Opposition Brief — Alfa-Laval Food & Dairy Co. v. Britz, Inc.

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Supreme Court, us,

FILED

DEC 5 1995

No. 95-725

In the Supreme Court

OF THE

United States

OCTOBER TERM, 1995

ALFA-LAVAL Foop & Dairy Co.,

AND ALFA-LAVAL CREDIT AB,

Petitioners,

Vv.

Britz, INC., HELM CONCENTRATES, INC.

AND HELM TOMATOES, INC.,

Respondents.

On Petition For Writ Of Certiorari

To The Supreme Court Of California

OPPOSITION TO PETITION

FOR WRIT OF CERTIORARI

THOMAS E. CAMPAGNE

(Counsel of Record)

CLIFFORD C. KEMPER

THE LAW FIRM OF

THOMAS E. CAMPAGNE &

ASSOCIATES

1685 North Helm Avenue

Fresno, California 93727

(209) 255-1637

Attorneys for Respondents

—————_————————————_ _ _————————yyIylI=eeEeE=E=EeECcyc5—q eee

QUESTIONS PRESENTED

1. Is the petition to this Court premature where this

case is presently being litigated in the state trial court and

subject to review by the State Appellate Court and the

California Supreme Court?

2. Should this Court review a State Appellate Court

decision—when no final disposition exists because the mat-

ter is on remand to the trial court for an evidentiary hearing

on arbitrator bias and to confirm or vacate the arbitration

award—where Petitioners do not assert that the case falls

within any of the four categories of cases considered final for

purposes of 28 U.S.C. section 1257 despite pending trial

court proceedings?

3. Did the State Appellate Court correctly decline to

read AAA Commercial Arbitration Rule 19 to abrogate

judicial review of arbitrator bias and hold that a trial court

considering a petition to confirm or vacate an arbitration

award is required to determine, de novo, whether the cir-

cumstances disclose a reasonable impression of arbitrator

bias?

TABLE OF CONTENTS

STATEMENT OF THE CASE ........ccccccccese

LAW AND ARGUMENT. .........:ccccsscccccees

A. THE PETITION IS PREMATURE AS NO

FINAL DISPOSITION EXISTS BECAUSE

THE MATTER IS ON REMAND TO THE

STATE SUPERIOR COURT FOR AN EVI-

DENTIARY HEARING AND PETITION-

ERS FAIL TO SHOW THIS MATTER

FALLS WITHIN ANY OF THE FOUR CAT-

EGORIES OF CASES WHERE A STATE

COURT DETERMINATION IS FINAL FOR

PURPOSES OF 28 U.S.C. SECTION 1257

DESPITE PENDING STATE TRIAL COURT

PROCEED ie cdeiuddvenete nats Seesb

B. THE STATE APPELLATE COURT COR-

RECTLY DECLINED TO ALLOW AAA

COMMERCIAL ARBITRATION RULE 19

TO ABROGATE JUDICIAL REVIEW OF

ARBITRATOR PARTIALITY BECAUSE

STATUTORY AND DECISIONAL LAW

RESERVES THE FINAL DECISION ON

ARBITRATOR BIAS FOR THE COURTS

UPON A PETITION TO VACATE OR CON-

FIRM AN ARBITRATION AWARD .......

COINCEAMIOGUE bc vvncniveaderesonssaphbuk copiers

iii

INDEX TO APPENDIX

(Separate Volume)

Letter from Arbitrator John EE. Peterson to

Messrs. Savrnoch, Strauss, Verticchio and Frame, dated

December 6, 1991, granting the issuance of deposition

subpoenas requested by Alfa-Laval’s co-counsel Mc-

CE died be ia oc Neb keteee'e div seuece

Letter from John T. Savrnoch of McCormick, Barstow to

Arbitrator John E. Peterson, dated December 2, 1991,

requesting the issuance of deposition subpoenas on

ee ele san whe sive evinces

Interim award of Arbitrator John E. Peterson in favor of

Alfa-Laval, dated May 22, 1992 ..........-..0eee

Order re motion for reconsideration of interim award of

Arbitrator John E. Peterson, dated September 24,

ae ee Ae eeu iebcb'sceeess

Declaration of Robert Glassman in support of petition to

vacate arbitrator’s award on the basis of arbitrator bias,

SS EE ee

Letter from Arbitrator John E. Peterson to Mr. Ted

Frame, dated June 25, 1992, denying any special rela-

tionship between arbitrator and his law firm to the

McCormick, Barstow law firm ...............0006-

Letter from Arbitrator John E. Peterson to Mr. Ronald

McNair of the AAA, dated July 9, 1992, acknowledg-

ing referrals from the McCormick, Barstow firm to the

arbitrator and/or his law firm while functioning as the

i el Gis lia es sb edaweesevberesees

Letter from Arbitrator John E. Peterson to Mr. Ron

MeNair of the AAA, dated July 15, 1992, acknowledg-

ing that he was employed as an expert on two separate

matters by McCormick, Barstow, co-counsel for Alfa-

Laval, while functioning as the arbitrator...........

Supplemental declaration of Mr. Ted R. Frame in support

of petition to vacate arbitrator’s award, dated April 19,

SET eat eh Gh n woes 5 62s eens oes FERN DS CRKON's

APP.

