Follow-up: One way or another, lawyers vow to change ADR representation rule

AlternativesTO THE HIGH COST OF LITIGATION

INTERNATIONAL INSTITUTE FOR CONFLICT PREVENTION & RESOLUTION VOL. 25 NO. 9 OCTOBER 2007

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TO THE HIGH COST OF LITIGATION

Publishers:Kathleen A. BryanInternational Institute for Conflict Prevention and Resolution

Susan E. Lewis John Wiley & Sons, Inc.

Editor: Russ BleemerJossey-Bass Editor: David FamianoProduction Editor: Ross Horowitz

VOL. 25 NO. 9 OCTOBER 2007 ALTERNATIVES 153

Published online in Wiley InterScience (www.interscience.wiley.com).Alternatives DOI: 10.1002/alt

FOLLOW-UP: ONE WAY OR ANOTHER,LAWYERS VOW TO CHANGEADR REPRESENTATION RULE

Concern over the crucial question of whocan represent parties in New Jersey con-flict resolution matters may be heating upthis fall.

But then again, maybe not.The national interest in a January New

Jersey Supreme Court Unauthorized Prac-tice of Law Committee opinion, whichseems to indicate out-of-state attorneysparticipating in New Jersey arbitrationsand mediations must register with thestate, stalled over the summer, after an adhoc group focusing on getting the opinionaltered or stricken suddenly disbanded.

Time had elapsed for a formal appeal tothe Court to overrule the January commit-tee opinion. Then, efforts directed at get-ting a different Court committee to exam-

ine more broadly the effects of Opinion 43fell apart in August.

The leader of an ad hoc group can-celed a conference call that was supposedto include New Jersey as well as nationalADR leaders, temporarily ending the ef-forts. [A representative of the CPR Insti-tute, which co-publishes this newsletterwith Jossey-Bass, a San Francisco-basedunit of John Wiley & Sons Inc., wasscheduled to participate.]

The representation issue affects funda-mental ADR practices. Members of the adhoc group, as well as outside observers,vow that moves to address the Court UPLCommittee opinion will be back.

Opinion 43, titled “Out-of-State At-torney Representing Party Before Panel ofthe American Arbitration Association inNew Jersey,” potentially has enormous im-plications for commercial ADR representa-tion in interstate matters. It appears to re-quire out-of-state in-house representatives

to register with the state even for privateADR matters. The opinion, many ADRpractitioners familiar with it believe, con-flicts with Uniform Mediation Act’s orien-tation to party control, which New Jerseyadopted in November 2004.

[For an account of the initial outcry overthe opinion and resources connected with it,see “N.J. Court Committee Requires MostOut-of-State Lawyers to Register for ADR,”25 Alternatives 61 (March 2007).]

ADR professionals want a rules clarifi-cation that asserts that parties may choosewhomever they want to represent them atthe negotiating table in private matters—without regard to registering with the stateunder the New Jersey adoption of Profes-sional Conduct Rule 5.5.

While tempers flared and feathers wereruffled this summer, the Supreme Courtrules committee that could consider rec-ommending to the Court to revise the con-flicting views still hadn’t been officiallyasked to tackle the subject at press time.

Stewart G. Pollock, chairman of theCourt’s Professional Responsibility RulesCommittee and a former N.J. SupremeCourt justice, said shortly after Labor Daythat no formal request had been made toreview the Opinion 43 effects, either fromthe Court or the public. Yet the issue stillmay come up via an indirect path at thecommittee’s fall meeting, scheduled forOct. 2, he says.

In fact, the rules committee already haslooked at Opinion 43, briefly. The rulescommittee issued a February report on avariety of subjects that included a discus-sion of RPC 5.5, which focuses on multi-jurisdictional practice. It recommended achange to New Jersey’s version of RPC 5.5,adding more specificity to the out-of-stateattorneys’ registration provisions that tookeffect when the state adopted the rule threeyears ago to regulate limited appearances inits courts.

The report stated that the number ofregistering attorneys had been low, and cit-ed Opinion 43 to note that monitoringand enforcing RPC 5.5 requirements “maybe difficult.”

