concomitantly, so are the "disincentives" to a trial de novo. Second, and more likely, if the rates of compensation established by the federal government are set at unrealistically low levels or disbursed begrudgingly, it would further discourage participation by attorneys who could not afford to underwrite the true cost of their services, particularly out-of-pocket items. As previously noted, proposed section 644 defines the cases which would be subject to mandatory arbitration. The language of the section raises a number of questions. The language concerning the jurisdictional maximum of $50,000, for example, seems simple enough but offers a potential avenue for abuse. A party who wishes to avoid arbitration will have substantial leeway in many types of action to allege monetary claims that exceed $50,000-e.g., for pain and suffering, speculative consequential damages, or punitive damages-and thus could side-step the mandatory arbitration procedure by asserting claims he realistically knows have no change of success.10 It is perhaps anomalous that a plaintiff who claims $55,000 and at formal trial proves damages of only $5,000 pays no penalty whereas the plaintiff who alleges $25,000 damages, receives an award of $20,000 and on a trial de novo does no better must pay costs to have his day in court. Another question unanswered by the drafting of the bill is whether claims, counterclaims, cross-claims and third party claims are to be aggregated in determining whether a case is referable to arbitration. One assumes that use of the term "relief sought" implies that each claim for relief is to be considered, not only the complaint. However, the correctness of that assumption is not entirely clear, and it is even less clear what is intended when the claim, the counterclaim, the third-party claim and the cross-claim do not individually exceed $50,000, but in the aggregate they do. Other questions will doubtless arise, such as whether claims in the alternative are to be aggregated." Apart from the bill's lack of specificity as to the cases that will be referred to arbitration when the United States is a party, there would appear to be other anomalies in the selection of cases for reference to arbitration. Thus, Jones Act claims are referable, but FELA actions apparently are not. Similarly, although contract and negotiable instrument actions under federal question and diversity jurisdiction are subject to arbitration, personal injury or property damage cases are referable only if they arise under diversity or admiralty jurisdiction and not federal question jurisdiction. It is difficult to understand why, for example, a diversity action for violation of a state safety standard resulting in an injury to person or property is referable to arbitration whereas an action brought under a federal safety law would not be. Moreover, if, as we assume, injury to property is intended to apply broadly to tortious conduct involving monetary loss, why should an action for violation of a state securities law or common law fraud be referable to arbitration brought as a diversity case, while an action for similar violation of Rule 10b-5 would not? Proposed section 645 sets forth the timetable for references to arbitration. If a case involves a claim for non-monetary relief, it is referable to arbitration only upon a determination by a court that such non-monetary claims are "insubstantial," after which the clerk within 120 days shall refer the case to arbitration. This provision raises two questions. First, a determination of insubstantiality may not be made until long after a case is filed. At such a late date, reference to arbitration, even if the award is allowed to become final, will not avoid much delay. Second, such a determination may be difficult to make. No standard of determination or guidelines are provided by the bill. Is there to be a hearing? Are only the pleadings to be considered? These and similar questions should not be left unanswered. The time schedule under Section 645 of the proposed legislation for reference of cases to arbitration raises several other serious questions. 10 Local Civil Rule 49 adopted by the Eastern District of Pennsylvania on February 1, 1978, purports to deal with this problem by specifying that, for purposes of determining whether an action should be referred to arbitration, "damages shall be presumed in all cases to be less than $50,000" unless counsel for the claimant files a certificate stating that "to the best of his knowledge and belief ** * damages recoverable exceed * $50,000." This provision, however, adds little if anything to Rule 11 of the Federal Rules of Civil Procedure. * * 11 Thus, truly separate claims should perhaps be aggregated, but a claim merely for indemnification or contribution perhaps should not. Other debatable situations can be foreseen. 