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

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Opposition Brief
- **Published:** January 1, 1996
- **Citation:** 516 U.S. 1072

## Text

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

i
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?

ii

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

iv

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

Vv

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

vi
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,

v.

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

nd

l

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 &

2

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

pr

a mite

3

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

4

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-

7

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

6

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.

7

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.

8

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

9

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

10

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).

1]

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-

12

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

13

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.”’)

14

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

15

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.

16

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

17

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

18

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,

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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386002_0748%3A3. Public record. Not legal advice.