PAGE

A-38

A-41

INDEX TO APPENDIX

(Separate Volume)

Letter from Ted R. Frame to Mr. Ron McNair, dated

July 21, 1992, requesting that the arbitrator be replaced

Letter from Rocco M. Scanza of the AAA to

Messrs. White, Dockterman, Kaplan and Frame, dated

August 4, 1992, denying Helm’s request to disqualify

the MOURNE Snc'e dccesin cs cave FUNG ER e Ns

Letter from Joan M. Dolinsky to Mr. Rocco M. Scanza of

the AAA, dated February 4, 1993, requesting reconsid-

eration of AAA’s denial of Helm’s request to disqualify

the GUORINGNT 6 i S05 UE ee eM Eee

Letter from Rocco M. Scanza of the AAA to

Messrs. White, Dockterman, Kaplan, Frame,

Vorzimer, Cotkin and Dolinsky, dated February 18,

1993, rejecting Helm’s request for reconsideration ...

Final award of Arbitrator John E. Peterson, dated

Deere SEs Bese os snk hic ii eae ss ua baer’

Supplemental award of attorneys’ fees and costs by Arbi-

trator John E. Peterson, dated May 6, 1993 and filed on

iar Dy Te akc ios dwn nc duce Ubke ser Shi cb eaw ee

A-68

A-70

A-79

A-81

TABLE OF AUTHORITIES

Cases

Page

American Railway Express Company v. Levee, 263 U.S.

SEE Bde bceds Ke GR IE CCE Fond 0s bocGee beh ei ers 7

Commonwealth Coatings Corp. v. Confidential

Casualty Co., 393 U.S. 145 (1968) ............... 6, 13, 15

Cox Broadcasting Corp. v. Cohn, 429 U.S. 469 (1975) 7,8

First Options of Chicago Inc. v. Kaplan, US. ‘

og GS ie oe ys Ae a a 16, 17

Fox Film Corp. v. Muller, 296 U.S. 207 (1935) ...... 11

Richard Gebers v. State Farm General Insurance

Company, 38 Cal.App.4th 1648, 45 Cal.Rptr.2d 725

SN Sheed Cebit say Chobecet lo eee: 13

Health Services Management Corp v. Hughes, 975 F.2d

ee a SE i's saci Wo os 08 Sh wa deh sss 14, 15, 18

Merit Insurance Co. v. Leatherby Insurance Co., 714 F.2d

UT I eid erin a dea weiwnad vans 12, 13

Michigan-Wisconsin Pipe Line Co. v. Calvert,

Comptroller of Public Accounts, et al., 347 U.S. 157

CTE ce bas cn vias Ghschesbnusauubety idebcers 7

Nida Engalla, et al. v. Permanente Medical Group, Inc.,

et al. 37 Cal.App.4th 497, 520-521, 43 Cal.Rptr.2d

Wee I 0a hn 0 oo Gio Sie SSE beara bak ewee ei 10

Perry v. Thomas, 482 U.S. 483 (1987) .............. 7

Rogers v. Schering Corporation, 165 F.Supp. 295

(D.C.N.J. 1958), aff'd, 271 F.2d 266 (3rd Cir. 1959) 14, 15

San Carlo Opera Co. v. Conley, 72 F.Supp. 825

(S.D.N.Y 1946) aff'd, 163 F.2d 310 (2nd Cir. 1947). 14,15

Smith v. Prudential Securities, 846 F.Supp. 978 (M.D.

PR SG hse sede e eh Rieke ae Pas Fea as 15

TABLE OF AUTHORITIES

CASES

Page

Volt Information Sciences, Inc. v. Board of Trustees of

Leland Stanford Junior University, 489 U.S. 468

COG ici cnn avd c daveb edbweseta bute dwabenc te 9, 10, 11

York Hannover Holding A.G. v. American Arbitration

Association et al. 92 Civ. 1643, 1993 WL 159961,

1993 U.S. Dist. LEXIS 6192 (S.D.N.Y. May 11,

DENY venue cvv vie sanas boas CAbAGE ARTES SARA a Ss 16

Statutes

OUR, Oh. BOE. 5 iccesscnacepedanse>scveecseces 9

DUT Bi icn cc sh coos sks césaceveneomedabe Ganeees 10, 11

PRS inikin veces ede ueecaecdenes Oneeverieee 9, 10, 11

Fe ERIE voce cc cette ceiiecset tens 7

Be Ts BERETS Sek i vedhncvecctncdsvecesecde es 7

De Ries UERPTURD ca cc cctvcckiesecivdadvecevtlvc 7

California Code of Civil Procedure

ERE 4 Save be vhs ke Ok REA Gee Sh abd ba Hbens 10

Ly} SCRAP et bs tern rr ee 5,14

Miscellaneous

AAA Commercial Arbitration Rule 19 ..... 9, 11, 12, 13, 16,17

No, 95-725

In the Supreme Court

OF THE

United States

OCTOBER TERM, 1995

ALFA-LAVAL Foop & Dairy Co.,

AND ALFA-LAVAL CrEpIT AB,

Petitioners,

Britz, INc., HELM CONCENTRATES, INC.

AND HELM TOMATOES, INC.,

Respondents.

