By

Kristiana Stiles

On October 17, 2023, a California district court judge vacated an arbitration award after finding that the arbitrator had shown clear bias against one party.¹ This ruling, along with reference to recent cases where bias was not found, show the high bar that an appellant is required to meet in order get their motion for vacatur granted. Despite the rarity, studying these cases can give a practitioner the tools needed to appeal on the grounds of arbitrator bias.

In FCM Investments, LLC v. Grove Pham, LLC, the arbitrator’s ruling in a real estate arbitration hinged largely on the fact that the arbitrator found a witness not credible.² The arbitrator reasoned that the witness, the defendant in the arbitration, used an interpreter during the proceeding despite living in the United States for a number of years, engaging in previous business transactions, and having a vague (and undescribed) stint as an interpreter.³ The arbitrator believed this meant the witness was trying to appear less sophisticated than she was.⁴ This was despite the fact that the arbitrator herself described the underlying business agreement as “rather complicated.”⁵ Consequently, the arbitrator held the fact of the witness’s use of an interpreter against her in the arbitration ruling.

On appeal, the court concluded the arbitrator’s conduct “create[d] a reasonable impression of possible bias requiring that the arbitration award be vacated.”⁶ Though arbitration’s premise generally limits judicial review, arbitrator misconduct that substantially prejudices a party’s rights necessitates vacation of the arbitrator’s rulings.⁷ Despite not raising a claim of bias before the trial court, the appeals court stated that both exceptions to forfeiture of a claim applied.⁸ Further, the court would have exercised its discretion anyway.⁹ In this case, the appeals court protected the rights of the parties to be heard by a neutral arbitrator, free of bias.

Vacatur of an arbitration award based upon arbitrator bias or prejudice is rare, so recent cases where arbitrator bias was not found, but was discussed, can help to clarify what is needed for a successful appeal. In an unreported California case, Bassam Samih Chelico v. Tjb Gearys, the court noted that “all presumptions [are] drawn in favor of the award’s validity.”¹⁰ Bias is determined on a “‘reasonable person’ standard.”¹¹ In Chelico, the plaintiff’s motion for vacatur alleged arbitrator bias in part because the arbitrator forgot to respond to an email.¹² The court found that the arbitrator’s actions affected both parties and, furthermore, the arbitrator thereafter ruled against the defendant, which conflicts with a bias claim.¹³ The court also dismissed numerous other claims of bias for lack of evidence or a showing of advantage to the defendant.¹⁴

The Alabama Supreme Court similarly dismissed an appeal from a denial to a motion to vacate because the appellant “did not present any evidence ‘that gives rise to an impression of bias that is direct, definite, and capable of demonstration, as distinct from a “mere appearance” of bias that is remote, uncertain, and speculative.’”¹⁵ The court found that the appellant’s claim that the arbitrator improperly disqualified their expert didn’t establish a ground for vacatur under the Federal Arbitration Act.¹⁶

Based upon the cases cited above, a party appealing for arbitrator bias should provide evidence of how the act(s) specifically affected them in a way that did not include the other party. They should clearly spell out how each act created a disadvantage for them or an advantage for the other side. The appellant’s claims should furthermore be sufficiently specific and cannot simply conclude bias based upon rulings not in their favor. Conclusory statements and claims will not suffice, and the court will not allow re-litigation of the rulings under the guise of a claim of bias.¹⁷ It is clear that courts will not second-guess an arbitrator’s ruling without good cause and evidence. That does not mean, however, that a biased arbitrator cannot be challenged or defeated.

While specifically designed to limit interference by courts, arbitration still allows a court to overrule an arbitrator in specific circumstances, such as arbitrator bias. Parties to an arbitration may feel assured by the infrequency of cases of arbitrator bias and the fact that the courts stand prepared to step in. In the rare case that a practitioner faces a biased arbitrator, however, their appeal should focus on specific acts that are backed up by clear evidence showing disadvantage. Mere conclusory claims will fall far short of the high bar required for a successful motion to vacate based on arbitrator bias.