The rules committee recommended

ADR BRIEFS • ADR BRIEFS • ADR BRIEFS

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VOL. 25 NO. 9 OCTOBER 2007154 ALTERNATIVES


that the Court adopt clarifying language“to leave no doubt that an out of state at-torney seeking to engage in [multi-jurisdic-tional practice in New Jersey] (and not becharged with engaging in the unauthorizedpractice of law) must take certain affirma-tive steps.”

The Pollock committee also stated thatregardless of whether the Court adopts thelanguage change, it was endorsing a stateOffice of Attorney Ethics recommendationfor an outreach campaign.

But the state Supreme Court on July 16rejected the rules committee’s recommen-dation. It asked the committee to revisitthe state’s version of Rule of ProfessionalConduct 5.5, conduct a broader examina-tion, and submit a report.

That move could put the issue back inthe rules committee members’ laps thismonth.

Opinion 43 triggers Rule 5.5 provi-sions. The opinion is under fire because itrecommended that the American Arbitra-tion Association, as well as other ADRproviders, require as part of their initial fil-ing processes that out-of-state lawyers sub-mit proof that they have complied withRule 5.5 by registering with the Court, andpaying the appropriate fees.

So it’s possible that in looking at Rule5.5, the rules committee will take onOpinion 43 ADR representation issues,says committee chairman Pollock. Headds, “There is a good deal of uncertaintyout there now.”

* * *

In fact, Opinion 43 may have been at theheart of the Court’s July rejection of thecommittee’s RPC 5.5 changes, and subse-quent request for an “overall review andevaluation.”

New Jersey’s RPC 5.5 registration re-quirement may reach the furthest intoADR matters among the rule adoptionsnationwide. Nevada’s RPC 5.5, for exam-ple, is similar to New Jersey’s, but it specif-ically exempts lawyers involved in arbitra-tion or mediation, both in private andpublic matters, from registering. On the

other hand, South Carolina’s Rule 404 lim-its a lawyer involved in mediation or arbi-tration under Rule 5.5(c)(3) to three ap-pearances in a 365-day period.

The leader of the former ad hoc NewJersey group addressing Opinion 43,Bennett Feigenbaum, who chairs the statebar association’s dispute resolution sec-tion, says that he deliberately disbandedthe group. With strong feelings about therepresentation problems, Feigenbaumsays that the conference calls “got un-wieldy, with everyone inviting their

friends and neighbors. It simply got outof hand.”

But, he continues, the group’s activitiesserved an important purpose. Feigen-baum—president of Legal Management &Audit Group Inc., a Morristown, N.J.,firm that audits legal bills and advises oncorporate legal expense management andADR—says the discussion last spring in-formed a comprehensive Opinion 43 ex-amination that the bar association disputeresolution section has submitted to the as-sociation’s board of trustees. The paper asksthe association to urge Rule 5.5 changesbefore the Court and its committees, basedat least in part on the Opinion 43 represen-

tation issues. The association had opposedthe rules committees’ recommendation onthe registration requirements that were re-jected by the Court last summer.

Feigenbaum declined to comment onthe submission’s content, pending thetrustees’ action, which is expected this fall.But he says he is putting together anothergroup of “five or six directly interested or-ganizations . . . to share with each otherand coordinate policy, legislative, and judi-cial action as they wish to do it.” [At presstime, a CPR Institute staffer was consider-ing participation.]

* * *

RPC 5.5’s goal, says Jonathan M. Hyman,a Rutgers Law School professor in Newark,N.J., “is to protect the members of thepublic from out-of-state attorneys whoaren’t members of the New Jersey bar andnot subject to any kind of control or disci-pline in New Jersey.”

But “there ought to be a better way toprovide that kind of protection that does-n’t involve the sweeping control of regis-tration requirements as broadly as thisseems to do,” says Hyman, a state bar as-sociation dispute resolution section mem-ber, adding, “That is what we have towork to develop. Hopefully the Pollockcommittee will do that.”

