Follow our Blog   l   Telephone:(320) 252-7600   l   Toll-Free: (888) 664-7600

Ethics in arbitration: three proposals to promote efficiency, finality and fairness in minnesota’s no-fault arbitration system

By Sarah R. Jewell
Reichert Wenner, P.A.
Re-produced with permission from MDLA, published in the Spring, 2013 edition of Minnesota Defense magazine.

Good Friday, 2006 was not a “good” day for me because my car was rear-ended by a Ford F350 truck when I stopped for traffic. Just before impact, I looked up in my rearview mirror and watched in disbelief as I saw the truck approaching my car from behind. The impact made dents all the way down to the vehicle frame and littered the road with debris. Before this accident, I had never been involved in any type of arbitration proceeding. My experience in navigating the process of no-fault arbitration as administered by the American Arbitration Association1 (“AAA”) inspired me to think about how arbitration touches the lives of Minnesotans across the state and the options available to improve the arbitration process.

The goal of this article is to propose changes to Minnesota’s no-fault arbitration system. The proposed changes are meant to offer a better range of choices in arbitrators for a particular location; to offer knowledge of past decisions by arbitrators through publication of arbitration awards; and to provide a limited opportunity for review of an arbitrator’s decision within the administering agency before parties seek vacatur in district court.

FOR THE LOVE OF ARBITRATION 

Some would say that in these economic times, arbitration is a necessary and integral part of our judicial system. District court dockets are increasingly backlogged and litigation is both time consuming and costly. Therefore, it is easy to see why alternative dispute resolution methods like arbitration are increasingly desirable. With many reasons to love arbitration, and with increasing numbers of Minnesota’s general public being funneled into the arbitration system as a means of settling no-fault insurance disputes, policy makers need to ensure legitimacy in the process now more than ever. See, e.g. Charles N. Bower, The Ethics of Arbitration: Perspectives of a Practicing International Arbitrator, Berkeley Journal of International Law & Publicist, Key Note Address (2010), http://bjil.typepad. com/publicist/2010/05/k.html.

Since the passage of the Federal Arbitration Act in 1925,2 the previous use of and negative attitude toward arbitration as a means of resolving disputes has dramatically changed from its traditional use in commercial disputes between “repeat player”parties, to today where arbitration is now the preferred method of alternative dispute resolution in everything from disputes involving information contained on a website, to disputes with credit card companies, your stock broker, airlines and even hospitals. Carrie Menkel-Meadow, Ethics Issues in Arbitration and Related Dispute Resolution Processes: What’s Happening and What’s Not, 56 U. Miami L. Rev. 949 (July, 2002).

CONFLICT OF INTEREST AND BIAS IN ARBITRATION 

Arbitration typically saves the parties time and money as compared to pursuing a lawsuit in the courts; however, there are drawbacks. For instance, arbitrators with undisclosed conflicts of interest are a major concern. Most arbitrators are sought after for their expertise and knowledge in a particular area of law — and therein lies the problem. In order for an arbitrator to become an expert in a particular area of law, he or she must have practiced in that area for a significant period of time. During that period of time, an expert naturally develops relationships with others who may refer cases to him or her.

Before becoming an arbitrator, the now-expert arbitrator likely specialized in representing one side or the other and may still actively represent those clients. But during arbitration, both sides want an impartial and fair arbitrator to review the merits of the case. The arbitrator is the judge and jury; the fact finder who has the power to grant or deny awards. However, unlike a judge, the arbitrator’s decision is not made public and is only subject to limited review. See Fed. R. Civ. 60; Minn. R. Civ. 60.02. Once an award is made, it is difficult to get it overturned because arbitration awards are final.

