author: WETTICK JR., A.J,

text:
    Trombetta v. Raymond James Financial Services Inc.

      C.P. of Allegheny County,
    no. GD04-015418.

      Kerin M. Kowach, for petitioners.

      David C. Franceski Jr. and Megan P. Willoughby, for respondents Raymond James Financial Services Inc., Raymond James & Associates Inc. and Lewis.

      Peter Gialames, pro se.

      Jeffrey J. Leech, for co-respondents.
    March 2, 2005
   WETTICK JR., A.J,

The subjects of this opinion and order of court are the petition of James Trombetta, Tara Trombetta Witover, and Julie Trombetta Gray for a rule to show cause why a de novo review of an arbitration award should not be granted or, in the alternative, why the arbitration award should not be vacated; and the amended cross-petition of Raymond James Financial Services Inc., Raymond James & Associates Inc., and Edward Lewis (Financial Services), for a rule to show cause why the NASD arbitration award should not be confirmed as to all parties.

According to the Award/NASD dispute resolution that is the subject of this litigation (Trombetta pet. exhibit A), in the arbitration proceedings, the Trombettas raised causes of action for breach of fiduciary duty, fraud, misrepresentation, negligence, gross negligence, and failure to supervise in which they sought $2 million in compensatory damages and an additional $2 million in punitive damages. These causes of action related to the purchase and sale of various stocks, investments on margin and option trading. Financial Services denied the allegations and asserted claims against Dr. Neil M. Niren for contribution and indemnification. Dr. Niren denied the allegations made in the joinder statement of claim and raised a cause of action for abuse of process against Financial Services and a cause of action against Peter Gialames and Edward Lewis for contribution and indemnification.

In June 2004, the arbitration panel entered an award denying all claims, third-party claims, and counterclaims in their entirety. The Trombettas and Financial Services have timely filed the petition and amended cross-petition that are the subject of this litigation.

The issue that I address in this opinion and order of court is the scope of the standard of review that I should apply in determining whether to confirm, modify, or vacate the June 2004 arbitration award.

Under Pennsylvania state law, the grounds for vacating a common-law arbitration award are set forth in 42 Pa.C.S. §7341, which reads as follows:

“Section 7341. Common-law arbitration

“The award of an arbitrator in a nonjudicial arbitration which is not subject to subchapter A (relating to statutory arbitration) or a similar statute regulating nonjudicial arbitration proceedings is binding and may not be vacated or modified unless it is clearly shown that a party was denied a hearing or that fraud, misconduct, corruption or other irregularity caused the rendition of an unjust, inequitable or unconscionable award.”

The grounds for vacating an award entered in statutory arbitration proceedings under Pennsylvania state law are set forth in 42 Pa.C.S. §7314 which reads as follows:

“Section 7314. Vacating award by court

“(a) General rule.—

“(1) On application of a party, the court shall vacate an award where:

“(i) the court would vacate the award under section 7341 (relating to common-law arbitration) if this sub-chapter were not applicable;

“(ii) there was evident partiality by an arbitrator appointed as a neutral, or corruption or misconduct in any of the arbitrators prejudicing the rights of any party;

“(iii) the arbitrators exceeded their powers;

“(iv) the arbitrators refused to postpone the hearing upon good cause being shown therefor or refused to hear evidence material to the controversy or otherwise so conducted the hearing, contrary to the provisions of section 7307 (relating to hearing before arbitrators), as to prejudice substantially the rights of a party; or

“(v) there was no agreement to arbitrate and the issue of the existence of an agreement to arbitrate was not adversely determined in proceedings under section 7304 (relating to court proceedings to compel or stay arbitration) and the applicant-party raised the issue of the existence of an agreement to arbitrate at the hearing.

“(2) The fact that the relief awarded by the arbitrators was such that it could not or would not be granted by a court of law or equity is not a ground for vacating or refusing to confirm the award.

“(b) Time limitation. — An application under this section shall be made within 30 days after delivery of a copy of the award to the applicant, except that, if predicated upon corruption, fraud, misconduct or other improper means, it shall be made within 30 days after such grounds are known or should have been known to the applicant.

“(c) Further hearing. — If the court vacates the award on grounds other than stated in subsection (a)(l)(v), the court may order a rehearing before new arbitrators chosen as prescribed in the agreement to arbitrate. Absent a method prescribed in the agreement to arbitrate, the court shall choose new arbitrators in accordance with section 7305 (relating to appointment of arbitrators by court). If the award is vacated on grounds not affecting the competency of the arbitrators under subsection (a)(l)(i) through (iv), the court may order a rehearing before the arbitrators who made the award or their successors appointed in accordance with section 7305. The time period within which the agreement requires the original award to be made is applicable to the rehearing and commences from the date of the court order directing a rehearing.

“(d) Confirmation of award. — If an application to vacate the award is denied and no application to modify or correct the award is pending, the court shall confirm the award.”

The grounds for vacating an arbitration award governed by the Federal Arbitration Act, at least in proceedings pending in the federal courts, are set forth in section 10(a) of the Act, 9 U.S.C. § 10(a), which reads as follows:

“(a) In any of the following cases the 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—

“(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)(l)-(4).

Federal case law also recognizes an additional ground for vacating an arbitration award governed by the Federal Arbitration Act: A manifest disregard for the law. In GMS Group LLC v. Benderson, 326 F.3d 75, 77-78 (2d Cir. 2003), the court summarized the case law as to what the manifest disregard test requires as follows:

“We have recently provided an extensive and comprehensive recapitulation of our case law in this area, Westerbeke Corp. v. Daihatsu Motor Co., 304 F.3d 200, 208-10, 212-14 and n.8, 217-18 (2d Cir. 2002), and, thus, we will not repeat it here. Briefly, however, and as a general matter, it is well established that, under the manifest disregard standard, it requires ‘more than a mistake of law or a clear error in fact finding’ to disturb an award. Goldman v. Architectural Iron Co., 306 F.3d 1214, 1216 (2d Cir. 2002). Nor is the failure of the arbitrators to understand the law, or to apply it appropriately, sufficient. See *78 Standard Microsys., 103 F.3d at 12. ‘Manifest disregard can be established only where a governing legal principle is well defined, explicit, and clearly applicable to the case, and where the arbitrator ignored it after it was brought to the arbitrator’s attention in a way that assures that the arbitrator knew its controlling nature.’ Goldman, 306 F.3d at 1216. (internal quotation omitted)”

The Second Circuit also addressed the situation (which we have in this case) in which there is no written opinion explaining the award:

“Insofar as delineating at baseline what will withstand manifest disregard review, especially where there is no written opinion, we have stated ‘ “[i]f a ground for the arbitrator’s decision can be infen'ed from the facts of the case, the award should be confirmed.” ’ Fahnestock & Co. v. Waltman, 935 F.2d 512, 516 (2d Cir. 1991) (quoting Sobel v. Hertz, Warner & Co., 469 F.2d 1211, 1216 (2d Cir. 1972)) (emphasis added); see also, Standard Microsys., 103 F.3d at 13; Siegel, 779 F.2d at 894. In other words, if ‘any justification’ can be gleaned from the record, as the district court noted, the award must be confirmed. We have also stated ‘we will confirm the award if we are able to discern any colorable justification for the arbitrator’s judgment, even if that reasoning would be based on an error of fact or law.’ Westerbeke, 304 F.3d at 212 n.8; see Standard Microsys., 103 F.3d at 13 (‘If there is even a barely colorable justification for the outcome reached, the court must confirm the arbitration award.’), (internal quotation omitted) Thus, the district court’s formulation is at least consistent with these statements.” 326 F.3d at 78.

The Federal Arbitration Act does not establish an independent basis for federal jurisdiction. Southland Corp. v. Keating, 104 S.Ct. 852, 861 n.9 (1984). Consequently, where (as in the present case) there is no diversity of citizenship, petitions to enforce or vacate arbitration awards entered in arbitration proceedings governed by the Federal Arbitration Act must be filed in the state courts. The Pennsylvania appellate courts have never addressed the issue of whether the federal or the state standards of review govern a petition filed in the Pennsylvania state courts to enforce or vacate an arbitration award entered in an arbitration proceeding governed by the Federal Arbitration Act.

However, the Trombettas contend that the standard of review is not governed by either federal or state statutory standards, but, instead, is governed by the following provision in the standard form client agreement which the parties executed:

“We agree that both parties will have a right to appeal the decision of the arbitrators if the arbitrators award damages that exceed $100,000; the arbitrators do not award damages and the amount of my [the client’s] loss of principal exceeds $100,000; or the arbitrators award punitive damages. In each ofthe foregoing cases, a court having jurisdiction will conduct a ‘de novo ’ review of the transcript and exhibits of the arbitration hearing. (emphasis added)” Trombetta pet. exhibit B at 2, arbitration disclosures (c).

This contention raises three issues: (1) whether this provision in the client agreement governed the parties’ relationship at the time plaintiffs’ claims were submitted to arbitration; (2) the meaning of “de novo” review; and (3) whether the parties may impose this standard of review on Pennsylvania state courts.