On Petition For Writ Of Certiorari

To The Supreme Court Of California

OPPOSITION TO PETITION

FOR WRIT OF CERTIORARI

STATEMENT OF THE CASE

In late 1989 Respondents Britz, Inc., Helm Concentrates,

Inc. and Helm Tomatoes, Inc. (“Helm”) prepared to build

a tomato processing plant. After consulting with manufac-

turers and engineers, Helm obtained machinery, equipment,

and consulting services from Petitioners Alfa-Laval Food &

Dairy Co. and Alfa-Laval Credit AB (“‘Alfa-Laval”)—a

large Swedish engineering and manufacturing concern.

Helm selected Alfa-Laval primarily because of Alfa-Laval’s

warranties and representations on the capabilities and relia-

bility of its paste sterilization equipment.

The Alfa-Laval equipment failed to perform as repre-

sented. The failure of Alfa-Laval’s equipment cost Helm its

business. Helm’s losses, including lost profits and expenses

incurred in attempting to make the equipment perform as

warranted, exceeded $5 million dollars. Helm lost an addi-

tional $10 million dollars when forced to sell the tomato

processing plant.

In September 1990, Helm sued Alfa-Laval for rescission

of the parties’ agreement and damages. Alfa-Laval success-

fully petitioned the Fresno County Superior Court to com-

pel arbitration of the dispute. The parties’ agreement

provided for submission of controversies and claims to

arbitration. See, Petition for Cert. p. 3. The parties’ agree-

ment also contained a choice of law provision:

“Section 15...is modified as follows: (1) the gov-

erning law shall be the law of the state of California,

(2) arbitration shall be in Fresno, and (3) the prevail-

ing party in the arbitration shall be entitled to reasona-

ble attorneys’ fees.”

Following the Superior Court’s granting of Alfa-Laval’s

petition to compel arbitration, the American Arbitration

Association (“AAA”) appointed John Peterson, a partner

in the Fresno, California law firm of Jory, Peterson &

Sagaser, as arbitrator. Helm accepted Peterson as the arbi-

trator—neither Helm nor its counsel possessed any facts

that caused them to believe Peterson might be biased in

favor of Alfa-Laval.

Arbitration on the issue of liability commenced in Janu-

ary 1992. The Chicago law firm of Wildman, Harrold, Allen

& Dixon (“Wildman, Harrold”) and attorney Craig White

(“White”) acted as Alfa-Laval’s primary counsel before the

arbitrator. The Fresno firm of McCormick, Barstow, Shep-

pard, Wayte & Carruth (“McCormick, Barstow”), Alfa-

Laval’s primary superior court counsel, actively worked with

the Wildman, Harrold firm on various aspects of the arbitra-

tion, and even requested and obtained affirmative relief for

Alfa-Laval from the arbitrator. Appendix to Opposition to

Petition for Certiorari pp. A-1 through A-7.

The arbitrator issued his interim award in May 1992.

Arbitrator Peterson concluded that Alfa-Laval’s perform-

ance representations concerning its machinery and equip-

ment were not representations of material fact and that, in

any event, “the. . . shut-down and run times language is not

essential to the purpose of the Alfa-~-Helm Agreement.”

App. to Opp. to Petition for Cert. pp. A-15, A-27. The

arbitrator also decided that each side would bear its own

fees and costs. App. to Opp. to Petition for Cert. p. A-23.

On June 22, 1992, Robert Glassman of Helm, spoke on

the telephone with Marshall Whitney, a senior member of

McCormick, Barstow. App. to Opp. to Petition for Cert. p.

A-36. After Mr. Giassman told attorney Whitney that

arbitrator Peterson issued an interim arbitration award

against Helm, Whitney said “He had personally made two

or three referrals to John Peterson recently, within that last

year or two....” App. to Opp. to Petition for Cert. p. A-36.

Glassman told Helm’s trial and arbitration attorney, Ted

Frame, about Whitney’s remark. Two days later Frame sent

the first of several written requests for disclosure of cases or

hl ai

a mite

other legal matters referred to arbitrator Peterson’s law firm

by any of the attorneys in the McCormick, Barstow firm or

visa-versa within 3 years of Peterson’s appointment as arbi-

trator. Peterson’s responses to inquiries from Frame began

to trickle in on June 25, 1992.

Initially, Peterson revealed no conflict of interest facts and

declared “there is no special relationship between me or our

firm and the McCormick, Barstow firm.” App. to Opp. to

Petition for Cert. p. A-38. Peterson acknowledged only that

his firm was on McCormick, Barstow’s list of referral firms.

Peterson offered no further response until July 9, 1992,

and then only following a flurry of letter exchanges between

White, Frame, and the AAA. At that time, in light of

Frame’s demands, Peterson wrote “In the past, when I have

arbitrated a matter involving a party represented by the

McCormick, Barstow firm, I have advised the American

Arbitration Association that I have been on McCormick,

Barstow’s referral list. I would have done so in this case had

I believed that McCormick, Barstow represented Alfa-Laval

in the arbitration, or in any other capacity.” App. to Opp. to

Petition for Cert. p. A-41. Yet, Peterson acknowledged he

knew McCormick, Barstow represented Alfa-Laval “in

[another] capacity.” “I knew in April 1991, that McCor-

mick, Barstow represented Alfa-Laval in the superior court

action.” App. to Opp. to Petition for Cert. pp. A-41 through

A-42.

