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ARBITRATION/MEDIATION/ADR UPDATE Talmage Boston Winstead Sechrest & Minick P.C. 1201 Elm Street 5400 Renaissance Tower Dallas, Texas 75270 214/745-5400 STATE BAR OF TEXAS 18 TH ANNUAL LITIGATION UPDATE INSTITUTE January 11-12, 2002 San Antonio, Texas Chapter 17

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Page 1: ARBITRATION/MEDIATION/ADR UPDATE - … UPDATE Talmage Boston Winstead Sechrest & Minick P.C. 1201 Elm Street ... • Regular guest columnist and book reviewer for …

ARBITRATION/MEDIATION/ADR UPDATE

Talmage BostonWinstead Sechrest & Minick P.C.

1201 Elm Street5400 Renaissance Tower

Dallas, Texas 75270214/745-5400

STATE BAR OF TEXAS

18TH ANNUAL LITIGATION UPDATE INSTITUTE

January 11-12, 2002San Antonio, Texas

Chapter 17

Page 2: ARBITRATION/MEDIATION/ADR UPDATE - … UPDATE Talmage Boston Winstead Sechrest & Minick P.C. 1201 Elm Street ... • Regular guest columnist and book reviewer for …

Talmage BostonWinstead, Sechrest & Minick

Shareholder, DallasT: (214) 745-5400F: (214) 745-5390

[email protected] Practice Area: Litigation

UNIVERSITY OF TEXASJD, 1978

BA cum laude, Economics, 1975, Phi Beta Kappa

• Board Certified in Civil Trial Law and Civil Appellate Law, Texas Board of Legal Specialization;• Current member of Council (ten members total) and Past Chairman (1993), Business Litigation

Section, Dallas Bar Association;• Member of Council (fifteen members total), Litigation Section, State Bar of Texas;• Active commercial litigator and mediator.

Recent Speaking Activities• Featured speaker at Advanced Civil Trial Law Course, State Bar of Texas, September 1998 on

Non-Binding Summary Jury Trials;• Will be the featured speaker giving the "ADR Update" at the Litigation Update Seminar put on by

the Litigation Section of the State Bar of Texas, January 1999;• Moderator of program involving Texas' New Summary Judgment Rule given as a program jointly

sponsored by the Business Litigation Section of the Dallas Bar Association and the LitigationSection of the State Bar of Texas, March 1998;

• Featured speaker at State Bar of Texas Advanced Personal Injury Law Course, July 1997, "TheUse of Non-Binding Summary Jury Trials as a Necessary Settlement Tool";

• Featured speaker to Business Litigation Section of Dallas Bar Association on "RecentDevelopments in Texas Deceptive Trade Practices Act", December 1994.

Published opinionsCounsel of record in a broad variety of fifteen state and federal trial and appellate published opinionsinvolving a multitude of business litigation issues over the past twenty years as set forth below:

STATE COURT:1. Gillespie v. Fields, 958 S.W.2d 228 (Tex.App. - Tyler, Sept. 30, 1997) (No. 12-96-00268-CV) --

Case involved whether the "discovery rule" applied in a statute of limitations case.2. City of Dallas v. Villages of Forest Hills, L.P., 931 S.W.2d 601 (Tex.App. - Dallas, April 30,

1996) (No. 05-95-00368-CV) -- Case involved a private party's being able to enforce a bindingcontract with a city, even if such contract was not prepared and approved in compliance with thecity charter.

3. Matter of the Marriage of Banks, 887 S.W.2d 160 (Tex.App. - Texarkana, Sept. 20, 1994) (No.06-94-00049-CV) -- Case involved the enforceability of a settlement agreement reached atmediation which one party later attempted to revoke.

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4. Roark v. Stallworth Oil & Gas, Inc., 813 S.W.2d 492 (Tex., June 19, 1991) (No. D-0333) -- Caseinvolved pleading burdens in a summary judgment case as well as sufficiency of consideration fora contract involving oil and gas properties.

5. Roark v. Stallworth Oil & Gas, Inc., 811 S.W.2d 630 (Tex.App. - Ft. Worth, July 25, 1990) (No.2-89-142-CV) -- Case involved the legal sufficiency of deemed admissions.

6. Transwestern Pipeline Co. v. Horizon Oil & Gas Co., 809 S.W.2d 589 (Tex.App. - Dallas, Apr.23 1991) (No. 05-90-01549-CV) -- Case involved enforceability of an arbitration provision in agas purchase contract.

7. Audio Data Corp. v. Monus, 789 S.W.2d 281 (Tex.App. - Dallas, Jan. 18, 1990)(No. 05-90-00059-CV) -- Case involved what can and cannot be litigated in state court while undisclosedbankruptcy proceedings are pending (voidability vs. voidness issues).

8. City of Carrollton v. Duncan, 742 S.W.2d 70 (Tex.App. - Fort Worth, Nov. 25, 1987) (No. 2-86-128-CV) -- Case involved boundary disputes in trespass to try title action and evidenceadmissibility issues related to such.

9. Curtis Sharp Custom Homes v. Glover, 701 S.W.2d 24 (Tex.App. - Dallas, Nov. 4, 1985) (No.05-84-00455-CV) -- Case involved issue of enforceability and forecloseability of equitable lienagainst homestead where stolen money was used to make homestead improvements.

10. Jeanes v. Henderson, 688 S.W.2d 100 (Tex., Mar. 27, 1985) (No. C-3130) -- Case involvedsuccessful application of doctrines of res judicata and collateral estoppel preventing re-litigationof issues tried previously.

11. First Nat. Bank of Marshall v. Beavers, 619 S.W.2d 288 (Tex.Civ.App. - Texarkana, June 30,1981) (No. 8880) -- Case involved admissibility of evidence of net worth being presented to thejury in the context of the awarding of punitive damages.

12. First Nat. Bank of Marshall v. Beavers, 602 S.W.2d 327 (Tex.Civ.App. - Texarkana, June 10,1980) (No. 8777) -- Case involved acquisition of prescriptive easement using a succession ofpersons in a chain of title claiming by adverse possession.

FEDERAL COURT:1. Texas Commercial Business Systems, Inc. v. F.C.C., 898 F.2d 460 (5th Cir. (Tex.), Apr. 16, 1990)

(No. 89-1035) -- Case involved an expert economist's testimony on causation being disregardedbecause it lacked a rational basis.

2. Herr-Voss Corp. v. Delta Brands, Inc., 900 F.Supp. 34 (N.D.Tex., Aug. 31, 1995)(No. 3:92-CV-0891-P) -- Case involved patent infringement issues and application of doctrine of equivalentsand best mode defenses.

3. Old Stone Bank v. Fidelity Bank, 749 F.Supp. 147 (N.D.Tex., Oct. 9, 1990) (No. CV. A. 4-88-726-E) -- Case involved enforceability of obligations upon successor bank as to obligations whichhad been incurred by a predecessor bank prior to FDIC takeover.

Other• Author, Position paper on "Tort Reform", successful 1994 George W. Bush for Governor

Campaign.• Inducted into Texas Baseball Hall of Fame in 1997 as a Media Member.• Regular guest columnist and book reviewer for Dallas Morning News.

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TABLE OF CONTENTS

Page

I. ARBITRATION ISSUES..........................................................................................................................................1

A. Federal Arbitration Act .......................................................................................................................................1

1. In General ......................................................................................................................................................1

2. Restrictions of the FAA in the Employment Context ....................................................................................1

3. Availability of Injunctive Relief to Allow Arbitration Proceedings to go Forward.......................................2

4. Distinctions Between the FAA and the Texas General Arbitration Act.........................................................2

B. The Texas General Arbitration Act .....................................................................................................................2

1. 1997 Amendments. ........................................................................................................................................2

2. Matters Outside the Scope of the TAA. .........................................................................................................2

C. Frequently Litigated Arbitration Issues...............................................................................................................3

1. Is There an Agreement to Arbitrate?..............................................................................................................3

a. Agreement by Conduct ...............................................................................................................................3b. Evidentiary Considerations.........................................................................................................................3c. Fraudulent Inducement Defense .................................................................................................................3d. When an Arbitration Clause Isn't an Arbitration Clause: ...........................................................................3e. Arbitration Agreements May Bind Non-Parties to the Contract.................................................................3f. Agreement to Arbitrate Must be Stated with Certainty...............................................................................4

2. Is the Arbitration Agreement Unconscionable? .............................................................................................4

a. Legal Test for Whether Arbitration Provision in Employment Contract is Unconscionable......................4b. Unconscionability Determined by Arbitrator in FAA Cases ......................................................................4c. Unconscionability Related to Inequitable Burden of Costs ........................................................................4d. Unconscionability Decided by Judge in TAA Cases..................................................................................5e. Unconscionability Based on Ignorance of Contract's Terms .....................................................................5

3. What is the Scope of the Arbitration Agreement? .........................................................................................5

a. Meeting of the Minds..................................................................................................................................5b. No Vague References to Disputes to be Arbitrated ....................................................................................5

4. Does the Arbitration Agreement Need to be Supported by Consideration?...................................................6

5. Has Either Party Waived its Right to Arbitrate or Compel Arbitration?........................................................6

6. Does the Arbitration Procedure Violate Due Process? ..................................................................................7