By

Austin Robinson

Binding a non-signatory party to an arbitration agreement conflicts with central tenets of arbitration – party autonomy and freedom of contract. Nevertheless, incorporation by reference may be necessary to preserve two other central tenets – efficiency and fairness. Incorporation by reference is a technique commonly used in construction arbitration to extend an arbitration clause to a non-signatory contractor or purchaser.¹

Generally, non-signatories cannot be bound to an arbitration agreement, but case law has created an exception for those that are incorporated by reference.² When an arbitration clause is incorporated by reference, the clause is not written in the main contract signed by the parties but rather in a separate and pre-existing document that is referenced by the main contract.³ Incorporation by reference creates uncertainty for both parties to a dispute and threatens the rights of the non-signatory.⁴ It is especially concerning when the clause is incorporated impliedly rather than as an express reference to the arbitral clause in the original agreement.⁵ Allowing a party to incorporate arbitral clauses by reference has generated significant controversy across the industry, but is particularly acute in the construction industry.⁶

Incorporation by reference is common practice in the construction industry to bind a subcontractor to an arbitration agreement entered into by the hiring contractor.⁷ The California Second District Court of Appeal in Remedial Construction found that the arbitration clause was not incorporated by reference into the subcontractor’s contract.⁸ The court mainly based its decision upon the finding that the subcontractor, Remedial, agreed to assume the primary contractor’s obligations, but only to the extent “as they relate to [Remedial’s] performance of the Work,” not the primary contractor and the client’s agreement to arbitrate.⁹ The court’s finding, although unsuccessful at proving incorporation by reference, suggests that they would have been bound to arbitration if the incorporation clause in the subcontractor agreement had not been limited to Remedial’s performance.¹⁰

The court’s fact-specific inquiry fails to address concerns about the lack of consent of third parties when a court finds an arbitration clause to be impliedly incorporated by reference. Consent has historically been a precondition to arbitration, as seen in the New York Convention, which requires a “written arbitration agreement or clause within an agreement, i.e. record of consent, for an arbitral award to be enforceable.”¹¹ Incorporation by reference indirectly conflicts with this principle as it can create a high-risk of confusion for a party that does not specifically consent to the language of the arbitration clause found within the separate agreement. However, just as the ideals of contract law have evolved so has its application to arbitration.

Although the parties are not providing express consent to the language of the clause, they are providing express consent to the language of the incorporation clause when executing the subsequent contract. Analogous to contract law’s expansion from wet signatures to e-signatures and click-wrap agreements, arbitration must also take into account the commercial and technological growth that society has experienced since the New York Convention was created. The fast-paced, commercialized, and voluminous nature of today’s business requires us to appreciate the speed, efficiency, and cost-effectiveness that incorporation by reference enables, and justifies expanding our definition of consent to include it.¹² For example, contractors who hire subcontractors tend to incorporate the original contract in order to avoid breaching their current contract with the client or creating an additional round of negotiations involving all three parties.¹³

Additionally, the courts have minimized the risks associated with the expansion of consent to allow arbitration to be incorporated by reference. The U.S. approach to joining a non-signatory to an arbitration agreement can be dependent on foreign law, the Federal Arbitration Act, or state contract law.¹⁴ Despite the variety in application, generally, the U.S. recognizes an arbitration agreement incorporated from one document into another if the documents, taken together, manifest an intent to arbitrate disputes.¹⁵ This tends to act as a safeguard for subcontractors, and similar non-signatory parties, by decreasing the risk of being improperly bound to an arbitration agreement. This is applied by the court in Remedial when they use the scope of the secondary agreement, as written in the subsequent contract, in order to inform their decision.¹⁶

The risks of improper consent are outweighed by the commercial advantages of incorporation by reference. Taking this into account with the safeguards implemented by the courts, it is clear that the use of incorporation by reference to bind a non-signatory party to arbitration is justified.

