For those of you who might not follow the Georgia Office of Dispute Resolution, the final state budget passed by the General Assembly cut $250,000 off ODR's budget -- a 60 percent reduction, leaving a total of $144,643 to sustain the office from July 1, 2007, to June 30, 2008. The cut was a random redirection of funds in which the state judiciary took a big hit overall. Earlier in the process, ODR's budget was completely eliminated. A last minute effort by ADR proponents to educate legislators about the important role ODR plays in our legal system was to no avail. Shinji Morokuma, who recently took over the directorship of ODR, remains calm as always in the face of this setback to the Supreme Court's ADR initiative. He is exploring options which he'll present to the Commission on Dispute Resolution at its May 22nd meeting in Athens. Read more!
Monday, May 7, 2007
Collaborative Lawyers hit ethics roadblock in Colorado
The most recent ABA e-report contains an article on the advisory non-binding decision of the Colorado Bar's ethics committee that an important element of collaborative lawyering is per se unethical. In "collaborative lawyering," the lawyers and parties commit to using cooperative instead of adversarial means of resolving their dispute. Confined mostly still to divorce and family disputes, collaborative lawyering takes advantage of the possible cost of additional lawyers to motivate settlement. The lawyers and the parties agree that the lawyers will withdraw if a party decides to litigate. This is spelled out at the onset of the process in a contract known as the “four-way agreement.” However, the ethics committee said the four-way agreement creates an insurmountable conflict of interest among lawyers and clients. The agreement violates Colorado's Professional Rule of Conduct 1.7(b), barring a lawyer from representing a client if the representation is “materially limited by the lawyer’s responsibilities to ... a third person.” Ethics Opinion 115, Ethical Considerations in the Collaborative and Cooperative Law Contexts (Feb. 24). Nor can the client consent to the conflict because the conflict impairs the lawyer’s independent judgment about the need for litigation. In contrast, footnote 11 of the opinion opins that a two-way agreement between the parties is ok because the lawyers are not entering into an agreement with each other and the opposing parties; however, such agreements would not commit the lawyers to withdrawal and thereby arguably gut the process.
Although other states have raised eyebrows at the four-way agreement, only Colorado has gone so far as to determine it unethical. It will be interesting to see if this raises any eyebrows in Georgia which has a small but thriving collaborative lawyering practice. Moreover, the National Conference of Commissioners on Uniform State Laws has formed a drafting committee for collaborative law which will tackle this problem in drafting model statutory language.
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FAA §4 confers subject matter jurisdiction
So much has happened since my last postings. While I've been busy trying to finish out the academic year, life in the ADR world continues unchecked. Most recently, the 11th Circuit decided Community State Bank, et al v. Strong, No. 06-11582 (11th Cir. Apr. 27, 2007). This case is part of the on-going battle between pay-day loan companies and class action lawyers, state regulators, and consumer advocates in which the former seek to (mis)use arbitration to avoid class actions and punitive-minded juries and the latter are looking for a way to tear down this arbitral bastion. Here, the parties were all too clever by half in their efforts.c
Community State Bank, et al v. Strong, No. 06-11582 (11th Cir. Apr. 27, 2007). This case is part of the on-going battle between pay-day loan companies and class action lawyers, state regulators, and consumer advocates in which the former seek to (mis)use arbitration to avoid class actions and punitive-minded juries and the latter are looking for a way to tear down this arbitral bastion. Here, the parties were all too clever by half in their efforts. It starts with pay-day loan stores whose interest rates are limited by Georgia usury law. To get around the restrictions, pay-day loan stores partnered with out-of-state banks. Despite Georgia’s usury laws, federal law allows out-of-state FDIC-insured banks who aren’t subject to similar interest-rate restrictions in their states (e.g., South Dakota) to extend loads to Georgia residents and charge what they want, in this case, the equivalent of an annual percentage rate of 252.692%. The pay-day lenders claim the relationship between themselves and the out-of-state banks is merely one of agency in which they market, service, and collect local loans on behalf of the bank, which extends the loan and is the true lender, thereby protecting their high interest rates under federal law. Not surprisingly, the other side argues that this alleged agency relationship is a sham, and that the local payday stores are the true lenders and that the interest rates on the loans issued by the payday stores are governed by state law, under which they are usurious. With the exception of the banks right to use the judicial forum to collect, the broad arbitration clause in these transactions states that the FAA governs the arbitration of any and all disputes. The borrower brought his class action in Georgia state court against the payday stores (not the out-of-state banks) alleging violations of various provisions of Georgia statutory and common law, asserting the arbitration clause was unconscionable and unenforceable, and specifically averring that he was not raising any federal cause of action nor claiming damages in excess of $75,000. In short, the borrower was avoiding federal court not only to stay in what may have been perceived as a more sympathetic state court but probably also to avoid a possibly more arbitration-friendly federal court.
