By George H. Friedman*
Talk about a bad draft day. In the midst of the NFL draft week hoopla came word that the Supreme Court of Missouri had disqualified the NFL’s Commissioner as the sole arbitrator in a case involving a non-player employee of the St. Louis Rams. Besides standing for the general proposition that a stronger party cannot impose an unconscionably unfair predispute arbitration clause (“PDAA”) on a weaker party, the case also reminds us that sometimes perceptions of possible arbitrator bias are so serious that the problem needs to be addressed before an arbitration award is issued. Because I’m in the midst of grading finals for my arbitration class at Fordham Law School, I can’t resist the temptation to analyze the issues.
A Brief Review: Two Federal Arbitration Act Concepts
State ex rel. Hewitt v. Hon. Kerr, No. SC93846 (Mo., Apr. 28, 2015), an en banc per curiam decision, involves multiple issues and shifting concurrences and dissents. But two things emerge from the opinion that are worth discussing to say the least.
Unconscionability: A core element of the United States Supreme Court’s support for PDAAs is the so-called separability doctrine, which holds that, under the Federal Arbitration Act , 9 U.S.C. §§ 1 et seq., a PDAA is a separate contract from the one in which it is embedded, and must be on “equal footing” with any other contract. Section 2 of the FAA provides that a PDAA must be enforced “save upon such grounds as exist in law or in equity for the revocation of any contract.” The issue of how far states can go in applying the “revocation of any contract” language in section 2 came to a head in AT&T Mobility, LLC v. Concepcion, 131 S. Ct. 1740 (2011).
There, SCOTUS invalidated a California rule of law because it singled out PDAAs for suspect, for suspect, disparate, burdensome treatment. Said the Court, “Although [FAA] § 2’s saving clause preserves generally applicable contract defenses, nothing in it suggests an intent to preserve state-law rules that stand as an obstacle to the accomplishment of the FAA’s objectives.” After Concepcion, the bottom line on FAA preemption of state law on arbitration was this: consistent with FAA § 2, states may invalidate PDAAs based on laws applicable to contracts in general, as long as they don’t single out PDAAs for burdensome or negative treatment. So, for example, a court might invalidate a PDAA if it is unconscionable as long as the state treats contracts in general – vs PDAAs – this way.
Arbitrator Bias: An arbitration award may be challenged under the FAA § 10(a)(2) for “evident partiality” of the arbitrator. Over the years, this part of the FAA has been interpreted to mean a party aggrieved by an arbitrator’s alleged bias generally must wait until the case is over to mount a challenge, which must come in the form of a motion to vacate the arbitration award. That is, as a general matter, interlocutory appeals are not permitted while the arbitration process is ongoing. See, e.g., Gulf Guaranty Life Ins. Co. v. Conn. Gen. Life Ins. Co., 304 F.3d 476 (5th Cir. 2002).
“Generally” Doesn’t Always mean “Always”
Notice I said “generally must wait.” It is hornbook arbitration law that generally speaking, piecemeal challenges to the arbitration process, including allegations of arbitrator bias, are not permitted. See, for example, At What Point Can You Seek to Disqualify an Arbitrator?
But what if the perceived bias is so bad that there’s no point forcing the parties to complete the arbitration process? In other words, how does one reconcile the “wait until the end” thrust of FAA section 10 with the “we’re not enforcing an unconscionable arbitration agreement” aspect of FAA section 2? A plurality of the Missouri Supreme Court in Kerr holds the arbitration clause defect – an unconscionably unfair method of arbitrator appointment –can be addressed immediately.
NFL Commissioner is Sacked as Arbitrator
The employment contract between Hewitt, the equipment manager of the St. Louis Rams, and the team had a PDAA stating, “The Rams and Hewitt also severally and mutually promise and agree that in any dispute which may arise between them, the matter in dispute shall be referred to the Commissioner of the National Football League for decision and after due notice and hearing, at which both parties may appear, the decision of said Commissioner shall be final, binding, conclusive and unappealable.” When Hewitt was terminated at age 54, he sued the team for age discrimination in violation of Missouri law. The team sought arbitration as provided in the PDAA.
Cutting through the clutter of a complex and somewhat convoluted procedural history, the Missouri Supreme Court came to the core issue of whether it was unconscionably unfair to compel Hewitt to arbitrate before the Commissioner who, according to the NFL’s constitution and bylaws, was an employee of the team owners (including the Rams)? The Court’s answer was “yes, it’s not fair.” Said the opinion, “Based on the facts of the present case, the terms in the contract designating the commissioner, an employee of the team owners, as the sole arbitrator with unfettered discretion to establish the rules for arbitration are unconscionable and, therefore, unenforceable. The constitution and bylaws provide that the ‘League’ consists of the team owners. Under the constitution and bylaws, the league ‘shall select and employ’ the commissioner and set his or her term of employment and compensation. The constitution and bylaws also provide unequivocally that the commissioner is employed by the league; i.e., the team owners… In effect, then, the commissioner is required to arbitrate claims against his employers.”
No Need to Wait
And, there was no need to wait until the arbitration case was over. Judge Laura Stith’s partial concurring/dissenting opinion summed it up thusly: “For the same reasons that I would not wait until after arbitration to determine whether the parties have agreed to arbitration, I agree with the per curiam that it would be pointless to wait until after arbitration to disqualify an arbitrator who was shown to be actually biased or to have an actual conflict of interest. Actual bias or an actual conflict inevitably would result in voiding of the result of the arbitration, and delaying that determination would be pointless.”
But the PDAA is Salvaged
In the end, the Kerr Court salvages the PDAA by fixing it. The Supreme Court severs the arbitrator-designation part of the PDAA, which then calls into play the Missouri Revised Uniform Arbitration Act [MUAA], Mo. Gen. Stat. §§ 435.350 et seq. Specifically, because the PDAA’s method of appointing an arbitrator had failed, the Supreme Court directs the trial court to appoint a replacement arbitrator. “The unconscionability of the terms regarding the arbitrator does not invalidate the entire agreement to arbitrate. Instead, those unconscionable terms are replaced by the relevant provisions in the MUAA.” Section 435.360 of the MUAA provides “If the arbitration agreement provides a method of appointment of arbitrators, this method shall be followed. In the absence thereof, or if the agreed method fails or for any reason cannot be followed, or when an arbitrator appointed fails or is unable to act and his successor has not been duly appointed, the court on application of a party shall appoint one or more arbitrators. The FAA in section 5 gives courts the same authority to replace arbitrators.
Does this holding call into question the Commissioner’s role as final arbiter of disciplinary matters involving NFL players? Probably not, in my view. First, the parties are of relatively equal bargaining position. Second, players are represented by a union. These differences were noted by the Court. But for everyone else, this decision is a clarion call that a facially unfair PDAA – including one that has an unconscionable arbitrator designation provision – can be challenged early in the arbitration process, and need not await issuance of an arbitration award.
*George H. Friedman, an ADR consultant and Chairman of the Board of Directors of Arbitration Resolution Services, Inc., retired in 2013 as FINRA’s Executive Vice President and Director of Arbitration, a position he held from 1998. In his extensive career, he previously held a variety of positions of responsibility at the American Arbitration Association, most recently as Senior Vice President from 1994 to 1998. He is an Adjunct Professor of Law at Fordham Law School. Mr. Friedman serves on the Board of Editors of the Securities Arbitration Commentator. He is also a member of the AAA’s nation roster of arbitrators. He holds a B.A. from Queens College, a J.D. from Rutgers Law School, and is a Certified Regulatory and Compliance Professional (Wharton-FINRA Institute).