30-434-78- -4 First, the bill contains a potential trap for the unwary. If after the answer is filed both sides allow 20 days to go by without initiating discovery or filing a dispositive motion, the case will automatically be referred to arbitration. (The bill makes no provision for third party practice. In this example, the case would be referred to arbitration before a third party pleaded at all.) At that point, further discovery is not possible and the arbitration must go forward. Thus, through inadvertence, the case may have to go through the entire arbitral process without discovery even though the drafters of the bill consider that an opportunity for discovery may be necessary in order to make arbitration acceptable to the parties. Second, the bill is silent as to the consequences which follow from time lost on discovery motion practice. If one party objects to discovery, thus requiring the other to move to compel it and the magistrate or court delays decision of that motion, the 120-day period may expire, leaving a party substantially deprived of discovery when the case is referred to arbitration. It would seem to make little sense to require a party to go forward with arbitration until he has obtained the discovery to which he is entitled and which he has sought in a timely manner. It should also be noted that a bottleneck in the first round of discovery may preclude a party from getting subsequent discovery which he learns is necessary only after obtaining the information sought in his first round.12 Finally, a party cannot await the result of a dispositive motion before deciding whether to seek discovery. Again, this may encourage unnecessary and expensive discovery practice. Thus, ironically, discovery may become more costly as a result of the time limit and lack of other limitations contained in the bill. We believe, therefore, that discovery prior to arbitration should instead be carefully restricted but flexibly administered. This would seem consistent with the intent of the bill, because if a party demands a trial de novo, the case is to be treated for all purposes as if it had not been referred to arbitration, and presumably further discovery may be pursued before trial. Consequently, we suggest that any bill of this kind should provide a procedure pursuant to which the scope of pre-arbitration discovery can be circumscribed or modified by the district court or magistrate following an initial "pre-trial" conference. Proposed section 645 (b) provides that the arbitration will be conducted before a panel of three arbitrators unless the parties agree on a single arbitrator and that the parties may agree on their own arbitrator(s) but that if they do not do so within seven days after the action has been referred to arbitration, the clerk shall choose the arbitrator(s) from the certified panel by a random process. We believe that the seven-day limit to notify the clerk that the parties have chosen arbitrators seems too short, especially since the notice of reference will probably be mailed to the parties. We believe that if the parties can agree upon their own arbitrators, they will be far more likely to accept the result than one handed down by arbitrators picked by the clerk, and that selection of arbitrators by consent is therefore to be encouraged. Thus, we would suggest that if the parties agree upon their own arbitrators at any time prior to the hearing, their choices should be confirmed. Proposed section 646 provides that the arbitration hearing shall commence not later than 30 days after the action is referred to arbitration and shall be concluded promptly. This does not seem objectionable in principle, but we have some concern that it may prove too inflexible in governing the commencement of the hearing or the later proceedings. It may well be that illness or commitments of one or more designated arbitrators or parties will prevent strict adherence to statutory requirements, and therefore some form of latitude, perhaps by court order, should be provided. Subsection (b) of section 646 provides that Rule 45 of the Federal Rules of Civil Procedure shall govern the issuance of subpoenas for the attendance of witnesses and the production of documentary evidence. Although we find this reasonable, we note the burden it places on witnesses, particularly those who are not interested in the case, to attend what may be an extra proceeding. Also, it is not clear from the language of the bill whether objections to a subpoena should be determined in the first instance by the arbitrator or the court. This should be clarified. 12 A corollary, also resulting from the requirement that discovery be completed within 120 days, is that in certain instances parties may demand more discovery than they actually need because they recognize they will not have the opportunity to follow up in sequential fashion. Subsection (d) of section 646 provides that a party may have a recording or transcript made of the hearing, but if he does so, he must furnish a copy without charge to any other party. The section leaves a question open: must a party elect to record or transcribe the entire proceeding or may he elect to transcribe only his opponent's case or portions of it? Moreover, we see no basis for requiring the party who makes the recording or transcript to furnish a copy free to the opposing side. Such a rule will simply lead to a game of bluff in which each side waits for the other to indicate first that a transcript will be made. Proposed section 647 requires that the arbitrators' award be filed with the court "promptly after the hearing is concluded" and provides that it shall be entered as a judgment of the court unless a trial de novo is timely requested. The judgment so entered is to have the same force and effect as a judgment of a court in a