The difficulty of enforcing the registra-tion of attorneys in private matters, saysHyman, is an important argument forchanging the rule to mute the effects ofOpinion 43. He says,

[I]f you take the mediation part out ofit, and you take two lawyers negotiat-ing a dispute for their clients—one in-state, and one out-of-state—what isthe status of the out-of-state lawyer?Do you need an in-state lawyer to ne-gotiate for the client in the state? . . .Out-of-state lawyers negotiate all thetime. [The rule] seems to articulatethat if they come to New Jersey theyneed to pay a fee. But if they stay onthe phone, it’s not a problem.

* * *

(continued from previous page)


Ethics Controversy

The issue: You need to register be-

fore you negotiate on behalf of

your corporate employer.

It’s New Jersey again. Whyshould I care? Are you in

compliance with multi-jurisdic-

tional practice requirements in

your own state? How about

when you cross a border?

The problem: Those require-

ments are of new or recent vin-

tage. And they’re not forgiving.



Meantime, it’s still up to ADR providersto put people on notice. Karen Bowers,the American Arbitration Association’s re-gional vice president at its Somerset, N.J.,office, says the association continues itspolicy of providing ADR matter partici-pants with information on individualstate requirements, including informationrelated to Opinion 43 it installed earlierthis year.

Bowers says that the association expectsto continue to support efforts to clarify theopinion’s effects. “The entire dispute reso-lution community was surprised when itcame down,” she says. [For more on the as-sociation’s view, see the Alternatives articlecited above.]

Minneapolis-based provider NationalArbitration Forum also has been involvedin discussions to address Opinion 43. Butit has other, considerably more pressingNew Jersey court business this fall, whichcould wind up taking a place in the debateover Opinion 43. The state SupremeCourt has granted NAF’s petition to hearIn the Matter of Riverview Professional Ser-vice (Docket Nos. 10-2005, 12-2005, and26-2005).

The case doesn’t invoke Opinion 43,which hadn’t been decided when the sameCourt unauthorized practice of law com-mittee ruled in late 2006 on nurses’ ap-pearances as “authorized representatives” ofinsurance companies at personal injury ar-bitrations that are a part of New Jersey’sno-fault automobile insurance scheme.NAF has a state contract to administer theso-called PIP arbitrations.

Under the ruling, the nurses are re-stricted to medical arguments, and aren’tpermitted to discuss or opine on legalities.

The Court at press time hadn’t sched-uled an argument date. But because thecase involves ADR representation, it’s pos-sible that a Court ruling could affect theProfessional Responsibility Rules Commit-tee’s work before it has emerged.

NAF communications specialistChristina Doucet provided this statement:

As a relatively recent Opinion, the Na-tional Arbitration Forum . . . is still ex-amining the effect that Opinion 43 has

on PIP arbitrations and other services.The Forum remains committed toworking with others in the ADR fieldto promote efficient and affordable ac-cess to justice for all, and looks favor-ably upon the freedom of parties tochoose whom they want to representthem. To that end, the Forum supportsbroad choice in representation, asdemonstrated in Rule 3 of its Code ofProcedure, which allows parties to acton their own behalf, or to be “repre-sented by an attorney or by a personwho makes an appearance on behalf ofa Party.”

ADR practitioner Hanan Isaacs, aPrinceton, N.J., solo who focuses on ADRmatters, was disappointed that the ad hocgroup efforts dissolved, but says that he’soptimistic that efforts to derail Opinion43’s effects will work. He says he expectsthe Court rules committee to take up theissue, and devise a recommendation morein tune with the Uniform Mediation Actand practice than the narrower focus of theout-of-state attorney registration rule rec-ommended by the rules committee and re-jected by the Court in July.

There has been even more New JerseyADR activity this year. Another SupremeCourt committee, the Advisory Commit-tee on Professional Ethics, publishedOpinion 711 during the summer, provid-ing new guidance for lawyers who work indivorce mediation centers operating inNew Jersey. [Hanan Isaacs is coauthor ofan article on the implications of the opin-ion for attorney-neutrals who align them-selves with provider organizations on page150 of this issue.]