7. Under What Circumstances Should an Arbitration Award be Vacated? .......................................................7

a. Texas Arbitration Act .................................................................................................................................8b. Federal Arbitration Act...............................................................................................................................8c. Evident Partiality ........................................................................................................................................8d. Sate Law: Where There's Been an "Evident Miscalculation of Figures"...................................................9e. State Law: Where Arbitrator Exceeds Powers...........................................................................................9f. Federal Law: Manifest Disregard of the Law.............................................................................................9

8. When Can a Party Appeal an Adverse Ruling on Arbitrability?....................................................................9

9. Miscellaneous New Arbitration Issues: .......................................................................................................10

a. Enforceability of Arbitration Provision in Repudiated Contract ..............................................................10

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b. Supreme Court Jurisdiction to Hear Arbitration Disputes ........................................................................10c. Securities Dealer Required to Arbitrate Title VII Discrimination Claim -- Employee Clearly Right to

Litigate .....................................................................................................................................................11d. In Collective Bargaining Agreement Where Union Negotiated Comprehensive Arbitration Provision,

Employee Not Bound, and Can Litigate Title VII Claims .......................................................................11e. Enforceability of Arbitration Agreements in Bankruptcy Court...............................................................11f. Federal Courts Aren't Empowered to Assist Parties in International Arbitrations With Discovery..........11g. No Arbitration of Magnusson-Moss Warranty Claims.............................................................................11h. Normally No Arbitration of Disputes Over Contingent Fee Contracts.....................................................12i. Non-Parties to an Arbitration Proceeding May be Barred from Bringing Suit by Res Judicata Based on

What Occurred at Arbitration...................................................................................................................12j. Arbitration Can be Appropriate Mechanism for Resolving Validity of Mechanics' Liens........................12

II. MEDIATION ISSUES...........................................................................................................................................12

A. Objection to Court Ordered Mediation .............................................................................................................12

B. Confidentiality Erosion .....................................................................................................................................12

1. No Absolute Mediation Confidentiality or Privilege. ..................................................................................12

2. Mediator Testimony Admissible Regarding Alleged Duress or Coercion at Mediation..............................13

C. Federal Government Settlement Authority at Mediation ..................................................................................14

D. Enforcement of Written Settlement Agreements ..............................................................................................14

E. Mediation Ethics Issue in Mass Torts Cases .....................................................................................................15

F. New Mediation Twist – Collaborative Law in Family Law Cases ....................................................................15

III. NON-BINDING SUMMARY JURY TRIALS ....................................................................................................16

A. The Movement in Texas State Courts ...............................................................................................................16

1. Dallas ...........................................................................................................................................................16

2. Houston........................................................................................................................................................16

3. Other Texas Forums for SJTs. .....................................................................................................................16

4. Caselaw on Confidentiality..........................................................................................................................16

B. SJTs in Texas Federal Courts ............................................................................................................................17

IV. FEDERAL LAW UPDATE: THE ALTERNATIVE DISPUTE RESOLUTION ACT OF 1998........................17

V. ETHICAL ISSUES ................................................................................................................................................17

A. No Requirement that Lawyers Tell Clients of Alternatives to Litigation. ........................................................17

B. Potential Malpractice Claim Against an Attorney Who Drafted an Unenforceable Arbitration Clause.. .........17

C. Potential Malpractice Claim Against an Attorney Who Allegedly Did Not Tell the Client That ArbitrationAwards Were Unappealable. Id. .......................................................................................................................17

D. A proposed ABA Model Rule of Professional Conduct Would Require a Lawyer-Mediator to TellUnrepresented Parties That the Lawyer-Mediator is not Representing any Party to the Proceeding. . .............17

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I. ARBITRATION ISSUES

A. Federal Arbitration Act

1. In General

The Federal Arbitration Act, 9 U.S.C.A. 1et seq. (West 1999), provides a strong foundationfor employers and business entities to addressdisputes arising in transactions involving"interstate commerce" to the fullest extentpermitted by the Congress' Commerce Clausepowers. Allied-Bruce Terminix Cos. Inc. v.Dobson, 115 S. Ct 834, 836 (1995). The TexasSupreme Court reaffirmed this stand in In re: L &L Kempwood Associates, L.P. 9 S.W.3d 125 (Tex.1999), holding that the FAA applied to "anycontract affecting commerce, as far as theCommerce Clause of the United State Constitutionwill reach." Id. at 127. Similarly, the case of InRe: Profanchik, 31 S.W.3d 381 (Tex.App. –Corpus Christi, 2000, no pet.) held that in anemployment contract involving two Texasresidents in which their dispute centered aroundownership interest in a Texas company, the FAAgoverned since the company in question hadsignificant contracts in many states and wastherefore engaged in a business that effectsinterstate commerce.

Thus, the scope of the FAA extends to mostcommercial disputes (since most involve interstatecommerce) and the Act preempts any inconsistentstate laws due to the effect of the SupremacyClause of the United States Constitution.However, consistent with general preemptiondoctrine, the Fifth Circuit has held that the FAAdoes not preempt state arbitration rules as long asthe state rules do not undermine the goals andpolicies of the FAA. ASW Allstate Painting andConstruction Company v. Lexington InsuranceCompany, 188 F.3d 307, 310 (5th Cir. 1999).Regardless of traditional notions of the effect ofpreemption, parties may contract to have theirdesired choice of law (substantive or procedural)which will be enforced, unless inconsistent withthe FAA. Doctor's Assoc., Inc. v. Casarotto, 116S.Ct. 1652 (1996).

2. Restrictions of the FAA in theEmployment Context

The FAA does not apply to contracts ofemployment for certain types of employees –– inparticular "seamen, railroad employees or anyother class of workers engaged in foreign orinterstate commerce." 9 U.S.C. 1 (1970). Thisprovision has been interpreted to exempt workersin the transportation industry, or workers engagedin the actual movement of goods in interstatecommerce. Circuit City Stores, Inc. v. Adams, 121S.Ct. 1302 (March 21, 2001). In the Circuit Citycase, the employee who sued Circuit City wasdetermined by the United States Supreme Courtnot to be a transportation worker and therefore hisemployment agreement was not excluded from theFAA, and his discrimination claim was subject toarbitration. The Circuit City case is certainlyconsistent with the trend among the majority ofcourts is to interpret this exclusion narrowly inlight of the strong federal policy favoringarbitration. Cole v. Burns International SecurityService, 105 F.3d 1465, 1470 (D.C. Cir. 1997).

In Rojas v. TK Communications, 87 F.3d 745,748 (5th Cir. 1996), the Fifth Circuit held that itwas joining with the majority of other courts thathave addressed the issue and concluded that Sec. 1of the Act is to be given a narrow reading, with thecourt noting that Congress could have limited thelanguage to state that nothing herein shall apply toany contract of employment had it intended toexclude all contracts of employment from FAAcoverage.

Texas state courts have applied the FAA tomost employment contracts and consistent withthe Fifth Circuit, have adopted a narrowinterpretation of the exclusion language. RussBerry & Company, Inc. v. Gant 998 S.W.2d 713,715 Tex. App. -- Corpus Christi 1999, nopetition); Merrill Lynch Pierce Fenner v.Macullum, 666 S.W.2d 604, 610 (Tex. App.—Houston [14th District] 1984, writ ref. n.r.e.).However, interstate commerce was notsubstantially affected so as to trigger theapplication of the FAA "when a party fromanother state hires a party in Texas to do repairs onfixed real property in Texas." KempwoodAssociates, supra, 993 S.W.2d at 877.

In the case of BWl Companies v. Beck, 910S.W.2d 620 (Tex. App.-- Austin 1995, orig. pro.),the Austin court applied the narrow interpretationof the FAA exclusion, and enforced the arbitrationprovision under the FAA because the employer

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was engaged in the landscaping business in severalstates and delivered its products across state lines.

3. Availability of Injunctive Relief to AllowArbitration Proceedings to go Forward

Federal Judge Sid Fitzwater recently granted apreliminary injunction to enforce contractualrights to stop solicitation of customers anddisclosure of confidential information in a pendingclaim subject to arbitration under the FAA.Merrill, Lynch, Pierce, Fenner & Smith, Inc. v.Chapman, 1998 U.S. Dist. LEXIS 17896 (N.D.Tex.).

4. Distinctions Between the FAA and theTexas General Arbitration Act

a. Under the TAA, based upon evidencepresented by the party seeking arbitration, it is upto the trial court to determine whether allconditions precedent have been satisfied so as toallow arbitration to commence; whereas under theFAA, it is the arbitrator who makes thatdetermination. Id. at 823-825; L & L KempwoodAssoc. v. Omega Builders, Inc., 972 S.W.2d 819(Tex.App--Corpus Christi 1998, no pet.); D.Wilson Const. v. Cris Equipment Co., 988 S.W.2d388 (Tex.App. -- Corpus Christi 1999).

b. Under FAA, Absent a ProcessBreakdown, Only Parties (Not Courts) SelectArbitrators is not final and can be challenged onlyby mandamus.

