Dispute Resolution The Newsletter for Conflict Resolution Neutals and Attorneys Published by the Dispute Resolution Section of the Tennessee Bar Association, December 2001
THE ART OF ARBITRATION CLE COURSE
PAUL LURIE’S LATEST E-MAIL REPORT In case you are reluctant to dismiss a non-meritorious arbitration claim, here is authority that you can do that. Paul Lurie, a Partner with Schiff, Hardin & Waite, a Chicago firm with offices in N. Y., D. C. and Ireland, is a noted AAA mediator and Large Complex Case arbitrator and sends e-mails to a list of official American Arbitration Association neutrals. He offered to send us the same information. He sends an e-mail only when there is something interesting to report. Here’s his latest: Even at a preliminary stage, NASD arbitrators may dismiss with prejudice. Sheldon v. Vermonty, --- F.3d ---, 2001 WL 1338399, 2001 U.S. App. LEXIS 23624 (10th Cir. 2001). During a telephonic hearing, an arbitration panel granted defendant's motion to dismiss plaintiff's claims with prejudice for failure to state a claim. Plaintiff claims that the NASD's Procedural Rules and the Code of Arbitration requires the arbitration panel to permit discovery and hold evidentiary hearings. The 10th Circuit held that there is no express provision in the procedural rules that prohibits an arbitration panel from dismissing claims with prejudice. In fact, the rules allow the arbitrator to award any relief that would be available in a court of law. As long as the dismissal does not deny a party of fundamental fairness (which includes only notice, opportunity to be heard, and to present relevant and material evidence) the arbitrator may grant this type of relief. Lurie thanked Charlie Rumbaugh, a California attorney and neutral, for the cite. STABILITY VS. CHANGE Mediating Dangerously: The Frontiers of Conflict Resolution By Kenneth Cloke Published by Jossey-Bass (http://www.josseybass.com) this year, Cloke’s new book addresses the dual risks of mediation to the participants: the futility of trying to keep the status quo ante with all its pains and problems versus undertaking the dangers and uncertainties of changing. Cloke says that "to resolve any conflict, we need to trust that what will happen if we discuss it is better than what will happen if we do not." He provides about 18 different definitions of conflict to help the parties redefine their conflict at a deeper level. His stated approach is a modified transformational approach whereby he uses both facilitation and evaluation to help the parties get over or around roadblocks. Yet he is quite concerned about the notion of "neutrality," believing that the parties frequently see neutrality as a legalistic mask for partiality or indifference. He believes that the parties want the appearance of neutrality. To the extent that mediation is not successful, Cloke thinks it’s in part because we mediators try too hard to put an end to conflict, to trade justice for harmony, pacification for peace, settling vs. resolving conflicts. The risk of aggravating conflict by encouraging parties to act on their values, he believes, is offset by the opposite danger of slipping into avoidance and condonation. It is a truism in mediation that we do not negotiate values. Instead, we try to promote tolerance, and use role reversal and reality testing, among other tools, in order to "get around" value disputes. Yet experience tells us that there inevitably are values — like facts and law, positions, and relationships — in every dispute. What Cloke seems to be saying is that tactical compromise is all right, but not strategic compromise ("settlement for settlement’s sake"), and that sometimes it is more productive to escalate the level of conflict, i.e., to mediate dangerously. Cloke’s ensuing chapters examine this theme from two perspectives — Chapters 1-10 -- internal (what limits us as mediators in effectiveness) -- and Chapters 11-20 -- external (the systems and structures that restrict us). For lawyers, Chapter 14, "What’s Better Than the Rule of Law," is a must read. He provides an A to Z list of what’s wrong with the Law, and lists a number of non-adversarial roles for lawyers. I also particularly enjoyed Chapter 3, "Honesty and Empathy: Speaking the Unspeakable." He describes ways to encourage deep levels of honesty, overcoming the fear of honesty, "dropping the pose and cutting the act," and designing honest questions. In many ways, Cloke’s is an idealistic and liberal approach to mediation that some might think is too "new age" for the kinds of disputes they mediate or serve as advocates. Yet many others besides myself