Still Rolling the Arbitration Dice?

Neil S. Ende, Founder and Managing Partner, Technology Law Group LLC

Longtime readers of PHONE+ might recall our repeated words of caution regarding the misperception that arbitration is the “better, faster and cheaper” alternative than court. While we have acknowledged these goals are attainable, we have also warned readers of the uncertainty of the arbitration process.

In prior articles and seminars, we have pointed out that: (i) the arbitrator has power to limit the scope of discovery and evidence in your case; (ii) where the arbitrator does not limit the scope of discovery, the discovery process is the same as it would be if your case were in court; (iii) as a general matter, the arbitrator is not obligated to provide written, reasoned opinions, supported by law and applying the facts of your case to the applicable law; (iv) in addition to paying your attorneys for legal services, you are also required to pay the arbitrator an hourly fee for her services; and (v) your right to appeal an arbitration award is extremely limited.

A recent opinion (August 2009) from the Court of Appeals of the State of California underscores the limited basis upon which a party may appeal a final award from arbitration. In Burlage v. Superior Court of Ventura County, Burlage (the petitioner) sought reversal of a trial court’s order to vacate a judgment from arbitration. Burlage, the clear winner at arbitration, obtained a judgment against Spencer for $552,750 in compensatory damages, $250,000 in punitive damages, and $732,570 in attorneys’ fees and costs.

The problem, at least from Spencer’s view, is that the arbitrator refused to admit evidence that the alleged damages weren’t actually sustained by Bulrage because of mitigating factors that dramatically reduced Bulrage’s actual damages, if there were any at all. In fact, the damages Bulrage complained of were remedied prior to the arbitration, at a cost of about $10,000 dollars. It’s no wonder Bulrage sought – and with some early success – to have that evidence excluded from the arbitrator’s consideration.

Ultimately, the trial and appellate courts agreed with Spencer, albeit narrowly. The appellate court’s majority opinion acknowledged “judicial review of a contract arbitration award is extremely limited” and a “court may not review the merits of the underlying controversy or the arbitrator’s reasoning, even when an error of law is apparent on the face of the award and causes substantial injustice.” The court also recognized prior rulings that held that “a contractual arbitration agreement gives the arbitrator the power to decide all questions of contract interpretation, historical fact or general law necessary, in the arbitrator’s view, to reach a decision,” but added, “inherent in that power is the possibility the arbitrator may err in deciding some aspect of the case … and awards may not be vacated due to such error because the arbitrator’s resolution of these issues is what the parties bargained for.” Ouch!

Fortunately for Spencer (and justice, perhaps?), “tolerance for fallibility has its limits.” Although courts are reluctant to intervene, they do have the power to vacate an award when a party’s rights “were substantially prejudiced … by the refusal of the arbitrator to hear evidence material to the controversy.” The majority concluded that, although the arbitrator’s determination of the beginning and ending dates to measure Bulrage’s damages was beyond the reach of judicial review, the arbitrator’s ruling “substantially prejudiced Spencer and undermined the fundamental principle” embodied by the requirement that arbitrator’s must consider material evidence.

The dissenting opinion however, observes that the exclusion of evidence “was the product of the arbitrator’s determination that the law does not permit consideration of evidence of mitigation” in such a case and that the arbitrator’s decision must be left alone. The dissent also asserts that the “safety valve” approach cited by the majority should not be applied as the ruling essentially sets the table for future challenges from parties on the short end of an arbitration award.

While Bulrage is arguably good news in the sense that the trial and appellate court agreed that judicial review was necessary to reverse what they believed to be a clearly faulty arbitration award, this case represents a rare exception to the rule. Take heed of the adage “buyer beware!” Arbitration can be a useful tool to have in your dispute-resolution toolbox, but not every tool is right for the job. Too often, we hear people admit they quit reading their contracts once they get to the “boilerplate” terms and conditions. Instead, you should take the time to carefully consider the impact of these provisions, including the arbitration clause; otherwise, you could be rolling dice without knowing your standing at the table.

Neil S. Ende is the founder and managing partner of Technology Law Group LLC, a Washington, D.C.-based telecommunications law firm. He also is a member of the 2008-09 PHONE+ Channel Partners Advisory Board.