And the same day the New JerseySupreme Court rejected the rules com-mittee’s RPC 5.5 registration require-ment, it also rejected the committee’s rec-ommendation to open up to the publicthe allegations against attorneys in fee ar-bitration proceedings, leaving the confi-dentiality provisions in place. The statebar association opposed the changes.Clients can still file suit if they want alle-gations public, but the arbitration systemremains closed. �

NINTH CIRCUIT FINDS WAIVING CLASS ARBITRATIONIS UNCONSCIONABLE

The Ninth U.S. Circuit Court of Appeal’slatest arbitration decision–striking a clausebecause it waived class arbitrations, andsending the case for trial–is yet another set-back for consumer arbitration, and morefodder against class arbitrations.

Or, if you’re on the consumer side, it’s astrong reaffirmation of the sanctity of classarbitration rules.

Either way, it has struck a nerve, in partbecause both sides say they want arbitra-tion, just not on the terms that the otherside seeks.

The panel opinion in Shroyer v. NewCingular Wireless Services Inc., No. 06-55964 (9th Cir. Aug.17, 2007)(available at:http://blog.wired.com/27bstroke6/files/cingulardecision.pdf), is hardly the firsttime California state or federal courts havefound arbitration contracts uncon-scionable. But the latest decision, one of awave involving the cellular telephone in-dustry and its strong push for arbitrationcombined with its stronger distaste for classarbitrations, may be the highest profile.

The decision, which sparked coveragein Business Week (see “Cell-Phone ContractDisputes Heat Up,” Aug. 20 2007)(avail-able at businessweek.com) and NBC’s To-day show on Sept 6., strongly suggests thatthe defense will request a rehearing in frontof the unanimous Ninth Circuit panel thatdecided against it, or the full Circuit enbanc—or, perhaps a file a petition to theU.S. Supreme Court.

The outcome means that one of the na-tion’s biggest cellular carriers will have toadjust its consumer contracts–something itsays it already has done in the face of otherclass litigation over the industry’s sales,services, and use of technology.

At press time, defendant AT&T–thecompany’s name after it merged with Cin-gular–said in a statement that it was re-viewing the case. David Falk, a partner inthe Palo Alto, Calif, office of defense firmMayer, Brown, Rowe & Maw LLP, de-



VOL. 25 NO. 9 OCTOBER 2007156 ALTERNATIVES


clined to comment, deferring to AT&T. The plaintiffs are ready to begin trial, andintend to proceed as soon as possible–tothe extent they can in the face of an appeal.A defense motion appealing the case“wouldn’t surprise me,” says Michael Kelly,a partner in the El Segundo, Calif., officeof Kirtland & Packard LLP. For now, theplaintiff class and its attorneys are waitingfor a Ninth Circuit order restoring theircase in the district court, which had dis-missed it.

Shroyer reverses the district court ordercompelling arbitration. It holds that a classarbitration waiver in the cellular provider’sstandard phone services contract is uncon-scionable, and, thus, unenforceable. It alsoheld that “the invalidation of the contractprovision is not preempted by the FederalArbitration Act.”

Plaintiff Kenneth Shroyer of Los Ange-les filed a class action suit in Californiastate court against Cingular and AT&TWireless for injuries suffered as result ofthe 2004 merger. He had subscribed toAT&T, but the service deteriorated post-merger. Cingular told him that it would beimproved if he signed a new Cingular con-tract. Shroyer entered into new serviceagreements by executing the contract overthe telephone. Shroyer answered “Yes” inresponse to the statement, “You agree tothe terms as stated in the Wireless ServiceAgreement and terms of service.”

The form contract included a bindingarbitration clause. The provision con-tained a class arbitration waiver thatbarred individuals from bringing represen-tative claims:

You and Cingular agree that YOUAND CINGULAR MAY BRINGCLAIMS AGAINST THE OTHERONLY IN YOUR OR ITS INDI-VIDUAL CAPACITY, and not as aplaintiff or class member in any pur-ported class or representative proceed-ing. Further, you agree that the arbi-trator may not consolidate proceed-ings of more than one person’s claims,and may not otherwise preside overany form of representative or class

proceeding, and that if this specificproviso is found to be unenforceable,then the entirety of this arbitrationclause shall be null and void.

