ADR and Governance News from Jim Reiman

October, 2016

Friends and colleagues

As regular readers of this Newsletter know, each month I present a summary of recent research reports, legal decisions and news articles that I hope my readers will find of interest and worthy of their time to peruse and perhaps download and read in their entirety.  I focus on three areas:  corporate governance, alternative dispute resolution (“ADR”), and eDocuments and eDiscovery.   Additionally, I almost always include a matter of general interest in an “Interesting Case/Article of the Month” section.

This issue will continue that tradition, but no cases on the eDiscovery/eDocuments topic will be included since none have come to my attention this month that are particularly interesting.  There’s lots of material in the other areas, however.

For my governance readers, I present a list of “commonsense principles of corporate governance” created not by academics or corporate governance consultants, but rather by an ad hoc  group of leading public company CEO’s, asset fund managers, and pension and mutual fund managers.  Also presented are two new research reports put out by the Stanford Corporate Governance Research Initiative; one which re-examines the question of separating the roles of CEO and Chairman, and another which examines the data correlating the relationship between CEO performance and firm performance.

For my arbitrator readers, I present two cases.  The first, out of the US District Court for the Southern District of New York, addresses whether non-signatories to an arbitration agreement may be compelled to arbitrate.  The second, a split decision issued by the US Court of Appeals for the Seventh Circuit, effectively reverses a decision of an arbitration panel that the Court apparently deemed was wrongly decided.

Finally, for my interesting article/case of the month, I found myself unable to present just one this month.  So, I’ve presented 3:  The first is an essay asserting that the Chinese Communist Party has returned to “Chinese roots [and] has brought about a new synthesis between political and cultural nationalism.”  The second is a short piece about the use of robots in a small pizza store – which I present as a commentary on the declining number of jobs for the unskilled.  Lastly, for those who saw the movie Woman in Gold and have been following the art world’s responses to attempts to recover art stolen by the Nazis, I present an article describing a new case filed against the Met in New York.

This Month’s Articles

Corporate Governance

  • Commonsense Principles of Corporate Governance – a New Baseline for Best Practices:  This past July, 13 of the country’s leading CEO’s and investment fund managers published a list of “commonsense principles” that they created to address what they believe to be “best practices” in corporate governance.  As the group related in their open letter announcing their conclusions:  “While most everyone agrees that we need good corporate governance, there has been wide disagreement on what that actually means. So we gathered a small group of executives to see if we could reach some consensus on what we think works in the real world.”  The principles are “commonsense recommendations and guidelines about the roles and responsibilities of boards, companies and shareholders.”  They are significant not only for what they say, but by WHO is doing the “saying:”  Warren Buffett (Berkshire Hathaway), Mary Barra (GM), Jamie Dimon (JP Morgan Chase), Jeff Immelt (GE), Larry Fink (Blackrock), Bill McNabb (Vanguard), and Ronald O’Hanley (State Street) to name just some of the 13.
  • Chairman and CEO – The Controversy Over Board Leadership Structure:  David Larcker and Brian Tayan, of Stanford’s Rock Center for Corporate Governance, take a fresh look at this issue, examining 187 companies over a 20 year period.  Their findings are presented in a concise overview, and through a series of charts and graphs.
  • Research Spotlight – CEO Attributes and Firm Performance:  Periodically Stanford reviews the literature and research on a particular topic, and summarizes it in simple PowerPoint slides and a detailed bibliography for those who wish to review the complete study.   As Stanford puts it, they create “concise introductions to concepts, facts, and research on corporate governance.”  This past September, they did just that for the question:  what is the “influence that CEOs have on company outcomes (performance and risk)?”  The “Spotlight”, and a couple of its highlights, are presented.