civil action except that it is not subject to appeal. We note that this leaves awards subject to vacatur under Rule 60 (b) of the Federal Rules of Civil Procedure, and hence arbitration awards may not be as final as they initially appear. The bill does not state whether the arbitrators are expected to render a decision embodying their reasoning, findings and conclusions. The practice of giving a reasoned decision would more closely approximate what a federal court is expected to do. On the other hand, in many forms of private arbitration-for example under the Commercial Arbitration Rules of the American Arbitration Association-arbitrators are actively discouraged from rendering any decision explaining their award. Rather, they are encouraged simply to state, without explanation, the relief granted. Proposed section 647 may imply the latter practice insofar as it suggests that the award would be in a form that would permit its entry as a judgment. Pursuant to Fed. R. Civ. P. 54(a), judgments are not to contain a recital of the pleadings, the report of a master or the record of prior proceedings. They are clearly distinct from findings and conclusions, Fed. R. Civ. P. 52(a), 58. We believe that it would be advisable to establish a uniform practice as to whether the arbitrators will render a reasoned decision, whether orally or in writing, as part of their function. There are arguments in favor of both positions which ought to be resolved. On the one hand, rendering of a reasoned decision is likely to have a persuasive effect. If the losing party accepts the arbitrators' reasoning, he will be less likely to insist upon a trial de novo than if he had no basis for understanding the award. On the other hand, the need to render a decision adds to the burdens of the arbitrator and in some cases may encourage a party to seek a trial de novo where he disagrees with the arbitrators' reasoning. Section 648 deals with the trial de novo. Subsection (a) provides that it may be obtained by any party who so demands within 20 days after the filing of the arbitration award. The provision that any party may request a trial de novo is straightforward in concept except in multi-party litigation.12 For example, it is not clear what result would follow if an award were rendered jointly and severally against two defendants but only one defendant demanded a trial de novo. Would the award become a final judgment against the non-demanding party? There would seem no reason to avoid finality unless issues of indemnification or contribution were involved. The collateral estoppel effects of a final award may also be a consideration to litigants. It is not clear whether such effect is intended by the drafters. Describing a final award as a judgment so suggests, although awards in private arbitration usually do not have collateral estoppel effect. Subsection (b) of section 648 provides that if a trial de novo is sought, the action shall be treated for all purposes as if it had not been referred to arbitration. However, this subsection is qualified by the succeeding two, which provide that testimony given at the arbitration can be used for impeachment purposes and for the imposition of costs of arbitration if the judgment is not more favorable than the arbitration award. The limitation in subsection (c) of section 648 to use of testimony for purposes of impeachment seems to us pointless. If, for example, a party has made an admission against interest at the arbitration, there would appear to be no reason whatever not to permit its use at the trial as substantive evidence. The real question, however, is whether there should not be a total privilege over the use of testimony at the arbitration hearing in any subsequent trial de novo. Such a rule would, for one thing, discourage litigants 12 It is at least theoretically subject to abuse. A party might demand a new trial principally for harassment, although this would be infrequent. from going to the expense of ordering a transcript of the arbitration proceeding, which could be a substantial expense. It should also be noted that if a transcript of the arbitration proceedings is made, it would be available in collateral litigation involving other parties. This fact could have significance in unusual circumstances in which there might be related cases in litigation. CONCLUSION Although very much aware that increasingly congested court dockets and escalating litigation delays and costs create major problems for both the judiciary and smaller claimants, we believe that adoption of the proposed legislation will not alleviate those problems. To the contrary, the non-binding mandatory arbitration contemplated by the bill may well exacerbate and compound the existing difficulties by forcing the parties to participate in a costly and timeconsuming additional proceeding which in many instances will be a complete nullity. Remedial surgery on the defectively drafted provisions will not, in our opinion, rectify the inherent flaws in the proposal, and we therefore urge Congress to disapprove the bill. Dated: New York, New York, March 1978. Respectfully submitted, [Additional material submitted by Robert Coulson: Bylaws of the American Arbitration Association, Inc., and description of National Construction Industry Arbitration System follows:] AMERICAN ARBITRATION ASSOCIATION, INC., BY-LAWS AS AMENDED THROUGH MARCH 1976 ARTICLE I-NAME, LOCATION AND INSIGNIA 1. The name of this organization shall be the American Arbitration Association, Inc., incorporated under the Not-For-Profit Corporation Law of the State of New York. 2. Offices of the Association shall be located in New York and/or in such other localities as may be determined by the Board of Directors. 