Following another flurry of letters between White, Frame

and the AAA, on July 15, 1992 Peterson finally revealed the

extent of his business relationship with McCormick, Bar-

stow. Peterson admitted that McCormick, Barstow referred

six new legal matters to him personally or to his

firm—within 18 months of his appointment as the arbitrator

in this case. App. to Opp. to Petition for Cert. pp. A-46

through A-52. Later, it was shown that McCormick, Bar-

stow referred a seventh matter to Peterson or to his firm

within the same period. App. to Opp. to Petition for

Cert. p. A-55. Most importantly, midway through his six

page letter, Peterson revealed the existence of the ongoing

pecuniary business relationship he had with McCormick,

Barstow as an expert witness while arbitrating the instant

matter:

“C. I was consulted and agreed to serve as an expert

witness in these matters in which McCormick, Barstow

represented attorney firms as legal malpractice defendants:

(1) Forte v. Lang, Richert & Patch

I was initially contacted in late 1984 or early 1985. I

provided deposition testimony and trial testimony on behalf

of defendants. The case resolved favorably to defendants in

September 1985.

(2) Bilyeu v. Baker, Manock & Jensen

Larry Wayte of the McCormick, Barstow firm contacted me

in about November 1991. I have reviewed the pertinent

transcripts and documents in the case, and provided an oral

opinion to Mr. Wayte. If this matter goes to trial, I expect to

testify.

(3) Fansler vy. Motschiedler, Michaelides & Wishon

Marshall Whitney of the McCormick, Barstow firm con-

tacted me in December 1991 regarding testimony in this

case. | have reviewed appropriate documents and tran-

scripts, provided an oral opinion, and given deposition testi-

mony. If this case goes to trial, I expect to testify.”

App. to Opp. to Petition for Cert. pp. A-49 and A-50.

Peterson admitted that just weeks before the arbitration

began, McCormick, Barstow hired him twice (in Novem-

ber 1991 and December 1991) as an expert witness for

McCormick, Barstow in other matters. Put plainly, Peterson

was on McCormick, Barstow’s payroll while he arbitrated

the Alfa-Laval/Helm dispute and while McCormick, Bar-

stow actively represented Alfa-Laval in the litigation and the

arbitration.

Armed with these admissions, Helm asked the AAA to

remove Peterson and appoint a new arbitrator. App. to Opp.

to Petition for Cert. pp. A-59 through A-67. The AAA

wrote the parties on August 4, 1992, affirming the continued

service of Peterson as arbitrator. App. to Opp. to Petition for

Cert. pp. A-68 and A-69.

Helm sought reconsideration from the AAA on Febru-

ary 4, 1993. App. to Opp. to Petition for Cert. pp. A-70

through A-78. On February 18, 1993 the AAA reaffirmed

Peterson’s continuing service as arbitrator. App. to Opp. to

Petition for Cert. pp. A-79 and A-80. Helm unsuccessfully

petitioned the Fresno County Superior Court to vacate the

interim award, and the California Fifth Appellate District

Court of Appeal (“Appellate Court”) denied Helm’s peti-

tion for extraordinary relief without comment.

The damages phase of the arbitration began in February

1993. Peterson issued his opinion and final award on

March 31, 1993. Peterson awarded Alfa-Laval

$587,425.00—as payment for the tomato processing equip-

ment that by then had been scrapped—and Helm nothing.

App. to Opp. to Petition for Cert. pp. A-81 through A-83.

Peterson also reversed the decision he made in his interim

award (that each side was to bear its own fees and costs),

and awarded fees and costs to Alfa-Laval by supplemental

award for a total award of $2,109,701.10. App. to Opp. to

Petition for Cert. pp. A-84 through A-88.

Helm petitioned the Fresno County Superior Court, pur-

suant to California Code of Civil Procedure section 1286.2,

to vacate the final arbitration award as supplemented by the

fee and cost award of May 10, 1993, based on arbitrator

bias. Alfa-Laval filed cross-motions to dismiss Helm’s peti-

tion, and to confirm the awards. Alfa-Laval argued: (1) The

AAA’s determination that the arbitrator need not be re-

moved was a “plausible” decision entitled to judicial defer-

ence; (2) no reasonable impression of bias existed because

McCormick, Barstow was counsel for Alfa-Laval only in the

Superior Court proceedings; and (3) Helm “waived” its

right to object to Peterson serving as arbitrator because

Helm knew there had been a Peterson-McCormick, Bar-

stow business relationship in 1985 and, armed with that

knowledge, should have asked about the parties’ present

business relationships. The Superior Court in essence agreed

with Alfa-Laval.

After the Superior Court entered judgment, Helm timely

filed a notice of appeal with the Appellate Court on Septem-

ber 14, 1993. The Appellate Court issued its opinion on

May 8, 1995, reversing the Superior Court’s decision in part,

and remanding the matter for an evidentiary hearing on the

arbitrator’s bias.

The Appellate Court held, in pertinent part, as follows on

the issue of the standard of review:

“In light of the explicit statutory authorization of judi-

cial determination of ‘evident prejudice’ of arbitrators as

interpreted in Commonwealth Corp., supra, 393 U.S. 145,

89 S.Ct. 337 we hold that a trial court considering a

petition to confirm or vacate an arbitration award is

required to determine, de novo, whether the circum-

stances disclose a reasonable impression of arbitrator bias,

when that issue is properly raised by a party to the

arbitration.”

App. to Petition for Cert. p. 20.

The Appellate Court issued a modification of opinion

upon denial of rehearing. App. to Petition for Cert. p. 65. On

August 10, 1995, the California Supreme Court denied

Alfa-Laval’s request for review, without comment. App. to

Petition for Cert. p. 29.