Alternative Dispute Resolution

  • Compelling Non-Signatories to an Arbitration Agreement to Arbitrate:  InNational Union Fire Insurance Company of Pittsburg v Beelman Truck Company, et al., an insurance company seeks to compel nine related companies to arbitrate their claim.  One of the nine companies signed the arbitration agreement; eight did not.  The case, heard in the US District Court for the Southern District of New York, addresses the issue of mandatory joinder.  Also addressed is the role of the courts under the Federal Arbitration Act when challenges to an arbitration are made, and the standard of review.
  • Vacating an Arbitrator Award – Arbitrators Exceeded Authority:  In Bankers Life & Casualty Insurance Co v. CBRE, Inc., the United States Court of Appeals for the Seventh Circuit reversed and remanded a district court’s decision which had denied a petition to set aside “a take-nothing” arbitration award.  Judge Posner, writing for the majority in a split decision, held that the arbitrators “exceeded their authority” by erroneously relying on a disclaimer, and therefore reversed the decision of the trial court confirming the award.  Judge Sykes dissented, arguing that while he might agree that the arbitrators wrongly decided the case in a plenary review, the majority decision exceeded the limited scope of judicial review permitted by the Federal Arbitration Act and the Illinois Arbitration Act.


Interesting Articles/Cases of the Month

  • China – the Communist Party’s Return to “Chinese Cultural Roots”:    Yingjie Guo, of the University of Sydney, observes a shift in the politics and language of the Chinese Communist Party, and discusses both that shift and his belief as to the likely consequences for domestic and foreign policy and political positioning.
  • Robots In The Corner Pizza Joint:  This is a short article about a Silicon Valley delivery-only pizza company replacing pizza chefs with robots.  I present the piece in part because of its quirky nature, and in part as an example of the ever shrinking number of low paid, low skill jobs (although I never considered throwing a pizza a low skill occupation).
  • Nazi Art and the New York Met:  Many of you have seen the movie “Woman in Gold” about Maria Altmann’s battle to recover the portrait of her aunt by Gustav Klimt.  In September, a similar but legally very different suit was filed against the New York Metropolitan Museum of Art to recover Picasso’s “The Actor.”

I hope you find one or more of the below articles of interest and worthy of your inbox’s space.

Warm regards,

Jim Reiman

Articles / Corporate Governance

Commonsense Principles of Corporate Governance

Last summer, an extraordinary gathering took place.  13 of the country’s leading CEO’s, investment fund managers and asset managers gathered to explore what constitutes good governance, and to try to find “consensus on what [they] think works in the real world.”  This past July they published their conclusions in an open letter and simple website with their thoughts.  In essence, the group laid out their thinking regarding “best practices” in 8 areas of corporate governance:  board composition and internal governance, board of directors’ responsibilities, shareholder rights, public reporting, board leadership, management succession planning, management compensation, and asset managers’ role in corporate governance.

As related in the introduction of this Newsletter, the Principles are notable in large measure because of the individuals whose opinions they comprise:  Tim Armour (Capital Group), Mary Barra (General Motors Company), Warren Buffett (Berkshire Hathaway), Jamie Dimon (JPMorgan Chase), Mary Erdoes (J.P. Morgan Asset Management), Larry Fink (Blackrock), Jeff Immelt  (GE), Mark Machin (CPP Investment Board), Lowell McAdam (Verizon), Bill McNabb (Vanguard), Ronald O’Hanley (State Street Global Advisors), Brian Rogers (T. Rowe Price), and Jeff Ubben (Valueact Capital).

As interesting as the principles and recommendations are, I found the authors’ “Open Letter” perhaps the most interesting.  Below is an excerpt:

“[E]ven among our small group, we don’t agree on absolutely everything.  But we do agree that, taken as a whole, these principles are conducive to good corporate governance, healthy public companies and the continued strength of our public markets. Thus, we are steadfast in our determination not to let our minor differences imperil this important effort.   

The principles set forth a number of commonsense recommendations and guidelines about the roles and responsibilities of boards, companies and shareholders. We firmly believe that empowered boards and shareholders, both providing meaningful oversight, are critical to the long-term success of public companies. But knowing that there is significant variability among the thousands of such companies and understanding that both context and circumstance matter, we have tried not to be overly prescriptive in how to achieve those goals. We also recognize that we live in a dynamic, fast-changing world – and that while many of these principles are and should be part of the corporate governance permanent landscape, some will inevitably change over time. 

These principles are not intended to be for or against activists, proxy advisors or special interest groups. While we know that not everyone will agree with everything in them, we hope that, at the very least, these principles will serve as a catalyst for thoughtful discussion. More than 90 million Americans own our public companies through their investments in mutual funds, and millions more do so through their participation in corporate, public and union pension plans. These owners include veterans, retirees, teachers, nurses, firemen, and city, state and federal workers. We owe it to all of them – and to all our shareholders and investors who have entrusted us with their savings – to get this right.”    