The Texas Supreme Court was recently facedwith a mandamus proceeding arising out of aparty's challenging the trial court's appointment ofa substitute arbitrator in an FAA arbitration. In reLouisiana Pacific Corp., 972 S.W.2d 63 (Tex.1998). The Court held that, under the FAA, a trialcourt is supposed to get involved in theappointment of arbitrators only when somemechanical breakdown in the arbitrator selectionprocess" occurs or when "one of the parties refusesto comply, thereby delaying arbitrationindefinitely." Id. at 64-65. Because the trial courterred in the appointment of a substitute arbitrator,the Supreme Court granted the mandamusapplication and directed the trial court to vacatethe appointment order.

c. Interlocutory Appeal

Under the Texas Act, a party may appeal thedenial of a Motion to Compel Arbitration.(Tex.Civ.Prac. & Rem. Code § 171.098). Underthe FAA, if a trial court grants a motion to compelarbitration and then dismisses the case, the order isfinal and appealable, whereas if the court grantsthe motion and stays further court proceedings,then the order is not final and can be challengedonly by mandamus. Green Tree Financial Corp. –Alabama v. Randolph, 121 S.Ct. 513 (2000). Theappellate courts have been instructed toconsolidate proceedings n the rare case where aparty is free to seek arbitration under either theFederal or the Texas Act. Consolidation of theproceedings allows a decision disposing of bothsimultaneously. In re: Valero Energy Corp., 968S.W.2d 916 (Tex.1998); In re: Anaheim AngelsBaseball Club, Inc., 993 S.W.2d 875, 877(Tex.App. – El Paso, 1999)

B. The Texas General Arbitration Act

1. 1997 Amendments.

The Texas legislature revised the TexasGeneral Arbitration Act in 1997. Tex. Civ. Prac. &Rem. Code 171.001 et seq. The 1997 revisions didnot significantly alter the prior statute, but didclarify procedural issues related to arbitration. Thebest example are those procedural revisionsregarding expanded discovery and the taking ofdepositions (171.050), which clearly signaled thelegislature's intent to put disputes into anarbitration setting. The 1997 Act also clarified thearbitration subpoena power (171.051) and set forthdetailed provisions regarding the method ofvacating (171.088) or correcting panels' awards(171.054) and appellate issues related thereto.

2. Matters Outside the Scope of the TAA.

a. Workers' Compensation benefitdisputes (covered under the Workmen's Compstatute)

b. Collective bargaining agreementdisputes (covered under Texas Labor Code,102.001 - 075).

c. As to arbitration agreements relating topersonal injuries or contracts involvingconsideration less than $50,000.00, the TAA will

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only apply if the agreement is in writing andexecuted by both parties and their attorneys.

C. Frequently Litigated Arbitration Issues

1. Is There an Agreement to Arbitrate?

The fundamental issue facing most litigateddisputes involving arbitration is determiningwhether there was an agreement between theparties to enter into an agreement to arbitrate. Thecourts have consistently resolved this inquirythrough the application of basic contractprinciples. Circuit City Stores, Inc. v. Curry, 946S.W.2d 486, 488-89 Tex. App. -- Ft. Worth 1997,original proceedings).

a. Agreement by conduct:

In the Circuit City case, the court held that afterthe employee was notified of the employer'sarbitration policy, the employee's failure to opt outand continue the work constituted an agreement toarbitrate.

b. Evidentiary Considerations

Whether there's an agreement to arbitrate isdetermined after the court conducts an evidentiaryhearing, if the facts are disputed, (corollary: iffacts are not disputed, use of affidavits isappropriate). Jack B. Anglin Co., Inc. v. Tipps, 842S.W.2d 266, 272 (Tex. 1992); 9 U.S.C. 4 (1970).

c. Fraudulent inducement defense:

The Texas Supreme Court has recently heldthat claims of fraudulent inducement as to anentire contract do not constitute a defense to theenforceability of the arbitration clause itself. InRe: First Merit Bank, 44 Tex.Supp.J.900, 2001Tex. Lexis 59 (as amended August 2, 2001). Onlyif a party can claim that there was fraud in theinducement of the arbitration clause itself (and notinducement as to the entire contract) could therebe a bar to the enforceability of the arbitrationclause. Id.

d. When an arbitration clause isn't anarbitration clause:

A professional baseball player signed astandard Minor League Players Contract whichprovided that any disputes or claims under thecontract were subject to "the Player's rights ofappeal. . .with the Commissioner" [of Baseball]. InRe Anaheim Angels Baseball Club, Inc., 993S.W.2d 875 (Tex. App. -- El Paso 1999). Eventhough the El Paso Court of Appeals held that theagreement was subject to the Federal ArbitrationAct because it involved interstate commerce, thesubject clause was held not to be an arbitrationclause since it made no mention of arbitration, butonly a right of appeal to the Commissioner, suchthat the player was entitled to litigate his claimsarising out of the team's alleged failure to provideadequate medical care. Id.

e. Arbitration agreements may bindnon-parties to the contract.

(1) Third party beneficiary of contractbond.

Both Austin and the Waco Courts of Appealsrecently enforced an arbitration agreement in asituation where the party (a wife) resistingarbitration had not signed the subject contract topurchase a mobile home, because she was deemedto be a third party beneficiary of the agreementwhich was signed by her husband. Nationwide ofBryan, Inc. v. Dyer, 969 S.W.2d 518 (Tex.App. -Austin 1998, no pet.); In Re: Rangel, 45 S.W.3d783 (Tex. App. – Waco 2001, no pet.). Similarly,Federal Magistrate Jeff Kaplan held that a parentcorporation could be required to arbitrate adispute, even if only the subsidiary was the partyto the arbitration agreement, where the subsidiaryagreed that the agreement would bind thesubsidiary's affiliates. Ericsson, Inc. v.Commscape, Inc., et al, 1999 WL 689473 (N.D.Tex., 1999).

(2) Equitable estoppel creating anagreement to arbitrate.

The Fifth Circuit recently held that anon-signatory to an arbitration agreement maycompel arbitration if the facts support theapplication of the doctrine of equitable estoppel.Grigson v. Creative Artists, 210 F.3d 524 (5th Cir.2000). In the Grigson case, the Fifth Circuit courtdetermined that the claims of the party seeking to

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compel arbitration (who had not signed the subjectcontract containing the arbitration provision) wereso intertwined with and dependent upon thesubject contract, that the party resisting arbitration(who had signed the subject contract) wasestopped from disputing that the claim should notbe arbitrated. The test is that a non-signatory maycompel arbitration in two situations: (i) when thesignatory must rely on the agreement in making itsclaims against the non-signatory and (ii) when asignatory alleges substantially interdependent andconcerted misconduct by both non-signatories andone or more signatories.

This power to compel arbitration by non-partyby means of equitable estoppel is not available,however, if the non-party is determined to have"unclean hands." Anco Ins. Svc. of Houston v.Romero, 27 S.W.3d 1 (Tex.App. -- San Antonio,2000).

f. Agreement to arbitrate must be statedwith certainty.

The intentions to have an arbitration agreementmust be expressed with certainty. Where acompany handbook stated that its contents were"guidelines", and were "not intended to constitutea legal contact with any employee," a statement inthe handbook stating the company's preference forarbitration to resolve disputes with its employeesdid not create an enforceable contract requiring thecompany to arbitrate. Tenet Healthcare Ltd. v.Cooper, 960 S.W.2d 386 (Tex. App. -- Houston[14th] 1997, pet. dism'd w.o j.).

As further proof of the need to express a clearintent to arbitrate, in the case of In re ACG CottonMarketing, L.L.C., 985 S.W.2d 632 (Ct. App. --Amarillo 1999, no pet), the Amarillo Court ofAppeals held that merely providing that certainassociation rules were incorporated into thecontract (where such rules provided for thepossibility of arbitration when both sides consentto it), without saying anything more about anintention to arbitrate, does not create an arbitrationprovision.

However, the Austin Court of Appeals hasrecently held that an arbitration clause may beenforceable when it is incorporated into a contractby reference. Teal Construction Co. v. DarrenCasey Interests, Inc., 46 S.W.3d 417 (Tex.App.-Austin, 2001).

2. Is the Arbitration AgreementUnconscionable?

a. Legal test for whether arbitrationprovision in employment contract isunconscionable.

The California Supreme Court has recentlyheld that an arbitration agreement is lawful (andtherefore not unconscionable) in the employmentcontract situation if it: (i) provides for neutralarbitrators, (ii) provides for more than minimaldiscovery, (iii) requires a written award,(iv) provides for all of the types of relief thatwould otherwise be available in court, and (v)does not require employees to pay eitherunreasonable costs or any arbitrator's fees orexpenses as a condition of access to the arbitrationform. Armendariz & Olague-Rodgers v.Foundation Health Psyche Care Services, Inc.,Cal.Sup.Ct. SO 75492 (8/24/00).

b. The United States Supreme Courtrecently examined the issue of when an arbitrationagreement is silent on the question of arbitrationcosts, does that make the agreement unenforceablebecause one party may find the costs prohibitive?Green Tree Financial Corp v. Randolph, 121 S.Ct.513 (2000). In the Green Tree case, the SupremeCourt held that the party challengingenforceability bears the burden of proof, and, inthat case, the party failed to carry its burden byfailing to offer any evidence that the costs wereprohibitive. An arbitration agreement's silenceand the risks that the costs may be prohibitive are"too speculative to justify the invalidation of anarbitration agreement".

c. Unconscionability determined byarbitrator in FAA cases.

Consistent with the holding in the Kempwoodcase, (972 S.W.2d 819, supra), in arbitration casesgoverned by the FAA, it is the arbitrator (and,therefore, not the trial judge) who is to considerclaims regarding the unconscionability of anarbitration agreement. In re Foster Mold, Inc., 979S.W.2d 665 (Tex-App. -- El Paso 1998, orig.proceeding); In Re: Rangel, 45 S.W.3d 783 (Tex.App.—Waco 2001, no pet.).

