Nishimura v. Gentry Homes, Ltd. ( 2014 )

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Electronically Filed
Supreme Court
SCWC-13-0000137
31-OCT-2014
09:35 AM
IN THE SUPREME COURT OF THE STATE OF HAWAII
---oOo---
________________________________________________________________
THOMAS NISHIMURA, COLETTE NISHIMURA,
Individually and on Behalf of a Class of All Persons
Similarly Situated, Petitioners/Plaintiffs-Appellees,
vs.
GENTRY HOMES, LTD.,
a Hawaii Domestic Profit Corporation,
Respondent/Defendant-Appellant,
and
SIMPSON MANUFACTURING CO., INC., a Delaware Corporation;
SIMPSON STRONG-TIE COMPANY, INC., a California Corporation,
Defendants.
_______________________________________________________________
SCWC-13-0000137
CERTIORARI TO THE INTERMEDIATE COURT OF APPEALS
(CAAP-13-0000137; CIV. NO. 11-1-1522-07)
OCTOBER 31, 2014
RECKTENWALD, C.J., NAKAYAMA, McKENNA, POLLACK, AND WILSON, JJ.
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OPINION OF THE COURT BY McKENNA, J.
I. Introduction
This appeal raises an issue of first impression in Hawaii:
what standard applies in reviewing the enforceability of an
arbitrator-selection provision? We adopt the “fundamental
fairness” standard set forth by the United States Court of
Appeals for the Sixth Circuit in McMullen v. Meijer, Inc., 355
F.3d 485 (6th Cir. 2004), and we hold that the arbitrator-
selection provision at issue in this appeal was fundamentally
unfair, because it gave the defendant’s agent “sole discretion”
to select an arbitration service to resolve a dispute between
the plaintiffs and defendant. In the instant case, the Circuit
Court of the First Circuit (“circuit court”)1 properly severed
and struck the arbitrator-selection provision and ordered the
parties to meet and confer to select an arbitration service.
The circuit court also properly reserved for itself the
authority to appoint an arbitration service if the parties could
not come to an agreement. Therefore, we vacate the ICA’s
judgment on appeal, which vacated the circuit court’s “Order
Granting in Part and Denying in Part Defendant Gentry Homes,
Ltd.’s Motion to Compel Arbitration Filed August 29, 2012,” and
its “Order Denying Gentry Homes’ Motion for Reconsideration of
the Order Granting in Part and Denying in Part Gentry Homes,
1
The Honorable Rhonda A. Nishimura presided.
2
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Ltd.’s Motion to Compel Arbitration [Filed August 29, 2012],
Filed on November 13, 2012.” The circuit court’s orders are
affirmed.
II. Background
A. Circuit Court Proceedings
1. The First Amended Class Action Complaint
On October 12, 2011, Petitioners/Plaintiffs-Appellees
Thomas Nishimura and Colette Nishimura, individually and on
behalf of a class of all persons similarly situated
(“Nishimuras”), filed their First Amended Class Action
Complaint. The Nishimuras alleged that Gentry Homes, Ltd.
(“Gentry”) constructed the Nishimuras’ home without adequate
high wind protection.
2. Motion to Compel Arbitration
On August 29, 2012, Gentry filed its Motion to Compel
Arbitration, pursuant to the following provision in the Home
Builder’s Limited Warranty (“HBLW”) between Gentry and the
Nishimuras (with emphasized portions relevant to this appeal):
VIII. Binding Arbitration Procedure
Any disputes between YOU and US, or parties acting on OUR
behalf, including PWC,[2] related to or arising from this
LIMITED WARRANTY, the design or construction of the HOME or
the COMMON ELEMENTS or the sale of the HOME or transfer of
title to the COMMON ELEMENTS will be resolved by binding
arbitration. Binding arbitration shall be the sole remedy
for resolving any and all disputes between YOU and US, or
OUR representatives.
. . . .
2
“PWC” stands for “Professional Warranty Service Corporation,” the
company administering the HBLW pursuant to a contract with Gentry.
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The arbitration shall be conducted by Construction
Arbitration Services, Inc., or such other reputable
arbitration service that PWC shall select, at its sole
discretion, at the time the request for arbitration is
submitted. The rules and procedures of the designated
arbitration organization, that are in effect at the time
the request for arbitration is submitted, will be followed.
A copy of the applicable rules and procedures will be
delivered to YOU upon request.
This arbitration agreement shall be governed by the United
States Arbitration Act (9 U.S.C. §§ 1-16) to the exclusion
of any inconsistent state law, regulation or judicial
decision. The award of the arbitrator shall be final and
binding and may be entered as a judgment in any court of
competent jurisdiction. . . .
The Nishimuras’ Opposition to Gentry Homes’ Motion to
Compel Arbitration drew the circuit court’s attention to a
notice on Construction Arbitration Services, Inc.’s website,
announcing that it had “permanently exit[ed] from the binding
construction arbitration dispute case administration business
effective July 1, 2009.” (Emphasis in original.) Thus, under
the HBLW’s arbitrator-selection provision, PWC was authorized to
“select, at its sole discretion” “such other reputable
arbitration service” to conduct the arbitration. “Reputable”
was not defined in the HBLW. The Nishimuras argued that the
instant arbitrator-selection provision contained no safeguards
against “potential bias,” and that PWC was empowered to choose
any arbitrator, including one with a pro-defense view.
