Shall we applaud, or regret, the latest decision from a panel in the US Second Circuit Court of Appeals concerning the quality of proof needed to vacate an international arbitration award for “evident partiality or corruption”? (Kohel Beth Yechiel Mechil of Tartikov, Inc. v. YLL Irrevocable Trust, No. 12-3247-CV (2d Cir. Aug. 30, 2013). Shall we applaud the fact that an arbitral award survived a motion to vacate by the losing side, and see this as another heartening judicial vindication of the arbitral process and an admirable exercise in judicial non-intervention– even though the “process” in this case was an unreasoned majority decision of a three-member rabbinical tribunal operating with non-neutral party appointees and under no rules and no governing law? Shall we applaud a decision that announces a legal standard of “abundantly clear” proof of corruption and bias, and finds the proof in this case unacceptably murky because it consisted of nothing more than a hearsay report of one neutral bystander who claimed to have heard the presiding arbitrator state that the Claimant would have the decision it wanted in a few more days?

Or shall we regret the fact that this Second Circuit panel, even while repeating the settled proposition that proof of actual bias is not required and that objective facts warranting an inference of bias will suffice, seems to inject rigidity into that supposedly flexible standard by holding that the evidence of bias or corruption must be “abundantly clear,” indeed “clear and convincing”? Have we not seen a flurry of recent commentary urging flexibility in the standards applicable to proof of arbitral corruption, to take into account the offense against public policy that arbitral corruption represents, and the intractable difficulty of proving misconduct that is inevitably disguised and concealed? Why do we not see this theme in the Second Circuit’s decision?

I suggest this is not destined to be a landmark case in the jurisprudence of “evident partiality or corruption” as a basis for annulment under US law. The case against the presiding arbitrator rested on hearsay, and the arbitration itself was un-transcribed, depriving the courts of any direct look at the challenged chairman’s conduct. Those who hope for judicial sensitivity to the difficult task of proving arbitral corruption should not despair, but should instead reasonably hope that even a standard of “abundant clarity” will be judiciously applied according to the context in every case.

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This month’s review of the applaudable and regrettable would be incomplete without a brief word about a decision from the US Eleventh Circuit Court of Appeals that also concerned alleged arbitrator bias. (FDIC v. IIG Capital LLC, 2013 WL 4007573 (11th Cir. Aug. 7, 2013). We can applaud the fact that the Court rejected as a non-starter (i.e. not even deserving of an evidentiary hearing) the contention that there might have been improper contact between an eminent arbitrator and the eminent arbitration specialist appearing before him as counsel, when the latter at the invitation of the former joined as a faculty member for a symposium held while the case was sub judice.  We can regret that evidently neither of these widely-admired members of our community saw fit to disclose the matter. In an IBA-colored world of disclosure categories, could there not be a True Blue List — matters not requiring disclosure but which if disclosed as a matter of prudence would do far more good than harm by simply keeping the arbitral air fresh and breathable? Professional conference contact during the case between arbitrator and counsel, or between arbitrator and arbitrator, is on my True Blue List.

One of the least discussed powers of the Arbitral Tribunal is the power of suggestion.

Professor Piero Bernardini, a well-reputed continental arbitrator and scholar, has described the arbitrator’s task in achieving an efficient process as “a balance between ‘proactive and judicious efforts’ to move proceedings forward in an efficient manner while at the same time ensuring respect for party autonomy and equality.” Volumes have been written about arbitral efficiency and party autonomy but rather little about how these themes are harmonized in the day-by-day practice of the craft of arbitrating.

One of the presumed character differences between the judge and the arbitrator is that the former as an officer of the state may carry on imperiously while the latter as an agent of the parties should proceed collaboratively whenever possible. V.V. (“Johnny”) Veeder has summarized this distinction with the observation that the arbitrator “is the master of the arbitration but not the parties’ master.”

And yet surveys of corporate users of arbitration report widespread dissatisfaction with the arbitral process and a shift in preference toward the courts (at least where the courts are familiar and close to home). And US parties and counsel are not alone in clamoring for the appointment of ex-judges as arbitrators.