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d. Unconscionability decided by judge inTAA cases.

Where the complaint to arbitration isprocedural unconscionability that relates to theactual making or the inducement which caused aparty to enter into the arbitration agreement, thenthose unconscionability issues are for the courtand not the arbitrator. In re Oakwood MobileHomes, Inc., 987 S.W.2d 571 (Tex. 1999).

e. Unconscionability related toinequitable burden of costs.

Though no Texas courts have addressed theissue yet, a good way for an employee to challengethe enforceability of an arbitration provision is tochallenge its burdensomeness as beingunconscionable when, for example, it

(i) requires the employee to pay the costsof the arbitrator. Davis v. LPK Corp., 1998 U.S.Dist. LEXIS 3504 (N.D. Cal. 1998); Shankle v.B-G Maintenance Management of Colorado, 163F.3d 1230 (10th Cir. 1999); Cole v. BurnsInternational Security Services, 105 F.3d 1465(D.C. Cir.1997);

(ii) imposes an arbitration fee perceivedto be excessive. Brower v. Gateway 2000, Inc.,1998 WL 481066 (N.Y.A.D. 1st Dept. - 1998).

(iii) causes the employee to forfeit hisright to recover his attorneys' fees and costs if heprevails. Maciejewski v. Alpha Systems Lab, Inc.,99 C.D.O.S. 6312 (Cal. App. Ct. 1999); or

(iv) is silent on the question ofresponsibility for fees because it fails to providethe minimum guarantees required to ensure that aparty's ability to vindicate statutory rights will notbe undone by steep filing fees, steep arbitrator'sfees, or other high costs of arbitration. Green TreeFinancial Corp. v. Randolph, 178 F.3d 1149 (11thCir. 1999), certiorari granted, 120 S. Ct. 1552(2000).

f. Unconscionability based on ignoranceof contract's terms.

As for published Texas opinions on the"unconscionability" of arbitration agreements, the

argument almost always fails if it is based on oneparty's ignorance of the arbitration agreement'sterms. EZPawn Corp. v. Mancias, 934 S.W.2d 87,90 (Tex. 1996). In the EZ Pawn case, the plaintiffclaimed that he should not be forced to arbitratehis wrongful discharge and employmentdiscrimination claims against his employerbecause he did not actually read his arbitrationagreement before signing it and did not understandits effect. The Texas Supreme Court rejected thisargument, citing the well-established rule incontract law that a party who has had anopportunity to read a contract, as did the plaintiff,and signs it, is presumed to know its contents.However, in the case of In re Turner BrothersTrucking Company, Inc., 8 S.W.3d 370, 375-76(Tex. Appeals - Texarkana 1999, pet. req.) theTexarkana Court of Appeals found an agreementto arbitrate to be unconscionable based onevidence that the employee signing the agreementwas illiterate and the employers presenting thearbitration agreement did not explain it to theemployee.

Thus, it appears that as long as the due processrequirements of notice and the opportunity tounderstand one's rights are present, the arbitrationagreement will be upheld and not set aside ongrounds of unconscionability.

3. What is the Scope of the ArbitrationAgreement?

a. Meeting of the minds.

Claims relating to the scope of the agreementare also grounded in traditional contractconstruction principles. The inquiry must bewhether the parties agreed at the time they enteredinto the contract that the claim would be subject toarbitration. If the FAA governs, any doubts aboutwhether the claims fall within the scope of thearbitration are resolved in favor of arbitration.Moses H. Cohen Memorial Hospital v. MercuryConstruction Company, 460 US 1, 24-25 (1983).

b. No vague references to disputes to bearbitrated.

The drafter of an arbitration agreement mustavoid vague references to arbitration of anundefined category of claims since such vaguenessmay push a particular claim outside of the dispute.

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Shearson Lehman Hutton, Inc. v. Tucker, 806S.W.2d 914, 919–20 (Tex. Appeals - CorpusChristi 1991, writ dismissed). If the arbitrationprovision in a contract says that it covers "alldisputes arising out of this agreement," that coversnot only contract claims, but also fraudulent ininducement claims, (Prima Paint Corp. v. Flood &Conklin Mfg. Co., 388 U.S. 395, 398 (1967)),antitrust claims arising from the contract,(Mitsubishi Motors Corp. v. Soler Chrysler -Plymouth, Inc., 105 S. Ct. 3346 (1985)),defamation and DTPA claims factuallyintertwined with the contract (Prudential Sec., Inc.v. Marshall, 909 S.W.2d 896 (Tex.1995)), andtortuous interference and infliction of distressclaims (American Employers Ins. Co., v. Aiken,942 S.W.2d 156 (Tex.App. --Ft. Worth 1997, nowrit)).

4. Does the Arbitration Agreement Need tobe Supported by Consideration?

Employees seeking to avoid an arbitrationagreement may contend that no considerationsupports the agreement because the employee is atwill. As a general rule, this does not preventparties from entering into a binding arbitrationagreement notwithstanding the at-will employmentdoctrine. In Re Alamo Lumber Co., 23 S.W.3d 577(Tex.App.--San Antonio, 2000); Burlington N.RR,Company v. Akpan, 943 S.W.2d 48, 52 (Tex.Appeals -- Ft. Worth 1996 no writ).

5. Has Either Party Waived its Right toArbitrate or Compel Arbitration?

a. The Austin Court of Appeals in theNationwide of Bryan, Inc. v. Dyer, 969 S.W.2d518 (Tex. App. -- Austin, 1998, no pet. h.),addressed the claim that arbitration rights had beenallegedly waived by reason of the moving party'sengaging in pre-litigation negotiations and failingto file a motion to compel arbitration until twomonths after the suit was filed. In rejecting thewaiver claim, under Texas common law, the Courtheld that waiver of arbitration rights takes placeonly when a party makes "a specific and deliberateact after suit is filed that is inconsistent with itsright to arbitrate, such as engaging in extensivediscovery or requesting a jury." Id. at 522.

b. Shortly after the Austin Court ofAppeals came down with its holding in theNationwide of Bryan case, the Texas SupremeCourt shed additional light on the issue ofarbitration waiver under the Federal ArbitrationAct. In re Bruce Terminex Co., 988 S.W.2d 702(Tex. 1998). In the Bruce Terminix case, the Courtheld that in light of the fact that "the FAAdisfavors waiver, and that there is a strongpresumption against waiver," the party seeking tocompel arbitration did not substantially invoke thejudicial process to its opponent's detriment bypropounding one set of eighteen interrogatoriesand one set of nineteen requests for production ofdocuments prior to seeking arbitration.

In addition, the Supreme Court held thatwhere it is the defendant who is the party seekingarbitration, it does not waive its rights by failing toinitiate the arbitration proceedings after the trialcourt granted its motion to compel arbitration,because it is always the plaintiff's burden to goforward with commencing arbitration, absent acontrary agreement between the parties.

c. Following on the heels of the BruceTerminix case, the San Antonio Court of Appealsheld that there could be no finding of a waiver ofthe right to arbitrate where a party maintained aconsistent litigation position of attempting to getthe litigation abated and have the disputearbitrated, even if that party had not satisfied theconditions precedent required to get to arbitrationas set forth in the subject contract. In re WeeklyHomes, 985 S.W.2d 111 (Tex.App. -- San Antonio1998).

d. Even if a party files a motion tocompel arbitration promptly, his failure to bring itto the court's attention while he participates indiscovery and a temporary injunction hearingconstitutes a waiver of his arbitration rights.Menna v. Romero, 2000 Tex. App. LEXIS 44(Tex.App. -- San Antonio 2000).

e. When a court is presented with amotion to compel arbitration, it must address itpromptly and cannot delay ruling on it pendingdiscovery, In re MHI Partnership, Ltd., 7 S.W.3d918 (Tex.App.--Houston [1st District] 1999).

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f. There is no waiver of a party's right toarbitrate if he participates in a mediation orderedby the trial court. In re Certain Underwriters ofLloyd's, 18 S.W.3d 867 (Tex. App. -- Beaumont2000).

g. There is no waiver of the right toarbitrate when the parties engage in extensivelitigation discovery and litigate a motion forsummary judgment, if there is no showing ofprejudice that those activities are beyond the scopeof what would have been covered in the course ofthe arbitration. Pennzoil Co. et al v. Arnold OilCo., 30 S.W. 3d 494 (Tex. App. -- San Antonio2000).

6. Does the Arbitration Procedure ViolateDue Process?

One criticism of the arbitration process is basedupon the alleged weakness of the procedures andthe deprivation of a jury trial. Although the UnitedStates Supreme Court rejected a number of thesechallenges in the case of Gilmore v. InterstateJohnson Lane Corporation, 111 S.Ct. 1647(1991), the court's decision has sparked numerousassociation rules (including the New York StockExchange) to become focused on proceduralfairness. The American Bar Association's Sectionon Labor and Employment Law, the NationalEmployment Lawyers Association, the AmericanArbitration and the National Academy ofArbitrators have all endorsed a due processprotocol for employment arbitration. Thefollowing due process safeguards have beenrecommended:

(a) Employees be allowed to choose theirown representatives.

