The American Arbitration Association declares that the objective of arbitration is a “fair, fast, and expert result that is achieved economically.” One way in which arbitration is faster than courthouse litigation is that, unless contracted for, there is no available appeal of a material error of law or clearly erroneous findings of fact. Moreover, a court will not alter an arbitration award unless: (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 material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced; or (4) the arbitrator exceeded his or her powers. Thus, arbitration, for all intents and purposes, is the end all be all for the parties.
Perhaps in an attempt to shift the AAA’s objective a bit from fast to fair, on November 1, 2013, the AAA enacted Optional Appellate Arbitration Rules, which provide parties with an opportunity to appeal a AAA arbitration decision to a AAA appellate panel. Issues ripe on appeal will be: 1) review of errors of law that are material and prejudicial; and 2) determinations of fact that are clearly erroneous.
To invoke the AAA’s appellate rules, the parties must either have contracted for the inclusion of the appeal or, at some point, stipulate to jurisdiction of the appellate panel. The parties must also agree that court action to modify, enforce, correct, or vacate the underlying award will be delayed until resolution of the appeal. Thus, contracting for or stipulating to AAA arbitration simply means adding a step between the underlying award and court involvement. Said differently, the AAA appeal process does not circumvent the need for judicial approval. It simply adds an additional, optional layer of review.
How does this additional appellate step work?
To initiate the appellate process, any party involved in the underlying award may file with the AAA a Notice of Appeal within 30 days from the date that the underlying award is submitted to the parties. The filing fee for the Notice of Appeal is a non-refundable $6,000 to be paid by the appellant. Appellees then have seven days after notice of the filing of a Notice of Appeal to file a cross-appeal, which also costs $6,000. In addition to the filing fee, the AAA appellate rules also allow for the imposition of attorney fees and other reasonable costs to be assessed to appellants if a statute or the parties’ contract so provides.
Jurisdictional challenges flow through the appellate panel, including any objections regarding the existence, scope, or validity of the arbitration agreement.
The appellate panel will render its written decision based upon briefs submitted by the parties. Although parties can make a request for oral argument within 30 days of service of the Notice of Appeal, the panel has sole discretion to determine whether or not to hear the argument. In deciding the appeal, the panel can do one of three things: (1) adopt the underlying award as its own; (2) substitute its own award for the underlying award (incorporating those aspects of the underlying award that are not vacated or modified); or (3) request additional information and notify the parties of the panel’s exercise of an option to extend the time to render a decision, not to exceed 30 days. What the panel cannot do, however, is send the matter back to the original arbitrator. Once service of the panel’s opinion is served upon the parties, the time to seek judicial approval or review begins to tick.
What’s the upshot?
AAA appeals will likely be reserved for complex business-related matters. The $6,000 filing fee, potential to incur attorney fees, if contracted for or permissible by statute, and other reasonable costs associated with the appeal will likely serve as a deterrent to parties involved in smaller disputes.
Parties should weigh the costs and the standards of review of both the AAA appeal and filing a motion to vacate an arbitration award with the court. For example, courts have held that an arbitration award should be vacated when “an arbitrator exceeds his power [such that] an award fails to draw its essence from the agreement of the parties.” Gingrich v. Wooster, 9th Dist. Summit, 2001 WL 22256, *5 (Jan. 10, 2001). This occurs when there is an absence of “a rational nexus between the agreement and the award,” or when the award is “arbitrary, capricious, or unlawful.” Id. To the contrary, the AAA panel will review: 1) errors of law that parties contend are material and prejudicial; and 2) determinations of fact that parties contend are clearly erroneous. Thus, a party must determine what aspect of the arbitration he, she, or it wishes to challenge. That party must then consider the costs associated with filing an appeal versus filing a motion with the court. Only then can a party make the decision whether or not to appeal to the AAA panel or just go straight to the courthouse. Notwithstanding that decision, however, it is still advisable for parties to contract for the option to appeal, and then make the decision whether or not to appeal, if the situation arises.
Lastly, the Optional Appellate Arbitration Rules do not much change the procedure parties can employ to achieve their desired alternative dispute resolution. That is because parties could always contract for a type of appellate procedure. The difference is that these rules provide parties with a designated, certified body solely responsible for conducting arbitration appeals.