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Recent Decisions Involving ADR – August 2012

By Brian R. Jerome, Esq.

Arbitration – Fee dispute

Where a Superior Court judge confirmed an arbitration award that resolved a fee dispute between the plaintiff and the defendant law firm, the arbitrator did not refuse to hear material evidence, so the confirmation order should be affirmed.

“… [Defendant] Goodwin [Procter] moved to exclude evidence that [plaintiff] Northland sought to introduce to show that one of Goodwin’s senior partners had disclosed confidential information about Northland to an investor, in violation of the law firm’s duty of loyalty and in breach of its obligation of confidentiality. … After reviewing the case law and considering the arguments made by the parties, the arbitrator determined that the evidence was immaterial and should be excluded. On October 19, 2010, the arbitrator issued a decision, awarding Goodwin approximately forty-five percent of the legal fees it was seeking from Northland.

“… Northland argues that the arbitration award should have been vacated rather than confirmed because the arbitrator ‘refused to hear evidence material to the controversy,’ which is one of the bases for vacatur enumerated in G.L.c. 251,

§12(a)(4), inserted by St. 1960, c. 374, §1.

“To begin with, we disagree with Northland’s contention that this court is empowered to engage in more searching inquiry in its review of an arbitration award simply because what has been arbitrated is an attorney’s fee dispute. We read Marino v. Tagaris, 395 Mass. 397 (1985), as an exercise of the Supreme Judicial Court’s supervisory power — a power committed by statute only to that court, see G.L.c. 211, §3 — rather than as calling for more searching inquiry in the ordinary course of arbitration awards in attorney’s fee disputes.

“In any event, even if more searching inquiry were called for, Northland has failed to demonstrate that the arbitrator ‘refused to hear evidence material to the controversy.’ G.L.c. 251, §12(a)(4). The arbitrator’s decision not to admit the evidence was made after a full offer of proof and oral argument. Even if the evidence were material, the arbitrator’s decision does not amount to a ‘refus[al]’ to hear it. … The statute speaks of ‘refus[ing] to hear evidence material to the controversy,’ not of erroneous determinations not to admit material evidence or ‘failures’ to hear material evidence. We therefore do not read the statute to create a special rule by which, contrary to the ordinary principles of review of arbitration awards, we may vacate an arbitrator’s award simply because we decide that evidence we determine to be ‘material’ was erroneously excluded from the arbitration.

“For aught that appears in the record, the arbitrator in this case may simply have concluded that the alleged breach of fiduciary duty, which caused no injury to Northland, provided no defense to Goodwin’s fee claim, and that the proffered evidence, which the arbitrator evaluated, was therefore not material to the issue before him. Even if the decision by the arbitrator to exclude the evidence were based upon an error of law, a point on which we express no opinion, an error of law does not provide a basis for a court to vacate an arbitration award. …”

Northland Investment Corporation v. Goodwin Procter LLP (Lawyers Weekly No. 11-114-12) (4 pages) (Rubin, J.) (Appeals Court) Case heard by Haggerty, J., and a motion for partial relief from judgment or to alter or amend the judgment considered by her. (Docket No. 11-P-1555) (July 25, 2012).


Arbitration plaintiff entitled to pre-award interest

The estate of a woman who was seriously hurt in an automobile accident was entitled to pre-award interest on an arbitration award in the woman’s underinsured motorist (UM) claim, the Appeals Court has ruled.

An arbitrator awarded no interest all, reserving the issue for the Superior Court.

A Superior Court judge, in confirming the arbitration award, awarded post-award interest but declined to award pre-award interest.

But the Appeals Court ordered that the arbitration award be amended to included pre-award interest.

“A claim for underinsurance benefits properly is considered to be a contract action,” Judge Joseph A. Trainor wrote for the court. “In her motion to confirm the award, the plaintiff properly requested that preaward interest be added from the filing date of her application to compel arbitration. We see no reason why preaward interest should not be added to the arbitrator’s award in these circumstances as part of the damages the plaintiff is ‘legally entitled to recover’ under [Ch. 175, Sec. 111D, which mandates arbitration when UM disputes can’t settle].”

The court also ruled, in an issue of first impression, that the issue of pre-award and post-award interest in arbitrated UM claims can indeed be reserved for consideration by a Superior Court judge. Additionally, the court found that pre-award interest should be calculated based on net, as opposed to gross, damages.

The 14-page decision is Bolman v.Plymouth Rock Assurance Corporation, Lawyers Weekly No. 11-102-12.

The original plaintiff in this case, Natalie Parker, was severely injured in a motor vehicle accident on Jan. 4, 2002.

At some point before she died on June 9, 2003, Parker settled her personal injury claim with Liberty Mutual Insurance Company, the insurer for the person who caused the accident, for the $100,000 policy limit.

After Parker died, plaintiff Diane P. Bolman, the executor of her estate, brought a claim for underinsured motorist benefits against Bolman’s own insurer, defendant Plymouth Rock Assurance Corporation, to recover the excess damages Bolman had sustained in the accident.