(b) Arbitrators have the authority to awardrepresentation fees in the interest justice.

(c) Employers should consider payingrepresentation costs for lower paid employees.

(d) Adequate but limited pretrialdiscovery.

(e) Prehearing depositions on an expeditedbasis.

(f) Arbitrators should provide parties withsix of their most recent decisions to aid in theselection process.

(g) Arbitrators have specific training inemployment law (or applicable area of thedispute).

(h) A list of procedure for selection ofarbitrators giving each party equal number ofstrikes.

(i) Arbitrator's award should be bindingwith limited scope of review.

(j) Arbitrator should issue a writtenopinion explaining the arbitrator's decision.

In 1997, the ABA's policymaking Houses ofDelegates approved certain due process standardsfor mediation and arbitration of statutoryemployment disputes, including the following:

1. Employee should have the right to berepresented by a person of their choice.

2. The fee for that representation shouldbe determined by agreement between theemployee and the representative, but the arbitratorshould have authority to provide feereimbursement by the employer as part of theremedy.

3. Employee should have access to allinformation reasonably relevant to mediationand/or arbitration of their claims.

4. A roster of the available arbitratorsand mediators with experience in employmentmatters should be established. Training should beprovided by government agencies, bar associationsand academic institutions acting under theauspices of a designating agency such as theAmerican Arbitration Association. Mediators andarbitrators should be selected using a listprocedure with certain number of strikes availableto both parties.

5. Arbitrator's awards should be finaland binding and the scope of review should belimited.

7. Under What Circumstances Should anArbitration Award be Vacated?

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a. Texas Arbitration Act

Under the Texas General Arbitration Act,TEX. CIV. PRAC. & REM. CODE 171.014,arbitration shall be vacated where:

(1) the award was obtained bycorruption, fraud, or other undue means;

(2) the rights of a party wereprejudiced by:

(a) evident partiality by anarbitrator appointed as a neutral arbitrator;

(b) corruption in an arbitrator;

(c) misconduct or willfulmisbehavior of an arbitrator;

(3) the arbitrators:

(a) exceeded their powers;

(b) refused to postpone thehearing after a showing of sufficient cause for thepostponement;

(c) refused to hear evidencematerial to the controversy; or

(d) conducted the hearing,contrary to Section 171.043, 171.044, 171.045,171.046, or 171.047, in a manner that substantiallyprejudiced the rights of a party; or

(4) there was no agreement toarbitrate, the issue was not adversely determinedin a proceeding under Subchapter B, and the partydid not participate in the arbitration heatingwithout raising the objection.

b. Federal Arbitration Act

Grounds for vacating an award under theFederal Arbitration Act, 9 U.S.C. 10, are thefollowing:

(1) Where the award was procured bycorruption, fraud, or undue means.

(2) Where there was evident partialityor corruption in the arbitrators, or either of them.

(3) Where the arbitrators were guiltyof misconduct in refusing to postpone the hearing,upon sufficient cause shown, or in refusing to hearevidence pertinent and material to the controversy;or of any other misbehavior by which the rights ofany party have been prejudiced.

(4) Where the arbitrators exceededtheir powers, or so imperfectly executed them thata mutual, final, and definite award upon thesubject matter submitted was not made.

(5) Where an award is vacated and thetime within which the agreement required theaward to be made has not expired, the court may,in its discretion, direct a rehearing by thearbitrators.

c. Evident Partiality

In a case where there was intended to be aneutral arbitrator, there is "evident partiality"under 171.014 Tex. Civ. Prac. & Rem. Code, as amatter of law, thereby automatically invalidatingthe arbitration ruling, when that neutral, during thependency of the arbitration proceedings, wasretained as litigation counsel (so as to be in aposition to earn a substantial fee) in a separate,unrelated matter at the recommendation of thearbitration defendant's law firm, and the neutralfailed to disclose such to the parties. BurlingtonNorthern Ry. Co. v. TUCO, Inc., 960 S.W.2d 629(Tex. 1997).

The trial court granted summary judgment that,as a matter of law, there was nothing in the factswhich "might reasonably create an appearance ofpartiality or bias." The Amarillo Court of Appealsreversed, holding that there was a fact issue on theneutral's "evident partiality," and remanded thecase for trial.

The Texas Supreme Court then modified theCourt of Appeals' opinion and found "evidentpartiality" as a matter of law and directed that thecase be sent back to the trial court withinstructions to vacate the arbitration award.

Justices Enoch, Spector, and Abbott dissentedfrom the majority opinion authored by ChiefJustice Phillips.

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The Corpus Christi Court of Appeals has alsorecently spoken to the subject of an arbitrator's"evident partiality" in the case of Int'l Bank ofCommerce-Brownsville v. Int'1 Energy Dev.Corp., 981 S.W.2d 38 (Tex. App. -- Corpus Christi1998, pet. filed). In that case, in which the subjectcontract had a provision that the FederalArbitration Agreement would govern theproceedings, the pertinent "evident partiality" factswere that a party (which was a bank) argued thatan arbitration award should be vacated becauseone of the neutral arbitrators:

(i) had a close friendship with a lawyerfor the non-complaining party; and

(ii) failed to disclose that he had been thesubject of a federal grand juryinvestigation nineteen years before thearbitration involving his dealings withbanks which allegedly made himprejudiced toward banks.The trial court held and the court ofappeals affirmed that such facts didnot provide a sufficient basis for adetermination that there was "evidentpartiality" in the challenged arbitrator.The Corpus Christi Court of Appealsnoted that there were no Fifth Circuitcases addressing the pertinentconsiderations for evaluating whetheran arbitrator had "evident partiality"under the FAA, and then looked atTexas case law for precedent that inorder for there to be "evidentpartiality", the questioned relationship"must be ongoing and direct ratherthan speculative and remote."

Most recently, the Houston Court of Appealslooked at the "evident partiality" issue in TexasCommerce Bank v. Univ. Tech. Inst., 985 S.W.2d678 (Tex. App. - Houston [1st Dist.] 1999), andheld that an arbitration award (in favor of TCB)should be vacated where one of the neutralarbitrators had represented TCB in a lawsuitinvolving a $1.5 million claim which preceded thearbitration by six years.

d. State Law: Where There's Been an"Evident Miscalculation of Figures"

The Tyler Court of Appeals faced an attempt tochallenge an arbitration award on the ground thatit contained an "evident miscalculation of figures,"(Tex. Civ. Prac. & Rem. Code under 171.015(a))and rejected such challenge where the award was"rationally infer able from the facts before thearbitrator," and was "within the range establishedby the testimony." Vernon E. Falconer, Inc. v.H.I., Ltd. Partnership, 970 S.W.2d 36 (Tex. App.-- Tyler 1998, no pet. h.).

e. State Law: Where Arbitrator ExceedsPowers

The El Paso Court of Appeals vacated anarbitration award on the basis that the arbitratorhad exceeded his authority where he ordered ElPaso County to pay a former employee's unusedsick leave in violation of Article III, 53 of theTexas Constitution which limits extracompensation to county employees. Lee v. El PasoCounty, 965 S.W.2d 668 (Tex. App. -- El Paso1998, pet. denied).

The Court of Appeals first noted the basicpremise handed down by the United StatesSupreme Court in W.R. Grace & Co., 461 U.S.757, 766 (1983), that courts are to substitute theirown judgment for that of an arbitrator if thearbitration award, left unchanged, would violatepublic policy. Because any award in contraventionof the State Constitution would clearly be inviolation of public policy, the award was vacated.

f. Federal Law:

As of 12/6/99, the Fifth Circuit now has joinedthe other courts of appeals which allow anarbitration award to be vacated when arbitratorshave acted in "manifest disregard of the law," andthe award results in significant injustice to thelosing party. Williams v. Cigna FinancialAdvisors, 197 F.3d 753 (5th Cir. 1999),cert.denied, 120 S.Ct. 1833, 146 L.Ed.2d 777(2000)

8. When Can a Party Appeal an AdverseRuling on Arbitrability?

a. If arbitration request is under TAA,losing party has interlocutory appeal right when (i)motion to compel denied or (ii) arbitration stayed.Tex. Civ. Prac. & Rem. Code. 171.017.

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b. In state court, if arbitration request isunder FAA, under same circumstances as a 8.a.above, losing party must file mandamusproceeding, Cantella & Co., Inc. v. Goodwin, 924S.W.2d 943 (Tex. 1996).

c. In a case where a party in state courtmoves to compel arbitration under both the TexasGeneral Arbitration Act (Tex. Civ. Prac. & Rem.Code 171.001-.098) and the FAA (9 U.S.C. 1-16),and the trial court denies the right to arbitrate, theparty's remedies are (i) to pursue mandamusreview to the appellate court under the FAA, and(ii) to pursue an interlocutory appeal to theappellate court under the TAA (Tex. Civ. Prac. &Rem. Code 171.098). In re Valero Energy Corp.,968 S.W.2d 916 (Tex. 1998); In re AnaheimAngels Baseball Club, Inc., 993 S.W.2d 875, 877(Tex. App. -- El Paso 1999).