(Emphasis is in the opinion.)AT&T responded by removing the ac-

tion to the U.S. District Court for Califor-nia’s Central District, and moved to compelarbitration and stay litigation. The cellularcompany asserted that the arbitrationclause was valid and enforceable under Fed-eral Arbitration Act Section 2, and theclause was neither procedurally nor sub-stantively unconscionable. Alternatively,AT&T claimed that the holding that theclause is unconscionable was “expressly and

impliedly preempted” by FAA Section 2,which provides that arbitration agreements“shall be valid, irrevocable, and enforceable,save upon such grounds as exist at law or inequity for the revocation of any contract.”

* * *

The federal court granted the motion tocompel. In the Ninth Circuit appeal, theissues were (1) whether the class arbitrationwaiver was unconscionable, procedurallyand substantively, under California law

and therefore not enforceable under theFAA, and (2) whether the FAA would ex-pressly and impliedly preempt a findingthat the waiver is unconscionable.

Under California law, according to theunanimous opinion written by CircuitJudge Stephen Reinhardt, a contract provi-sion is unenforceable only if it is both pro-cedurally and substantively unconscionable.

The Ninth Circuit applied DiscoverBank v. Superior Court of Los Angeles, 36Cal.4th 148 (Cal.2005), which requiresthe court to decide “(1) whether the agree-ment is ‘a consumer contract of adhesion’drafted by a party that has superior bar-gaining power; (2) whether the agreementoccurs ‘in a setting in which disputes be-tween the contracting parties predictablyinvolve small amounts of damages’; and (3)whether ‘it is alleged that the party withthe superior bargaining power has carriedout a scheme to deliberately cheat largenumbers of consumers out of individuallysmall sums of money.’”

The Discover Bank clause was held tobe unconscionable by the CaliforniaSupreme Court, which also found that theFAA didn’t preempt California law. TheShroyer clause was written before DiscoverBank, and it met a similar fate. The NinthCircuit panel concluded that the class arbi-tration waiver satisfies the three DiscoverBank criteria, so it was both procedurallyand substantively unconscionable.

The Reinhardt panel found that theservice agreements were adhesion con-tracts. The second point was a key to theopinion: the slight damages were substan-tially smaller than the $1,000 damagesamount that a California appellate courtfound satisfied Discover Bank’s second el-ement in Cohen v. DirecTV Inc., 142Cal.App. 4th 1442 (2006). Because thedamages were low, Shroyer, like Cohen,suggests that individual actions aren’teconomical.

The cellphone provider countered thatShroyer had other choices, but the panelfound that it wasn’t enough to defeat proce-dural unconscionability. The defense alsoargued that it paid for the full arbitrationcosts, and winning plaintiffs receivingawards equal to or greater than their de-

(continued from previous page)


Waiving the Class

The issue: Another class action ar-

bitration waiver is stricken by

the Ninth Circuit.

It’s California again. Whyshould I care? Even though

it’s a consumer clause, these

wireless industry cases serve as a

reminder to update arbitration

clauses across the board.

The problem: Both sides say they

like and want arbitration. But

instead, they’re going to trial.



mands can receive attorneys fees under thearbitration agreement–therefore permittingindividual small-value claims.

But it wasn’t enough. The Ninth Cir-cuit, citing Discover Bank, rejected the ra-tionale that “the potential availability of at-torney fees to the prevailing party in arbitra-tion ameliorates the problem posed by suchclass action waivers.” See 36 Cal.4th at 162.

As a result, the class arbitration waiverwas both procedurally and substantively un-conscionable, and held to be unenforceable.

AT&T contended that a finding thatthe class arbitration clause is unconscionablewould be expressly preempted by the Feder-al Arbitration Act. But the Ninth Circuitpanel pointed out that the same preemptionargument was rejected in Discover Bank, aswell as in the key arbitration cases of Ingle v.Circuit City Stores, Inc., 328 F.3d 1165,1170 (9th Cir.2003), and Ting v. AT&T,319 F.3d 1126 (9th Cir.2003).