have seen transformational outcomes in all kinds of disputes because of honest trialogue. Just a few days ago, for example, a person who had been demonized by one party because of misinformation was transformed to a person of worth because of direct and honest discussion. In another recent case, third parties were interjecting themselves and their problems into a dispute. Once we got clear of the interferences, the parties were able to have valid communications and resolve their conflict. Has anyone read Narrative Mediation: A New Approach to Conflict Resolution by John Winslade and Gerald Monk? I’ve read the first chapter and found it interesting. But the approach is controversial. As I understand it, it is based on a therapeutic approach, and typically entails separate sessions initially. Check out reviews and other information on the publisher’s website, http://www.josseybass.com. Reviews are also available at http://www.mediate.com, http://www.amazon.com., and, as I recall, in some periodicals. PARENTING PLAN INFO ON SUPREME COURT WEBSITE If you haven’t visited it lately, check out http://www.tsc.state.tn.us and go to Programs, then Parenting Plan. A complete set of forms is provided in Spanish and English. The forms on this site include some good materials for your clients, e.g., Parents Guide to Developing the Parenting Plan, Parents Guide to Parent Education Program, Permanent and Temporary Plans forms, and Parents’ Guide to Mediation. Note that some courts use different forms. There are also a forms for lawyers, e.g., Lawyers’ Guide to Mediation, Motion to Preempt Educational Program, Motion for Pro Bono Mediation, and various orders; and forms for mediators. ARBITRATORS’ POWERS TO ISSUE SANCTIONS IN SECURITIES ARBITRATIONS By Scott T. Beall and Rebecca Davis Of Tate, Lazarini & Beall, PLC Arbitrators have broad and inherent powers to control their proceedings and to impose sanctions on parties that refuse to comply with their orders. The range of sanctions include but are not limited to (i) dismissing a claim, defense or proceeding, (ii) precluding a party from introducing evidence, and/or (iii) awarding monetary sanctions and drawing adverse inferences against a recalcitrant party. A. Dismissing Claim, Defense Or Proceeding The dismissal of a claim, defense or proceeding with prejudice is reserved for the most abusive behavior and requires two predicate acts: (i) a willful and intentional material violation of a specific panel order, and (ii) prior disregard of lesser sanctions. See NASD Rule 10305(b) and NYSE 604(b) Arbitrators may go so far as to entirely dismiss an arbitration with prejudice for egregious discovery misconduct by a party: If arbitrators are not permitted to impose the ultimate sanction of dismissal on plaintiffs who flagrantly disregard rules and procedures put in place to control discovery, arbitrators will not be able to assert the power necessary to properly adjudicate claims. This is a case where plaintiffs [sic] blatant disregard for the rules interfered with the Panel’s ability to arbitrate the claims and was therefore properly dismissed. Parties in arbitration must understand that willful violations of the discovery process can have severe consequences. They must also be aware that arbitrators have the power to enforce their directives. First Preservation Capital, Inc. v. Smith Barney, Harris Upham & Co., Inc., 939 F. Supp. 1559, 1565 (S.D. Fla. 1996); see also Kletstad v. Daugherty Dawkins Strand Yost, NASD No. 92-0283 (1992)(dismissing claimant’s entire case before the hearing for claimant’s failure to provide specificity as to his claims as ordered by the Panel); Tacher v. Parsons, slip opinion 98 CV 4482 (S.D.N.Y. May 5, 2000), affirming in part Parsons v. Kensington Wells Inc., NASD No. 96-05310 (after repeated violations of discovery orders, Panel struck all of the respondents’ defenses on issue of liability and precluded respondents from cross-examining witness on any liability issues). See also David E. Robbins, Securities Arbitration Procedure Manual § 9-8 (4th ed. 2000) (discussing arbitrators’ power to dismiss claims as a sanction and citing to Credit Suisse First Boston Corp. v. Patel (Index No. 120490/98), N.Y.L.J. Aug. 18, 1999, p. 23, in which the New York Supreme Court ruled that arbitrators have such authority). The NASD Arbitrator’s Manual (January 2001, p. 21) specifically recognizes the power of a panel to dismiss with prejudice a proceeding in the face of discovery abuse by a party, providing in pertinent part that: Subsequent to the issuance of a subpoena or order for the production of documents or information, the