The Nishimuras feared that PWC would select an arbitration
service aligned with developers, because PWC marketed its “close
relationship” with Zurich, the parent of the insurance company
for Haseko Homes, Inc. and Haseko Construction, Inc., which at
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that time was also being sued for the same construction defect
as in the instant case. The Nishimuras alleged that PWC would
have a “strong financial incentive in helping secure an outcome
in favor of Gentry in the instant action. . . .” They noted
that another circuit court judge had severed and stricken the
arbitrator-selection provision in the Haseko case “on the ground
of PWC’s conflict of interest. . . .” The Nishimuras argued,
“Allowing a party so closely aligned with the defendants in a
similar case involving similar claims before this Court to
unilaterally select the arbitrator would deprive Plaintiffs of a
fair and effective forum in which to vindicate their claims.”
In support of their argument, the Nishimuras cited, inter alia,
McMullen, 355 F.3d 485.
In its Reply, Gentry argued that the Nishimuras set forth
“no evidence of bias with the ultimate arbitrator,” because none
had been selected. Gentry pointed out that the arbitration-
selection provision authorized PWC to choose an arbitration
service, not the ultimate arbitrator. Gentry also argued that a
party who does not consent to the other party’s choice of
arbitrator can petition the court to appoint an arbitrator.
Gentry also argued that a party must await the conclusion of
arbitration to raise a challenge of “evident partiality” in the
arbitrator.
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At a hearing on the Motion to Compel Arbitration, counsel
for the Nishimuras asked the circuit court to sever and strike
the arbitrator-selection provision, order the parties to agree
to a local arbitrator, or appoint one itself, as another circuit
court had done in the Haseko case. Counsel for Gentry countered
that he did not believe the circuit court had the authority to
order the parties to agree to an arbitrator. The circuit court,
on the other hand, stated that “just on the face of” the HBLW
arbitrator-selection provision, “there is a potential conflict
. . . .” The circuit court stated to Gentry’s counsel, “[T]he
less you have to reserve in the future as possible appealable
issues, the better. . . .”
The circuit court therefore granted in part and denied in
part Gentry’s Motion to Compel Arbitration. While it ordered
the Nishimuras to arbitrate their claims against Gentry, the
circuit court found the following:
The Motion is DENIED to the extent that this Court finds
that there is a potential conflict of interest with
Professional Warranty Services, Inc. (“PWC”) selecting the
arbitration service as set forth under the Home Builder’s
Limited Warranty. Accordingly, the method by which the
arbitration service is to be selected under the Home
Builders’ Limited Warranty is severed and stricken.
Pursuant to Hawaii Rules of the Circuit Courts Rule 12.23,
3
Hawaii Rules of the Circuit Courts (“RCCH”) Rule 12.2(a) (2012)
provides the following, in relevant part:
Authority to order. The court, sua sponte or upon motion by
a party, may, in exercise of its discretion, order the
parties to participate in a non-binding Alternative Dispute
Resolution process (ADR or ADR process) subject to terms
and conditions imposed by the court. ADR includes
mediation, summary jury trial, neutral evaluation, non-
(continued. . .)
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this Court orders that Plaintiffs and Gentry shall meet and
confer on the selection of a local arbitration service
within forty-five (45) days of entry of this Order. If
Plaintiffs and Gentry are unable to agree, the Court shall
select a local arbitration service for this matter.
3. Motion for Reconsideration
Gentry filed a Motion for Reconsideration of the circuit
court’s order asking the court to set aside the provision
severing and striking the arbitrator-selection provision. In
addition to reiterating arguments that the time to challenge
arbitrator bias is post-award and that the Nishimuras had
presented no evidence of bias or potential bias, Gentry argued
that RCCH Rule 12.2 did not authorize the circuit court to
“modify the parties’ agreement for binding arbitration. . . .”
Gentry argued that RCCH Rule 12.2 authorizes court-mandated non-
binding arbitration, not binding arbitration, which is what the
parties had agreed to in the HBLW.
In the Nishimuras’ Opposition to Gentry’s Motion for
Reconsideration, they argued that the circuit court had “broad
discretion to appoint an arbitration service (or here, order the
parties to meet and confer to appoint one) when the specified
arbitration service is no longer in business or the arbitrator
3
(. . .continued)
binding arbitration, presentation to a focus group, or
other such process the court determines may be helpful in
encouraging an economic and fair resolution of all or any
part of the disputes presented in the matter.
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is partial to one of the parties.” The Nishimuras then cited to
9 U.S.C. § 5 (2009),4 which states the following:
If in the agreement provision be made for a method of
naming or appointing an arbitrator or arbitrators or an
umpire, such method shall be followed; but if no method be
provided therein, or if a method be provided and any party
thereto shall fail to avail himself of such method, or if
for any other reason there shall be a lapse in the naming
of an arbitrator or arbitrators or umpire, or in filling a
vacancy, then upon the application of either party to the
controversy the court shall designate and appoint an
arbitrator or arbitrators or umpire, as the case may
require, who shall act under the said agreement with the
same force and effect as if he or they had been
specifically named therein; and unless otherwise provided
in the agreement the arbitration shall be by a single
arbitrator.
