Source: http://lawblog.boydlawfirmpc.com/
Timestamp: 2019-04-23 13:56:20+00:00

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CAN AN ARBITRATION CLAUSE HAVE AN ENFORCEABLE PROVISION TO THE EFFECT THAT IT IS SUBJECT TO JUDICIAL REVIEW FOR AN ERROR OF LAW?
The Federal Arbitration Act, 9 U.S.C. 10, provides the grounds on which an arbitration clause can be vacated. These include, primarily, grounds like fraud, corruption, undue means, evident partiality, other gross misbehavior, or exceeding their powers. These grounds have been held to be exclusive. Hall Street Assoc., LLC v. Mattel, Inc., 552 U.S. 576, 578 (2008). Thus, under the FAA, a clause providing that there would be judicial review for an error of law would be unenforceable.
However, such a clause is permissible under the Texas General Arbitration Act ("TAA"). In Nafta Traders, Inc. v. Quinn, 339 S.W.3d 884 (Tex. 2011), the Texas supreme court found that it was permissible to have a clause which forbids the arbitrators from rendering a decision which contains reversible error under either state or federal law or to apply a cause of action or remedy not allowed under state or federal law. Though enforcement of such a clause would have the effect of expanding the grounds available under the TAA for attacking an arbitral award, the court found the clause to be enforceable. The court also found that the TAA had not been preempted by the FAA on this subject.
I have tried a major arbitration that had a clause like the one in Nafta. Although the ground of review sounds narrow, the fact is that in any case of a degree of complexity, a clause like this will almost guarantee courthouse litigation in addition to arbitration. Consequently, a good argument can be made that this sort of clause defeats some of the purposes of arbitration, such as a potentially speedier adjudication and one that will likely avoid the courthouse.
If Fraudulent Concealment Trumps Limitations, What Trumps Fraudulent Concealment?
Fraudulent concealment of a cause of action can toll the running of limitations, but the tolling can end upon proof that the plaintiff has learned of facts, conditions, or circumstances which would cause a reasonably prudent person to make inquiry which, if pursued, would lead to the discovery of the concealed cause of action. This is the holding of the recent Supreme Court of Texas opinion in Etan Industries, Inc. v. Lehmann, No. 10-0318 (Tex. 12/16/2011).
This case continues the trend in the supreme court of increasing the potency of statute of limitations defenses.
In Etan, the plaintiff had secured a judgment based on trespass by a cable and internet provider who did not have a proper easement. The provider had misled the plaintiff by claiming it had a proper easement. The jury found damages for the plaintiff and also found that the defendant had fraudulently concealed the existence of the cause of action. Additionally, the jury also found that the plaintiffs could not have reasonably learned of facts and circumstances that would lead them to the conclusion that a cause of action was being concealed until a time that was within the limitations period. So, the judgment was well supported by the jury verdict.
But the supreme court pointed to earlier evidence that might have led the plaintiff to learn of the concealed cause of action at a time outside of the two year limitations period. The court concluded that this evidence "conclusively established" facts necessary to overcome the fraudulent concealment and thus reversed and rendered the judgment.
In reaching this conclusion, the court also cited its previous precedent of Borderlon v. Peck, 661 S.W. 2d 907, 909 (Tex. 1983).
What Says the Texas Supreme Court About Whether Arbitration Contract Clauses Trump AAA Rules?
No so much, yet. In Americo Life v. Myer (12/16/11), it had before it a case where the AAA had disqualified a party-selected arbitrator (selected by Americo) on the basis that he was not "impartial." After losing the arbitration, Americo sought to set aside the award based on the proposition that the AAA was erroneous in its disqualification of the arbitrator in question, Ernest E. Figari, Jr.
Americo argued to the AAA (1) that Figari was, in fact, impartial, and (2) even if he was not, he satisfied that contractual basis for an arbitrator, that is, that he merely be "a knowledgeable, independent businessperson or professional." Notice that the contractual definition does not include impartiality.
The court of appeals held that Americo had waived its complaint by failing to argue number (2) of the arguments listed above before the AAA. However, the supreme court held that that argument had, in fact, been made before the AAA and was not, therefore, waived. Accordingly, it remanded to the court of appeals for further proceedings consistent with its opinion.
What about the question raised on its merits? I think Americo will eventually prevail on that. Arbitration is a creature of contract. It is quite possible that parties to a contract might, for instance, value the expertise or knowledge of an arbitrator more than his impartiality. If they do, the rules of the arbitration forum should give way to the contract. The rules of the forum are normally viewed simply as "default" rules, to be applied if the parties do not provide otherwise.
You might ask, "why would anyone ever want an arbitrator that was not impartial?"
In the early common law, we did not even have impartial juries. The juries were selected based on their knowledge of the local dispute--not their lack of knowledge of it. The people who knew the parties best and who even knew about the dispute itself were deemed better fact finders than total strangers.
On the international level, disputes between old enemies like Greece and Turkey or Ireland and Great Britain have often been mediated by experienced diplomats who have immense personal knowledge of the participants in the disputes, their background, and the history of the disputes. There is something to be said for knowledge and expertise, even if it might be such that it would affect pure impartiality. Pure impartiality might require a large degree of ignorance of the issues.