arbitrator(s) may be advised that the party to which the order was directed has not complied with its terms. Arbitrators have wide discretion in addressing such noncompliance. For example, the arbitrator(s) may draw an adverse inference against any party who did not comply with the order; assess adjournment fees, forum fees, or other costs and expenses, including attorneys’ fees, caused by noncompliance; initiate a disciplinary referral in instance of noncompliance by a member firm or associated person of a member firm; or take other appropriate action to expedite the proceedings or assist any party to develop fully its case. In extraordinary cases the arbitrators may dismiss a claim, defense or proceeding with prejudice as a sanction for willful or intentional failure to comply with an order of the arbitrators, if lesser sanctions have proven ineffective. (emphasis added) The NASD and NYSE Rules require parties to timely file an Answer specifying all available defenses and relevant facts thereto that will be relied upon at the hearing The failure of a respondent to timely provide specific defenses and relevant facts may provide the basis for a preclusion motion. NASD Rule 10314(b)(2)(A) states that A Respondent, Responding Claimant, Cross-Claimant, Cross-Respondent, or Third-Party Respondent who pleads only a general denial as an Answer may, upon objection by a party, in the discretion of the arbitrators, be barred from presenting any facts or defenses at the time of the hearing. Arbitrators are also permitted to preclude a party from presenting a defense at the hearing when such party fails to comply with deadlines for filing Answers to Statements of Claim or to Counterclaims. For example, the NASD Arbitrator Training Guide (1996) provides as follows: Rule 10314(b) of the Code requires respondents to answer allegations within 20 business days [now 45 calendar days] of receiving a statement of claim. If a respondent misses the deadline, arbitrators can bar him or her from presenting defenses at the hearing. The Training Guide, however, emphasizes that preclusion as a sanction should be awarded only in cases of extreme bad faith, stating in part as follows: The panel determination on whether to bar late defenses is based on equitable factors, including: • Reason for the delay • Length of the delay • Whether the late filing prejudices claimant’s ability to be prepared for the hearing In general, the panel will deny a motion to preclude an answer. Courts are not fond of forfeitures on technical grounds. Unless there is extreme bad faith on behalf of the respondent, the panel should postpone the hearing and may assess related costs and fees against the responsible party. B. Precluding Evidence The NASD and NYSE rules require parties, at least 20 days prior to the commencement of the hearing, to exchange documents expected to be introduced at the hearing and to identify witnesses intended to be called at the hearing. Failure to timely comply with these rules may result in a sanction precluding a party from introducing documents or witness testimony. NASD Rule 10321(c) provides: At least twenty (20) calendar days prior to the first scheduled hearing date, all parties shall serve on each other copies of documents in their possession they intend to present at the hearing and shall identify witnesses they intend to present at the hearing. The arbitrators may exclude from the arbitration any documents not exchanged or witnesses not identified. This paragraph does not require service of copies of documents or identification of witnessess which parties may use for cross-examination or rebuttal. The NASD Arbitrator’s Manual (January 2001, p. 23) urges arbitrators to be guided by "concepts of fairness" in considering preclusion motions and alternatively suggests that the panel can "exclude documents not exchanged or identified, or witnesses not identified", or "adjourn the hearing to afford the disadvantaged party a fair opportunity to examine and evaluate the documents" that were untimely provided and assess "the noncomplying party with costs and expenses that arose because of the postponement." C. Assessing Monetary Sanctions and Drawing Adverse Inferences The imposition of lesser sanctions, usually involving monetary penalties, is specifically recognized in NASD Rule 10305(b) and NYSE Rule 604(b), and typically involves abusive discovery tactics followed by non-compliance with a panel’s order. In recent years, the NASD has become pro-active in encouraging panels to curb discovery abuse. For example, in September 1999, the Securities and Exchange Commission approved the