Publications

2021 Issue Two – Special Arbitration Issue

ENFORCING YOUR ARBITRATION AGREEMENT: WHERE AND HOW

By: Ken Carroll and Neil Burger

A dispute has arisen between you and one of your customers, employees, or someone else with whom you do business. Worse, your opponent has opened the hostilities by suing you in state or federal court. You believe there’s an agreement that requires the dispute to be resolved in arbitration. But how do you enforce that agreement? And where, in what forum? Thinking about these issues and planning ahead in preparing and executing an arbitration agreement can help avoid uncertainty and costly delays in getting your dispute resolved as you intended.

Who decides “arbitrability”—that is, whether your dispute will be decided by the arbitrators or by a court?

When parties disagree about whether a matter must be arbitrated, there are two “gateway issues” that must be resolved at the outset: (1) whether there is an arbitration agreement, and if so, (2) whether the dispute at issue is covered by that agreement. But who decides those “gateway issues”? It’s a tougher question than you might think.

Generally speaking, both “gateway issues” and any sub-issues are presumed to be questions for the court to decide before it will compel the parties to resolve their dispute in arbitration. But both federal and Texas state courts recognize that, because arbitration is favored and is a creature of contract, the parties can alter this normal procedure in their arbitration agreement. That is, they can agree to have the arbitrators, rather than the court, determine questions of “arbitrability.”

Obviously, there’s a bit of a chicken-and-egg problem: How can arbitrators be authorized to determine arbitrability if there’s a question about whether there should be any arbitration (or arbitrators) in the first place? Most jurisdictions, state and federal, have resolved this logical conundrum by (1) having the court determine the threshold question about whether there is any arbitration agreement at all, but then (2) allowing the arbitrators to decide all other issues of arbitrability if  there is “clear and unmistakable evidence” that the parties intended to delegate those issues to the arbitrators. Whether there exists such “clear and unmistakable evidence” is itself an issue for the court.

So, how do you make sure your arbitration agreement expresses “clear and unmistakable” intent to delegate questions of arbitrability to the arbitrators and not the court? Probably the most common method, recognized by Texas and federal courts, is to explicitly incorporate by reference into the parties’ arbitration agreement the AAA Commercial Rules. That’s because Commercial Rule 7 provides that an arbitrator “shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope, or validity of the arbitration agreement or to the arbitrability of any claim or counterclaim.” Even that approach, however, has its limits. For example, a party may be held to have waived its right to arbitrate if that party has “substantially invoke[d] the judicial process to the detriment or prejudice of the other party” before seeking to compel arbitration. The U.S. Fifth Circuit Court of Appeals very recently held, in International Energy Ventures Management v. United Energy Group (2021), that a court and not the arbitrator should decide whether such a “litigation-conduct waiver” has occurred, even where the AAA rules were incorporated into the parties’ agreement. In addition, care must be taken not to make any delegation language subject to “carve-outs” or exceptions—circumstances that have led to lengthy and expensive court battles over who decides issues of arbitrability. Decide for yourself whether to delegate those threshold issues to the arbitrators or leave them with the court. But be clear about your choice. Avoid uncertainty, because that can lead to costly preliminary litigation, rather than quick referral of the dispute to arbitration for resolution on the merits.

Prepare to prove the parties and claims are subject to arbitration

Once you’ve established an arbitration agreement exists, you still need to prove that (1) the parties and (2) the claims are subject to that agreement, whether that question is raised before a trial court or the arbitrators. These two inquiries seem simple, but can run into practical real-world problems.

First, what happens if the employee, customer, or other party simply denies that they signed the agreement? Did anyone in your office actually see the person sign it? Was the signature electronic? Where’s the original? You can set up fairly simple processes to avoid this proof conundrum and help ensure your arbitration agreement will be enforced.

If you’re having parties physically sign the arbitration agreement, be sure to establish an HR protocol that ensures that every person signs at the beginning of the relationship, and then have an employee staffed with the job of collecting each original agreement. These agreements can then either be stored alphabetically in one place or be housed with each person’s employment or account file. Knowing where these agreements are stored is essential to efficiently locating each agreement during tight litigation deadlines, should the need arise. If possible, the same person should be in charge of collecting signatures and storing the executed agreements. This allows that person to sign an affidavit “proving up” the agreement—swearing to the court or arbitrators that the arbitration agreement was signed by the employee and filed in the company’s ordinary course of business. If you have multiple offices, consider having one central location where all the signed agreements are kept. And, just to be safe, scan all the paper documents for electronic storage in case the hard copy goes missing, can’t be found, or is destroyed.

