Frankfurt Kurnit Klein & Selz

March 12th, 2008

Rules on Prehearing Dispositive Motions in Arbitrations

Parties to various types of commercial agreements frequently include arbitration clauses in an effort to obtain a cheaper, more expeditious form of dispute resolution than resort to the courtroom.

However, once faced with the reality of arbitration, both claimants and respondents often try to import into arbitration time-consuming and expensive features of traditional litigation, such as broad discovery and dispositive motion practice, in order to obtain more information prior to an evidentiary hearing and to avoid a hearing that one or the other party believes to be unnecessary.

Some arbitral bodies have responded to the proliferation of dispositive motions by promulgating rules restricting their availability. Given this trend, attorneys drafting arbitration provisions should consider whether to address the parties' ability to make these motions in the arbitration agreement itself.

Ad Hoc Basis

• Absent Specific Rules, Dispositive Motions Have Been Determined on an Ad Hoc Basis. Historically, the rules of the major arbitral organizations have generally not included rules delineating under what circumstances parties may bring or arbitrators may grant dispositive motions before conducting an evidentiary hearing. For example, neither the American Arbitration Association (AAA) Commercial Arbitration Rules nor the International Dispute Resolution Procedures, implemented by the International Centre for Dispute Resolution, contain an explicit provision permitting dispositive motions, and arbitrators have interpreted more general rules as giving them discretion to entertain such motions.₁ To the extent that rules did refer to prehearing dispositive motions, the rules made such motions generally available, without setting out any procedural prerequisites or guidance to the arbitrator.₂
• Trend Towards Limiting Availability of Prehearing Dispositive Motions. Arbitral organizations have recently begun promulgating rules intended to limit the availability of prehearing dispositive motions. For example, on July 1, 2006, the AAA added Rule 27 to its Employment Arbitration Rules providing that: "The arbitrator may allow the filing of a dispositive motion if the arbitrator determines that the moving party has shown substantial cause that the motion is likely to succeed and dispose of or narrow the issues in the case." In adopting Rule 27, the AAA noted that "[t]hough previously uncommon, dispositive motion provisions have begun to be written into agreements, especially employment agreements, in recent years. Recognizing this fact, the AAA has added this new rule, which sets the standards by which an arbitrator may entertain dispositive motions brought by parties."₃
• On Sept. 20, 2007, the Financial Industry Regulatory Authority (FINRA)₄ proposed detailed new rules₅ designed to "ensure that parties have their claims heard in arbitration, by significantly limiting motions to dismiss filed prior to conclusion of a party's case in chief and by imposing stringent sanctions against parties for engaging in abusive practices under the rule."₆ These new proposed rule changes are intended to address the fact that although the former NASD Code of Arbitration Procedure did not expressly authorize prehearing dispositive motions, practitioners have long filed such motions, and arbitrators have taken the view that they have the authority to grant such motions in appropriate cases.₇
• FINRA's proposed rule changes provide specific procedures for motions to dismiss.₈ Specifically, under the proposed rule changes, the panel may not consider a motion to dismiss a party or claim made prior to the conclusion of a case in chief "unless the panel determines that": (i) "the party previously released the claim(s) in dispute by a signed settlement agreement and/or written release"; or (ii) "the party was not associated with the account(s), security(ies), or conduct at issue."₉

Procedural Requirements

The proposed rule changes contain several procedural requirements for dispositive motions. Specifically, dispositive motions:

(i)   Must be made in writing and only after the filing of an answer;
(ii)  Must be decided by the full panel;
(iii) May only be considered provided the parties have an opportunity for a prehearing conference on the motion;
(iv) May only be granted (in whole or in part) by a unanimous panel and must be accompanied by a written explanation; and
(v)  May not be re-filed following a denial absent specific permission by panel order.

The proposed rules also contemplate significant penalties for parties filing unsuccessful prehearing motions. If the motion is denied, the panel must assess forum fees associated with the motion hearings against the moving party and grant a party opposing a frivolous motion reasonable costs and attorney's fees. If the panel determines that the motion was filed in bad faith, the proposed rules permit the panel to issue additional sanctions.

The different approaches of the AAA and FINRA expose the latent tension that underlies arbitration: while a mechanism should exist that allows respondents to obtain prehearing dismissal of claims that are frivolous or clearly barred legally, the arbitration process must also ensure that any final award be based on as complete a factual and legal record as possible given, among other things, the substantially unreviewable nature of arbitration awards.

The AAA employment rule seeks to resolve this tension by creating a "substantiality" bar to prehearing motions. Although this approach gives arbitrators some guidance that motions are disfavored and should be restricted, it transposes the judicial prehearing process to an arbitration context and grants wide discretion to the arbitrator. Thus, respondents will, at a minimum, be able to delay proceedings merely by initiating a premotion procedure and in some instances may succeed in burdening the arbitration with fact-based summary-judgment-type motions. This two-step process will likely substantially delay the hearing at a considerable cost to all parties and if allowed, could result in a merits decision that will then be essentially irreversible.₁₀

The FINRA approach resolves the tension between expedition and completeness by substantially limiting such motions and providing both detailed guidelines as to when, how and why prehearing motions can be made, as well as sanctions for unsuccessful motions. In this way, FINRA's proposed rules further its expressed goal of ensuring that claimants get a full hearing of their claims. However, the rules appear to be so restrictive that seemingly proper subjects for a dispositive motion, such as damages claims for defamation actions based on a Form U-5 in New York, or claims barred by statutes of limitation, must still go to a hearing.

