court.

  • Avoid delegation clauses.

As always, there is no substitute for consulting with an attorney when attempting to draft one of these agreements.

ARTICLE BY Vanessa L. Goddard of Steptoe & Johnson PLLC
© Steptoe & Johnson PLLC. All Rights Reserved.

Are they Worth Price of Paper They’re Printed On? – Ubersization of Arbitration Clauses

Arbitration has long been treated as an inferior method of resolving disputes, despite pronouncements to the contrary from the U.S. Supreme Court. However, arbitration does serve a purpose. The process is less formalized, so it moves much faster than the court system. That means less disruption to business. It’s also less expensive than bringing a civil action, making it easier for individuals to assert their rights or air their grievances. For these reasons and more, many businesses have incorporated arbitration provisions into their contracts and handbooks. The Federal Arbitration Act was enacted in 1925, yet these types of contractual agreements to arbitrate still get shot down in certain courts and by certain administrative authorities.more

Drivers v. Uber – The Arbitration Dispute

In Uber’s California litigation, Judge Chen has examined various aspects of the arbitration provisions contained in the various versions of Uber’s agreements with its drivers.  The 2013 Agreement and the 2014 Agreement shared several key features:

(1) all disputes not exempted from the scope of arbitration were subject to resolution by final and binding arbitration;

(2) arbitration could proceed only on an individual basis, not by class;

(3) the delegation clause in the provision stated that “disputes arising out of or relating to the interpretation or application of this Arbitration Provision, including the enforceability, revocability or validity of the Arbitration Provision or any portion of the Arbitration Provision” shall be decided by the arbitrator; and,

(4) an opt-out clause allowed drivers to avoid the arbitration clause.

In separate litigation, the Court had Uber revise the opt-out provision to make it more conspicuous and less onerous on the drivers.  Because the 2013 Agreement contained the original opt-out provision, it did not stand a chance of being found enforceable.  In later 2014 and 2015 Agreements,  Uber included the provision in boldface and ALL CAPS with text larger than the provisions around it.  Language also was added to explain the significance of arbitration and the right to opt-out.  Additionally, to exercise that right now, a driver need only send an email to Uber stating his/her name and the desire to opt-out (although he/she could send a letter by regular mail, overnight delivery, or hand-delivery, too).  As a result, when the Court certified a class on September 1, 2015, those drivers who failed to opt-out of the provision were excluded from the class.  However, in December, the Court found the arbitration agreements were unenforceable on California public policy grounds, irrespective of the opt-out provision, thus dramatically increasing the size of the class.

Meanwhile, delegation clauses, like the one set forth under (3) above, seem to cause consternation in courts across the nation.  Even the U.S. Supreme Court has recognized that courts are the typical adjudicators of whether the parties have agreed to arbitrate in the first instance.  Because a delegation clause puts this determination in the hands of the arbitrator instead, it must be clear and unmistakable.  In Uber’s case, the clause was clear, but it was made ambiguous because it conflicted with other clauses contained in the Agreements.  For instance, a separate clause in Uber’s 2013 and 2014 driver agreements stated that the state and federal courts in San Francisco had exclusive jurisdiction over any disputes, actions, or claims arising out of the Agreement.  While Uber argued that the forum selection clause reserving jurisdiction in San Francisco courts was for any disputes found not subject to arbitration, Judge Chen did not buy into that argument.  He felt the clauses conflicted, and since the courts would have to apply rules of construction to resolve the ambiguity created by the competing clauses, that meant that the delegation clause was not clear and unmistakable, and therefore, was unenforceable.

The arbitration provision in Uber’s 2013 and 2014 Agreements also addressed responsibility for payment of the arbitrator’s fees.  It provided that if applicable law did not require Uber to pay for all of the costs and fees of arbitration, then the costs would be apportioned between the parties as required by law.  Judge Chen found that because the delegation clause would force drivers to pay exorbitant fees just to arbitrate whether or not their substantive disputes even belonged before the arbitrator in the first place, when drivers would not have to pay a court to make that determination, such a clause deprived drivers of any forum for their claims.

The arbitration provision contained three additional unfavorable terms which Judge Chen found were not sufficiently highlighted for the drivers’ attention.  For one, the confidentiality clause precluded the parties from disclosing the existence, contents, or results of any arbitration.  For another, the intellectual property carve-out clause excluded intellectual property disputes from arbitration – something the Court found favored Uber.  Finally, the unilateral modification clause permitted Uber to unilaterally modify the terms of the agreement without notice to the drivers.  As a result of all of the foregoing issues, the Court found the agreements to arbitrate were unconscionable.  Thus, Judge Chen refused to enforce them.