Electronic signatures present their own unique issues. Relying on the Texas Uniform Electronic Transactions Act, the Supreme Court of Texas in Aerotek, Inc. v. Boyd (2021) recently bolstered parties’ ability to rely on e-signatures and digital agreements, even when one party denies having electronically “signed” such an agreement. (A discussion of Aerotek, with a link to the decision itself, is available here.) Still, how do you prove that the opposing party (and not someone else) actually consented to having their signature electronically placed on the arbitration agreement? As in Aerotek, you need to be able to track how the electronic agreement was sent, how it was accessed by the signer, when it was electronically signed, and then where on the computer server it is stored. One way to prevent someone from later denying they electronically executed the agreement is to forward the fully executed agreement by email back to the person after they’ve signed it. If they don’t object at that time, it will be harder for them to deny the electronic signature in the future.

Remember, courts will not necessarily rely on affidavits from an HR employee explaining the customary practices that the business takes when onboarding an employee or vendor. Just because it’s the usual practice to have someone sign an arbitration agreement on their first day doesn’t necessarily prove this particular person signed the agreement, especially if that person denies that they did. You need to set up a provable system that allows you to establish that each employee signed the arbitration agreement, whether by hand or electronically.

Last, the claims asserted in the dispute must fall within the scope of the arbitration provision. Here, the drafter of the agreement can be its best proponent. Both Texas law and federal law strongly favor arbitration and presume that an agreement to arbitrate exists. Therefore, broad language that encompasses all possible disputes between the parties will likely prevail, even if the particular dispute was not foreseen at the time the arbitration agreement was signed. Once the claims asserted touch on the parties’ agreement—such as “all claims arising between the parties”—the trial court lacks discretion to refuse to compel arbitration. And if the court doesn’t compel, you can seek immediate appellate relief, a remedy the party opposing arbitration does not have if the case is sent to the arbitrators by the court.

By: Bret Madole and Laura Hebert

Arbitration is a method for resolving legal disputes without going to court. Where parties are similarly situated, they may specify by agreement whether disputes will be arbitrated and, if so, how the arbitration will be conducted. At other times, one party may require that disputes will be arbitrated as a condition to doing business. Lawyers are frequently asked which is better: arbitration or litigation? The answer, of course, is “It depends.” This edition of the Capital newsletter is devoted to arbitration, addressing some of the issues that most frequently arise and starting with a very brief summary of factors to be considered.

Cost

Perhaps the most the common reason for choosing arbitration is the belief that it will cost less than litigation. This may or may not be true. For a large employer that requires its employees to arbitrate disputes, mandatory arbitration likely would result in cost savings for the employer. But what about two parties to a commercial contract that requires arbitration? Attorneys’ fees and the costs of discovery can be – but are not always – substantially lower in arbitration. What if the parties disagree on whether their dispute is subject to mandatory arbitration, as is often the case? The cost of litigating this initial question may eat up any savings that might otherwise have resulted from arbitration. Ultimately, if the parties can reach agreement on the questions of whether and how to arbitrate, arbitration can be less expensive than going to court. But absent such agreement, cost savings may not materialize. 

For tips on keeping arbitration costs down and avoiding a dispute about whether to arbitrate, see the articles “Five Practical Things to Consider If You Include an Arbitration Clause in Your Contract” and “Enforcing Your Arbitration Agreement: Where and How.” 

Control

The general perception is that arbitration gives the parties greater control over the proceedings than they would have in court. Parties to arbitration may be able to select an arbitrator in whom both sides have confidence, whereas litigants do not get to select their judge. However, the arbitration parties are not always able to select the arbitrator or to mutually agree on an arbitrator. Sometimes the parties will not even be able to control how many arbitrators will hear their dispute, which can obviously affect the cost of arbitration. Moreover, once the arbitrator is selected, the arbitrator may have more discretion in fashioning the outcome than a judge has in a court case. Additionally, whereas trial results can usually be challenged on appeal, a party may not be able to appeal an unfavorable arbitration result. For more on this subject, see “Can I Appeal a ‘Rogue’ Arbitration Award?” in this issue.