As to the first issue, I find that the provision in the client agreement set forth in the previous page governed the relationship between the Trombettas and Financial Services. I reject Financial Services’ contention that this provision was modified through a mailing (Investment Briefings, vol. 14, issue 4 (winter 2000)) from Raymond James to its account holders. Financial Services memorandum in opposition, exhibit H. On page five of the Investment Briefings is an article titled “Raymond James simplifies language on client account agreement.” While the bottom portion of the article includes a new arbitration agreement that eliminates the provision for a de novo review, the first paragraph of the article states that Raymond James has recently simplified the arbitration language contained in its client account agreement in an effort to make it easier for clients to understand. The heading and first paragraph are deliberately misleading because the amendment was not intended to, and did not, simplify language but, instead, changed the standard of review for arbitration awards by eliminating the provision for a de novo review. Thus, the article does not furnish adequate notice to the clients of Raymond James that the arbitration agreement described in the article substantially modified the prior agreement.

In addition, the second paragraph of the article states, “Because current clients will not be exposed to this new language unless they open another account with Raymond James, we wanted to take this opportunity to share this change with you.” This language suggests that the so-called simplified arbitration language does not apply if a client does not open another account.

I reject Financial Services’ argument that the Niren account, opened in May of 1999, is not governed by the language of the client agreement providing for a de novo review. The writings executed in connection with the Niren account incorporate the provisions of the client agreement, including the provision for a de novo review. Trombetta app., exhibit 5 at l.

I next address the second issue — what is meant by the provision that a court “will conduct a ‘de novo’ review of the transcript and exhibits of the arbitration hearing.” I agree with the Trombettas that a de novo review means that a judge of this court should not give any weight to the decision of the panel of arbitrators. Instead, the judge reviews the transcript, including exhibits, of the arbitration hearing and makes his or her own decision in the same fashion as if the judge were presiding over a non-jury trial where the record consisted of only deposition testimony and exhibits offered by the parties. The sole function of the arbitration proceedings, in other words, is to create a record that the common pleas court judge will use to decide the case.

While Financial Services disagrees with plaintiffs’ description of the role of the court, it is not clear what it is proposing as an alternative. At oral argument, neither party proposed a standard of review in which the trial court judge would review what the arbitrators did as if the trial court judge was an appellate court. Neither party proposed that the standard be whether under applicable law the evidence could support the arbitration award. If this is what the parties intended, the agreement would not have referred to a “de novo” review.

Financial Services argues that, as part of the de novo review, the court cannot enter its own award/verdict/judgment. The court must either deny the petition to vacate and grant the amended cross-petition to confirm the award (meaning that the court, following an independent review of the evidence, reached the same result as the arbitration panel) or remand the case to another arbitration panel if the court has not reached the same result as the arbitration panel. I am not construing the agreement in this fashion because it is inconsistent with the reasons why the parties sought arbitration: a prompt resolution of the matter. The resolution of arbitration claims frequently does not involve either a ruling giving the claimant everything the claimant sought, or a ruling giving the claimant nothing. In the present case, a possible resolution of the dispute would be an award to the Trombettas of some damages that are far less than the amount which they sought. Thus, for example, if I conducted a de novo review and concluded that the Trombettas should receive damages of $175,000, Financial Services proposes that I would vacate the arbitration award and remand for further NASD proceedings. If the next panel of arbitrators awarded $219,000 to the Trombettas at a second arbitration proceeding (which would apparently involve a new hearing), a judge reviewing the second appeal would vacate the arbitration award and order a remand if he or she concluded that $371,000 should have been awarded.

The third issue that I now address is whether the Pennsylvania courts will enforce the provisions of an arbitration agreement that require a common pleas court judge to decide each of the claims and defenses raised by the parties to an arbitration proceeding by conducting a de novo review of the arbitration proceedings.

In the present case, the record consists of a transcript of more than 2,400 pages and 140 exhibits (not counting sub-parts).

A de novo review requires the trial court judge, through a review of the record, to become as familiar with all aspects of each claim and each defense as if he or she were a trial judge deciding the parties’ claims in a non-juiy trial. This is far different from the role of a common pleas court judge applying statutory standards for vacating an arbitration award. In this latter situation, the few grounds that a court may consider usually involve the review of limited portions of the record.

The Pennsylvania appellate courts have never addressed the issue of whether courts, when considering whether to confirm or vacate an arbitration award, will enforce a provision in an arbitration agreement which raises the level of judicial review beyond that available under applicable legislation. Most state courts that have considered this issue have ruled that the parties may not contractually expand the scope of judicial review of arbitration awards.

John T. Jones Construction Co. v. City of Grand Forks, 665 N.W.2d 698 (N.D. 2003), appears to be the most recent appellate state court opinion that has addressed this issue. The parties’ agreement provided for a de novo review of issues of law. The arbitrator ruled against the contractor who was seeking additional compensation. The contractor appealed the ruling, claiming that the arbitrator erred as a matter of law in ruling that it did not provide sufficient evidence of a differing site condition. The city cross-appealed, claiming that the arbitrator erred by not awarding attorney’s fees and other expenses.

Both parties contended that the court should apply a de novo standard of review for issues of law. The North Dakota Supreme Court rejected this contention, stating that the North Dakota Arbitration Act provided the sole means for securing judicial review of an arbitration award in the courts of that state. Thus, a request to vacate an arbitration award is governed by the “completely irrational standard of review” provided for under North Dakota’s Arbitration Act.

In reaching this result, the North Dakota Supreme Court reviewed, and followed, the case law of other state courts:

“State courts ‘have generally held that the parties may not provide in their agreement for court involvement not authorized by the particular state’s arbitration act.’ 21 R. Lord, Williston on Contracts §57:130 at p. 638 (4th ed. 2001). For example, in Chicago SouthShore and S. Bend R.R. v. Northern Indiana Commuter Transp. Dist., 289 Ill.App.3d 533, 224 Ill.Dec. 595, 682 N.E.2d 156, 159 (1997), reversed on other grounds, 184 Ill.2d 151, 234 Ill.Dec. 395, 703 N.E.2d 7 (1998), the court, interpreting the Illinois version of the Uniform Arbitration Act, stated:

“Subject matter jurisdiction gives the right to hear and determine causes. The subject matter jurisdiction of the trial court to review an arbitration award is limited and circumscribed by statute. The parties may not, by agreement or otherwise, expand that limited jurisdiction. Judicial review is limited because the parties have chosen the forum and must therefore be content with the infor-malities and possible eccentricities of their choice.

“(citations omitted) In Brucker v. McKinlay Transp. Inc., 454 Mich. 8, 557 N.W.2d 536, 540 (1997), the court, construing the Michigan version of the Uniform Arbitration Act, said:

“In locating an alternative means of dispute resolution, the parties are generally free to craft whatever method they choose. All sorts of private conciliation, mediation, and arbitration devices are available. What parties are not able to do, however, is reach a private agreement that dictates a role for public institutions.

“See also, Oakland-Alameda County Coliseum Auth. v. CC Partners, 101 Cal.App.4th 635, 124 Cal.Rptr.2d 363, 370-71 (2002) (holding ‘parties to an arbitration agreement cannot contractually expand the scope of judicial review beyond that provided by statute’); Crowell v. Downey Cmty. Hosp. Found., 95 Cal.App.4th 730, 115 Cal.Rptr.2d 810, 817 (2002) (holding ‘[bjecause the legislature clearly set forth the trial court’s jurisdiction to review arbitration awards when it specified grounds for vacating or correcting awards ..., we hold that the parties cannot expand that jurisdiction by contract to include a review on the merits’); Dick v. Dick, 210 Mich.App. 576, 534 N.W.2d 185, 191 (1995) (holding, by agreeing to permit appeal of substantive issues, the ‘parties have attempted to create a hybrid form of arbitration. However, we find no authority for it. Rather, we conclude that, having invoked binding arbitration, the parties are required to proceed according to the applicable statute and court rule’); but see Maluszewski v. Allstate Ins. Co., 34 Conn.App. 27, 640 A.2d 129, 132 (1994) (stating ‘[i]f the parties engaged in voluntary, but restricted, arbitration, the trial court’s standard of review would be broader depending on the specific restriction,’ and if the restriction is that the arbitrator’s award must conform to the law, the court would be bound to enforce the restriction).” 665 N.W.2d at 703.

While state courts have generally refused to enforce contractual provisions expanding the scope of review, federal courts of appeal addressing this issue are split.

Kyocera Corp. v. Prudential-Bache Trade Services Inc., 341 F.3d 987 (9th Cir. 2003) (en banc) is the most recent decision of a federal court of appeals addressing this issue. The parties’ agreement provided that a court shall vacate, modify, or correct an award on any of the grounds set forth in the Federal Arbitration Act, and, in addition, where the arbitrators’ findings of fact are not supported by substantial evidence, or where the arbitrators’ conclusions of law are erroneous. Id. at 990-91.

The court’s opinion recognized that federal courts of appeals are split as to whether the parties can contractually expand the judicial standards for review of an arbitration award entered in arbitration proceedings governed by the Federal Arbitration Act. The opinion discussed the case law described in the next paragraph supporting the position that contractual provisions cannot expand the scope of review and the case law described thereafter supporting the position that these contractual provisions will be enforced.