The circuit court denied Gentry’s Motion for
Reconsideration. Gentry then timely appealed the circuit
court’s order granting in part and denying in part its Motion to
Compel Arbitration, as well as the circuit court’s order denying
its Motion for Reconsideration.
B. ICA Appeal
1. Opening Brief
In its Opening Brief, Gentry raised the following Points of
Error:
1. Whether the trial court erred in denying, in part,
Gentry’s Motion to Compel Arbitration and ordering Gentry
and Plaintiffs to meet and confer on the selection of the
arbitration service in contravention of the express terms
of the parties’ arbitration agreement as set forth in the
[HBLW] that Plaintiffs rely upon in bringing their claims
against Gentry.
2. Whether the trial court erred in denying Gentry’s
Motion for Reconsideration.
4
9 U.S.C. § 5 is a provision in the Federal Arbitration Act, 9
U.S.C. §§ 1-16 (2009) (“FAA”). The parties do not dispute that the FAA
governs their arbitration agreement.
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3. Whether the trial court erred in finding that PWC had a
potential conflict of interest in selecting the arbitration
service pursuant to the terms of the parties’ arbitration
agreement as set forth in the [HBLW].
4. Whether the trial court erred in finding that PWC’s
potential conflict in selecting the arbitration service was
a sufficient basis to strike that portion of the parties’
arbitration agreement requiring PWC to select the
arbitration service in order to avoid a future appealable
issue.
5. Whether the trial court erred in relying upon Hawaiʻi
Rules of the Circuit Courts Rule 12.2 as the basis to order
the parties to meet and confer on the selection of a local
arbitration service in contravention of the express terms
of the parties’ arbitration agreement as set forth in the
[HBLW] requiring PWC to select the arbitration service.
Gentry first argued that RCCH Rule 12.2 governs non-binding
arbitration and did not authorize the circuit court to order the
parties into binding arbitration.
Gentry next argued that the circuit court “lacked
jurisdiction under the FAA to entertain the Nishimuras[’] pre-
arbitration challenge to the partiality of the not yet selected
arbitrator.” Gentry cited to 9 U.S.C. § 10 (2009)5 as authority
for its position that the time to challenge the arbitrator’s
partiality is after the issuance of the arbitration award, when
the court is authorized to vacate an arbitration award “where
there was evident partiality or corruption in the arbitrators,
or either of them.”
Gentry argued that, even if the circuit court had
jurisdiction to entertain the Nishimura’s pre-arbitration
5
9 U.S.C. § 10(a)(2) (2009) provides the following, in relevant
part: “[T]he United States court in and for the district wherein the award
was made may make an order vacating the award upon the application of any
party to the arbitration -- . . . where there was evident partiality or
corruption in the arbitrators, or either of them.”
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“challenge to the partiality of the not-yet-selected
arbitrator,” the Nishimuras did not establish that any
arbitration service selected by PWC pursuant to the HBLW would
be biased toward Gentry. Gentry cited Phillips v. Assocs. Home
Equity Servs., Inc., 179 F. Supp. 2d 840, 845 (N.D. Ill. 2001),
for the following proposition: “In the absence of credible
evidence of actual bias in favor of the lenders, we ‘decline to
indulge the presumption that the parties and arbitral body
conducting a proceeding will be unable or unwilling to retain
competent, conscientious and impartial arbitrators.’” (Emphasis
added.) Gentry also cited Doctor’s Assocs., Inc. v. Stuart, 85
F.3d 975, 981 (2d Cir. 1996), for its rejection of the
defendants’ argument that an arbitration agreement was
unconscionable, because the defendants “failed to present any
credible evidence indicating bias on the part of the
[arbitration service or its arbitrators,] particularly because
[d]efendants’ claims have not yet gone to arbitration.”
2. Answering Brief
In their Answering Brief, the Nishimuras disagreed with
Gentry’s argument that a challenge to the arbitrator-selection
process must be raised after the arbitrator has issued an
arbitration award. The Nishimuras cited McMullen, 355 F.3d 485,
and Walker v. Ryan’s Family Steak Houses, Inc., 400 F.3d 370,
385 (6th Cir. 2005), for the proposition that “the general rule
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prohibiting pre-arbitration challenges to an allegedly biased
arbitration panel does not extend to an allegation that the
arbitrator-selection process itself is fundamentally unfair. In
such a case, ‘the arbitral forum is not an effective substitute
for a judicial forum,’ and, therefore, the party need not
arbitrate first and then allege bias through post arbitration
judicial review.” The Nishimuras argued that once a court
determines that the arbitrator-selection process is
fundamentally unfair, then 9 U.S.C. § 5 authorizes the court to
“choose an alternative method for selecting the arbitrator.”