Privacy and Transparency

Weighing heavily in favor of arbitration for some is the privacy it affords to the parties involved. Unlike court records and trial proceedings, which are usually accessible by the public, arbitration is private, and the parties are typically under an obligation of confidentiality. For parties who put a premium on privacy, the confidential nature of arbitration can be enough to outweigh any advantages that a trial may have.

Formality

Arbitration proceedings can be relatively informal compared with a trial. The rules of evidence and procedure, which often make trials and trial preparation long and complicated, do not apply, and the setting is typically less formal. Arbitrations may proceed without, or with greatly reduced, formal discovery or depositions, which can lead to faster and less expensive resolution. The flip side of the informality is that the rules of evidence and procedure that apply to a trial have been worked out carefully over many years to try to ensure fairness to all parties. Without them, one or both sides may feel they did not get a fair hearing. An experienced and competent arbitrator can go a long way toward making the process fair to all parties.

Time

Many consider time as a critical advantage of arbitration, especially when compared with litigation, as arbitrators are often able to hear cases and render their decisions much more quickly than the courts. However, this may not necessarily be true. To cite an extreme example, in a partnership dispute where the partnership agreement required mandatory arbitration by a three-member arbitration panel, the panel did not render a decision for almost three years after the arbitration hearing. The parties might very well have saved themselves time and money if they had litigated.

As discussed here and as further shown in this issue of the Capital newsletter, the realities of arbitration can be very different from common perceptions and deciding whether to arbitrate can be a complicated decision.

By: Ken Carroll

If you’ve decided you want to arbitrate disputes relating to your contract or business arrangement, here are five practical things you ought to consider covering in your arbitration agreement, things that most people don’t think about until it’s too late:

1. Pick the right arbitration service. Many business arbitrations nowadays are conducted by the American Arbitration Association. But yours doesn’t have to be. You can choose to use the AAA, and that brings with it a number of advantages, including established rules and procedures and a wide selection of experienced potential arbitrators. But there are other organizations that do arbitrations, such as JAMS, formerly known as the Judicial Arbitration & Mediation Services. Or you and your counter-party may be able to agree up front on a private individual arbitrator. Consider the costs and the advantages and disadvantages of each approach in drafting your arbitration agreement.

2.  Specify the number of arbitrators. Under the AAA Commercial Rules, if the arbitration agreement doesn’t specify whether the dispute is to be heard by a single arbitrator or by a panel, “the dispute shall be heard and determined by one arbitrator, unless the AAA, in its discretion, directs that three arbitrators be appointed.” To state the obvious, three arbitrators will cost a lot more than a single arbitrator. Having three arbitrators also introduces more challenges in scheduling and in arbitrator selection. You may prefer having a panel of three decide your case, rather than entrusting all decisions to a single arbitrator. But, especially where there is a limited amount in controversy, the parties should make that decision, rather than leaving it to “the AAA, in its discretion.”

3.  Specify where and how the arbitration will be held. If your company is headquartered in Dallas, but you have customers or business relationships with persons and entities across the country, you probably want to specify that the arbitration will be held in Dallas, in accordance with Texas law. As may seem obvious, not only will that reduce your arbitration costs, it may also help ensure more consistent results. Further, knowing they will have to travel to Texas to arbitrate may dissuade some of your opponents from pursuing the process. So, you should specify that in your agreement, rather than leaving the “locale” of the arbitration to the AAA or the arbitrator. But the nation’s recent experience during the COVID-19 pandemic has added a wrinkle. The value of specifying a Dallas “locale” for your arbitration—to say nothing of the quality of the parties’ presentations, including witness testimony—may be diminished if the arbitration is conducted “virtually,” by Zoom or some other remote-communication platform. So, consider adding a requirement that at least the final hearing in the arbitration will be conducted in person in the specified locale, and not remotely through some electronic platform, unless all parties agree otherwise when it comes time for that hearing.