LAW AND ARGUMENT

A. THE PETITION IS PREMATURE AS NO FINAL

DISPOSITION EXISTS BECAUSE THE MAT-

TER IS ON REMAND TO THE STATE SUPE-

RIOR COURT FOR AN_ EVIDENTIARY

HEARING AND PETITIONERS FAIL TO SHOW

THIS MATTER FALLS WITHIN ANY OF THE

FOUR CATEGORIES OF CASES WHERE A

STATE COURT DETERMINATION IS FINAL

FOR PURPOSES OF 28 U.S.C. SECTION 1257

DESPITE PENDING STATE TRIAL COURT

PROCEEDINGS

Petitioners fail to show that this matter falls within any of

the four categories of cases in which a state court determi-

nation is treated as final under 28 U.S.C. section 1257 where

additional proceedings are pending in the state trial court.

See, Cox Broadcasting Corp. v. Cohn, 429 US. 469,

479-484 (1975).' No final disposition exists. The Appellate

Court remanded the case for an evidentiary hearing on

' As a threshold matter, Petitioners seek a writ to the wrong court. Petitioners

assert jurisdiction exists pursuant to 28 U.S.C. section 1257 (a) because “the

decision below ... concerns Petitioner's ‘“[rJights ... claimed under the ...

statutes of ... the United States [Citation omitted].’” Petition for Cert p. 2.

The California Supreme Court declined Petitioners’ request for review. App. to

Petition for Cert. p. 29. Where discretionary review by a higher state court is

denied, the intermediate appellate court judgment is the highest court from

which review is sought. See, ¢.g., Perry v. Thomas, 482 U.S. 483, 489 (1987)

(appeal pursuant to former 28 U.S.C. 1257 subdivision (2) appropriate from

Second Appellate District Court of Appeal where California Supreme Court

denied review); American Railway Express Company v. Levee, 263 U.S. 19,

20-21 (1923) (writ of certiorari properly addressed to court of appeal since

Louisiana Supreme Court jurisdiction is discretionary and that court declined

jurisdiction); Michigan-Wisconsin Pipe Line Co. v. Calvert, Comptroller of

Public Accounts, et al., 347 U.S. 157, 159-160 (1954) (appeals under former 28

U.S.C. section 1257 dismissed because made from Texas Supreme Court and

not Civil Court of Appeals where Texas Supreme Court refused review). The

petition here seeks a writ of certiorari to the California Supreme Court, instead

of the California Fifth Appellate District Court of Appeal. In addition, the

Appellate Court no longer has jurisdiction as the remittitur issued on August 18,

1995. Thus, the petition is inappropriate.

arbitrator bias, waiver of objection to bias, and a determina-

tion to vacate or confirm the arbitrator’s award. If the award

is vacated, the arbitration begins anew. If no partiality is

found or objection to partiality was waived, then judgment

shall be reinstated. App. to Petition for Cert. pp. 65-67. In

short, Petitioners prematurely seek review from this Court

when there is yet to be a decision from the Superior Court

with probable review by the Appellate Court and the

California Supreme Court.

Petitioners ignore the limited exceptions applied by this

Court, pursuant to Cox Broadcasting Corp. v. Cohn, 429

U.S. 469, 479-484, to hear matters notwithstanding pending

trial court proceedings: (1) Petitioners make no showing

that a federal issue is conclusive and that the outcome of the

further proceedings is preordained; (2) Petitioners make no

showing that a federal issue requires decision despite the

outcome of the future state court proceedings—although

Petitioners argue that contracts will be disturbed as a result

of the Appellate Court determination, as discussed below,

that determination does nothing more than confirm statu-

tory and decisional law allocation of power to the courts to

review arbitrator bias; (3) Petitioners make no showing that

a federal question has been finally decided ‘and later review

of the federal issue cannot be had whatever the outcome of

the case; and (4) Petitioners make no showing that absent

immediate review by this Court, the state court decision

would result in serious erosion of federal policy. Because this

case does not fall within any of the exceptions carved out in

Cox Broadcasting Corp. v. Cohn, 429 U.S. 469, the petition

is premature and should be denied.

lalla

B. THE STATE APPELLATE COURT CORRECTLY

DECLINED TO ALLOW AAA COMMERCIAL

ARBITRATION RULE 19 TO ABROGATE JUDI-

CIAL REVIEW OF ARBITRATOR PARTIALITY

BECAUSE STATUTORY AND DECISIONAL

LAW RESERVES THE FINAL DECISION ON

ARBITRATOR BIAS FOR THE COURTS UPON

A PETITION TO VACATE OR CONFIRM AN

ARBITRATION AWARD

Petitioners cast the issue as follows: “The lower court's

mandated de novo review of the AAA’s ‘conclusive’ decision

overruling a party’s objection to the arbitrator is simply a

refusal to enforce the parties’ agreement to arbitrate according

to the AAA Commercial Arbitration Rules.” Petition for Cert.

p. 14. Petitioners argue that this is in contravention of Sec-

tion 4 of the Federal Arbitration Act, providing that a federal

court may issue an order directing that the arbitration

“_.. proceed in the manner provided for in such agreement.”

Petitioners misapprehend the applicability of provisions of

the Federal Arbitration Act, 9 U.S.C. section | ef seq.

