Hawaii arbitration statute amended to make vacature for arbitrator non-disclosure permissive where Court finds such non-disclosure to be substantial and material.


On July 11, 2017, Governor Ige signed  SB 314, SD1, HD1, CD1  which became Act 187 of the 2017 Legislature. Act 187 amends HRS 658A- 12 of the RUAA to require a finding that an arbitrator’s non-disclosed relationship or dealing is substantial and material and makes it permissive (“may”) rather than mandatory (“must”) for a reviewing court to conclude that it is appropriate to vacate an arbitrator’s decision.


Note to arbitration practitioners:


            With the passage of Act 187, the arbitration landscape in Hawaii is changed, but not that different. Hopefully, the legislation firmly establishes that an arbitrator’s failure to disclose some information of a past, present or future relationship or dealing with a party (party, principal, counsel, partner, witness, fellow arbitrator) involved in an arbitration matter will not mandatorily lead to vacature of an arbitrator’s decision unless the undisclosed relationship or dealing is material and substantial.


            For Arbitrators:

            Arbitrators must still make a good faith inquiry and disclose all potential dealings and relationships that might cause a party to be concerned about the impartiality of the arbitrator. Your inquiry and disclosure should also include any personal social, civic, community, business, professional and social media participation that you may have. The old guidance of “when in doubt, disclose, disclose, disclose!” is still good advice. Let the parties have the final say as to whether they are comfortable with placing the decision making authority into your hands.


            In Narayan v. AOAO Kapalua Bay Condominium, (No. SCAP-16-0000588) (“Narayan II”), the Hawaii Supreme Court sought to “clarify the scope of relationships that require disclosure.” The case thus give good guidance to arbitrators and arbitration practitioners as to the kinds of relationships and dealings that are pertinent and which should be disclosed.

I digested the Narayan II case in some detail in the July, 2017 edition of this newsletter. You can also access it in the newsletter section of my website, LouChang.com.


            For Advocates:

            Advocates should still do their diligence in vetting the integrity, background and qualifications of potential arbitrators. Do your investigation early and completely. Include personal, family, firm and internet search information, Don’t be reluctant to ask questions of your prospective arbitrator to gather all information that may be pertinent to your client’s and your interests. Provide all information to your client so that they may participate in and be comfortable with the critical decision of selecting the arbitrator for their matter. If your investigation presents information indicating some possible omission in the disclosure information provided by the arbitrator, resist the temptation to withhold such information as a possible post arbitration shot to overturn an adverse decision and get a “second bite at the apple”. The better practice is to put all such information on the table so that all participants in the arbitration process can act to maintain the integrity and practicality of the arbitration process.


For Courts:

            On June 15, 2017, the Hawaii Supreme Court issued its decision in Narayan v. AOAO Kapalua Bay Condominium, (No. SCAP-16-0000588) (“Narayan II”) which stated that:

 relationships that are “more than trivial” must be disclosed and that “de minimis” relationships and interests and connections between a party and an arbitrator which are “long past, attenuated, or insubstantial” need not be disclosed under HRS Sec. 658A-12. A court must consider the “substantive nature” of the relationship at issue to determine whether it would give a reasonable impression of partiality.” Determining whether a relationship is “substantive” may involve the “consideration of several factors, including but not limited to the directness of the connection (or the degrees of separation) between the arbitrator and either party, as well as the type of connection or activity at issue, and its timing relative to the arbitration proceedings.


            Courts will need to define more clearly the kinds of past dealings and relationships that are “more than trivial” or “de mimimus”. As the Courts do so, arbitrators and advocates will have clearer guidance on this issue and more stability in the arbitration process will be restored.