Doubtless, the lenders thought the federal court more likely to enforce the arbitral clause, too. They filed a FAA §4 petition to compel arbitration. Since the FAA does not by itself confer subject matter jurisdiction, the district court (N.D. Ga.) determined that it lacked subject matter jurisdiction and dismissed. Bound by its previous decision in Tamiami Partners Ltd. ex rel. Tamiami Development Corp. v. Miccosukee Tribe of Indians of Florida, 177 F.3d 1212 (11th Cir. 1999) (“Tamiami III”), a reluctant 11th Circuit panel reversed stating §4 confers subject matter jurisdiction if the underlying dispute involves a federal question. The court in Tamiami III held that the text of § 4 of the FAA, 9 U.S.C. § 4, requires a district court, in determining whether it has federal question jurisdiction over a § 4 arbitration claim, to “look through” that claim and instead ask whether the underlying dispute the petitioner seeks to arbitrate states a federal question. What was the federal question in the underlying dispute? It was whether or not the loans were lawful under federal law. The lenders argued that they would be seeking a declaratory judgment from the arbitrator that the loans were lawful under federal law thereby raising a federal question.
I describe the panel as “reluctant” because it clearly was chaffing under the precedent of Tamiami III. In his forceful and well-reasoned concurrence in Strong, Judge Marcus argues that the Court should revisit the question en banc.
It is my understanding that neither party briefed this issue, and that the court brought up Tamiami. I must admit that I have avoided trying to deconstruct the Tamiami cases. I viewed them as aberrations resulting from the complexities of federal law governing gambling operations on Indian lands. But the Strong case really highlights the impact of Tamiami in expanding the court’s jurisdiction. Essentially, if a plaintiff in state court has the power to make a federal claim, whether he has done so or not, the defendant seeking to enforce an arbitral agreement in a more arbitration-friendly federal court can create subject matter jurisdiction by simply filing a FAA §4 petition with a showing of their intention to seek a declaratory judgment on a federal claim from the arbitrator. The 11th Circuit is alone with the 4th Circuit in this interpretation of FAA §4. But it makes sense in a purely strict constructionist approach. Take a look at the language of §4. Unlike §§3, 9, 10 & 11, §4 states that one may “petition any United States district court, which save for [the arbitral agreement], would have jurisdiction under Title 28, in a civil action or in admiralty of the subject matter of a suit arising out of the controversy between the parties…” Clearly a suit over the application of federal banking laws would raise a federal question bestowing subject matter jurisdiction under Title 28.
I’m a bit puzzled by the notion that a party would seek a declaratory judgment from an arbitrator. The power to issue declaratory judgments is provided to the federal courts by statute, and while I suppose there is no reason an arbitrator could not have that power through a broad clause, it raises some interesting questions about the res judicata and collateral estopple effect of the award.
This dispute is likely to continue. At the federal level, the 11th Circuit may take it en banc, and it’s a good candidate for cert to the Supreme Court. At the state level, the state court struck down the lenders’ arbitration defense as a sanction for failing to timely respond to discovery requests relating to the unconscionability of the arbitral provision. That may also be appealed. Stay tuned.
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