In Bowen v. Amoco Pipeline Co., 254 F.3d 925, 933 (10th Cir. 2001), the Tenth Circuit refused to enforce a provision in the arbitration agreement that either party may seek to vacate the arbitration award on the ground that the award is not supported by the evidence. In Chicago Typographical Union No. 16 v. Chicago Sun-Times Inc., 935 F.2d 1501, 1504-1505 (7th Cir. 1991), the Seventh Circuit stated that the parties “cannot contract for judicial review” of an arbitration award; “federal jurisdiction cannot be created by contract.” In UHC Management Co. Inc. v. Computer Sciences Corp., 148 F.3d 992, 997-98 (8th Cir. 1998), the Eighth Circuit, in dicta, strongly suggested that the parties may not contractually expand judicial review of arbitration awards. Also see Schoch v. InfoUSA Inc., 341 F.3d 785, n.3 789 (8th Cir. 2003), where the court stated: “[W]e again express skepticism as to whether parties can contract for heightened judicial review of arbitration awards, which would seemingly amend the FAA, crown arbitrators mini-district courts, force federal trial courts to sit as appellate courts, and completely transform the nature of arbitration and judicial review.”

However, in Roadway Package System Inc. v. Kayser, 257 F.3d 287, 291-92 (3d Cir. 2001), the Third Circuit held that the Federal Arbitration Act permits parties to contract for vacatur standards other than those provided in the Act. Thus, the court would enforce an arbitration agreement providing for review standards borrowed from state law. In Gateway Technologies Inc. v. MCI Telecommunications Corp., 64 F.3d 993 (5th Cir. 1995), the Fifth Circuit enforced an arbitration agreement providing for a de novo review for errors of law stating that the FAA’s pro-arbitration policy intends for courts to enforce arbitration agreements according to their terms in the same fashion as other contracts are enforced.

After considering the decisions of the other federal courts of appeals, the majority opinion of the court en banc in Kyocera followed the case law limiting review to the grounds set forth in the Federal Arbitration Act:

“Because the constitution reserves to Congress the power to determine the standards by which federal courts render decisions, and because Congress has specified the exclusive standard by which federal courts may review an arbitrator’s decision, we hold that private parties may not contractually impose their own standard on the courts.” 341 F.3d at 994.

The Ninth Circuit may have been influenced by the scope of the task that the trial court would need to perform under the standard of review set forth in the arbitration agreement:

“Under the broad standard of review approved in LaPine I [130 F.3d 884 (9th Cir. 1997)], Kyocera presses at least 25 distinct grounds for vacating or correcting the decision of the arbitral panel due to alleged errors of law and unsubstantiated findings of fact. To decide a number of these issues — including whether it is reasonable for estoppel purposes to rely on an agreement not yet approved by a board of directors when the agreement takes effect only on board approval; whether an injured entity properly mitigates its damages when it refuses partial relief provided pursuant to an order of the court; and whether damages for the destroyed business value of a dissolved business may be calculated as of any date other than the date of contractual breach — would require a detailed examination of California law and the application of that law to a factual record spanning several years and many thousands of pages.” 341 F.3d at 994.

The opinion of the Tenth Circuit in Bowen v. Amoco Pipeline Co., supra, sets forth most of the arguments in support of the position that parties may not expand judicial review. In Bowen, the arbitration provision that the court refused to recognize provided that either party may appeal on the ground that the award is not supported by the evidence. The court concluded that the purposes behind the Federal Arbitration Act do not support a rule allowing parties to alter the judicial process by private contract.

According to the Tenth Circuit, Congress enacted the Federal Arbitration Act in 1925 with the primary goal of changing the judiciary’s refusal to enforce arbitration clauses in private contracts. While the Act provides for the courts to enforce contractual provisions setting forth procedural rules under which arbitration will be conducted, there is nothing within the Act stating that the parties are free to interfere with the judicial process. There is simply no authority for allowing private parties to determine how federal courts review arbitration awards. 254 F.3d at 934. The court stated that it would reach an “illogical result” if it concluded that the policy of insuring judicial enforcement of arbitration agreements is well-served by allowing more expansive judicial review following the arbitration. “The FAA’s limited review ensures judicial respect for the arbitration process and prevents courts from enforcing parties’ agreements to arbitrate only to refuse to respect the results of the arbitration.” Id. at 935.

Contractually expanded standards would threaten “to undermine the independence of the arbitration process and dilute the finality of arbitration awards because, in order for arbitration awards to be effective, courts must not only enforce the agreements to arbitrate but also enforce the resulting arbitration awards.” Id. Also, expanded judicial review would place the courts “in the awkward position of reviewing proceedings under potentially unfamiliar rules and procedures. Under either expanded legal or expanded factual standards, the reviewing court would be engaging in work different from what it would do if it had simply heard the case itself.... Because parties may not force reviewing courts to apply unfamiliar rules and procedures, expanded judicial review would threaten the independence of arbitration and weaken the distinction between arbitration and adjudication.” Id. at 935-36. (citations omitted; footnote omitted)

Related arguments recognized in other decisions are that the parties to the litigation may not determine how public resources are to be spent and how judicial resources are to be used. A broad merit-based review of arbitration awards lessens the social desirability of arbitration. A hybrid process in which the arbitration panel serves merely as a privately-constituted court of first resort, leaving the courts with the ultimate decisional authority on the merits, undermines the arbitration process that Congress envisioned in which the judicial role is essentially to facilitate and ensure procedural fairness, and not to resolve or review the merits of the parties’ dispute.

The arguments in favor of enforcing arbitration agreements permitting enhanced merit-based review of an arbitration award begin with a different characterization of the F ederal Arbitration Act. This Act, according to the proponents of enhanced review, did not envision any specific roles for the arbitrators and the courts. The standards of section 10(a) of the Federal Arbitration Act for vacating an arbitration award are default standards that apply if the parties do not develop their own standards. The purpose of the Federal Arbitration Act was to place agreements governing arbitration on the same footing as any other contractual agreements. Any agreement that the parties reach regarding the matters that shall be arbitrated, the manner in which these matters shall be arbitrated, and the scope of judicial review are intended to be enforced in the same fashion as any other contractual arrangements.

Proponents of enhanced review also contend that, if courts will not enforce provisions for expanded judicial review of arbitration awards, parties who would have otherwise arbitrated their disputes will not do so. Thus, the refusal to enforce provisions for expanded judicial review is inconsistent with the primary goal of the Federal Arbitration Act of encouraging arbitration.

Proponents of enhanced judicial review reject the argument that enhanced review should not be recognized because it allows the parties to dictate the use of judicial resources and requires courts to perform functions that they do not ordinarily perform. The typical agreement providing for expanded judicial review provides for a vacation of an arbitration award based on errors of law and a lack of evidentiary support. These are standards that courts frequently apply, and the judicial resources expended in conducting such a review are far less than those resources that would be expended through a trial of the dispute.

There are middle positions that judges have taken.

The Ninth Circuit opinion by the court en banc in Kyocera Corp. reversed a ruling of a three-judge court in LaPine Technology Corp. v. Kyocera, 130 F.3d 884 (9th Cir. 1997), which reversed the lower court’s use of the section 10 standards of the Federal Arbitration Act rather than the broader contractual provisions of the arbitration agreement. A concurring opinion by Judge Kozinski in LaPine recognized that, while enforcing an arbitration agreement with enhanced judicial review will consume fewer judicial resources than if the case were given plenary adjudication, the work that the district court must perform under the arbitration clause is not a subset of what it would be doing if the case were brought directly in the court. “It’s not just less work, it is different work.” However, Judge Kozinski concluded that:

“Nevertheless, I conclude that we must enforce the arbitration agreement according to its terms. The review to which the parties have agreed is no different from that performed by district courts in appeals from administrative agencies and bankruptcy courts, or on habeas corpus. I would call the case differently if the agreement provided that the district judge would review the award by flipping a coin or studying the entrails of a dead fowl.”

In Crowell v. Downey Community Hospital Foundation, 115 Cal. Rptr. 2d 810 (Cal. Ct. App. 2002), the majority opinion upheld the ruling of the trial court that the parties could not expand the court’s jurisdiction to review the arbitration award beyond that provided by statute; the provision the court would not enforce provided for an award to be vacated if based on an error of law or if not supported by substantial evidence. In a dissenting opinion, Judge Nott stated that he would not enforce all stipulations to have a court act in excess of statutory authority. “Each stipulation must be analyzed in terms of what the impact is not only on the parties, but also on public policy considerations, and on the functioning of the courts.... [I]t would be inappropriate for the parties to stipulate that the court act or decide a case in a manner inconsistent with normal standards of judicial conduct.” Id. at 825. (citations omitted)

In this case, Judge Nott did not see any reason why it would be inappropriate for the trial court to act in accordance with the wishes of the parties that the review of an arbitration award include reviewing the award for errors of law and sufficiency of the evidence:

“The court would have before it a transcript from which to make an intelligent review, and the standard of review is the same used in many administrative mandamus proceedings. The public would benefit from having the main burden of work performed by an arbitrator at private expense, rather than using a public court. The review to be performed by the trial court for errors of law and sufficiency of the evidence would undoubtedly take less time (and thus less public expense) than if the matter were originally tried by the court.” Id. at 825-26.