use of The Discovery Guide in NASD arbitrations. In NASD Notice To Members 99-90, which adopted The Discovery Guide, the NASD specifically encouraged panels to impose sanctions on parties for failing to cooperate in discovery: The arbitration panel should issue sanctions if any party fails to produce documents or information required by a written order, unless the panel finds that there is "substantial justification" for the failure to produce the documents or information. The panel has wide discretion to address noncompliance with discovery orders. For example, the panel may make an adverse inference against a party or assess adjournment fees, forum fees, costs and expenses, and/or attorneys’ fees caused by noncompliance. In extraordinary cases, the panel may initiate a disciplinary referral against a registered entity caused by noncompliance. In extraordinary cases, the panel may initiate a disciplinary referral against a registered entity or person who is a party or a witness in the proceeding, or may, pursuant to Rule 10305(b), dismiss a claim, defense or proceeding with prejudice as a sanction for intentional failure to comply with an order of the arbitrator(s) if lesser sanctions have proven ineffective. Consistent with the directive in NASD Notice To Members 99-90, it is not uncommon for panels to draw an adverse inference against parties or impose significant monetary sanctions on parties who fail to cooperate in discovery, including awarding discovery costs, fines, forum fees and attorneys’ fees. See, e.g., Teixeira v. Hunter Int’l Securities, Inc., NASD Case No. 96-02581 (drawing adverse inference against party for failure to produce documents ordered to be produced); Chiu v. TD Waterhouse Investor Services, Inc., NASD Case No. 00-04485 (specifically finding Section VIII of NASD Notice to Members 99-90 as support for monetary sanctions); Hanz v. National Securities Corp., NASD Case No. 99-02419 (sanction of $100 per day for 114 days for violating discovery order); Hamzeh v. Bear Stearns Securities Corp., NASD Case No. 99-0959 ($50,000 sanction for failing to comply with discovery deadlines); McDaniel v. Bear Stearns & Co., NASD Case No. 97-00497 (panel refused admission of documents produced after discovery deadline and imposed $25,000 monetary sanctions for other discovery abuse); Waddle v. L.T. Lawrence & Co., 1998 U.S. Dist. LEXIS 20006 (N.D. Ill. Dec. 16, 1998) (confirming NASD arbitration award sanctioning Respondents in the amount of $10,000 for failure to provide discovery); Alloy v. Burke, NASD Case No. 96-01982 ($5,000 monetary sanctions for discovery abuse). See also Jeffrey L. Liddle & Ethan A. Brecher, Discovery Practice and Pitfalls, in Securities Arbitration 2000 (PLI) (discussing NYSE and NASD cases in which arbitration panels sanctioned discovery misconduct). Similar to the requirements for the imposition of severe sanctions, a violation of a specific written panel order regarding discovery is generally required before lesser monetary sanctions will be imposed. See NASD Notice To Members 99-90, Section VIII. In addition to sanctioning parties that fail to cooperate with discovery, arbitrators also have the power to impose monetary sanctions when parties refuse to participate in or abuse the arbitration process. See, e.g., Ravenscroft v. Dennis Fitz Dixon, Simmons & Bishop Co., NASD Case No. 00-04129 (awarding $2,000 monetary sanctions for party failing to appear at hearing); Podoba v. Salomon Smith Barney, NASD Case No. 00-01797 (awarding monetary sanctions for frivolous allegations); Kavanagh v. Montrose Capital Management, Inc., NASD Case No. 00-05194 (awarding $15,000 monetary sanctions against parties and their counsel for submitting intentionally false testimony); Kotakis v. Gruntal & Co., 2000 U.S. Dist. LEXIS 10094 (N.D. Cal. July 11, 2000) (confirming NASD arbitration award dismissing plaintiff’s claims and awarding sanctions against plaintiff in amount of $800). Moreover, arbitration panels have also awarded respondents substantial costs and attorney’s fees as a sanction for claimants initiating legally and/or factually baseless claims. For example, in Thomas v. Prudential Securities, Inc., 921 S.W.2d 847, 848 (Tx. Ct. App. 1996), the court affirmed an NYSE arbitration panel’s award of $96,000 in witness and attorney’s fees to Respondents where the arbitration panel rejected plaintiffs claim that Prudential "‘preyed’ upon [Claimants] by placing them in an investment situation unsuitable for their age and financial acumen." Id. See also Duke v. Marshall & Co., NASD Consolidated Case Nos. 90-00460, 90-0461, 90-00116 (holding claimants