Three years into the Covid-19 pandemic, the words “delayed due to Covid” still strike fear in the hearts of clients and attorneys across the country. For almost two years, many courts stopped almost all in-person hearings and trials, moving largely to virtual platforms. And while the wheels of justice continued to slowly turn, courts still face a yearslong backlog, especially for jury trials. As a result, judges are looking for other avenues to offload their dockets.
These delays in the courts may lead to more arbitration proceedings, but attorneys should beware of potential problems with this detour. Since the signing of The Federal Arbitration Act in 1925, the United States Supreme Court has continuously upheld arbitration agreements. But as most litigators know, the right to appeal an arbitration is extremely limited, with an arbitrator’s decision only being overturned for a manifest disregard of the law. It is not enough for an arbitrator to interpret the law incorrectly. Not only must the law be well-defined, explicit and clearly applicable, but the arbitrator must know the law and refuse to apply it. As such, almost all appeals from arbitration awards fail.
Such “speedbumps” can turn into much bigger issues for businesses. As we know, arbitration is a creature of contract, but imprecise drafting could lead to a multitude of issues. In 2019, the Supreme Court held in Henry Schein v. Archer White Sales that if the parties agree the arbitrator must decide the scope of his or her own power, the court must respect that decision. This is true even if the issue at hand clearly cannot be decided by the arbitrator.
If a contract adopts the rules of the American Arbitration Association or another association, the parties may be taking the long way around an issue. AAA rules specifically reserve the right to determine arbitrability for the arbitrator. This means the arbitrator, who is being paid to determine a case, can decide if they get to keep the case. Attorneys should proceed with caution before drafting language adopting the rules of these associations. Additionally, non-signatories to an arbitration agreement may find themselves along for the ride in an arbitration under arguments such as agency, alter ego, equitable estoppel and third-party beneficiary.
With courts looking to offload their pandemic dockets, organizations such as the AAA dramatically increased the number of virtual hearings. In March 2020, there were just 17 virtual hearings, according to the AAA. A year later, that number jumped to 782. It has since leveled out to around 500 virtual hearings a month, a number that is still vastly higher than it was pre-pandemic. Courts are calling these virtual hearings a “new normal,” with the U.S. District Court in the District of Kansas noting they “likely will be for some time” in Wilkens v. ValueHealth, LLC.
While these hearings are undeniably convenient, virtual hearings in arbitration have led to many questions. While courts have routinely said that parties cannot be forced to accept a virtual trial, the opposite is true in arbitration. Courts are supporting virtual arbitration hearings in a variety of cases, and attorneys should be cautious when drafting arbitration agreements. In Pipkin v. Nabors Indus., Ltd., the U.S. District Court in the District of Wyoming upheld a virtual hearing even though the agreement stated the arbitration would be held either telephonically or in person. In Legaspy v. FINRA, the U.S. District Court in the Northern District of Illinois upheld a virtual hearing over the party’s objection because the contract stated the Director of FINRA could designate the time and place of the arbitration.
The implications of an arbitration clause can reach far beyond the parties in the contract. Section 7 of the Federal Arbitration Act may allow an arbitrator to compel discovery from third parties. Whether the third parties actually “must attend before them,” however, is the subject of a circuit split. A majority of the circuits — including the Second, Third, Fourth and Ninth Circuits — hold the arbitrator has the power to call witnesses but cannot force a third party to produce documents or appear at a discovery deposition. Instead, the third party can only be compelled at a proceeding before an arbitrator. District courts from Florida, Illinois, Louisiana, New York and Texas have also held a third party cannot be compelled to produce discovery until the final hearing, and most only compel the discovery in extraordinary circumstances.
On the other hand, a minority of circuits — the Sixth and Eighth Circuits — have held the ability to compel discovery before the final hearing is an important part of the arbitrator’s job because it improves efficiency. These judges find that parties should be conducting discovery before the final hearing and will compel pre-suit discovery from third parties in arbitration.
Courts are also struggling to answer the question whether third-parties can be required to attend a virtual arbitration hearing. For example, the Eleventh Circuit has held third-parties cannot be required to attend a virtual hearing under the Federal Arbitration Act, even if they could be compelled to attend a live hearing. However, without word from Congress or the Supreme Court, it is unclear what other courts will do with the growing popularity of virtual hearings in arbitration.
Then there are the logistical challenges with virtual proceedings we have all experienced — bad internet connectivity, barking dogs, leaf-blowing neighbors and participants who may not adhere to online etiquette. (The toilet flush heard during oral arguments at the Supreme Court comes to mind.)
Courts also have not yet addressed the issues regarding potential deception in virtual hearings. The implications could be astronomical: We have encountered situations of attorneys holding up answers off-screen for clients to read in a deposition. In another instance, parties used chat features to communicate discretely. Obviously, this would not be allowed if all parties were in the room.
In the end, it is just as much about the ride as it is the destination, and attorneys should be very leery before heading down the path of arbitration in the age of virtual hearings. Attorneys should carefully reconsider their “standard” arbitration clauses and whether arbitration is really in the best interests of the client in that particular contract. Because of the circuit split described above, the choice of law in an arbitration agreement can also be critical to getting third-party discovery. Finally, unless your client is willing to be forced into only virtual proceedings, the issue of live proceedings must specifically be addressed in the arbitration provision.
Paul Lackey is the Dallas office managing partner at Stinson LLP. He can be reached at paul.lackey@stinson.com.
Bailey McGowan is an associate attorney in Stinson LLP’s Dallas office. She can be reached at bailey.mcgowan@stinson.com.
