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  Alternative Dispute Resolution

Practice Points


September 19, 2016

Can Courts Enforce Contractual Mediation Provisions?


In Heston v. GB Capital, LLC, 16cv912 (S.D.Cal. 2016), a contract provided that disputes must first be submitted to non-binding mediation, and then arbitration. When the plaintiff filed a lawsuit in court without first mediating or arbitrating, the defendant sought to compel both mediation and arbitration under the Federal Arbitration Act, 9 U.S.C. §4. The court ordered arbitration, but refused to order the parties to mediation. The denial was based on a prior district court decision (Trujillo v Gomez, Case No. 14cv2483 BTM, 2015 WL 1757870 (S.D. Cal. 2015)), which in turn based its holding on the Eleventh Circuit’s decision in Trujillo, Advanced Bodycare Solutions, LLC v. Thione Int’l, Inc., 524 F.3d 1235 (11th Cir. 2008).


To understand why the district courts in Heston and Trujillo courts would not order mediation, even though required by the contract, one must look at the Eleventh Circuit decision that both are based on. In Trujillo, Advanced Bodycare Solutions, LLC v. Thione Int’l, Inc., 524 F.3d 1235 (11th Cir. 2008), the party seeking to compel mediation filed its motion solely under the Federal Arbitration Act, and the court held that mediation could not be ordered under the FAA because mediation is not covered by that statute. The court carefully noted however, that there may be other means for courts to enforce contractual mediation clauses:


Nor do we hold that agreements to mediate are per se unenforceable. They might be specifically enforceable in contract or under other law; that issue is not before us. Finally, we emphasize that we do not hold that stays in aid of mediation are per se impermissible. To the contrary, district courts have inherent, discretionary authority to issue stays in many circumstances, and granting a stay to permit mediation (or to require it) will often be appropriate. We merely hold that the mandatory remedies of the FAA may not be invoked to compel mediation.


Based on the reasoning similar to that suggested in this paragraph, some courts have dismissed (without prejudice) cases where parties have failed to comply with contractual mediation clauses. E.g., Bank of Am., N.A. v. SFR Investments Pool 1, LLC, No. 2:15-CV-0693-GMN-VCF, 2016 WL 389981, at *2 (D. Nev. Jan. 31, 2016)(“because these claims were not submitted to mediation prior to the filing of this action, the Court lacks subject matter jurisdiction, and will dismiss these claims without prejudice”). Other courts have stayed cases until a contractually-required mediation is completed. E.g., Getchell v. Suntrust Bank, No. 6:15-CV-1702-ORL-TBS, 2016 WL 740603, at *3 (M.D. Fla. Feb. 25, 2016) (“This action is due to be stayed so the parties can perform their contractual obligation to mediate”). All of these courts relied upon basic breach of contract legal principles to either dismiss without prejudice or stay pending completion of the contractually-required mediation.


It is possible that the defendant in Heston will be able to enforce the mediation requirement by asking the arbitrator to dismiss or stay the action until the required mediation is completed. Nonetheless, the takeaway from these rulings is that a party seeking to enforce a contractual clause requiring both mediation and arbitration should plead common law breach of contract theories in addition to the Federal Arbitration Act.


Keywords: alternative dispute resolution, adr, litigation, mediation, compel, contract principles, theories, obligation to mediate


Jonah Orlofsky practices at The Law Offices of Jonah Orlofsky in Chicago, Illinois.

 

 

September 8, 2016

Suit Challenges Dept. of Labor Regulations


On June 1, 2016, the Chamber of Commerce of the United States of America, the Securities Industry and Financial Markets Association, the Texas Association of Business, and a number of other organizations filed a lawsuit over the U. S. Department of Labor’s regulations regarding fiduciary conflict of interest rules for retirement plans. One of the counts filed in the in the Northern District of Texas challenges regulation provisions that limit a business’s ability to include a class action waiver in its arbitration agreements. According to the plaintiffs, this restriction violates both the Federal Arbitration Act, 9 U.S.C. § 1 et seq., and the Administrative Procedure Act, 5 U.S.C. § 500 et seq.

 

More generally, the thrust of the Complaint is summed up in this paragraph:

 

In short, the Department [of Labor] is instituting a deliberately unworkable fiduciary definition, with full knowledge that financial services firms and insurance institutions will have no choice but to seek an exemption from it. The Department is conditioning that exemption on an agreement to adhere to practices that the Department has no authority to require or enforce, and that will therefore be administered instead by the class action bar.

 

Keywords: alternative dispute resolution, litigation, class action waiver, fiduciary, conflict of interest rules, Department of Labor regulations

 

Karl Bayer, Karl Bayer Dispute Resolution, Austin, TX

 

 

September 2, 2016

Seventh Circuit Holds Panel Exceeded Its Authority


The Seventh Circuit reversed a district court’s decision upholding an arbitration award. It held that, by relying on a disclaimer in documents outside the parties’ contract, the arbitration panel exceeded its authority. Bankers Life & Cas. Ins. Co. v. CBRE, Inc., No. 15-1471, 2016 WL 4056400, at *2–3 (7th Cir. July 29, 2016).

 

Insurance company Bankers hired real estate company CBRE to negotiate a sublease of Bankers’ space and to find Bankers a new location. Bankers and CBRE signed a Listing Agreement providing, among other things, that CBRE would “assist [Bankers] in . . . presenting offers” and “answer [Bankers’] questions relating to the offers.” Id. at *1. Bankers told CBRE that it wanted to net $7 million in savings from the deal. In turn, CBRE presented Bankers with a series of cost-benefit analyses (CBAs). When one CBA showed $6.9 million in net savings, Bankers accepted the deal, subleased its space, and relocated. CBRE’s calculation was inaccurate, however, and Bankers’ savings were only $3.8 million.

 

In arbitration, Bankers sought to recoup the deficiency and to avoid paying commissions. It contended, among other things, that CBRE violated the Listing Agreement by failing to provide accurate information. The arbitration panel (Panel) acknowledged that the Listing Agreement required CBRE to answer questions accurately and that CBRE made a material mistake. Nonetheless, the Panel issued an arbitration award (Award) in favor of CBRE. It reasoned that the CBAs constituted the answers that, under the Listing Agreement, CBRE was required to provide and that the CBAs contained a disclaimer for errors in the CBAs. On this ground, the Panel ruled that CBRE had not violated the Listing Agreement.

 

Bankers challenged the Award in district court, lost, and appealed to the Seventh Circuit. In a majority opinion by Judge Posner, the Seventh Circuit reversed, holding that the Panel exceeded its authority by relying on the disclaimer in the CBAs.

 

With regard to the disclaimer, the Listing Agreement, and the Panel’s Award, the court concluded as follows: The disclaimer only appeared in the CBAs, the CBAs were not part of the Listing Agreement, and the CBAs did not amend the Listing Agreement (because Bankers did not agree to the CBAs). In addition, the Panel relied upon the disclaimer in making its Award.

 

With regard to judicial review, the court recited federal law recognizing that arbitrators may not exceed their authority. Noting the court’s diversity jurisdiction, the court looked to Illinois law to define the scope of that authority. The court observed that, under Illinois law, the Panel’s authority was limited by the unambiguous language of the contract. The court also observed that “Illinois courts will not vacate an arbitration award for mere ‘errors in judgment or mistakes of law’ unless ‘gross errors of judgment in law or a gross mistake of fact’ are ‘apparent upon the face of the award.’” Id. at *2 (quoting Garver v. Ferguson, 389 N.E.2d 1181, 1183–84 (Ill. 1979)).

 

Applying these principles, the court held that the Panel exceeded its authority. In the court’s analysis, the Panel was authorized to interpret the parties’ contract, which was the Listing Agreement. According to the court, the Panel was not authorized to rely on the disclaimer because the disclaimer only appeared in the CBAs and the CBAs were not part of the Listing Agreement. The court concluded that, consequently, by relying on the disclaimer the Panel exceeded its authority. The court further concluded that gross errors of judgment in law or a gross mistake of fact appeared upon the face of the Award.

 

Judge Sykes dissented. In the dissent’s view, although the Panel’s reasoning was potentially erroneous, the Panel’s Award was grounded in the Listing Agreement. The dissent concluded that, for this reason, the Panel did not exceed its authority in the relevant sense, and the Award could not be vacated.

 

Practice Pointer
On its face, this decision teaches that a party who seeks the protection of a disclaimer should make the disclaimer part of the governing contract; otherwise, the disclaimer may not be effective. More broadly, this decision arguably stands for the proposition that an arbitration panel exceeds its authority by committing something similar to “manifest error.” This decision is important because it arguably expands the circumstances under which courts will vacate arbitration awards.

 

Keywords: alternative dispute resolution, litigation, disclaimer, arbitration award, judicial review, gross error, contract interpretation

 

Heather K. Afra, Novack and Macey LLP, Chicago, IL

 

 

August 24, 2016

Enforceability of Arbitration Clauses in Ontario


The recent decision of the Ontario Superior Court of Justice in Haas v. Gunasekaram, 2015 ONSC 5083 reinforces the approach that Ontario Courts take to defining the boundaries of arbitration clauses.

 

Haas centered around three aspiring restauranteurs who opened an Italian restaurant together. The investors had the foresight to enter into a shareholders’ agreement while the relationship was still a happy one. Contained within the shareholders’ agreement was an arbitration clause that applied to any dispute between the parties “respecting this Agreement or anything herein contained.”

 

Unfortunately, the restauranteurs did not remain on harmonious terms. One of the parties commenced an action for breach of fiduciary duty stemming from alleged involvement with competing restaurants; misrepresentations which induced the plaintiff to enter into the investment; and oppression relating to the non-issuance of shares, director registration issues, and unauthorized salary payments.

 

The matter before the Court was an application by the defendants to stay the action and refer it to arbitration pursuant to the arbitration clause. The Court noted that the governing principle in defining what is and is not arbitrable is that, to be arbitrable, a dispute must relate to the agreement that contains the arbitration clause. The Court referred to the Ontario Court of Appeal decision in Woolcock v. Bushert (2004), 246 D.L.R. (4th) 139, wherein the Court stated at paragraph 23 that:

 

[the] words ‘relating to’ enjoy a wide compass. So long as a matter in dispute is referable to the interpretation or implementation of some provision of the Agreement, it is arbitrable.

 

The Court also applied the analytical approach utilized by the Ontario Court of Appeal to interpret a forum selection clause in Matrix Integrated Solutions Ltd. v. Naccarato, 2009 ONCA 593 by examining the “pith and substance” of the plaintiff’s claim.

 

The Court concluded in Haas v. Gunasekaram that neither the misrepresentation nor the breach of fiduciary duty claim were contractual in nature and did not rely upon or refer to the shareholders’ agreement:

 

[20]      The meat of this case is based on the allegations of representations made by the defendants with the purpose of inducing Haas into joining the business venture. The SHA is pleaded as part of the instrumentality used by the defendants as part of the inducements. The subject matter of these allegations does not, in my view, rely on contractual obligations contained in the SHA. In other words, the claim is not for breach of contract but the fraudulent misrepresentation of facts which caused Haas to enter into the business agreement. …        

 

[21]      The breach of fiduciary duty allegations centre on the defendants working for rival companies at the same time that they were supposed to manage the jointly owned Osteria dei Ganzi. Haas also alleges that two of the defendants, Gunasekaram and Viscardi, opened a competing Italian restaurant within one kilometre of Osteria dei Ganzi. Once again, these allegations do not rely upon or refer to the SHA as a basis for their validity and are not contractual in substance …

 

The claim for oppression did concern specific contractual clauses. However, as the bulk of the claims asserted fell outside the scope of the arbitration clause, and all claims involved the same factual matrix, carving off some of the claim for arbitration was not appropriate as it would result in duplication, increased costs, and delay.

 

It should be noted that it is not the categorization of a claim that determines if a dispute is governed by an arbitration clause, but whether the contract in which the arbitration clause resides is engaged in asserting the claim.

 

The juxtaposition of the decision in Haas to the Ontario Court of Appeal decision in Greenfield Ethanol Inc. v. Suncor Energy Products Inc., 2007 ONCA 823 demonstrates this point. The party opposing arbitration in Greenfield argued that because the agreement in question did not contain a specific clause creating a fiduciary relationship, a claim for breach of fiduciary duty was not arbitrable. The Court disagreed, ruling that because the agreement as a whole was being relied upon as creating a fiduciary relationship, the claim for breach of fiduciary duty was “not clearly outside” the scope of the arbitration clause.

 

The take-away point is that the Court will look to the substance of a claim and whether it engages the agreement in which the arbitration clause resides in order to determine if it is arbitrable. Moreover, the Court will rule against enforcing an arbitration clause where doing so gives rise to a multiplicity of proceedings by allowing some aspects of a claim to be dealt with in arbitration and others within the court system.

 

Keywords: Canadian law, Canadian arbitration clauses, misrepresentations, fiduciary duty

 

Geoffrey Janoscik, Pallett Valo LLP, Mississauga, Ontario

 

 

August 16, 2016

Supreme Court of Texas Denies Motion to Compel Arbitration on Alternate Ground


The Supreme Court of Texas has ruled that a company did not waive its right to arbitration by bringing a “friendly” declaratory judgment action.

 

Facts and Procedural History
In RSL Funding, LLC v. Pippins, No. 14-0457 (Tex., July 1, 2016), RSL agreed to purchase certain annuity contracts issued by MetLife from three individuals. As part of this arrangement, RSL and the individuals signed an arbitration agreement. Neither RSL nor the individuals had an agreement to arbitrate with MetLife.

 

When MetLife refused to honor RSL’s purchase of the annuities, RSL filed a declaratory judgment action against MetLife and the Individuals. Later, when disagreements arose between RSL and the Individuals, RSL sought to stay the case and compel the individuals to arbitrate the disagreements. The Texas court denied RSL’s motion for arbitration, ruling that it had waived its right to arbitrate by invoking the judicial process. RSL filed an interlocutory appeal.

 

A divided Texas appellate court affirmed the lower court’s decision, holding that RSL waived its right to pursue arbitration because it substantially invoked the litigation process against both MetLife and the individuals. RSL then filed a petition for review with the Texas Supreme Court.

 

Supreme Court Decision
In its opinion, the Texas Supreme Court noted that a party may waive its right to arbitration by substantially invoking the judicial process but that “there is a strong presumption” against such a waiver and that “a party who litigate[s] one claim with an opponent d[oes] not substantially invoke the litigation process for a related yet distinct claim against another party with whom it ha[s] an arbitration agreement.” 433 S.W.3d at 545. Stating the matter succinctly, the court said that RSL’s litigation conduct with respect to MetLife “is not relevant to . . . whether RSL waived its arbitration rights with the Individuals.” What was relevant was RSL’s conduct toward the individuals with whom it had an arbitration agreement.

 

The Texas court stated that waiver depends on the “totality” of circumstances and involves consideration of numerous factors including:

 

whether the party asserting the right to arbitrate was plaintiff or defendant in the lawsuit, how long the party waited before seeking arbitration, the reasons for any delay in seeking to arbitrate, how much discovery and other pretrial activity the party seeking to arbitrate conducted before seeking arbitration, whether the party seeking to arbitrate requested the court to dispose of claims on the merits, whether the party seeking to arbitrate asserted affirmative claims for relief in court, the amount of time and expense the parties have expended in litigation, and whether the discovery conducted would be unavailable or useful in arbitration.

 

Here, the court held that RSL did not waive its right to arbitrate disputes with the individuals:

 

RSL asserted only that MetLife breached its annuity contracts by refusing to honor the assignments, sought a declaratory judgment that the assignment agreements were enforceable, and sought a judgment against MetLife for damages, interest, costs, and attorney’s fees. RSL did not seek recovery from the Individuals. To the contrary, its actions were supported by the Individuals as evidenced by their affidavits that, in part, waived citation because they fully “underst[ood] and support[ed] the nature of this action for declaratory relief.”

 

The court noted that the individuals were named as defendants not because RSL had a genuine dispute with them, but because Texas law required all interested persons to be named in declaratory judgment actions. It stated that a “friendly” declaratory judgment action such as this did not show that RSL had chosen to litigate rather than arbitrate its disputes with the individuals. As a result, RSL did not waive its right to arbitrate when disputes arose between it and the individuals after the declaration judgment action was filed.

 

Despite this holding, however, the Texas Supreme Court affirmed the decision to deny RSL’s motion to compel arbitration on an alternate ground: RSL had failed to join its assignees in the arbitration.

 

Keywords: alternative dispute resolution, litigation, friendly, declaratory judgment, stay, waiver, assignees

 

Karl Bayer, Karl Bayer Dispute Resolution, Austin, TX

 

 

August 8, 2016

Eighth Circuit Affirms Arbitrator's Suspension of NFL's Peterson


On August 4, 2016, the US Court of Appeals for the Eighth Circuit reached a conclusion about an “evident partiality” challenge to a National Football League (NFL) arbitration. The challenge was over a football player’s suspension that is substantively identical to the conclusion reached by the Second Circuit in the Deflategate/Tom Brady dispute—that a union and the employer’s representative may agree in a collective bargaining agreement upon a process for selecting an arbitrator that results in an individual with close ties to the employer’s representative being selected as the arbitrator.

 

The facts in National Football League Players Association, on its own and on behalf of Adrian Peterson, v. National Football League and National Football League Management Council, No. 15-1438 (8th Cir. August 4, 2016) involved an arbitration in which Adrian Peterson, a star running back for the Minnesota Vikings, was suspended as a disciplinary matter for hitting his son “with a tree branch as a form of corporal punishment.” To hear Peterson’s and the Players Association’s challenge to the suspension, Mr. Harold Henderson was appointed by the League as the sole arbitrator pursuant to the collective bargaining agreement between the League and the Players Association. Henderson was formerly a senior official of the NFL responsible for matters related to discipline and currently is president of a charity affiliated with the League.

 

“Henderson is the president of the Player Care Foundation, a League-affiliated charity. He previously served for sixteen years as the League’s vice president for labor relations and chairman of the NFL Management Council Executive Committee.”

 

The Players Association asked Henderson to “recuse himself from the hearing due to his close ties to League officials and his role in shaping the League’s disciplinary policies. Henderson denied the request, noting that the Association had not objected to his designation as arbitrator in dozens of past disciplinary appeals.”

 

In the arbitration, Henderson upheld Peterson’s suspension. Peterson and the Players Association then challenged that ruling in court, and the dispute eventually reached the Eight Circuit Court of Appeals. Most of the issues on appeal dealt with the proper standard for judicial review of an arbitration award, with the appellate panel applying a deferential standard and upholding the arbitration award. Towards the end of the appellate opinion, though, the Eight Circuit addressed a challenge to the award based on the assertion that Henderson was “evidently partial” and thus the award should be vacated. The court rejected that challenge, relying like the Second Circuit in the Deflategate opinion, on party autonomy and waiver reasoning:

 

The Association first asserts that Arbitrator Henderson was “evidently partial,” because he demonstrated “such a degree of partiality that a reasonable person could assume that the arbitrator had improper motives.” Dow Corning Corp. v. Safety Nat’l Cas. Corp, 335 F.3d 742, 750 (8th Cir. 2003) (quotation omitted). In Williams v. National Football League, 582 F.3d 863 (8th Cir. 2009), an NFL player raised a virtually identical challenge to the League’s general counsel serving as an arbitrator in a dispute arising under the previous collective bargaining agreement. We held that the Association had “waived its objection to [the general counsel] serving as arbitrator by agreeing in the CBA that the Commissioner’s designee . . . could serve as arbitrator.” Id. at 885–86. Allowing the Commissioner or the Commissioner’s designee to hear challenges to the Commissioner’s decisions may present an actual or apparent conflict of interest for the arbitrator. But the parties bargained for this procedure, and the Association consented to it. See CBA art. 46 § 2(a). It was foreseeable that arbitration under the Agreement sometimes would involve challenges to the credibility of testimony from Goodell or other League employees. When parties to a contract elect to resolve disputes through arbitration, a grievant “can ask no more impartiality than inheres in the method they have chosen.” Winfrey v. Simmons Food, Inc., 495 F.3d 549, 551 (8th Cir. 2007) (quotation omitted). The Association’s challenge to Henderson’s service as arbitrator is thus foreclosed by Williams, and a remand is unnecessary. Accord Nat’l Football League Mgmt. Council v. Nat’l Football Players Ass’n, 820 F.3d 527, 548 (2d Cir. 2016).

 

This decision, like the Deflategate decision, relies on Federal Arbitration Act precedents, not just Labor Management Reporting and Disclosure Act arbitration precedents. It remains unclear whether this doctrine of party autonomy overriding “evident partiality” applies to disputes beyond labor-management issues under a collective bargaining agreement.

 

Keywords: alternative dispute resolution, adr, litigation, party autonomy, evident partiality, waiver, collective bargaining agreement

 

Mark Kantor, Member of the College of Commercial Arbitrators, Washington, D.C.

 

 

August 2, 2016

Court of Arbitration in Sport Denies Russian Appeal of Olympic Ban


On July 21, 2016, the Court of Arbitration in Sport (CAS) Panel announced that it had denied the appeal by the Russian Olympic Committee and 68 Russian athletes from the International Association of Athletics Federations (IAAF) ruling that the field and track team is ineligible to participate in the Rio Olympics. 

 

On November 13, 2015, the IAAF provisionally suspended the All Russia Athletics Federation (ARAF) from IAAF membership on grounds of systematic state-sponsored doping in Russian track and field athletics.  The IAAF made that provisional suspension full and indefinite later in November 2015. 

 

In a request for arbitration filed at the CAS on July 3, 2016, the Russian Olympic Committee and the 68 claimant athletes asked the CAS: (1) to review certain legal issues; and (2) to order that any Russian athlete who was not currently the subject of any period of ineligibility for the commission of an anti-doping rule violation be declared eligible to participate at the 2016 Olympic Games in Rio (subject to meeting the qualification standards for his or her event).

 

On July 15, 2016, 67 of the same Russian athletes filed an appeal against the IAAF decisions to deny applications from these athletes to compete internationally as "neutral athletes" at the 2016 Olympic Games in Rio.

 

The CAS Panel held a hearing on July 19, 2016. On July 21, 2016, the CAS issued a press release reporting the panel’s decision. The press release states that “[i]n view of the urgency of the matter, the CAS Panel has issued only its decision, which is unanimous, without the grounds.  The full Arbitral Award, including the grounds for the Panel’s decision, will be issued as soon as possible.”

 

The International Olympic Committee has been waiting for this ruling before deciding whether to ban the entire Russian Olympic team from participating in the Rio Olympics as recommended by the World Anti-Doping Agency (WADA). WADA’s recommendation is largely the result of The McLaren Investigation Report which was published on July 18, 2016.

 

Keywords: alternative dispute resolution, adr, litigation, Rio Olympics, ban, Russian athletes, Russia, Court of Arbitration in Sport, International Olympic Committee, World Anti-Doping Agency, WADA, McLaren Investigative Report

 

Mark Kantor, Member of the College of Commercial Arbitrators, Washington, D.C.

 

 

July 27, 2016

Second Circuit Reaffirms Manifest Disregard of Law as a Valid Ground for Vacature


The Second Circuit recently reaffirmed its position that manifest disregard of law or the arbitration agreement is a valid ground for vacating an arbitration award. Sutherland Global Services v. Adam Technologies, 2016 WL 494155 (2d Cir. 2016). Its decision highlights a split among the circuits.

 

In 2008, the U.S. Supreme Court held that §10(a) of the Federal Arbitration Act (FAA) provides the “exclusive grounds” for vacating arbitration awards. Hall St. Assocs. LLC v. Mattel, Inc., 552 U.S. 576 (2008). Since then, the circuits have split on whether manifest disregard of the law survives as a separate ground for vacature. The Fifth, Eighth, and Eleventh Circuits have held that manifest disregard is no longer a valid ground, while the Second, Fourth, and Ninth Circuits have held that it is valid as a “judicial gloss” on the grounds stated in FAA §§10(a)(3) and (4). The Third Circuit has not yet ruled on this issue.

 

In Sutherland, the Second Circuit read Hall Street to hold that the grounds for vacature in section 10 of the FAA are “generally exclusive,” but stated that “as ‘judicial gloss on the specific grounds for vacature of arbitration awards’ in the FAA, an arbitrator’s “‘manifest disregard’ of the law or of the terms of the arbitration agreement remains a valid ground for vacating arbitration awards.” Id. Manifest disregard of the arbitration agreement as a ground for vacature appears consistent with FAA §10(a)(4) which allows vacature if the arbitrator exceeds his or her powers.

 

In Sutherland, the appellant argued that the arbitration panel had exceeded its powers and manifestly disregarded the parties’ contract and New York law because: (1) a material contract document had not been executed by the parties, and (2) the panel based the award on work performed by appellant’s affiliate contrary to the terms of the contract. The Sutherland court rejected these arguments. It said that the primary inquiry under §10(a)(4) is whether the arbitrator’s award draws its essence from the parties’ agreement and provides even a “barely colorable” justification for the arbitrator’s interpretation of it. It held that the arbitrators had interpreted the contract so as to rebut the appellant’s contentions, and that the court would not scrutinize the panel’s contractual interpretation or its factual findings.