The parties could not agree on the amount of damages and, as a result, on Dec. 31, 2007, Bolman filed an application in Superior Court to compel arbitration.

The dispute went to arbitration in March 2010 to determine the total damages, exclusive of interest or offsets.

On May 7, 2010, the arbitrator issued a decision awarding $150,000 in gross damages. The parties agreed that they would resolve any offsets among themselves. The arbitrator also wrote in the final paragraph of his decision that the parties agreed to have any question of interest determined “by the court.”

Plymouth Rock subsequently tendered a $42,000 check to Parker’s estate, deducting $108,000 for the $100,000 payment from Liberty Mutual and for an $8,000 payment under the personal injury protection provision in Parker’s own policy with Plymouth Rock.

Bolman filed a motion in Superior Court to confirm the arbitrator’s award, seeking both pre-award and post-award interest. She also sought to have the interest payments calculated based on the $150,000 gross award rather than the $42,000 net award.

Plymouth Rock opposed the motion, arguing that the plaintiff was not entitled to pre-award interest and that any interest award should be calculated based on the net award.

Superior Court Judge Richard E. Welch III awarded post-award interest based on the net award but declined to award pre-award interest.

The plaintiff appealed.

The Appeals Court first found that pre-award interest is indeed permissible under state law and – by extension – the Plymouth Rock policy.

As Trainor noted, the SJC held in its 2002 decision in Connecticut Valley Sanitary Waste Disposal, Inc. v. Zielinski that “’the entitlement of a party to preaward interest is a decision that is within the purview of arbitrators.’”

Pre-award interest compensates prevailing parties for the loss of use of money that they should have had to begin with and shouldn’t have had to chase, and thus are truly part of compensatory damages, the judge continued.

As a result, he said, such interest awards can be part of the damages a plaintiff is “’legally entitled to recover’” under Sec. 111D.

Next, the court found that the interest issue in a UM arbitration can be reserved by an arbitrator for consideration by a judge.

“Generally, in a proceeding to confirm an arbitration award, a judge may not alter an arbitrator’s decision that allows, denies or fails to mention preaward interest,” Trainor acknowledged.

He also conceded that the Appeals Court had on other occasions vacated trial judges’ additions of pre-award interest to arbitration awards.

But in those cases, Trainor wrote, the arbitration awards were completely silent on the issue of pre-award interest, while in this case the arbitrator clearly referenced the parties’ agreement that a judge would resolve the interest issue.

Further, he added, a number of other jurisdictions allow a court to award pre-award interest if the issue has been reserved in the text of an arbitration decision.

The court found that pre-award interest should have been awarded in this particular case.

Specifically, Trainor characterized the claim as a “contract action.” In contract actions, interest is automatically added to damages at the “contract rate” or at the rate of 12 percent annually from the date of the breach or demand, he said.

Because the plaintiff property requested that pre-award interest be added from the filing date of her motion to compel arbitration, the court saw “no reason” why it shouldn’t be done.

However, said Trainor, “[i]t is worth reiterating that any determination that preaward interest shall be added … is … applicable only in circumstances where the interest issue has been reserved, as here.”

Had the issue not been reserved, he said, “the determination made by the arbitrator, including silence on the issue, would not be reviewable, either here or below.”

Finally, the court concluded, the pre-award interest should be calculated based on the amount of the net award, not the gross award as the plaintiff had requested.


Class-wide arbitration claim OK

3:20 pm Thu, July 5, 2012
Massachusetts Lawyers WeeklyThe 1st U.S. Circuit Court of Appeals has held in an issue of first impression that an arbitrator, and not a judge, must decide if an arbitration agreement allows for a dispute to move forward individually or on a class-wide basis.

The plaintiff franchisor argued that the U.S. Supreme Court’s 2010 ruling in Stolt-Nielsen S.A. v. AnimalFeeds International Corp. required the express consent of the parties before arbitration could proceed as a class action.

But the 1st Circuit disagreed, holding not only that an agreement silent on the class-action question did not control, but also that the arbitrator was properly in a position to decide the intent of the parties.

“We … reject the … precept, on which [the franchisor’s] argument depends, that there must be express contractual language evincing the parties’ intent to permit class or collective arbitration,” Chief Judge Sandra L. Lynch wrote for the court. “Stolt-Nielsen imposes no such constraint on arbitration agreements.”

The 18-page decision is Fantastic Sams Franchise Corporation v. FSRO Association Ltd., et al., Lawyers Weekly No. 01-156-12.

Defendant Fantastic Sams Regional Owners Association represents a group of franchisees that had entered into agreements with plaintiff Fantastic Sams Franchise Corp.

The franchise corporation is the franchisor of a chain of hair salons known as Fantastic Sams.

In 2011, the owners’ association filed a demand for arbitration against the franchise corporation, seeking declaratory and injunctive relief on behalf of its members for breach of contract and violations of Chapter 93A.

In response, the franchise corporation filed suit in U.S. District Court in Boston, seeking to stay the arbitration demand and compel the owners’ association to bring its claims on an individual basis.