While I commend the entire collection of principles to all to read (they comprise just 9 pages), below are highlights that the authors selected and set forth on their website:

■ Truly independent corporate boards are vital to effective governance, so no board should be beholden to the CEO or management. Every board should meet regularly without the CEO present, and every board should have active and direct engagement with executives below the CEO level;

■ Diverse boards make better decisions, so every board should have members with complementary and diverse skills, backgrounds and experiences. It’s also important to balance wisdom and judgment that accompany experience and tenure with the need for fresh thinking and perspectives of new board members;

■ Every board needs a strong leader who is independent of management. The board’s independent directors usually are in the best position to evaluate whether the roles of chairman and CEO should be separate or combined; and if the board decides on a combined role, it is essential that the board have a strong lead independent director with clearly defined authorities and responsibilities;

■ Our financial markets have become too obsessed with quarterly earnings forecasts. Companies should not feel obligated to provide earnings guidance — and should do so only if they believe that providing such guidance is beneficial to shareholders;

■ A common accounting standard is critical for corporate transparency, so while companies may use non-Generally Accepted Accounting Principles (“GAAP”) to explain and clarify their results, they never should do so in such a way as to obscure GAAP-reported results; and in particular, since stock- or options-based compensation is plainly a cost of doing business, it always should be reflected in non-GAAP measurements of earnings; and

■ Effective governance requires constructive engagement between a company and its shareholders. So the company’s institutional investors making decisions on proxy issues important to long-term value creation should have access to the company, its management and, in some circumstances, the board; similarly, a company, its management and board should have access to institutional investors’ ultimate decision makers on those issues.

 Commonsense Principles Of Corporate Governance


Chairman and CEO – The Controversy Over Board Leadership Structure:  

As those involved in corporate governance and who think about board structure know, for several years a debate has ensued over whether the roles of board chairman and company CEO should be merged in a single person, or held by separate individuals.  David Larcker and Brian Tayan, of Stanford’s Rock Center for Corporate Governance, take a fresh look at this issue, examining 187 companies over a 20 year period.  They “examined in detail the leadership structures of publicly traded corporations and the circumstances under which they are changed.”  Their data “sample includes the 100 largest and 100 smallest companies in the Fortune 1000 [during the period] 1996-2015.”

The study resulted in “3,525 firm-year observations.”  Of those, “61 percent of the time companies had a dual chairman/CEO, while 39 percent of the time they separated the roles. Large companies (69 percent) are more likely than small companies (53 percent) to have combined leadership, although even among small companies duality is the prevailing standard.”

“Most separations occur during the succession process, with the former CEO, founder, or other officer continuing to serve as chair on either a temporary or permanent basis.”  

*      *     *

“Approximately a quarter (22 percent) of separations are not part of an orderly succession. Nine percent follow an abrupt resignation of the CEO, 6 percent a governance issue (such as accounting restatement or CEO scandal), 3 percent a merger, 2 percent a shareholder vote, and 2 percent are required of the company as part of a government bailout.

*      *     *

The decision to combine the chairman and CEO roles tends to be more uniform. The vast majority of combinations (91 percent) involve an orderly succession at the top. Only 9 percent are associated with a merger, sudden resignation, or governance related issue.  In 90 percent of combinations, the current CEO is given the additional title of chair; in 10 percent of cases, a new CEO is recruited to become dual chair/CEO.  

Most interesting, perhaps, is the frequency with which companies “permanently” separate the leadership roles only to recombine them at a later date. Slightly over one-third (34 percent) of companies in our sample permanently separated the chairman and CEO roles and later recombined them during the 20-year measurement period.

