Effective November 1, the American Arbitration Association (“AAA”) unveiled new rules that offer an optional appeals process for commercial parties in arbitration. While recognizing that the “objective of arbitration is a fair, fast and expert result that is achieved economically,” the AAA established the Optional Appellate Arbitration Rules (“Appellate Rules”) in order to accommodate parties’ desire for “a more comprehensive appeal of an arbitration award within the arbitral process.” These Rules envision a fuller, substantive, review mechanism to serve as an alternative to the limited, procedure-centric, judicial review of arbitration awards that only rarely results in awards being vacated.
Notably, the Appellate Rules are intended to provide for an appeal of an award issued by the AAA, or International Centre for Dispute Resolution (“ICDR”), to an arbitration appeal tribunal that would “apply a standard of review greater than that allowed by existing federal and state statutes.” In particular, the Appellate Rules allow appellate review for (1) errors of law that are “material and prejudicial”, and/or (2) determinations of fact that are “clearly erroneous.” Moreover, the Appellate Rules aim for an appellate process that will reach completion within three months, with time for briefing and discretionary oral argument. Importantly, utilization of the Appellate Rules requires agreement upon the parties through a formal arbitration clause (post-dating November 1, 2013) or mutual stipulation. As such, a party may not unilaterally appeal an AAA or ICDR arbitration award.
The availability of the Appellate Rules to parties arbitrating before the AAA or ICDR seeks to balance the safeguards provided by judicial appeal with the efficiency often afforded through arbitration. Time will tell whether this balance is achieved and whether commercial parties embrace an arbitral scheme that more closely resembles the judicial process. A discussion of certain noteworthy aspects of the Appellate Rules follows below.
Availability of Appeal and Filing Requirements
The process afforded by the Appellate Rules only applies where the commercial parties have stipulated to or contracted for it. No party to an arbitration may unilaterally appeal an AAA or ICDR award, and the Appellate Rules do not impose a presumption in favor of appeal where an arbitration clause is silent with respect to appeal. Similarly, the arbitration appeals process does not apply “to disputes where the arbitration clause is contained in an agreement between individual consumers and businesses where the business has a standardized, systematic application of arbitration clauses with customers and where the terms and conditions of the purchase of standardized, consumable goods or services are non-negotiable or primarily non-negotiable in most or all of its terms, conditions, features or choices.” Rule A-1.
Assuming the availability of appeal, an arbitration party has “thirty (30) days from the date of the Underlying Award is submitted to the parties” to file a Notice of Appeal, along with copy of the applicable agreement providing for appeal, a copy of the Underlying Award and a $6,000 administrative filing fee, with the AAA. The appealing party must also simultaneously provide these appeals documents to all arbitration parties. Rule A-3(a)(i)-(ii).
Constitution of Arbitration Appeal Tribunal
If the parties have not appointed an appeal tribunal and have “not provided for any other method of appointment”, the AAA will appoint the tribunal by simultaneously sending each party an identical list of names of persons “chosen from the AAA’s Appellate Panel.” The parties are then “encouraged” to agree to the tribunal from that list and advise the AAA of their agreement. Rule A-5(a). If the parties cannot agree upon the appeal tribunal from the AAA’s pre-selected list, each party has fourteen (14) days “from the transmittal date in which to strike names objected to, number the remaining names in order of preference, and return the list to the AAA.” If, after considering a list with the remaining names, the parties still cannot agree on an appeal tribunal, or if “acceptable arbitrators are unable to act”, the AAA “shall have the power to make the appointment from among other members of the AAA’s Appellate Panel without the submission of additional lists.” Rule A-5(b).
Absent an agreement by the parties to utilize a single arbitrator, the appellate tribunal will consist of a panel of three appellate arbitrators, with the AAA appointing the panel Chairperson. Rule A-5(c). In addition, if the parties have requested an appellate arbitrator with “specific qualifications”, the AAA “will consider such requests when creating the list of the appellate arbitrators.”
Jurisdiction of Arbitration Appeal Tribunal and Issues Subject to Appeal
The Appellate Rules provide that the appeal tribunal “shall have the power to rule on its own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement.” If the appeal tribunal determines that it lacks jurisdiction to hear the appeal, “the appeal shall be dismissed and the Underlying Award shall be deemed to be final.” Rule A-9.