* * *

Despite everything, both sides say they stillwant arbitration–on their terms. “I ab-solutely . . . believe that having a class arbi-tration under these agreements would be

an equitable and fair way to resolve themwithout burning up millions of dollars ofattorneys fees on both sides,” says plain-tiffs’ attorney Michael Kelly.

But that’s not going to happen, hesays, noting that arbitration clauses maymake the headlines, but he believes thatthey are a secondary purpose in his adver-sary’s view. “This isn’t a fight aboutlawyers or plaintiffs not wanting to go toarbitration,” says Kelly. “Arbitration isthe stalking horse to ban a class presenta-tion of claims. It’s that simple.”

William Weinstein, a partner at NewYork’s Sanford Wittels & Heisler, LLP, whoalso is representing Shroyer and class plain-tiffs, says that the law was clear in the case.“From a legal standpoint, the decision iscompletely consistent with the prior deci-sions of the Ninth Circuit, and the Califor-nia Supreme Court in Discover Bank,” hesays. “I was delighted to get the decision,but I can’t say that I was surprised by it.”

In the AT&T Wireless statement aboutthe case, spokesman Walt Sharp noted:

It’s important to remember that thisopinion is based on our old arbitrationclause. We continue to believe that a

consumer is better off pursuing a claimunder our arbitration clause, ratherthan pursuing a class action.

We have significantly improved our ar-bitration clause to make it more con-sumer friendly. Our current arbitra-tion clause calls for the company—if itdoes not settle a consumer complaintand loses arbitration—to pay thegreater of the amount of either the ar-bitration or the state’s judicial defini-tion of a small claim (commonly$5,000). Also, if the consumer hasused a lawyer in winning an arbitra-tion case, the company would pay twotimes the lawyer’s fee.

* * *

This ADR Brief was reported and written byAlternatives editor Russ Bleemer. Esther Seon-Min Lee, a CPR Intern, originally covered thecase for the Recent News feature at the CPRInstitute’s home page, www.cpradr.org, andcontributed research to this article. �

DOI 10.1002/alt.20198

(For bulk reprints of this article, please call (201) 748-8789.)


CPR NEWS • CPR NEWS • CPR NEWS

Copley Plaza at 800-257-7544, or by E-mailing [email protected]. �

FINAL CALL:CPR’S 2007 AWARDS NOMINATIONS

One month to go: The submission dead-line for nominations for the 2007 CPRAwards for Excellence in Alternative Dis-pute Resolution is Nov. 1.

The awards will be presented at a din-ner at CPR’s Annual Meeting in January inNew York.

CPR has been recognizing ADR achieve-ments in companies, classrooms, books andarticles, and courts annually since 1983.

Law Firm Award for Excellence in ADR atthe meeting. [For more information on theaward, see CPR News, 25 Alternatives 50(March 2007); Alternatives will present de-tails on the award winner in next month’sissue.] In addition, CPR will offer intensivemediator training concurrent with themeeting. See item below.

The CPR Institute thanks the follow-ing meeting sponsors: Northeast Utilitiesof Hartford, Conn.; Boston’s Liberty Mu-tual Insurance Co.; Schnader Harrison Se-gal & Lewis LLP; Goodwin Procter LLP;Kirkpatrick & Lockhart Preston Gates El-lis LLP, Foley Hoag LLP, Heller ErhmanLLP, Nixon Peabody LLP, and Los Angeles-based attorney-neutral Jeff Kichaven.

Rooms can be reserved at the Fairmont

(continued from page 146)

Getting Together

The event: CPR’s Fall Meeting is

later this month in Boston.

What’s New? All are welcome—

with discounts for members.

What Else Is Going On? The

CPR Awards program deadline

is near, three training programs

are on tap, and CPR helped

honor an ADR legend.


Documents

Follow-up: One way or another, lawyers vow to change ADR representation rule