Next, the Nishimuras argued that there was sufficient
evidence to support the circuit court’s finding that PWC had a
conflict of interest rendering the arbitration-selection
provision fundamentally unfair, based upon PWC’s relationship
with insurance companies and builders, as well as the language
of the HBLW. The Nishimuras pointed out that “the arbitrator
selection process contains no safeguards against potential
bias,” and that PWC, acting on Gentry’s behalf, “can literally
choose any arbitration service it unilaterally deems to be
‘reputable. . . .’”
As to Gentry’s argument that RCCH Rule 12.2 did not
authorize the circuit court to order the parties to meet and
confer to select a local arbitration service, the Nishimuras
counter-argued that the circuit court relied on that rule only
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for the limited purpose of ordering the parties to attempt to
agree on an arbitration service; it did not order the parties
into binding arbitration under the rule.
3. The ICA’s Published Opinion
The ICA issued a published opinion. Nishimura v. Gentry
Homes, Ltd., 133 Hawaii 222, 325 P.3d 634 (App. 2014). The ICA
asserted that the HBLW provision stating that PWC “act[s] on
[Gentry’s] behalf” merely served to “put a distance between
Gentry’s interest and the arbitrator,” but did not authorize PWC
to potentially “select an arbitration service that would resolve
arbitration in favor of Gentry.” 133 Hawaii at 228, 325 P.3d at
640. As such, the ICA concluded that the HBLW’s language “does
not establish PWC’s improper motives or evident partiality.”
Id.
The ICA then distinguished Walker, 400 F.3d 370, and
McMullen, 355 F.3d 485, from the instant case. 133 Hawaii at
228, 325 P.3d at 640. The ICA distinguished Walker, stating
that the plaintiff employees in Walker entered into an
arbitration agreement with the very entity that would arbitrate
their disputes with their employer, unlike the instant case,
where PWC “would not itself serve as an arbitrator and was
required to select a reputable arbitration service.” Id. The
ICA distinguished McMullen, stating that the arbitration clause
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at issue in that case gave the defendant employer unilateral
control over the pool of potential arbitrators, unlike the
instant case, where PWC, not Gentry, selects an arbitration
service. Id. The ICA then “decline[d] to conclude that PWC’s
potential conflict of interest constitutes bias rendering the
arbitrator-selection process under the [HBLW] so ‘fundamentally
unfair’ as to be unenforceable.” Id. The ICA then concluded
that the circuit court’s actions in invalidating the arbitrator-
selection provision before PWC selected the arbitration service
were premature and improper. Id. According to the ICA,
“Nishimura Plaintiffs are not precluded from challenging the
arbitration service designated by PWC or the neutral arbitrator
selected by that service for bias upon appropriate proof before
the start of the arbitration proceedings.” Id.
Although its discussion up to this point in the opinion
focused on the fundamental fairness of the arbitrator-selection
process, the ICA’s opinion then shifted to a discussion on
unconscionability. Id. Specifically, the ICA held, “In order
to avoid enforcement of an allegedly unconscionable arbitration
clause, Nishimura Plaintiffs were required to present evidence
of actual partiality or bias of the arbitration service
designated by PWC or the neutral arbitrator selected.” Id.
(citing Doctor’s Assocs. Inc., 85 F.3d at 981) (emphasis added).
The ICA then cited Gilmer v. Interstate/Johnson Lane Corp., 500
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U.S. 20, 30 (1991), to conclude that the Nishimuras’
contentions, “based on circumstances of PWC’s business
relationships,” constituted merely a “‘generalized attack’ on
PWC’s impartiality,” resting on a suspicion of arbitration out
of step with the United States Supreme Court’s endorsement of
this method of dispute resolution. 133 Hawaii at 229, 325 P.3d
at 641. Without proof of “actual partiality or bias,” the ICA
held, “the circuit court should have confined judicial review to
the fairness of the completed arbitration award, at which time 9
U.S.C. § 10 could provide for vacating the award upon a finding
that the arbitrators acted with evident partiality.” Id.
The ICA then concluded that the circuit court should have
enforced the HBLW’s arbitrator-selection provision. Id. The
ICA vacated the order granting in part and denying in part
Gentry’s motion to compel arbitration, as well as the order
denying Gentry’s motion for reconsideration. Id. The ICA then
remanded the case to the circuit court for further proceedings.
Id.
III. Standard of Review
An appellate court reviews a trial court’s order granting
or denying a motion to compel arbitration de novo, using the
“same standard employed by the trial court and based upon the
same evidentiary materials ‘as were before [it] in determination
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of the motion.” Koolau Radiology, Inc. v. Queens Med. Ctr., 73
Haw. 433, 440, 834 P.2d 1294, 1298 (1992) (citations omitted).
IV. Discussion
A. The “Fundamental Fairness” Standard in Challenges
to the Arbitrator-Selection Process
Preliminarily, we note that the parties agree that the HBLW
is governed by the FAA. 9 U.S.C. § 2 (2009) provides the
following:
A written provision in any maritime transaction or a
contract evidencing a transaction involving commerce to
settle by arbitration a controversy thereafter arising out
of such contract or transaction, or the refusal to perform
the whole or any part thereof, or an agreement in writing
to submit to arbitration an existing controversy arising
out of such a contract, transaction, or refusal, shall be
valid, irrevocable, and enforceable, save upon such grounds
as exist at law or in equity for the revocation of any
contract.