The Appellate Rules also specify two independent grounds on which parties may appeal an arbitration award. Namely, a party may seek appellate review for: (1) “an error of law that is material and prejudicial”; or (2) “determinations of fact that are clearly erroneous”. Rule A-10. Although this Rule plainly contemplates some level of deference upon an original arbitration panel’s legal and factual findings, it is not entirely clear whether such deference neatly equates to any standards of judicial review used by appellate courts. In particular, neither this Rule, nor any other of the Appellate Rules, provides that legal errors by the original arbitration panel should be reviewed de novo as would be the case in appellate court. Without the express benefit of a judicially analogous standard of review, arbitration appeal tribunals may be left to themselves to define the precise meaning of “material and prejudicial” for the purpose of determining whether to reverse or modify an underlying arbitral award for legal error.
Structure of Arbitration Appeal Proceeding
All arbitration appeals under the Appellate Rules “will be determined upon the written documents submitted by the parties” “unless otherwise directed by the appeal tribunal.” The appeal tribunal has the discretion to set oral argument upon request by a party or if the tribunal “deems oral argument necessary”. Rule A-15(a). Any request for oral argument must be made “within thirty (30) days of service of the Notice of Appeal or it is waived.” If the appeal tribunal grants oral argument, “it shall be scheduled to take place within thirty (30) days of filing of the last brief.” Rule A-15(b).
Within one week of the appeal tribunal being appointed, the appeal tribunal and the Case Manager will schedule a conference call with all of the parties. On that call, the appeal tribunal will, among other things, set a briefing schedule as well as a deadline by which the parties must submit a record on appeal. Rule A-7(a). The Rules require the parties to “cooperate” in “compiling the record on appeal”. Rule A-16. The parties “may” submit “relevant excerpts of the transcript of the arbitration hearing giving rise to the Underlying Award”, any expert reports, deposition transcripts or affidavits that were submitted as part of the arbitration hearing, documentary evidence admitted into evidence during the arbitration hearing, “pre- and post-hearing briefs” of both parties, “or other evidence relevant to the appeal that was presented at the arbitration hearing.” Importantly, however, a “party may not present for the first time on appeal an issue or evidence that was not raised during the arbitration hearing.” Moreover, any disputes as to whether a document is part of the record on appeal “shall be determined by the appeal tribunal.” Id.
The Rules provide a default briefing schedule under which the appellant has 21 days to file an “initial brief” of 30 pages. Rule A-17(a). The Appellee, in turn, has 21 days after service of the appellant’s “initial brief” to file an “answer brief” and/or an initial “cross appeal” brief, each also limited to 30 pages. Rule A-17(b). The parties are each entitled to then file a reply brief, limited to 10 double-spaced pages, within 10 days of service of the opposing party’s answer brief. Rule A-17(d),(f). One extension may be granted for “good cause shown”, and an additional extension may be granted “in extraordinary circumstances” and subject to the discretion of the appeal tribunal. Rule A-17(g). Within thirty days of service of the last brief, the appeal tribunal must either render a decision or request additional information “and notify the parties of the tribunal’s exercise of an option to extend the time to render a decision, not to exceed thirty (30) days.” Rule A-19(a)(1)-(3).
Form of Appeal Decision and Finality of Appeal
In rendering its appeal decision, the appeal tribunal may “adopt the Underlying Award as its own, or, substitute its own award for the Underlying Award (incorporating those aspects of the Underlying Award that are not vacated or modified)”. Rule A-19(a)(1)-(2). The appeal tribunal’s decision, unless the parties agree otherwise, “shall be in writing and shall include a concise summary of the decision and an explanation for the decision.” Rule A-19(c). The Rules require a “majority”, though not unanimity, of arbitrators comprising the appeal tribunal to reach the decision. Additionally, the appeal tribunal does not have the authority to order a new arbitration hearing or send the case back to the original arbitration panel for corrections or further review. Rule A-19(a). The Rules make clear that the “appeal tribunal’s decision shall become the final award for purposes of the enforcement proceedings.” Rule A-20.
Other than Rule 20’s reference to judicial enforcement proceedings, the Appellate Rules do not address whether, and how, the arbitration appellate process affects enforcement of, or challenges to, a final arbitration award in court. Specifically, the Federal Arbitration Act (“FAA”) allows for arbitration awards to be vacated where: (1) the award was procured through fraud, corruption, or undue means; (2) the arbitrator was plainly biased; (3) the arbitrator was guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and materials to the controversy, or any other misbehavior by which the rights of any party have been prejudiced; or (4) the arbitrator exceeded his or her powers. The Appellate Rules do not express a view as to whether a reviewing court’s evaluation of any of these bases, for purposes of enforcing or vacating an arbitration award, should change in light of the newly established arbitration appeals process. As a result, reviewing courts will likely have to address whether the same standard of judicial review that applies to an arbitration award rendered by a single panel likewise applies to a final award rendered by an arbitration appeal tribunal.