 

The appellant also argued that the arbitrators committed legal error because they ignored a contract provision that limited liability. The court disagreed stating that manifest disregard of the law applies only in those exceedingly rare instances where there is some egregious impropriety on the part of the arbitrator. The court elaborated: “It is not enough … to show that the panel committed an error—or even a serious error … It is only when [an] arbitrator strays from the interpretation and application of the agreement and effectively ‘dispenses his own brand of industrial justice’ that his decision may be unenforceable.” Id. Since the court found no manifest disregard of either the law or the arbitration agreement, it affirmed the district court’s confirmation of the award.

 

A similar conclusion was reached by the Fourth Circuit several years ago. Wachovia Securities, LLC v. Brand, 671 F.3rd 472 (2012). In Wachovia, the losing party argued that the arbitrators had manifestly disregarded a state statute by refusing to hold an evidentiary hearing on the victor’s claim for attorney’s fees. The losing party argued that the arbitrators violated Section 10(a)(3) which provides for vacature “where the arbitrators were guilty of . . . misbehavior by which the rights of any party have been prejudiced.” In rejecting this argument, the court applied a two-part test: (1) whether the applicable legal principle is clearly defined and not subject to reasonable debate; and (2) whether the arbitrator refused to heed that principle. It ruled that the test was not satisfied because the meaning of the statute was not clearly defined and was subject to debate. It further reasoned that: “Whether manifest disregard is a ‘judicial gloss’ or an independent ground for vacature, it is not an invitation to review the merits of the underlying arbitration ...” Id. at 483. The denial of the appellant’s motion to vacate was affirmed.

 

Sutherland and Wachovia provide guidance for arbitrators drafting arbitration awards. Since an award must draw its essence from the underlying agreement, the award should set forth the arbitrator’s interpretation of the agreement and any governing law. Further, the award should not include statements that suggest a controlling principle of law is being flouted.

 

Keywords: alternative dispute resolution, adr, litigation, manifest disregard, rare, egregious, own brand of industrial justice

 

Edward Lozowicki, Lozowicki ADR, Palo Alto, CA

 

 

July 20, 2016

A Website User's Assent to Arbitration Terms Is Required


An arbitration clause “buried” in an online “Service Agreement” was not enforceable because a consumer was not given reasonable notice that using a website constituted assent to an agreement containing an arbitration clause. Sgouros v. TransUnion Corp., 817 F.3d 1029 (7th Cir. 2016).

 

In Sgouros, a customer purchased a “credit score” from a credit reporting agency’s website. When the customer attempted to purchase a car, he discovered that the credit score he had purchased was 100 points higher than the credit score used by the car dealership. When the customer filed suit, the credit reporting agency moved to compel arbitration based on an arbitration clause that could be found in an agreement that the customer purportedly agreed to when he used the website.

 

Applying Illinois law, the Seventh Circuit held that the relevant question involved a “reasonable communicativeness” test. According to the court, this test asks (a) whether the web pages presented to the consumer adequately communicated all of the terms and conditions of the agreement; and (b) whether the consumer received reasonable notice of the terms. Id. at 1034.

 

To answer the question it posed, the court examined the format of the website. The court noted that the customer had to complete three steps to obtain a credit report. The first step required the customer to provide identifying information and answer “Yes” or “No” regarding tips and news about the service. Upon clicking one of those buttons, the customer was brought to the second step. Step 2 required the customer to create a user name and password and submit his credit card information.

 

A “Service Agreement” was located in a scrollable window at the bottom of the screen for the second step. To view the Service Agreement, the customer had to click on the box and scroll down. There was no requirement to do so. The Service Agreement contained a hyperlink to a “printable version.” The arbitration clause at issue was located on the eighth page of the 10-page “printable version” of the Service Agreement.

 

Above a button stating “I Accept & Continue to Step 3” and beneath the scrollable service agreement window was a statement that read:

 

You understand by clicking on the ‘I Accept & Continue to Step 3’ button below, you are providing ‘written instructions to TransUnion Interactive, Inc. authorizing TransUnion Interactive, Inc. to obtain information from your personal credit profile from Experian, Equifax and/or TransUnion. You authorize TransUnion Interactive, Inc. to obtain such information solely to confirm your identity and display your credit data to you. Id. at 1033.

 

The Seventh Circuit found that the website would not reasonably inform the consumer that he was agreeing to be bound by the Service Agreement. Indeed, according to the court, the website actively misled the customer:

 

But what cinches the case for Sgouros is the fact that TransUnion’s site actively misleads the customer. The block of bold test below the scroll box told the user that clicking on the box constituted his authorization for TransUnion to obtain his personal information. It says nothing about contractual terms. No reasonable person would think that hidden within that disclosure was also the message that the same click constituted acceptance of the Service Agreement.

 

Id. at 1035. As a result, the court refused to enforce the arbitration clause in the Service Agreement.

 

Practice Pointer
Companies who want their websites to bind customers to contracts should design their websites so that it is clear to their customers that they are entering into a contract when they “click” through the website. A court might not be convinced that a customer assented to an arbitration agreement if it is “buried” in an online service agreement and the website was less than clear that the customer was entering into an agreement by “clicking” through the website.

 

Keywords: alternative dispute resolution, adr, litigation, scroll, arbitration agreement, click-through, clickwrap, service agreement

 

Timothy Miller, Novack and Macey LLP, Chicago, IL

 

 

July 14, 2016

Sabotage of Arbitration Results in Dismissal of Lawsuit


On July 1, 2016, the Second Circuit issued a summary order that affirmed the district court’s decision to: (1) deny the plaintiffs’ motion to lift the stay of their pro se lawsuit in favor of arbitration; and (2) dismiss the plaintiffs’ case. Gaul v. Chrysler Fin. Servs. Am. LLC (Case No. 15-1337).

 

The court said that its prior decisions had not explicitly stated what standard of review should apply to an order that denies a motion to lift a stay of litigation in favor of arbitration, but that the plaintiffs’ motion failed even under a de novo standard. The reason was that the plaintiffs had sought to frustrate the court’s ruling that they should arbitrate their dispute:

 

The record indisputably evidences that the Gauls in effect failed to comply with the district court’s order compelling arbitration. Jeffrey Gaul bombarded the AAA with inappropriate, hostile, and threatening emails, which resulted in its refusal to conduct the arbitration. As the district court reasoned, litigants may not “obtain the result they prefer by sabotaging the process the law requires.” Apr. 8, 2015, Decision & Order at 8 (Dist. Ct. Dkt. 155) (Supplemental App’x at 293).

 

The court cited a number of decisions to support its position. See Orion Shipping & Trading Co. v. E. States Petroleum Corp. of Panama, S.A., 284 F.2d 419, 421 (2d Cir. 1960) (party who has agreed to arbitration “should not be permitted to avoid it” by “merely running to the judge with charges so futile that they may reasonably appear to the court only a device for getting delay”); Motorola Credit Corp. v. Uzan, 561 F.3d 123, 129 (2d Cir. 2009) (the unclean hands doctrine “closes the doors of a court of equity to one tainted with inequitableness or bad faith relative to the matter in which he seeks relief” (quoting Precision Instrument Mfg. Co. v. Auto. Maint. Mach. Co., 324 U.S. 806, 814 (1945))).

 

The clear lesson from the case is that a party who is ordered to arbitrate its claims must comply with the court’s order in good faith and cannot evade its obligation to arbitrate by directing inappropriate actions at the arbitrator or the arbitral association.

 

Keywords: alternative dispute resolution, adr, litigation, motion to lift stay, sabotage, bad faith, dismiss

 

Michael S. Oberman, Kramer Levin Naftalis & Frankel LLP, New York, NY

 

 

July 6, 2016

Law Firm's Refusal to Pay Former Client's Arbitration Fees Subjects It to Litigation


Many law firms include an arbitration clause in the retention agreements that they have with their clients. Such agreements have the same advantages (and disadvantages) that arbitration agreements do in many other settings. Generally speaking, they enable firms to resolve disputes quicker, cheaper, and with less publicity than litigation. But what happens when the client cannot afford to pay its share of the arbitration fees?

 

Situations where one party cannot or will not pay its share of the arbitration fees arise with some frequency, and the options for addressing this problem are limited. In Tillman vs. Rheingold, Valet, Rheingold, Shkolnik & McCartney, a client filed a malpractice suit against her attorneys in federal court, and the firm successfully moved to stay her case and to require her to arbitrate her claims. At some point, however, the client ran out of funds and could not afford to continue to pay her half of the arbitrator’s compensation. The arbitrator asked the law firm to pay the client’s share, and the law firm refused. Unwilling to work for half-pay, the arbitrator dismissed the case, and the client then moved to lift the stay and resume her malpractice suit. The law firm convinced the district court to dismiss the case, but the Ninth Circuit reversed.

 

The Ninth Circuit affirmed the part of the district court opinion that refused to dismiss the client’s case under Rule 41(b). It agreed that such dismissal is a “harsh penalty” that should not be employed where, as here, the client was willing to obey the district court’s order to arbitrate but was unable to pay the expenses of the arbitration and therefore was not culpable in her failure to obey a court order.

 

However, the Ninth Circuit disagreed with the district court’s ruling that the court had no authority to allow the client’s lawsuit to resume. The Ninth Circuit noted that section 3 of the Federal Arbitration Act (FAA) requires courts to stay litigation “until such arbitration has been had in accordance with the terms of the [arbitration] agreement.” The court interpreted this phrase to be satisfied.

 

In this regard, the court stated that nothing in the FAA required dismissal in a situation where, as here, the arbitration had gone as far as it could, the arbitration had not been decided on the merits or otherwise resulted in an award, and the arbitration had been terminated in accordance with the arbitration rules because the plaintiff truly could not afford to pay the ongoing arbitration fees. The court held that district courts have an obligation to decide the cases before them “absent a firm basis for declining to do so.” Id. at 13. Accordingly, it remanded the case with instructions to permit the malpractice case to go forward.

 

There are two points that are central to this decision. First, the client legitimately could not afford to pay the ongoing arbitration fees and proved that to the district court’s satisfaction. Indeed, the Ninth Circuit noted that if the client could afford to pay the arbitration fees but refused to do so, the district court “most probably” (and properly) would have dismissed her complaint under Rule 41(b) for failing to comply with the district court’s order to arbitrate.

 

Secondly, the law firm could have avoided further litigation if it had paid the client’s share of the arbitrators’ compensation and allowed the arbitration to be decided on the merits. Indeed, the law firm could have asked the arbitrator to allocate the arbitration fees evenly to each side in the eventual award. Instead, the law firm played hard ball and lost the opportunity to arbitrate its client’s malpractice claims.

 

Keywords: alternative dispute resolution, adr, litigation, legal malpractice, Rule 41(b), failure to pay arbitration fees or expenses, stay of litigation, dismissal

 

Mitchell L. Marinello, Novack and Macey LLP, Chicago, IL

 

 

June 29, 2016

Be Careful What You Sign at Mediation


An executed, handwritten, two-sentence agreement reached during mediation may constitute a binding settlement agreement even where the parties later exchange, but fail to execute, a formal typewritten settlement agreement. Beverly v. Abbott Laboratories, 817 F.3d 328, 334 (7th Cir. 2016).

 

After her termination, Martina Beverly filed an employment discrimination lawsuit against Abbott Laboratories. At the end of a fourteen-hour mediation session, the parties and their counsel signed a two-sentence handwritten agreement reflecting their respective positions and obligating Abbott to communicate the positions internally. It stated that Abbott was offering $200,000 plus the costs of mediation. It also stated that “Beverly has demanded $210,000+ Abbott/AbbVie pays cost of mediation to resolve this matter” and provided that her demand would remain open for five days. The next day, Abbott accepted Beverly’s demand in an email and attached a draft typewritten settlement agreement similar to one sent prior to mediation. Beverly’s counsel responded a few minutes later stating, “Oh happy days! Best $10,000 Abbott has ever spent. You are a gem.” However, Beverly ultimately declined to sign the settlement agreement.

 

Abbott filed a motion to enforce the handwritten agreement, contending that an offer, acceptance, and meeting of the minds occurred, regardless of Beverly’s refusal to sign the later typewritten agreement. Beverly argued that the handwritten agreement was a preliminary document indicating the intent to execute a binding settlement agreement in the future because it omitted material terms located in the typewritten agreement. The district court disagreed with Beverly and granted Abbott’s motion.

 

The Seventh Circuit affirmed, holding that the handwritten agreement was enforceable because it sufficiently defined the parties’ intentions and obligations. It provided that Beverly offered to “resolve this matter” if Abbott paid $210,000 and mediation costs and was signed by the parties and their counsel. Further, Beverly’s counsel responded positively when Abbott accepted the terms of the handwritten agreement.

 

The court rejected Beverly’s position that the handwritten agreement was not binding because it omitted material terms located in the typewritten agreement, including waiver-and-release language, which was described by the typewritten agreement as “essential” and “material.” The court found that Beverly’s offer to “resolve this matter” was sufficient to convey her offer to abandon her claims even without the more formal language.

 

The Seventh Circuit held that unexecuted typewritten proposals did not render the handwritten agreement unenforceable. The court emphasized that the anticipation of a more formal agreement does not nullify an otherwise binding informal agreement. Illinois courts enforce promises made in connection with ongoing negotiations involving incomplete agreements. The court agreed with the district court that the parties’ failure to sign the formal typewritten agreement merely left the handwritten agreement’s enforceability undisturbed. The court distinguished a case cited by Beverly where offer letters expressly anticipated the future execution of an agreement.

 

Practice Pointer: Any informal settlement agreement reached at mediation that contemplates the execution of a more formal settlement agreement at a later date should make clear that the informal agreement is not binding. If parties fail to make that clear, courts are likely to enforce the informal agreement.

 

Keywords: alternative dispute resolution, adr, litigation, mediation, written settlement agreement, offer and acceptance, material terms

 

John Haarlow, Jr., Novack and Macey LLP, Chicago, IL

 

 

June 23, 2016

Arbitrator's Interpretation of Collective Bargaining Agreement Stands


By opinion issued June 20, 2016 in N.Y.C. & Vicinity District Council of the United Brotherhood of Carpenters v. Ass’n of Wall-Ceiling and Carpentry Industries of N.Y., Inc., the Second Circuit reversed a district court judgment that vacated an arbitration award under a collective bargaining agreement (CBA).

 

At issue was whether employers had to staff two-man jobs under the two-man job provision of the CBA or instead could elect to invoke a provision in a separate agreement that the employers had entered into with the local union’s international parent. The arbitrator ruled that the employers could invoke the provisions in the international agreement, but the district court held that the arbitrator’s ruling did not draw its essence from the CBA and that it conflicted with an earlier court order that had approved the CBA. The Second Circuit reversed.

 

The Second Circuit made clear that it was reviewing the arbitrator’s decision under the standard that applies to a labor case:

 

a federal court’s review of labor arbitration awards is narrowly circumscribed and highly deferential – indeed, among the most deferential in the law.” Nat’l Football League Mgmt. Council v. Nat’l Football League Players Ass’n, F.3d, 2016 WL 1619883, at *1 (2d Cir. 2016) (“NFL”). A court is “not authorized to review the arbitrator’s decision on the merits”; its role is simply to determine “whether the arbitrator acted within the scope of his authority as defined by the collective bargaining agreement.” Id. at *6. Thus, as long as “the arbitrator was even arguably construing or applying the contract and acting within the scope of his authority and did not ignore the plain language of the contract,” the award should ordinarily be confirmed. Id. (internal quotation marks omitted).

 

The Court noted that an award should be vacated if it “contradicts an express and unambiguous term of the contract or . . . so far departs from the terms of the agreement that it is not even arguably derived from the contract,” United Bhd. of Carpenters v. Tappan Zee Constructors, LLC, 804 F.3d 270, 275 (2d Cir. 2015). In other words, an award should be vacated if it does not “draw[] its essence from the collective bargaining agreement” but reflects instead “the arbitrator’s own brand of industrial justice.” NFL, 2016 WL 1619883, at *6 (internal quotation marks omitted).

 

The Second Circuit ruled that the arbitration award at issue did not violate any of these precepts and, accordingly, that it should be confirmed:

 

We agree that, to the extent the district court’s judgment rests on the basis that the award did not draw its essence from the CBA, it must be vacated. Rather than dispensing his “own brand of industrial justice,” the arbitrator addressed the narrow question whether the CBA forecloses the invocation of the International Agreement’s two‐man job provision. Relying on the parties’ history of allowing invocation of the International Agreement and on the CBA’s negotiating history, he concluded that the CBA’s silence on the issue indicated that the parties did not intend to change that practice and thus supported WCC’s position. That conclusion is at least arguably derived from an interpretation of the CBA itself and contradicts none of its “express and unambiguous” terms. . . . Although it might have been equally reasonable for the arbitrator to have agreed with the District Council, a federal court is not authorized to decide whether the arbitrator’s interpretation of a collective bargaining agreement was correct on the merits. NFL, 2016 WL 1619883, at *6. The arbitrator’s decision here comfortably survives our tightly circumscribed scope of review.

 

Keywords: alternative dispute resolution, adr, litigation, collective bargaining agreement, essence of agreement, interpretation, scope of review

 

Michael S. Oberman, Kramer Levin Naftalis & Frankel LLP, New York NY

 

 

June 20, 2016

New Jersey Becomes Third Recent State Court to Refuse to Enforce Delegation Clause


In a decision that appears intentionally controversial, the Supreme Court of New Jersey has refused to enforce the delegation clause in a for-profit college’s enrollment agreement in a 5–1 opinion. Morgan v. Sanford Brown Institute, 2016 WL 3248016 (N.J. June 14, 2016). Although the delegation clause had never been specifically challenged by the plaintiffs, as is required by SCOTUS’s Rent-A-Center in order to avoid delegating the issue of arbitrability to the arbitrator, the court found that fact was immaterial.

 

The plaintiffs alleged that Sanford Brown Institute had induced them to enroll via misrepresentations and deception. In response, the defendants moved to compel arbitration, based on an arbitration agreement in the plaintiffs’ enrollment agreement. The trial court denied the motion, but the intermediate appellate court reversed, concluding that an arbitrator should decide whether the arbitration agreement was enforceable due to the presence of a delegation clause.

 

At the state’s highest court, the issue of whether the delegation clause was enforceable was the sole issue. The plaintiffs argued that they were unaware that the arbitration agreement “denied them their right of access to a judicial forum and to a jury trial,” making the arbitration agreement unenforceable under New Jersey’s Atalese decision. The plaintiffs—and the court—characterized their failure to understand that arbitration is a substitute for court, not an addition to court, as preventing a meeting of the minds, and therefore, a challenge to the very existence of the entire agreement. In response, the defendants pounded on Rent-A-Center, arguing that it is binding precedent and must be applied, thus concluding that since the plaintiff failed to challenge the validity of the delegation clause specifically, an arbitrator must address any challenges to arbitrability (including challenges under Atalese).

 

The delegation clause that was enforced in Rent-A-Center, because the plaintiff did not challenge its validity in particular, stated that “[t]he Arbitrator, and not any federal state, or local court or agency, shall have exclusive authority to resolve any dispute relating to the interpretation, applicability, enforceability or formation of this Agreement.” The delegation clause that New Jersey refused to enforce in Morgan stated: “Any disputes, claims, or controversies between the parties to this Enrollment Agreement arising out of or relating to…(v) any objection to arbitrability or the existence scope, validity, construction, or enforceability of this Arbitration Agreement shall be resolved pursuant to this paragraph (the “Arbitration Agreement”).” [Note that the New Jersey clause does not specifically say the issue will not be addressed by a court, but the words used to describe the types of disputes that will be arbitrated are very similar.]

 

After acknowledging that the plaintiffs did not specifically challenge the delegation clause in Morgan, the court went on to establish some logical building blocks for distinguishing Rent-A-Center. First, it noted that state law governs whether the parties “entered an agreement to delegate” arbitrability. Second, delegation clause must be clear and unmistakable under First Options. Third, no one challenged the “clarity” of the delegation clause in Rent-A-Center (there is the wiggle room!). Therefore, because the New Jersey plaintiffs challenge whether the delegation clause was clear enough to allow a meeting of the minds, the New Jersey Supreme Court defines that as a challenge to the formation of the arbitration agreement containing the delegation clause, putting the issue of arbitrability squarely before the court. And, having concluded that the court, not an arbitrator, could decide the validity of the arbitration clause, this court went on to find it unenforceable:

 

The arbitration provision in the Sanford Brown enrollment agreement suffers from the same flaw found in the arbitration provision in Atalese—it does not explain in some broad or general way that arbitration is a substitute for the right to seek relief in our court system. That flaw—non-compliance with the dictates of Atalese—extends to the purported delegation clause…

 

***

 

In conclusion, the arbitration provision and purported delegation clause do not meet the requirements of First Options and Atalese and do not satisfy the elements necessary for the formation of a contract, and therefore are unenforceable.

 

The lone dissenting justice stated, “I cannot reconcile the majority’s reasoning with the United States Supreme Court’s decision in Rent-A-Center.”

 

All in all, I often feel that arbitration law is a big game of Whack-a-mole, where the U.S. Supreme Court is the kid holding the hammer, and the state courts keep randomly popping up with new and creative ways around arbitration precedent. But now, with only eight Justices, and no Scalia, will SCOTUS be willing to bring down the hammer on states for not following its controversial 5–4 decision in Rent-A-Center? I am guessing not.

 

Key words: alternative dispute resolution, adr, litigation, delegation clause, contract formation, arbitrability, substitution

 

Liz Kramer, Stinson Leonard Street, Minneapolis, MN

 

 

June 14, 2016

Fifth Circuit Holds That Employer's Arbitration Agreement Is Illusory


In Nelson v. Watch House Int’l, L.L.C., No. 15-10531 (5th Cir., Mar. 2, 2016), the Fifth Circuit ruled that an arbitration agreement included in an employment contract was illusory and unenforceable because its “savings clause” failed to expressly require that advance notice regarding any amendments or termination of the arbitral agreement be provided to workers.

 

The plaintiff, Nelson, secured a position as a training instructor with Watch House International (Watch House) in Dallas, Texas. Prior to beginning his employment, Nelson received an electronic copy of an employee handbook. The handbook included an arbitration agreement which stated the parties agreed to resolve any disputes through binding arbitration. The arbitration agreement also stated:

 

This agreement is issued with the authority of the Company and is binding on the Company. This Agreement may not be altered except by consent of the Company and shall be immediately effective upon notice to Applicant/Employee of its terms, regardless of whether it is signed by either Agreeing Party. Any change to this Agreement will only be effective upon notice to Applicant/Employee and shall only apply prospectively.

 

After working for Watch House for approximately four years, Nelson reported to his employer that he was being harassed at work over both his race and religion. About two weeks after reporting the alleged harassment, Nelson was fired.

 

In response to his termination, Nelson filed a lawsuit against his former employer in the Northern District of Texas. Watch House then filed a motion to compel arbitration. In his opposition to Watch House’s motion, Nelson argued that its arbitration agreement was unenforceable because it was illusory under, inter alia, In re Halliburton Co., 80 S.W.3d 566 (Tex. 2002), and Lizalde v. Vista Quality Markets, 746 F.3d 222 (5th Cir. 2014).

 

The district court granted Watch House’s motion to compel arbitration and dismissed Nelson’s case without prejudice.

 

Nelson appealed to the Fifth Circuit and argued that Watch House’s Arbitration Plan was illusory because it failed to include a savings clause related to existing claims and disputes and requiring advance notice of termination. After stating that Texas law governed the parties’ dispute, the Fifth Circuit held that:

 

Here, the Plan provides that Watch House may make unilateral changes to the Plan, purportedly including termination, and that such a change “shall be immediately effective upon notice to” employees. Watch House’s retention of this unilateral power to terminate the Plan without advance notice renders the Plan illusory under a plain reading of Lizalde, which is supported by recent decisions from Texas intermediate courts. See, e.g., Temp. Alts., Inc., 2014 WL 2129518, at *4–5 (collecting cases).

 

Because the Arbitration Plan was illusory, Nelson was not bound by it, and the order compelling arbitration was reversed. This case counsels that employers wishing to preserve the right to make future changes in their arbitration agreements with employees must make sure that their arbitration agreements clearly provide, among other things, that prior notice will be given before any future changes will become effective.

 

Keywords: alternative dispute resolution, adr, litigation, advance notice, illusory, amendment or termination, employee, employer

 

Karl Bayer, Karl Bayer Dispute Resolution, Austin, TX

 

 

May 31, 2016

Availability of Class Arbitration an Issue for the Courts


The availability of class arbitration is an issue for the courts to decide in the first instance—at least when the parties’ arbitration agreement is silent on this issue. Dell Webb Communities, Inc. v. Carlson, 817 F.3d 867 (4th Cir. 2016).

 

Home purchasers, the plaintiffs, filed an arbitration demand arising from alleged construction defects. The plaintiffs in their demand sought class arbitration. The relevant agreement contained an arbitration clause, and the arbitration case manager subsequently notified the parties that the arbitrator would decide whether the home sales agreement permitted class arbitration.