I find this article of interest and have presented it for two reasons:  First, as noted, this is a “hot” topic in governance circles and the study provides new and helpful data.  Secondly, and more importantly to me, it asks the questions that I believe boards should be asking when considering the issue.  Those questions, with an explanation as to why the question is being asked, are:

  1. Many governance experts and shareholder activists believe that the CEO of a corporation should never serve as chairman of their own board. The research literature, however, contains little evidence that chairman/CEO duality is on average detrimental to future performance or governance quality.  Why do activists advocate that corporations—especially large corporations—strictly separate the chairman and CEO roles?  How much of this activism is publicity-seeking rather than an attempt to improve corporate governance?
  2. Research evidence suggests that the benefits and drawbacks of independent board leadership are situation-dependent. It is not always clear, however, which situations benefit from shared leadership and which benefit from combined leadership. What factors should the board consider in deciding whether to combine or separate board leadership? Which structure should be the default setting for a company?
  3. General Motors cited “stability” when justifying the decision to recombine the chair and CEO roles in 2010. Is a combined chairman/CEO structure more stable than separate leadership?  How can the board weigh the tradeoffs between stability of leadership, efficient decision making, and decreased oversight?

  Stanford Business School, Corporate Governance Research Initiative, Stanford Closer Look Series, “Chairman and CEO:  The Controversy Over Board Leadership Structure.”


Research Spotlight – CEO Attributes and Firm Performance

As noted in the introduction section of this Newsletter, Stanford University’s Corporate Governance Research Institute periodically compiles the varied research on a particular topic, and presents the researchers’ findings in short 1 slide PowerPoint slides.  I’ve always found these “Spotlights” interesting, in part because more often than not different researchers examining the same issue find different results.  Also, sometimes, trends can be seen from the dates of the research.  For those reasons, I presented their September Spotlight:  CEO Attributes and Firm Performance.

The research questions explored:

  1. What is the influence of CEOs on firms
  2. What is the impact of a CEO on performance
  3. What is the importance of managerial experience
  4. What is the importance of personal and managerial attributes
    1. Personality
    2. Background
    3. Background and Risk Tolerance
    4. Background and Fraud

Stanford’s conclusions:

“Modest evidence exists that personal and professional attributes are associated with their performance as managers:

  • Previous experience and work style seem to be predictive of future performance.
  • Personal choices and background are only modestly predictive.
  • The importance of personality is unknown.

Research on this topic is still being developed”

My take:  I look for trends and try to see why different studies reach different conclusions.

Consider:  A 1988 study which examined 12 British retail companies between 1965 and 1984 found that “CEOs are responsible for 3.9% to 7.0% of firm performance.”  In contrast

  • a 2008 study of 92 CEO’s at 51 companies during the period 1992 – 2002 found that “CEOs account for 29.2% of unexplained variance in company profitability (ROA) and 12.7% in business-segment profitability.”
  • a 2014 study of 830 CEO’s at 315 companies, during the period 1992-2011found that CEOs account for 35.5% of firm outcomes (measured as ROA).

Why the differences?  Have markets changed?  Has the role of a CEO changed?  Have research analytics changed?  Does a trend exist showing that CEO’s have an increased impact on firm performance?  If so, why?  I’ve no answers, nor does Stanford.  Nonetheless, I find these reviews and compilations worthy of the read and often thought-provoking.  If nothing else, they make one a more critical reader of academic research.

 Stanford Business School, Corporate Governance Research Initiative, Quick Guides, “CEO Attributes and Firm Performance,” September, 2016

Articles / Alternative Dispute Resolution

Compelling Non-Signatories to an Arbitration Agreement to Arbitrate

In National Union Fire Insurance Company of Pittsburg v Beelman Truck Company, et al,the plaintiff insurance company (“National Union”) sought to compel nine related companies to arbitrate an insurance dispute under the Federal Arbitration Act (“FAA”).  One of the nine companies, Beelman Truck Company (“Beelman Truck”), did not dispute its obligation to arbitrate.  The remaining 8 companies (the “Resistors”) are all affiliates of Beelman Truck and are all commonly controled by Beelman Truck’s principal, Frank Beelman.

The underlying dispute between National Union, Beelman Truck and the Resistors is described by the Court only as “an insurance dispute.”  The relevant facts:   National Union provided insurance coverage to Beelman Truck for a four year period pursuant to a “set of interlocking contracts including annual policies, schedules of policies and payments, and biennial payment agreements.”  The payment agreements contained an arbitration clause which was signed by Beelman Truck but not by the Resistors.  The Resistors are all affiliates of Beelman Truck and controlled by the same natural person who signed the arbitration agreement.  National Union claimed that the Resistors should be deemed signatories of the arbitration agreement, hence compelled to arbitrate.  The Resistors asserted that since they did not sign the arbitration agreement, they cannot be forcibly joined in the arbitration.