(Emphasis added). Thus, under the FAA, invalidation of an
arbitration provision is authorized. In determining whether an
arbitrator-selection provision is enforceable, we adopt the
“fundamental fairness” standard set forth by the Sixth Circuit
in McMullen, 355 F.3d 485.
In McMullen, on the eve of arbitration, after an arbitrator
had been selected, a plaintiff employee (“McMullen”) brought an
action challenging the fairness of the arbitrator-selection
process. 355 F.3d at 488. The arbitration agreement granted
her employer “exclusive control over the pool of potential
arbitrators from which the arbitrator is selected.” 355 F.3d at
487. From that pool of potential arbitrators, the employer and
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employee each struck an arbitrator until only one remained. 355
F.3d at 488.
McMullen’s employer counter-argued that the bias McMullen
“fears will manifest itself during her arbitration hearing is,
at this point, merely potential bias.” 355 F.3d at 494
(emphasis in original). Quoting Gilmer, the Sixth Circuit
acknowledged that the United States Supreme Court, “when
presented with an allegation of hypothetical bias, ‘decline[d]
to indulge the presumption that the parties and arbitral body
conducting a proceeding will be unable or unwilling to retain
competent, conscientious and impartial arbitrators.’” Id.
(citing Gilmer, 500 U.S. at 30). The Sixth Circuit recognized,
however, that McMullen’s claim went “beyond an allegation of a
potentially biased arbitrator because McMullen cites a lack of
fairness inherent in the arbitrator-selection process.” Id.
The Sixth Circuit explained that the employer’s arbitration
agreement “grants one party to the arbitration unilateral
control over the pool of potential arbitrators. This procedure
prevents [the employer’s arbitration program] from being an
effective substitute for a judicial forum because it inherently
lacks neutrality.” Id. (footnote omitted).
Like Gentry, McMullen’s employer also argued that “Gilmer
clearly establishes that the preferred method of challenging
allegations of bias is to pursue the underlying claims through
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the arbitration process and then seek review only ‘[w]here there
was evident partiality or corruption in the arbitrators [under 9
U.S.C. § 10].’” 355 F.3d at 494 n.7. The Sixth Circuit
disagreed. The court stated, “While this is true for
allegations of potential or hypothetical bias among the
arbitrators, it does not apply to an allegation, as is present
here, that the arbitrator-selection process is fundamentally
unfair. . . . [P]rocedural unfairness inherent in an
arbitration agreement may be challenged before the arbitration.”
Id. As such, the Sixth Circuit recognized, “When the process
used to select the arbitrator is fundamentally unfair, as in
this case, the arbitral forum is not an effective substitute for
a judicial forum, and there is no need to present separate
evidence of bias or corruption in the particular arbitrator
selected.” Id.
Several cases since McMullen have also explored fundamental
fairness in arbitrator-selection clauses. In Walker, 400 F.3d
370, plaintiff employees filed a complaint for FLSA violations
against the defendant employer, Ryan’s Family Steak Houses, Inc.
(“Ryan’s”). 400 F.3d at 373. Ryan’s moved to compel
arbitration and to dismiss the complaint. Id. The district
court denied the motion, concluding, inter alia, that the
arbitration forum outlined in the arbitration agreements between
employer and employees did not provide for effective vindication
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of statutory claims and was an inappropriate substitute for the
judicial forum. Id. The Sixth Circuit affirmed. 400 F.3d at
372.
In the Walker case, the employees signed arbitration
agreements with Employment Dispute Services Inc., (“EDSI”), not
their employer, Ryan’s. 400 F.3d at 374. Ryan’s had entered
into a contract with EDSI to have EDSI administer an employment
dispute resolution program. Id. By entering into the
arbitration agreements with EDSI, the employees agreed to submit
all employment disputes with Ryan’s to binding arbitration with
EDSI. 400 F.3d at 375. The arbitration rules provided that
EDSI would select a panel of three potential arbitrators from
the following separate pools: “(1) supervisors or managers of
an employer signatory to an agreement with EDSI; (2) employees
who are non-exempt from the wage and hour protections of the
Fair Labor Standards Act; and (3) attorneys, retired judges, or
other competent legal professional persons not associated with
either party.” Id. From the pool of potential arbitrators
selected by EDSI, the employee and employer would alternately
strike names until only one name remained. 400 F.3d at 376.
In Walker, the Sixth Circuit again acknowledged the general
rule, set forth in Gilmer, that a party cannot avoid the
arbitration process simply by alleging the arbitration panel
will be biased, because 9 U.S.C. § 10 allows for the vacation of
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an arbitration award, post-arbitration, for evident partiality
in the arbitrator. 400 F.3d at 385. The Walker Court also
recognized the exception set forth in McMullen for pre-
arbitration challenges to the fundamental fairness of the
arbitrator-selection process. Id. The Walker court then held
that EDSI’s arbitral forum was not neutral and, therefore, the
arbitration agreements were unenforceable. 400 F.3d at 385-86.