While I find to be persuasive the case law holding that courts should not enforce provisions expanding the scope of review of an arbitration award, in this case I need not decide whether there are additional grounds for vacating an arbitration award set forth in an arbitration agreement (such as a de novo review for issues of law) that the Pennsylvania courts will enforce. In this opinion, I am deciding only that Pennsylvania courts will not enforce an agreement providing for a de novo review of an arbitration award.

The parties’ “arbitration” agreement is not an alternative method for resolving the dispute. By utilizing the standard of a de novo review, the parties essentially bypass the arbitrators. The common pleas court would not be conducting a review of the arbitration award because the court is not to give any weight to the decision of the arbitrators. Instead, it would decide the case on the merits based on the testimony and exhibits furnished in the arbitration proceeding.

There are several reasons why the Pennsylvania courts should not enforce this provision. First, the procedure provided for in the agreement which makes the judge the trier of fact but requires the judge’s decision to be based on the record of the arbitration proceedings undermines the integrity of the judicial process. Perhaps the most important tool that a judge has for reaching the right result in a non-jury trial is his or her ability, as the trier of fact, to ask questions of the witnesses to ensure that he or she folly understands the testimony of each witness. In addition, the trier of fact should be making the rulings that determine the scope of the testimony. The reputation of the courts will suffer if the parties may impose restrictions on the manner in which the court may conduct its de novo review that significantly interfere with the quality of the decision-making process.

Also, a “de novo review” standard should not be enforced because arbitration proceedings that are subject to a de novo review do not necessarily conserve judicial resources. While it may be argued that it is quicker to read, rather than hear, the testimony, it is unlikely that in this case a common pleas court judge can decide the case through a single reading of the transcript that exceeds 2,200 pages. Furthermore, it is extremely likely that a competent trial judge, by working with counsel before and during trial, would have significantly reduced the amount of testimony that the parties offered. Questions that a judge asks a witness may eliminate the need for more prolonged testimony. A judge may direct counsel to limit a witness’ testimony to matters that are disputed. The testimony of a witness that is not disputed can be introduced through deposition excerpts. There may be a place for leading questions and summaries of testimony.

Also, the de novo review sought through a petition to vacate an arbitration award is outside the scope of the tasks that judges perform, so there are no established procedures governing the role of the courts. Does the trial judge enter an award, a decision, or a judgment? Is the trial court required to make findings of fact and conclusions of law; does this depend on whether the arbitrators were required to do so? Are there any additional steps that must be taken by a party who is satisfied with the ruling of the trial judge, such as filing a petition to confirm an arbitration award? Does a party who is dissatisfied with the ruling of the trial court file a petition with the trial court to vacate the arbitration award, a motion for post-trial relief, or a direct appeal to the appellate courts? What issues may be presented to the appellate courts and how are they raised/preserved? What is the role of the appellate courts?

Judicial resources should not be utilized to address these procedural issues created by an agreement of the parties that would place a court in an unfamiliar setting. Thus, courts should not enforce agreements that will place a court in this position.

For the reasons set forth in this opinion, I am denying the Trombettas’ request for a de novo review of the arbitration award. Since the Trombettas’ brief focused on why this court, in conducting the de novo review of the record, should rule in their favor, I am scheduling a second argument at which the parties will address the issues that remain as a result of this ruling that the provision in the parties’ arbitration agreement providing for a de novo review will not be enforced.

ORDER

On March 2, 2005, it is hereby ordered that:

(1) petitioners’ request for a de novo review of the arbitration award is denied;

(2) oral argument will be held on the remaining issues on April 19, 2005 at 11 a.m. o’clock; and

(3) the Trombettas shall file a supplemental brief addressing the remaining issue within 14 days of this date, Financial Services shall file a supplemental brief in response within 28 days of this date, and the Trombettas may file a reply addressing the supplemental brief of Financial Services within 35 days of this date.

      . Until the United States Supreme Court addresses this issue, it is for the state courts to decide whether to apply state legislation or section 10 of the FAA. State courts are divided. See Jill I. Gross, Over-Preemption of State Vacatur Law: State Courts and the FAA, 3 J. Am. Arb. 1 (2004).

      . TheNew Account form concludes: “By signing below, I acknowledge that I have received, read, understand, and agree to abide by all the terms and conditions set forth in the client agreement, incorporated herein by this reference.”

      . A court reporter was present at the oral argument.

      . The arbitration agreement also provided for a clearly erroneous standard of review for issues of fact. Id. at 700.

      . As I previously discussed in footnote 1 at page 19 of this opinion, the case law of the different states is divided as to whether a state court that is considering a petition to modify an arbitration award entered pursuant to the Federal Arbitration Act will apply the state law standards for vacating an arbitration award or the Federal Arbitration Act standards for doing so. This means that there is no clear authority as to whether the Pennsylvania courts should be applying federal case law or Pennsylvania case law in considering the enforceability of contractual provisions broadening the standard of review for FAA arbitration.

      . In this opinion, I have not mentioned section 11 of the Federal Arbitration Act governing the modification and correction of an arbitration award. The same arguments apply.


source: Caselaw Access Project

author: TURGEON, J.,

license: Public Domain

text:
    Miller v. York Newspapers Inc.

      C.P. of Dauphin County,
    no. 2004 CV 1732.

      Richard D. Sprague, for plaintiff.

      Terence J Barna and Amy B. Ginensky, for defendants York Newspapers, MediaNews, Fisher and Hough.

      Gayle C. Sproul, for defendant Buckner News.
    January 28, 2005
   TURGEON, J.,

Currently before the court are the defendants’ preliminary objections seeking dismissal of a defamation action brought by the plaintiff, a public official. For the reasons set forth below, the preliminary objections are sustained and the defamation action dismissed.

BACKGROUND

On June 29, 2003, the York Sunday News published an editorial titled “State police sex scandal,” under the “Our views” section of the paper. The substance of the publication was that the Pennsylvania State Police was in the midst of a scandal involving sex discrimination and abuse claims within its ranks. The editorial stated that the Pennsylvania State Police Commissioner at the time, plaintiff Colonel Jeffrey Miller, had confirmed that between 1995 and 2001, 163 allegations of sex abuse complaints had been made against the state police, 68 of which were substantiated. An attorney representing a woman in a lawsuit against the police believed that the problem within the Pennsylvania State Police was systemic while Miller believed the problem was the result of a “few bad apples,” and thought the charges of a broader problem were “nonsense.” The editorial opined that Col. Miller’s institution of a zero-tolerance policy in substantiated cases should be vigorously pursued. Colonel Miller had admitted, however, that in the past, the punishment meted out by the state police in misconduct cases had “eroded” since supervisors believed, with some merit, that harsh punishment and firing would be overturned by arbitrators. The editorial noted the need for reform of the state arbitration rules and concluded:

“The arbitration problem is no excuse for the state police brass going easy on rogues, though. They should play hardball in arbitration cases, even if they ultimately lose. Meanwhile, Miller, who used to head up the state police legislative affairs office, should start lobbying for arbitration reform.

“But he shouldn’t be handling the probe into these misconduct cases.

“Why? Because he himself was the subject of a sex discrimination case. A female employee in the legislative office recently won $277,000 in a suit disputing her firing by Miller. She claimed the office had turned into an old boys club.

“If this is true, can the president of that club really be expected to conduct a thorough ‘zero tolerance ’probe?

“Gov. Ed Rendell is right to appoint an outsider to investigate the situation.” (Complaint, exhibit A.) (emphasis added)

Plaintiff asserts that the highlighted portions of the editorial are defamatory. (Complaint ¶12.)

The lawsuit referred to in the article was one brought by Barbara Wilhelm, who had been employed in the Pennsylvania State Police Legislative Affairs Office. Wilhelm’s lawsuit named as defendants the Commonwealth of Pennsylvania, the Pennsylvania State Police and individual Pennsylvania State Police employees not including Col. Miller. (Complaint ¶15.) Col. Miller asserts that the article is false since he has never been the subject of a sex or gender discrimination case and was never accused of such by Wilhelm. (Complaint ¶¶ 14,15.) Furthermore, he claims the article is false since he did not, in fact, fire Wilhelm and she did not allege that in her lawsuit. (Complaint ¶18.) Finally, Col. Miller asserts the article is false since it portrayed him as the “president” of “an old boys club” within the Pennsylvania State Police, as someone who tolerates sexual misconduct, and as someone not to be taken at his word when he said he would institute a zero-tolerance policy. (Complaint ¶21.)

Plaintiff alleges that the defendants published the article with knowledge that it was false, or with reckless disregard of truth or falsity. (Complaint ¶¶31,32.) With regard to reckless disregard, plaintiff alleges that the defendants failed to verify their facts with him or with the Pennsylvania State Police prior to publication and also failed to verify the facts against the Wilhelm lawsuit, a matter of public record. (Complaint ¶¶13,16,19.) Plaintiff seeks both compensatory and punitive damages for the alleged harm he has suffered to his professional and personal reputation and for his resultant severe emotional distress.