Does this mean the arbitration users would actually prefer more imperium from their arbitrators? Perhaps not precisely so. But it may very well be the case that what parties to complex, contentious, and high-value disputes really want (not to mention need) most of all are innovative procedural solutions, that they are encouraged to adopt, that invite efficiency gains without material sacrifice in the scope of evidence-gathering or the presentation of legal positions.

And that is where the arbitrator’s power of suggestion can and in appropriate circumstances should come into play. One of the heralded virtues of arbitration is the supposed flexibility of the procedure. But the source of that flexibility will rarely be the parties. Often the parties have counsel more accustomed to judicial proceedings and predisposed toward importing judicial notions of orderly procedure into the arbitral process (and not only in regard to pre-hearing discovery, although this import receives the most attention).

And yet if those court-oriented litigators, acting with the presumed consent of their clients, have selected vastly-experienced specialists in arbitration to preside over their case, there must be a reason that they have done so. And a good candidate for that reason is that the parties actually want guidance through the arbitral process from experts in arbitral procedure whose specialty is harmonizing efficiency, fairness, and party autonomy.

Arbitrators are not the masters of the parties but the parties are the masters of the procedure only to the extent that they are clearly (and resolutely) in agreement. But the arbitral tribunal wielding the power of suggestion may lay the foundation for party agreement on a variety of issues, steering away from poorly conceived agreed solutions, and providing a rallying point toward which the parties might migrate when the chances of their reaching an agreed solution without arbitral input are not great.  In other circumstances, the tribunal detecting an intractable difference might invite the parties to reach agreement on a matter or else submit their respective proposed solutions within a finite time frame. This is the exercise of the power of suggestion in another form: to hasten (but not “rush”) the parties toward agreement or at least constructive solution-driven, thinking.

In some cases the advocates are accomplished and reputed arbitration specialists who can be relied upon to advance effective solutions that the client is willing to accept. And where that is so the arbitrator’s power of suggestion should be invoked more reluctantly. But even then, the role of advocate has a curious tendency to channel the thinking of experienced hybrid arbitrator-advocates toward zero-sum solutions.

So, if the question “Whose Arbitration Is It Anyway?” must inevitably be answered “Yes, it is the parties’ arbitration,” still each arbitrator might usefully consider from the outset “What is the Arbitration the parties want?” The prudent exercise of the power of suggestion will often be a valuable way to have that question answered, and perhaps answered in a fashion that draws in the parties to an efficient procedure they would not achieve on their own.

You may not recall the last time a hearsay objection was sustained by an arbitral tribunal. And understandably so. Arbitrators “take [the hearsay evidence] for what it’s worth,” and steer clear of challenges to their awards on grounds (FAA Section 10 (a)(3)) that they committed “misconduct” by “refusing to hear evidence.”

But just suppose: In a real estate arbitration to determine fair value for purposes of a partner buy-out, all of Respondent’s written evidence of fair value is excluded as hearsay by the arbitrator. For example, a written offer to purchase the property was excluded as hearsay, on the theory that without the offeror as a witness, the written offer was not subject to cross-examination. Respondent evidently does not offer as witnesses the authors of the excluded hearsay documents. The facts relied on by Respondent’s expert for her opinion on fair value having been excluded, her opinion now carries no weight. Claimant wins.

Consider now two judicial review scenarios, in each of which the Respondent moves to vacate the award on the basis of the arbitrator’s misconduct in refusing to hear evidence.

In scenario one, the Court is persuaded to vacate the award. While recognizing that the arbitrator had wide discretion in regard to admissibility of evidence, the Court concludes that the arbitrator excluded what amounted to the entirety of Respondent’s factual case. The Court notes that such “technical” objections as hearsay need not be and generally are not obstacles to admitting evidence in arbitration, and that the categories of exclusion mentioned expressly in the AAA Commercial Arbitration Rules are irrelevance and redundancy (cumulative evidence). And the Court bemoans the fact that the arbitrator did not provide a statement of the reasons for the exclusion of evidence. In this context, the Court concludes, exclusion of essentially all of one party’s fact evidence on the ultimate (and only) issue, the value of the property, was clearly prejudicial and amounted to arbitral misconduct. (LJL 33rd Street Assocs. v. Pitcairn Properties, Inc., 2012 WL 613498 (S.D.N.Y. Feb. 15, 2012)).