4.  Be specific about attorneys’ fees. Under the “American rule” followed in most court cases in the United States, each side in a lawsuit pays its own attorneys’ fees, unless (i) there is a statute that provides for an award of fees, usually to the prevailing party, or (ii) the contract between the parties does so. The AAA Commercial Rules, however, arguably introduce a twist. Rule 47(a) says the “arbitrator may grant any remedy that the arbitrator deems just and equitable,” and Rule 47(d) specifically allows for “an award of attorneys’ fees if all parties have requested such an award.” At least on their face, these provisions don’t adhere to the American Rule requiring a statutory or contractual basis for a fees award. You should carefully consider how you want fees to be handled by an arbitrator, including perhaps specifying in your agreement that the parties agree fees may not be awarded by the arbitrator under AAA Rule 47 other than as authorized by statute.

5.  Don’t go international if you don’t need to. The AAA’s international arm is the ICDR—the International Centre for Dispute Resolution. It offers capabilities suited to international arbitrations, such as multilingual staff. But its administrative costs are higher than standard AAA costs. Cases will be shifted to the ICDR if the parties are from different countries, if much of the contract is performed outside the United States, or for several other reasons. Often, however, even when the technical bases for involving the ICDR are triggered, the parties do not need the ICDR’s additional resources—for example, when one party is a U.S. company and the other is incorporated in Canada or Mexico but operates largely from a U.S. facility, and all dealings between the parties have been and will be in English. Consider specifying in your arbitration agreement that any arbitration will be administered by the AAA or JAMS, and not the ICDR, to try to avoid unnecessary fees. In the same vein, you might consider including an agreement that all arbitration fees and expenses will be split equally between the parties, at least pending the final award. Otherwise, you may find yourself saddled with a fee schedule (for example, the AAA employment dispute schedule) that provides for fees and expenses to be paid largely or entirely by the business.

2021 Issue One

SEC LOOSENS RESTRICTIONS ON EXEMPT SECURITIES OFFERINGS

By: George Lee and Kylie Jennings

Every securities offering must either be registered with the SEC or qualify for a registration exemption. Because of the expense and regulatory burdens of a registered public offering, smaller companies must rely on one of the exemptions provided by SEC rules.  The SEC recently amended its rules and provided helpful guidance to make it easier for small companies to raise capital. Among other things, the new rules and guidance (1) increase the amounts that can be raised using Crowdfunding and Regulation A, (2) allow certain preliminary communications to potential investors, (3) ease certain disclosure requirements to non-accredited investors under Rule 506(b), and (4) provide safe harbors to avoid integration of offerings. Most of the amendments became effective on March 15.

Crowdfunding

The new Crowdfunding rules:

• Increase the offering limit from $1.07 million to $5 million in a 12-month period;
• Remove investment limits for accredited investors; and
• Extend temporary pandemic relief from certain requirements for small Crowdfunding by eligible businesses.

Regulation A

The amendments:

• Increase the maximum offering amount under Tier 2 of Regulation A from $50 million to $75 million; and
• Increase the maximum offering amount for secondary sales under Tier 1 of Regulation A from $15 million to $22.5 million.

Preliminary Communications

The amended rules will allow companies to “test the waters” by communicating with potential investors to determine their interest in a future offering without having to worry that the communications would be considered general solicitation. These communications are limited to a generic solicitation of interest prior to determining the terms of the offering or the exemption that will be relied on.  In addition, written materials must contain certain legal disclaimers and still must comply with state law requirements.

Companies can also participate in “demo days” sponsored by colleges, universities, state or local government, non-profit organizations, incubators, or angel investors. This allows businesses to provide information about existing or future offerings to potential investors with certain restrictions.

Offerings to Non-Accredited Investors under Reg. D

Traditionally, attorneys have advised against including non-accredited investors in offerings under Rule 506(b) of Regulation D due to the onerous disclosure requirements, including audited financial statements (please see our article on accredited investors in this newsletter).  By relaxing certain financial statement requirements, the amendments align these requirements with those under Regulation A based on the size of the offering:

• For offerings up to $20 million, the requirements for Tier 1 Regulation A offering would apply, which do not require audited financial statements.
• For offerings of more than $20 million, the requirements for Tier 2 Regulation A offerings would apply.

Integration Safe Harbors

Finally, the SEC has updated its guidance on integration of offerings.  Previously, the rule of thumb was that offerings made within six months of each other could be viewed as a single offering, which could jeopardize a private placement exemption if one of the offerings involved general solicitation.