The specific evidence the Walker court considered was that
EDSI was a for-profit business, and Ryan’s annual fee accounted
for over 42% of EDSI’s gross income in the year the employees
filed their complaint. 400 F.3d at 386. Thus, “[g]iven the
symbiotic relationship between Ryan’s and EDSI, Ryan’s
effectively determines the three pools of arbitrators, thereby
rendering the arbitral forum fundamentally unfair to claimants
who are applicants or employees.” Id. The Sixth Circuit
ultimately concluded that “EDSI’s and Ryan’s arbitration scheme
does not allow for the effective vindication of Plaintiffs’ FLSA
claims.” 400 F.3d at 388. The Sixth Circuit thus declined to
enforce the arbitration agreements. Id.
In Geiger v. Ryan’s Family Steak Houses, Inc., 134
F. Supp. 2d 985 (S.D. Ind. 2001), the United States District Court
for the Southern District of Indiana also had occasion to
consider the arbitration agreement between EDSI and employees of
Ryan’s. In that case, plaintiff employees sued Ryan’s under
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Title VII of the Civil Rights Act of 1964. 134 F. Supp. 2d at
988. As with Walker, the plaintiff employees’ arbitration
agreement with EDSI allowed EDSI to select the three pools of
arbitrators, and the employer and employee would alternately
strike names from the pools of arbitrators until only one name
remained. 134 F. Supp. 2d at 990-91. The district court held,
“[T]here is a strong potential for bias in the selection of the
arbitration panel.” 134 F. Supp. 2d at 995. This was because
EDSI received payment from its agreements with Ryan’s and “thus
clearly has an incentive to maintain its contractual
relationship with Ryan’s . . . while applicants or employees
. . . have no leverage. . . .” Id. Further, the court noted,
“EDSI also retains full authority to select both the Rules for
arbitration as well as the pools of potential arbitrators. Such
power in the face of the potential for bias on the part of EDSI
in favor of employers such as Ryan’s renders it unlikely that
applicants/employees will participate in an unbiased forum.”
Id. (footnote omitted).
McMullen, Walker, and Geiger all hold that courts may
entertain pre-arbitration challenges to the arbitrator-selection
process, because such claims are the exception to the general
rule that challenges to arbitrator bias must await the
completion of arbitration under 9 U.S.C. § 10. Further,
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McMullen and Walker hold that the standard by which a court
analyzes arbitrator-selection clauses is fundamental fairness.6
B. The ICA’s “Actual Bias” Holdings
The ICA initially properly analyzed the Nishimuras’ case
for fundamental fairness under McMullen and Walker. 133 Hawaii
at 228, 325 P.3d at 640. The ICA then distinguished those two
cases and held that the Nishimuras did not present facts showing
that the arbitrator-selection clause in the HBLW was
fundamentally unfair. Id. The ICA then proceeded, however, to
hold, “In order to avoid enforcement of an allegedly
unconscionable arbitration clause, Nishimura Plaintiffs were
required to present evidence of actual partiality or bias of the
arbitration service designated by PWC or the neutral arbitrator
selected.” Id. (emphasis added). Later in the opinion, the ICA
also held, “Because Nishimura Plaintiffs failed to prove that
the arbitration selection process would necessarily result in
actual partiality or bias, the circuit court should have
6
We note that “fundamental fairness” in arbitration is a concept
our appellate courts have already recognized. In In re Arbitration between
United Pub. Workers, AFSCME, Local 646, AFL-CIO & City & Cnty. of Honolulu,
119 Hawaii 201, 210, 194 P.3d 1163, 1172 (App. 2008), the ICA quoted the
Prefatory Note to the revised Uniform Arbitration Act (2000), the basis of
HRS Chapter 658A, for the proposition that “arbitration is a consensual
process in which autonomy of the parties who enter into arbitration
agreements should be given primary consideration, so long as their agreements
conform to notions of fundamental fairness. . . .” (Emphasis added). See
also Kay v. Kaiser Found. Health Plan, Inc., 119 Hawaii 219, 229, 194 P.3d
1181, 1191 (App. 2008) (“Arbitrators wield great power over the scope and
nature of the arbitration proceedings and all determinations of fact and law,
with virtually no appellate review of their decisions. The fundamental
‘fairness’ of these expansive powers must be grounded in the assurance that
neutral arbitrators are indeed neutral. . . .”) (Emphasis added).
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confined judicial review to the fairness of the completed
arbitration award, at which time 9 U.S.C. § 10 could provide for
vacating the award upon a finding that the arbitrators acted
with evident partiality.” 133 Hawaii at 229, 325 P.3d at 641
(emphasis added).
In support of this “actual bias” standard, the ICA cited to
Doctor’s Assocs., Inc., 85 F.3d 975. Doctor’s Assocs., Inc.,
however, did not involve a pre-arbitration challenge to the
fundamental fairness of an arbitrator-selection provision.