Now consider how another court viewed the same issue:  An arbitrator need not apply technical evidence rules, such as the common law rule against hearsay that in the US is widely codified at the state and federal level. But certainly it is well within the discretion given the arbitrator under rules like the AAA Commercial Rules to decide, with regard to particular evidence, that the hearsay rule will be applied.  The arbitrator’s decision to apply the hearsay rule cannot be said to be misconduct, where the party whose evidence is excluded has other non-hearsay means to prove the facts. Where the hearsay declarants could have been witnesses but the Respondent elected not to call them, the prejudice from exclusion of the hearsay evidence is self-inflicted by the Respondent. The arbitrator’s evidence ruling thus does not furnish a basis to vacate the award. (LJL 33rd Street Assocs. v. Pitcairn Properties, Inc., 2013 WL 3927615 (2d Cir. July 31, 2013)).

Which result is more persuasive? I have juxtaposed the decision of the District Court and US Second Circuit Court of Appeals, in the same case, and I obscured that fact to invite the reader to give equal consideration to the district court and appellate court opinions (each penned by a judge among those most expert on arbitration law issues). One can readily agree with both decisions. The solution seems to lie in details of the arbitration proceedings that are not fully explained in the decisions and may not have been clear in the record in either court. One cannot tell from the reading whether Respondent had adequate opportunity after learning of the arbitrator’s ruling excluding the hearsay evidence to seek leave to present witness testimony from the authors of the hearsay documents. The Second Circuit seems to assume, but does not demonstrate with reference to the Record on Appeal, that there was indeed such an opportunity.

Is there a lesson in this beyond yet another judicial vindication of poorly-exercised arbitral discretion? May I be so bold as to suggest that the American Arbitration Association would do well to implement some form of advisory system for arbitrators in need of guidance? Let us assume that the parties in this case thought that the credentials required for the arbitrator in this case were mainly those of a Manhattan commercial real estate lawyer, perhaps a litigator in that field, and that they selected accordingly. Let us further assume that the arbitrator had little to no experience as an arbitrator, and followed her instincts as a trial lawyer donning a judge’s robe.

In this case, the arbitrator probably was motivated to exclude the hearsay, rather than have the lack of testimony from the authors of the documents affect the probative value, because the arbitrator was required to appoint a valuation expert and turn over the fact evidence to her. The arbitrator could understandably have been concerned that the non-lawyer valuation expert would not exercise the proper judgment about the weight of the hearsay evidence.  A proper course of action would have been to admit the hearsay evidence upon the condition that the authors be made available for cross-examination, and to record that course of action in a clearly-worded procedural order. This may seem obvious to experienced arbitrators. But the question here that I pose is how shall this approach be made obvious to inexperienced arbitrators, in time for them to make better decisions in handling their cases? We should look to the AAA to harness the wealth of human resources at its disposal among the most experienced and skilled arbitrators to establish a confidential consultation system for arbitrators facing difficult issues.

Last week’s decision by the US Ninth Circuit Court of Appeals that incorporation of the UNCITRAL Rules in an arbitration clause is considered as a matter of federal arbitration law to be a clear and unmistakable delegation to the arbitrators of exclusive power to decide the scope of arbitrable issues — [Oracle America, Inc. v. Myriad Group A.G., 2013 WL 3839668 (9th Cir. July 26, 2013)] — may at first blush appear to be uneventful news, at least for practitioners who do not practice in the 9th Circuit or often frequent its federal district courts to pursue or resist arbitration. The view from 37,000 feet — good for admiring California’s High Sierras, less ideal for appreciating its federal arbitration jurisprudence — might be that this is only an instance of another appellate court leaping on a bandwagon already occupied by most of its “sister” federal appellate circuits. But this case had some curious elements that the Court did not address.