LEGAL DISCUSSION

Defendants raise preliminary objections testing the legal sufficiency of plaintiff’s defamation action. The question presented by the demurrer (legal insufficiency) is whether, on the facts averred, the law says with certainty that no recovery is possible. Where a doubt exists as to whether a demurrer should be sustained, this doubt should be resolved in favor of overruling it. Tucker v. Philadelphia Daily News, 577 Pa. 598, 848 A.2d 113, 131 (2004). (citations omitted)

An action for defamation under Pennsylvania statute requires as follows:

“Section 8343. Burden of proof

“(a) Burden of plaintiff. — In an action for defamation, the plaintiff has the burden of proving, when the issue is properly raised:

“(1) The defamatory character of the communication.

“(2) Its publication by the defendant.

“(3) Its application to the plaintiff.

“(4) The understanding by the recipient of its defamatory meaning.

“(5) The understanding by the recipient of it as intended to be applied to the plaintiff.

“(6) Special harm resulting to the plaintiff from its publication.

“(7) Abuse of a conditionally privileged occasion.” 42 Pa.C.S. §8343.

“If the statement in question bears on a matter of public concern, or the defendant is a member of the media, First Amendment concerns compel the plaintiff to prove, as an additional element, that the alleged defamatory statement is in fact false.” Lewis v. Philadelphia Newspapers Inc., 833 A.2d 185, 191 (Pa. Super. 2003). (citations omitted) Where the plaintiff is a public figure or public official, as is the plaintiff here, the plaintiff must additionally prove that the defendant, in publishing the offending statement, acted with actual malice, i.e., “with knowledge that [the statement] was false or with reckless disregard of whether it was false or not.” Id. (citations omitted) See Tucker, 848 A.2d at 127-28 (to prevail on a defamation claim, the pubic figure plaintiff must prove, by clear and convincing evidence, that the allegedly defamatory statements were false and that the defendants published them with actual malice).

“ ‘Actual malice’ is a fault standard, predicated on the need to protect the public discourse under the First Amendment from the chill that might be fostered by less vigilant limitations on defamation actions brought by public officials.

“[T]he stake of the people in public business and the conduct of public officials is so great that neither the defense of truth nor the standard of ordinary care would protect against self-censorship and thus adequately implement First Amendment policies. Neither lies nor false communications serve the ends of the First Amendment, and no one suggests their desirability or further proliferation. But to insure the ascertainment and publication of the truth about public affairs, it is essential that the First Amendment protect some erroneous publications as well as true ones....

“Thus, the actual malice standard, by design, assures ‘that public debate will not suffer for lack of “imaginative expression” or “rhetorical hyperbole” which has traditionally added much to the discourse of this Nation.’ ... ‘[T]he First Amendment requires that we protect some falsehood in order to protect speech that matters. ’ ” Lewis at 191. (citations omitted)

The defendants attack plaintiff’s complaint as insufficient since they claim the alleged defamatory statements are not false. Alternatively, they argue that the plaintiff has failed to sufficiently plead actual malice.

First, defendants assert that the defamation action is legally insufficient since the portions of the article that are allegedly defamatory are either substantially true or are mere opinion. Defendants accurately characterize the essence of plaintiff’s defamation claims to consist of the following: (1) defendants falsely claimed plaintiff was the subject of a sex or gender discrimination suit; (2) defendants falsely claimed he fired Ms. Wilhelm; and (3) defendants falsely claimed he was the “president” of “an old boys club” within the Pennsylvania State Police, was someone who tolerates sexual misconduct, and was someone who cannot be taken at his word when he said he would institute a zero-tolerance policy. (Complaint ¶¶14, 18, 21.) Defendants argue that the first two statements are substantially true and the third is opinion.

Not every error in a publication provides a basis for a defamation action. Pennsylvania law provides that it is a complete defense to a libel action that the publication is “substantially true.” 42 Pa.C.S. §8342. “Minor inaccuracies do not amount to falsity so long as ‘the substance, the gist, the sting, of the libelous charge be justified.’ Put another way, the statement is not considered false unless it ‘would have a different effect on the mind of the reader from that which the pleaded truth would have produced.’ ” Mason v. New Yorker Magazine Inc., 501 U.S. 496, 517 (1991). (citations omitted)

In this case, the pleaded truth would reveal that the statements that plaintiff “was the subject of a sex discrimination suit” in which Ms. Wilhelm won $277,000 “disputing her firing by Miller,” are substantially true. The pleaded truth, discerned from the complaint, attached exhibits and the public record of the underlying suit against the Pennsylvania State Police, reveals as follows: Following trial in federal court in September 2002, a jury found that Wilhelm had been dismissed from her job as a legislative specialist with the Legislative Affairs Office of the Pennsylvania State Police because she had complained about sex discrimination. The jury awarded her $250,000 damages. The final judgment was later increased to reflect delay damages, attorney’s fees and costs.

The essence of her federal suit was that over the course of her employment in the Legislative Affairs Office, from January 1998 through her termination on May 1, 2000, she was discriminated on the basis of her gender as reflected in her salary, the manner in which she was treated and in her opportunities for advancement; that she complained repeatedly, to no avail, to her supervisors, and elsewhere, about her disparate treatment; and that in retaliation, she was fired. Officially, Wilhelm had been told her job was terminated due to the need to reorganize the Legislative Affairs Office. Her complaint included separate counts for equal pay, sex discrimination and wrongful discharge. In addition to naming the Commonwealth of Pennsylvania and the Pennsylvania State Police as defendants, Wilhelm also named three individual defendants, then-Commissioner of the Pennsylvania State Police Paul J. Evanko, the Deputy Commissioner of Administration, Lt. Col. Thomas Coury, and her immediate supervisor in the Legislative Affairs Office, Captain Michael Simmers. (Defendants’ supporting brief, exhibit C.)

By the time of trial, Wilhelm’s equal pay and discrimination counts had been dismissed leaving her wrongful discharge claim remaining. As to that claim, Wilhelm brought it against all the named defendants, asserting they had initiated a series of investigations and administrative actions to destroy her career in retaliation for her making complaints about their discriminatory employment practices, obtaining private legal counsel and discussing her complaints with an independent entity within the state government. Id.

Plaintiff points out that the editorial’s depiction of Wilhelm’s lawsuit was false since Wilhelm never accused Col. Miller of discriminating against her or firing her. This is technically accurate; however, the public record indicates the editorial’s depictions of Col. Miller’s role are substantially true. Colonel Miller testified at Wilhelm’s trial on behalf of the defendants in that suit. The trial record indicates that Colonel Miller began work in the Legislative Affairs Office on February 24,2000, and he was assigned by Comm. Evanko to be the director on March 18, 2000. Commissioner Evanko told Colonel Miller he wanted to professionalize the office, fix communications problems and have office personnel working in the same direction. After reviewing staffing issues, Col. Miller reported back that he needed clerical support. He also recounted that Wilhelm did not appear to be on board with his goals and that in April 2000 she had responded viscerally to his direction for open office communications, particularly involving another employee. As a result, Col. Miller approached Comm. Evanko and Lt. Col. Coury on April 17,2000, while at a training course. He told Comm. Evanko that he needed clerical help more than the legislative specialist position, then filled by Wilhelm. (Defendants’ supporting brief, exhibit D (pp. 10, 17-18, 32-34).) He testified that:

“I requested that if there was any way possible for us to get clerical support in the office, that we needed that as soon as possible. And secondly my recommendation was that Ms. Wilhelm be removed from my office as soon as possible if the commissioner saw fit to do so.” (Id. at p. 34.)

According to Col. Miller, Comm. Evanko told him he understood Col. Miller and would discuss it with Lt. Col. Coury. Colonel Miller learned a short while later from Lt. Col. Coury that action had been taken upon his request to remove Wilhelm from his office. Colonel Miller was directed to take Wilhelm to a meeting with the personnel director the next business day, whereupon she would be fired. Indeed, on May 1, 2000, he accompanied her to the personnel department where she was provided a copy of a letter outlining her dismissal, effective that day. (Id. at pp. 35-37.)

In reaching its verdict, the jury specifically found that Wilhelm “was dismissed from her job because she complained about sex discrimination.” (Id. exhibit C.) This verdict was clearly a rejection of the official reason for firing Wilhelm, and as testified to by Col. Miller, which was that the police needed to reorganize the Legislative Affairs Office. Thus, the reasons offered by Col. Miller for firing her were found by the jury to have been pretextual. The jury found Wilhelm had been fired in retaliation for raising sex discrimination complaints. Thus, the depiction in the editorial that Col. Miller had fired Wilhelm is substantially true. Colonel Miller initiated and succeeded in getting her fired by requesting that Comm. Evanko remove her from his office. Furthermore, it is accurate that Col. Miller’s actions were the subject of Wilhelm’s sex discrimination case. By the time of trial, the only issue before the jury was whether Wilhelm had been wrongfully terminated. Her termination was set in motion by Col. Miller. Thus, a fair reading of the editorial’s depiction of the Wilhelm lawsuit and Col. Miller’s relationship and involvement in it, would have the same effect on the mind of the reader as that produced from the pleaded truth as reflected in the record from the Wilhelm trial. Mason, supra. As such, because the challenged language is substantially true, plaintiff’s claims are legally insufficient to maintain a defamation action.