The Supreme Court in the Valero case held thata court of appeals which finds itself in thisposition of addressing a FAA mandamusproceeding and a TAA interlocutory appeal shouldconsolidate the two proceedings and then renderone decision disposing of both issuessimultaneously. Id. at 917.

d. If arbitration request is under TAA,after motion to compel is granted: losing party hasno right to interlocutory appeal (Tex. Civ. Prac. &Rem. Code 171.017) or to mandamus proceeding.McMullen v. Yates, 697 S.W.2d 500 (Tex.App. --San Antonio 1985, no writ).

e. In state court, if an arbitration requestis under the FAA, after motion to compel isgranted, losing party has no right to interlocutoryappeal, Gathe v. Cigra Healthcare of Texas, Inc.,879 S.W.2d 360 (Tex. App. -- Houston [14thDist.] 1994, writ denied), but may bring amandamus proceeding. Solis v. Evans, 951 S.W.2d44 (Tex. App.--Corpus Christi 1997, no writ).

f. In federal court (i) if motion to compelarbitration is denied, party can pursueinterlocutory appeal. 9 U.S.E. 16; (ii) if motion tocompel arbitration is granted, and order is finalsuch that the court has nothing left to do, thenorder is appealable; and if motion to compelarbitration is granted, and is not a final order,

losing party may bring mandamus proceeding.Green Tree Financial Corp. – Alabama v.Randolph, 121 S. Ct. 513 (2000).

9. Miscellaneous New Arbitration Issues:

a. Enforceability of Arbitration Provisionin Repudiated Contract:

A favored tactic in attempting to avoidarbitration is to claim that the party seeking toarbitrate under a contract has lost his right toenforce the arbitration provision by reason of hishaving repudiated and/or anticipatorily breachedthe subject contract. In 1998, the Texarkana Courtof Appeals was faced with prior conflictingopinions on this issue. Contrast, Miller v. PuritanFashions Corp., 516 S.W.2d 234 (Tex.Civ.App. -Waco, 1974, writ ref'd n.r.e.) and Pepe Intl Dev.Co. v. Pub Brewing Co., 915 S.W.2d 925, 932(Tex.App. - Houston [1st Dist.] 1996, no writ).

The Texarkana Court favored the holding in thePepe case and held that arbitration agreementsmade under the Texas arbitration statute areenforceable and irrevocable in spite of attacksmade upon the contract as a whole. DallasCardiology Associates v. Mallick, 978 S.W.2d 209(Tex.App. -- Texarkana 1998, no pet. h.).

b. Supreme Court Jurisdiction to HearArbitration Disputes

In September 1998, the Texas Supreme Courtdismissed an application for writ of error for lackof jurisdiction in a situation where the trial courthad denied a motion to compel arbitration, theappellant had pursued his right to an interlocutoryappeal to the Tyler Court of Appeals (found at 950S.W.2d 375), and, losing there, tried to get to theSupreme Court. Certain Underwriters at Lloyd's ofLondon v. Celebrity, Inc., 988 S.W.2d 731 (Tex.1998).

The Supreme Court held that it had nojurisdiction to consider the case, under22.225(b)(3) of the Texas Government Code andunder the Texas Arbitration Act (Tex. Civ. Prac. &Rem. Code 177.098(b)), because there was nodissenting opinion from the court of appeals andno conflicting decisions from two or more courtsof appeals on the subject issue. Petitioners'argument that he was entitled to be heard by theSupreme Court because the Tyler Court of

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Appeals' opinion was in conflict with the generalstatewide policy favoring arbitration fell on deafears.

c. Securities Dealer Required to ArbitrateTitle VII Discrimination Claim --Employee Clearly Waived Right toLitigate

The Fifth Circuit was recently faced with anon-traditional scenario whereby a securitiesbroker, licensed by the NASD, who in hissecurities license application agreed to arbitrateany dispute with his firm, found himself wantingto pursue litigation on his Title VII employmentdiscrimination claim (because he had beenallegedly wrongfully terminated after blowing thewhistle on some sexual harassment activities).Mouton v. Metropolitan Life Ins. Co., 147 F.3d453 (5th Cir. 1998). The Fifth Circuit reversed thetrial court and determined that the arbitrationclause should be read broadly to include the TitleVII claims, and did not fall within the exception tocompulsory arbitration as a "dispute involving theinsurance business of any member which is also aninsurance company." The Court held that theplaintiff's Title VII claims involved defendant'sobligations as an employer rather than an insurer,such that the insurance business exception had noapplication. The Fifth Circuit follows the majorityrule on this issue, with the Ninth Circuit in theminority. Duffield v. Robertson Stephens & Co.,144 F.3d 1182 (9th Cir.), cert. den., 1998 U.S.LEXIS 7127.

d. In Collective Bargaining AgreementWhere Union NegotiatedComprehensive Arbitration Provision,Employee Not Bound, and CanLitigate Title VII Claims.

The situation causing the enforceability of thearbitration provision in the Mouton case does notexist where the provision was not agreed to by theemployee, but by a union on behalf of anemployee, in a collective bargaining agreement.Then, the employee may litigate (and, thus, not becompelled to arbitrate) his Title VII claims.McCormick v. El Paso Electric Co., et al. 996S.W.2d 241 (Ct. App.-- El Paso 1999).

e. Enforceability of ArbitrationAgreements In Bankruptcy Court

The issue frequently arises whether arbitrationagreements are enforceable in cases involvingentities in bankruptcy. The Fifth Circuitestablished the law in this jurisdiction on thissubject in Matter of Nat'1 Gypsum Co., 118 F.3d1056 (5th Cir. 1997).

In the National Gypsum case, NGC was aChapter 11 debtor and was attempting to avoidarbitration proceedings initiated by its liabilityinsurance carrier ("INA") which had defendedNGC in a number of asbestos lawsuits. TheBankruptcy Court, Judge Solis, and the FifthCircuit all agreed that when a dispute is a "core"bankruptcy matter, then the Bankruptcy Court hasthe discretion to refuse to order arbitration of suchdisputes when it determines that permittingarbitration would be in conflict with the purposesof the Bankruptcy Code. Thus, the question doesnot get answered merely by a determination ofwhether a dispute is "core" or "non-core," butwhether its resolution in arbitration wouldspecifically conflict "with the textual provisionsand/or purposes of the Bankruptcy Code." Id., at1067.

Bankruptcy Judge Donald Sharp of the EasternDistrict of Texas then followed the Fifth Circuit'sholding in the case of In re Harold W. Bailey, II;Harold W. Bailey, II v. Sorenson Laboratories,Inc., 217 B.R. 523 (Bank. E.D. Tex. 1997).

f. Federal Courts Aren't Empowered toAssist Parties in International Arbitrations WithDiscovery

Although Congress has empowered federalcourts to have jurisdiction to provide assistance ondiscovery matters to parties litigating judicialproceedings in foreign countries, 28 U.S.C. 1782,this does not extend to providing assistance ondiscovery matters to parties engaged ininternational arbitrations. Republic of Kazakhstanv. Biedermann Intern., 168 F.3d 880 (5th Cir.1999).

g. No Arbitration of Magnuson-MossWarranty Claims

Under warranty claim asserted underMagnuson-Moss Warranty Act, the parties to an

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agreement cannot impose binding arbitration into aconsumer product warranty agreement. In Re: VanBlarcum, 19 S.W.3d 484 (Tex. App. -- CorpusChristi 4/6/2000).

h. Normally No Arbitration of DisputesOver Continent Fee Contracts

Except under specifically definedcircumstances, a contingent fee contract for legalservices cannot have an enforceable arbitrationprovision, under 171.002(a)(3) of the TexasArbitration Act. A legal malpractice claim is apersonal injury action. In re: Pamela Godt, 28S.W.3d 732 (Tex. App. -- Corpus Christi 2000).The TAA does not apply to a claim for personalinjury unless (i) each party to the claim, on theadvice of counsel, agrees in writing to arbitrate;and (ii) the agreement is signed by each party andeach party's attorney. Id. Where the party whosigned the contingent fee agreement as client wasnot acting on the advice of counsel when shesigned the agreement, then the TAA does notapply, and the arbitration provision is notenforceable. Id.

i. Non-Parties to an ArbitrationProceeding May be Barred fromBringing Suit by Res Judicata Based onWhat Occurred at Arbitration.

j. Arbitration can be appropriatemechanism for resolving validity of mechanics'liens.

The Houston Court of Appeals (1st Dist.)recently rejected a claim that the validity ofmechanics' liens can only by evaluated inaccordance with Texas Property Code§53.160(e)(2), where the parties on the front endof their agreement had provided for resolving theirdisputes by arbitration Dalton Contractors, Inc.v. Bryan Autumn Woods Ltd. 2001 WL 1340590(Tex.App.—Houston [1ST Dist.], Nov. 1. 2001).

If one party who participates in anarbitration has the same interest at stake as anon-party who later decides to pursue litigationover the same issue that was the subject of thearbitration, then the non-party to the arbitrationmay be barred by res judicata. Daic, et al v. NauruPhosphate Royalties (Texas) Inc., 27 S.W.3d 695(Tex. App. -- Beaumont 2000).

II. MEDIATION ISSUES

A. Objection to Court Ordered Mediation

1. When a litigator gets ordered intomediation, and believes it will be a waste of time,he should object to the Order within ten (10) daysafter receiving notice of the Order. 154.022 Tex.Civ. Prac. Rem. Code.