Arbitration Case Roundup: Some recent cases ruling on arbitration issues of interest:


Second Circuit rules in an employment discrimination, retaliation, wrongful termination case on when the federal court has diversity jurisdiction under the Federal Arbitration Act


On August 14, 2017, the Second Circuit Court of appeals ruled in Hermes of Paris, Inc.. v. Swain; Docket No. 16-3182-cv that complete diversity of jurisdiction is not needed to satisfy the diversity requirement. In the case, Swain, a citizen of New Jersey, brought an employment discrimination case against his employer, Hermes and a co-worker in state court alleging violation of state discrimination laws, retaliation and breach of contract. Hermes petitioned the Federal District Court to compel arbitration. Hermes and Swain were the parties involved in the federal court petition. They were the  direct parties to an arbitration agreement and were citizens of different states.  But the co-worker defendant was also a citizen of New Jersey thus breaking complete diversity of citizenship.


The US Supreme Court has ruled that the FAA does not provide federal courts with an independent basis to take jurisdiction of a matter. Vaden v. Discover Bank, 556 U.S. 49, 59, 129 S.Ct. 1262, 173 L.Ed.2d 206 (2009). (Section 4 of the FAA “bestows no federal jurisdiction but rather requires for access to a federal forum an independent jurisdictional basis over the parties’ dispute.”) Federal court jurisdiction must be established under traditional federal question or diversity of citizenship grounds. In Hermes of Paris v. Swain, the Second Circuit Court ruled that diversity is measured by reference to the parties to the petition to compel arbitration. Because Hermes and Swain were the parties to the petition to compel arbitration, the federal court has the requisite diversity jurisdiction to rule on the matter and does not have to “look through” to the underlying state court action to determine whether diversity or federal question exists in the underlying action.


Ninth Circuit rules that where an employment contract arbitration agreement is ambiguous as to whether class arbitration is permitted, such ambiguity will be ruled against the drafter.

In Varela v. Lamps Plus, Inc., 2017 WL 3309944 (Aug. 3, 2017), the 9th Circuit held that employees could bring their claims related to a data breach as a class action in arbitration.  The employees had first brought their class claims to federal court, and the employer moved to compel individual arbitration. The district court found the arbitration agreement was valid, but ambiguous about whether class actions were waived. Construing that ambiguity against the employer who drafted the agreement, the district court ordered class arbitration. On appeal, the 9th Circuit affirmed the finding of ambiguity, sending the class to arbitration as a group. One judge issued a two sentence dissent, noting “we should not allow Varela to enlist us in this palpable evasion of Stolt-Nielsen”  (Reported by Liz Kramer of Stinson Leonard Street LLP.)

US Supreme Court overrules Kentucky Supreme Court “clear statement” rule.


In cases involving wrongful death claims against a nursing home, the nursing home sought to compel the arbitration of such claims based upon an arbitration agreement contained in the nursing home service contract. The Kentucky Supreme Court had ruled that the power of attorney instruments used by family members to place their loved ones in the care of the nursing home were not valid to authorize the agents to sign an arbitration agreement, ruling that such authorization of an agent failed to clearly state that the power of attorney included the ability to agree to arbitration of claims.


In Kindred Nursing Centers L.P. v. Clark, No. 16–32, 581 U.S. ___ (2017), the US Supreme Court ruled that Kentucky’s clear-statement rule violated the FAA’s principle of equal treatment. The Supreme Court reasoned that the FAA makes arbitration agreements “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2. In so doing, the FAA establishes an equal-treatment principle by which a court may invalidate an arbitration agreement based on generally applicable contract defenses but not based on legal rules that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue. Accordingly, the FAA preempts any state rule that, on its face, discriminates against arbitration as well as any rule that covertly accomplishes the same objective by disfavoring contracts that have the defining features of an arbitration agreement. By requiring an explicit statement before an agent can relinquish a principal’s right to go to court and receive a jury trial, Kentucky’s clear-statement rule hinged on the primary characteristic of an arbitration agreement. Therefore, the court concluded that the rule failed to put arbitration agreements on an equal plane with other contracts and, thus, violated the FAA.  (Reported by David Zaslowsky and Grant Hanessian of Baker McKenzie.)