Next, the defendants argue that Col. Miller cannot maintain his defamation action based upon language suggesting Col. Miller was the president of an “old boys club,” since the language is opinion. I agree. The portion of the article in question states:

“[Wilhelm] claimed the office had turned into an old boys club.

“If this is true, can the president of that club really be expected to conduct a thorough ‘zero tolerance’ probe?”

Colonel Miller characterizes this portion of the article as falsely stating that he was the president of an “old boys club” within the Pennsylvania State Police, was someone who tolerates sexual misconduct, and was someone who cannot be taken at his word when he said he would institute a zero-tolerance policy. This is a mis-characterization of the plain words of the article. The language posits a question and an opinion that “if this is true,” as Wilhelm suggests, that the Pennsylvania State Police had become an “old boys club,” then Col. Miller, as the head of the police or “president of that club,” should not preside over the probe into police misconduct. The article does not state that Col. Miller is the president of an old boys club. Nor does it state that he cannot be expected to properly conduct the probe.

Under Pennsylvania law, “[o]pinion, without more, is not actionable as libel.” Beckman v. Dunn, 276 Pa. Super. 527, 535, 419 A.2d 583, 587 (1980). Similarly, under federal law, “a statement of opinion relating to matters of public concern which does not contain a provably false factual connotation will receive full constitutional protection.” Milkovich v. Lorain Journal Co., 497 U.S. 1, 20, 110 S.Ct. 2695, 111 L.Ed.2d 1 (1990). To be actionable, an opinion “may reasonably be understood to imply the existence of undisclosed defamatory facts justifying the opinion.” Beckman, supra. The basis for the opinion that Col. Miller should not conduct the probe because the Pennsylvania State Police might have become an old boys club was disclosed in the editorial; that is, numerous substantiated cases of sexual misconduct existed within the state police ranks, including the Wilhelm case, a case in which Col. Miller actively sought to terminate her position and resulting in her winning a substantial verdict against the police. As such, this language is protected speech.

Second, the defendants alternatively seek dismissal of Col. Miller’s action on the basis that the pleadings are legally insufficient to meet the actual malice standard required to maintain defamation against a public figure. As noted, actual malice requires that statements be published with knowledge of their falsity or with reckless disregard of whether they are false or not. See Tucker, supra, 848 A.2d at 127-28. The requirement that the plaintiff be able to show actual malice by clear and convincing evidence is initially a matter of law. Id., 848 A.2d at 130 (citing Milkovich at 17).

“This rule [requiring actual malice] is not simply premised on common-law tradition, but on the unique character of the interest protected by the actual malice standard. Our profound national commitment to the free exchange of ideas, as enshrined in the First Amendment, demands that the law of libel carve out an area of breathing space so that protected speech is not discouraged. The meaning of terms such as actual malice — and, more particularly, reckless disregard — however, is not readily captured in one infallible definition. Rather, only through the course of case-by-case adjudication can we give content to these otherwise elusive constitutional standards. Moreover, such elucidation is particularly important in the area of free speech for precisely the same reason that the actual malice standard is itself necessaiy. Uncertainty as to the scope of the constitutional protection can only dissuade protected speech — the more elusive the standard, the less protection it affords. Most fundamentally, the rule is premised on the recognition that ‘[fjudges, as expositors of the constitution, ’ have a duty to ‘independently decide whether the evidence in the record is sufficient to cross the constitutional threshold that bars the entry of any judgment that is not supported by clear and convincing proofof “actual malice. ” ’ ’’Tucker, 848 A.2d at 130-31 (quoting Harte-Hanks Communications Inc. v. Connaughton, 491 U.S. 657, 685-86, 109 S.Ct. 2678, 105 L.Ed.2d 562 (1989) (emphasis added in Tucker)).

As explained above, the speech in question was either substantially true or was opinion. As such, actual malice cannot be shown since the article was not published with either knowledge of falsity or reckless disregard for its potential falsity.

Furthermore, to the extent that the editorial could be considered false, the plaintiff has failed to sufficiently allege actual malice since his allegations of reckless disregard amount to no more than negligence. Regarding the showing of actual malice through reckless disregard, our Supreme Court in Tucker stated:

“It is clear that a showing of ‘ [a] “reckless disregard” for the truth . . . requires more than a departure from reasonably prudent conduct.’ Harte-Hanks, 491 U.S. at 688, 109 S.Ct. 2678. Failure to check sources, or negligence alone, is simply insufficient to maintain a cause of action for defamation. Recklessness generally, and in the context of actual malice, is not easily shown. As we have explained:

“The [United States] Supreme Court has emphasized that the question of whether a statement has been published with reckless disregard of falsity is not measured by whether a reasonably prudent man would have [published], or would have investigated before publishing. Rather, (t)here must be sufficient evidence to permit the conclusion that the defendant in fact entertained serious doubts as to the truth of his publication. Thus, while recklessness may be found where there are obvious reasons to doubt the veracity of the informant or the accuracy of his reports it simply cannot be concluded that a defendant entertained the requisite doubt as to the veracity of the challenged publication where the publication was based on information a defendant could reasonably believe to be accurate.

“Curran, 439 A.2d at 660 (internal citations and quotations omitted). The allegations of recklessness against appellant-newspapers, at best, present a situation in which one could conclude that perhaps it would have been better if appellant-newspapers asked the Tuckers or their attorney directly whether their loss of consortium claim included a claim for damage to their sexual relationship. However, while hindsight may be twenty-twenty, this failure does not constitute actual malice. Indeed, it may not rise to the level of negligence.” Tucker, 848 A.2d at 135-36.

Colonel Miller here raises the almost identical bases as argued in Tucker for claiming reckless disregard by the newspapers; that is, Col. Miller asserts that the defendants avoided the truth by failing to check with him or the Pennsylvania State Police to verify their facts, and by failing to verify their facts against the public record. (Complaint ¶¶13, 16 and 23.) These allegations are legally insufficient to assert actual malice since they amount to no more than negligence, carelessness, bad judgment or inaccuracy in the preparation and publication of the editorial in question. Tucker, supra. As such, to the extent the publication could be considered false, plaintiff has failed to sufficiently assert actual malice on the basis that the defendants published with reckless disregard for whether the article was true or false.

Accordingly, we enter the following:

ORDER

And now, January 28, 2005, defendants’ preliminary objections to plaintiff’s complaint are sustained. Plaintiff’s complaint is hereby dismissed.

      . The documents from the Wilhelm case — including the federal complaint, orders of judgment and portions of Colonel Miller’s and Wilhelm’s trial testimony — were not part of the pleadings, but were attached to defendants’ brief. Nevertheless, “a court may take judicial notice of public documents in ruling on a preliminary objection in the nature of a demurrer.” Solomon v. United States Healthcare Systems of Pennsylvania Inc., 797 A.2d 346, 352 (Pa. Super. 2002). (citation omitted)

      . Among Wilhelm’s complaints were that she was not assigned an automobile, was held accountable for leave usage and attendance, was required to perform duties outside of her classification and was prohibited from attending staff meetings and selected legislative functions; that she repeatedly notified Comm. Evanko and those under his supervision, as well as a number of people under the supervision of Lt. Col. Coury of the disparate treatment; that persons within the department learned of her complaints in violation of department procedure; that Comm. Evanko and Lt. Col. Coury allowed Simmers to head an investigation of her complaints even though she was making complaints against him; that her complaints against Captain Simmers were adjudicated and held to be unfounded without notifying her or permitting her to be a witness to the proceedings, in violation of internal regulations; that she was not afforded an opportunity to apply for the director of the Legislative Affairs Office, which position was given to then-Captain Jeffrey Miller by Comm. Evanko on March 18,2000, and that Wilhelm was required to train Miller after he was chosen; that she was not given an opportunity to apply for the assistant legislative liaison position, which was given to another male employee, and that she was also required to train him.

      . To the extent that plaintiff alleges actual malice on the basis that the defendants published the editorial with knowledge of its falsity, his allegations would be sufficient to withstand a demurrer, assuming the publication was indeed false. See complaint ¶23 (plaintiff alleges “defendants knew that the statements, innuendoes and implications concerning Colonel Miller in the ... editorial were totally false.”). As noted, however, the statements at issue are substantially true or are opinion.


author: KISTLER, J.,

text:
    Pepper Mill Condominium Association v. Hartford Fire Insurance Company

      C.P. of Centre County,
    no. 2003-1368.

      Richard A. Vanderlin, for plaintiff.

      Andrew S. Granzow, for defendant Hartford Fire Insurance Co.

      Terry J. Williams, for defendant Borough of State College.