The new amendments relax the previous guidance by adding four non-exclusive safe harbors. The most significant change allows an issuer to commence a new offering 30 calendar days after the termination or completion of another offering without triggering integration.

These specific rules and safe harbors can be complex, and this alert is meant to provide an overview of the changes the SEC has made to the exempt offering rules. Should you have any questions regarding the updated rules in general or any of these particular issues, please contact George Lee.

2021 Issue One

SEC EXPANDS CATEGORIES OF “ACCREDITED INVESTORS”

By: George Lee and Tyler Wright

Effective December 8, 2020, more investors will now qualify as “accredited investors,” including clients of family offices, certain investment professionals, and knowledgeable employees of private funds, regardless of their net worth or income. The SEC amended its rules to make it easier for small companies and private investment funds to raise capital from investors who have established financial sophistication through avenues besides wealth or income. Please also see our article on exempt offerings in this newsletter.

New categories of accredited investors include:

• Family Offices with at least $5 million in assets under management, and their family clients;
• SEC and state Registered Investment Advisers;
• Exempt Reporting Advisers;
• Rural Business Investment Companies;
• Licensed investment professionals with Series 7, Series 65, or Series 82 certifications;
• Knowledgeable Employees of private funds; and
• Entities owning more than $5 million in investments, including Native American Tribes, governmental bodies, funds, and non-US entities.

Accredited Investors Under Reg. D

 Qualification as an accredited investor is one of the principal tests for determining who is eligible to participate in private securities offerings. Traditionally, most companies and private funds have relied on the exemption provided by Rule 506(b) of Regulation D (“Reg. D”) to raise capital because of the preemption of state registration requirements and the ability to reasonably rely on self-certification of accredited status by investors.  While up to 35 non-accredited investors may participate in a Rule 506(b) offering, as a practical matter, most Rule 506(b) offerings are limited to accredited investors because of the additional disclosures, including financials statements, that Reg. D requires to be given to non-accredited investors. The downside of a Rule 506(b) offering is that general solicitation or advertising is not allowed.

Companies and private funds that wish to use general solicitation to find investors may rely on Rule 506(c) of Reg. D, but the issuer must take extra steps to verify that all investors are accredited. Nevertheless, the SEC has recently indicated that the steps to verify that investors are accredited may not be as onerous as many lawyers previously thought.

New Accredited Investor Categories for Individuals

 For nearly 40 years, individuals had to meet certain net‑worth or annual‑income levels (generally net worth of over $1 million, or individual annual income of at least $200,000, or joint income of  $300,000) to be Accredited Investors. While the new rules leave these financial thresholds undisturbed, the SEC has added two new categories that are not based on wealth or income.  First, the SEC has designated licensed investment professionals that have Series 7, Series 65, or Series 82 certifications as accredited investors, and the SEC may add additional professional certifications in the future.  Second, “knowledgeable employees” of private fund managers will now be able to invest in the private funds managed by their employer, regardless of their net worth or income.  This knowledgeable employee qualification is the same one that allows knowledgeable employees to invest in funds that rely on the exemptions provided by 3(c)(1) or 3(c)(7) of the Investment Company Act.

Family Offices

The updated accredited‑investor definition will allow family offices to make investments on behalf of their family clients regardless of the net worth or assets of the family client if:

• the family office manages over $5 million for its family clients;
• the family client was not formed for the purpose of making the investment; and
• the person with the family office that is directing the investment for the family client has the knowledge and experience to evaluate the merits and risks of the investment.

Conclusion

 The amendments to the accredited‑investor definition mark a significant step by the SEC to modernize its thinking about investors’ financial sophistication. They remove unnecessary barriers, and substantially increase access to private markets for those deemed qualified to participate in them. Those looking to issue private securities can now do so to a larger audience and with fewer restrictions.

Please contact George Lee or your favorite Carrington Coleman attorney if you would like more information on how these changes may help you.

By: Andrea Perez

The long-needed push and support for diversity, inclusion, and equity in the corporate world is finally making serious impact on the financial sector, and may actually signal true progress. Corporate press releases noting commitments to diversity, inclusion, and equity are commonplace these days, and many of these initiatives aim to diversify boards and the c-suite. The Nasdaq Stock Market recently joined these efforts, but took things a step further by proposing new rules requiring board diversity for companies listed with Nasdaq. It should be noted that Nasdaq is not the first to push for diversity requirements, and similar requirements have been implemented in California and at least 11 other states. But Nasdaq’s strong stance will undoubtedly lead to concrete changes in many of the world’s largest corporations.