Rather, in that case, the defendants alleged that the
arbitration service named in the arbitration agreement (American
Arbitration Association or “AAA”) “relies on [the plaintiffs] to
provide it with repeat business and thus has a bias in favor of
[that party].” 85 F.3d at 980. The Second Circuit in that case
rejected the argument, stating, “Defendants have failed to
present any credible evidence indicating bias on the part of the
AAA –- or its arbitrators –- in favor of [the plaintiffs] in
this case, particularly because Defendants’ claims have not yet
gone to arbitration.” 85 F.3d at 981 (citing 9 U.S.C. § 10(a)).
Importantly, nowhere in the Doctor’s Assocs., Inc. opinion does
the “actual bias” standard appear.
Although not cited in the ICA’s published opinion, it
appears that the “actual bias” language comes from Phillips, 179
F. Supp. 2d 840, which Gentry cited in its Opening Brief.
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Phillips is also a case in which the fundamental fairness of an
arbitrator-selection provision was not at issue. In that case,
the arbitration agreement called for AAA to arbitrate the
dispute. 179 F. Supp. 2d at 843. The plaintiff in Phillips
argued that “arbitration is inappropriate because the American
Arbitration Association is biased in favor of the defendants,”
and analogized her case to the series of cases involving EDSI.
179 F. Supp. 2d at 845. The United States District Court for the
Northern District of Illinois rejected the argument, holding,
“[The EDSI] cases are clearly distinguishable; in those cases,
the defendants had ongoing service contracts with ESDI [sic] and
paid ESDI [sic] to maintain an employment dispute resolution
forum. Here, [the plaintiff] provides no evidence that the AAA,
one of the country’s leading non-for-profit dispute resolution
organizations, is on defendants’ payroll or any other evidence
of actual bias on the part of the AAA.” Id. (emphasis added).
In Phillips, only the bias of AAA was alleged, not the
process by which AAA was selected as the arbitrator;
nevertheless, the plaintiff and the district court analyzed the
bias claim using the EDSI line of cases. While the financial
interest linking EDSI to Ryan’s in Walker and Geiger arguably
demonstrates “actual bias,” Phillips overstates the holding in
those cases to conclude that only “actual bias” rendered the
arbitrator-selection provisions fundamentally unfair.
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“Actual bias” need not be proven in a pre-arbitration
challenge to an arbitrator-selection provision, where, as in
McMullen, the mere fact of one party’s “exclusive control over
the pool of potential arbitrators from which the arbitrator is
selected” renders the arbitrator-selection process fundamentally
unfair. 355 F.3d at 487, 494. In other words, an arbitrator-
selection provision “grant[ing] one party to the arbitration
unilateral control over the pool of potential arbitrators”
prevents arbitration “from being an effective substitute for a
judicial forum because it inherently lacks neutrality.” 355
F.3d at 494.
Further, contrary to Gentry’s argument and the ICA’s
holding, the Nishimuras did not need to await PWC’s selection of
the arbitration service and arbitrator before challenging the
enforceability of the HBLW’s arbitrator-selection provision. We
note that in McMullen, the Sixth Circuit focused on the process
of arbitrator selection, not any actual arbitrator or his or her
alleged bias, even though an arbitrator had been selected in
that case. See 355 F.3d at 488. Accordingly, the Sixth Circuit
did not conclude that “actual bias” must be shown to render an
arbitrator-selection process unfair; rather, the Sixth Circuit
held, “When the process used to select the arbitrator is
fundamentally unfair, . . . there is no need to present separate
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evidence of bias or corruption in the particular arbitrator
selected.” 355 F.3d at 494 n.7.
In short, we adopt the “fundamental fairness” standard
under McMullen to review pre-arbitration challenges to the
arbitrator-selection process. There is no requirement for a
party challenging the arbitration-selection process to show
“separate evidence of bias,” and, therefore, no requirement to
show “actual bias” on the part of any particular arbitrator.
Hence, the ICA erred in its holding that the Nishimuras needed
to demonstrate “actual bias” in order to invalidate the HBLW’s
arbitrator-selection provision. 133 Hawaii at 228-29, 325 P.3d
at 640-41.
C. Application of the “Fundamental Fairness” Standard to
the Instant Case
The HBLW arbitration provision states, in relevant part,
the following:
VIII. Binding Arbitration Procedure
Any disputes between YOU and US, or parties acting on OUR
behalf, including PWC, related to or arising from this
LIMITED WARRANTY, the design or construction of the HOME or
the COMMON ELEMENTS or the sale of the HOME or transfer of
title to the COMMON ELEMENTS will be resolved by binding
arbitration. Binding arbitration shall be the sole remedy
for resolving any and all disputes between YOU and US, or
OUR representatives. . . .
The arbitration shall be conducted by Construction
Arbitration Services, Inc., or such other reputable
arbitration service that PWC shall select, at its sole
discretion, at the time the request for arbitration is
submitted.
Ordinarily, an arbitration agreement is valid unless there is
some basis to refuse to enforce it. 9 U.S.C. § 2. In this
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case, PWC’s identification with Gentry provides a basis for
finding the arbitrator-selection provision unenforceable as
fundamentally unfair. The plain language of the arbitration
agreement shows that PWC acts on Gentry’s behalf in
administering the HBLW, which would include selecting an
arbitration service, at PWC’s “sole discretion,” now that
Construction Arbitration Services, Inc. is no longer available.