(“FAA”) and attempt to graft a procedural provision of the

FAA onto a state court analysis to argue that a federal court

would read the agreement and AAA Commercial Arbitra-

tion Rule 19 differently than the State Appellate Court.

The Appellate Court stated that “[t]he parties impliedly

agree that this case is governed by the Federal Arbitration

Act....” App. to Petition for Cert. p. 6. The parties’

agreement, however, included a choice of law provision that

made clear: “(1) the governing law shall be the law of the

State of California, (2) arbitration shall be in Fresno

[California]....” In Volt Information Sciences, Inc. v.

Board of Trustees of Leland Stanford Junior University, 489

U.S. 468, 477-479 (1989) this Court held that parties

remain free to include a choice of law provision providing

which state law governs the arbitration claims to which the

arbitration provision of the contract applies.” Here, Petition-

ers’ insistence on enforcement of the contract according to

its terms under the auspices of section 4 of the FAA is

undercut by the existence of the choice of law provision

providing for the application of California law and by the

parties’ reliance on the California Arbitration Act when

petitioning the Superior Court to vacate or confirm the

arbitration award.

In addition, this Court has never held that FAA section 4

applies in state court proceedings. In Volt Information

Sciences, 489 U.S. 468, the appellee argued that California

Code of Civil Procedure section 1281.2 (incorporated

through the choice of law provision in the parties’ contract)

conflicted with FAA section 4. This Court clarified it had no

need to decide whether FAA sections 3 and 4 applied in

state court proceedings because, even if fully applicable to

state court proceedings, FAA sections 3 and 4 do not

foreclose utilization of the California Code of Civil Proce-

dure—the choice of law clause does not offend federal

policy. Id., p. 479-480. In so doing, this Court noted FAA

section 4 is not applicable to state court proceedings:

While we have held the FAA’s “substantive” provi-

sions—§§ | and 2—are applicable in state as well as

federal court, see Southland Corp. v. Keating, 465

U.S. 1, 12 (1984), we have never held that §§ 3 and 4,

which by their terms appear to apply only to proceed-

ings in federal court, see 9 U.S.C. § 3 (referring to

‘proceedings brought in any of the courts of the United

States’), are nonetheless applicable in state court. See

Southland Corp. v. Keating, supra, at 6, n. 10 (ex-

pressly reserving the question whether ‘§§ 3 and 4 of

? See, also, ¢.g., Nida Engalla, et al. v. Permanente Medical Group, Inc., et al.,

37 Cal.App.4th 497, 520-521, 43 Cal. Rptr.2d 621 (1995) (Even where underly-

ing contract involves interstate commerce, parties remain free to include choice-

of-law provision).

the Arbitration Act apply to proceedings in state

courts’); see also id., at 29 (O’Conner, J., dissenting )

(§§ 3 and 4 of the FAA apply only in federal court).

Id., 489 U.S. at p. 477, n.6.

Petitioners’ argument would make every state court anal-

ysis of an arbitration agreement subject to federal court

review to ascertain whether the federal court would have

enforced the contract in the same manner under the author-

ity of FAA section 4. This misconceives the effect of the

FAA on state law determinations. This Court held that,

recognizing Congress’ purpose in providing that the FAA

ensure private arbitration agreements are enforced according

to their terms, the FAA preempts state laws that require a

judicial forum, not arbitration, for resolution of claims. Volt

Information Sciences, Inc. v. Board of Trustees of Leland

Stanford Junior University, 489 U.S. 468, 478. It does not

follow that how a federal court might read and enforce an

arbitration agreement preempts the Appellate Court’s con-

struction here, which merely affirmed existing federal and

state statutory grounds and case law upon which courts may

vacate an arbitration award. “[T]he interpretation of private

contracts is ordinarily a question of state law, which this

Court does not sit to review.” Volt Information Sciences,

489 U.S. at p. 474; See also, Fox Film Corp. v. Muller, 296

U.S. 207 (1935) (where judgment of state court rests upon

two grounds, one federal and the other nonfederal, this

Court will not review if nonfederal ground independent and

adequate to support judgment).

Even if Petitioners’ premise that the parties’ agreement

should be construed as a matter of federal law is arguably

tenable, nevertheless, both the text of AAA Commercial

Arbitration Rule 19 and federal decisional law supports the

Appellate Court’s determination—there is no discord be-

tween the Appellate Court decision, federal court precedent,

and the holdings of this Court.

AAA Commercial Arbitration Rule 19 provides:

Disclosure and Challenge Procedure—Any person ap-

pointed as neutral arbitrator shall disclose to the AAA

any circumstance likely to affect impartiality, including

any bias or any financial or personal interest in the

result of the arbitration or any past or present relation-

ship with the parties or their counsel. Upon receipt of

such information from the arbitrator or another source,

the AAA shall communicate the information to the

parties and, if it deems it appropriate to do so, to the

arbitrator and others. Upon objection of a party to the

continued service of a neutral arbitrator, the AAA shall

determine whether the arbitrator should be disqualified

and shall inform the parties of its decision, which shall

be conclusive.

Petition for Cert. p. 5; italics added.

A fair reading of the italicized language allows for the

AAA administrator’s determination to be conclusive as to

the continued service of the arbitrator in the arbitration

proceeding, thus parties are precluded from interlocutory

judicial intervention prior to the conclusion of the arbitra-

tion. Arbitrator Peterson did not disclose his connection to

McCormick, Barstow, pursuant to the first sentence of AAA

Commercial Arbitration Rule 19, until after the issuance of

his interim award on liability and after repeated demands for

disclosure. App. to Opp. to Petition for Cert. pp. A-46

through A-52. The court in Merit Insurance Co. v.