On December 11, 2020, Nasdaq submitted its “Proposal to Adopt Listing Rules related to Board Diversity” to the SEC for its approval. On February 26, 2021, Nasdaq filed amendments to the proposal based on over 200 comments it received. The rules are very encouraging for those eager to see better representation in the boardrooms of corporations.

One of the proposed rules would require each Nasdaq-listed company, subject to certain exceptions, to (1) have, or explain why it does not have, at least one director who self-identifies as a female, and (2) have, or explain why it does not have, at least one director who self-identifies as Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander, two or more races or ethnicities, or as LGBTQ+.[1] A second rule would require all Nasdaq-listed companies to publicly disclose board-level diversity statistics by the later of one calendar year from the date the SEC approves the proposal, or the date the company files its proxy statement or its information statement (or, if the company does not file a proxy, in its Form 10-K or 20-F) for its annual meeting of shareholders during the calendar year when the proposal is approved.[2]

Nasdaq explained its new diversity initiative as follows:

• The goal of the proposal is to provide stakeholders with a better understanding of a company’s current board composition and enhance investor confidence that our listed companies are considering diversity in the context of selecting directors, either by meeting the proposed board diversity objectives or by explaining their reasons for not doing so, which can include describing an alternative approach.[3]

In the recently filed amendment, Nasdaq states “Corporate culture, human capital management, and technology-driven changes to the business landscape have underscored the benefits of enhanced board diversity—diversity in the boardroom is good corporate governance.”[4] For those who have experienced the “boys’ club” atmosphere of some boardrooms, such changes give hope for equitable and inclusive treatment.

There may be further amendments to the proposal prior to its approval, and this article provides a brief summary of the proposed rules as of the date this article was written. The proposed rules are complex with many exceptions to consider, and different timelines for compliance based on a company’s listing tier. If adopted, Nasdaq-listed companies must meet the new board requirements in 2-5 years, based on their listing tier, or provide an explanation why the company will fail to do so within the same timeframe.[5] This is a short period given the required lead time necessary to recruit and vet directors for Nasdaq-listed companies. Therefore, Nasdaq-listed companies should currently be looking to recruit directors who are diverse, if they are not already doing so, or risk being left even further behind. For those companies having difficulty locating diverse candidates, Nasdaq created a partnership with Equilar, a provider of corporate leadership data solutions, to provide placement and recruiting assistance.[6] Equilar is certainly a helpful resource, but this seems like one area in which these firms should avoid outsourcing.

If the proposal is adopted, what happens to a Nasdaq-listed company that fails to comply? Nasdaq’s Listing Qualifications Department would first promptly notify the company that it has until the later of its next annual shareholders meeting, or 180 days from the event that caused the deficiency, to cure the deficiency.[7] A company can cure the deficiency either by meeting the applicable minimum diversity objectives or by providing the alternative public disclosure requirements.[8] If a company does not comply within the applicable period, it could be delisted from Nasdaq.

The public comment period is still open for Nasdaq’s proposed rules, and should you or your organization be so inclined, you can file comments with the SEC using this link: https://www.sec.gov/rules/sro/nasdaq.htm#SR-NASDAQ-2020-081. But the current state of the proposed rules are very encouraging, and likely to be approved by the SEC in similar form in the near future. If Nasdaq adopts these rules, they will have significant impact on diversity and inclusion in the higher echelons of businesses, as most Nasdaq-listed companies currently fall short of the diversity requirements. Though it would be a better solution if American companies would take these inclusive measures without the need for new regulations from the stock exchange, it is very welcome news that Nasdaq recognizes that diversity is good business, and broadening the boardroom also makes for better business decision making.

[1] SR-NASDAQ-2020-081 Amendment 1, Nasdaq Listing Rule 5605(f) (Diverse Board Representation) (proposed Feb. 26, 2021), https://listingcenter.nasdaq.com/assets/RuleBook/Nasdaq/filings/SR-NASDAQ-2020-081_Amendment_1.pdf

[2] SR-NASDAQ-2020-081 Amendment 1, Nasdaq Listing Rule 5606 (Board Diversity Disclosure) (proposed Feb. 26, 2021), https://listingcenter.nasdaq.com/assets/RuleBook/Nasdaq/filings/SR-NASDAQ-2020-081_Amendment_1.pdf.