 

The defendants then filed a federal-court complaint seeking to compel bilateral (as opposed to class) arbitration and a motion for summary judgment that the availability of class arbitration should be decided by the court in the first instance, not the arbitrator. The district court denied the defendants’ motion for summary judgment. The district court held that the availability of class arbitration under the parties’ contract was a “threshold inquiry” for the arbitrator rather than the court. It reasoned that whether the arbitration clause permitted class arbitration was a “simple” contract interpretation issue that “concerns the procedural arbitration mechanisms available to” the plaintiffs. The defendants appealed, but the Fourth Circuit disagreed and reversed.

 

In reaching its decision, the Fourth Circuit observed that the Supreme Court “has identified two categories of threshold questions—procedural questions for the arbitrator, and questions of arbitrability for the court.” It acknowledged that a plurality of the Supreme Court in Green Tree Fin. Corp. v. Bazzle, 539 U.S. 444 (2003) had found that the availability of class arbitration “was a procedural one for the arbitrator” but then noted that more recent Supreme Court precedent—including Oxford Health Plans LLC v. Sutter, ___ U.S. ___, 133 S.Ct. 2064 (2013) and Stolt-Nielsen S.A. v. AnimalFeeds Intern’l Corp., 559 U.S. 662 (2010)—pointed in the opposite direction. Also guiding the Fourth Circuit’s analysis was the notion that review of class arbitrations is far more limited than traditional class actions, as well as the Supreme Court’s observation in Stolt-Nielsen that class-action arbitration “changes the nature of arbitration to such a degree that it cannot be presumed that the parties consented to it simply by agreeing to submit their disputes to an arbitrator.”

 

The Fourth Circuit recognized that parties could agree that the issue was one for the arbitrator to decide in the first instance, but it held that unless the parties “unmistakably” provided that the issue should be decided by the arbitrator, the availability of class arbitration was a threshold issue for the courts, not the arbitrator.

 

Practice Pointer: Counsel should be mindful of this decision, particularly when faced with an effort to seek class arbitration. Parties opposing class arbitration should immediately invoke the protection of the courts, and ask a court to decide the issue. On the other hand, if a party wants an arbitrator to decide the availability of class arbitration, the party should make that preference explicit and unequivocal in the governing arbitration clause.

 

Keywords: alternative dispute resolution, adr, litigation, class arbitration, class arbitrability, threshold question, procedural question, Stolt-Nielsen, Oxford Health Plans

 

Christopher S. Moore, Novack and Macey LLP, Chicago, IL

 

 

May 24, 2016

Texas Supreme Court Rejects Manifest Disregard


On Friday, the Supreme Court of Texas ruled that an arbitral award may not be vacated under the Texas Arbitration Act (TAA) based on common-law grounds. In Leonard K. Hoskins v. Colonel Clifford Hoskins and Hoskins, Inc., No. 15-0046 (May 20, 2016), two siblings were ordered to engage in arbitration over the allegedly improper transfer of certain mineral rights from their father’s estate. Following arbitration, Leonard, one of the siblings, asked a trial court to vacate the arbitrator’s decision under the TAA based on the arbitrator’s manifest disregard of the law. The trial court instead confirmed the award, and Leonard filed an appeal with Texas’ Fourth Court of Appeals in San Antonio.

 

On appeal, the San Antonio court held that the vacatur grounds enumerated in the TAA were exclusive. As a result, the appellate court declined to consider Leonard’s manifest disregard claim. The Fourth District also rejected Leonard’s argument that he was deprived of his statutory rights during arbitral proceedings. Ultimately, the court of appeals affirmed the trial court’s order confirming the arbitral award. Leonard then filed a petition for review with the Supreme Court of Texas.

 

In its written opinion, the Texas Supreme Court first examined “whether the enumerated grounds for vacatur delineated in the TAA are exclusive.” After reviewing the language in the TAA, the court stated:

 

The statutory text could not be plainer: the trial court “shall confirm” an award unless vacatur is required under one of the enumerated grounds in section 171.088. Id. § 171.087. As the court of appeals correctly determined, the TAA leaves no room for courts to expand on those grounds, which do not include an arbitrator’s manifest disregard of the law.

 

Next, the court dismissed Leonard’s argument that the arbitration award should be vacated because the arbitrator conducted the proceedings “in a manner that substantially prejudiced” his rights in violation of § 171.047 of the TAA. According to Leonard, the arbitrator committed error by issuing a final award without considering Leonard’s supplemental complaint which was filed after the arbitrator awarded summary judgment in favor of the Leonard’s relatives. After examining the record, the Court held “the arbitrator’s failure to conduct a second hearing did not amount to a violation of the TAA’s hearing requirements, nor did it ‘substantially prejudice’ Leonard’s rights.”

 

Keywords: alternative dispute resolution, adr, litigation, manifest disregard, summary judgment, prejudice, second hearing

 

Karl Bayer, Karl Bayer Dispute Resolution, Austin, TX

 

 

May 5, 2016

The Mediation Privilege: Grubaugh v. Hon. Blomo, County of Maricopa et al


Grubaugh addresses the limits of mediation confidentiality and highlights the split between jurisdictions that allow exceptions to the privilege for legal malpractice cases and those that don’t.

 

In Grubaugh, the plaintiff claimed that her former attorneys provided “substandard legal advice … during a family court mediation,” and claimed damages as a result of that poor advice. Her prior attorneys (the defendants) argued that the entire mediation process is privileged under Arizona law, hence communications allegedly made during and after such process related to the mediation cannot be used to support a legal malpractice claim. As a result, they argued, Grubaugh’s complaint should be dismissed.

 

Before addressing the Arizona Appellate Court’s opinion, it is important to be clear as to what was at issue. There was no claim that a confidentiality agreement (often an express agreement signed by all participants to a mediation) was breached or should be set aside. Rather, at issue was the applicability and scope of Arizona’s mediation privilege statute, which provides that

 

[t]he mediation process is confidential. Communications made, materials created for or used and acts occurring during a mediation are confidential and may not be discovered or admitted into evidence unless one of [four] exceptions [are] met.

 

The plaintiff did not assert that one of the applicable exceptions applied. Instead, she argued that by filing the legal malpractice action against her former counsel she waived the privilege, hence advice allegedly provided during and after the mediation could be used to support her law suit. The trial court agreed and permitted the action to proceed. The defendant lawyers appealed, and the Arizona appellate court reversed.

 

Explaining its decision, the Court differentiated mediation privilege in Arizona from attorney-client privilege.

 

The mediation process privilege, however, differs from the attorney-client privilege, which may be impliedly waived. [citation omitted]. The attorney-client privilege originated at common law and was subsequently codified by the Arizona legislature. At common law, the privilege was impliedly waived when a litigant's “course of conduct [was] inconsistent with the observance of the privilege.” [citation omitted]

 

In contrast to the attorney-client privilege, Arizona's mediation process privilege has no common law origin. It was created entirely by the legislature. Therefore, this court must rely upon the language of the statute to determine its meaning. Unlike waiver of the attorney-client privilege under the statute and common law, the statutory waiver provisions of the mediation process privilege are specific and exclusive [citation omitted].

 

Finding no applicable waiver under the statute, the Arizona Appellate Court held that the mediation privilege applied and therefore the alleged “substandard” advice could not be used to support plaintiff’s complaint. Accordingly, the case was dismissed.

 

This case is instructive for two reasons: First, it sets out the important lesson that mediation privilege is a creature of statute and not common law; second, there is a split among the states regarding the scope of mediation confidentiality and when/how mediation disclosures may be revealed. Bottom line: know the statutes governing the mediations you conduct.

 

Keywords: alternative dispute resolution, adr, litigation, mediation, privilege, waiver, attorney-client privilege, malpractice

 

Jim Reiman, ReimanADR, Evanston, IL

 

 

May 2, 2016

Do the AAA Commercial Rules Authorize an Award of Attorney Fees?


Gemalto, a leading international digital security company based in Amsterdam, reportedly won a $45 million arbitration award against Merchant Customer Exchange (MCE), a consortium of United States retailers that includes Wal-Mart, Target, and Kohl’s. Gemalto claimed that MCE, for its own convenience, terminated a contract to develop a mobile payment platform. The panel of three arbitrators awarded Gemalto contract damages plus more than $3 million in attorney’s fees.

 

MCE is seeking to have the award vacated on the ground that the arbitrators exceeded their authority by awarding Gemalto attorney’s fees. MCE argues that Texas law provides no basis for the arbitrators to award legal fees and that the parties did not include an attorney’s fee provision in their contract.

 

Gemalto acknowledges that neither Texas law nor the parties’ contract authorizes an award of legal fees, but nonetheless argues that the arbitrators acted properly. Gemalto notes that both parties asked the arbitration panel for an award of attorney’s fees in their submissions and that the parties agreed that the Commercial Rules of the American Arbitration Association apply to their arbitration. Gemalto further notes that AAA Commercial Rule 47(d) provides that when both sides request attorney’s fees, the arbitrators are empowered to award them. Thus, the parties’ countervailing requests to confirm or vacate the award presents the question of whether and under what circumstances AAA Rule 47(d) authorizes arbitrators to include attorney’s fees in their award.

 

The dispute highlights a lesson for all litigators: review the arbitration rules that apply to your case, and do not routinely include a prayer for attorney’s fees without considering that your request may provide the arbitrators with authority they otherwise might not have. To read more about this story visit the Texas Lawyer website.

 

Keywords: alternative dispute resolution, adr, litigation, attorney’s fees, American Arbitration Association, Commercial Rules, Rule 47

 

Mitchell L. Marinello, Novack and Macey LLP, Chicago, IL

 

 

April 25, 2016

Second Circuit Reinstates Brady's Suspension


The Second Circuit, in a 2–1 decision, reinstated the four-game suspension of Tom Brady based on his alleged involvement in deflating the footballs used in the 2015 American Football Conference Championship Game. In essence, the court held in National Football League Football Management Council et al v. NFL Players Association and Tom Brady (Case Nos. 15-2801 (L) & No. 15-2805 (CON), April 25, 2016) that the arbitration process was properly conducted and reversed the district court ruling that Brady had been denied a fair hearing.

 

Summary
After an investigation had been conducted by his outside counsel, Roger Goodell, the NFL Commissioner (Commissioner), suspended New England Patriots quarterback Tom Brady for four games for Brady’s alleged participation in a scheme to deflate the footballs used in the 2015 American Football Conference Championship Game. Brady requested an arbitration hearing to review his suspension, and Goodell exercised his discretion under the NFL collective bargaining act to serve as the arbitrator. Goodell denied certain discovery requested by Brady, and, after an evidentiary hearing, issued an award upholding the suspension. The district court vacated the award on the ground that Brady did not have adequate notice that he could be subject to a suspension, rather than just a monetary fine, and for lack of fundamental fairness based on Goodell’s denial of Brady’s discovery requests. On appeal, the Second Circuit reversed and reinstated the award upholding Brady’s suspension.

 

Standard of Review
The Second Circuit stated that its role was limited to determining whether the arbitration proceedings and award met “the minimum legal standards established by the Labor Management Relations Act, 29 U.S.C. §141 et seq.” In essence, this meant that the court was obliged to determine if the arbitrator was “even arguably construing or applying the contract and acting within the scope of his authority” and did not “ignore the plain language of the contract.”



Basis for Decision
The court noted that, under the collective bargaining agreement (CBA) between the NFL Players Association and the NFL, the Commissioner was authorized to investigate possible rule violations, impose sanctions, and preside over arbitration proceedings that challenged the sanctions that he imposed. The court stated that, although such a regime was unusual, it was the system the parties had agreed upon, and the court’s role was not to question it.

 

The court then went on to review the facts revealed in the investigative report, as well as subsequent facts cited by the Commissioner indicating that Brady deliberately had caused his cell phone to be destroyed even though he knew that the investigators wanted to examine it for evidence. Given all of the circumstances, the court reached the “firm conclusion” that the Commissioner acted within his authority and that there was no basis for reversal.

 

The district court had vacated the award on the ground that Brady was denied certain discovery, including testimony from the NFL’s general counsel and access to the notes of the law firm that prepared the investigative report for the NFL, and on the ground that Brady did not receive adequate notice that his actions could lead to a suspension instead of merely a fine. The Second Circuit rejected all of these arguments.

 

As to notice, the Court stated that Article 46 of the CBA gave the Commissioner broad authority to take disciplinary action against a player whom he “reasonably judge[s]” to have engaged in “conduct detrimental to the integrity of, or public confidence in, the game of professional football.” Moreover, the provisions relating to equipment violations and monetary fines that Brady cited did not specifically cover tampering with footballs and did not say that discipline for violations would be limited to fines. Indeed, those provisions stated that discipline other than fines could be imposed, including “suspension.” Ultimately, the court had no trouble concluding that Goodell’s interpretation of his authority under the CBA was at least “barely colorable” which “is all the law requires.”

 

As for the discovery issues, the court stated that procedural questions “such as which witnesses to hear and which evidence to receive or exclude, are left to the sound discretion of the arbitrator and should not be second guessed by the courts.” The court regarded the testimony of the NFL’s General Counsel as collateral to the issues presented at the arbitration. The court also stated that applicable arbitration rules did not provide for extensive discovery, but required only that both sides exchange the exhibits they intended to rely upon at the hearing. The court held that Goodell acted within his discretion in refusing to require the investigative file to be turned over, particularly when Goodell had not reviewed that file in making his decision but had relied only upon the final investigative report.

 

Finally, the court also briefly addressed Brady’s challenge that the Commissioner was evidently partial because, as arbitrator, he was reviewing his own actions and decision. The Court stated simply:

 

Here, the parties contracted in the CBA to specifically allow the Commissioner to sit as the arbitrator in all disputes brought pursuant to Article 46, Section 1(a)….Had the parties wished to restrict the Commissioner’s authority, they could have fashioned a different agreement.

 

Keywords: alternative dispute resolution, adr, litigation, Labor Management Relations Act, LMRA, fines, suspension, discretion, discovery, evident partiality

 

Mitchell L. Marinello, Novack and Macey LLP, Chicago IL

 

 

April 19, 2016

A Mediation Provision Is a Condition Precedent to Litigation


In MB America, Inc. v. Alaska Pac. Leasing, 132 Nev. Adv. Op. 8 (Feb. 4, 2016), the Nevada Supreme Court enforced a contract’s mediation provision as a condition precedent to litigation.

 

MB America (MBA), the supplier of rock-crushing machines, and Alaska Pacific Leasing Company (Alaska), the distributor of the rock-crushing machines entered into a contract whereby Alaska agreed to become a dealer for MBA’s products. A dispute arose, and MBA filed a complaint seeking specific performance of the contract’s mediation provision. Alaska filed a motion for summary judgment arguing that the case should be dismissed because MBA had failed to comply with the contract’s mediation provision. The lower court granted Alaska’s motion. Id. at 2.

 

On appeal, the Nevada Supreme Court addressed whether the contract’s mediation provision was a condition precedent to litigation and whether MBA complied with the mediation provision. On both points, the supreme court affirmed the lower court’s grant of summary judgment in favor of Alaska.

 

The court first addressed MBA’s argument that the mediation provision was not a condition precedent. The relevant provision states that “[t]he parties agree that any disputes or questions arising hereunder. . . shall be submitted to mediation. . . . If mediation between the parties does not result in a mutual satisfying settlement within 180 days after submission to mediation, then each party will have the right to enforce the obligations of this Agreement in the court of law of Reno, Nevada.” Id. at 5.

 

The court held, as a matter of first impression in Nevada, that the mediation provision of the contract was an enforceable condition precedent to any litigation. In reaching this conclusion, the court relied on DeValk Lincoln Mercury, Inc. v. Ford Motor Co., 811 F.2d 326, 336 (7th Cir. 1987)and Tattoo Art, Inc. v. TAT International, LLC, 711 F.Supp.2d 645, 651 (E.D.Va. 2010). Both cases had found that a mediation provision was similarly unambiguous in requiring that parties comply with mediation as a condition precedent to litigation. Id. at 3–5.

 

Having found that the mediation provision was a condition precedent, the supreme court next addressed whether MBA had complied with the mediation provision by initiating mediation prior to filing its complaint, or whether MBA’s compliance was excused.

 

The court noted that, to initiate mediation, a party must first request mediation. MBA argued that it was not required to comply with the mediation provision because Alaska had waived mediation by rejecting MBA’s mediation requests. In support of its position, MBA proffered two letters. In the first letter, MBA claimed it “requested mediation.” The court rejected that characterization, pointing out that MBA had not “requested” mediation, but instead merely stated that “[h]opefully [mediation] will not be necessary.” Id. at 8–9.

 

The second letter MBA put forward was from Alaska. MBA claimed that, in that letter, Alaska rejected mediation when it wrote that the mediation provision did not apply to the parties’ dispute. The court disagreed with MBA’s characterization of Alaska’s letter as a “rejection” of mediation. Rather, the court interpreted the letter as stating Alaska’s belief that mediation did not apply. The court did not regard that statement as a categorical rejection of MBA’s request for mediation. Id. at 9–10.

 

The lessons from this case are clear. First, a court is likely to enforce as a condition precedent a contract provision that requires mediation to take place before a lawsuit is filed. Second, to comply with such a condition precedent, a party must convey a clear request to mediate and receive the equivalent of a clear response. If the request and response are not clear, a court may be unwilling to find that the party complied with the condition precedent or that the other party “rejected” the mediation request.

 

Keywords: alternative dispute resolution, adr, litigation, mediation, request to mediate, condition precedent, summary judgment

 

Eileen Boyle, Novack and Macey LLP, Chicago, IL

 

 

April 18, 2016

Mesa Fails to Establish Renewable Energy Discrimination Claims Against Canada


A Texas-based renewable energy company has reportedly lost a North American Free Trade Agreement (NAFTA) claim filed against the Canadian government following arbitral proceedings. In Mesa Power Group LLC v. Government of Canada, No. 2012-17, Mesa accused the government of Ontario, Canada of engaging in discrimination against the private wind-energy company that was founded by Texas oil tycoon T. Boone Pickens. In the case, Mesa claimed the provincial government gave preference to other energy companies following private meetings with Ontario officials. As a result, Mesa sought over $600 million in damages from the Canadian government related to several wind-energy projects Mesa intended to build in Ontario that never came to fruition.

 

According to the U.S. Department of State,

 

Mesa Power Group, LLC, a renewable energy company incorporated in Delaware, filed a NAFTA Chapter Eleven claim against the Government of Canada in October 2011, alleging arbitrary and unfair application of various government measures related to the regulation and production of renewable energy in Ontario. Claimant alleges that Canada has violated various NAFTA provisions, including Article 1102 (national treatment), Article 1103 (most favored nation treatment), Article 1105 (minimum standard of treatment), and Article 1106 (prohibition on performance requirements).

 

In October 2014, Mesa’s claims against Canada were heard by a NAFTA arbitration tribunal using the rules of the United Nations Commission on International Trade Law (UNCITRAL) and organized by the Permanent Court of Arbitration. Earlier this month, the arbitration panel ruled in favor of the Canadian government and ordered Mesa to pay Canada nearly $3 million in legal fees.

 

Although the tribunal’s written decision is not yet available, the entirety of the arbitral proceedings may be viewed online.

 

Keywords: alternative dispute resolution, adr, litigation, NAFTA, UNCITRAL, Canada, energy, discrimination

 

Karl Bayer, Karl Bayer Dispute Resolution, Austin, TX

 

 

April 6, 2016

Attack an Arbitration Agreement with a Rifle, Not a Shotgun


When a contract contains multiple severable agreements to arbitrate—including an agreement that the arbitrator itself will determine arbitrability—a party seeking to challenge the contract’s enforceability must challenge the specific arbitration clause at issue. Brennan v. Opus Bank, 796 F.3d 1125 (9th Cir. 2015). In short, you need to attack an arbitration provision with a rifle, not a shotgun.

 

Brennan signed an employment agreement when he took an executive position with Opus Bank. The employment agreement provided that Brennan could terminate his employment for “Good Reason” and receive a substantial severance payment. Brennan believed there had been a material negative change in his work responsibilities, so he sent Opus Bank a Notice of Termination with Good Reason. Opus Bank hired an independent attorney to investigate whether Brennan’s termination was in fact for Good Reason. After receiving the attorney’s report, Opus Bank determined that Brennan lacked Good Reason to terminate his employment, so Opus Bank advised Brennan that it considered his Notice of Termination as a voluntary resignation, for which Brennan would not be entitled to a severance payment.

 

Although the employment agreement contained an arbitration provision, Brennan filed a breach of contract lawsuit in federal court, arguing that his causes of action should be resolved by litigation, not arbitration, because the arbitration provisions were unconscionable, and therefore unenforceable.

 

Opus Bank responded with a motion to strike Brennan’s complaint and a motion to compel arbitration. The bank’s motions argued that like the parties’ dispute over Brennan’s termination, the unconscionability of the arbitration clause had to be decided by the arbitrator. The bank asserted that the court lacked jurisdiction because the employment agreement expressly incorporated the Rules of the American Arbitration Association (AAA), one of which states that the “arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the…validity of the arbitration agreement.” The district court granted the bank’s motion and dismissed the complaint.

 

On appeal, the Ninth Circuit made two complementary findings. First, the court held that incorporation of the AAA rules constitutes clear and unmistakable evidence that the contracting parties agreed to arbitrate arbitrability. Having made the first determination, the court noted that the parties’ contract effectively contained three agreements: (1) Brennan’s employment agreement, (2) the arbitration clause, and (3) the incorporation of the AAA rules that delegates enforceability questions to the arbitrator.

 

Following the Supreme Court’s decision in Rent–A–Center, West, Inc. v. Jackson, 561 U.S. 63, 130 S.Ct. 2772, 177 L.Ed.2d 403 (2010), the court held that when a contract contains multiple, severable agreements to arbitrate, it is critical for a party challenging one of the nested provisions to do so specifically, rather than merely challenging the arbitration clause as a whole. Because Brennan’s contract with the bank was about employment, not exclusively about arbitration, Brennan was required to specifically challenge the enforceability of the provision delegating arbitrability questions to the arbitrator in order to bring the dispute within the court’s purview. Since he did not do so, the court upheld the dismissal of his complaint.

 

Practice Pointer: An agreement incorporating the AAA rules that delegate enforceability questions to the arbitrator contains multiple layers of arbitration provisions—both an agreement to arbitrate and an agreement to delegate questions of enforceability to the arbitrator. For a court to hear a dispute over enforceability, therefore, a party must specifically attack the contract’s delegation provision.

 

Keywords: alternative dispute resolution, adr, litigation, Federal Arbitration Act, delegation, arbitrability

 

Scott D. Simon, Goetz Fitzpatrick LLP, New York, NY

 

 

March 23, 2016

Appellate Decision Compelling Arbitration Must Address All Defenses


The Supreme Court of Texas has overturned an order compelling arbitration that was issued by the El Paso Court of Appeals. The decision turns on the appellate court’s failure to address all of the defendant’s arguments supporting her position that the parties’ arbitration agreement was invalid.

 

In Cardwell v. Whataburger Restaurants LLC, No. 14-1019 (February 26, 2016), Yvonne Cardwell, an El Paso dishwasher, signed a pre-employment acknowledgement stating she understood that any work-related or injury disputes with her employer, Whataburger, would be resolved by arbitration in Dallas. After becoming injured at work, Cardwell filed a lawsuit against her employer in El Paso.

 

In response to her complaint, Whataburger filed a motion to compel arbitration. Cardwell responded by arguing that the parties’ arbitration agreement was invalid, procedurally unconscionable, and illusory. In addition, Cardwell argued the Federal Arbitration Act did not apply to the dispute, and the arbitral agreement was unenforceable under state law. Although Whataburger eventually agreed to hold the arbitration in El Paso, the trial court denied the company’s motion to compel arbitration. According to the trial court, the parties’ agreement to arbitrate was unconscionable.

 

Whataburger filed an interlocutory appeal with the Eighth District Court of Appeals in El Paso. The appellate court found that Cardwell failed to demonstrate the parties’ arbitration agreement was unconscionable, reversed the lower court’s decision denying Whataburger’s motion to compel arbitration, and remanded the case with instructions to compel arbitral proceedings. You can read more about the Eighth District’s decision in a previous Disputing blog post.

 

On appeal to the Supreme Court of Texas, Cardwell claimed the appellate court failed to address each of her asserted grounds for denying Whataburger’s motion to compel arbitration. In a per curium decision that was issued without oral argument, the state high court ruled that Texas’ appellate court committed error when it remanded the case with instructions to compel arbitration.

 

Since “Cardwell’s various arguments were briefed by both parties,” the Texas Supreme Court stated:

 

The court of appeals “must hand down a written opinion that . . . addresses every issue raised and necessary to final disposition of the appeal.” TEX. R. APP. P. 47.1. The court of appeals could not order arbitration without either addressing Cardwell’s arguments or remanding the case to the trial court to address them. See Cincinnati Life Ins. Co. v. Cates, 927 S.W.2d 623, 626 (Tex. 1996).

 

Accordingly, we grant Cardwell’s petition for review and without hearing oral argument, TEX. R. APP. P. 59.1, reverse the judgment of the court of appeals and remand the case to that court for further proceedings.