Leatherby Insurance Co., 714 F.2d 673, 681 (7th Cir. 1983)

reasoned that because the AAA ethical standards do not

have the force of law (even where failure to disclose is a

material violation of those standards), it does not follow that

the award will automatically be nullified by a court. This is

because the AAA, competing with others offering such

service, may “set its standards as high or as low as it thinks

its customers want,” but the standards it sets in its code of

ethics “does not lower the threshold for judicial interven-

tion.” Jd. p. 681.

Under Merit Insurance Co. v. Leatherby Insurance Co.,

714 F.2d 673, Peterson’s failure to disclose to the AAA, in

compliance with the first sentence of AAA Commercial

Arbitration Rule 19, would not alone /ower the threshold for

vacating the award. By parity of reasoning, any standards set

by the AAA for arbitrator bias, and the AAA review of

claims of bias pursuant to the last sentence of AAA Com-

mercial Arbitration Rule 19, cannot raise the threshold for

judicial review of arbitrator bias.

Petitioners’ reading, on the other hand, goes too far—it

subjugates the statutory and decisional law power of the

courts to review arbitrator bias after the arbitration award is

issued to the procedural rules of the AAA.” Petitioners’

misplaced reliance on section 4 of the FAA would result in

the abrogation of section 10 of the FAA which provides that

a federal court may vacate the award upon application by a

party to the arbitration “[w]here there was evident partiality

_.. in the arbitrators ....” See, also, Commonwealth Coat-

ings Corp. v. Confidential Casualty Co., 393 U.S. 145

(1968). Petitioners’ reasoning fails to acknowledge that

AAA rules do not have the force of law. (See, Merit

Insurance Co. v. Leatherby Insurance Co., 714 F.2d 673,

680).

Petitioners argue that allowing the AAA to finally deter-

mine arbitrator bias preserves the integrity of the arbitration

process. See, Petition for Cert. pp. 24-26. The Appellate

See, ¢.g., Gebers v. State Farm General Insurance Company, 38 Cal.App.4th

1648, 45 Cal.Rptr.2d 725 (1995) (insurance company could not dilute the

legislative mandate requiring appraiser impartiality by using a policy provision

that described the appraisers as “independent.”’)

Court decision, however, is in harmony with the fundamen-

tal principle that justifies narrow judicial review of the

merits of an arbitrator's award and thereby preserves the

cornerstone of impartiality upon which arbitration rests.

Arbitrators are free to decide the merits of the controversy

with limited judicial review, provided the arbitrator is neu-

tral, detached, and impartial. To safeguard this cornerstone,

Congress, in enacting section 10 of the FAA, and the

California legislature’s enactment of Code of Civil Proce-

dure section 1286.2, reserved for the courts the final deter-

mination of arbitrator partiality or bias. Accordingly, federal

courts reviewing challenges to arbitrator partiality under the

FAA reason that it is for the court to ultimately decide

whether the award should be vacated. The courts have been

reluctant to entertain review of arbitrator partiality only

where the parties, with knowledge of possible bias, fail to

raise an objection during the arbitration process.

For example, the court in San Carlo Opera Co. v. Conley,

72 F.Supp. 825 (S.D.N.Y 1946) aff'd, 163 F.2d 310 (2nd

Cir. 1947) concluded that where a party timely objects to an

arbitrator based on bias, and the AAA overrules the objec-

tion, the party must proceed with the arbitration; the party

will not, however, be precluded from reasserting the bias

issue before a court upon a petition to vacate the award. See,

also, ¢.g., Rogers v. Schering Corporation, 165 F.Supp. 295

(D.C.N.J. 1958), affd, 271 F.2d 266 (3rd Cir. 1959)

(counsel learned of arbitrator bias from source other than

AAA and objected to continuing service of arbitrator at very

next hearing. The objection was found to be timely made

and preserved for district court review).

Similarly, in Health Services Management Corp v.

Hughes, 975 F.2d 1253, 1263 (7th Cir. 1992), the court

reasoned that if counsel objected to the arbitrator under

AAA Construction Industry Arbitration Rules, his objection

is preserved for the court’s subsequent review; in failing to

object to the AAA, the party waived the right to object. If,

however, as in the instant manner, the party has no know!l-

edge of the ongoing business relationships of the arbitrator

giving rise to the issue of arbitrator bias, there can be no

waiver. Id., at p. 1260. In Smith v. Prudential Securities,

846 F.Supp. 978, 980 (M.D. Fla. 1994), the court enter-

tained a challenge of partiality even where the party failed to

object to the AAA after disclosure. The court, nevertheless,

concluded that the party failed to sustain its burden of

showing evident partiality under the FAA.

In sum, instead of deference, the test applied by courts for

reviewing failure of an arbitrator to disclose is that articu-

lated by the Court in Commonwealth Coatings Corp. v.

Continental Casualty Co., 393 U.S. 145. To the extent the

Appellate Court decision held that a court reviews arbitrator

bias de novo (without deference to the AAA), the Appellate

Court’s reasoning is consistent with prior federal decisions

and represents a natural expression of existing federal

precedent.