liable to respondents for an award of attorneys’ fees in the amount of $543,747.50 and out of pocket expenses in the amount of $90,269.77 for a total of $634,017.27); Finstad v. Shearson Lehman Brothers, Inc., NYSE No. 95-0102 (granting "no award to Claimant as Claimant failed to meet his burden of proof with respect to the claims alleged" and ordering claimant to pay "Shearson Lehman Brothers, Inc., the sum of $100,0000 in attorney’s fees as provided by Rule 11 of the Federal Rules of Civil Procedure"). In short, parties who abuse the arbitration process and fail to comply with arbitrators’ orders face a range of sanctions from dismissal of their claims and/or defenses with prejudice to significant monetary sanctions. Endnotes: 1. This article specifically addresses arbitrators’ powers in NASD and NYSE arbitrations. 2. See Forsythe Int'l v. Gibbs Oil Co., 915 F.2d 1017, 1023 n. 8 (5th Cir. 1990)("Arbitrators may ... devise appropriate sanctions for abuse of the arbitration process"); First Preservation Capital v. Smith Barney, Harris Upham & Co., 939 F. Supp. 1559, 1565 (S.D. Fla. 1996) (explaining "the great discretion arbitrators have over the proceedings" and the power to sanction "plaintiffs who flagrantly disregard rules and procedures put in place to control discovery"); Bigge Crane & Rigging Co. v. Docutel Corp., 371 F. Supp. 240, 246 (E.D.N.Y. 1973)(same); Pisciotta v. Shearson Lehman Bros., 629 A.2d 520 (D.C. 1993), cert. denied, 114 S. Ct. 690 (1994)(same). 3. NASD Rule 10305(b) and NYSE Rule 604(b) state that: The arbitrators may dismiss a claim, defense, or proceeding with prejudice as a sanction for willful and intentional material failure to comply with an order of the arbitrator(s) if lesser sanctions have proven ineffective. 4. See NASD Rules 10302 and 10314 and NYSE Rules 601(d) and 612(c). 5. NYSE Rule 619(c) is substantively similar and also requires service of the document and witness lists on the NYSE Director of Arbitration. TBA ADR SECTION’S EXECUTIVE COUNCIL MEETING The Dispute Resolution Section of the Tennessee Bar Association held its Executive Council meeting by conference call on December 4th. Potential affiliations issues were tabled as premature. We discussed the upcoming Art of Arbitration CLE program, its handouts and speaker materials. The Section Chair, David Taylor, agreed to contact Jan Walden, the Section’s CLE chair, who was not present regarding plans for the Spring conference. IT WAS ALSO NOTED THAT ATTORNEYS WHO ARE RECEIVING THE NEWSLETTER ARE ENCOURAGED TO JOIN THE DISPUTE RESOLUTION SECTION. There are benefits to be gained from membership for advocates as well as neutrals. WHEN IS EVALUATIVE TOO EVALUATIVE? In the Securities Arbitration Commentator, Vol XI, No. 12, (July 2001) at pp. 6-7, E. Scott Douglas describes a hypothetical conversation between two mediators discussing the question for mediators and attorneys, "When is Evaluative Too Evaluative?" Also, read "Give and Take," an article by Martin E. Latz in the ABA Journal for December 2001 at page 66. Each of these articles gives a scary example of mediator conduct that is excessively evaluative. NASHVILLE CONFLICT RESOLUTION CENTER’S VOLUNTEER MEDIATION TRAINING The Nashville Conflict Resolution Center (NCRC) is offering its next Volunteer Mediator Training in early February. Participants learn and use valuable mediation skills to help disputants resolve their conflicts themselves. NCRC mediators work with Nashville’s courts, businesses, and residents to achieve resolution in a variety of civil, family, and victim-offender conflicts. Training fee is waived for participants who volunteer their time in NCRC's General Sessions Court Civil Mediation Program. Rule 31 mediators are encouraged to inquire. If you or someone you know who is interested in becoming a mediator, and for more information, contact De’an Bass, NCRC Executive Director, at (615) 242-9272 or de_anbass@hotmail.com. A Personal Note: I helped with and participated in the first NCRC training sessions in September — it’s two weekends — and it was an exceptional experience on two counts. First, it was a joy to work with those who were new to mediation, and, second, it was a great training refresher for me. Since then I’ve conducted a number of volunteer mediations at General Sessions court, and found it rewarding both in terms of helping parties resolve their disputes and in terms of practicing my mediation profession. Nashville’s is the newest conflict resolution center. Let us know what is going on in your communities in other parts of the state. |
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