Both the AAA and FINRA approaches acknowledge that the delay and cost of prehearing motions can undermine the expedition essential to a workable arbitration process. Moreover, the limitations on such motions are consistent with the fact that the absence of meaningful appellate review of arbitration awards militates against prehearing dispositions, except in the most obvious cases.

However, given the ease with which arbitrations can be commenced, and the potential burden on respondents to defend against such claims, especially when one considers the cost of procedures like discovery, respondents need a mechanism to address frivolous or legally-precluded claims before such costs are incurred. Thus, a hybrid of the AAA and FINRA approach would seem preferable: better defined guidelines and protocols without the severe restrictions on the subject matter of such motions. Arbitrators need to be empowered to control their proceedings and both abusive claims and abusive motions should be curtailed.

Conclusion

In the meantime, practitioners drafting arbitration clauses should be aware of the varied approaches taken by different arbitral bodies and should consider including contractual language addressing this issue. Thus, when selecting an arbitral body to serve as a forum, the drafter should review the rules of the particular arbitral organization to ensure that those rules are consistent with the parties' intent. In addition, to the extent that a party wishes to secure the right to submit a dispositive motion and selects an arbitral forum that does not have a specific rule delineating the availability of such motions, the drafter should be cognizant of the trend disfavoring these motions and the corresponding need to be explicit about the parties' right to make them.

Endnotes:

1. For example, AAA arbitrators have found authority to consider dispositive motions in Rule 30 of the AAA Commercial Rules, which grants the arbitrator "the discretion to vary [the conduct of the proceedings whereby evidence is presented]" and enables the arbitrator to expedite the dispute by, inter alia "direct[ing] the parties to focus their presentations on issues the decision of which could dispose of all or part of the case." See, e.g., Sherrock Bros. Inc. v. DaimlerChrysler Motors Co., LLC, No. 06-4767, 2008 WL 63300, at *4 (3rd Cir. Jan. 7, 2008) (confirming AAA Commercial Rules arbitration award granting summary judgment motion).
2. For example, Rule 18 of JAMS Comprehensive Arbitration Rules and Procedures states that, upon request, an arbitrator "may permit any Party to file a Motion for Summary Disposition of a particular claim or issue," provided the interested parties have reasonable notice in order to respond. See also AAA, Construction Industry Arbitration Rules, R-31(b) ("The arbitrator shall entertain motions, including motions that dispose of all or part of a claim . . . .").
3. AAA, "AAA Employment Rules Provide Important Options, Increased Flexibility," June 30, 2006, http://www.adr.org/sp.asp?id=28572.
4. FINRA was created in 2007 through the consolidation of the National Association of Securities Dealers (NASD) and the New York Stock Exchange Member Regulation.
5. FINRA filed its proposed rule changes on Nov. 2, 2007 with the Securities and Exchange Commission (SEC), which must review and approve the rules before they are promulgated. FINRA's application is currently pending with the SEC.
6. Proposed Rule Change by FINRA, File No. SR-FINRA-2007-021 (FINRA Proposal), at 11.
7. See NASD Code of Arbitration Procedure, R. 10303 (entitling parties to a hearing, but not expressly requiring an evidentiary hearing); Sheldon v. Vermonty, 269 F.3d 1202, 1207 (10th Cir. 2001) (confirming NASD arbitration award dismissing claim with prejudice where motion to dismiss briefed and argued); Allen v. RBC Dain Rauscher Inc., No. C06-5163 RJB, 2006 WL 1303119, at *5 (W.D. Wash. May 9, 2006) (same).
8. The proposed rule amendments also impose time limits and procedural hurdles on a party's pre-existing right under the rules to move to dismiss a claim that was not "eligible for submission to arbitration," i.e., was submitted after "six years have elapsed from the occurrence or event giving rise to the claim." FINRA R. 12206(a), 13206(a); FINRA Proposal.
9. FINRA Proposal, R. 12504(6), 13504(6).
10. See, e.g., Vento v. Quick & Reilly Inc., 128 Fed. Appx. 719, 723 (10th Cir. April 20, 2005) (confirming NASD arbitration award dismissing claim as a matter of law on the pleadings); Griffin Indus. Inc. v. Petrojam, Ltd., 58 F. Supp. 2d 212, 219 (S.D.N.Y. 1999) (confirming pre-hearing award over objection that arbitrators' failure to conduct oral hearings amounted to misconduct); Wise v. Wachovia Secs. LLC, No. 04 C 7438, 2005 WL 1563113, at *3 (N.D. Ill. May 4, 2005) (confirming award dismissing claims on summary judgment), aff'd, 450 F.3d 265, 268 (7th Cir. 2006). It should be noted that at least in one case, though the court expressly recognized that arbitrators may grant motions to dismiss facially invalid claims after oral argument, it nonetheless vacated an arbitral award because the panel failed to consider evidence on factual issues presented by the claimant, who was not afforded an opportunity to have his motion to compel production heard. See Prudential Secs. Inc. v. Dalton, 929 F. Supp. 1411, 1417 (N.D. Okla. 1996).

Authors: Amelia Brankov & Brian Maas

Reprinted with permission from the March 12, 2008 edition of the New York Law Journal.