EMBEDDED NEUTRALS AND FAIRNESS 

Whether looking at commercial arbitration players or the Minnesota no-fault arbitration system, there is astounding evidence of the rise of “embedded neutrals,” particularly in uneven contexts between one-time and repeat players. See Nancy A. Welsh, What Is (Im)Partial Enough in a World of Embedded Neutrals?, 52 Ariz.L.R. 395 (Summer, 2010). “Embedded neutral” is a term that describes arbitrators, mediators and other dispute resolution “neutrals” whose involvement arises as a result of their association with one of the parties involved in the dispute. Id. 

This situation may be particularly worrisome:

when the embedded neutral’s role has come about due to his or her special relationship with the repeat player; the one-time player is not as sophisticated as the repeat player; and the one-time player has not voluntarily chosen the dispute resolution forum that will be used to resolve their dispute, and is not aware of the special relationship between the embedded neutral and the repeat player or is effectively unable to challenge it. 

Id. Despite these concerns, the United States Supreme Court has upheld arbitral decisions and settlement agreements produced by alleged “embedded neutrals” and has repeatedly rejected one-time players’ claims of structural bias. Id. 

VACATUR

After arbitration, aggrieved parties may not be satisfied with an arbitrator’s decision or may suspect undisclosed conflicts of interest created an unfair bias. Those parties may have an arbitrator’s award vacated in district court under Federal Rule of Civil Procedure 60 and Minnesota Rule of Civil Procedure 60.02.

Minnesota statutes require vacatur where an arbitration award was “…procured by corruption, fraud or other undue means; there was evident partiality by an arbitrator appointed as a neutral or corruption in any of the arbitrators or misconduct prejudicing the rights of any party…”. Minn. Stat. § 572.19, subd. 1(2)(2010). Although the rules for vacatur are in place, vacatur generally is not favored, and courts typically will only reverse an arbitrator’s award where evident unfairness, unconscionability or fraud is clearly shown.

Despite a general satisfaction with Minnesota arbitration, even Minnesota arbitrators are not immune to accusations of bias. The Minnesota Court of Appeals, for instance, affirmed a trial court’s vacation of an award under the No- Fault Act after finding “an appearance of bias sufficient to support the trial court’s vacation of the original arbitration award.” Balchova v. Bassovski, 1997 WL 561272 (Minn. Ct. App. Sept. 9, 1997) (arbitrator found for respondent and made statements to petitioner’s attorney appearing to show bias against immigrants). The court based its holding in Balchova in part on Northwest Mechanical Inc. v. Public Utilities Commission of City of Virginia, 283 N.W.2d 522 (Minn. 1979) (holding even those impermissible contacts or dealings that “might create an impression of possible bias” suffice to show evident partiality); and Produce Refrigerator Co. v. Norwich Union Fire Ins. Soc’y, 97 N.W. 875, 877 (Minn. 1904) (noting general rule that person is disqualified to act as arbitrator where he or she has formed opinion or is otherwise prejudiced with respect to subject matter).

NO-FAULT ARBITRATION IN MINNESOTA 

Minnesota Statutes section 65B.525, subdivisions 1-2, requires mandatory submission to binding arbitration of claims brought by an insured against his or her insurance company for resolution of disputes arising under the No-Fault Act. Minnesota’s no-fault system initially incorporated a means of alternative dispute resolution— arbitration—for cases valued at $1,000 or less. Over time, the value of the cases which must be mandatorily decided via no-fault arbitration proceedings has increased. Minn. Stat. § 65B.525. The value of cases covered by the statute increased to $5,000, and then again to $10,000. § 65B.44(2010).

The Minnesota Supreme Court authorized and appointed a No-Fault Standing Committee to oversee the administration of the no-fault system of arbitration and to recommend changes to the rules governing no-fault proceedings. Minn. No-Fault Rule 43. Although the no-fault system has changed over the years, most would say it works as intended—to provide those injured in automobile accidents with fast, fair and final decision on their claims under the No-Fault Act. In fact, since 1975, the American Arbitration Association has presided over tens of thousands of arbitrations under Minnesota’s no-fault Yet, underneath the exterior of a pretty good system are smoldering conflicts and polarized views regarding the rules governing no-fault arbitration proceedings in Minnesota. Kate Stifter, Vice President of the American Arbitration Association’s Minneapolis office (Phone interview Jan. 21, 2011, Minneapolis, Minnesota). The benefits of arbitration are only worthwhile if the parties obtain a fair hearing, absent the spectre of bias and undisclosed conflicts of interest. It is increasingly difficult to strike a proper balance between fairness and efficiency because parties’ interests in keeping costs down seem to conflict with necessary procedures to ensure fairness and full disclosure.