U.S. District Court Judge Nathaniel M. Gorton barred collective arbitration on 25 of the 35 agreements at issue because they contained provisions stating that any arbitration between the franchise corporation and owners’ association must be done individually.

The agreements were all written and entered into after 1988.

The remaining 10 agreements, executed prior to 1988, contained no express prohibitions on class or collective arbitration. As a result, Gorton denied relief.

He concluded that whether the agreements precluded the owners’ association’s action “is a matter of contract interpretation which the parties have agreed to submit to arbitration.”

In affirming Gorton’s denial, Lynch wrote that the question of what the parties agreed to authorize was for the arbitrator to decide. She said she disagreed with the franchisor’s claim that the lack of an express agreement prohibited a class-wide claim.

“[Fantastic Sams Franchise Corporation] reads Stolt-Nielsen too broadly,” she said. “The Court granted certiorari in that case to decide ‘whether imposing class arbitration on parties whose arbitration clauses are ‘silent’ on that issue is consistent with the [FAA].’”

Unlike Fantastic Sams, the Stolt-Nielsen parties stipulated their agreement was unambiguously silent on class arbitration.

“Although the arbitration panel had considered the language, context, and usage of the agreement in that case, the Court held that these considerations were ‘beside the point’ in a case in which the ‘parties were in complete agreement regarding their [lack of] intent,’” she wrote. “Once the parties stipulated that they had reached ‘no agreement’ on class arbitration, … ‘the only task … left for the panel … was to identify the governing rule applicable’ in the case.”

The franchisor’s argument failed, Lynch said, because the agreements in Fantastic Sams were not ‘silent’ in the same way they were in Stolt-Nielsen.

“Furthermore, the Supreme Court has not extended Stolt-Nielsen to the type of associational action brought by [Fantastic Sams Regional Owners Association], which is different in many respects from the class-action arbitration at issue in Stolt-Nielsen,” she wrote. “We cannot conclude, under the auspices of Stolt-Nielsen, that as a matter of law the broad arbitration clause at issue here precludes arbitration of this issue.”


Arbitration – Res judicata – Dismissal of teacher

Where the plaintiff, formerly a high school teacher with tenure, has challenged an arbitrator’s decision affirming his dismissal by the defendant school district for inappropriate sexual conduct toward a pupil, the plaintiff is barred by res judicata from proceeding with his federal claims in this court.

“The only issue currently before the court is whether [plaintiff Thomas] Atwater is barred by res judicata from proceeding with his federal claims in this court. Defendants contend that an absolute bar exists because the state court litigation, involving the same parties and the same dispute, reached a prior final judgment on the merits. …

“Defendants further contend that although Atwater attempted to preserve his federal law claims under the ‘England reservation,’ England [v. Louisiana State Bd. of Med. Exam’rs, 375 U.S. 411 (1964)] is inapplicable. … In contrast, Atwater was not ‘shunted’ from federal court for [R.R. Comm’n of Texas v. Pullman Co., 312 U.S. 496 (1941)] abstention reasons, but chose of his own volition to seek relief in the first instance from the state courts.

“Atwater, for his part, contends that this court’s stay and administrative closure of the federal case at the parties’ request was tantamount to Pullman abstention because he had suggested in the joint scheduling statement that the court stay the case based on Pullman abstention principles. There is nothing, however, in the record to suggest that the court adopted Atwater’s reasoning. The court did not analyze Atwater’s claims to determine if there were any difficult and potentially dominant state law issues that might complicate the resolution of the federal constitutional claims. Rather, the court assumed that, like many similarly situated plaintiffs, Atwater had chosen to proceed first in the local forum because he thought he had a greater likelihood of success there.

“Atwater next argues that the reservation of his federal law claims is effective because: (1) defendants waived any objections to his claim-splitting by agreeing to stay this case … and/or (2) the SJC acknowledged his reservation. However, defendants consistently voiced objection to the validity of Atwater’s purported reservation in their answers to Atwater’s state and federal complaints, in the joint statement to this court, and in their opposition to Atwater’s motion to reopen this case. Moreover, it is disingenuous for Atwater to suggest that the SJC reserved his federal claims or validated his reservation. The High Court only noted that Atwater sought to do so, and therefore his federal claims were not before the state courts.

“Finally, Atwater asserts that res judicata principles do not bar his federal law claims because: (1) an arbitration decision has no res judicata effects on subsequent §1983 civil rights litigation … and/or (2) a state court judgment does not foreclose subsequent §1983 civil rights litigation in federal court unless the claims were actually presented to and decided by the state court. … The first argument is a non-starter as defendants do not rely on the preclusive effects of the arbitration decision, but that of the lengthy state court litigation that concluded in the highest court of the state. The second argument is not the law in the First Circuit, where res judicata bars any subsequent claims, including §1983 claims, that could have been brought in an earlier-decided state litigation. …”

Atwater v. Commissioner of Education of the Commonwealth of Massachusetts, et al. (Lawyers Weekly No. 02-253-12) (7 pages) (Stearns, J.) (USDC) (Civil Action No. 06-11550-RGS) (June 20, 2012).