 

However this case is ultimately decided, it is clear that arbitration’s goals of being faster and less expensive than litigation will not be achieved. When faced with a decision that is favorable but incomplete, future Texas litigants may wish to consider preempting an appeal by moving for reconsideration and asking the court to address any significant arguments its opinion has omitted.

 

Keywords: alternative dispute resolution, adr, litigation, unconscionable, every issue raised, incomplete opinion, remand

 

Karl Bayer, Karl Bayer Dispute Resolution, Austin, TX

 

 

March 15, 2016

American Rule Governs Attacks on Arbitration Awards


In Zurich American Ins. v. Team Tankers AS, Case No. 14-4036-cv (January 28, 2016), the Second Circuit held that a carrier who prevailed in arbitration was not entitled to recoup the fees and costs it incurred in its efforts to confirm the arbitration award in court.

 

The carrier had transported the chemical acrylonitrile (ACN) for a customer. The customer brought arbitration claiming the carrier had improperly handled the ACN during the voyage and caused it to yellow and decline in value. After losing the arbitration, the customer opposed the carrier’s effort to confirm the arbitration award. The lower court confirmed the award and held that the carrier was entitled to recover its attorney’s fees and costs in the confirmation proceedings. In overturning that decision, the Second Circuit stated:

 

Our basic point of reference when considering the award of attorney's fees is the bedrock principle known as the American Rule: Each litigant pays his own attorney's fees, win or lose, unless a statute or contract provides otherwise." Baker Botts L.L.P. v. ASARCO LLC, 135 S. Ct. 2158, 2164 (2015). In the proceeding below, the District Court determined that this "default rule," id. at 2168, was displaced by contract. The Court awarded fees and costs to the respondent carrier under a provision of the charter agreement which reads: "BREACH. Damages for breach of this Charter shall include all provable damages, and all costs of suit and attorney fees incurred in any action hereunder."

 

The court found the lower court’s reasoning to be in error. It stated that the contractual provision in question authorizes a fee award against a party that breaches the charter agreement, but that there was no finding below that the customer (who lost its contract claim against the carrier) had breached the charter agreement. As a result, the contractual provision did not apply.

 

The customer then argued that a fee award would be proper as a matter of statutory law, but the court also rejected that argument:

 

The [customer] argues in the alternative that the award can be sustained under 28 U.S.C. § 1927, which authorizes a court to assess "costs, expenses, and attorneys' fees" against any attorney who "so multiplies the proceedings in any case unreasonably and vexatiously." But an award under § 1927 is proper only "when there is a finding of conduct constituting or akin to bad faith." State St. Bank v. Inversiones Errazuriz, 374 F.3d 158, 180 (2d Cir. 2004) (internal quotation marks omitted). The attorney's actions must be "so completely without merit as to require the conclusion that they must have been undertaken for some improper purpose such as delay." Id.

 

The court held that the record did not support a finding of bad faith or improper purpose. It reasoned that the customer's arguments on appeal were tied to recognizable legal concepts. Thus, the customer’s manifest-disregard argument relied on the proposition that arbitrators manifestly disregard the law when the facts they find flatly and obviously preclude the legal conclusions they reach. The customer’s "corruption" and "misbehavior" arguments relied on the disclosure-based framework that the court had applied in evident-partiality cases. See, e.g., Applied Indus. Materials Corp. v. Ovalar, 492 F.3d 132, 137-38 (2d Cir. 2007). The court stated that the customer’s arguments were not convincing, but it held that they were “not so unconvincing as to require the conclusion that they [were] made for an improper purpose.”

 

Practice Pointers: The American Rule is a firm rule of law, and it will not be overridden simply because a party challenges an arbitration award and loses. Accordingly, counsel drafting arbitration agreements should consider adding a provision that specifically provides that, if the arbitration award is challenged, the prevailing party shall be entitled to recover its attorney’s fees in any legal proceedings that follow. Note that the contractual language here suggested that result but did not cover every situation. Note also that unsuccessful challenges to an arbitration award will not support an award of attorney’s fees under 28 U.S.C. § 1927 unless they are so meritless that they support a finding of bad faith.

 

Keywords: alternative dispute resolution, adr, litigation, attorney’s fees, costs, American Rule, confirmation of award, § 1927, bad faith

 

Mitchell L. Marinello, Novack and Macey LLP, Chicago, IL

 

 

March 7, 2016

Arbitration Clause Covers Disputes Over Related Agreements


By summary order issued March 4, 2016 in Hatemi v. M & T Bank, the Second Circuit reversed the district court’s denial of a motion to compel arbitration. The decision provides an interesting example of how an arbitration clause can cover disputes over related disputes, even when those disputes concern a separate agreement.

 

In Hatemi, the plaintiff claimed that he did not want overdraft protection and had never signed an overdraft protection agreement with the bank but that the bank had charged him fees for overdraft protection anyway. The report of the magistrate judge, which was accepted by the district court, recognized that the arbitration clause in the plaintiff’s account agreement was broad, but focused on the bank’s listing of certain agreements as the governing documents for the account. That list did not include any overdraft protection agreement—even though the bank generally had customers sign overdraft protection agreements in order to obtain overdraft protection. The bank’s motion to compel arbitration was denied, because the arbitration clause was held not to apply to the overdraft agreement that directly governed the customer’s obligation to pay overdraft protection fees.

 

The Second Circuit disagreed with this outcome, because it found that the parties’ arbitration clause was broad enough to cover any dispute related to the account or any services provided in connection with the account. The arbitration clause stated:

 

Each dispute or controversy that arises out of or is related to your account with us, or any service we provide in connection with your account or any matter relating to your or our rights and obligations provided for in this agreement or any other agreement between you and us relating to your accountor a service provided by us in connection with your account, whether based on statute, contract, tort, fraud, misrepresentation or any other legal or equitable theory, including any claim for interest and attorney’s fees, where applicable (any “Claim”) must be determined on an individual basis by binding arbitration in accordance with the Federal Arbitration Act (“FAA”—Title 9 of the United States Code) under the auspices of the American Arbitration Association (“AAA”).

 

The Second Circuit reasoned that issues concerning overdraft protection and the fees charged to that service were “indisputably related to Hatemi’s account and to a service provided in connection with his account.” Accordingly, it held that the arbitration clause in the account agreement “extends to the instant dispute regardless of whether the disputed overdraft protection agreement is incorporated into the Account Agreement or even exists.” The court added that any fact issues concerning whether the parties made an overdraft protection agreement could be raised and resolved in the arbitration itself.

 

This practical decision demonstrates that an arbitration clause should be interpreted as written and that, when an arbitration clause is broad, it can cover disputes that relate to the parties’ relationship, even including a dispute over the existence or non-existence of a separate agreement that did not contain an arbitration clause.

 

Keywords: alternative dispute resolution, litigation, adr, overdraft protection, broad arbitration clause, related agreement

 

Michael S. Oberman, Kramer Levin Naftalis & Frankel LLP, New York NY


 

March 3, 2016

Waiver Is for the Court; Fraudulent Inducement Is for the Arbitrator


In September 2014, a New York district court dismissed a complaint for breach of contract and fraudulent inducement and compelled the parties to arbitrate. Ralph Lauren Corp. v. U.S. Polo Ass'n, No. 13 Civ. 7147, 2014 WL 4377852 (S.D.N.Y. Sept. 04, 2014). The case stands for the proposition that the courts generally decide whether a party has waived its right to arbitrate and that arbitrators generally decide claims of fraudulent inducement.

 

For many years, Ralph Lauren Corporation (RLC) and certain of its affiliates were involved in trademark litigation in the Southern District of New York with the United States Polo Association (USPA), which is the governing party in charge of the sport of polo. In 2003, two of RLC’s subsidiaries, PRL USA Holdings, Inc. (PRL) and Polo/Lauren Company, L.P. (PLC) entered into a settlement agreement (Settlement Agreement) with USPA, which also bound USPA’s licensees in different international locations. The agreement provided USPA and its licensees with the right to use certain “Settlement Marks” so long as they: (1) displayed a prominent hangtag that said “not affiliated with Polo Ralph Lauren”; and (2) adhered to certain restrictions concerning the manner in which the apparel using the settlement marks was promoted, advertised and sold.

 

The Settlement Agreement contained a broad arbitration clause that provided that any controversy between PRL and USPA or any of USPA’s affiliates or licensees would be resolved through arbitration administered by the American Arbitration Association’s International Centre for Dispute Resolution (ICDR) and would take place in the city that was the principal place of business of the USPA licensee involved in the dispute. It also bound the parties to bring any litigation concerning the Settlement Agreement in New York.

 

In September 2007, Arvind Brands (Brands), a division of Arvind Limited, entered into a licensing agreement with USPA that permitted Brands to use the Settlement Marks on apparel and other products in India. In connection with this, Brands signed a separate agreement agreeing to be bound by the terms of the Settlement Agreement. Thereafter, USPA and Brands developed a substantial business in India selling apparel and other items that used the Settlement Marks.

 

In 2009, Arvind Limited demerged Brands and turned it into a subsidiary named Arvind Lifestyle Brands Limited (ALBL). Under Indian law, all of Brands’ duties and liabilities were transferred to ALBL and Arvin Limited was relieved of those duties and liabilities. Apparently, neither RLC nor its subsidiaries knew that Arvind Limited had created this subsidiary.

 

In December 2012, RLC notified both USPA and Arvind Limited that Arvind Limited had manufactured and sold products in India with hangtags that violated RLC’s trademarks and rights under the Settlement Agreement. RLC then initiated arbitration against USPA and Arvind Limited in India. RLC did not include its subsidiaries PRL and PLC in the arbitration nor did it name ALBL as a respondent. Arvind and ALBL responded by filing suit against RLC in India, arguing that RLC had no right to enforce its subsidiaries’ rights under the Settlement Agreement and that ALBL, and not Arvind Limited, was the proper party to the Settlement Agreement and the arbitration.

 

On August 27, 2013, the India court entered an interim injunction tentatively holding that RLC was not the proper party to initiate suit to enforce rights under the Settlement Agreement. This injunction was to remain in force for a few days until RLC filed its objections and the court could consider them. RLC did not respond to the injunction nor did it add PRL and PLC as parties to the arbitration. Instead, it withdrew from the arbitration and, along with PRL and PLC (collectively, RLC Parties) filed suit in the Southern District of New York where it raised a variety of contract and other claims. Not long thereafter, ICDR stayed the arbitration proceedings, and Arvind Limited and ALBL voluntarily dismissed their lawsuit in the India court.

 

USPA and Arvind responded to the RLC Parties’ lawsuit by moving to compel arbitration. The RLC Parties objected, claiming that USPA and Arvind had fraudulently induced them to enter into the Settlement Agreement and then engaged in an “international shell game” by demerging Brands into a separate corporate entity. They also asserted that USPA and Arvind had waived their right to arbitration by filing suit in India.

 

The district court ruled that the issue of waiver was for the court, not the arbitrator, to decide. It then denied the RLC Parties’ waiver defense because the RLC Parties could not show that the India lawsuit prejudiced them in any meaningful way. The court noted that USPA and Arvind were not trying to relitigate any issue by invoking arbitration, the India court had not decided any dispositive motions, and there had been no excessive delay on the part of USPA and Arvind. Instead, any delay and any expense that the India lawsuit had imposed on the RLC Parties was the result of the RLC Parties’ attempt to avoid arbitration in favor or litigation in New York.

 

Turning to the issue of fraudulent inducement, the district court noted that although the RLC Parties made general challenges to the Settlement Agreement and the Consent Agreement, they did not attack the validity of the arbitration clause included in those agreements. Accordingly, pursuant to Rent-A-Center, West, Inc. v. Jackson, 561 U.S. 63, 71, the court held that it was for the arbitrator to decide the RLC Parties’ fraudulent inducement claims, and it granted USPA and Arvind’s motion to compel arbitration.



Practice Pointers: This case illustrates two points about arbitral jurisdiction. First, it holds that, at least in the Second Circuit, the assertion that a party has waived its right to arbitration is an issue for the court to decide. Second, it reinforces the principle, increasingly well-supported, that fraudulent inducement claims are for the arbitrator to decide unless the party opposing arbitration alleges that it was fraudulently induced into the actual agreement to arbitrate.

 

Keywords: litigation, alternative dispute resolution, adr, prejudice, excessive delay, waiver, fraudulent inducement

 

Rebecca Smart, J.D. Candidate 2017, DePaul University College of Law, Chicago IL


 

February 24, 2016

Arbitration Under Political Attack


In the continuing story of political challenges in the U.S. to consumer and similar types of arbitration, Public Citizen, the advocacy NGO, recently filed a petition with the U.S. Department of Education asking the Department of Education to bar federal funding of for-profit educational institutions that require students to enter into pre-dispute arbitration clauses, whether in enrollment papers or other agreements.

 

Public Citizen argues that “the Higher Education Act allows the Department of Education to cut off Title IV funding to schools that are not capable of providing the education they promise, and it permits the agency to impose conditions on funding. The rule sought by Public Citizen’s petition is within the department’s authority and should be adopted without delay.” Public Citizen also argues in its petition that such a ban would be consistent with the Federal Arbitration Act. See pp. 23–24 of the petition.

 

Public Citizen’s petition parallels a request made by nine sitting U.S. Senators to DOE last week. The letter from the Senators (Sens. Dick Durbin (D-IL), Sherrod Brown (D-OH), Richard Blumenthal (D-CT), Barbara Boxer (D-CA), Al Franken (D-MN), Ed Markey (D-MA), Jeff Merkley (D-OR), Chris Murphy (D-CT), and Sheldon Whitehouse (D-RI).

 

 The Senators argue that the U.S. Higher Education Act's provisions requiring schools to enter into program participation agreements with the Department can be employed to require a ban on mandatory arbitration as a condition for schools receiving federal funds. “Moreover,” wrote the Senators, “it is very clear that the federal government can impose contractual conditions on the receipt of federal funds. See South Dakota v. Dole, 483 U.S. 203 (1987).”

 

Similarly, a senior staff attorney in the New York Legal Assistance Group Special Litigation Unit has made the same recommendation (“on behalf of the Legal Aid Community”) to the Department of Education as part of DOE’s ongoing “negotiated rulemaking” on higher education issues.

 

If the argument that a federal agency may, based on broad regulatory purposes in federal legislation, condition the availability of federal funds on recipients banning pre-dispute arbitration clauses is correct, then that principle would apply to all federal funding programs, not solely to federal funding of educational programs. However, South Dakota v. Dole, cited by these Senators, was not an arbitration case. South Dakota v. Dole concerned the National Minimum Drinking Age Act which Congress passed in 1984. That Act withheld 5 percent of federal highway funding from States that did not maintain a minimum legal drinking age of 21. South Dakota, which at the time allowed 19-year-olds to purchase low-alcohol 3.2 percent beer, challenged the law, but lost at the Supreme Court. Thus, the situation in South Dakota involved specific a Congressional mandate to withhold federal funds unless the State complied with the specific federal drinking age policy.

 

Here, of course, the Higher Education Act, which was passed decades ago, says nothing about conditioning federal funding on a bar to pre-dispute arbitration clauses, nor do any provisions of the Higher Education Act address the Federal Arbitration Act’s long-standing approval of arbitration agreements generally. Unlike the situation at issue in South Dakota v. Dole, therefore, Congress cannot be said to have expressly modified the Federal Arbitration Act in other legislation to authorize barring pre-dispute arbitration agreements by for-profit educational institutions.

 

As should be apparent, this seems to be a coordinated advocacy effort among certain NGOs and Members of Congress critical of arbitration.

 

It will be interesting to see if interested for-profit educational institutions or any arbitration institutions, oppose these petitions.

 

Keywords: alternative dispute resolution, adr, litigation, advocacy, politics, for-profit education, federal funding

 

Mark Kantor, Member of College of Commercial Arbitrators, Washington, D.C.


 

February 18, 2016

Arbitration Award Overturned Because Panel Not Impartial


On November 4, 2015, the New York Supreme Court vacated an arbitration award concerning the right to televise baseball games on the ground that the arbitration panel was not impartial. The arbitration involved the Baltimore Orioles (Orioles), the Commissioner of Baseball (Commissioner) and the Washington Nationals (Nationals). TCR Sports Broadcasting Holding, LLP d/b/a Mid Atlantic Sports Network (“MASN”) v. WN Partner, LLC, No. 652011/2014.  

 

The arbitration proceedings were governed by the Revenue Sharing Definitions Committee of Major League Baseball. Mid Atlantic Sports Network (MASN) and the Orioles moved to vacate the award, and their motion was opposed by the Commissioner and the Nationals who moved to confirm the award.

 

The court reviewed the award pursuant to the FAA because of the dispute’s impact on interstate commerce. Accordingly, the review was extremely limited and the burden of proof lies with MASN and the Orioles to show that the award should be vacated.

 

In its decision, the court discussed each of the elements for vacating an award under the FAA, including corruption, fraud, arbitrator misconduct, the use of undue means to procure the award, evident partiality, and corruption. The court rejected each of these grounds except for evident partiality.

 

The finding of evident partiality was based on the fact that Proskauer Rose LLP, the law firm representing the Nationals and the Commissioner in the arbitration, concurrently represented in unrelated matters every entity in the arbitration, including the individual arbitrators, except for MASN and the Orioles. In fact, the same lawyers handling the arbitration were involved in each of the other representations. The court noted that:

 

To the extent that "there is no authority for a finding of 'evident partiality' in such a relationship," the Court suspects ''the simple reason for this lack of precedent is that arbitrators in similar situations have disqualified themselves rather than risk a charge of partiality."

 

In its finding the court pointed out that the “appearance of bias” is not a basis under the FAA so that it was not able to rely upon the appearance of bias as a ground for vacating the award. However, the court stated that it would have used this ground as a basis for vacatur had it been legally available. The court found that MASN and the Orioles had established that their frequent claims of prejudice based on Proskauer’s selection as counsel were completely ignored by the arbitration panel, objectively demonstrating “ an utter lack of concern for fairness of the proceeding that is ‘so inconsistent with basic principles of justice’ that the award must be vacated.”

 

Practice Pointers: Parties and their counsel need to recognize that impartiality is an important principal in arbitration and that arbitrators must recuse themselves when a significant conflict of interest is apparent. Here, either the arbitrators or Proskauer should have been recused. Obviously, there is little point in winning an arbitration only to have it overturned by the courts particularly where the entire problem could have been avoided by being more circumspect at the outset.

 

Keywords: alternative dispute resolution, litigation, impartial, evident partiality, bias, vacating, vacatur

 

Barry Leigh Weissman, Carlton Fields, Los Angeles, CA, and New York, NY


 

February 18, 2016

New York Court Refuses to Enforce Arbitral Subpoenas


A New York trial court recently addressed the availability of discovery in a pretrial arbitration hearing.


The Empire State Building Company moved for an order compelling defendant Michael Day and non-party Carmen Canas to comply with subpoenas for documents and testimony issued by an arbitration panel of the American Arbitration Association. Empire State Bldg. Co. LLC v New York Skyline, Inc. (Sup. Ct., N.Y. County, Feb. 11, 2014).


The Supreme Court of New York (the trial court), held that neither the Federal Arbitration Act (FAA) nor the New York Uniform Code authorize the issuance of a subpoena for the production of documents or the taking of testimony during a pretrial arbitration hearing. Id. Instead, subpoenas can be issued only for the production of documents or the presentation of testimony at the arbitration hearing on the merits. Accordingly, the court refused to enforce either subpoena. Id.


The court examined the limitations of the subpoena powers granted to the arbitration panel under the relevant provisions of the New York procedural code (CPLR 2302 and CPLR 7505). The court found that CPLR 2302 and 7505 empower an arbitrator to issue subpoenas only to procure evidence at a hearing on the dispute and not to compel attendance at deposition. The court also determined that CPLR 2302 is not intended to require non-parties to engage in pre-arbitration hearing disclosures or steps preparatory to the hearing. Similarly, the court determined that CPLR 7505 is limited to procuring evidence at the hearing of the dispute itself. Id.


The court also examined federal law. The court determined that The Empire State Building is a national and worldwide tourist destination and that the case therefore involved interstate commerce. As a result, the Federal Arbitration Act (FAA) applied. Citing Life Receivables Trust v. Syndicate 102 at Lloyds of London, 549 F3d 210 (2d Cir 2010), the court held that section 7 of the FAA does not authorize an arbitrator to compel pre-hearing document discovery from non-parties to the arbitration. The court also noted that: “One commentator has called an “emerging rule” that the arbitrator’s subpoena authority under section 7 of the FAA “does not include the authority to subpoena non-parties for prehearing discovery even if a special need or hardship is shown.” Thomas H. Oehmke, 3 Commercial Arbitration sec. 91:5 (2008). Id.


In summarizing the applicability of FAA section 7, CPLR 2302, and CPLR 7505 the court stated, “Based upon this legal authority, a judicial order to enforce the arbitration panel’s subpoenas of these non-party witnesses would be imprudent.”


Key words: litigation, alternative dispute resolution, CPLR 2302, CPLR 7505, subpoenas, discovery, prehearing, Federal Arbitration Act


Pritesh Patel, J.D. Candidate 2016, DePaul University College of Law, Chicago, IL


 

February 8, 2016

Oregon Court Blocks Use of Certain Mediation Statements in Malpractice Case


As mediation has become more common, perhaps it is inevitable that there are more malpractice complaints arising from attorneys’ handling of mediations. One frequently asked question is whether the mediation privilege, which generally makes mediation statements and conduct confidential and inadmissible in litigation between the parties, also prevents a client from using his attorney’s mediation statements or conduct to establish a legal malpractice claim.


On December 10, 2015, in a case of first impression (in Oregon), the Oregon Supreme Court addressed this question in the context of Oregon’s mediation statutes in Alfieri v. Solomon SC S062520. The court held that the Oregon statutes protect “only communications exchanged between the parties, mediators, representatives of a mediation program and other persons while present at mediation proceedings.” (Emphasis added.) The court held that the private communications between a client and his attorney outside the presence of the other mediation participants—such as statements made during a private conference between the lawyer and client —were not protected mediation communications, even if they directly related to the mediation. As a result, the client and the attorney both were entitled to use the statements made outside the actual mediation proceedings as evidence to assert or defend against a legal malpractice claim. Statements made during the mediation, however, when the mediator and/or the other party were present, were confidential and could not be used in the client’s legal malpractice case.


Like many other states, Illinois has adopted the Uniform Mediation Act, which also protects the confidentiality of statements made during mediation. Unlike the Oregon mediation statutes, however, section 6 of the Illinois Mediation Act, 710 ILCS 35/6, provides an express exception to the confidentiality of mediation statements for the purpose of asserting or defending against a malpractice claim. Thus, section 6 provides in relevant part that:


(a) There is no privilege under Section 4 [against disclosure, admissibility or discovery] for a mediation communication that is:

.   .   .


sought or offered to prove or disprove a claim or complaint of professional misconduct or malpractice filed against a mediation party, nonparty participant, or representative of a party based on conduct occurring during a mediation;



Although we have not found any Illinois cases discussing this provision, the wording of the statute seems plain enough. In Illinois generally, though with some exceptions, statements made during mediation are confidential and cannot be used in court proceedings between the parties. Nonetheless, statements made during mediation appear to be available for use to assert or defend against malpractice and misconduct claims that are based on actions or conduct that takes place during the mediation.


Practice Points: Attorneys asserting or defending malpractice or other misconduct claims arising in a mediation setting need to be conversant with the particular mediation statute in the relevant jurisdiction. It is worth noting, however, that under the Uniform Mediation Act, statements made during or in connection with the mediation may be discoverable and admissible as evidence.


Keywords: mediation, mediation privilege, malpractice or misconduct


Mitchell L. Marinello, Novack and Macey LLP, Chicago IL


 

February 2, 2016

Federal Court Affirms Partial Stay of Discovery


In January 2014, the Seventh Circuit affirmed a district court’s decision to partially lift a stay of discovery. The central issue was whether the district judge had authority to allow any discovery to proceed, when the fruits of the discovery might be relevant to or evidence in a related and pending foreign arbitration. GEA Group v. Flex-N-Gate Corp. Case Nos. 13-2135, 13-2594 (7th Cir. Jan. 10, 2014). The facts of the case follow.


In May 2004, GEA Group, a German engineering company, made a written agreement to sell a subsidiary to Flex-N-Gate, a U.S. manufacturer of auto parts. When the deal did not close, GEA alleged that Flex-N-Gate breached the contract and initiated arbitration in Germany. In 2009, GEA also brought suit in federal court in Illinois against Flex-N-Gate and Khan, its CEO. GEA alleged that Khan used his control to strip Flex-N-Gate’s of its assets and that Kahn was its alter ego and was personally obligated to pay an award if Flex-N-Gate could not do so. Meanwhile, Flex-N-Gate filed a counterclaim alleging that it had been induced to sign the contract by GEA’s misrepresentations.


GEA’s motion to stay all court proceedings, including discovery, was denied. In 2010, GEA appealed, and its appeal was denied because the court presumed that an arbitration award granted in GEA’s favor three days earlier was the end of the dispute. However, Flex-N-Gate convinced a German court to vacate that award and order a new arbitration. GEA then filed a new motion to stay discovery in the district court until the German proceedings were completed. The district court denied the motion, but, in 2011, the Seventh Circuit reversed and ordered the case stayed for all purposes until the arbitration proceedings were finished, because the case was “clearly governed by the arbitration provision in the Contract.” Id. at 4.