[3] Nasdaq’s Proposal To Adopt Listing Requirements For Board Diversity, What Nasdaq-Listed Companies Should Know, Nasdaq (accessed March 9, 2021), https://listingcenter.nasdaq.com/assets/Board%20Diversity%20Disclosure%20Five%20Things.pdf.

[4] SR-NASDAQ-2020-081 Amendment 1, at 6 (proposed Feb. 26, 2021), https://listingcenter.nasdaq.com/assets/RuleBook/Nasdaq/filings/SR-NASDAQ-2020-081_Amendment_1.pdf

[5] Nasdaq’s Board Diversity Rule Proposal FAQs (accessed March 9, 2021), Nasdaq Listing Center https://listingcenter.nasdaq.com/Material_Search.aspx?mcd=LQ&cid=157&sub_cid=&years=2020&criteria=1&materials

[6] Id.

[7] Id.

[8] Id.

On January 5, the Consolidated Appropriations Act created the Emergency Rental Assistance Program (ERA) to assist households that are unable to pay rent and utilities due to the COVID-19 pandemic. The ERA allocates $25 billion to local governments (both counties and cities) with a population of 200,000 or more.

Recipients can only use the funds to provide assistance to eligible households with rent and rental arrears, and utilities and home energy costs and arrears. Using ERA funds to pay for mortgage relief is outside the scope of the program and is not permitted.

The deadline to apply for the ERA is January 12.

Eligible grantees for the ERA funds are counties or cities with populations of more than 200,000 residents. At least 90% of the funds must be used to provide financial assistance to eligible households. The deadline for grantees to obligate the funds is September 30, 2021. Treasury has the power to recoup any unused funds. Grantees may also transfer any unused funds to their respective state to utilize in their assistance program before the September 2021 deadline.

Eligible household is defined as a renter household that has a household income at or below 80% of the area median and at least one individual living in the household: (1) qualifies for unemployment or has experienced a reduction in household income, incurred significant costs, or experienced a financial hardship due to the COVID-19 pandemic; and (2) can demonstrate a risk of experiencing homelessness or housing instability.

Eligible households may receive up to 12 months of assistance, plus an additional 3 months if the grantee determines the extra months are needed to ensure housing stability and grantee funds are available. Either eligible households or landlords may submit an application for rental assistance through programs established by grantees.

Eligible grantees are directed to make payments to a lessor or utility provider on behalf of the eligible household, unless the lessor or utility provider does not agree to accept such funds from the grantee, in which case the grantee may make such payments directly to the eligible household for the purpose of making payments to the lessor or utility provider.

Individuals in need of mortgage assistance are notably left out of the ERA.

DEADLINES

The deadline to submit the application for ERA funding is January 12. This application consists of a short list of terms and conditions, a form designating bank information for the receipt of funds, and a signature page.

CARRINGTON COLEMAN’S SUGGESTION

Eligible counties and cities should submit the ERA terms and conditions as soon as possible. For counties and municipalities who received Coronavirus Relief Funds (CRF), the amount disbursed under the ERA will likely be significantly less, but will still be a substantial amount that is important for assisting local communities. Final disbursement amounts are not yet available.

While there are still many outstanding details surrounding the ERA program, we recommend that counties and municipalities who meet the population requirement optimize these funds to assist those struggling to afford housing in their communities due to the COVID-19 pandemic.

2021 Issue Two – Special Arbitration Issue

CAN I APPEAL A “ROGUE” ARBITRATION AWARD?

By: Lyndon Bittle

You agreed to arbitration, and thought the hearing went well. Sometime later, you receive the arbitrators’ decision and ask, “What were they thinking? This can’t be right. They’re wrong on the law and the facts. Can I appeal?”

To determine whether, and on what grounds, you can appeal an unfavorable arbitration award, the first step is to review the agreement that approved arbitration as a means of settling disputes. That agreement may control whether the scope of an appeal is governed by the Federal Arbitration Act (FAA), the Texas Arbitration Act (TAA), or an appellate panel of the organization that administered the arbitration, such as the American Arbitration Association (AAA). And that decision can affect the odds of a successful appeal.

