If George Bush is “the decider,” is he an arbitrator?

Recently, the 11th Circuit expressly distinguished mediation from arbitration. OK, so mediation and arbitration are different (duh), but another question has been raised and the waters muddied.
In Advanced Bodycare Solutions, LLC v Thione International, Inc., 524 F.3d 1235 (11th Cir. (Fla) 2008), the Court decided §3 of the FAA cannot be used to enforce a dispute resolution clause that provides for either mediation or non-binding arbitration prior to litigation. Advanced Bodycare sued Thione for breach of contract. Thione moved to stay the suit pending arbitration pursuant to §3 of the FAA. The district court denied the motion, and the 11th Circuit granted interlocutory appeal. Here’s the dispute resolution provision of the contract:

A. The parties recognize that disputes as to certain matters may from time to time arise which relate to either party’s rights and/or obligations hereunder. It is the objective of the parties to establish procedures to facilitate the resolution of such disputes in an expedient manner by mutual cooperation and without resort to litigation. To accomplish that objective, the parties agree to follow the procedures set forth below if and when such a dispute arises between the parties.

B. If any dispute arises between the parties relating to the interpretation, breach[,] or performance of this Agreement or the grounds for the termination thereof, and the parties cannot resolve the dispute within thirty (30) days of a written request by either party to the other party, the parties agree to hold a meeting, attended by the Chief Executive Officer or President of each party, to attempt in good faith to negotiate a resolution of the dispute prior to pursuing other available remedies. If within sixty (60) days after such written request, the parties have not succeeded in negotiating a resolution of the dispute, such dispute shall be submitted to non-binding arbitration or mediation with a mutually agreed upon, independent arbitrator or mediator. The arbitration or mediation shall be held in Atlanta, Georgia. Each party shall bear its own costs and legal fees associated with such arbitration or mediation. If no resolution acceptable to both parties is reached through arbitration or mediation, either party may resort to instituting legal action against the other in court and all rights and remedies of the party shall be preserved in such action. This Agreement shall be interpreted in accordance with the laws of the state of Georgia.

In concluding that the FAA cannot be used to enforce this agreement, the Court used this reasoning: 1) if, in a dispute resolution agreement, a party has an unconditional right to choose between two or more ADR processes, and 2) one of them is not arbitration, then 3) the FAA cannot be used to enforce the provision. From there, it would appear pretty easy—the agreement provides for a choice of either mediation or non-binding arbitration, and mediation is not arbitration; therefore, no FAA. Courts may be able to stay litigation pending mediation on the basis of authority other than the FAA, such as the inherent authority to control dockets, etc., and mediation agreements may be enforced as conditions precedent under contract or other law. Id. at 1240. The Court expressly left open the question of whether or not §3 of the FAA could be used to enforce non-binding arbitration agreements, Id. at 1241; however, its effort to clarify the distinction between mediation and arbitration may have inadvertently undermined the enforceability of non-binding arbitration under the FAA.

Until now, the 11th Circuit had not enunciated a test for determining if a procedure is FAA arbitration. The leading case is still probably AMF Inc. v. Brunswick Corp., 621 F. Supp. 456 (D.C.N.Y., 1985), in which the court determined that the FAA applies to non-binding arbitration. In that case, the non-binding process used wasn’t even called “arbitration,” and it lacked any adversarial hearing element; nevertheless, the court determined that the FAA applied. Citing AMF for the proposition that one test of whether a procedure is arbitration is merely the submission to a third party to decide, the Court noted other possible tests, procedural resemblance to “classic arbitration, and whether enforcement serves the Congressional purposes of the FAA. It could have simply stopped with the distinction of the parties empowering someone else to make a decision; however, it went further by deciding that the existence of an award was controlling leading to the following “bright line” rule: “If a dispute resolution procedure does not produce some type of award that can be meaningfully confirmed, modified, or vacated by a court upon proper motion, it is not arbitration within the scope of the FAA.” At 1239 (footnote omitted).

This test goes well beyond AMF, whose dispute resolution process would arguably fail to meet this criterion. A non-binding arbitration award cannot be meaningfully confirmed, modified, or vacated. A quick look at the language of the FAA provides no support for such a test. Nothing in the act expressly limits its coverage to binding arbitration agreements, and while I say this without delving into the legislative history, there does not appear to be a presumption in the FAA that the arbitration award is meant to be binding. Indeed, the opposite is indicated in §9, on confirmation, which begins with “If the parties in their agreement have agreed that a judgment of the court shall be entered upon the award made pursuant to arbitration,” then they can seek confirmation. Thus, §9 alone is worded so as to be applicable if the parties agreed to use the courts to enforce a binding award. By inference, the preceding provisions of the act are applicable to any arbitration agreement, binding or not, and the subsequent provisions on vacatur and modification apply to binding awards.

Both courts rely on the purposes of the FAA to support their conclusions, and this is where they seem to diverge. In AMF, the court focuses on the underlying purpose of the FAA to reverse judicial hostility to arbitration and allow the parties contractual control over their dispute resolution process and the extent and effect of the award. It concludes:

Arbitration is a creature of contract, a device of the parties rather than the judicial process. If the parties have agreed to submit a dispute for a decision by a third party, they have agreed to arbitration. The arbitrator's decision need not be binding in the same sense that a judicial decision needs to be to satisfy the constitutional requirement of a justiciable case or controversy. 621 F. Supp. at 460 (cite omitted).

Although the 11th Circuit gives freedom to contract a nod (at 1239), it presumes that the primary purpose of the FAA is to reduce litigation by enforcing dispute resolution agreements that actually dispose of a controversy rather than possibly burdening the courts with it. A non-binding process does not impose settlement on the matter. I think the Court could have done this better by focusing more explicitly on the meaning of “to settle by arbitration” in FAA §2. Although it and the AMF court briefly used the §2 language, they seemed to have reached different conclusions about it (it will take several pages to parse that one).

In short, the 11th Circuit left open the question of whether the FAA applies to non-binding arbitration, but it created a test under which I would have to conclude that it doesn’t. Whether it matters or not is another question. What do you think?

PS - Two additional issues to raise. What will this do to Med-Arb agreements? Why wasn’t the Georgia Arbitration Code applied? It appears to be the law applicable to the contract. The Court doesn’t address that issue, and perhaps the parties simply argued the FAA. But, unlike the FAA’s §2 which arguably enforces only agreements to “settle by arbitration a controversy,” the GAC enforces submissions to arbitration existing or future controversies without mention of the term “settle.”
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