In addition to the Resistors, an additional entity was before the Court.  Beelman Truck sought to join the insurance broker in the arbitration.  The insurance broker, like the Resistors, had not signed the arbitration agreement.  Unlike the Resistors, however, the insurance broker was neither an affiliate of Beelman Truck nor controlled by Beelman Truck’s principal.

As preface to the discussion of the substantive issues, the case highlights an important pleading technicality which it addresses in a footnote (footnote 4) – actions to compel or enforce arbitrations cannot be responded to via a motion to dismiss.

§6 of the FAA provides:

“Any application to the court hereunder shall be made and heard in the manner provided by law for the making and hearing of motions, except as otherwise herein expressly provided.”

Courts have read §6 narrowly, holding that the language “in the manner” means that applications to compel an arbitration or enforce an arbitration award are motions and not pleadings.  See ISC Holding AG v. Nobel Biocare Fin. AG, 688 F.3d 98, 113 (2d Cir. 2012).  In Beelman, the insurance company initiated the suit by filing a “Petition To Compel Arbitration.”  The Resistors responded by filing a “Motion to Dismiss.”  A motion to dismiss was therefore improper.  Thus, the Court “construe[d] the motion to dismiss as the Resistors’ opposition to the petition.”

Since an opposition to a petition to compel arbitration is not a “motion,” the question arises:  what is the standard of review?  The Court in Beelman answers this:

“When evaluating a petition to compel, the Court ‘applies a standard similar to that applicable for a motion for summary judgment.’ [citation omitted].  The Court must grant the petition if there is no genuine issue of material fact regarding the requirements to compel arbitration. [citation omitted]

Regarding the substantive issues presented by the Beelman case, the Court separated the parties to be joined into two groups:  The Resistors (who were all affiliates of Beelman Truck and controlled by its principal), and the insurance broker (an independent third party).  The Court next set forth the applicable legal standard:

The FAA ‘requires courts to enforce privately negotiated agreements to arbitrate … in accordance with their terms.’  [citation omitted]   The statute limits the Court’s role in adjudicating the petition to ‘determining two issues: i) whether a valid agreement or obligation to arbitrate exists, and ii) whether one party to the agreement has failed, neglected or refused to arbitrate.’  [citation omitted]. If the Court finds that these requirements are met, it must issue ‘an order directing the parties to proceed to arbitration in accordance with the terms of the agreement.’  [citation omitted]

“[A]rbitration is a matter of contract, ’ [citation omitted] and ‘a party cannot be required to submit to arbitration any dispute which [it] has not agreed so to submit.’ [citation omitted]  The issue of whether the parties are obliged to arbitrate their dispute therefore breaks down into two questions: ‘(l) whether the parties have entered into a valid agreement to arbitrate, and, if so, (2) whether the dispute at issue comes within the scope of the arbitration agreement.’ [citation omitted]  The parties can delegate much of the threshold arbitrability inquiry to the arbitrator as long as the contract ‘clearly and unmistakably’ memorializes their intent to do so. [citation omitted]  But the Court must always ascertain for itself whether the resisting party is subject to a valid arbitration agreement, because even the broadest arbitration clause cannot bind a party who never agreed to it. [citation omitted]

*    *     *

[I]n evaluating whether the parties have entered into a valid arbitration agreement, the court must look to state law principles.  [citation omitted]

Applying these principles to the Beelman case, the Court found that the undisputed facts were that the Resistors were both affiliates of Beelman Truck (the entity that signed the arbitration agreement) and “named insureds” under the policy.  The Court further held that the Resistors, as a matter of law, “are signatories” to the relevant documents hence they may be compelled to join the arbitration.

The same was not the case with respect to the insurance broker, however.  With respect to the insurance broker, the Court found that such party had neither signed the arbitration agreement nor other relevant documents, and could not be deemed to have done so.

The Second Circuit recognizes only five theories under which a non-signatory can be compelled to arbitrate: ‘1) incorporation by reference; 2) assumption; 3) agency; 4) veil-piercing/alter ego; and 5) estoppel. [citations omitted]  Beelman Truck invokes two of these theories: incorporation by reference, and estoppel.