Greatly simplified, this case involved an IP license for a Swiss company to make use of Java software, one of Oracle’s major products.  But the arbitration clause in the license was also a litigation clause. It said that all disputes under the license shall be arbitrated, except that either party could opt to litigate a dispute relating to that party’s “Intellectual Property Rights.” And it said that in a case eligible for litigation, if litigation were elected the court’s jurisdiction would be exclusive.

The clause provided for arbitration under the UNCITRAL Rules, and those Rules of course provide that arbitral tribunals have power to rule on issues of their own jurisdiction. I have referred, in recent posts, to the principle that the adoption of such rules delegates arbitrability to the arbitrators as the Incorporation-by Reference Principle. I will continue to use that shorthand here. Dutifully, your Commentator reviewed all the Incorporation-by-Reference Principle First Options “arbitration of arbitrability” case law cited in the Ninth Circuit’s decision. Not one of the arbitration clauses involved in those cases was this type of hybrid arbitrate-unless-you-litigate formulation. So, the Ninth Circuit might have analyzed in its opinion, but did not, what were the reasonable expectations of the parties as to the forum in which arbitrability would be determined if Oracle filed a trademark/copyright infringement suit in federal court, as it did, and if Oracle alleged, as it did, that the action fell within the express elective litigation carve-out for disputes involving its IP rights.

This case highlights how very little the Incorporation-by-Reference Principle has to do with the actual intentions of the parties. The courts have embraced the Principle largely without analyzing why the parties’ adoption of an arbitration rule of compétence-compétence that empowers arbitrators to decide jurisdiction must necessarily divest a court of such power. That position is a matter of interpretation, which is really to say it is a matter of federal pro-arbitration policy. A main tenet of federal arbitration law is that any doubts about the scope of arbitrable issues are to be resolved in favor of arbitration.  Thus, if an adopted arbitral compétence-compétence rule like UNCITRAL Rule 23(1) (2010) makes arbitrability arbitrable, any doubts about whether that Rule makes the Tribunal’s jurisdiction over arbitrability exclusive are to be resolved in favor of exclusivity.  But this means that what the US federal courts are treating as “clear and unmistakable evidence” is partly evidence and partly presumption — or, stated another way, the “evidence” is only “clear and unmistakable” because of a policy-based rule of construction in the absence of which one would be hard-pressed to characterize such compétence-compétence rules as conferring exclusive arbitrability jurisdiction on arbitrators.

Further, even though most courts have not so stated expressly, a critical contextual element of the Incorporation-by-Reference Principle is that the arbitration clause broadly commits all disputes between the parties to arbitration without material exception. When the contract does not expressly sanction any entrée to a judicial forum for merits adjudication, there is considerable appeal to the position that the arbitral compétence-compétence rule, in context, represents an exclusive forum choice for arbitrability disputes.

Given these dimensions of the Incorporation-by-Reference Principle, it is curious that the Ninth Circuit panel did not spend any energy on the question of whether the express litigation carve-out in the arbitration clause had any significance as evidence of the parties’ intentions. The fact that the panel did not do so does not necessarily mean that the panel’s decision is unsound. It does however confirm our understanding that the Incorporation-by-Reference Principle, as an implementation of the First Options “clear and unmistakable evidence” test, is not genuinely a rule of evidence or a barometer of the intentions of the parties, but a policy-based pro-arbitration federal common law rule on the allocation of power between courts and arbitrators. It may well be a good thing for there to be such a rule. But if we admit that the rule is policy-driven, then we might also hope that the US Supreme Court in a proper case would hold that First Options is a precedent that has outlived its useful life and should be supplanted by express rules of construction, emanating from the FAA, for deciding on the allocation of arbitrability jurisdiction between courts and arbitrators.

Tonight Arbitration Commentaries brings its readers the annual Midsummer Night’s Dream post. In tonight’s dream, an arbitration clause drifts in and out of view through an undulant layer of fog. In a fleeting moment of legibility, we see that the clause provides for arbitration under the UNCITRAL Rules in New York. Before we can read further to see if any appointing authority is designated, the dense misty curtain envelops the page anew. But a voice, resounding and echoing, instructs us: ” NOOOOOOO……”

The scene shifts. Two pinstripe-clad figures, one in gray, one in blue, appear on the steps of a forbidding massive edifice marked by the letters “PCA.”  In time, a white-clad monk-like form, hooded and faceless, appears at an open window on a upper floor, and unfurls a white sheet marked in red white and blue letters “SDNY.”

