WHAT IS FAA “ARBITRATION”?

FEBRUARY 2013

What is the meaning of “arbitration?”  This is not simply a philosophical question, but a serious legal issue that can have significant consequences in a particular case.

The issue arose recently in the Second Circuit, in the case of Bakoss v. Certain Underwriters at Lloyds of London, ___ F.3d ___ (2nd Cir. 2013) (Decided January 23, 2013).  The case involved a Certificate of Insurance which included language allowing each party to select a physician for the purpose of determining whether the insured was “totally disabled.”  In the event the two physicians disagreed, they were to “[jointly] name a third Physician to make a decision on the matter which shall be final and binding.”  The issue before the court was whether the third-physician clause was an arbitration agreement and thus covered by the Federal Arbitration Act.

The court first decided whether to follow the line of cases ruling that the definition of “abitration” should be resolved by federal common law or the competing line holding that the issue was one of state law.  The court noted that the Sixth,Tenth, and First Circuits applied federal law while the Fifth and Ninth Circuits applied state law, and sided with the circuits who decided the issue by relying on federal common law.  Under federal law “[a]n adversary proceeding, submission of evidence, witnesses and cross-examination are not essential elements of arbitration” and “[i]f the parties have agreed to submit a dispute for a decision by a third party, they have agreed to arbitration.”   AMF Inc. v. Brunswick Corp., 621 F.Supp. 456, 460 (E.D.N.Y. 1985).  Accordingly, the court concluded that the third-physician clause was indeed an arbitration agreement.

The Eleventh Circuit does not yet seem to have squarely ruled on the question of which law applies.  However, in Advanced Bodycare Solutions, LLC v. Thione International, Inc., 524 F.3d 1236 (11th Cir. 2008), the court had to decide whether a contract providing that disputes “shall be submitted to non-binding arbitration or mediation” was an agreement to arbitrate.  The court acknowledged that the Eleventh Circuit had not yet annunciated a test for resolving whether a particular dispute resolution procedure is FAA “arbitration,” but discussed in some detail the AMF case and a Tenth Circuit case, (both of which applied federal law) and stated that “submitting a dispute to a third party for a binding decision is quintessential ‘classic abitration.’”

The court concluded that it would resolve disputes about whether a dispute resolution method is FAA arbitration by looking for “common incidents [of] classic arbitration,” including (1) an independent adjudicator, (2) who applies substantive legal standards, (3) considers evidence and argument (however formally or informally), and (4) renders a decision that purports to resolve the rights and duties of the parties (typically by awarding damages or equitable relief).  The court said that the presence or absence of any of these factors will not always be determinative.

Turning to the specific issue before it, the court held that “[i]f a dispute resolution procedure does not produce some type of award that can be meaningfully confirmed, modified, or by a court upon proper motion, it is not arbitration within the scope of the FAA.”  524 F.3d at 1239.  Because  mediation does not purport to adjudicate a case, it is not arbitration, and a provision that allows the parties to choose between mediation and arbitration, at the aggrieved party’s option, is not an arbitration agreement.  The court reserved “for another day” the issue of whether non-binding arbitration, standing alone, is within the scope of the FAA.

In the author’s opinion, the nature of the court’s discussion in Advanced Bodycare Solutions, and that court’s apparent approval of the AMF, Inc. case, strongly suggests that the Eleventh Circuit has decided (although has not expressly held) that the meaning of FAA “arbitration” should be resolved by federal common law.