In May 2013, Flex-N-Gate asked the district court to reopen discovery, and GEA opposed that request. GEA stated that court proceedings were ancillary to the arbitration because GEA would drop its case if GEA lost in arbitration or if the final award were paid in full. GEA said that it would seek judgment in court only if Flex-N-Gate did not pay any award in full, in which instance, GEA wanted to pursue its fraudulent conveyance claims against Kahn so as to secure full payment. GEA argued that discovery was premature and a stay was required under section 3 of the FAA, because the issues the case were all referable to arbitration. Khan argued that his personal liability for any award against Flex-N-Gate was not at issue in the arbitration and that section 3 was therefore inapplicable. The district judge agreed with Kahn and lifted the stay for the limited purpose of allowing Khan to conduct discovery to defend himself from GEA’s claims. GEA appealed.


On appeal, GEA argued that its fraudulent conveyance claim against Khan could be barred by the statute of limitations before a final arbitration award was issued, and that the lawsuit it filed was designed to protect against this possibility and should not move forward until the arbitration was completed and its result known. The Seventh Circuit acknowledged the possibility that GEA’s claims could be time-barred, but it was not persuaded that GEA had effectively preserved that argument in its appeal. More importantly, the Seventh Circuit noted that GEA’s true argument was that Flex-N-Gate should not be permitted to take discovery in the court case because it might use that discovery in the German arbitration. The Seventh Circuit said that GEA brought that potential problem on itself by filing suit against Kahn, who was entitled to defend himself. Moreover, the German authorities would determine whether any information that came out of discovery could be used in the arbitration.


In short, the Seventh Circuit ruled that how the discovery was used in the German arbitration was not its concern, and Khan was entitled to defend himself by taking discovery. Accordingly, GEA’s appeal from the district court’s partial lifting of the stay on discovery was denied. Id. at 17.


Practice Points: This case emphasizes the importance of fully thinking through one’s litigation strategy—including its risks—before taking action, particularly if one is going to file a claim against a sophisticated and well-heeled party. With regard to foreign arbitration, the case illustrates that one of the risks of filing a lawsuit is that it may create a path to discovery that would otherwise not be available in an arbitration setting.


Keywords: alternative dispute resolution, adr, litigation, foreign arbitration, discovery, stay of proceedings, stay of discovery, fraudulent conveyance


Jessica De Bella, DePaul University College of Law, Class of 2017, Chicago, IL


 

January 19, 2016

Supreme Court Upholds Class Action Arbitration Waiver


In December 2015, the Supreme Court reversed yet another California decision relating to arbitration.


Plaintiff Imburgia was a DirecTV customer who subsequently cancelled her DirecTV service, thus subjecting her to cancellation fees. She, along with other plaintiffs who were charged cancellation fees, filed a class-action lawsuit claiming that DirecTV’s high cancellation fees were wrongful. The arbitration agreement in DirecTV’s contracts stated that “[n]either you nor we shall be entitled to join or consolidate claims in arbitration.” The arbitration agreement further stated that if the “law of your state” makes the waiver of class arbitration unenforceable, then the entire arbitration provision is unenforceable. The contract also said that the arbitration provision “shall be governed by the Federal Arbitration Act.”


The California trial court refused to send the case to arbitration and instead permitted the class action to move forward. This ruling appeared to be in direct conflict with federal law. In AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011),the Supreme Court ruled that the FAA preempted state laws—like the California statute—that invalidated arbitration agreements that prohibited plaintiffs from joining their claims together. DirecTV appealed the trial court’s decision to California Court of Appeals.


The California appellate court ruled that the contractual language stating that the FAA was the governing law was a “general” provision and that the language making the arbitration provision unenforceable if the “law of your state” made the waiver of class arbitrations unenforceable was a more specific provision. The appellate court then rather woodenly applied a tradition rule of contract construction that the specific governs the general, and it concluded that California law, not the FAA, governed the parties’ agreement and made the arbitration agreement unenforceable. The court also found the arbitration provision ambiguous and ruled that it should be construed against DirecTV, the drafter. Accordingly, it upheld the trial court’s decision. The California Supreme Court denied discretionary review, and DirecTV petitioned for a writ of certiorari to the United States Supreme Court.


The Supreme Court reversed. The Supreme Court stated that lower courts are bound to follow the previous holdings of the Supreme Court and that the ruling in AT&T v. Concepcion was controlling. Concepcion had invalidated the California statute at issue on the ground that it was preempted by the FAA. The Court also held that the relevant contract language was not ambiguous and should be given its ordinary and logical meaning. Thus, the words “unless the law of your state” make class waivers unenforceable referred to valid state laws, not invalid ones. The statute the California courts relied on was invalidated by Concepcion, thus making its application to the parties’ arbitration clause an error. The end result was that the arbitration agreement, including its ban on plaintiffs joining their claims together in one proceeding, was enforceable.


A practice tip for attorneys drafting agreements is that, if your client wants to include a class action waiver in its arbitration clause, you should make sure the language is concise and clear. You also may need to update the language periodically to reflect changes and clarifications in the law. You should consider that some state courts may be hostile to arbitration and not give those courts the opportunity to thwart your intentions. Obvious though it may be, not every case can support an appeal to the United States Supreme Court or be lucky enough to be granted certiorari! You also might as well include a provision stating that the FAA applies rather than taking a chance that a lower court may not acknowledge that your contract involves interstate commerce (as nearly all contracts do).


A practice tip for litigators is to take note that the Supreme Court has again upheld its holding (Concepcion) that class action bans are enforceable in arbitration clauses governed by the FAA.


Keywords: alternative dispute resolution, adr, litigation, state law, California, class action, class arbitration, enforceability


Frank Murray, DePaul University College of Law, Class of 2016, Chicago, IL

 


 

January 15, 2016

Governor Brown Vetoes California Bill Prohibiting Arbitration of Employment Claims


The California Legislature recently passed AB 465 which would have prohibited arbitration of claims arising under the California Labor Code in employment agreements.


Governor Brown vetoed the bill. Below is his veto message. Note his reference to the Supreme Court’s FAA decisions.


BILL NUMBER: AB 465
VETOED DATE: 10/11/2015


To the Members of the California State Assembly:


Assembly Bill 465 would outlaw the use of mandatory arbitration agreements as a condition of employment, making California the only state in the country to have this particular prohibition. I have reviewed in depth the arguments from both sides about the fairness and utility of mandatory arbitration agreements. While most evidence shows that arbitration is quicker and more cost-effective than litigation, there is significant debate about whether arbitration is less fair to employees. The evidence on actual outcomes in arbitration versus litigation is conflicting and unclear, with some studies showing employees receive more in arbitration while other studies show the opposite.


While I am concerned about ensuring fairness in employment disputes, I am not prepared to take the far-reaching step proposed by this bill for a number of reasons.


California courts have addressed the issue of unfairness by insisting that employment arbitration agreements must include numerous protections to be enforceable, including neutrality of the arbitrator, adequate discovery, no limitation on damages or remedies, a written decision that permits some judicial review, and limitations on the costs of arbitration. See, e.g., Armendariz v. Foundation Health Psychcare Services, Inc. 24 Cal. 4th 83 (2000). If abuses remain, they should be specified and solved by targeted legislation, not a blanket prohibition.


In addition, a blanket ban on mandatory arbitration agreements is a far-reaching approach that has been consistently struck down in other states as violating the Federal Arbitration Act ("FAA"). Recent decisions by both the California and United States Supreme Courts have found that state policies which unduly impede arbitration are invalid. Indeed, the U.S. Supreme Court is currently considering two more cases arising out of California courts involving preemption of state arbitration policies under the FAA. Before enacting a law as broad as this, and one that will surely result in years of costly litigation and legal uncertainty, I would prefer to see the outcome of those cases.


For these reasons, I am returning AB 465 without my signature.


Sincerely, 
Edmund G. Brown Jr.


Practice Pointers: The fact that this bill was passed demonstrates that the California Legislature continues to oppose the use of arbitration in employment matters. As a general matter, California has also been hostile to arbitration in the consumer context, such as its use in consumer contracts to prevent class actions. California businesses who wish to use arbitration provisions in their employment agreements should take heed. In addition to any legal battles they may face, employers need to have a sense for public relations. Thus, as well as carefully researching the law before drafting arbitration provisions, employers should ensure that any arbitration agreements they use are procedurally and substantively fair to employees and do not overreach. Ultimately, there is little benefit in one-sided arbitration provisions that provide reasons for courts to reject them or that give further ammunition to those already opposed to arbitration in the employment context.


Keywords: alternative dispute resolution, adr, litigation, mandatory arbitration, employment, California


Edward Lozowicki, Lozowicki ADR, Palo Alto, CA

 


 

January 7, 2016

Mandatory Arbitration Clause Ruled Unenforceable


In an issue of first impression in Pennsylvania, a state court has ruled that the mandatory arbitration clause in Reed Smith’s client engagement letters is unenforceable because it was not specifically signed by the client and did not inform the client of the rights he was giving up and the potential costs he might incur. The court rejected Reed Smith’s argument that the arbitration clause should be enforced because their client was a sophisticated businessman and attorney.


Plaintiff Jerald S. Batoff sued Reed Smith and attorney Widin for legal malpractice in negotiating a $20.5 million settlement with Batoff’s insurance company after Batoff’s Villanova mansion burned down in April 2012. Batoff alleged that Reed Smith advised him to enter into the settlement without the involvement of the tenants who were living in the home at the time of the fire and who had an option to purchase the home. The lease and option-to-buy agreement required the tenants to be involved in any such negotiations.


Batoff alleged that he incurred more than $500,000 in damages from legal fees he paid in litigation with the tenants plus potentially millions of dollars in additional damages, because the settlement required Batoff to indemnify the insurance company if the tenants sued the insurer, which they did.


In April, Philadelphia Court of Common Pleas Judge John M. Younge denied without explanation Reed Smith’s preliminary objections to Batoff’s suit under the theory that the case was required to be sent to arbitration. In his December 18 opinion, which revisited and expounded on that decision, Younge said the Pennsylvania Supreme Court has yet to weigh in on the issue of attorney-client arbitration agreements. He noted that Pennsylvania Rule of Professional Conduct 1.8 allows such mandatory arbitration agreements if the client is “fully informed of the scope and effect of the agreement,” but found the client was not so fully informed here. With no Pennsylvania case law to rely on, Younge cited a recent Eastern District of Pennsylvania case, Sanford v. Bracewell & Guiliani, which relied on a test outlined by the Louisiana Supreme Court in the case Hodges v. Reasonover, to determine whether an arbitration agreement fully informed the client of the rights being given up by agreeing to arbitration.


The Hodges case stated that clients signing arbitration clauses should be informed they are waiving their right to a jury trial, their right to an appeal, and broad discovery rights, and should also be informed that they could pay substantial upfront costs, could still make a disciplinary complaint against their attorney and could speak with independent counsel before signing the agreement. Hodges also stated that clients should be fully informed of the types of claims that would have to be submitted to arbitration. Applying this law to the facts, Judge Younge stated that:


the defendants were unable to establish that [Batoff] ever read the arbitration clause, or was even aware of its existence, because it was found in an addendum to the engagement letter that was neither signed nor initialed by [Batoff]. Based on the language of the arbitration agreement, the defendants were also unable to establish that [Batoff] was informed of the ramifications and scope of arbitration.

 

Younge said that Reed Smith’s arbitration clause did not provide any explanation of the rights Batoff was waiving, including his right to a jury trial and his right to engage in full discovery, nor did it inform him that he could face substantial upfront costs. The Court discounted the fact that Batoff was a successful businessman and attorney, noting that Batoff was not licensed to practice law at the time of the engagement and “no proof was presented that he was specialized in contract law or arbitration agreements.” The Court also noted that Batoff did not feel capable of handing the dispute himself which is why he hired defendants to serve as his counsel. The Court said that defendants submitted no law to support their argument that lawyers should face a lower standard of proof about the disclosures they must make when their clients are sophisticated.


Practice Pointers: Attorneys who want to put arbitration provisions into their engagement agreements should review their state law, including any professional rules or opinions, to see whether and with what qualifications arbitration provisions are enforced. As a matter of conservative planning, attorneys may want to specifically include the kind of disclosures referenced in this Pennsylvania decision. Interested observers should also keep a lookout for any further developments on appeal.


Key words: alternative dispute resolution, adr, litigation, legal malpractice, attorney-client arbitration, waiver of rights, mandatory disclosures, discovery, costs, jury trial


Mitchell L. Marinello, Novack and Macey LLP, Chicago, IL

 


 

January 5, 2016

NLRB Stands Its Ground


The National Labor Relations Board (NLRB) has once again found that an employer’s mandatory class-action arbitration waiver violates the National Labor Relations Act (NLRA). Citigroup Technology, Inc. and Citicorp Banking Corporation, Case 12–CA–130742 (December 1, 2015).


In December 2012, Citigroup Technology, Inc. and Citicorp Banking Corporation (collectively, Citi) began requiring workers at its Tampa, Florida, facility to sign an employment arbitration policy (EAP) included in its handbook for United States employees. The Citi EAP states that workers are required to engage in arbitration over certain employment-related disputes solely through individual arbitration.


In January 2013, Darlene Echevarria, signed the agreement when she was hired. About the same time, Citi hired Andrea Smith. Smith’s offer letter included an agreement to follow the company’s arbitration procedure for any disputes with the company as a condition of her employment. Smith signed the offer letter and digitally signed the company’s EAP policy. Echevarria left her position with Citi in August 2013 and Smith left in March 2014.


Later, Echevarria, Smith, and a number of other former Citi employees filed a demand for class arbitration over purported wage and hour violations committed by Citi with the American Arbitration Association (AAA). The AAA refused to administer the matter because the EAP required individual arbitration. The workers then filed a charge with the NLRB.


In their case, the former Citi employees accused the company of violating Section 8(a)(1) of the NLRA by maintaining the EAP which required workers to engage in individual arbitration and by enforcing the EAP against a former worker. An administrative law judge ruled that the NLRB’s decisions in D.R. Horton and Murphy Oil controlled the dispute. The judge also distinguished the United States Supreme Court’s holding in American Express Co. v. Italian Colors Restaurant, 133 S.Ct. 2304 (2013) by stating:


Although the Supreme Court has upheld the enforcement of individual mutual arbitration agreements in these and other cases, the Board recognizes that the Court has never addressed or resolved the issue of exclusive individual arbitration over class and/or collective actions under the Act. The Board understands that the FAA establishes a liberal policy favoring arbitration agreements. D.R. Horton, 357 NLRB No. 184, slip op. at 8. However, as noted in D.R. Horton, the Supreme Court has “repeatedly emphasized” that the FAA protects agreements to arbitrate federal statutory claims “so long as ‘a party does not forgo the substantive rights afforded by the statute.’” Id. at 9–10, citing Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 26 (1991) (quoting Mitsubishi Motors Corp., supra at 628).

 

Respondent further contends that the Supreme Court in American Express makes clear that it is improper to find a congressional command where none exists, and therefore, since none exists in the language or legislative history of the NLRA, there should be no such finding here. However, as stated, the Board decisions in D.R. Horton and Murphy Oil establish that such a command exists in that Section 7 substantively guarantees employees the right to engage in collective action, including collective legal action, for mutual aid and protection concerning wages, hours, and working conditions. For the same reasons, the Supreme Court’s decision in CompuCredit, supra, and other cases cited by Respondent are distinguishable. Further, these general consumer litigation and commercial cases do not address the central questions of how and to what extent the FAA may be used to interfere with, by way of private agreements, the fundamental substantive right of workers to engage in concerted activity established and protected by the NLRA—the gravamen of the violation here and in D.R. Horton.

 

Ultimately, the administrative law judge relied on the Board’s prior decisions in D.R. Horton and Murphy Oil to rule that Citi “violated Section 8(a)(1) of the Act by maintaining the EAP, and by enforcing that policy by moving to compel individual arbitration of the Charging Party’s class action submission before the AAA.” The judge also determined that the company “engaged in unfair labor practices.” As a result, the administrative law judge ordered Citi to stop maintaining or enforcing the class-action arbitration prohibition included in the EAP.


On appeal, an NLRB panel ruled in a 2–1 decision:


Applying the Board’s decisions in D.R. Horton, 357 NLRB No. 184 (2012), enf. denied in rel. part, 737 F.3d 344 (5th Cir. 2013), and Murphy Oil USA, 361 NLRB No. 72 (2014), enf. denied, –F.3d– (5th Cir. Oct. 26, 2015), the judge found that the Respondent violated Section 8(a)(1) of the Act by maintaining the EAP. We adopt that finding.


The Board also found that Citi’s “conduct did not amount to enforcement of the EAP in violation of Section 8(a)(1).”


Given the many recent NLRB decisions adhering to D.R. Horton, it appears that the Board will continue to rule in favor of class arbitration in the employment dispute context. The Board’s apparent disinclination to follow Fifth Circuit precedent also suggests its ultimate goal may be to create a circuit split that would require the U.S. Supreme Court to review the issue.


Key words: alternative dispute resolution, litigation, adr, NLRB, D.H. Horton, class arbitration, employment


Karl Bayer, Karl Bayer Dispute Resolution, Austin, TX

 


 

December 18, 2015

Binding Mediation Is Not the Same as Arbitration


In Tirreno v. The Hartford, 2015 WL 8132972 (Conn.App. Dec. 15, 2015), the parties had agreed to resolve a dispute through binding mediation, by which they meant that the parties would first work with a jointly selected mediator to try to reach a settlement, but if no settlement were reached, the mediator would decide the claim and determine damages. These terms were agreed to orally and then memorialized in a series of emails between the parties. Pursuant to this agreement, the parties first attempted to reach a voluntary settlement but, when that failed, the mediator issued a written decision summarizing the mediation evidence and making a damage award. The plaintiff refused to accept the damage award, however, and opposed the defendant’s motion to enforce it. The trial court granted the defendant’s motion to enforce the mediator’s decision. The plaintiff appealed.


On appeal, the plaintiff reiterated its argument that the procedure the parties had used effectively was arbitration and that a Connecticut arbitration statute required any agreement to arbitrate to be reduced to writing. The plaintiff concluded that, inasmuch as the parties had never reduced their dispute resolution agreement to writing, the mediator lacked jurisdiction to decide the parties’ dispute. The appellate court had to decide whether the binding mediation procedure was the equivalent of arbitration and, if so, whether the mediator’s decision was enforceable.


The appellate court noted that there are no particular words required to form an agreement to arbitrate, but that there must be a clear manifestation of the parties’ intent to arbitrate. Here, the court found that the parties consistently referred to the submission of their case to a mediator who, if the parties could not reach a voluntary settlement, would take on the additional responsibility of assigning a final damages number. The only use of the word “arbitration” was by the mediator in the caption of his final decision. The court further noted that in emails between the parties, counsel stated that this method of dispute resolution would be “similar to arbitrating the case, but would not be as time-consuming and less expensive.” The court also found that the parties conduct was inconsistent with the proceeding being arbitration. For example, the plaintiff complained that the proceeding was not a regular arbitration with each side presenting witnesses, and the defendant filed a motion to enforce a settlement, not a motion to confirm an arbitration award.


Based on all of this evidence, the appellate court concluded that there was no clear and direct manifestation of an intention to resolve their dispute through arbitration. Accordingly, the court ruled that the Connecticut arbitration statute was not applicable and confirmed the trial court’s decision to enforce the mediator’s decision as the parties’ settlement agreement.     

       

Practice Pointers: This decision shows that binding mediation may be something quite different from an agreement to mediate plus an agreement to refer to arbitration any issues that the mediation does not resolve. Instead, when the parties give a mediator the authority to resolve any disputes not settled by the mediation, the resulting decision or award may be regarded by the court as a settlement agreement and enforced accordingly. As the Connecticut court stated in its final comment: “Our arbitration statutes may not be used as a sword to subvert a mutually agreed upon adjudication procedure or as a weapon of further court litigation."


Keywords: alternative dispute resolution, litigation, adr, binding mediation, settlement agreement, arbitration, writing, intent


Jonah Orlofsky, The Law Offices of Jonah Orlofsky, Chicago IL



 

December 16, 2015

Third Circuit Holds that Ambiguities Preclude Arbitration


In Maddy v. General Elec. Co., 2015 WL 7776471, the Third Circuit affirmed the district court’s denial of a motion to compel arbitration. The issue was whether the plaintiffs, employees paid an hourly wage plus overtime, were subject to mandatory arbitration. The dispute arose because the plaintiffs sought payment for unpaid overtime under state and federal laws from their employer, General Electric, the defendant. The defendant filed a motion to compel arbitration.


 After several years of working for the defendant, the plaintiffs signed a form acknowledging that the defendant had implemented a mandatory alternative dispute resolution program (Program) and that by continuing employment they would be bound to resolve disputes pursuant to the Program. The final step in the Program was arbitration. See Maddy v. General Elec. Co., 80 F. Supp. 3d 544, 546 (2015). There were two versions of the Program—a 2008 version (2008 Program) and a 2009 version (2009 Program). The 2008 Program and 2009 Program applied to different types of employees. If the 2008 Program was the program referenced in the form signed by the plaintiffs, the Program would not have applied because neither plaintiff would have been the type of employee covered under the Program. If the 2009 Program was referenced in the form, on the other hand, the plaintiffs arguably would have been obligated to arbitrate their claims. The form signed by the plaintiffs did not, however, specify which version of the Program they were “acknowledging.”


The district court denied the defendant’s motion to compel arbitration holding that: (1) the acknowledgement form lacked “clear language of assent” and was ambiguous as to which version of the Program applied to the plaintiffs; and (2) even if the form referenced the 2009 Program, the plaintiffs were not the type of employees covered by the 2009 Program. 2015 WL 7776471 at *2.


Construing the facts in the light most favorable to the plaintiffs, the Third Circuit affirmed the district court’s ruling. The court noted, among other things, that it was unclear which version of the Program applied to the plaintiffs—a conclusion supported by the fact that the defendant provided conflicting declarations on that issue.


The Third Circuit went on to note that the 2009 Program was ambiguous as to whether the plaintiffs were the type of employees covered thereunder, and that this ambiguity would be resolved against the defendant as the drafter of the language. Hence, and even assuming the 2009 Program applied, the court held that the plaintiffs were not the type of employee required to arbitrate disputes, and upheld the district court’s denial of the defendant’s motion to compel arbitration.


Maddy serves to remind employers of two fundamental lessons. First, when employers implement or replace a program mandating arbitration or an alternative dispute resolution, they should take steps to ensure that the employees are aware of—and clearly agree to—the program. Second, and relatedly, when an employer wants to change the type of employee subject to the program, the program itself should contain a clear definition of the employees governed thereby. Here, the employer had failed to ensure that the employees were aware of the specific program referenced in the form and also failed to explicitly define the type of employee governed by the program.


Keywords: alternative dispute resolution, adr, litigation, ambiguity, motion to compel arbitration, covered employee, acknowledgment form


Eileen Boyle, Novack and Macey LLP, Chicago, IL


 

December 2, 2015

Wi-Fi Company Cannot Enforce Clickwrap Agreement to Arbitrate Against a Consumer


In Berkson v. Gogo LLC, Case No. 14-CV-1199 (April 8, 2015), the defendant moved to compel arbitration based upon an arbitration clause in an online “terms of use” agreement. The United States District Court for the Eastern District of New York denied that motion, holding that, “the average internet user would not have been informed, in the circumstances present in this case, that he was binding himself” to arbitration. The case is currently on appeal to the Second Circuit.


Gogo LLC provides in-flight Wi-Fi to travelers in a variety of airports and airlines. Plaintiffs Adam Berkson and Kerry Welsh sued Gogo, claiming that the company improperly increased its sales by misleading customers into purchasing a service that charged a customer’s credit card, on an automatically-renewing continuing monthly basis, without adequate notice or consent. Gogo charged Berkson and Welsh between $35 and $40 per month for three and 16 months, respectively. Gogo moved to compel arbitration pursuant to the terms and conditions agreement; the plaintiffs countered that they lacked notice of the terms and conditions at the point of sale.


In a lengthy opinion, U.S. District Judge Jack B. Weinstein surveyed the law relating to Internet-based contracts of adhesion, sometimes referred to as clickwrap agreements. Clickwrap agreements require a user to click a box on the website acknowledging agreement to certain terms and conditions before making a transaction. These sorts of agreements are generally enforceable, since it would be impossible for companies to negotiate them with each end-user. Therefore, terms and conditions are presented as a contract of adhesion—take it or leave it. In digital commerce, courts generally hold that such contracts of adhesion are enforceable only to the extent that their terms are reasonable and that end-users have manifested their assent to be bound in a meaningful manner. Typically, the manifestation of assent involves forcing the user to see (or scroll through) the full terms, and then click “accept.” Courts have further held that the terms must be presented clearly at the point of sale—not hidden in a tiny font on an obscure page of the site.