      J David Smith, for defendant City of Williamsport.
    January 4, 2005
   KISTLER, J.,

The subject of this opinion and order is defendant’s motion for summary judgment. There are three issues which are disputed: Whether defendant, Hartford Fire Insurance Company, is required to pay plaintiff, Pepper Mill Condominium Association, for emergency expenses associated with plaintiff’s collapsed parking deck; whether defendant is required to pay for costs associated with plaintiff’s construction of a temporary parking lot; and whether defendant acted in bad faith when it denied coverage for the above mentioned claims.

First, it is plaintiff’s position that defendant is required to pay for the emergency expenses pursuant to the parties’ Special Multi-Flex Policy’s Commercial General Liability Coverage form. Plaintiff alleges that after the collapse it was necessary to search for potentially trapped or injured persons. Plaintiff states that various entities provided emergency assistance and equipment. Additionally, in order to gain access to the wreckage, an adjoining property owner’s chainlink fence was removed and the sidewalks damaged.

Plaintiff supports their position by suggesting that defendant is misinterpreting an exclusionary clause in the policy. The clause reads that defendant will not cover property damage to:

“(1) Property you own, rent, or occupy, including any costs or expenses incurred by you, or any other person, organization or entity, for repair, replacement, enhancement, restoration, or maintenance of such property for any reason, including prevention of injuiy to a person or damage to another’s property....”

Plaintiff interprets the exclusion by the plain meaning of the language. Plaintiff argues that the latter portion of the exclusion, “including . . . prevention of injury to a person or damage to another’s property,” is limited to only “repair, replacement, enhancement, restoration or maintenance” expenses. Plaintiff suggests, for example, that the exclusion would apply to a situation in which loose tile was removed and replaced to prevent them from falling and injuring people.

Plaintiff cites case law to suggest that previous courts have held that emergency response expenses are covered under a general liability policy. In Leebov v. United States Fidelity and Guaranty Company, 401 Pa. 477, 165 A.2d 82 (1960), the court held an insurer was obligated to pay for efforts to prevent further damage. The insured stopped a landslide and prevented serious damage while constructing a building. The court reasoned that “it is folly to argue that if a policy owner... makes a reasonable expenditure and prevents a catastrophe, he must do so at his own cost and expense.” Id. at 481, 165 A.2d at 86.

Second, it is plaintiff’s position that defendant is required to pay for the costs incurred in constructing a temporary parking lot to replace the collapsed parking deck.

Plaintiff supports its position by alleging that defendant misinterprets the language in the Property and Commercial General Liability Coverage portions of the policy. The section defendant relies upon is as follows:

“(A) Coverage

“We will pay for direct physical loss of or damage to the following types of covered property caused by or resulting from a covered cause of loss, up to the applicable covered property limits of insurance stated in the declarations....”

Plaintiff contends that the language covers both “physical loss” as well as “damage”; therefore, these terms should be read independently from each other and construed as two distinct types of property loss.

Plaintiff cites previous case law that has defined “direct physical loss” to include losses that are not a literal physical loss, but a loss of a property right. In Gibson v. Secretary of U.S. Department of Housing and Urban Development, 479 F. Supp. 3 (M.D. Pa. 1978), the insurance policy provided for “direct loss by flood.” The insured’s house was not physically destroyed by flooding, but was surrounded by water and was deemed to be uninhabitable. The court held that, although there was no direct loss, the plaintiff was entitled to recover the insurance proceeds because he had lost the right to occupy his house. The court in Hetrick v. Valley Mutual Insurance Co., 15 D.&C.4th 271 (Cumberland Cty. 1992), held that an oil spill which polluted ground water and made the insured building uninhabitable qualified as a direct loss of the building.

Here, plaintiff contends that the loss of its parking spaces from the collapse was a loss of a property right, analogous with the loss of the use of the house in Gibson and Hetrick. Plaintiff’s lost property right amounted to its right to occupy its parking facilities, and there is no exclusion to such a right in the policy.

Regarding the first two issues, it is defendant’s position that the initial policy does not cover the damages plaintiff is seeking. Defendant maintains that the expenses are not “those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage.’ ”

First, defendant contends that plaintiff is misinterpreting the previously mentioned exclusionary clause. Defendant believes that the alleged emergency services do not constitute “direct physical loss of’ or “damage to” covered property caused by or resulting from a covered cause of loss, as required by the terms and conditions of the policy.

Second, defendant believes it is not legally obligated to pay for the cost of constructing temporary parking facilities. These expenses do not constitute “direct physical loss of’ or “damage to” covered property caused by or resulting from a covered cause of loss pursuant to the policy. Moreover, defendant asserts that it already paid plaintiff $25,000 in relation to these costs. This amount is the limit of any available coverage for expediting expenses.

With respect to the third issue, plaintiff contends that defendant’s failure to pay claims was done in bad faith. Plaintiff alleges that defendant’s interpretation of the policy was unreasonable because of the legal precedent that plaintiff provided compared to defendant’s lack of legal precedent. See Waldman v. Pediatric Services of America Inc., 1999 U.S. Dist. Lexis 6106 (E.D. Pa. April 30, 1999). Plaintiff also alleges that defendant conducted an unreasonable investigation because defendant failed to contact the emergency providers and promptly determine the facts. See Williams v. Hartford Casualty Insurance Co., 83 F. Supp.2d 567 (E.D. Pa. 2000) (mem.), aff’d, 99-CV-01732 (3d Cir. April 4, 2001) (mem.). Finally, plaintiff alleges that defendant’s refusal to pay these claims is frivolous because of defendant’s failure to cite any supporting legal authority excluding coverage. See Frog, Switch & Manufacturing Co. Inc. v. Travelers Insurance Co., 193 F.3d 742 (Pa. 1999).

Defendant rebuts this contention by alleging that plaintiff has failed to establish by clear and convincing evidence that its conduct constitutes bad faith. Defendant supports its position by citing 42 Pa.C.S. §8371. However, section 8371 has been preempted because it has been found to conflict with the Employee Retirement Income Security Act of 1974. See McGuigan v. Reliance Standard Life Ins. Co., 256 F. Supp.2d 345, 348 (E.D. Pa. 2003); Barber v. Unum Life Insurance Co. of America, 383 F.3d 134, 136 (C.A.3 Pa. 2004).

Summary judgment is proper when there are no genuine issues of material fact as to a necessary element of the cause of action or there are defenses that could be established by additional discovery or expert reports. Pa.R.C.P. 1035.2(1). It is the burden of the moving party to show that there are no genuine issues of material fact. Anderson v. Moore, 437 Pa. Super. 642, 645, 650 A.2d 1090, 1092 (1994). The court must examine all of the evidence in the light most favorable to the non-moving party, and any doubt must be resolved against the moving party. Id. at 645, 650 A.2d at 1092-93. Summary judgment may only be granted where reasonable minds could not differ, Askew by Askew v. Zeller, 361 Pa. Super. 35, 42, 521 A.2d 459, 463 (1987), and unless the case is free from doubt. Anderson, 437 Pa. Super. at 645, 650 A.2d at 1092-93.

With respect to the interpretation of an insurance contract, the goal of the court is to determine the intent of the parties by way of the instrument’s language. Gene & Harvey Builders v. Pennsylvania Manufacturers’ Association Insurance Co., 512 Pa. 420, 426, 517 A.2d 910, 913 (1986). Where ambiguities in the instrument’s language are found, they must be construed in the light most favorable to the insured. Ryan Homes Inc. v. The Home Indemnity Co., 436 Pa. Super. 342, 346, 647 A.2d 939, 941 (1994). “Courts should read policy provisions to avoid ambiguities, if possible, and not torture language to create them.” Id., quoting Carpenter v. Federal Insurance Co., 432 Pa. Super. 111, 118, 637 A.2d 1008, 1012 (1994). However, a contract is not rendered ambiguous simply because the parties do not agree upon the proper construction. Ryan Homes, 436 Pa. Super. at 346, 647 A.2d at 941.

In the current case, this court does not believe summary judgment is appropriate with respect to the first issue. Having reviewed the Commercial General Liability Coverage form in the light most favorable to plaintiff, this court finds that plaintiff has sufficiently demonstrated that the emergency expenses incurred are not included in the exclusionary clause. The costs to excavate in search of potential survivors of the wreckage is not mentioned or alluded to in the exclusionary clause. The “prevention of injury” portion relates back to the restorations and repairs portion of the clause. Noting the holding in Leebov, it is clear that plaintiff was not attempting to repair, replace, enhance, restore, or maintain its collapsed parking deck to prevent injury; rather, it was attempting to locate possible survivors of the wreckage. As such, there exists a genuine issue of material fact which precludes a granting of summary judgment.

Regarding the second issue, this court believes summary judgment is appropriate. Defendant has shown that there are no genuine issues of material fact as to which party should pay for the cost of building temporary parking spaces. Plaintiff cites Gibson v. Secretary of U.S. Department of Housing and Urban Development, 479 F. Supp. 3 (M.D. Pa. 1978), supra, to suggest that the facts in that case are similar to the facts in the current case. In Gibson, the plaintiff’s house was rendered permanently uninhabitable because flood waters surrounded the house and created an island. From then on, the house was subjected to flooding three to four times a year. Although the house could be repaired, it was deemed impractical to do so because of the high risk of flooding. The court held that the plaintiff was entitled to flood insurance proceeds to build a new house because he suffered a loss of a property right that was foreseeable at the policy’s conception. Id. at 6.