Could this be?  Could it one day come to pass that the US District Court in Manhattan would be designated by the Permanent Court of Arbitration as the appointing authority in an international case under the UNCITRAL Rules? Please indulge this fantasy a moment longer, as there is method to this madness.

Chapters One and Two of the Federal Arbitration Act contain provisions for judicial power to appoint arbitrators. But there are material differences. Chapter Two, implementing the New York Convention, simply provides in Section 206 that a court having jurisdiction, in an action or proceeding that falls under the Convention, may appoint arbitrators in accordance with the provisions of the agreement. So if the Secretary General of the Permanent Court of Arbitration, upon application of a party in a case under the UNCITRAL Rules that (from an FAA Chapter Two perspective) falls under the Convention, did designate a US federal district court as the appointing authority, there would be no jurisdictional obstacle to the court’s fulfillment of the mission. That would not be the case under Chapter One, Section 5 of the FAA. That original domestic arbitration enactment from 1925 envisioned a judicial role in the appointment of arbitrators only in default — if the parties did not specify a method of appointment, or if the agreed method became unworkable such that the parties’ intent to arbitrate would be stymied unless the court lent assistance.

That difference is worth understanding, because the limited judicial role in appointments under FAA Chapter One underlies a well-developed body of federal jurisprudence holding that the federal courts will not intervene in an ongoing arbitration to remove and replace an arbitrator on grounds of bias or lack of independence.  US courts have read Section 5 in combination with Section 10(a)(2) which permits the court to vacate an award based upon the “evident partiality” of an arbitrator, to require the conclusion that a party has no judicial redress for arbitrator bias during the arbitration, but only the right to seek annulment of the award. The courts have injected a policy component into the statutory analysis, reasoning that multiple challenges to consecutively-appointed arbitrators might be employed as a tactic to paralyze the arbitration process. For a very recent installment of this jurisprudence, read the opinion of a Boston federal judge in National Casualty Co. v. OneBeacon American Ins. Co.,  2013 WL 3335022 (D. Mass. July 1, 2013). [Also read a case discovered by your Commentator after this post was written: PK Time Group, LLC v. Robert, 2013 WL 3833084 (S.D.N.Y. July 23, 2013)]. In National Casualty, a reinsurance case, the parties had  agreed upon a rather convoluted process to break a deadlock on selection of the presiding arbitrator that involved each party-appointee submitting a list of candidates that would be ranked by the other. But having not selected an institutional provider of arbitration rules, they had no private mechanism for challenge. The court, citing the line of cases discussed here, refused to take on that role, and thus denied an application to strike one presiding arbitrator candidate from the list.

This judicial position of abstention has not caused much outcry because most arbitration in the US is administered by private organizations like the AAA whose rules provide a challenge process. And the abstention position is in part the legacy of the pre-2004 era of arbitrator ethics in the US, when the party-appointed arbitrator was presumed to be partisan. Courts understandably had little appetite to be involved in sorting out tolerable and intolerable partisanship. And at a time in history when more domestic arbitrations were one-day events with minimal discovery, the costs of new proceedings in the rare instances when an arbitrator was found, post-award, to have been unacceptably biased, were not so great as to evoke much organized consternation.

But that was then. Today it seems rather regrettable that parties facing multiple years of proceedings and millions of dollars in attorney and arbitrator fees should have to complete the case before a tribunal that includes a biased arbitrator if they have not agreed to use rules that include a challenge process.