3. The seal of the Association shall include the letters "AAA" in such design as may be approved by the Board of Directors. 4. The Association may adopt any insignia in such design as may be approved by the Board of Directors. ARTICLE II-PURPOSES 1. The objectives of the Association are, for the benefit and education of the general public and interested parties, to study, research, promote, establish and administer procedures for the resolution of disputes of all kinds through the use of arbitration, mediation, concilliation, negotiation, democratic elections and other voluntary procedures, together with such other objects and purposes as are set forth in the certificate of incorporation as consolidated and amended. 2. The Association shall not pay dividends or distribute any part of its income or profit to its members, directors or officers. Compensation in a reasonable amount may be paid to members, directors or officers for services rendered. 13 Subcommittee member. 3. No substantial part of the activities of the Association may be devoted to influencing legislation. ARTICLE III-MEETINGS OF THE ASSOCIATION 1. The Annual Meeting of the members of the Association for the election of officers and directors and the transaction of any other business relating to the affairs of the Association shall be held at such place and on such dates as may be determined by the Board of Directors. 2. Special meetings of the members may be called by the President, or by resolution of the Board of Directors or Executive Committee, and shall be called upon written petition of any twenty-five (25) members, such petition to be filed with the President. 3. Notice of the time and place of the meeting, or any adjournment thereof, shall be mailed or delivered to the last recorded address of each member, or, in lieu thereof, shall be published in a newspaper to be designated by the President, such mailing, delivery or publication to be made not less than ten days nor more than thirty days prior to the date of such meeting. 4. One hundred members of the Association, present in person or by proxy, shall constitute a quorum at the annual or any special meeting and a vote of the majority thereof shall be effective. ARTICLE IV-MEMBERSHIP AND CONTRIBUTIONS 1. Annual Members: Any person, firm, corporation or association interested in the goals and purposes of the Association shall be eligible to annual membership, subject to such qualifications and procedures as the Board of Directors may prescribe. An annual member shall pay such dues as may from time to time be established by the Board of Directors for the respective classification of annual members to which such member belongs and shall be entitled to the privileges of the Association as determined for such class. Any firm, corporation or association which is a member in good standing is entitled to designate a representative thereof to exercise the privileges of such membership. Any member failing to pay dues within ninety (90) days from the date they become payable, may, after notice thereof, be either suspended or dropped from membership. Each member in good standing shall be entitled to cast one vote for the election of each of the Directors as hereinafter provided and on such questions as may be submitted to the members from time to time. Any member entitled to vote at any meeting may cast such vote by proxy. 2. Contributions: Any person, firm, corporation, association or foundation or other organization interested in advancing the Association's goals and purposes may offer grants or contributions to the Association for the purpose of appropriate research or education, without necessarily becoming a member of the Association. However, upon the contirbutor's application any appropriate portion of such grant or contribution may be allocated as membership dues, whereupon such contributor shall enjoy all the privileges of such membership. ARTICLE V-AFFILIATIONS 1. The Association may grant or accept affiliation with other appropriate organizations with mutual interests, upon such terms and conditions as the Board of Directors shall in each case approve. ARTICLE VI-BOARD OF DIRECTORS 1. The Association shall be governed by a Board of Directors of not less than forty, whose number may be fixed by vote of the members at an annual meeting. 2. The Board shall be divided into four substantially equal classes. One fourth of the Board shall be elected at each annual meeting. Each class shall serve for four years. Vacancies occurring in any class of elected Directors may be filled through appointment for the unexpired term by the Board or by the members at the next annual meeting. 3. Candidates for the office of Director shall be nominated by a nominating Committee, to be appointed by the Board of Directors. 4. The Board of Directors shall meet for the purpose of electing the Officers and the Executive Committee of the Association immediately after the Annual |