After reviewing and applying the applicable facts, the Court found that neither applied to the insurance broker hence the insurance broker could not be compelled to join the arbitration. 

 The full opinion:  National Union Fire Insurance Company of Pittsburg v Beelman Truck Company, et al, United Stated District Court for the Southern District of New York, Case 1:15-cv-08799-AJN   Document 81   Filed 08/24/16


Vacating an Arbitrator Award – Arbitrators Exceeded Authority:

In Bankers Life & Casualty Insurance Co v. CBRE, Inc., the United States Court of Appeals for the Seventh Circuit reversed and remanded a district court’s decision rejecting a challenge to an arbitration award and affirming the award.  The case involved a commercial real estate brokerage agreement and an arbitration administered by JAMS and which proceeded pursuant to JAMS rules.  The Court of Appeals clearly believed the arbitration tribunal wrongly decided the case, and based upon the facts presented in the opinion most will likely agree.

Indeed, the case thus presents the uncomfortable circumstance wherein a court is asked to confirm an award that it believes was wrongly decided – not by just a little, but by a lot!  The result:  two of the three appellate judges (in the opinion of this reviewer) forced a square peg into a round hole in order to do justice and correct a legal wrong.  The third appellate judge held firm to the strict legal standards of review and dissented, holding that the majority exceeded the limited scope of a court’s review of an arbitration award.  The irony of the case:  the majority held that the award should be rejected because the arbitration tribunal exceeded their authority.

I note as a preface to a description of the case that Bankers Life cuts no new legal ground.  Indeed, from a purely legal perspective, it is not terribly interesting.  Nonetheless, I present it because it is an example of how judges, on occasion, twist the law in order to avoid a result that they believe unjust.  I also present it for the dissenting opinion, which sets forth the clear, sometimes painful, law that courts cannot overturn arbitral awards merely because they are wrongly – indeed grossly – decided.

The facts:  Plaintiff was a tenant with a long term lease in a building occupied by a rapidly growing “dot-com” company.  The defendant, a well regarded national real estate brokerage and advisory company, thus approached plaintiff and asked plaintiff whether it would sub-lease their space to the dot-com and relocate to new space which defendant would find for them.  Plaintiff responded that they would do so if i) defendant identified acceptable alternative space, and ii) plaintiff would net $7 million from the transaction.

Plaintiff and defendant thereupon entered into a listing agreement (“Listing Agreement”) which provided that defendant “would ‘accept delivery of and present [plaintiff] all offers and counteroffers to buy, sell, or lease … property’ of [plaintiff ]; “would assist [plaintiff] in developing, communicating, negotiating, and presenting offers, counteroffers, and notices”; and would “answer [plaintiff’s] questions relating to the offers, counteroffers, notices, and contingencies.”

After reaching this agreement, defendant presented plaintiff with “a series of cost-benefit analyses (CBAs), comparing the costs of leasing new space with the benefits of subleasing the old space to [the dot-com].”  One CBA delivered to plaintiff showed that plaintiff would generate $6.9 million, and plaintiff, relaying on the CBA, accepted the transaction, sub-leased its space to the dot-com, and moved to a new facility.

Unfortunately, the CBA presented by defendant and relied upon by plaintiff contained an error – a $3.1 million error!

 “It omitted [a] promise [by plaintiff], as part of the deal with [the dot-com company], to give [the dot-com] a $3.1 million tenant improvement allowance to enable [the dot-com] to improve the space formerly occupied by [plaintiff]. The uncontradicted evidence is that had [plaintiff] known it would profit by only $3.8 million ($6.9 million – $3.1 million) from the deal package (lease plus sublease), it would have rejected the deal and thus not have relocated and defendant would not have obtained the $4.5 million in commissions that it received as compensation for having arranged the sublease to [the dot-com] and [plaintiff’s] relocation to [a new space].”

Plaintiff, bound by its agreement to sub-lease its space to the dot-com and relocate, honored its agreement with the dot-com company and thereupon commenced an arbitration proceeding against plaintiff to recover the $3.1 million and also to avoid having to pay the defendant a commission for the leasing of its new space.

