Anne’s attorney, Bob, carefully reviewed an arbitration agreement for his
client, Anne, before she invested more than $200,000 in a mutual fund. Bob
had heard that big companies inserted arbitration provisions into their customer
agreements to preclude their customers from any shot at justice when the big
company breached the agreement. Not so this time. Yes, the agreement
said that Anne gave up her right to a jury trial. But that was okay with
Bob. He liked arbitration because he knew it could be a less-costly and
more-expeditious alternative to litigation.
After Anne’s investment was virtually wiped out – the mutual fund company
invested the bulk of Anne’s monies in a company called Bear Stearns a couple of
months ago – Bob filed an arbitration demand against the mutual fund company,
asserting negligence, fraud and a host of other interesting common law
claims. The arbitration process did not cost a lot and lasted a mere three
months, from the filing of the arbitration demand to the arbitrator’s
decision. Um, Anne lost on every aspect of every claim.
But that was not the end of the matter. Bob prepared a well-researched
petition to vacate the award. Reason: the arbitrator slept through most of
the hearing. Bob’s compelling brief cited a recent decision in which a
trial court granted a petition to vacate an arbitration award because the
arbitrator “fell asleep intermittently throughout both days of the hearing,
which included sleeping during the testimony of several witnesses.” A.
Perrotta Contracting Inc. v. Four Brothers, 2 Pa. D. & C.
5th 225, 226 (C.P. 2007).
Anne’s arbitration hearing lasted one day, not two. However, the
arbitrator slept more than just intermittently; he slept all afternoon.
Bob concluded that he had a winner. He told Anne that, after the court
overturns the arbitration award, she would have a second bite at the apple, in a
brand new hearing. The brand new arbitrator would be awake and alert,
especially when Bob presented lots of power point slides in support of Anne’s
claims.
Bob appropriately filed Anne’s petition in state court, not federal court,
because there was no federal question or diversity of citizenship. Going
into state court delighted Bob because he believed that a Judge there would
sympathize with Anne.
Bob correctly recognized that the Federal Arbitration Act, 9 U.S.C. § 9 et
seq. (the “FAA”), governs because Anne had filed her claims under National
Association of Securities Dealers (“NASD”) rules. As Bob properly
concluded, the FAA has a three-month time limit to file a petition to overturn
an arbitration award. Bob made sure he timely filed the petition by filing
it on the 87th day after the sleepy arbitrator’s award.
Less than a week later, Bob received an envelope from the Court. Rather
soon, he thought, for an order vacating the arbitration award, particularly
because the mutual fund had yet to file its response to Bob’s petition.
Had he filed the petition in the wrong office? Had he forgotten to attach
a required document to the petition? Bob collapsed into the nearest chair
when he read the Order, which said all too simply, “upon consideration of
petitioner’s petition to vacate arbitration award and without awaiting
respondent’s response, the Court sua sponte dismisses the petition as
untimely.”
Surely, Bob thought, the Court was mistaken. After all, the arbitration
agreement between Anne and the mutual fund company stated that the parties had
contracted to arbitrate their claims under the FAA, which has a three-month time
limit to seek to vacate an arbitration award. If a different time limit
did apply, the time to challenge an arbitration award would vary, based on the
procedural law of the state where the petition was filed. Talk about a
lack of uniformity – parties seeking to challenge arbitration awards subject to
NASD rules would have different time limits to file their petitions; the time
limit would depend on the law of the state where the party filed the
petition.
After spending a few minutes doing legal research, Bob was surprised to find
that a recent Pennsylvania Supreme Court decision, Moscatiello v.
Hilliard, 939 A.2d 325 (Pa. 2007), demonstrated that he had it all
wrong. Here is what the Pennsylvania Supreme Court said:
- Pennsylvania has a thirty-day time limit to
seek to overturn an arbitration award. This time limit applies in both
common law arbitration, 42 Pa. Cons. Stat. Ann. § 7314(b), and statutory
arbitration, id.at § 7342(b).
- Federal law preempts conflicting state law only if the latter “stands as an
obstacle to the accomplishment and execution of the full purposes and objectives
of Congress.”
- The thirty-day limit in Pennsylvania to contest an arbitration award –
a procedural rule – does not undermine federal policy. Therefore, the FAA
does not preempt state law on the issue of the time limit to challenge an
arbitration award.
- The Pennsylvania
thirty-day time limit governs because “it more quickly
renders arbitration awards final.”
As he drafted a letter to his malpractice carrier – he wanted to ensure that
he timely informed his carrier of Anne’s to-be-filed malpractice claim – Bob
summarized his strategy for the next time he loses an arbitration claim subject
to the NASD:
- Read the arbitration agreement to determine the governing law.
- Don’t pay any attention to the preceding rule if you seek to overturn an
arbitration award and you have to figure out whether federal or state procedural
rules apply.
- Apply the applicable state procedural rule if you file your petition in
state court. Apply the applicable federal procedural rule if you file your
petition in federal court.
- Don’t pay any attention to the preceding rule if the state procedural rule
“stands as an obstacle to the accomplishment and execution of the full purposes
and objectives of Congress.” Do pay attention to the preceding rule if the
state procedural rule does not “stand as an obstacle to the accomplishment and
execution of the full purposes and objectives of Congress,” especially if
application of the state procedural rule would better reach the result that the
FAA’s rules sought to achieve.
Got it?