As PWC acts on Gentry’s behalf under the HBLW, the Nishimuras’
concern that PWC’s exercise of its sole discretion is akin to
Gentry’s exercise of such discretion is legitimate. As such,
under McMullen, the HBLW’s arbitrator-selection provision, which
“grants one party to the arbitration unilateral control over the
pool of potential arbitrators . . . prevents [arbitration under
the parties’ agreement] from being an effective substitute for a
judicial forum because it inherently lacks neutrality”;
therefore, the arbitrator-selection process is fundamentally
unfair. 355 F.3d at 494, 494 n.7. Accordingly, the circuit
court properly severed and struck the arbitrator-selection
provision. Although the circuit court severed and struck the
arbitrator-selection provision due to “potential conflict of
interest,” and not expressly due to “fundamental unfairness,” we
may “affirm a judgment of the lower court on any ground in the
record that supports affirmance.” Canalez v. Bob’s Appliance
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Serv. Ctr., Inc., 89 Hawaii 292, 301, 972 P.2d 295, 304 (1999)
(citations omitted).
D. Fashioning Relief for an Unenforceable Arbitrator-
Selection Provision
We next address whether the circuit court had the authority
under RCCH Rule 12.2 to order the parties to meet and confer to
select a local arbitration service. As Gentry points out, RCCH
Rule 12.2(a) authorizes the circuit court to order non-binding
arbitration, and the parties have agreed to binding arbitration
under the HBLW:
Authority to order. The court, sua sponte or upon motion by
a party, may, in exercise of its discretion, order the
parties to participate in a non-binding Alternative Dispute
Resolution process (ADR or ADR process) subject to terms
and conditions imposed by the court. ADR includes
mediation, summary jury trial, neutral evaluation, non-
binding arbitration, presentation to a focus group, or
other such process the court determines may be helpful in
encouraging an economic and fair resolution of all or any
part of the disputes presented in the matter. . . .
(Emphasis added). On the other hand, as the Nishimuras
point out, the circuit court did not order the parties into
binding arbitration under RCCH Rule 12.2 to settle the
construction defect dispute. Rather, the circuit court
ordered the parties to meet and confer to select a local
arbitration service, which constitutes such other “process
the court determines may be helpful in encouraging an
economic and fair resolution of all or any part of the
disputes presented in the matter.” Thus, pursuant to RCCH
Rule 12.2, the circuit court’s action was appropriate.
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Further, the circuit court’s order provided, “If
Plaintiffs and Gentry are unable to agree, the Court shall
select a local arbitration service for this matter.” This
part of the order followed the Nishimuras’ counsel’s
request to the circuit court: “If we cannot come to an
agreement [about who we want to arbitrate this case], you
select somebody.” Whether or not RCCH Rule 12.2 applied, 9
U.S.C. § 5 provided authority for the circuit court to
select an arbitrator in such a situation:
If in the agreement provision be made for a method of
naming or appointing an arbitrator or arbitrators or an
umpire, such method shall be followed; but if no method be
provided therein, or if a method be provided and any party
thereto shall fail to avail himself of such method, or if
for any other reason there shall be a lapse in the naming
of an arbitrator or arbitrators or umpire, or in filling a
vacancy, then upon the application of either party to the
controversy the court shall designate and appoint an
arbitrator or arbitrators or umpire, as the case may
require, who shall act under the said agreement with the
same force and effect as if he or they had been
specifically named therein; and unless otherwise provided
in the agreement the arbitration shall be by a single
arbitrator.
Therefore, we affirm in toto the circuit court’s order granting
in part and denying in part Gentry’s motion to compel
arbitration, as well as its order denying Gentry’s motion for
reconsideration of that order.
V. Conclusion
The ICA erred in requiring a party challenging an
arbitrator-selection provision to show evidence of “actual
bias.” In resolving a challenge to an arbitrator-selection
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provision, we apply the “fundamental fairness” standard
articulated by the United States Court of Appeals for the Sixth
Circuit. In the instant case, we conclude that the arbitrator-
selection provision is fundamentally unfair because it
authorized one party’s agent to exercise its sole discretion in
selecting an arbitration service to hear a dispute between that
party and the plaintiffs. We therefore vacate the ICA’s
Judgment on Appeal, and affirm the circuit court’s “Order
Granting in Part and Denying in Part Defendant Gentry Homes,
Ltd.’s Motion to Compel Arbitration Filed on August 29, 2012”
and its “Order Denying Gentry Homes’ Motion for Reconsideration
of the Order Granting in Part and Denying in Part Gentry Homes,
Ltd.’s Motion to Compel Arbitration [Filed August 29, 2012],
Filed November 13, 2012.”
Melvin Y. Agena /s/ Mark E. Recktenwald
for petitioners
/s/ Paula A. Nakayama
Ryan H. Engle
for respondent /s/ Sabrina S. McKenna
/s/ Richard W. Pollack
/s/ Michael D. Wilson
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