An arbitration ensued and the arbitration panel issued three awards.  The initial award held that “while [defendant] had indeed erred in greatly exaggerating the value of the sublease/lease deal that it had arranged for [plaintiff], it had not violated the Listing Agreement because the agreement did not explicitly require [defendant] to furnish [plaintiff] with a correct CBA, and [defendant] had not violated its obligations, set forth in the Listing Agreement, to assist [plaintiff] ‘in developing, communicating, negotiating and presenting offers, counteroffers and notices” and “to answer [plaintiff’s] questions relating to offers, counteroffers, notices, and contingencies.”

The Appellate Court found this reasoning “odd,” commenting:

[T]he panel said that ‘the mistake in [defendant’s] analysis on the summary pages of the CBAs is not a violation of its obligation to assist [plaintiff] ‘in developing, communicating, negotiating and presenting offers[,] counteroffers and notices’ nor a failure to ‘answer [plaintiff’s] questions relating to offers, counteroffers, notices, and contingencies.’ It’s hard to imagine what else the mistake might be. 

Evidencing the Appellate Court’s disdain for the arbitration tribunal’s award, the Court continued:

“Evidently the panel had misgivings. For four months later (June 2014), in response to [plaintiff’s] unsurprising motion for reconsideration of the award, the panel changed course. It now acknowledged ‘that the Listing Agreement obligated [defendant] to answer questions accurately” and that “[defendant] [had] made a mistake and that mistake was material.” Yet the panel adhered to its earlier ruling in favor of defendant, on the ground that “as stated by [plaintiff], the required answers [to questions [plaintiff] had put to the brokerage firm concerning the sublease to [defendant] and the leasing of alternative premises for plaintff] “were the CBAs” (emphasis in original) and “the CBAs … included a disclaimer that provided that [defendant] was not guaranteeing that there were not any errors contained in the CBA. Here, there was an arithmetic error, or an error in aligning the columns of numbers. The disclaimer clearly provides that [defendant] was not responsible for errors.” 

So much for the facts.  Now to the law and the Appellate Court’s application of the law.

The case, while in Federal Court by reason of diversity jurisdiction, applied the Illinois Arbitration Act (“Illinois Act”) and not the Federal Arbitration Act (“FAA”).  The distinction, however, is immaterial in that the Illinois Act and the FAA share the identical language and the same origin (see, the dissenting opinion of J. Sykes and citations therein).

The Illinois Act (and FAA) only permit a court to vacate an arbitration award if the arbitrators “exceeded their powers.”  Thus, the Appellate Court needed to make such a finding.  In Bankers Life, it did just that:

The panel exceeded its authority. It was authorized to interpret the contract. The contract did not include the cost benefit analyses. The panel’s reliance on the disclaimer in the CBAs was therefore unjustified.

Judge Sykes, dissenting from the majority opinion, found this conclusion less than compelling.  While clearly agreeing that the arbitrators wrongly decided the case, J. Sykes relied upon Illinois Supreme Court precedent and similar Federal Court rulings construing the FAA which hold:

The fact that arbitrators have made an erroneous decision will not vitiate their award. If they have acted in good faith, the award is conclusive upon the parties; and neither party is permitted to avoid it[] by showing that the arbitrators erred in their judgment, either respecting the law or the facts of the case.  [citation omitted]

*      *     *

We’ve said much the same thing when describing the scope of judicial review under the FAA. Almost three decades ago we explained that a gross error in interpreting the parties’ contract will not suffice to vacate an arbitration award. . . 

From a purely legal perspective and advocate of arbitration, I find the majority decision inBanker’s Life troubling.  Its reasoning is tortured, and while on its face consistent with the near universal body of law described and documented by J. Sykes, it is in fact contrary to that body of law and thus potentially an invitation to other courts to twist a legal analysis into an unnatural form in order to achieve a desired result.  As one who believes in justice and fairness, however, and that courts should never forget that their decisions affect real people and have real consequences, I applaud the decision as a courageous preservation of justice.

 The full opinion:  In Bankers Life & Casualty Insurance Co v. CBRE, Inc., No. 15-1471 (7th Cir. July 29,2016)

Articles / Interesting Case of the Month

The Chinese Communist Party Returns to its Cultural Roots

As regular readers of this Newsletter and those who know me are aware, I’ve a deep and long standing interest in China having built and run a business there.  Thus, when I see interesting articles regarding China, its history and politics, I generally take note and have presented those I find especially worthy.  Therefore, at the risk of presenting articles on China’s culture two months in a row, I include in this month’s Newsletter a piece appearing in the East Asian Forum describing a “new synthesis between [Chinese] political and cultural nationalism.”