FAIRNESS, PERCEIVED 

The public needs an arbitration system that is fair, impartial and somewhat open to public scrutiny. This is particularly true because the participants have no choice but to participate in arbitration and they have little recourse if they receive an unfair or biased award.

Although finality in arbitration is an important feature, the arguably more important aspect of a no-fault arbitration system is the perceived fairness of the process. One way to achieve perceived fairness is by enhancing the current procedures available to consumers by adding an optional layer of internal review before a party may seek vacation in the courts. This option already exists in New York’s no-fault arbitration system and is administered by the same service provider we have here in Minnesota: the AAA.

In 2009, Mahavong v. Allstate Property & Casualty Company, Inc., Stearns County District Court File No. 73-CIV-08- 5655 (2009) made “waves” in the Minnesota No-Fault Governing Committee, (a/k/a the “Standing Committee”) and prompted changes in the rules for no-fault arbitrators. In Mahavong, a local St. Cloud, Minnesota attorney, Frank Rajkowski, of the Rajkowski Hansmeier Law Firm, was slated to serve as an arbitrator for a no-fault proceeding. Petitioner Mahavong was represented by Attorney Joe Crumley of Bradshaw & Bryant. Id.Before the arbitration was held, Crumley objected to Rajkowski serving as arbitrator due to a perceived conflict of interest with the Respondent, Allstate Insurance. Id. Rajkowski did not agree that he had a conflict of interest and insisted on serving as arbitrator.

Crumley moved the district court to disqualify Rajkowski on grounds that even if Rajkowski did not have a direct conflict of interest, he benefitted from his partner’s work with Allstate and thus had an indirect pecuniary interest and potential for bias in the outcome of the arbitration. Id. The district court agreed with Crumley and disqualified Rajkowski from serving as the arbitrator. Although Rajkowksi did not have a direct conflict at the time, he was still financially benefitting from his partner’s work with Allstate and that was enough for the court to grant disqualification in order to avoid the appearance of bias where Rajkowski was arguably an “embedded neutral” See Welsh, Supra.

Mahavong was one of the cases mentioned as support for recent Amendments to the Rules of Procedure for No-Fault Arbitration which were passed by the Standing Committee May 3, 2010, particularly Rule 10(b). See Petition For Amendments to the Minnesota No-Fault Arbitration Rules.4 Minnesota No-Fault Rule 10 governs conflicts of interest and required disclosures for arbitrators serving in no-fault proceedings in Minnesota. From 2007 to 2010, the Standing Committee proposed several changes to Rule 10. Supreme Court Petitions.5 In 2009, the Standing Committee proposed changes to Rule 10(b) that are now the current rule. Current Rule 10 states (in relevant part):

a. Every member of the panel shall be a licensed attorney at law of this state or a retired attorney or judge in good standing. Effective January 1, 2004, requirements for an arbitrator shall be: (1) at least 5 years in practice in this state; (2) at least one-third of the attorney’s practice is with auto insurance claims or, for an attorney not actively representing clients, at least one-third of an ADR practice is with motor vehicle claims or not-fault [sic] matters; (3) completion of an arbitrator training program approved by the No-Fault Standing Committee prior to appointment to the panel; (4) at least three CLE hours on no-fault issues within their reporting period; and (5) arbitrators will be required to re-certify each year, confirming at the time of recertification that they continue to meet the above requirements. 