Bodies like the AAA should be viewed merely as vehicles to carry out contractual arbitrations. Their rules, when they are supplanted by agreements of the parties themselves, should have no effect.
Now, in this case there is also an argument that by adopting the AAA rules, the parties expanded their definition of the qualifications of an arbitrator. Perhaps, but the better argument is that because the parties spoke to the definition, they spoke fully and in finality.
Is It Ever Permissible For a Law Firm to be Adverse to a Current Client?
The answer in Texas is "yes" in state court but "no" in federal court.
Comment 11 to Texas Disciplinary Rule 1.06 states: "Ordinarily, it is not advisable for a lawyer to act as advocate against a client the lawyer represents in some other matter, even if the matter is wholly unrelated....However, there are circumstances in which a lawyer may act as an advocate against a client, for a lawyer is free to do so unless this Rule or another [disciplinary] rule is violated. For example, a lawyer representing an enterprise with diverse operations may accept employment as an advocate against the enterprise in a matter unrelated to any matter being handled for the enterprise if the representation of one client is not directly adverse to the representation of the other client."
Under this rule, for example, a lawyer practicing in a large multi-office firm likely would not be prohibited from being adverse to a client for whom his firm was doing completely unrelated work in an office of the firm on the other side of the world.
Are Disqualifications Rules the Same For Lawyers and Paralegals?
No. For instance, if a lawyer with personal knowledge of a case is hired by a new firm, his personal knowledge is automatically imputed to the other lawyers in that firm so that the firm cannot be adverse to his former client. Henderson v. Floyd, 891 S.W.2d 252 (Tex. 1995).
However, in Phoenix Founders v. Marshall, 887 S.W.2d 831 (Tex. 1994), the Supreme Court held that where a paralegal with knowledge of a particular matter transfers to another law firm acting adversely to that paralegal's former client on a substantially related matter, the paralegal (and thus the new firm) would not be disqualified if the paralegal were properly screened from participation in the matter. Then-Justice Cornyn, in Conflicts of Interest--Recent Developments in the Texas Supreme Court, 16 REV. LITIG. 515, 528 (1997) stated, regarding this ruling: "Underlying the Court's result is an expressed concern for the mobility of paralegals and other non-lawyers, especially those who work in large firms on massive, complex litigation." This distinction regarding paralegals was re-stated and confirmed in In re Mitcham, 133 S.W. 2d 274, 276 (Tex. 2006).
Of course, from this it does not follow that a paralegal can actually work on the other side of the same case after moving to a new firm. In re Columbia Valley Healthcare Systems, Inc., 320 S.W.3d 819 (Tex. 2010).
It is interesting that the Supreme Court has this concern for the employment mobility of paralegals but does not have the same concern for the mobility of lawyers. The sweeping imputations of knowledge characterized by cases like Henderson v. Floyd, supra, do, in fact, hinder lawyer job mobility.
For that reason, the Restatement (Third) of the Law Governing Lawyers, Section 204, would provide the same solution (screening) for lawyers that the Texas rule allows for paralegals. The Texas Supreme Court would do well to re-examine its position on this issue and to consider adopting that favored by the Restatement.
Do Lawyers Have a Duty of Loyalty to Former Clients?
No. Though one court has said otherwise.
Lawyers clearly have a duty of confidentiality to former clients, that is, a duty not to disclose privileged information learned during the attorney client relationship. And, for that reason, Texas Disciplinary Rule 1.09 prohibits lawyers from being adverse to former clients in matters that are substantially related to the prior representation--recognizing that that situation carries with it too much danger of misuse of confidential information. No actual misuse of confidential information need be shown to disqualify a lawyer or his firm in that situation; rather, the substantial relationship itself is enough.
But what about a duty of loyalty? Certainly, there is a duty of loyalty to current clients. But aside from the duty of preserving confidences, courts generally have not recognized any other sort of loyalty that must be maintained for former clients.
An exception is the Fifth Circuit in In re American Airlines, 972 F.2d 605 (Fifth Cir. 1992). In that case, Vinson Elkins was acting adversely to American Airlines in an antitrust case, and American was a former client. (There was a contention by American that it was even a current client, but that did not appear to be correct based on the evidence and was not a basis of decision of the Court). The Court also did not rely on there having been a substantial relationship between VE's prior representation of American and the case at bar. Rather, the Court stated that VE had violated a "duty of loyalty" to its former client and also invoked the then and now discredited doctrine that a firm should be disqualified when there is even an "appearance of impropriety."
The decision has been strongly criticized by commentators, one of whom was Dean Sutton, who was the principal author of the current Texas Disciplinary Rules. He called the decision's reasoning "unfathomable froth." (Sutton, Introduction to Conflicts of Interest Symposium: Ethics, Law, and Remedies, 16 REV. LITIG. 490, 513 (1997). Another commentator called its reasoning "incoherent." Schneyer, Nostalgia in the Fifth Circuit: Holding the Line on Litigation Conflicts Through Federal Common Law, 16 REV. LITIG. 537, 558 (1997). Shneyer at the time was a professor at the University of Arizona Law School.
I also criticized it in my own article, Boyd Current Trends in Conflict of Interest Law, 53 BAYLOR L. REV. 1 (2001).
Whether the Fifth Circuit would use the same reasoning now is an open question; my guess would be "no."

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