The court ultimately held that Gogo failed to bring the arbitration clause to a user’s attention and that it could not fairly bind users to its terms. The judge found that Gogo did not do enough during the sign-up process to draw users’ attention to the terms and conditions hyperlink containing the arbitration clause.


“The design and content of the website, including the homepage, did not make the “terms of use” readily and obviously available to [users],” the court held. “The hyperlink to the “terms of use” was not in large font, all caps, or in bold. Nor was it accessible from multiple locations on the webpage. By contrast, the “SIGN IN” button is very user-friendly and obvious, appearing in all caps, in a clearly delineated box in both the upper right hand and the lower left hand corners of the homepage.”


Moreover, Gogo did not e-mail or physically mail a copy of the terms of use to consumers, as some other companies employing these agreements do. The court noted that this further supports the plaintiffs’ argument that there was not sufficient notice of the terms. Gogo also did not require users to scroll through the terms and conditions before accepting them (known as a “scrollwrap agreement”). This, too, weighed against enforcement.


Practice Pointer: Companies cannot rely upon arbitration agreements hidden in “terms and conditions” on websites—especially if users are not required to scroll through the terms first. For an arbitration clause to be enforced against a consumer in an internet-based contract, the clause must be physically prominent, perhaps in bold lettering or in a large font. Intentional or even unintentional “burying” of the clause will render it unenforceable. Courts will examine the point-of-sale page to determine whether a reasonable Internet user would have been on sufficient notice of any terms to the agreement.


Keywords: alternative dispute resolution, adr, waiver, litigation, arbitration, clickwrap, scrollwrap


Brian Farkas, Goetz Fitzpatrick LLP, New York, NY


 

December 1, 2015

Court of Appeals Overrules Lower Courts Order to Compel Arbitration


In September 2014, the United States Sixth Circuit Court of Appeals reversed an order issued by a Michigan district court to compel arbitration. Robert Kay v. The Minacs Group, Inc., 13-1974 (6th Cir. Sep. 5, 2014). The case turned on the employer’s failure to include its entire employee handbook in the record.


In 1995, Plaintiff Robert Kay began working at Phoenix Group (Phoenix). Six years later, in 2001, The Minacs Group (Minacs) purchased Phoenix. Despite the change in ownership, Kay continued working for the company. In 2011, Minacs fired Kay and hired someone younger to replace him. Kay was sixty years old and he sued Minacs Group under the Age Discrimination in Employment Act (ADEA) and Michigan’s Elliot Larsen Civil Rights Act (ELCRA).


Minacs moved to dismiss Kay’s complaint and compel arbitration in accordance with a receipt of policies and procedures (Phoenix Receipt) that Kay had signed in 1995 when he was hired by Phoenix. The Phoenix Receipt contained an arbitration clause that read:


I also acknowledge that any and all controversies or claims arising out of, or relating to these Policies and Procedures shall be resolved by . . . arbitration . . .

 

In his complaint, Kay had stated that he began working for “defendantin 1995. The district court took this statement as a judicial admission that Phoenix and Minacs were one and the same company and it therefore regarded the arbitration clause in the Phoenix Receipt as still being in effect. On that basis, the district court compelled Kay to arbitrate his age discrimination claims against Minacs.


Kay moved for reconsideration. He said that he never intended to admit that Phoenix and Minacs were the same entity. He said that he had been fired by Phoenix and rehired by Minacs and asked for leave to amend his complaint to clarify these points. He also said that the arbitration clause in the Phoenix Receipt did not cover his age discrimination claims, because Phoenix’s Policies and Procedures (Phoenix Policies) had been superseded by Minac’s own policies. Minacs opposed Kay’s motion, but it did not submit the Phoenix Policies or its own employee handbook to the court. The district court denied Kay’s motion for reconsideration and Kay appealed.


The Sixth Circuit reversed. It held that the district court had been too strict in construing Kay’s complaint and should have given him the chance to amend his complaint. The Sixth Circuit also held that Minac’s “troubling” failure to include the Phoenix Policies in the record defeated Minac’s position. The court noted that the arbitration clause covered those claims arising out of or relating to the Phoenix Policies but since the Phoenix Policies were not in the record, the court had no idea what the arbitration agreement covered. The court then interpreted the Phoenix Receipt literally and, because it did not say that it covered any age discrimination claims, the court ruled that Kay was not required to arbitrate his age discrimination claims and could pursue those claims in federal court. (The court was also critical of Minac’s failure to include its own handbook in the record, because it suspected that handbook superseded the Phoenix Policies.)


Practice Pointers: The Kay case illustrates that arbitration agreements should be construed like any other contract. That is, “[a]rbitration provisions, like any other provision, must be interpreted in the context of the whole contract.” Id. at 5. Thus, when the obligation to arbitrate a dispute is contested, it is prudent to put the parties’ entire agreement into the record, and it may be necessary to do so when the arbitration agreement does not fully and explicitly identify the kinds of disputes that it covers.


Keywords: alternative dispute resolution, litigation, Phoenix  Group, Minacs Group, Robert Kay, arbitration, age discrimination, adr, ADEA, ELCRA


Marni Weinstein, DePaul University College of Law, Class of 2017, Chicago, IL


 

November 23, 2015

Mississippi Supreme Court Enforces an Arbitration Provision for Legal Fees


The Mississippi Supreme Court enforced an arbitration provision between a client and her attorney relating to a fee dispute. Slater-Moore v. Goeldner, 113 So. 3d 521, 531 (Miss. 2013).


Between 2007 and 2008, Norma Slater-Moore, the plaintiff, entered into two contracts for legal services with the Goeldner Law Firm, the defendant—one governing the defendant’s handling of a claim and another governing the defendant’s handling the appeal of that claim. The parties’ contracts stated that any dispute over the defendant’s fees would be subject to binding arbitration, collectively, the Arbitration Provision. Id. at 524.Both contracts stated that the “contract was discussed in detail, all questions about its content, meaning and scope were answered, and client acknowledges receipt of copy.” Id. The plaintiff signed the contract below this provision. Thedefendant did not sign the contract.


The parties proceeded in accordance with the terms of the contract in pursuing the plaintiff’s claim and appeal. After losing the appeal of her claim, the plaintiff brought an action against the defendant for legal malpractice, breach of contract, misrepresentation, and bad faith. The crux of the plaintiff’s legal malpractice claim was that the defendant engaged in billing misconduct. Id. The defendant filed a motion to compel arbitration of the claims regarding improper legal fees. The Mississippi circuit court granted the motion. Id. at 525.


On appeal, the Mississippi Supreme Court addressed the plaintiff’s three arguments that: (1) the contracts, including the Arbitration Provisions therein, were invalid and unenforceable; (2) the legal malpractice claim is not a “fee dispute” within the scope of the Arbitration Provision; and (3) the requirements of the arbitration agreements are procedurally unconscionable. To address these arguments, the court applied a two-prong inquiry: “‘whether the parties intended to arbitrate the dispute’ and if so, [] ‘whether legal constraints external to the parties’ agreement foreclosed the arbitration of those claims’” Id. at 526.


First, the court rejected the plaintiff’s contentions that the Arbitration Provision was invalid. Specifically, the court reasoned that (1) the parties’ actions in pursuing the plaintiff’s claim and appeal made it clear that they intended to be bound by the terms of the written agreement despite the fact that the defendant did not sign the contract; (2) the plaintiff agreed to submit any fee dispute to arbitration by signing the contract; and, (3) that the plaintiff had not met her burden to prove that the absence of certain words—“arbitrate” or “arbitration”—invalidated the contract.


Second, the court found that the plaintiff’s legal malpractice claims fell within the scope of the Arbitration Provision because the malpractice claim was essentially a dispute over legal fees.


Third, the court rejected the plaintiff’s contention that the agreements were procedurally unconscionable. The court noted that the plaintiff failed to show any evidence that she was unaware of the terms of the Arbitration Provision. The court observed that the plaintiff’s signature on the contract was directly below the clause and stated that the “contract was discussed in detail” and “all questions about its content, meaning, and scope were answered.” Id. at 529.


Practice Pointers: Goeldner serves to warn parties that they will be hard-pressed to contradict what a document they signed plainly says. It also stands as a sharp reminder that parties need to carefully define the disputes they are agreeing to arbitrate. Finally, although the court enforced the Arbitration Provision in this case, the defendant’s failure to sign the agreement needlessly subjected the defendant to the risk that the Arbitration Provision would not be enforced. The lesson? Sign an arbitration agreement if you want it enforced.


Keywords: alternative dispute resolution, adr, litigation, malpractice, fee dispute, valid, enforceable, arbitration, signature, motion to compel arbitration


Kristen Odijk, DePaul University College of Law, Class of 2016, Chicago, IL

 


 

November 17, 2015

Two Lawsuits, Two Years, and an Appeal Are Not Enough to Waive Arbitration


In Stratton vs. Portfolio Recovery Assocs., LLC, 2015 WL 6675551 (E.D. Ky. November 2, 2015), the district court permitted a defendant to amend its complaint to add arbitration as an affirmative defense after the defendant had filed suit in state court, briefed and argued two motions to dismiss the plaintiff’s federal lawsuit, took part in an appeal to the Sixth Circuit, and engaged in more than two years of litigation. Despite this extensive litigation activity, the court held that the defendant had not waived its right to arbitrate the parties’ dispute.

 

Portfolio Recovery Associates, LLC (PRA) was in the business of purchasing debt and then seeking to recover payment. It purchased Stratton’s credit card debt and, on June 20, 2012, filed suit in state court to collect the sum due. On May 13, 2013, Stratton filed her own suit in federal court alleging that PRA’s state-court action, which sought pre-judgment interest, violated the Fair Debt Collection Practices Act. Stratton also sought class certification.

 

PRA moved to dismiss Stratton’s federal complaint, and its motion was denied. Stratton then filed an amended complaint, which further addressed the issue of pre-judgment interest. PRA moved to dismiss again. This time, the district court granted PRA’s motion, but Stratton appealed. The Sixth Circuit reversed and reinstated Stratton’s action.

 

On January 7, 2015, PRA filed an answer to Stratton’s amended complaint. Thereafter, the district court issued a scheduling order that permitted the parties to amend their pleadings by July 31, 2015, slightly more than a month before discovery ended. Stratton served two requests for admissions during the discovery period. PRA moved for and was granted a protective order as to one of those requests which it ultimately answered, but it did not issue any discovery of its own.

 

On June 26, 2015, two years after the suit had been filed, PRA moved to amend its answer to add arbitration as an affirmative defense. Stratton opposed the motion, asserting that it would prejudice her and that, after two years of litigation, PRA had waived its right to arbitrate. She also argued that the motion was futile, because PRA was no longer entitled to arbitration. The court rejected her arguments.

 

So far as prejudice was concerned, the court held that Stratton had not shown that granting the motion would require her to spend significant additional resources in discovery or trial preparation. The court noted that, as of that time, only PRA had responded to any discovery requests and more than a month remained before discovery would be closed. The court also noted that it had not yet scheduled the matter for trial. The court stated that cases where prejudice was found involved extensive discovery and/or trial preparation, circumstances that did not exist here. The fact that PRA’s motion was timely under the court’s scheduling order was another factor in PRA’s favor. The court concluded that Stratton failed to show any significant prejudice.

 

In ruling on waiver, the court applied federal law, holding that the parties’ selection of Utah law was not specific enough to govern issues of arbitrability, including the waiver of arbitration rights. The court then noted that because of the strong federal presumption in favor of arbitration, “waiver is not to be lightly inferred.” Id. at *4. Citing Johnson Assocs. Corp. v. HL Operation Corp.¸ 680 F. 3d 713 (6th Cir. 2012), the court held that the legal standard was whether the party seeking arbitration had taken actions inconsistent with reliance on its arbitration agreement and whether its delay had prejudiced its opponent.

 

The court again stressed that “very little discovery” had taken place. It also credited PRA’s assertion that it had received the underlying credit card agreement just a short time before filing its motion to amend and had not realized before then that the parties’ agreement contained an arbitration clause. The small amount of discovery taken to date plus PRA’s lack of culpability in delaying its request for arbitration was enough for the court to conclude that PRA’s conduct “[was] not inconsistent with its right to arbitrate.” Id. Accordingly, the court allowed PRA to amend is answer to include arbitration as an affirmative defense and, one can only surmise, soon will be staying Stratton’s lawsuit in favor of arbitration.

 

Practice Points: Litigators should not assume that every court will be as forgiving as the PRA court to parties who are ignorant of their right to arbitrate and have failed to assert that right in a prompt and diligent manner. Nonetheless, the PRA decision shows that a party’s right to arbitrate may not be lost, even when that party has engaged in extensive and lengthy litigation. Thus, attorneys for parties who have participated in litigation and belatedly realized that the dispute should be in arbitration should not abandon hope before taking a close look at the law that governs the waiver of arbitration rights.

 

Keywords: alternative dispute resolution, adr, waiver, prejudice, litigation, motion to amend, affirmative defense, discovery

 

Mitchell L. Marinello, Novack and Macey LLP, Chicago IL


 

November 16, 2015

Ignoring an Arbitration Proceeding Is No Protection Against an Adverse Award


A party who agrees to arbitrate cannot avoid an adverse arbitration award by ignoring the arbitration proceedings. Merchant Cash & Capital, LLC v. Ko, Case No. 14 Civ. 659(KPF) (S.D.N.Y. June 19, 2015).

 

Ko operated an auto body shop. He contracted with Merchant Cash, a company that purchases receivables from other businesses, taking $140,000 in exchange for his agreement to turn over $163,800 of his sales to Merchant Cash. As required by the parties’ agreement, Ko opened a designated bank account and used a special credit card processing company for his business transactions. After turning over approximately $5,500 of his sales receivables to Merchant Cash, Ko abruptly closed the bank account, stopped using the credit card terminal, and refused to make further payments to Merchant Cash.

 

Merchant Cash filed a breach of contract lawsuit. Following the parties’ agreement to arbitrate, the court entered an order staying the lawsuit pending arbitration before the AAA. After initial arbitration pleadings had been filed, Ko’s attorney withdrew as Ko’s counsel. The arbitrator issued orders urging Ko to obtain new counsel and advising him that if Ko chose not to participate in the arbitration, the matter might be heard and an award granted anyway.

 

Ko did not respond to the arbitrator’s orders, nor to subsequent communications regarding discovery and other matters related to the proceedings. The arbitrator notified Ko of preliminary hearings, sought opposition papers from him, and scheduled the final hearing. Ko did not participate in any part of the arbitration.

 

After considering what evidence he had before him, the arbitrator awarded the outstanding balance to Merchant Cash. Merchant Cash then returned to court and filed a motion for summary judgment confirming the arbitrator’s award. Ko did not oppose the motion or otherwise appear in the litigation.

 

The court examined Merchant Cash’s submission in depth even though Ko had failed to respond. The court noted that a high showing is needed to avoid summary confirmation of an arbitration award, such as one of the four statutory bases enumerated in the FAA, or that the arbitrator has acted in manifest disregard of the law.

 

The court held that Ko did not contest the facts set forth in the petition to confirm the award, the arbitrator did his best to include both parties in the arbitration proceedings, and had even provided a reasoned decision for his award, and none of the grounds for vacating the award under the FAA were present. Because both parties had an opportunity to participate fully in the arbitration and Ko had not challenged the award’s legal sufficiency, the court granted Merchant Cash’s motion for summary judgment and entered judgment against Ko in accordance with the arbitrator’s award.

 

Practice Pointer: Parties ignore arbitration proceedings at their peril. Refusing to participate in an arbitration will not prevent an arbitration award against that party once it has agreed to arbitrate. Given courts’ great deference to arbitration awards, it is essential for a respondent to present its defense on the merits during the arbitration.

 

Keywords: alternative dispute resolution, adr, litigation, Federal Arbitration Act, confirmation of award, participation in proceedings

 

Scott D. Simon, Goetz Fitzpatrick LLP, New York, NY


 

November 4, 2015

Federal Court Denies Motion to Compel Arbitration


In May 2015, a federal court denied a defendant’s motion to compel arbitration because the claim in question did not arise under the parties’ arbitration clause. Savage v. Citibank N.A., No. 14-CV-03633-BLF, 2015 WL 2214229, at *2 (N.D. Cal. May 12, 2015).


The plaintiff, Savage, was a senior citizen and war veteran who became unemployed and unable to meet his payment obligations under his Macy’s credit card. The Macy’s credit card had been extended to Savage through the defendant DSNB, Macy’s financing arm, and serviced by the defendant Citibank who handled billing and collections. The defendants proceeded to attempt collection through repeated phone calls. Savage requested by telephone and in writing not to receive any more collection calls. Thereafter, however, the defendants’ collection efforts only increased.


After Savage filed suit for violations of the Fair Debt Collection Practices Act, Citibank moved to compel arbitration pursuant to an arbitration provision in a separate agreement between Citibank and Savage for a Sears credit card. The parties agreed that there was no arbitration agreement in place for the Macy’s credit card and that the question presented was whether the Sears agreement encompassed Savage’s claims. The Sears arbitration agreement stated that it not only covered claims between Savage and Citibank relating to the Sears credit card “but also Claims made by or against anyone connected with us or you or claiming through us or you, such as a co-applicant, authorized user of your account, an employee, agent, representative, affiliated company, predecessor or successor, heir assignee, or trustee in bankruptcy.”


The court looked to the Federal Arbitration Act (FAA) to determine the enforceability and scope of the arbitration agreement, stating that “arbitration under the FAA is a matter of consent and the FAA’s pro-arbitration policy does not operate without regard to the wishes of the contracting parties.” Here, the court reasoned that there was no basis for the defendants’ assertions that the plaintiff consented to engage in a relationship “ad infinitum with Citibank regardless of the subject matter of future interactions by agreeing to the Sears agreement. To hold otherwise would provide absurd consequences resulting in limitless cause of actions.” Despite the broad language of the arbitration clause, the court ultimately decided that Savage’s claims fell outside the scope of the agreement.


The Savage decision recognizes that the parties’ intent, as found in the reasonable interpretation of the words of their contract, is the basis for arbitral jurisdiction. It also recognizes that it is unreasonable to interpret a general arbitration agreement so broadly that it would subject the parties to a never-ending obligation to arbitrate their disputes, regardless of subject matter. 


Keeping this case in mind, attorneys drafting agreements for clients who want their arbitration clause to cover all future disputes in a given subject area, even disputes involving different contracts than the one in which the arbitration clause is placed, need to make the breadth of the arbitration agreement very explicit and perhaps draw special attention to it if they want the courts to respect it. Litigators should also take heed that courts are unlikely to interpret an arbitration agreement so broadly that it applies to disputes unrelated to the contract in which it appears—at least unless that intent is made very clear.


Keywords: alternative dispute resolution, adr, litigation, consent, scope of arbitration agreement, credit card


Frank Murray, DePaul University College of Law, Class of 2016, Chicago, IL


 

October 28, 2015

Northern District of Illinois Holds Party Waived Right to Compel Arbitration


In Smith v. Adams & Associates, No. 1-14-C-5522, 2015 WL 5921098, at *5, (N.D. Ill. Oct. 9, 2015) the court denied a defendant’s motion to compel arbitration because the defendant had participated in litigation and thereby waived her right to arbitrate.

 

Mo’nique Smith, the plaintiff, was hired by Adams & Associates, the defendant. Her employment agreement contained a broad arbitration clause requiring employment-related disputes to be arbitrated. One year later, the defendant terminated the plaintiff’s employment.

 

In July 2014, the plaintiff filed a pro se employment discrimination lawsuit against the defendant. The court appointed counsel to represent the plaintiff, and the appointed counsel filed an amended complaint. At a status hearing the following February, the court set a discovery cut-off date as well as a future status date. In April 2015, the defendant served the plaintiff with interrogatories and a request to produce. On June 4, 2015, the defendant moved to compel arbitration.

 

Around the same time it moved to compel arbitration, the defendant made an oral motion for the dismissal of the plaintiff’s appointed counsel. The defendant argued that the plaintiff’s counsel from a state-court action had filed an appearance in the instant federal case and that the plaintiff should be barred from proceeding with both retained and appointed counsel. The court denied the defendant’s oral motion and allowed the plaintiff to proceed with both attorneys.

 

In support of its motion to compel arbitration, the defendant argued that the arbitration clause in The plaintiff’s employment agreement mandated that the parties arbitrate the employment discrimination claims. In opposition, the plaintiff argued that the defendant waived its right to arbitrate the employment dispute by choosing to proceed in the federal forum and defend against the plaintiff’s claims. The court agreed with the plaintiff.

 

The court acknowledged that the party asserting waiver has a heavy burden in order to overcome the “strong federal policy favoring enforcement of arbitration agreements.” Id. at *3.When considering if a party waived its right to arbitrate, the court considered several factors: diligence in litigation; participation in litigation; any substantial delay in its request for arbitration; the party’s participation in discovery; whether its conduct was intentional or merely responsive; and “whether the party opposing arbitration ‘was prejudiced by its reliance on the litigious behavior of the waiving party.’” Id. at *3–4. The court noted that waiver is a case-specific inquiry based on the totality of the circumstances.

 

The court held that the defendant waived its right to arbitration due to its participation in litigation. The court found waiver from the defendant’s acquiescence to the discovery deadline, its initiation of discovery, and its delay of almost one year before filing its motion to compel arbitration. Id. at *4.

 

Also supporting a finding of waiver, according to the court, was the fact that the defendant’s litigation conduct was not merely responsive. Id. Specifically, the court stated that the defendant’s intentional requests for the removal of the plaintiff’s appointed counsel “represent[ed] an affirmative effort to gain a substantive advantage in the federal court case by attempting to force” the plaintiff to proceed pro-se or with her attorney from the state-court action. Id. The court’s interactions with counsel “strongly suggest[ed] that [the defendant] made a conscious decision to wait to assert its right to arbitrate to secure whatever tactical advantage it could against an indigent Plaintiff.” Id. at *5.

 

The lesson learned from Smith is simple: If you want to enforce an arbitration agreement, then “don’t delay!” A party seeking to enforce an arbitration clause must request the “earliest feasible determination” of whether claims must be arbitrated. Id. at *5. Any litigation conduct that is more than merely responsive—initiating discovery, for example—could very well be construed as a waiver of the party’s right to arbitrate.

 

Keywords: alternative dispute resolution, adr, litigation, motion to compel arbitration, waiver, waiver by participation

 

Eileen Boyle, Novack and Macey LLP, Chicago IL


 

October 27, 2015

"Outlined" Mediation Settlement Agreement Enforced


In PNC Bank, N.A. v. Springboro Medical Arts, 2015-Ohio-3386 (Ohio App. Ct. 2015), an Ohio appellate court held that a mediation agreement was binding even though the agreement only “outlined” the settlement terms and recited that the parties later would draft a “formal” settlement agreement.

 

In Springboro, PNC made a loan that went into default and that had been guaranteed by Joshua Wright (Wright). The dispute over Wright’s liability was referred to mediation. During the mediation, the parties reached an agreement that was transcribed by the mediator (Mediation Settlement). The Mediation Settlement provided that PNC would release Wright if Wright: (a) paid PNC certain amounts on certain dates; and (b) provided PNC with a “financial statement showing no more than $160,000 in assets.” Id. at ¶ 6. The Mediation Settlement also stated that the parties would draft “such additional [formal] documents as are required to give effect to these outlined terms.” Id. No such formal documents were prepared.

 

PNC asked the trial court to declare the Mediation Settlement void due to the failure of an “express condition precedent,” namely, that Wright’s financial statement indicated he had “assets exceeding $160,000.” Id. at ¶ 8. In response, Wright filed a motion to enforce the Mediation Settlement and to admit parol evidence showing that the term “assets” referred only to Wright’s collectible, non-exempt assets.

 

The trial court rejected Wright’s argument. It found that: (1) the Mediation Settlement was a “fully integrated” and enforceable contract; and (2) the term “assets” was unambiguous, parol evidence was inadmissible, and that “assets” was not confined to Wright’s non-exempt assets. The trial court entered judgment in PNC’s favor, finding that Wright had not complied with the Mediation Settlement because his financial statement showed that his total “assets” exceeded $160,000.

 

The appellate court affirmed the trial court’s findings that the Mediation Settlement was a fully integrated and enforceable contract, that “assets” was unambiguous, and that parol evidence was therefore not admissible. In so ruling, it rejected Wright’s argument that the Mediation Settlement was not final. “Although the [Mediation Settlement] stated that the parties ‘shall draft in formal legal language and form such additional documents as are required …’ this does not mean that additional documents were, in fact, required to create a binding agreement.” Id. at ¶ 21. Instead, the court held, the “pertinent consideration” is whether the parties formed a clear and definite agreement containing “all the essential terms for a binding contract.” Id. The court noted that the Mediation Statement contained the essential terms for a binding settlement agreement. It also stated that there was no evidence that the parties “did not intend to be bound by the terms of an agreement until formalized in a written document.” Id. at ¶ 25. To the contrary, the court observed, “Wright signed the written [Mediation Settlement] and we must conclude that he intended to be bound by the terms as expressed at that time….” Id. at ¶ 28.