b. No person shall serve as an arbitrator in any arbitration in which he or she has a financial or personal conflict of interest. Under procedures established by the Standing Committee and immediately following appointment to a case, every arbitrator shall be required to disclose any circumstances likely to create a presumption or possibility of bias or conflict that may disqualify the person as a potential arbitrator. Every arbitrator shall supplement the disclosures as circumstances require. The fact that an arbitrator or an arbitrator’s firm represents automobile accident claimants against insurance companies or self-insured, including the respondent, does not create a presumption of bias. It is a financial conflict of interest if, within the last year, the appointed arbitrator or the arbitrator’s firm has been hired by the respondent to represent the respondent or the respondent’s insureds in a dispute for which respondent provides insurance coverage. It is a financial conflict of interest if the appointed arbitrator is aware of having received referrals within the last year from officers, employees or agents of any entity whose bills are in dispute in the arbitration or the arbitrator’s firm has received such referrals and the arbitrator is aware of them. 

The one-year limitation on insurance defense firms having their partners serve as arbitrators if they have done business with the insurance company who is the Respondent in an arbitration proceeding has created an even greater polarization of the Standing Committee between plaintiffs attorneys and insurance defense attorneys. Stifter Interview, Supra.

Outside of the metro area, the pool of potential qualified arbitrators necessarily shrinks when many of them are going to be disqualified based on that limitation. Also, it seems rather duplicitous that the rule claims it is not a “presumption of bias” for a firm to work with claimants against insurance companies, including the Respondent in a given arbitration, but if an arbitrator has worked with a Respondent in the past one year that individual is automatically disqualified from serving as arbitrator in a dispute involving that company. This rule cuts only one way: against insurance defense attorneys.

PROPOSED CHANGES 

I propose three changes to improve no-fault arbitrations in Minnesota. First, alter Rule 10(a) of the no-fault rules to allow attorneys who do not have at least 1/3 of their practice in automobile cases to serve as no-fault arbitrators. Second, publish no-fault arbitration awards. Third, provide for a limited internal review of no-fault arbitration awards by a AAA Special Master.

1. Allow additional attorneys to serve as arbitrators 

Currently, Rule 10(a) requires that every member of the arbitrator panel be a licensed attorney in the state; have at least 5 years in practice in the state; that at least 1/3 of the attorney’s practice is with auto insurance claims or motor vehicle claims or no-fault claims; and that the individual must have all the other training and requirements established by the Standing Committee before appointment to the panel. This Rule should be amended to allow other kinds of law practitioners (such as trust and estate attorneys and not just insurance defense lawyers and personal injury lawyers), to serve as arbitrators for no-fault cases with a potential award value of less than $10,000.00.

This change would allow for a larger pool of potential arbitrators who are not already conflicted in outstate areas, where the same people practicing in personal injury arising from motor vehicle accidents and insurance defense are going to be disqualified much faster. In addition, we already allow randomly-selected people “off the street” to serve as jurors and decide civil cases worth much larger dollar values and criminal cases where a defendant’s liberty is at stake. Therefore, why not allow an attorney who has dealt with principles and doctrines of law in different areas, and presumably has a basic understanding of what a trier of fact should look for in a case, to serve the quasi-judicial function of deciding no-fault disputes?

Critics may ask, how do we create a more ethical practice by opening up practice rather than restricting access to practice? Although trust attorneys may not be experts in no-fault proceedings they, and others like them, are the perfect solution to the problem of bias and conflicts of interest because they are not already embedded in the no-fault system. In other words, rather than having the majority of their practice stemming from insurance companies or personal injury claimants, such attorneys would likely have a mix.

Allowing other kinds of attorneys to add no-fault arbitration to the mix of their practices is a practical and efficient answer to avoiding conflicts which are inherent in embedded neutrals. While most regulatory approaches to increasing quality start from the perspective of limiting the players, this would not be a problem because all arbitrators would still have to undergo the basic arbitration training requirements stated in the Minnesota No Fault Standing Committee’s rules.