2. Although a party ordered to mediate isnot required to mediate in good faith (Decker v.Lindsay, 824 S.W.2d 247 (Tex.App. -- Houston[1st Dist.] 1992, no writ), and a mediation orderthat requires a party to mediate in good faith isvoid (Texas Parks and Wildlife Dept. v. Davis, 988S.W.2d 370 (Tex. App. - Austin 1999), no pet.); InRe Relator Acceptance Insurance Company, 33S.W.3d 443 (Tex. App.--Ft. Worth, 2000, no pet.),if a party anticipates that he will be attending themediation (per the Court's Order) but does not planto negotiate in good faith, then he must file his154.022 Objection to Mediation on a timely basisor else he can be sanctioned under TRCP 141 forthe court costs, attorneys' fees, and mediator's feesincurred in connection with the unsuccessfulmediation. Texas Dept. of Transp. v. Pirtle, 977S.W.2d 657 (Tex. App. -- Fort Worth 1998, pet.denied).

3. Where a party who does not want tomediate files a timely (but rejected) objection to acourt-ordered mediation, his only downside risk ispotential liability for the mediator's fee which istaxable as court costs in the final judgment againstan unsuccessful litigating party. Texas Parks andWildlife Dept. v. Davis, 988 S.W.2d 370, 376(Tex.App. -- Austin 1999, no pet.)

B. Confidentiality Erosion

1. No Absolute Mediation Confidentiality orPrivilege.

a. Balancing of confidentiality vs public"need to know" policy.

Although the manner in which participantsnegotiate should not be disclosed to the trial courtin accordance with 154.073(a) In Re: RelatorAcceptance Insurance Co., No. 2000 WL 1728427

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(Tex.App.-Ft. Worth 11/22/00); Texas Parks &Wildlife Dept. v. Davis, 988 S.W.2d 370, 375(Tex.App.-Austin 1999, no pet.); and Williams v.State, 770 S.W.2d 948, 949 (Tex.App. - Houston[1st Dist] 1989, no pet). There is a caveat to thisgeneral rule in the statute. 154.073(e), Tex. Civ.Prac. & Rem. Code, provides for the trial court'spresiding over an in camera proceeding todetermine whether the duty to disclose informationas a matter of public policy (such as for a fiduciaryto disclose information to his beneficiary) is moreimportant to the interests of justice than the duty tomaintain the confidentiality of mediationcommunications. If the public policy favoringdisclosure in a particular circumstance outweighsthe public policy of mediation confidentiality, thejudge may order that testimony be admitted andthe confidentiality of the mediationcommunications will not be honored. A trialcourt's refusal to conduct such an in camerahearing upon request is an abuse of discretion. InRe: Relators Acceptance InsuranceCompany,Supra. Furthermore, videotape materialscomposed of an attorney questioning factwitnesses) prepared exclusively for use at amediation are subsequently discoverable because"mediation activities do not provide a blanketprotection" for all materials used. In re: Learjet,Inc., 2001 WL 1439997 (Tex.App.—Texarkana,Nov. 15, 2001).

b. No confidentiality for victim-offendermediations.

Tex. Atty. Gen. Ordinance 659 (1999) providesthat a mediation conducted between a victim andan offender by the Texas Department of CriminalJustice does not qualify as a mediation forpurposes of Chapter 154 of the Texas CivilPractice and Remedies Code, such that thesemediation communications are not consideredconfidential, since the purpose of the mediation isto accomplish some form of healing rather thanresolve a dispute.

c. Federal court limitations orconfidentiality.

In the federal courts in Texas, there is nomediation "privilege," but rather communicationsat a mediation are "confidential," but suchconfidentiality can be set aside to prove fraud,

duress, coercion, or mutual mistake. F.D.I.C. v.White, 76 F.Supp. 2d 736, 738, (N.D.Tex. 1999).In the White case, over the F.D.I.C.'s objection, thecourt considered the affidavit testimony of theparties and their attorneys regarding the F.D.I.C.'sallegedly threatening criminal prosecution duringa mediation in order to pressure White to settle.Magistrate Kaplan considered the affidavittestimony reflecting the statements made at themediation, but then held that there was no duressor coercion, and proceeded to enforce themediation settlement agreement.

d. Grand jury issues.

In federal court, a grand jury subpoena maycontrol over a claim of mediation confidentiality.Magistrate Kaplan's holding in the White case thatthere is no mediation privilege in federal courts isconsistent with a recent Fifth Circuit holding thatdocuments exchanged during confidentialmediation proceedings (over 600 mediations in all)which took place under the Texas AgriculturalMediation Program, a state program that receivesfederal funding under the Federal AgriculturalCredit Act ("ACA"), are available to besubpoenaed by a federal grand jury, such that thereis no federal mediation privilege. In re Grand JurySubpoena dated December 17, 1996, 148 F.3d 487(5th Cir.1998).

In the Grand Jury case, supra, the Fifth Circuitdetermined that neither the Texas ADR statute(Tex.Civ.Prac. & Rem.Code 154.001 et seq.), northe federal Alternative Dispute Resolution Act (5U.S.C. 571, et seq), had any application to whetherthe prior mediation was confidential, even thoughthe parties had agreed in writing that the TexasADR Statute would apply and that the mediationcommunications would remain confidential; ratherthe case went off on the congressional intentbehind the ACA and, in particular, whether theAct was intended to create a mediation privilege.Though the ACA does state that mediationmaterial shall be "confidential", because of thesecrecy in the grand jury proceedings, the FifthCircuit held that the "confidentiality" of themediation documents would be preserved even ifpassed on to the grand jury.

2. Mediator Testimony AdmissibleRegarding Alleged Duress or Coercion atMediation.

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a. Federal Judge David Hittner inHouston was recently presented with a situation(in a 1983 Civil Rights Act claim arising out of ashooting death involving policemen) where theplaintiffs attempted to revoke a mediationsettlement agreement because of the mediator'sallegedly forcing them to settle by allegedlythreatening them with the likelihood of beingforced to pay additional fees and costs if theyfailed to settle. Allen v. Leal, 27 F. Supp. 2d 945(S.D. Tex. 1998).

In the course of the proceedings, Judge Hittnergave the mediator the opportunity (but did notorder him) to testify regarding what happened atthe mediation in order to give him a chance todefend his professional reputation, and themediator, in fact, accepted the opportunity and didso testify.

In the Allen case, the Association ofAttorney-Mediators ("AAM") got leave of court tofile an amicus curiae brief, and during thependency of the proceedings, the president of theHouston Chapter of AAM was quoted publicly assaying, "What some people might consider a littlebullying is really just part of how mediationworks." Judge Hittner held that such an assertionwas in violation of 154.053(a) Tex. Civ. Prac. &Rem Code, which states that a mediator "may notcompel or coerce the parties into a settlementagreement."

Judge Hittner then held that he did not havejurisdiction to evaluate the defendants' breach ofmediation settlement agreement against therevoking plaintiffs, and that it would have to bedetermined in separate state court litigationbecause the mediation settlement dispute was not"part of the same case or controversy" as the main1983 case until the resolution of the enforceabilityof the mediated settlement agreement gets litigatedin state court.

b. A recent case from California(reported in the May 2000 issue of the State Bar ofTexas ADR Section newsletter) also involved acourt ordering a mediator to testify regarding whatoccurred during a mediation when both partiesdesired such mediator testimony. Olam v.Congress Mortgage Company, 68 F. Supp.2d 1110(N.D.Cal. 1999). In the Olam case, the plaintiffclaimed that the Memorandum of Settlementsigned by him at the mediation was executed

under duress. Both plaintiff and defendant waivedthe confidentiality provisions relating to mediationthereby allowing the mediator to testify. ACalifornia federal magistrate held that whethersuch communications were confidential or not wasdetermined by the state law of the forum (in thatcase, California law), because of state lawgoverning the case. Under California law, themediator was compelled to testify "in the interestof justice" in an in camera proceeding, resulting inthe judge's tendering the testimony into the record,but then finding that there was no duress in theexecution of the settlement agreement.

C. Federal Government SettlementAuthority at Mediation

The Fifth Circuit recently denied a writ ofmandamus filed by the United States governmentarising out of Judge Joe Fish's ordering thegovernment to have a representative presentduring the entire mediation with full settlementauthority. In re U.S. 149 F.3d 332 (5th Cir. 1998).The Fifth Circuit tempered Judge Fish's rulingsomewhat by proposing that he "consideralternatively ordering the government to have theperson or persons identified as holding fullsettlement authority consider settlement inadvance of the mediation and be fully preparedand available by telephone to discuss settlement atthe time of mediation." Id. at 333.

D. Enforcement of Written SettlementAgreements

1. ADR Statute: 154.071(a), Tex. Civ. Prac.& Rem. Code, provides that if the parties reach asettlement and execute a written agreementdisposing of the dispute (at mediation), theagreement is enforceable in the same manner asany other written contract.

2. After the enactment of the ADR Statutein 1987, when one party to a settlement agreementrevoked, rescinded or simply balked at signingdefinitive settlement settlements (including ordersof dismissal and releases), the standard practicewas to file a Motion to Enforce SettlementAgreement or something similar thereto. However,in 1995, the Texas Supreme Court held that asettlement agreement can be enforced, eventhough one party withdraws its consent. The

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proper enforcement mechanism, however, is a suitfor breach of contract rather than a consent decree.Padilla v. LaFrance, 907 S.W.2d 454 (Tex. 1995).This holding was furthered in Mantas v. 5th Courtof Appeals, 925 S.W.2d 656 (Tex. 1996) whereinthe Supreme Court held that a party attempting toenforce a mediation settlement agreement mayamend its pleadings and add a claim for breach ofcontract. If the suit is not pending in the trial court,then the party seeking to enforce an agreementmust file a separate breach of contract suit under anew cause number.