 

Turning to the meaning of “assets,” the appellate court, like the trial court, gleaned the meaning of the term from a dictionary. It parted ways from the trial court however, because the “trial court considered only Wright’s ‘total assets’ and did not consider the part of the general definition that defines assets as property ‘applicable to or subject to the payment of debts.’” Id. at ¶ 35. Noting that Ohio law exempted from execution several items on Wright’s financial statements, the court held that Wright’s assets did not exceed $160,000, and thus, Wright had not failed to comply with the Mediation Settlement.

 

Springboro should remind practitioners of two basic lessons. First, if one does not want to risk being bound by incomplete settlement agreements—so common in the mediation context—make that abundantly clear; at the very least, one should not sign the “outlined” agreement. Second, parties should take the time to clearly define key settlement terms.

 

Keywords: alternative dispute resolution, adr, litigation, mediation, settlement agreement, term sheets, outlined agreements, enforceability, ambiguity, parol evidence

 

Christopher S. Moore, Novack and Macey LLP, Chicago IL

 

 

October 26, 2015

The (Amended) Federal Discovery Rules and Commercial Arbitration?!


A defining quality of commercial arbitration is that it is generally less expensive and faster than civil litigation. It is supposed to be a vehicle that “cuts to the chase” and resolves the dispute on the merits more directly and, in conversational terms, with less muss and fuss.

 

For some time now, one of the common war stories among commercial arbitrators involves arbitration agreements that incorporate Fed. R. Civ. P. 26 (Rule 26) and the other federal discovery rules into the arbitration process. What on earth were the drafters of those arbitration agreements thinking? The typical arbitrator’s reaction to such agreements is often bewilderment, perplexed resignation, or worse.

 

The reason for such reactions is clear. After all, Rule 26 permits any and all discovery so long as it is “reasonably calculated to lead to the discovery of admissible evidence.” So when parties import it into the arbitration process, they can practically kiss the notion of efficiency goodbye—“Start turning over all those stones, boys!”

 

Like most war stories, this one involves some hyperbole. Federal courts have been applying Rule 26 for years, and if the discovery permitted in federal court can be characterized as liberal, it would be awfully hard to argue that it is typically abusive or out of control. Federal courts have the discretion to control discovery; so do arbitrators when they apply the federal rules to discovery issues in an arbitration setting. Still, there is little doubt that importing Rule 26 into the arbitration process makes dispute resolution more like litigation and less like the cheaper and faster process arbitration is supposed to deliver.

 

In any case, all of that may be about to change. Amended Rule 26, which is scheduled to come into effect on December 1, 2015, reads as if it came straight out of the Arbitrator’s Almanac. Particularly so with respect to the “proportionality” concept:

 

Scope in General. Unless otherwise limited by court order, the scope of discovery is as follows: Parties may obtain discovery regarding any nonprivileged matter that is relevant to any party’s claim or defense and proportional to the needs of the case, considering the importance of the issues at stake in the action, the amount in controversy, the parties’ relative access to relevant information, the parties’ resources, the importance of the discovery in resolving the issues, and whether the burden or expense of the proposed discovery outweighs its likely benefit. Information within this scope of discovery need not be admissible in evidence to be discoverable. (Emphasis added.)


Proportionality is a fundamental concept guiding the scope of responsible discovery in commercial arbitration cases. The factors listed in Amended Rule 26 are the same factors that most commercial arbitrators use to help them decide how much discovery should be permitted in an arbitration when the parties cannot agree on the scope of discovery themselves.

 

Of course, how Amended Rule 26 is put into practice is yet to be seen in the federal courts. But arbitrators need no longer shudder when Rule 26, as amended, is incorporated into the discovery provisions of a commercial arbitration agreement. And clients and counsel involved in arbitrations where the federal rules apply can still benefit from arbitration’s efficiency. Proportionality and practical considerations—such as the amount in dispute, the true needs of the case, and the importance of the issues presented—will continue to be important factors in determining how much discovery is appropriate in a given case.

 

Keywords: alternative dispute resolution, adr, litigation, discovery, Amended Rules of Civil Procedure, Rule 26, proportionality


Mitchell L. Marinello, Novack and Macey LLP, Chicago IL

 

 

October 5, 2015

Federal Court Defers Brokerage Case to Panel for Initial Decision


In December 2014, a federal court stayed a lawsuit and sent the parties to a FINRA arbitration, even though it recognized that some of the parties’ claims might need to come back to the court for resolution. Christensen v. Nauman, 73 F. Supp. 3d 405 (S.D.N.Y. 2014).


KCCI was a FINRA-registered brokerage firm owned by the plaintiff, Christensen, and two of the defendants, Nauman and Gollner. Between 2008 and 2014, Nauman and Gollner made several decisions on behalf of KCCI without holding shareholder meetings or providing notice to Christensen. Those decisions included multiple million-dollar payouts to the defendants and the firm’s CFO, issuing new shares in KCCI and thereby diluting Christensen’s 40 percent stake, and selling the firm without paying any of the proceeds to Christensen.


When Christensen learned of the sale, he filed suit in the Southern District of New York seeking, inter alia, repayment of money to KCCI by the other shareholders and a declaration that he was entitled to 40 percent of the proceeds from any sale of KCCI. The defendants moved to dismiss the complaint in favor of arbitration. They argued that, although section 13205 of the FINRA Code of Arbitration Procedure (the Code) prohibits the arbitration of shareholder derivative claims, Christensen’s complaint contained numerous direct claims. Christensen counter-argued that without discovery he could not know the underlying facts and determine which claims were direct and which were derivative.


The court held that the “matter should proceed in the first instance to arbitration, with the direction to the arbitration panel to resolve only those claims that, following development of a factual record, it finds direct in nature….” Christensen at 415. The court had three basic reasons for its decision. First, the complaint contained direct claims that were required to be resolved in arbitration. Second, the development of a factual record in the arbitration would allow the panel to decide which claims were derivative and needed to be brought in court. Third, to allow the potentially derivative claims to be litigated at the same time that the direct claims were being arbitrated would not be efficient and thus would thwart a major goal of arbitration.


The court also held that the proceedings should be stayed and not dismissed, because some of the claims might need to be determined by the court at a later date. The court also noted that the dismissal of a case is appealable whereas a stay is not. Thus, to dismiss the case would potentially lead to an appeal that would prolong the litigation and delay the arbitration process.


The Christensen decision recognizes that efficiency is a primary goal of arbitration, and it promotes that goal. Instead of permitting parallel proceedings to take place in arbitration and court, the court gave the arbitration panel the ability to develop the factual record and determine which claims should be arbitrated. If necessary, any remaining claims could be brought to court at a later time.


Keywords: alternative dispute resolution, adr, litigation, FINRA, direct claims, derivative claims, dismiss, stay, efficiency


Christopher King, DePaul University College of Law, Class of 2016, Chicago, IL


 

September 29, 2015

AAA Employment Rules Give Arbitrator Right to Decide Gateway Issues


In Universal Protection Serv., LP v. Superior Court, No. CO785557 (Cal. App. 4th 2015), the court denied a mandamus petition that sought to set aside an order compelling the employer to arbitrate a dispute with its employees, including whether class action relief was available.


The plaintiffs, a group of armed security guards at the Yolo County Superior Court, were employed by Universal Protection, Service LP (UPS). Their complaint alleged that they were required to provide themselves with certain equipment (such as guns and handcuffs) and also to pay the costs of keeping themselves certified as armed guards, but that they were not reimbursed for their equipment or training costs. When they filed an administrative complaint, as required by law, all but one of them was fired and none were paid their wages. They then filed a class action complaint in state court. Their amended complaint sought to compel class-wide arbitration of their claims under California’s Labor Code Private Attorneys General Act of 2004.  


The parties had signed an arbitration agreement that stated that the American Arbitration Association’s National Rules for the Resolution of Employment Disputes (the AAA Employment Rules) would apply. UPS filed a cross-complaint seeking a declaration that (1) the trial court, not the arbitrator, should decide whether class relief was available under the parties’ arbitration agreement and (2) the parties’ arbitration agreement barred any class relief.  UPS then moved to compel individual arbitration and to stay the court proceedings. The trial court stayed the court proceedings but referred the entire matter to arbitration. UPS filed a petition for mandamus arguing that only the court, not the arbitrator, had jurisdiction to decide if class relief was available.


The California appellate court held that the issue to be decided was whether the arbitration agreement “clearly and unmistakably” gave the arbitrator the right to decide whether the parties’ agreement permitted class arbitration. Because this question turned on the language of the parties’ agreement and the AAA Employment Rules, the court reviewed the trial court’s decision de novo.


The court stated that the fact that the arbitration agreement did not mention class arbitration did not resolve whether the agreement “clearly and unmistakably” gave the arbitrator the power to decide jurisdictional questions, such as whether class action relief was available. It noted that Rule 6 of the AAA Employment Rules specifically stated that “The 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.” The court also noted that the AAA Supplementary Rules for Class Arbitrations applied to all cases that involved any AAA rules, directed the arbitrators to decide whether class arbitration is appropriate under the parties’ arbitration agreement, and spelled out the procedures the arbitrators should follow in making that decision. 


The court then joined the majority of decisions holding that the incorporation of arbitration rules that give the arbitrator jurisdiction to decide so-called gateway questions, such as the availability of class relief, should be considered to be part of the parties’ arbitration agreement and given their intended effect. It quoted the Ninth Circuit’s observation that “Virtually every circuit to have considered the issue has determined that incorporation of the [AAA] rules constitutes clear and unmistakable evidence that the parties agreed to arbitrate arbitrability.” As a result, the court denied the petition for mandamus and allowed the matter to proceed to arbitration, including the plaintiffs’ demand for class relief. 


Keywords: class action, class arbitration, jurisdiction, gateway questions, employment, incorporation and AAA rules


Mitchell L. Marinello, Novack and Macey LLP, Chicago IL


 

September 29, 2015

Fifth Circuit Rules in OMG, L.P. v. Heritage Auctions


In OMG, L.P. v. Heritage Auctions, Inc., No. 14-10403, 2015 WL 2151779 (5th Cir. May 8, 2015), petition for cert. filed, (U.S. Sept. 9, 2015) (No. 15-298), the Fifth Circuit held that two parties agreed to arbitrate the issue of contract formation of two contracts by actually arbitrating that issue. It reached this conclusion despite the arbitrator’s finding that the contracts—which contained arbitration provisions putting the parties in arbitration in the first place—were never formed.


OMG involved a dispute between an auction house (Heritage) and a supplier (OMG). 2015 WL 2151779, at *1. The parties entered into two contracts containing identical arbitration clauses. Id. at *1–2. After a dispute arose, the parties submitted it to arbitration. Id. During the arbitration, Heritage argued that the parties had not reached a meeting of the minds on a key contractual term and, thus, the contracts were unenforceable and should be rescinded. Id. at *2. Heritage prevailed on this issue, and the arbitrator found that a contract never existed. Id.


OMG then filed suit in federal court to vacate the arbitration award. Id. Its position was straightforward: if the arbitrator found that no contract existed between OMG and Heritage, then they never agreed to arbitrate, and the arbitrator lacked authority to determine the contract formation issue in the first instance. The district court agreed with OMG and vacated the arbitration award.


The Fifth Circuit, however, reversed. Its analysis began with the adage that arbitrations are creatures of contract and the maxim that parties can agree to arbitrate issues that they were not otherwise contractually bound to arbitrate. Id. at *3. Addressing the parties’ arbitration conduct, the Fifth Circuit found persuasive that OMG and Heritage addressed contract formation issues in their arbitration pleadings, in their pre-hearing briefs, at the hearing, and in their post-hearing briefs. Id. at *3–4. Moreover, OMG argued the merits of the contract formation issue at each of those stages and never challenged the arbitrator’s authority to decide it by, for example, objecting in the arbitration or seeking judicial intervention. Id. at *4–5. Consequently, the parties’ submission of the contract formation issue to the arbitrator supplied the arbitrator with authority to decide that issue such that the issue of whether the parties’ contracts supplied that authority was moot. Id. at *1, *5 & n.3. The Fifth Circuit went even further, holding that, had OMG wanted to preserve its right to object to arbitrability, then “it should have refused to arbitrate, leaving a court to decide whether the arbitrator could decide the contract formation issue.” Id. at *5.


The Fifth Circuit's ruling sends a clear message: if a party maintains that an issue is not arbitrable, then the party must refuse to arbitrate its merits and instead seek judicial intervention. Left unclear by the Fifth Circuit's ruling is whether judicial intervention should or could be sought before, during, or after the arbitration. The ruling also appears to erode the FAA's grounds for vacatur based on the arbitrator exceeding his or her powers, which the Fifth Circuit's opinion referenced, but did not substantively address.


It will be interesting to see whether the Supreme Court grants certiorari and, if so, whether the Fifth Circuit’s opinion will be affirmed. It also will be interesting to follow further development in Fifth Circuit as trial courts evolve the procedural paths by which arbitrations may be enjoined or vacated when one party claims issues are not arbitrable.  


Keywords: alternate dispute resolution, ADR, vacatur, implied arbitration agreement, judicial intervention, waiver


Andrew P. Shelby, Novack and Macey LLP, Chicago, IL


 

September 25, 2015

District Court’s Mid-Arbitration Intervention Clear Error


In the middle of an ongoing arbitration, a federal district court took the extraordinary step of disqualifying the parties’ arbitrator. In re Sussex, 781 F.3d 1065 (9th Cir. 2015), the Ninth Circuit Court of Appeals issued a writ of mandamus vacating the trial court’s order. In doing so, the court distanced itself from its ruling in Aerojet-General Corp. v. Am. Arbitration Ass’n, 478 F.2d 248 (9th Cir. 1973), which observed that judicial intervention in ongoing arbitrations may occur in “extreme cases.”


In Sussex, the American Arbitration Association (AAA) appointed Brendan Hare, an attorney, to arbitrate disputes that condominium purchasers had brought against a developer. 781 F.3d at 1069. At about the time the third of the three related disputes was consolidated before Hare (about one year after Hare’s appointment), he started a litigation-finance business—a business that fronts litigation costs for a stake in the outcome. In promoting his new venture, Hare stated that he invests in “high-value, high-probability legal claims and litigations.” After beginning his business, Hare completed a new disclosure form for the AAA, but never disclosed the new venture’s existence.


The defendant asked the AAA to disqualify Hare, arguing that Hare had an incentive to issue a “high-value” award to the plaintiffs to promote his business—a business that had nothing but a website.  While the AAA considered whether to disqualify Hare (which it ultimately refused to do), the defendant filed motions to disqualify Hare in state and federal courts. After some litigation in the state court, the parties agreed to use a different arbitrator in one case. But, relying on the Ninth Circuit’s Aerojet decision, the federal district court granted the motion to disqualify Hare from the other two proceedings.


In Aerojet, the Ninth Circuit found that interim judicial review “should be indulged, if at all, only in the most extreme cases.” Aerojet, 478 F. 2d at 251. The district court determined that Sussex was an “extreme case” because: (a) The defendant would likely prevail on a motion to vacate the arbitration award due to Hare’s evident partiality; and (b) disqualifying the arbitrator immediately would avoid repeating the arbitration in the future. In re Sussex, 781 at 1070. The Ninth Circuit disagreed and issued a writ of mandamus directing the district court to vacate its order.


Unlike the majority of other circuits, which prohibit judicial intervention during an arbitration, the Ninth Circuit’s Aerojet decision leaves open the possibility of intervention in “extreme cases.” However, neither the Aerojet court, nor any other panel of the Ninth Circuit has ever found an “extreme case” existed. And Sussex would not be the first.


In deciding whether to issue a writ of mandamus, the appellate court focused on one factor—whether the trial court committed clear error in finding Hare partial. Cases finding evident partiality of an arbitrator have involved “direct financial connections between a party and an arbitrator or .  .  .  a concrete possibility of such connections.” Conversely, evident partiality does not exist where undisclosed facts relate to attenuated or insubstantial connections between a party and an arbitrator. Here, the Ninth Circuit found Hare’s potential ability to profit from a large award to the plaintiffs was, at best, attenuated or insubstantial.


Moreover, even if Hare’s undisclosed business created a reasonable impression of partiality, the appellate court rejected the district court’s finding that avoiding delays and expenses from a second arbitration warranted Hare’s disqualification. The Ninth Circuit reiterated its view that “mere cost and delay” is inadequate to warrant interim collateral review.


Although the Ninth Circuit did not reverse Aerojet’s “extreme case” exception to judicial intervention in an arbitration, this exception’s viability now is in serious doubt.


The defendant filed a petition for a writ of certiorari before the U.S. Supreme Court, which is scheduled for conference on September 28, 2015.


Keywords: litigation, alternative dispute resolution, arbitrability, judicial intervention, mandamus, evident partiality, clear error


Andrew D. Campbell, Novack and Macey LLP, Chicago IL


 

September 4, 2015

Arbitration Ordered in Employee Personal Injury Case


Texas’ Eighth District Court of Appeals has ruled that a boot manufacturer may require its workers to arbitrate their workplace injury claims under a provision included in their employment contract.


In Lucchese Boot Co. et al. v. Licon, No. 08-14-00228-CV, Lucchese Boot Co. et al. v. Solano, No. 08-14-00229-CV, and Lucchese Boot Co. et al. v. Rodriguez, No. 08-14-00230-CV, (Tex. App. – El Paso, July 29, 2015), several workers filed personal injury complaints against their employer. Although such cases typically would be subject to the Texas workers’ compensation law, Lucchese is not a subscriber to the program.


In their lawsuits, the workers sought damages for injuries that they suffered on the job. In response, Lucchese unsuccessfully sought to compel arbitration under the terms of the company’s Benefits Injury Plan. When that attempt failed, Lucchese argued that the disputes should be arbitrated under its Problem Resolution Program. The state court denied Lucchese’s motion and the company filed an interlocutory appeal with the Texas appellate court in El Paso.


The appeals court stated that the gateway issue of whether the cases were subject to arbitration was reserved for the courts due to the limited scope of the arbitration provision. Next, the court found that the workers waived their claim that the agreement to arbitrate was illusory since they failed to explain what rendered it so on appeal.


The court of appeals then ruled that an enforceable arbitral agreement existed. The court stated the terms of the Problem Resolution Program were “definite, ascertainable, and not subject to more than one reasonable interpretation.” The court concluded that “both prongs of the arbitration test have been met: an arbitration agreement exists, and the dispute between the parties falls within its ambit.” See Delfingen, 407 S.W.3d at 797. The trial court could not refuse to enforce the arbitration agreement on any defective formation grounds.


The court next held the workers failed to provide evidence that the agreement to arbitrate was unconscionable and rejected the employees’ argument that Lucchese was estopped from seeking to compel arbitration under the Problem Resolution Program because the company unsuccessfully had sought to compel arbitration under the Benefit Plan.


Because Lucchese established that a binding arbitration agreement existed that was not subject to any valid defenses, the court reversed the trial court’s order denying Lucchese’s motion to compel arbitration and remanded the case.


Keywords: alternative dispute resolution, litigation, employer, workers’ compensation, personal injury, compel arbitration


Karl Bayer, Karl Bayer Dispute Resolution, Austin TX

 

 

August 27, 2015

Clickwrap Arbitration Agreement Upheld


Increasingly the enforceability of clickwrap agreements—agreements entered into when an online consumer clicks a box accepting the terms of a contract before being allowed to further utilize a website—is the subject of litigation. Recently, in Whitt v. Prosper Funding LLC, the Southern District of New York ruled that an arbitration provision in a clickwrap agreement was assented to by the consumer, not unconscionable and otherwise enforceable. No. 1:15-cv-136-GHW, 2015 WL 4254062, at * 8 (S.D.N.Y. July 14, 2015).

 

Whitt, the plaintiff, a deaf man, applied for a loan through the defendant Prosper Funding LLC’s website. After doing so, and in order to confirm his identity for purposes of the loan application, the plaintiff called the defendant using a Video Relay Service—a service that allows deaf individuals to communicate by telephone using a sign language interpreter. The defendant refused to accept these calls and required the plaintiff to provide additional proof of his identity—something that was not required of hearing customers. Meanwhile, the defendant suspended the plaintiff’s account.

 

The plaintiff sued in federal court alleging the defendant violated the ADA and related state statutes. The loan application agreement allowed the parties to choose to resolve any claim through binding arbitration administered by the AAA or JAMS. Id. at *2. The defendant elected to arbitrate the dispute and moved to dismiss the plaintiff’s complaint and compel arbitration through JAMS.

 

Whitt argued that the arbitration provision was unenforceable because: (a) he never assented to it; and (b) even if he had assented, the costs of arbitration prevented him from vindicating his statutory rights, therefore, enforcement of the provision would be unconscionable. The court rejected both arguments.

 

Under New York law, parties seeking to enforce arbitration provisions must prove, by a preponderance of the evidence, that a valid arbitration agreement exists. Id. at *4. Clicking a box acknowledging awareness of, and agreement to, the terms of a contract suffices to create a contract under New York law. Id. Because the defendant demonstrated that a valid arbitration agreement existed, the burden shifted to the plaintiff to prove that the claims were unsuitable for arbitration. Id. at *3 citing Green Tree Fin. Corp.-Alabama v. Randolph, 531 U.S. 79, 91 (2000).

 

The plaintiff first argued that he was not constructively aware of the agreement’s terms—which were available only through a hyperlink—and, therefore, never assented to them. The court disagreed. It found that when completing the loan application the plaintiff clicked on a box stating, in bold text, “Clicking the box below constitutes your acceptance of . . . the borrower registration agreement.Id. at*4. Clicking the box was sufficient to show assent. Further, the hyperlink to the agreement was conspicuous. The court cited several cases holding that online consumers are constructively aware of an agreement’s terms if they are available through a conspicuous hyperlink. Id. at *5. Thus, the court concluded, the plaintiff assented to the agreement’s arbitration provision.

 

The plaintiff next argued that the provision was unconscionable because the prohibitive costs of arbitration precluded the plaintiff from effectively vindicating his federal statutory rights. Id. at *6. The court rejected this argument, too.

 

Although the plaintiff demonstrated that he was impoverished, he did not submit any evidence of the likely costs of an arbitration. Id. at 7. The court refused to speculate as to these costs. Id. Moreover, the JAMS standards in consumer actions would cap the plaintiff’s costs at $250.00; the defendant would bear all remaining arbitration costs. Thus, the fees the plaintiff would incur in an arbitration were comparable to proceeding in court. Moreover, under the agreement, the defendant agreed to pay up to $1,000 for the plaintiff’s arbitration costs. So it was unlikely that the plaintiff would incur any fees whatsoever.

 

Yet, assuming arguendo that the plaintiff had to pay something to arbitrate his claim, the parties’ agreement shifted fees to the defendant if the plaintiff prevailed. And, if the plaintiff lost, he would not be responsible for the defendant’s fees. In other words, the only conceivable way the plaintiff would pay arbitration costs were if he lost in the arbitration. Clearly, the plaintiff would not concede that point just to defeat the defendant’s motion to dismiss. After rejecting both of the plaintiff’s challenges to the clickwrap agreement, the court compelled the parties to arbitrate.

 

Clickwrap agreements are becoming the norm in online transactions. This case is part of a growing body of law finding that the simple act of clicking a box will create a binding agreement—including an agreement to arbitrate. This case also demonstrates that clickwrap arbitration provisions are not unconscionable where a consumer’s arbitration costs will be minimal.

 

Keywords: alternative dispute resolution, litigation, clickwrap, unconscionable, cost prohibitive, compel arbitration, agreement to arbitrate, constructive knowledge, hyperlink, arbitration costs

 

Andrew Campbell, Novack and Macey LLP, Chicago, IL

 

 

August 20, 2015

Arbitration Litigation Waiver Clause Blues


In Dispenziere v. Kushner Companies, 2014 N.J. Super. Lexis 157, 101 A.3d 1126 (App. Div. Nov. 21, 2014) the New Jersey Appellate Court refused to enforce the arbitration clause in a condominium unit purchase agreement that did not include “clear and unambiguous language” that the buyer was waiving the right to sue in court. The Appellate Division relied on a New Jersey Supreme Court case decided in September 2014, Atalese v. United States Legal Services Corp 219 N.J. 430 (2014). Although both cases involved what are commonly called “consumer” contracts, one cannot safely assume that the holdings are limited to such contracts. Under New Jersey law a consumer is anyone who “consumes” goods or services, including business entities. See Hundred E. Credit Corp. v. Eric Schuster Corp., 212 N.J. Super. 350, 355–56 (App. Div. 1986) (Ruling that business entities are persons protected by the Consumer Fraud Act, and that the Act is not limited to “personal, family or household use.”). Since many arbitration clauses do not contain sufficiently clear waiver language, it may now be open season in New Jersey on arbitration clauses.


The plaintiffs who appealed in Dispenziere purchased condominiums at The Landings at Harborside, LLC (The Landings) in Perth Amboy, New Jersey. In August of 2000, the Perth Amboy Redevelopment Agency (PARA) authorized the city of Perth Amboy to enter into an agreement with The Landings. The agreement envisioned development of town-homes, row houses, condominiums, retail space, a hotel, ample parking, a cultural center, a waterfront walkway, and park spaces. The Landings entered into an agreement with the city in September 2000. 2014 N.J. Super. LEXIS 157, **1–3.