Because federal authority is consistent with the decision

of the Appellate Court, Petitioners’ claim that the Appellate

Court decided an important question of federal law which

has not been, but should be, settled by this Court lacks

merit. See, Pet. for Cert. p. 2. Even if federal cases dealing

with the issue of review of an arbitration award, where

parties resorted first to the arbitration rules for a decision on

arbitrator partiality, did not expressly use the phrase “de

novo” review, their holdings impliedly support this stan-

dard—courts defer to an arbitration body’s decision on bias

only where the party seeks judicial intervention before

conclusion of the arbitration proceedings, or where a party

with knowledge of bias, fails to timely object. See, ¢.g., San

Carlo Opera Co. v. Conley, 72 F.Supp. 825; Rogers v.

Schering Corporation, 105 F.Supp. 295; Health Services

Management Corp. v. Hughes, 975 F.2d 1253; Smith v.

Prudential Securities, 846 F.Supp. 978. Here, the steps

taken by Respondents are consistent with the facts of the

above cases. Respondents asked the AAA to remove the

arbitrator pursuant to AAA procedure immediately after

becoming aware of the facts evidencing arbitrator bias.

Respondents, in writing, timely objected, preserving their

objection for judicial review. Therefore, the Appellate Court

decision is consistent with federal precedent and need not be

reviewed.

Petitioners, on the other hand, cite inapposite case law.

For example, Petitioners cite York Hannover Holding

A.G. v. American Arbitration Association et al., 92 Civ. 1643

(CSH), 1993 WL 159961, 1993 U.S. Dist. LEXIS 6192

(S.D.N.Y. May 11, 1993). There, the court deferred to a

AAA determination regarding arbitrator partiality. That

case turned upon the party’s attempt to use the court to

intervene in the ongoing arbitration proceedings. The court

began by outlining the limited ability of the court to inter-

fere with ongoing arbitration proceedings. The court then

noted that AAA Commercial Arbitration Rule 19 set out

the procedure for objecting to the continued service of an

arbitrator. The court concluded that “[a]t this point in the

process, the court must defer to the decision of the AAA.”

(Italics added). The court did not hold that deference would

be afforded the AAA determination once the arbitrator

issued a final award and the party petitioned the court to

vacate the award based upon arbitrator bias.

Petitioners cite First Options of Chicago Inc. v. Kaplan,

__US.___, 115 S.Ct. 1920 for the proposition that

courts misconstrue the FAA when they invoke state law or

other concerns to override the parties’ contractual terms.

See, Petition for Cert. p. 12. From this proposition, Petition-

ers reason that the Appellate Court should have found the

AAA’s determination on arbitrator bias to be conclusive

because the parties’ agreement provided for arbitration

under AAA rules. Petition for Cert. p. 14. Petitioners

continue to confuse FAA preemption of state law requiring

a judicial forum for resolving disputes without arbitration,

with the utilization of limited judicial review of arbitration

awards.

First Options v. Kaplan supports Respondents’ conten-

tions. The Court held that the standard of review applied to

an arbitrator’s decision regarding arbitrability depended on

whether the parties agreed to submit the issue of arbi-

trability to the arbitrator. Jd. 1293. If “clear and unmistaka-

ble” evidence shows the parties agreed to arbitrate

arbitrability, then the standard a court applies is the same as

applied to arbitration decisions in general. Jd. 1924. The

Court explained “[i]n this manner the law treats silence or

ambiguity about the question ‘who (primarily) should de-

cide arbitrability’ differently from the way it treats silence or

ambiguity about the question ‘whether a particular merits-

related dispute is arbitrable because it is within the scope of

a valid arbitration agreement’—for in respect to this latter

question the law reverses the presumption [Citation omit-

ted].” Id. 1924. Agreement about submitting the question of

arbitrability for decision by the arbitrator is fundamentally

different from whether arbitration conclusively decides mat-

ters reserved for the courts upon a petition to vacate or

confirm the award made on claims arbitrated.

Under Petitioners’ reasoning, state and federal statutory

grounds for judicial review of arbitrator partiality would be

displaced—i.e., “who” finally decides arbitrator partiality

would shift from the court to the AAA administra-

tor—based upon Petitioners’ urged construction of the par-

ties’ agreement and AAA Commercial Arbitration Rule 19.

Parties reasonably expect that the statutory and decisional

law basis for judicial review of an arbitrator’s award remains

intact. Petitioners’ argument undermines not only legislative

intent but also the expectation of the parties. The Appellate

Court correctly reasoned that AAA Commercial Arbitration

Rule 19 should not be read to effect this shift in “who”

ultimately decides arbitrator partiality.

“The standard of review that the [Court] must render in

examining ‘the record’ [when the parties allege arbitrator

bias] must be seen in light of the purpose of a court’s

function in confirming or vacating an arbitration award.”

Health Services Management Corp. v. Hughes, 975 F.2d at

1258. The court has a duty to adequately review the record

for alleged instances of evident partiality or other arbitrator

misconduct, Jd., at p. 1258, n. 3. The Appellate Court’s

reasoning is made especially compelling by pointing out that

since the AAA received a significant fee for appointing

Peterson, it had a vested business interest in not making a

mid-arbitration decision to disqualify Peterson. This court

need not disturb the Appellate Court’s decision.

CONCLUSION

For the foregoing reasons, respondents respectfully re-

quest that the petition for a writ of certiorari be denied.

Dated: November 30, 1995

Respectfully Submitted,