Any discussion of arbitration appeals begins with the FAA, which governs most commercial contracts affecting interstate commerce. Under the FAA, as interpreted by the United States Supreme Court, arbitration awards are presumed to be final and enforceable, except in rare circumstances. Specifically, a court may vacate an award:

(1) where the award was procured by corruption, fraud, or undue means;

(2) where there was evident partiality or corruption in the arbitrators, or either of them;

(3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy, or of any other misbehavior by which the rights of any party have been prejudiced; or

(4) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.

9 U.S.C. § 10(a). The Supreme Court has held these are the only grounds for vacating an arbitration award, and they cannot be supplemented by agreement of the parties, thus rendering appeals of most arbitration awards toothless. For example, in Hall Street Associates, LLC v. Mattel, Inc. (2008), the parties agreed that a district court “shall vacate, modify, or correct any award: (i) where the arbitrator’s findings of facts are not supported by substantial evidence, or (ii) where the arbitrator’s conclusions of law are erroneous.” The Supreme Court held this provision unenforceable because it purported to expand the scope of review beyond the statutory grounds. The Fifth Circuit subsequently interpreted Hall as barring “manifest disregard of the law,” a long-recognized common law ground for reversing arbitrations, as a basis for review under the FAA. And the Fifth Circuit has defined “evident partiality” to mean an arbitrator’s failure to disclose a “significant compromising relationship.”

For matters governed by the TAA, the potential grounds for appeal are only slightly more liberal. In Nafta Traders, Inc. v. Quinn (2011), the Texas Supreme Court held that Hall did not control the meaning of virtually identical language in the TAA. Specifically, the Court held “the TAA permits parties to agree to expanded judicial review of arbitration awards.” Moreover, the Court held the FAA did not prevent state courts from enforcing the parties’ agreement to expand judicial review of an award governed by the TAA. In addition, Texas applies a somewhat broader definition of “evident partiality” than the Fifth Circuit. And the Texas Supreme Court has not resolved whether common-law grounds for challenging arbitration awards are preempted by the TAA.

Given these differences, how do you know whether your agreement is governed by the federal or state rules? Unless an agreement explicitly provides otherwise or a statutory exception applies, the FAA governs arbitration provisions in any “contract evidencing a transaction involving commerce,” which has been interpreted quite broadly. And where the FAA applies, it overrides conflicting provisions of state law, including the TAA. Contracting parties may, however, choose to have their agreement governed by state law, provided they use language leaving no doubt as to their intention. It is not enough to provide that the agreement is “governed by Texas law.” The Texas Supreme Court and the Fifth Circuit have held the FAA does not apply where a contract explicitly requires that disputes be resolved “in accordance with the Texas General Arbitration Act.”

As noted, choosing to have an agreement governed by the TAA might result in a somewhat expanded scope of review. Are other options available if the parties want to ensure greater review of arbitration awards for legal or factual errors? In recent years, in response to concerns by many parties of the lack of effective relief for serious errors by arbitrators, several major organizations, including the AAA, JAMS, and CPR (the International Institute for Conflict Prevention & Resolution), have developed internal procedures for review by a panel of senior arbitrators. Because the appeal is internal to the organization and does not affect judicial review, it can be available in agreements governed by the FAA or TAA. This review is available, however, only if the original arbitration agreement includes provisions invoking the internal appeals process. According to the AAA, its “rules permit review of errors of law that are material and prejudicial, and determinations of fact that are clearly erroneous.” And it touts that its appellate process “can be completed in about three months, while giving both sides adequate time to submit appellate briefs.” An appeal is treated as a new proceeding, requiring additional fees.

Here’s the rub: How do you know when negotiating an agreement requiring arbitration of disputes whether you or your adversary will be the one searching for grounds to appeal an arbitration award? Protecting against “rogue” awards could make arbitration more attractive. But making appeals more available or effective could undermine one of the primary purposes of arbitration—an efficient means of resolving disputes. There is no simple answer to this question, but these issues should be considered whenever an arbitration agreement is contemplated. Be careful what you ask for.

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The presidential candidates have built very different platforms, with threats and opportunities for the construction industry in both options.

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