2. Publish Arbitrator Opinions 

My next proposed change is to publish arbitrators’ decisions. Because participants are required to resolve their disputes in mandatory, binding arbitration, the parties should have an idea of who their arbitrator is by looking up some of that arbitrator’s decisions. Just like judges who may have certain tendencies, arbitrators may have tendencies, too. If their decisions are publicized, then attorneys from both sides can be better informed as to whom they wish to strike from the list of potential arbitrators offered by AAA.

In addition, arbitrators’ opinions should be published because no-fault proceedings serve a quasi-judicial function. Greater transparency is necessary when parties are cut off from their right to appeal to a court of competent jurisdiction and be heard before a judge whose decisions are made public. Parties should have the right to know the “judge” (arbitrator) who will decide their case.

Critics of this proposal may say it would add unnecessary costs to the program, which is meant to resolve disputes efficiently. There may be some additional costs; however, those costs would be no more than scanning an award and posting it online (after redacting personal information, of course). In fact, I venture to guess that Thomson Reuters would publish the data in a searchable database if they could get it from the courts. Westlaw already hosts a database with other arbitration decisions, such as NASDAQ arbitrations between investors and their stock brokers as well as some labor law arbitration awards. See www.lawschool.westlaw.com. With technological advances and the ability of even a pro se litigant to access materials online or in a public library, publishing arbitrator decisions is not such a farfetched idea; it is an idea whose time has come.

3. Add Internal Reviews 

My next proposal is to add an internal review process to No-Fault Arbitrations which would be handled within AAA in Minnesota to allow parties the opportunity to have another set of eyes review the award for any bias, unfairness, or mistake of law. Similar to the New York no-fault arbitration system, also administered by AAA, the Minnesota Legislature should allow the opportunity for an appeals-type proceeding conducted by a Master Arbitrator. These reviews would have similar limitations to those in force in New York, so that costs would be limited and the scope of review narrowly tailored to only address the issues brought forward in the original arbitration.

Again, critics may view this added layer of review as eroding, rather than increasing, the virtue of finality. However, a limited review system within the framework of the existing no-fault arbitration system would allow parties to challenge an arbitration outcome without filing for vacatur in district court, which is often difficult to obtain absent a clear violation of ethical rules. It would also lessen the burden on the courts from hearing these types of disputes. By limiting the scope and the time for appeal, parties would still receive finality on arbitration awards much more quickly than they would in the courts.

CONCLUSION 

Since 1974, the rules governing Minnesota’s no-fault arbitration system have undergone several changes. However, more are needed to bring the reality in line with the parties’ hopes and expectations for the process: a better range of choices in arbitrators for their locality; knowledge of past decisions by arbitrators; and the opportunity to appeal or challenge an arbitrator’s decision within the realm of no-fault proceedings before attempting to vacate an award in district court. With these few changes, we can enhance the efficiency, finality and fairness of Minnesota’s no-fault arbitration process by learning from other states’ systems while uniquely tailoring the rules to fit the needs of all constituents involved in the process.

1.  The American Arbitration Association is the approved vendor for administering Minnesota’s no-fault arbitration services.

 

2.  Title 9, US Code, Section 1-14, was first enacted February 12, 1925 (43 Stat. 883), codified July 30, 1947 (61 Stat. 669), and amended September 3, 1954 (68 Stat. 1233).

3.  http://www.adr.org/aaa/faces/aoe/gc/automobileinsurance/mnnofault?_afrLoop=330892324302132&_afrW…afrWindowId=null&_afrLoop=330892324302132&_ afrWindowMode=0&_adf.ctrl-state=oe3b970uk_166

4.  http://www.mncourts.gov/Documents/0/Public/administration/AdministrationFiles/No-Fault Arbitration…for Amend No-Fault Arb Rls.pdf

5.  http://www.mncourts.gov/search/search.aspx?zoom_query=no fault standing committee&zoom_per_page=10&zoom_cat=-1&zoom_and=0&zoom_ sort=0