By

Ava McCartin

In Wallrich v. Samsung Elecs. Am., Inc.,¹ the United States District Court for the Northern District of Illinois compelled arbitration between Samsung and 35,651 individual claimants.² Unlike in many disputes between consumers and large multinational corporations—where the consumer resists arbitration—here, the claimants try to hold Samsung to its word.

By way of background, the issue before the district court arose from tens of thousands of Illinois-based Samsung users alleging violations of the Illinois Biometric Information Privacy Act.³ In accordance with the Samsung Terms & Conditions, the individual claimants, all 50,000 of them, filed individual arbitration demands before the American Arbitration Association (“AAA”).⁴ After a slew of administrative communications, the AAA “issued its administrative decision October 31, 2022,” finding that 50,000 claimants and met the filing requirements and directing Samsung to pay its share of the administrative fees—in this case, $4,125,000.⁵ Even though the AAA conditioned arbitration on payment of administrative fees—“per Samsung’s own Arbitration Agreement,” Samsung refused to pay its share.⁶

Like most consumer arbitration agreements, Samsung alone drafted and proposed the arbitration agreement in question.⁷ In fact, simply by using a Samsung device, a user agrees to several Terms and Conditions, including a binding alternative dispute resolution term that demands arbitration under the rules of the American Arbitration Association.⁸ Despite Samsung’s baffling assertions to the contrary,⁹ the district court found that Samsung had previously acknowledged that “each Samsung device holder accepted Samsung’s terms and conditions containing the arbitration clause when using their Samsung device.”¹⁰ Further, the agreement expressly prohibits class actions or “combined or consolidated” disputes—instead mandating claims be brought individually.¹¹

However, once 50,000 individual claimants came forward with requests to arbitrate individual biometric privacy complaints, Samsung quickly changed its tune.¹² As the district court noted, “Samsung was surely thinking about money when it wrote its Terms & Conditions,” and while it “may not have expected so many would seek arbitration against it . . . [it cannot] ‘blanch[] at the cost of the filing fees it agreed to pay in the arbitration clause.’”¹³ Samsung attempted to do just that.

Despite bearing full responsibility for drafting the arbitration provision, and making the business decision to bar collective claims, Samsung refused to uphold its end of the bargain.¹⁴ This position highlights the increasingly frustrating and underhanded tactics companies use to shield themselves from consumer accountability.

At the time the district court entered its decision—which Samsung is appealing—over a year had elapsed since the claimants first filed their demands with the AAA.¹⁵ In the meantime, the individual claimants “had sent Samsung notices of intent to arbitrate, filed complaints in the forum agreed upon by the Arbitration Agreement, and satisfied their AAA-dictated financial responsibilities by paying their own filing fees.”¹⁶ To be clear: Samsung was not the only party responsible for paying AAA fees—but it was the only party that refused to do so.

Samsung’s position that the claimants, even after their demonstrated continued compliance with the dispute resolution proceedings, waived their rights to arbitrate, is borderline frivolous and suggests improper dilatory motives.¹⁷ Samsung’s contention that the claimants should “lend over $4,000,000 while the dispute pends” without claiming inability to pay or unconscionability further exemplifies the absurdity of their tactics.¹⁸ The only reason the AAA administrative fee is required at all is because Samsung opted into AAA arbitration rather than allowing disputes to go to a court or a jury—and the only reason each claim needs to proceed on an individual basis is because Samsung barred class actions and collective claims.¹⁹ In other words, Samsung made its bed, and now it has to lie in it.

The district court did the right thing by compelling arbitration and specifically ordering Samsung to pay its share of the arbitral fees to allow the proceedings to move forward. Optimally, other companies see this win for consumers, and recognize that even when arbitration provisions are involved, courts will uphold consumer protection laws and hold companies accountable to their customers.