Considering the holding in Gibson, this court believes that plaintiff’s interpretation of the policy is mistaken. The policy agreed to by plaintiff and defendant covers “direct physical loss of or damage to covered property caused by or resulting from a covered cause of loss.” Plaintiff believes this language should be interpreted to include the construction of temporary parking. However, this court does not believe constructing temporary parking spaces falls within the categories of either “physical loss of’ or “damage to” the parking deck.

Paying for temporary parking in this case would be similar to the insurer in Gibson paying for the plaintiff’s lodging expenses while the plaintiff built a new house. There is no evidence in either the present case or in Gibson to suggest that any of the parties made an agreement as to which party would pay for interim accommodations if the insured’s structure were to be lost. Rather, in both cases, the insurer is obligated to pay for only the construction of a new structure to replace the damaged one. Since there is no evidence to the contrary, any loss suffered by plaintiff with respect to the construction of temporary parking spaces is not com-pensable under the policy. As such, summary judgment is appropriate because defendant has sufficiently shown that there are no genuine issues of material fact regarding which party should pay for the costs of temporary parking.

Regarding the third issue, this court does not find that defendant acted in bad faith when it denied plaintiff payment. Previous courts have defined “bad faith” on the part of an insurer as a:

“[F]rivolous or unfounded refusal to pay proceeds of a policy; it is not necessary that such refusal be fraudulent. For purposes of an action against an insurer for failure to pay a claim, such conduct imports a dishonest purpose and means a breach of a known duty (i.e., good faith and fair dealing), through some motive of self-interest or ill will; mere negligence or bad judgment is not bad faith.” Terletsky v. Prudential Property & Casualty Insurance Co., 437 Pa. Super. 108, 125, 649 A.2d 680, 688 (1994), citing Black’s Law Dictionary 139 (6th ed. 1990). The success in bringing a claim for bad faith requires the insured to show by clear and convincing evidence that “the insurer did not have a reasonable basis for denying benefits under the policy and that the insurer knew of or recklessly disregarded its lack of reasonable basis in denying the claim.” MGA Insurance Co. v. Bakos, 699 A.2d 751, 754 (Pa. Super. 1997).

In the current case, this court believes that plaintiff has failed to show by clear and convincing evidence that defendant did not have a reasonable basis for denying its claim. Plaintiff has not displayed that defendant failed to make prudent efforts to investigate the claim. Defendant denied plaintiff’s claim because it reasonably believed plaintiff was not entitled to either the emergency expense claim or the claim for payment for construction of extra parking spaces. Additionally, plaintiff has failed to offer proof that defendant unreasonably delayed the handling of the claim. As such, plaintiff’s bad faith claim shall be dismissed because there exists no genuine issue of material fact.

ORDER

And now, January 4, 2005, defendant’s motion for summary judgment regarding the emergency expense claim is hereby denied, and this issue will proceed towards trial. Defendant’s motion for summary judgment regarding payment for the construction of a temporary parking lot is hereby granted. Defendant’s motion for summary judgment regarding plaintiff’s bad faith claim is hereby granted.


author: NEW, J.,

text:
    Harris v. Thomas Jefferson University Hospital

      Francis S. Blatcher, Gerald J. Dugan and Mark C. Cavanaugh, for plaintiff.

      Dorothy Duffy, Amanda A. ODea, Donald N. Camhi and James C. Stroud, for defendants.
    December 28, 2004
   NEW, J.,

This court properly granted plaintiff’s motion to open judgment of non pros for failing to file a timely certificate of merit because plaintiff met all the requirements under Pennsylvania Rule of Civil Procedure 3051 for opening a judgment of non pros and satisfied the purpose of filing a certificate of merit.

FACTUAL AND PROCEDURAL HISTORY

James Harris (plaintiff) initiated this present action on April 5,2004, against Thomas Jefferson University Hospital (defendant Hospital), Kenneth Neuburger M.D. (defendant Neuburger), Aaron Weiss M.D. (defendant Weiss), and Maria P. Childers M.D. (defendant Childers). Plaintiff alleged that defendants failed to appropriately treat plaintiff’s decedent’s, Dimitrius Stratton, asthma, resulting in his death.

On July 6 and August 22, 2003, plaintiff obtained the expert reports of Marc M. Levine M.D., a board-certified emergency room physician. In the reports, Dr. Levine provided his opinion that defendants Hospital, Neuburger, Weiss and Childers breached the standard of care in their treatment of plaintiff’s decedent which led to his death. These reports were provided to defendant Hospital as well as the insurance carrier for defendant Neuburger in October and September, 2003, respectively. In January 2004, plaintiff also obtained the report of Dr. Alan Rushton M.D., Ph.D., a board-certified pediatrician. Dr. Rushton’s report indicated that the conduct of the defendants fell below the standard of care for hospitals and physicians in their respective specialties and that such conduct was a substantial factor in the death of plaintiff’s decedent. Plaintiff argues that the reports of Dr. Levine and Dr. Rushton complied with the requirements of the certificate of merit rules.

Pursuant to Pa.RC.P. 1042.3(a), plaintiff was required to file a certificate of merit on or before June 4, 2004. Plaintiff failed to file a certificate of merit. On July 8 and 9, 2004, defendants Hospital, Neuburger and Weiss filed praecipes to enter judgment of non pros pursuant to Rule 1042.6. Judgment of non pros was entered. Plaintiff filed a petition to open the judgments of non pros entered in favor of defendants Hospital, Neuburger and Weiss on July 16, 2004. On August 17, 2004, this court entered an order granting plaintiff’s petition to open the judgments of non pros. Defendants appeal the order.

LEGAL ANALYSIS

Pennsylvania Rule of Civil Procedure 1042.3(a) contains the requirement that in any action based upon an allegation that a licensed professional deviated from an acceptable professional standard, the plaintiff shall file a certificate of merit within 60 days after the filing of the complaint. The certificate certifies that another appropriate licensed professional has supplied a written statement that there is a basis to conclude the care, skill, or knowledge exercised or exhibited by the defendant in the treatment, practice, or work that is the subject of the complaint fell outside acceptable professional standards and such conduct was a cause in bringing about the harm. Hoover v. Davila, 862 A.2d 591 (Pa. Super. 2004).

Rule 1042.6 allows for the prothonotary to enter a judgment of non pros against the plaintiff for failing to file a certificate of merit within the required time. Pa.R.C.P. 1042.6. The procedure to open a judgment of non pros entered pursuant to Pa.R.C.P. 1042.6 is governed by Pa.R.C.P. 3051. Koken v. Lederman, 840 A.2d 446 (Pa. Commw. 2003). In order to open the judgment, Rule 3051 requires: (1) the petition to open be timely filed; (2) there be reasonable or justifiable excuse for any delay; and (3) there be a meritorious cause of action.

In the case sub judice, plaintiff met all the requirements to open a judgment of non pros as defined by Rule 3051. The first entry of judgment of non pros was entered on July 8, 2004. The second entry was filed the next day. Plaintiff filed a petition to open the judgment of non pros as to both one week later. Filing within one week is considered timely.

As to whether there was a reasonable or justifiable excuse for delay, the reason provided by plaintiff was based upon his knowledge that, prior to the initiation of the lawsuit, plaintiff had provided the defendants with all the information that would have been contained in a certificate of merit. Plaintiff’s counsel was under the belief that the information provided was enough to satisfy the requirement under Pa.R.C.P. 1042.3. By providing the defendants with the medical expert reports stating there is a valid cause of action, plaintiff believed he had more than satisfied the purpose of the filing of a certificate of merit. Plaintiff’s counsel had provided defendants with full, complete information, and therefore believed there was no need for the filing of a certificate of merit. Although the court believes the plaintiff is in error and that a certificate of merit must be filed, the court finds the plaintiff has met the requirements of Rule 3051 that he had a reasonable belief \hat the requirements of the certificate of merit had been met.

Based on the expert reports of Dr. Levine and Dr. Rushton, plaintiff has shown a meritorious claim. The reports allege the defendants’ conduct fell below the applicable standard of care and the conduct of the defendants caused plaintiff’s decedent’s death.

Plaintiff met all three requirements set out in Pa. R.C.P. 3051 for the opening of a judgment of non pros. Additionally, plaintiff has more than satisfied the purpose of filing a certificate of merit. Plaintiff provided defendants, prior to the required filing of the certificate of merit, not just an attorney’s affidavit, but the reports themselves. The purpose of Pa.R.C.P. 1042.3(a) is to prevent the filing of baseless professional negligence claims. Since plaintiff has met that purpose, he should not be barred from his day in court because he mistakenly, but reasonably, believed he had met his obligation. Therefore, the order opening the judgment of non pros was proper.

Wherefore, for all the reasons stated above, this court’s order should be affirmed.