Author Yingjie Guo, of the University of Sydney, explores the Chinese Communist Party’s recent “promot[ion] of Sino-centrism with uncharacteristic gusto[, and the]. . . notable ramifications for China both domestically and internationally.”

Historical context is required:

For a long time, Chinese nationalism was not a homogeneous ideological movement but one split into cultural and political strands, which were at loggerheads for nearly a century.  Chinese cultural nationalism aimed to maintain cultural autonomy, unity and identity by defending ‘a distinctive and historically-rooted way of life’. Under cultural nationalism, ethnic values, myths and memories become the basis of the national community. 

Chinese political nationalism, on the other hand, sought to reconstruct the political authority of the state and replace China’s cultural heritage with a new culture congenial to the state.  It also served the purpose of nation building, state building or modernisation depending on the prevailing contemporary political ideology.  Political nationalism dominated its much weaker opponent from the early 20th century to the late 1980s thanks to the popular belief that Chinese cultural traditions were responsible for the country’s backwardness and humiliation at the hands of Western powers.

Guo observes that under President Xi Jinping, Chinese cultural nationalism has gained new prominence.  “This development is one manifestation of the party-state’s current movement away from Marxism and its long tradition of political nationalism.  Since the reform era, the historical mission of the [Chinese Communist Party (the “CCP”] has shifted from one of class struggle and continuous revolution to a focus on economic development, harmonious society and the ‘China dream’.”

Per Guo:

The CCP is no longer a ‘people’s democratic dictatorship’ based on the alliance of the industrial proletariat and peasantry, as it is defined in the country’s constitution. Nor is it simply guided by Marxism – Leninism or Mao Zedong thought.  In the new milieu, the CCP must be guided by traditional Chinese ideas, beliefs and visions. And, rather than relying on the economic performance of 1949–2013, the CCP’s legitimacy must now be derived from its conformity to traditional notions of good governance.

CCP leaders are now not only justifying China’s political system, political values and development model on the basis of ‘national conditions’ but are also doing so with reference to age-old Chinese traditions.  That is, national conditions are being extended to include historical heritage.  Consequently, China is becoming more inward-looking and less politically liberal than at any other time in the post-Mao era.

I found the article thought-provoking and commend it to you.

   Yingjie Guo, “The CCP Returns To Chinese Cultural Roots,” East Asia Forum, October 3, 2016


Robots In The Corner Pizza Joint

We all know that robots have become omnipresent in manufacturing plants around the world, replacing low skill, repetitive task jobs with machines that are faster, more accurate, and far less costly than their human counter-parts.  As technology advances, we’re now seeing robots in less tech/industrial settings.  Thus, when I spotted this article about a Silicon Valley delivery-only pizza chain replacing many of its pizza chefs with robots, I thought I’d present it as a light alternative to the denser articles generally presented, and as a comment on the rapidly evolving work-place and the impact of such on our economy and political system.

By the way, a week after this piece came out and I filed it away for this Newsletter, I found myself in good company – National Public Radio did a piece on the same pizza chain.

 “Inside The Pizza Chain That’s Replacing Chefs With Robots,” CNBC, September 29, 2016


The Met and Nazi Art

Last week, in a story reminiscent of the movie ‘Woman in Gold” (a great film, by the way, which I strongly recommend), the heirs to the estate of the former owner of Picasso’s “The Actor” filed suit against the New York Metropolitan Museum of Art seeking to recover the famous painting.  Unlike the story of the Klimt painting related in the Helen Mirren movie, the Picasso painting was not stolen.  Rather, the family sold the painting under duress to raise money to escape Nazi controlled Germany.  As a result, the legal issues are very different and the result may be as well.  Presented here is a short squib relating the filing of the case and some of it’s the background facts.

 Michael Keough, “Suit Against Met Alleges that $100 Million Picasso Painting Was Sold Under Duress in Nazi Germany,” Steptoe & Johnson LLP SDNY Blog, October 4, 2016