This post will not elaborate further the arbitration policy case for discarding the current doctrine. The modest point made here is that none of this doctrine appears to have been developed or applied in international cases falling under the Convention and FAA Chapter Two. [The Court in the newer PK Time Group case, above-mentioned in brackets, failed to acknowledge that the case fell under the Convention, and failed to analyze it under FAA Chapter Two, as the case evidently reached federal court upon removal from New York state court on the basis of diversity.] At the very least, in a case such as the one in my Midsummer Night’s Dream, where the UNCITRAL Rules are used including Article 13(4) providing that the appointing authority shall rule on any challenges based on an arbitrator’s alleged lack of independence or impartiality, there would seem to be no compelling reason for the court to decline to entertain such an application. And indeed by entertaining that application the court would be enforcing the parties’ agreement according to its terms. Courts could and should distinguish the FAA case law on the basis that it was not developed in cases under the Convention and Chapter Two. Further, courts carrying out a mandate as appointing authority that is derivative of the parties’ agreement should be reluctant to construe Section 10(a)(2) as an implied prohibition on addressing “evident partiality” during the course of the proceedings. After all, in the context of Chapter Two, Section 10(a)(2) applies only to the extent it is not in conflict with Chapter Two, and an application of that Section to render unenforceable an agreement of the parties to have the appointing authority rule on arbitrator challenges would be just such a conflict.

A Sweet Dream on a mid-summer night.

In the Concepcion case in 2011 [AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740], five Justices of the Supreme Court of the United States agreed that the FAA pre-empts a rule of state law that makes an arbitration agreement unconscionable if the agreement prohibits class arbitration.  The actual implications of Concepcion for class arbitration remain murky, as the Supreme Court’s other recent decisions relating to class arbitration have been context-specific. Thus in Stolt-Nielsen the Court’s decision (5-3) was “anti-” class arbitration [Stolt-Nielsen S.A. v. Animalfeeds International Corp., 559 U.S. 662 (2010)], because the tribunal had no basis in the contract to order it (the parties having stipulated that they had no agreement about class arbitration). But in Oxford Health Plans (8-0) [Oxford Health Plans LLC v. Sutter, 133 S.Ct. 2064 (Jun. 10, 2013)] the Court’s decision was “pro-” class arbitration because the arbitrator was, rightly or wrongly, construing the contract in deciding that it permitted class arbitration. And in American Express (5-4) [American Express Co. v. Italian Colors Restaurant, 133 S.Ct. 2304 (Jun. 20, 2013)], once more the decision was “anti-” class arbitration, this time because the majority was unconvinced that a class proceedings waiver so seriously inhibited private civil enforcement of the antitrust laws as be a violation of public policy.

Into this summer stew we must now blend a new decision of a panel in the U.S. Ninth Circuit Court of Appeals (including, sitting by designation, the trial judge in the Stolt-Nielsen case), concerning FAA pre-emption (or not) of state law rules that treat as unconscionable clauses in consumer contracts that purport to waive “fundamental” rights including, but not limited to, the right to a trial by jury. (Mortensen v. Bresnan Communications LLC, 2013 WL 3491415 (9th Cir., July 15, 2013)).  At issue in Mortensen was the arbitration clause in a consumer contract for broadband internet service. The clause required all claimants to be named, and prohibited both class proceedings or consolidation. But plaintiffs’ challenge to the clause was not specific to the class and consolidation barriers.  Instead, plaintiffs invoked a Montana state law doctrine of the unconscionability of consumer contracts of adhesion. The essence of the Montana doctrine was that any clause in an adhesive consumer contract that purports to deprive a consumer of a fundamental right or a reasonable expectation will be ineffective unless the proposed deprivation is separately and fully explained before the contract is signed.