3. In Cadle Co. v. Castle, 913 S.W.2d 627(Tex.App. - Dallas 1996, writ den'd), the DallasCourt of Appeals concluded that there was nosummary proceeding for the enforcement ofwritten settlement agreements and since154.071(b), CPRC, gives the trial judge thediscretion to either include or exclude terms ofwritten settlement agreement, a party seekingenforcement of a mediation settlement agreementis to put to the same proof and other requirementsas would be a party in an original proceeding.Accordingly, a "Motion to Enforce SettlementAgreement" was determined to be an inappropriatevehicle for accomplishing that objective.

4. When a party seeks to enforce a writtenmediation settlement agreement, both Rule 408,Tex.R.of Civ.Ev. and its Federal counterpart) aswell as 154.073, CPRC, are implicated. How canthe fact of settlement, one might ask, beadmissible to establish liability? The answer issimple, of course: "Liability", in this context has todo with liability for breaching an agreement(settlement agreement) rather than liability on theunderlying dispute. Hence, a settlement reached atmediation, duly signed and in writing, does not runafoul of the traditional rules respectinginadmissibility of settlement discussions or offers.

5. In fact, there is precedent for theenforceability of an oral settlement at mediation.Hur v. City of Mesquite, 893 S.W.2d 227(Tex.App.-Amarillo 1995, writ denied).

E. Mediation Ethics Issue in Mass TortsCases

Rule 1.08(f) of The Texas Disciplinary Rulesof Professional Conduct provides that a lawyer

who represents two or more clients shall notparticipate in making an aggregate settlement ofthe claims of or against the clients without a fulldisclosure of all relevant facts. In the context ofmass torts, this required lawyers to consult witheach client prior to agreeing to an aggregatesettlement of claims. When a lawyer has thousandof clients, meaningful consultation with each ofthem regarding the terms of the settlement isdifficult if not impossible. Additionally, clientshave the right to individualize privacy, anddisclose unto each client the relevant factsnecessary for each to make an "informed decision"only serves to violate this trust and results inincreasing the transaction cost as the lawyer triesto explain the difference in amounts received byother clients. Finally, the rule prohibits the lawyerfrom accepting an aggregate settlement unlesseach client approves the settlement after learningits term. Although some lawyers have attemptedto circumvent this rule by having the Plaintiffsagree in advance to be bound by the ADRagreement upon a majority vote, the courtsgenerally have been reluctant to enter suchagreement over the minority's objection citing theaggregate rule. .C. Brock and Fred D. Raschke,"Shadow Cast over ADR in Mass-Torts Context",Texas Lawyer, p.34.

F. New Mediation Twist – Collaborative Lawin Family Law Cases

The 2001 Texas Legislature passed HB 1363which sanctions the practice of Collaborative Lawin family cases in Texas. It adds sections 6.603and 153.0072 to the Texas Family Code andprovides that the parties and their attorneys mayagree to conduct their dissolution of marriageproceeding or suit affecting the parent-childrelationship under collaborative law procedures.Although the bill is limited to family law, it iscertainly possible that practitioners under certaincircumstances might want to use commerciallitigation it, by agreement, in the commercialdispute. A collaborative law agreement mustinclude provisions for: (i) full and candidexchange of information between the parties andtheir attorneys as necessary to make a properevaluation of the case; (ii) suspending courtintervention into the dispute while the parties areusing collaborative law procedures; (iii) hiringexperts, as jointly agreed, to be used in the

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procedures; (iv) withdrawal of all counselinvolved in the collaborative law procedure if itdoes not result in settlement of the dispute, and(iv) other provisions as agreed to by the partiesconsistent with a good faith effort tocollaboratively settle the matter.

III. NON-BINDING SUMMARY JURYTRIALS

A. The Movement in Texas State Courts

1. Dallas

a. Beginning in December 1996, statecourts in Dallas started using non-bindingsummary jury trials ("SJTs") on an ongoing basisas an alternative ADR technique. Since that time,almost all Dallas district judges have conductedSJTs and most have done more than one.

b. Beginning in the Spring of 1997, andin each subsequent semester, the course on ADRtaught at SMU Law School introduced the SJT asan ADR alternative to law students.

c. Beginning in July 1997, the SJT videoproduced by the Dallas Bar Association's BusinessLitigation Section was distributed to all districtjudges in Texas' largest cities, as well as to anydistrict judge in any other counties who requesteda copy. (If you would like one, please contactTalmage Boston, the co-author of this paper).

d. In July 1998, the Dallas CountyAlternative Dispute Resolution office began a pilotprogram, endorsed and utilized already by at leastfour Dallas District Judges, involvingcourt-ordered one-half day SJTs in small softtissue injury cases (see Dallas Bar AssociationHeadnotes article attached as Exhibit "D"). TheSJT Subcommittee of the Dallas Bar Associationformed in the summer of 2001 is now attemptingto cause Dallas judges to use this ADR device inbigger, more complex cases.

2. Houston

Many Harris County judges have usedsummary jury trials. Per Judge Harvey Brown, thejudges have found that SJTs help the partiesevaluate their cases, and more often than not lead

to settlements. The attorneys in Harris County,however, have had very limited experience withSJTs and often object to the procedure or requireconvincing of its utility. The jurors have been verysupportive of SJTs. The Harris County judgeshave found that one day SJTs may not give theparties an adequate amount of time to present theircases. If the parties do not feel they have anadequate opportunity to present their cases, theydo not give sufficient credence to the jury verdict.Therefore, a number of cases have been given twoor three days to present their evidence. The judgeshave also experimented with having the mediatorattend the trial and discussing the case with thejury after the verdict. One judge uses the SJT onlyif the liability facts are particularly strong and thedamages are uncertain or if the parties will agreethat they will not increase the demand or reducethe offer after the SJT.

3. In the past three years, district judges inEl Paso, Midland, and Fort Worth have alsostarted using SJTs.

4. Caselaw on Confidentiality

The Kaiser Permanente case which involvedan SJT after the parties settled following the SJT.Prior to the SJT, the parties had entered into aRule 11 agreement aimed at maintaining theconfidentiality of certain documents. On May 6,1998, The Dallas Morning News intervened in thecase and filed a Rule 76a Motion seeking to obtainthe confidential documents which were the subjectof the Rule 11 Agreement. In re Kaiser FoundHealth Plan of Texas, 997 S.W.2d 605 (Tex.App.-- Dallas 1998, no pet. h.).

Judge Marshall, the trial judge who presidedover the SJT, determined that in May 1998, (fourmonths after the January dismissal), he still hadjurisdiction to hear the Morning News Rule 76aMotion.

The Kaiser Defendants filed a petition for writof mandamus to prevent the trial court fromhearing the Rule 76a Motion. The Dallas Court ofAppeals granted the writ and held that the trialcourt lacked jurisdiction to hear the Rule 76aMotion after its plenary jurisdiction had expired.The appellate court went on to find that, as amatter of law, any documents introduced in a SJTproceeding are not subject to a Rule 76a Motion.

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B. SJTs in Texas Federal Courts

1. Section III of the Civil Justice Expenseand Delay Reduction Plan instituted by the judgesin the Northern District of Texas, effective July 1,1993, endorses ADR programs and in particular"recognizes the following ADR methods:mediation, mini-trial, and summary jury trial. Ajudge may approve the ADR method the partiessuggest or any other method the judge believes issuited to the litigation."

Thus, federal judges in the Northern District ofTexas are empowered to order cases intonon-binding summary jury trials as a method ofADR.

2. SJTs in Texas Federal Courts.

In the Northern District of Texas, Judge JoeFish has ordered at least one case into an SJT.

IV. FEDERAL LAW UPDATE: THEALTERNATIVE DISPUTE RESOLUTIONACT OF 1998

On October 31, 1998, President Clinton signedinto law House Bill 3528, which became PublicLaw 105-315, the Alternative Dispute ResolutionAct of 1998, a copy of which is attached.Basically, the Act formalizes that all federal courtsare to create local rules to devise and implementtheir own ADR programs to encourage andpromote ADR use in their respective districts.

V. ETHICAL ISSUES

A. No Requirement that Lawyers Tell Clientsof Alternatives to Litigation.

In its review of the Rules of ProfessionalConduct, the ABA Commission on the Evaluationof the Rules of Professional Conduct, known asthe Ethics 2000 Commission has declined toinclude an express requirement that lawyers tellclients of alternatives to litigation. "Much To DoAbout ADR" William C. Smith, ABA Journal 62,66 (June 2000).

There is no requirement yet that lawyersdiscuss the pros and cons of different ADRprocesses. Id.

B. Potential malpractice claim against an attorney whodrafted an unenforceable arbitration clause. Id.

C. Potential malpractice claim against anattorney who allegedly did not tell the client thatarbitration awards were unappealable. Id.

D. A proposed ABA Model Rule ofProfessional Conduct would require alawyer-mediator to tell unrepresented parties thatthe lawyer-mediator is not representing any partyto the proceeding. "Ethics Rules Proposed forADR Neutrals", 25 Litigation News No. 4 (May2000).