Can an enforceable arbitration agreement even be written? 

Arbitration agreements are evaluated on a case-by-case basis.  While many are still disfavored, as I mentioned earlier, they are more likely to be upheld if they are not unconscionable.  The procedural component of the unconscionability analysis usually deals with the formation of the agreement itself.  This includes the characteristics of the parties (e.g., age, literacy, sophistication), the manner and circumstances under which the contract was executed, and whether terms of the agreement are hidden or complex, among other things.  The substantive component looks at the unfairness of the agreement.  Judge Chen, acknowledging that the issue wasn’t fully settled, nevertheless evaluated the arbitration provision through the lens of an employer/employee relationship.  Let me provide some tips that make arbitration agreements more likely to be upheld by courts in the employment context.

  • Keep your agreement to arbitrate in a separate document requiring a separate acknowledgement.

  • While the agreement may cover all workplace disputes between the parties, do not preclude employees from filing charges with state or federal administrative agencies, like the EEOC.

  • If you reserve the right to modify or discontinue the arbitration clause, include a requirement that notice will be given to employees and that the modification or rescission will be applied prospectively.

  • Since cost is a big issue for courts reviewing these agreements, make sure the employee will only be required to pay what the arbitrator finds is reasonable should the employee lose, or make sure the costs to pursue arbitration are not more costly than those to bring a lawsuit.

  • The remedies available in arbitration should be similar to those available in court.

  • Avoid delegation clauses.

As always, there is no substitute for consulting with an attorney when attempting to draft one of these agreements.

ARTICLE BY Vanessa L. Goddard of Steptoe & Johnson PLLC
© Steptoe & Johnson PLLC. All Rights Reserved.

How Deflategate May Affect Your Business

In a closely watched case, federal judge Richard M. Berman of the Southern District of New York vacated the four-game suspension handed down to New England Patriots quarterback Tom Brady by NFL Commissioner Roger Goodell. Relying on Section 10 of the Federal Arbitration Act, Judge Berman’s decision focuses in large part on the discovery aspects of the arbitration proceeding which originally confirmed Brady’s suspension. In vacating the suspension, Judge Berman strikes a blow to those who view arbitration as a low-cost alternative to the traditional expense and burden of discovery, and provides an arrow in the quiver of parties looking to employ discovery costs as leverage in their disputes.

The suspension was originally imposed after the NFL commissioned an independent investigation into whether the New England Patriots, and Brady, tampered with game-used footballs during last season’s AFC Championship Game. Brady’s appeal was initially heard through the arbitration proceedings provided for under the NFL’s Collective Bargaining Agreement, and Commissioner Goodell served as the sole arbitrator. During the proceeding, Commissioner Goodell denied Brady’s request for the files gathered and created during the independent investigation, and also denied Brady’s request to compel testimony from Jeff Pash, general counsel for the NFL. Commissioner Goodell ultimately issued an award upholding the suspension and the NFL sought confirmation of that award from Judge Berman.

In a 40- page written opinion vacating the suspension, Judge Berman not only focused on what he deemed “fundamentally unfair” discovery rulings made by Commissioner Goodell, he also relied in part on the contention that Commissioner Goodell did not provide adequate justification for those rulings, particularly with respect to his decision to preclude the testimony of Pash. By digging into the nuts and bolts of the discovery process, Judge Berman deviated from what is often viewed as the “rubber stamp” process of confirming an arbitration award. Further, by pointing to the reasoning (or lack thereof) behind the arbitrator’s individual discovery rulings, Judge Berman arguably expands the burden on arbitrators to incorporate more formality into their decisions and, in essence, second-guessed the judgment of the Commissioner in his role as Arbitrator. Parties looking to protect future arbitration awards may also now feel the need to demand more formality in the discovery process, and from their arbitrators.

At one time, arbitration was seen as a more informal, yet sophisticated, way for businesses to settle disputes and conserve resources. With the increase in filing fees, the self-expansion of powers (and processes) by the organizations who conduct arbitrations, and now rulings like Judge Berman’s, it may be time to re-evaluate that view.

The NFL already has announced its intention to appeal. This case may go into overtime.