The U.S. District Court in Montana denied the motion to compel arbitration, holding that application of Montana’s rule was within the “savings” clause of FAA Section 2 (i.e. that arbitration agreements shall be valid “save upon such grounds as exist in law or in equity for the revocation of any contract”). In this decision, the Ninth Circuit held that Concepcion‘s reasoning required enforcement of the arbitration clause and federal pre-emption of the Montana rule. The Mortensen Court’s distillation of the holding in Concepcion is that when a state law unconscionability rule has a negative impact on enforceability of arbitration agreements, and that impact is disproportionate to the impact on other agreements, the rule is pre-empted by the FAA even if it is facially neutral in its application to arbitration agreements and other agreements. The Ninth Circuit panel’s interpretation of Concepcion — reading that decision as an extension of FAA pre-emption to state law rules of unconscionability that have a disproportionate anti-enforcement impact on arbitration agreements —  was seen by the panel as critical to the outcome. That is so because the panel did not think the Montana rule depended on the unique nature of arbitration agreements. In the panel’s view, the Montana rule as stated by Montana’s courts might apply to a wide variety of matters about which a consumer might have “reasonable expectations,” but in fact the Montana rule had evolved in cases where parties challenged arbitration clauses. So another look at what Concepcion actually held seems in order, having in mind that there are at least four judges on the Court, the dissenters, who may have an interest in taking up Mortensen or a case like it to define more precisely the border between FAA pre-emption and state law unconscionability/public policy in a consumer contract setting.

The Mortensen panel focused its attention on a passage in Concepcion wherein the Supreme Court had (i) posited that Section 2’s “savings” clause does not “save” state law unconscionability rules that “rely on the uniqueness of an arbitration agreement,” (ii) illustrated this point by reference to hypothetical state rules treating as unconscionable those arbitration agreements that do not provide for judicially monitored discovery or use of the Federal Rules of Evidence, and (iii) observed that such rules could not be defended as an application of a general policy against exculpatory clauses, because “[i]n practice…the rule would have a disproportionate impact on arbitration agreements.” 131 S. Ct. at 1747. The critical sentence in Concepcion, however, and arguably the essence of its holding, comes a few paragraphs later, when the Court states: “Requiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.” Id. at 1748. And the most sensible reading of Concepcion, despite the majority’s much-criticized attacks on the competence of arbitrators to manage and efficiently resolve complex high-value class actions, is that the “fundamental attribute” interfered with by California’s unconscionability rule was not bi-lateral arbitration between two contracting parties, but the ability of the parties to decide whether or not to arbitrate only according to that bi-lateral model.  “Disproportionate impact” does not appear to be the guiding principle in the Concepcion decision.

So viewing Concepcion, one might ask two questions about the Ninth Circuit’s decision in Mortensen? Was the outcome mandated by Concepcion, as the panel believed it was? And was the outcome correct in any event? On the first question, it is significant that the Montana rule had nothing to do with the design of the arbitration process. The Montana rule was only about the indicia of contractual consent in adhesive consumer contracts. As such, it seems that Concepcion was not directly on point. The problem with the Montana rule, however, is that it was what one might call a wolf in sheep’s clothing. Montana’s courts, motivated by antagonism to take-it-or-leave-it arbitration clauses in adhesive contracts between companies and consumers, fashioned a common law rule about contractual assent that was facially neutral as between arbitration and other “fundamental rights” or “reasonable expectations,” but had as its specific objective to eradicate the formation of an arbitration agreement through a consumer’s giving assent merely by accepting the purchased product or service. The undressed wolf, i.e. the Montana rule, is the sort of traditional anti-arbitration state law rule that the Supreme Court has found pre-empted in many pre-Concepcion cases. It was little more than a thinly-veiled rule that arbitration is unconscionable because it deprives consumers of the right to a trial by jury. Thus, it appears that the outcome in Mortensen is correct.

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New York lawyers reading this post should be alerted to a similar issue that may eventually come before New York’s courts. Part 137 of the Rules of the Chief Administrator of the New York Courts provide for arbitration of attorney-client fee disputes mainly at the election of the client and subject to judicial de novo review if the client is unsatisfied with the outcome. Part 137 also purports to specify disclosure requirements imposed upon an attorney if the attorney wishes to make an agreement with the client for binding arbitration of fee disputes other than Part 137 arbitration. In particular the attorney must specifically inform the client of the right to arbitrate under Part 137 and provide to the client a copy of the Part 137 arbitration procedures. If the FAA applies to the attorney-client engagement agreement’s arbitration clause, does Part 137 (like the Montana rule) establish a special anti-arbitration rule for client assent that is pre-empted by the FAA?  Arguably it does, as it constitutes an unacceptable interference with the rights of attorney and client to agree to resolve fee disputes through ordinary commercial arbitration.