Article By Thomas Haskins of Barnes & Thornburg LLP

© 2015 BARNES & THORNBURG LLP

Let the NFL Season Begin: Judge Overturns Arbitration Award Suspending Tom Brady

Tom Brady will begin the 2015 NFL season as the starting quarterback of the New England Patriots for the 14th consecutive season following U.S. District Court Judge Richard Berman’s grant of the National Football League Players Association’s motion to vacate NFL Commissioner Roger Goodell’s July 28, 2015, arbitration award imposing a four-game suspension on Brady. This forestalled the suspension before it was scheduled to take effect on September 5.

Judge Berman found the NFL failed to show it applied Article 46 of its collective bargaining agreement with the NFLPA fairly and consistently.

This decision is the fourth time a legal authority has challenged the NFL’s application of Article 46, following U.S. District Judge David Doty in the Adrian Peterson case, former Federal Judge Barbara Jones in the Ray Rice arbitration, and former NFL commissioner Paul Tagliabue in his opinion regarding the Saints players in Bountygate.

While judges rarely vacate arbitration awards, Judge Berman identified specific problems with the Brady arbitration hearing held by Goodell, including denial of access to key witnesses, which can be grounds to vacate an arbitration award. He found problematic the denial of NFLPA attorneys’ request to question NFL general counsel Jeffrey Pash, who edited the Wells Report before its release.

In addition, Judge Berman criticized Goodell for using the League’s collectively bargained steroid punishment policy to justify the suspension. Recognizing that the policy’s procedures are irrelevant to the allegations made against Brady, Judge Berman wrote that the steroid policy “cannot reasonably be used as a comparator for Brady’s four-game suspension for alleged ball deflation by others.”

Judge Berman also found decisions cited by the NFL to support confirming the arbitration award to be distinguishable. While Article 46 authorizes the League to use Goodell as the arbitrator for player appeals, Judge Berman concluded the “law of the shop,” requiring fairness and consistency, prohibits Goodell from rendering a decision that may have been compromised by bias.

The next phase of this litigation has already begun. The NFL recognizes that a motion seeking a stay of Judge Berman’s decision would require a showing of “irreparable harm,” and its argument would fall short on this score.

The NFL filed a Notice of Appeal with the U.S. Court of Appeals for the Second Circuit within hours of Judge Berman’s decision.

Therefore, the immediate impact of Judge Berman’s decision is that Tom Brady can play in the first four games of the upcoming NFL season. Indeed, because of the Notice of Appeal, Judge Berman’s decision does not yet have precedential authority. However, the long-term effect of Judge Berman’s decision is far-reaching and considerable for the NFL, the NFLPA, and any private arbitral process governed by a collective bargaining agreement.

The NFL’s appeal faces the burden of convincing two appellate judges that Judge Berman misapplied the law.

Each case presents unique issues and facts, appellate courts typically do not reverse district court judges on their orders to vacate or confirm arbitration awards. The NFL likely will rely on strong legal precedent discouraging federal judges from interfering with a private arbitrator’s decision. In his 40-page decision, Judge Berman reasoned that the NFL failed to provide notice to Brady that being aware of deflated footballs and obstructing an investigation were misconduct justifying a four-game suspension. The NFL will undoubtedly argue that the “lack of notice” argument is irrelevant where the collective bargaining agreement gives the Commissioner complete authority to evaluate the definition of “conduct detrimental” to the League and to issue punishments based upon that determination. This is the authority provided by the NFLPA to the Commissioner under the current collective bargaining agreement and the NFL will argue it was not required to provide such “notice.” The NFL likely will also stress that Judge Berman’s decision to vacate Brady’s suspension reflects a complete disregard of judicial precedents confirming arbitration awards.

Clearly, this matter is not about Tom Brady, deflated footballs, or even NFL’s investigation. Rather, the appeal is about the NFL seeking to protect its internal arbitral process. Indeed, 38-year-old Tom Brady may even be retired by the time the appeals are ultimately resolved and a final determination is made.

Should the Second Circuit affirms Judge Berman’s decision, it will create a stronger precedent for the NFLPA to challenge future discipline issued through the NFL’s arbitral process. The Second Circuit’s precedent also will have potential far-reaching implications on all employers who utilize a private arbitration governed by a collective bargaining agreement, especially in light of the broad authority afforded to the Commissioner in the NFL’s collective bargaining agreement.

Article By Gregg E. Clifton & Benjamin A. Tulis of Jackson Lewis P.C.

Jackson Lewis P.C. © 2015