The plaintiffs bought their units between 2004 and 2007, each executing a purchase agreement. By 2011 the developers allegedly sought to pare back the development and submitted a revised proposal to PARA, which deleted proposed amenities and substituted rental units for owner-occupied units. 2014 N.J. Super. LEXIS 157, **2, 4, 5. Unhappy with these changes, the plaintiffs filed suit against the developers alleging various common law claims as well as a violation of the New Jersey Consumer Fraud Act. N.J.S.A. 56:8-1 to 20. The defendants moved to compel arbitration pursuant to an arbitration clause in the purchase agreement.


The trial court granted the defendants’ motion, and the plaintiffs appealed. In reversing, the Appellate Division explained that, like the clause recently invalidated by the New Jersey Supreme Court in Atalese, “the arbitration provision in the purchase agreements is similarly devoid of any language that would inform unit buyers such as plaintiffs that they were waiving their right to seek relief in a court of law.” 2014 N.J. Super. LEXIS 157, *12. This finding alone was conclusive, without regard to the sophistication of the parties or whether the plaintiffs were represented by counsel at the time they purchased their units.


The practical reality is that in New Jersey, an arbitration clause must make clear that by agreeing to arbitrate the parties waive their right to bring suit in court. Accordingly, practitioners drafting arbitration clauses should include waiver provisions in clear and unambiguous language. “No particular form of words is necessary to accomplish a clear and unambiguous waiver of rights[,]” but the court in Atalese cast a lifeline by giving examples of valid waiver language:


  • Employee agrees to waive her right to a jury trial and that all disputes relating to her employment shall be decided by an arbitrator;
  • By agreeing to arbitration, the parties understand and agree that they are waiving their rights to maintain other available resolution processes, such as a court action or administrative proceeding, to settle their disputes; and
  • Instead of suing in court, we each agree to settle disputes (except certain small claims) only by arbitration. The rules in arbitration are different. There’s no judge or jury, and review is limited, but an arbitrator can award the same damages and relief, and must honor the same limitations stated in the agreement as a court would. 219 N.J. at 444-45 (examples paraphrased).

Going forward, similar language should be used in every arbitration clause in a contract governed by New Jersey law, and even in those arbitration agreements arguably subject to the Federal Arbitration Act and the laws of other states. Not doing so is an invitation to litigation.


Keywords: alternative dispute resolution, litigation, clear, unambiguous waiver, jury, trial, unenforceable


Calvin K. May and Robert J. MacPherson, Gibbons P.C., Newark, NJ

 

 

August 7, 2015

Award Vacated Due to Arbitrator's Failure to Disclose


In Municipal Workers Compensation Fund, Inc. v. Morgan Keegan & Co., 2015 WL 1524911 (Ala. April 3, 2015), the Alabama Supreme Court vacated an arbitration award when one arbitrator on a three–arbitrator panel failed to disclose his investment firm’s relationship with one of the parties and its counsel.


The Municipal Workers Compensation Fund, Inc. (Fund) hired Morgan Keegan Asset Management, Inc. (MAM) to invest and manage funds. The Fund lost approximately $15 million when the subprime housing market collapsed.


The Fund initiated FINRA arbitration proceedings asserting various claims, including breach of contract, breach of fiduciary duty and violation of state securities laws. The parties selected a panel of three arbitrators based on disclosure reports. One of the arbitrators was a vice president/partner in a “relatively small” investment firm. The arbitrator failed to disclose that his investment firm had been a co-underwriter with MAM on numerous equity and debt issuances and had been co–defendants in a number of lawsuits. The arbitrator also failed to disclose that his investment firm had a past and ongoing attorney–client relationship with MAM’s counsel.


The arbitrators denied the Fund’s claims following a hearing. The lower court refused to vacate the arbitration judgment, and the Fund appealed to the Alabama Supreme Court. Reversing the lower court’s decision, the Alabama Supreme Court held that the Fund established evident partiality on the part of the arbitrator under 9 U.S.C. § 10(a)(2) and was entitled to have award vacated. The Court noted that FINRA rules impose upon the arbitrator the duty to make a reasonable effort to discover business relationships between his investment firm and the parties and their legal counsel. Although the arbitrator lacked actual knowledge of his firm’s business relationship with MAM and its counsel, he had constructive knowledge of that relationship. The Alabama Supreme Court held that the arbitrator’s failure to disclose the relationship resulted in a “reasonable impression of partiality” and required the arbitration award to be vacated. The Court also held that the finding of evident partiality in one arbitrator required vacatur of the arbitration award by the panel.


Municipal Workers Compensation Fund serves as yet another reminder of the importance of conflicts checks and the disclosure of all business relationships between a potential arbitrator’s firm and a party. Although an arbitrator may lack actual knowledge of his or her firm’s relationship with a party or its counsel, the arbitrator may be deemed to have constructive knowledge of that relationship requiring vacatur of an arbitration award.


Keywords: alternative dispute resolution, adr, litigation, disclosure, constructive knowledge, vacatur


James N. Walter, Jr., Capell & Howard P.C., Montgomery, AL

 

 

August 3, 2015

California Denies Arbitration Due to Possible Conflicting Rulings


In VOX Entertainment, Inc. v Reese et al., 2014 WL 462251 (Cal. App. 2 Dist. Feb. 5, 2014), a California appellate court affirmed a denial of a motion to compel arbitration where not all defendants were bound by an arbitration agreement and conflicting decisions could result.

 

VOX, a marketing and event company, sued five defendants—three individuals and two corporations. The three individuals were all previous members of VOX management, with leading roles in the company’s finance, marketing, and sales divisions. According to the complaint, in 2011 the three decided to establish a competing business and used their positions at VOX to advance their competitive advantage by “encumbering VOX financially to the benefit of their planned competing business and positioning clients to transition to their planned competing business.” The client base for this competing business would be “selected from the most lucrative clients of VOX.”

 

The two corporate defendants were VOX clients. The individual defendants allegedly disclosed their secret plan to establish a competing business, and the corporate clients sought to establish a joint venture with them in order to save money on the types of services provided by VOX.

 

VOX’s claims included inter alia, disclosure of confidential information, misappropriation of trade secrets, unfair competition, and breach of contract.

 

The three individuals each had signed employment agreements with the company that required arbitration of “any dispute, controversy, or claim arising out of or related to the agreement, or its validity, enforcement, interpretation, breach, or termination.” The corporate defendants, however, did not have any arbitration agreement with VOX.

 

The individual defendants moved to compel arbitration pursuant to their employment agreements. VOX, preferring court, opposed the motion to compel on the grounds that VOX’s claims against the corporate defendants arose from the same transactions as those against the individuals. VOX argued that resolution of some claims in a judicial forum and others in an arbitral forum could result in conflicting or inconsistent rulings. Moreover, VOX argued that the defendants in each forum would attempt to blame the defendants in the other proceeding in order to seek to escape liability, or minimize their apportionment of fault. This could hurt VOX’s potential recovery.

 

Both the trial and appellate courts agreed with VOX, citing California Code of Civil Procedure section 1281.2(c). That section gives courts discretion to deny a motion to compel arbitration where “[a] party to the arbitration agreement is also a party to a pending court action… with a third party, arising out of the same transaction or series of related transactions and there is a possibility of conflicting rulings on a common issue of law or fact.” Despite the strong public policy in California and elsewhere that favors the enforcement of arbitration agreements, the court here agreed that the facts connecting the corporate and individual defendants were too similar to allow the claims against them to proceed in different tribunals. Instead, the court held that all claims against all defendants would be heard in court.

 

Keywords: arbitration, alternative dispute resolution, litigation, conflicting results, California Code of Civil Procedure, motion to compel

 

Brian Farkas, Goetz Fitzpatrick LLP, New York, NY

 

 

July 28, 2015

Tennessee High Court Clarifies Tennessee Law to Avoid Preemption


In Berent v. CMH Homes, Inc., No. E2013-01214-SC-R11-CV, 2015 WL 3526984, —S.W.3d—(Tenn. June 5, 2015), the Tennessee Supreme Court considered whether the FAA as interpreted by the U.S. Supreme Court in AT&T Mobility v. Concepcion, 131 S. Ct. 1740 (2011), preempted a state common-law rule rendering certain arbitration agreements invalid as unconscionable. The Tennessee Supreme Court had previously set forth the common law rule in Taylor v. Butler, 142 S.W.3d 277 (Tenn. 2004). There, it held unconscionable an arbitration provision in a consumer adhesion contract for financing an automobile because it contained non-mutual remedies, i.e., it permitted the seller/lender to bring essentially any claim in court or arbitration, but confined the buyer/borrower to arbitration only. Taylor, 142 S.W.3d at 286–87. In Berent, the Tennessee Supreme Court faced similar facts plus a preemption challenge to the Taylor rule based on the U.S. Supreme Court’s intervening decision in Concepcion.

 

In Berent,the buyer of a mobile home and its seller/purchase-financing lender entered into a consumer adhesion contract that required them to arbitrate all disputes except small claims. Berent, 2015 WL 3526984, at *2. As a further exception, the contract permitted the seller/lender to sue in court to “enforce the security interest” it held in the mobile home or to “seek preliminary relief.” Id. Relying on Taylor, the district and intermediate appellate courts invalidated the contract. In the Tennessee Supreme Court, the seller interposed a preemption challenge based on Concepcion and, in the alternative, attacked the lower courts’ application of Taylor to the facts of the case.

 

The Tennessee Supreme Court first found that the FAA did not preempt the Taylor rule. It initially noted that, since Concepcion, a circuit split has developed regarding whether “the FAA preempts a state common-law rule that non-mutuality of remedies in the arbitration provision of an adhesive contract is per se unconscionable and renders the arbitration provision unenforceable.” Id. at *7. It then turned to examining whether Taylor set forth a per se rule that, potentially, could be preempted—i.e., whether, under Taylor, any degree of non-mutuality of remedies in a consumer adhesion contract renders it unconscionable.

 

The court found that Taylor did not set forth a per se rule. While acknowledging that Taylor was “not a model of clarity,” the court noted that, instead of applying a bright-line rule, the Taylor opinion looked to the particular facts and circumstances of the contract at issue and applied general unconscionability principles thereto. Id. at *8–*9. Further, intermediate Tennessee appellate courts had not applied Taylor as setting forth a per se rule. Id. at *8. And, those courts had also applied Taylor outside of the arbitration-provision context as a case setting forth general unconscionability principles. Id. at *9.

 

From this, the Tennessee Supreme Court concluded that the Taylor rule escaped Concepcion preemption because it does not constitute a defense that applies only to arbitration or derives its meaning from the fact that an arbitration agreement is at issue. Id. at * 9–*10. To the contrary, the rule is just a particular application of a “standard common-law defense[]” of unconscionability that, under Concepcion, is not preempted by the FAA, which “permits courts to invalidate an arbitration agreement for reasons such as unconscionabilty so long as they ‘place arbitration agreements on an equal footing with other contracts.’” Id. at *10 (quoting Concepcion, 131 S. Ct. at 1745).

 

With the preemption hurdle cleared, the Tennessee Supreme Court went on to apply the Taylor rule to the facts of the case and rejected the buyer’s challenge to the arbitration agreement as unconscionable, notwithstanding the non-mutuality of remedies therein. Id. at *14. The court reasoned that the degree of non-mutuality of the agreement in Berent was not as unbalanced as the non-mutuality at issue in Taylor. Id. at *13–*14. Indeed, in Taylor, the agreement confined the buyer to arbitration while allowing the seller to elect litigation or arbitration. Id. In contrast, in Berent the non-mutuality extended only to permitting the seller/lender to use litigation to enforce its security interest in the property at issue and obtain preliminary relief. Id. Further, unlike in Taylor, the non-mutual “carve out” in Berent served a legitimate business purpose: preserving the status quo pending arbitration and allowing the seller to take advantage of state-law foreclosure mechanisms, which are highly prescribed to include safeguards for both parties. Id. at *14. In short, the Tennessee Supreme Court concluded that the Berent agreement was not unconscionable because it was not beyond the expectations of an ordinary person or oppressive. Id.


It will continue to be interesting how courts grapple with the Concepcion decision and common-law challenges to arbitration contracts.

 

Keywords: alternative dispute resolution, ADR, litigation, Concepcion, preemption, unconscionability, adhesion

 

Andrew P. Shelby, Novack and Macey LLP, Chicago, IL

 

 

July 23, 2015

Second Circuit Refuses to Confirm Foreign Arbitration Award


By summary order issued on July 1, 2015, the Second Circuit for the second time in the same case declined to confirm an award issued by an arbitral panel in Brazil. VRG Linhas Aereas S.A. v. MatlinPatterson Global Opportunities Partners II L.P., No. 14-3906-CV, 2015 WL 3971177 (2d Cir. July 1, 2015) affirming No. 11 Civ. 0198 (MGC), 2014 WL 4928929 (S.D.N.Y. Oct. 2, 2014).

 

The Second Circuit previously remanded the matter to the district court to determine if the parties had agreed to arbitrate the substantive liability issue that was resolved by the award as well as the issue of arbitrability. VRG, 2015 WL 3971177, at *1 (citing VRG Linhas Aereas S.A. v. MatlinPatterson Global Opportunities Partners II L.P., 717 F.3d 322 (2d Cir. 2013)). On remand, the district court found that the party against whom the award was issued (the defendant), did not agree to arbitrate—notwithstanding the fact that the arbitral tribunal in Brazil found otherwise and the Brazilian courts had refused to vacate the arbitral award. VRG, 2015 WL 3971177, at *1–2.

 

The matter came to the United States when the plaintiff sought to confirm the award in the Southern District of New York pursuant to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 9 U.S.C. § 201-08 (New York Convention). Id., at *2; VRG, 717 F.3d at 323. The district court refused to confirm the award—twice. On appeal from the district court, the plaintiff contended (originally and in its appeal after remand) that the district court erred by failing to enforce and give effect to the judgments of Brazilian courts. The Second Circuit, however, held that under the New York Convention, the threshold issue of arbitrability is to be determined under United States arbitration law. VRG, 2015 WL 3971177, at *2; VRG, 717 F.3d at 325.

 

In that regard, under United States law, the Second Circuit found that the district court properly examined the operative agreements to determine if and what the parties had agreed to arbitrate. Based on a review of the agreements, the court agreed with the district court that the defendant had not agreed to arbitrate. VRG, 2015 WL 3971177, at *2.

 

The underlying dispute arose out of the acquisition of the plaintiff, VRG, by a Brazilian corporation from two of the defendant’s indirect subsidiaries. A dispute arose over the purchase price adjustment in the Purchase and Sale Agreement (PSA), and the plaintiff referred the dispute to arbitration, naming the defendant, MatlinPatterson, over its objections. The arbitral tribunal in Brazil found that the defendant had agreed to arbitrate all issues arising under the PSA and found the defendant liable for fraudulent misrepresentations. Id., at *1.

 

Section 14 of the PSA contained an arbitration clause. Notably, however, the defendant did not sign the PSA. The defendant did sign a one-page noncompete agreement in which it agreed not to compete with the plaintiff for a certain period of time. The noncompete was executed at the same time as the PSA and was one of many addendums to the PSA—Addendum 5. Id. The noncompete mentioned the PSA (and incorporated and restated the PSA’s noncompete provision), but did not expressly incorporate all of its terms. Further, the noncompete did not contain an arbitration clause. Id., at *2; see also VRG, 2014 WL 4928929, at *2.

 

Based on the foregoing, on remand, the district court found that the defendant did not agree to arbitrate. The Second Circuit affirmed:

 

Because Addendum 5 contains no arbitration clause of its own, and because it does not incorporate the PSA’s arbitration clause within Section 14, we conclude, like the District Court, that MatlinPatterson did not agree to arbitrate. In the absence of any threshold arbitration agreement, and in accordance with the calculus set forth in our prior decision, we affirm the District Court’s judgment denying VRG’s petition to confirm the arbitral award.

 

VRG, 2015 WL 3971177, at *2.

 

In so holding, the Second Circuit followed the “well-established rule” of contract interpretation that “[w]here . . . the parties to an agreement choose to cite in the operative contract ‘only a specific portion’ of another agreement, . . . ‘a reference by the contracting parties to an extraneous writing for a particular purpose makes it part of their agreement only for the purpose specified.’” Id. (citations omitted).

 

This case is a reminder of the importance of the threshold questions when a matter is submitted to arbitration—did the parties agree to arbitrate and who shall decide a dispute’s arbitrability. VRG, 717 F.3d at 325. The answers to these questions turn on the language of the operative agreements as well as the applicable law.

 

Keywords: alternative dispute resolution, litigation, foreign arbitration, arbitrability, jurisdiction, Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 9 U.S.C. § 201-08, New York Convention, confirming awards, vacating awards


Michael S. Oberman, Kramer Levin Naftalis & Frankel LLP, New York, NY

 

 

July 20, 2015

Alabama Supreme Court Requires Policyholders to Arbitrate


In American Bankers Ins. Co. v. Tellis, 062615 ALSC 1131514 (June 26, 2015), the Alabama Supreme Court held that policyholders, who did not sign, read, or even receive insurance forms that contained arbitration agreements, nevertheless, had manifested their assent to the arbitration agreements by affirmatively renewing their policies and paying premiums. Accordingly, the court held that the policyholders were required to arbitrate their claims that American Bankers had sold them homeowners’ insurance with a level of coverage that they could never receive even if the covered property was a total loss.

 

In the case, several policyholders had sued the insurer for breach of contract, fraud, unjust enrichment, and other claims. The insurer moved to compel arbitration based on arbitration agreements contained in two of the forms that constituted a part of the policy. The trial courts denied the motions to compel, and the insurer appealed. Several appeals that arose out of nearly identical facts were then consolidated.

 

The policyholders stated that the arbitration provision was not contained in the insurance applications that they signed, and that they did not sign, read or receive the two insurance forms in which the arbitration provisions appeared. They argued that, as a result, they never agreed to arbitrate their disputes.

 

The Alabama Supreme Court held that the arbitration provision did not have to be in the insurance application, or any document that the policyholders signed, in order to be enforceable. The court noted that the insurance policy stated that it was not complete without the declarations page and that the declarations page listed the two forms that contained the arbitration agreements. The court held that the policyholders had a duty to “to investigate those forms because the declarations page indicated that the forms were part of the policy.” The court held that the policyholders’ failure to do so did not relieve them of the arbitration agreements those forms contained. Instead, the court ruled that by renewing their policies and paying the premiums for them, the policyholders ratified the insurance policies, including their arbitration provisions.

 

The chief justice of the court issued a vigorous dissent, arguing that the plaintiffs could not be denied their constitutional right to a jury without a knowing and voluntary waiver of their jury right which, he maintained, had not occurred. The dissent went further, arguing that the Federal Arbitration Act (FAA) was originally intended to be strictly a procedural statute limited to federal cases and that it should not apply to lawsuits in state court. The chief judge cited substantial authority for his position, mostly in the form of the FAA’s legislative history and dissenting opinions in other cases, including dissents by various justices of the United States Supreme Court.

 

Keywords: alternative dispute resolution, litigation, insurance application, forms, renewal, payment of premiums, ratification, arbitration, right to a jury

 

Mitchell L. Marinello, Novack and Macey LLP, Chicago IL

 

 

July 6, 2015

Manifest Disregard: The Circuit Split Persists


Section 10 of the Federal Arbitration Act does not list “manifest disregard of the law” as one of the four bases for vacating an arbitration award. Nonetheless, it continues to be argued and, sometimes, accepted. An analysis shows that, while some circuits have shifted their position slightly, there is still no clear majority on whether manifest disregard of the law is a valid basis for overturning an arbitration award.


Three federal appellate courts have maintained a strict reading of SCOTUS’s 2008 Hall Street decision. The Fifth, Eighth, and Eleventh Circuits continue to hold that manifest disregard is no longer an applicable basis for vacating an arbitration award. See McVay v. Halliburton Energy Servs., Inc., 2015 WL 1810950, at *2 (5th Cir. Apr. 22, 2015); Medicine Shoppe Intern., Inc. v. Turner Invs., Inc., 614 F.3d 485, 489 (8th Cir. 2010); Campbell’s Foliage, Inc. v. Federal Crop Ins. Corp., 562 Fed. Appx. 828, 831 (11th Cir. 2014).


The Second, Fourth, Seventh, Ninth, and Tenth Circuits take the opposite view and have allowed arguments to vacate an arbitration award based on manifest disregard of the law. See A & G Coal Corp. v. Integrity Coal Sales, Inc., 565 Fed. Appx. 41, 42–3 (2nd Cir. 2014); Dewan v. Walia, 544 Fed. Appx. 240, 248 (4th Cir. 2013); Renard v. Ameriprise Fin. Servs., Inc., 778 F.3d 563, 56–69 (7th Cir. 2015); Wetzel’s Pretzels, LLC v. Johnson, 567 Fed. Appx. 493, 494 (9th Cir. 2014); Adviser Dealer Servs., Inc. v. Icon Advisers, Inc., 557 Fed. Appx. 714, 717 (10th Cir. 2014).

Interestingly, more circuit courts have opted for a middle ground in the last few years, declaring that the issue is undecided. The First Circuit recently reversed a district court’s decision to vacate an arbitration award for manifestly disregarding the law. See Raymond James Fin. Servs., Inc., v. Fenyk, 780 F.3d 59, 63–4 (1st Cir. 2015). The court stated that whether the manifest disregard doctrine remains good law is “uncertain,” but that the alleged error in the arbitrator’s award did not meet that high standard in any case.


In addition to the First Circuit, the Sixth and Third Circuits leave unanswered the question whether manifest disregard is a legitimate basis to vacate an arbitration award. In 2008, the Sixth Circuit decided to continue accepting manifest disregard and overturned an arbitration award on that basis, yet in 2014 it held that the legitimacy of using manifest disregard has not been settled and evaded applying it. See Coffee Beanery, Ltd. v. WW, LLC, 300 Fed. Appx. 415, 419 (6th Cir. 2008); Schafer v. Multiband Corp., 551 Fed. Appx. 814, 818–19 (6th Cir. 2014). Although the Third Circuit has allowed manifest disregard arguments in the past, it recently held that “this court has not yet ruled” on whether manifest disregard is an allowable basis to vacate an award. Bellantuono v. ICAP Secs. USA, LLC, 557 Fed. Appx. 168, 173–74 (3rd Cir. 2014).


Litigants hoping to overturn arbitration awards should not take great comfort in the fact that five circuit courts allow manifest disregard arguments. Even those five circuits are reluctant to vacate arbitration awards on that basis. In fact, we were able to find only two federal appellate courts, the Fourth and Ninth, that have overturned an arbitration award on that basis since 2009. See Dewan, 544 Fed. Appx. at 248; Comedy Club, Inc. v. Improv West Assocs., 553 F. 3d 1277, 1289–90 (9th Cir. 2009).


Here’s the scorecard:


Manifest Disregard Lives

Manifest Disregard Dead

Status Uncertain

2015

2nd, 4th, 7th, 9th, 10th

5th, 8th, 11th

1st, 3rd, 6th

2012

2nd, 4th, 6th, 9th, 10th

1st, 5th, 7th, 8th, 11th.

3rd

 


Keywords: alternative dispute resolution, litigation, manifest disregard, vacate, arbitration


Liz Kramer, Stinson Leonard Street, Minneapolis, MN, and Bri’An Davis, University of  Iowa College of Law, Class of 2017, Iowa City, IA

 


 

June 29, 2015

Litigation Stay Lifted after Arbitration Dismissed for Failure to Pay Arbitration Fees


In Pre-Paid Legal Services, Inc. v. Cahill, No. 14-7032, 2015 WL 3372136 (10th Cir. May 26, 2015), the United States Court of Appeals for the Tenth Circuit rejected an attempt to stay a federal lawsuit pending arbitration after the arbitrators terminated the proceeding because of a party’s failure to pay arbitration fees.

 

In Cahill, Pre-Paid Legal Services, Inc. (Pre-Paid) and Todd Cahill (Cahill) entered into an employment contract containing an arbitration clause. Id. at *1. Cahill was Pre-Paid’s sales associate. Id. After Cahill left the company, Pre-Paid sued Cahill for breach of his employment contract. Cahill moved to stay the case pending arbitration before the American Arbitration Association (AAA). Id. at **1–2. The district court entered the stay. Id. at *2.

 

In the arbitration proceeding, Pre-Paid paid its share of the arbitration fees. Id. Cahill did not pay his share, despite repeated warnings from the AAA that the arbitration proceeding would be suspended if he failed to make payment. Id. Eventually, the AAA suspended the arbitration proceeding, warning Cahill that the arbitration proceeding would be terminated if payment was not received by a specific deadline. Id. Cahill failed to pay by the deadline. The AAA then terminated the arbitration proceeding. Id.

 

Subsequently, Pre-Paid asked the federal district court to lift the stay. Id. Cahill opposed the request. Id. The district court lifted the stay, and Cahill filed an interlocutory appeal under section 16(a)(1)(A) of the Federal Arbitration Act (FAA). Id. Pre-Paid asked the court to dismiss the appeal or, alternatively, affirm the order lifting the stay. Id.

 

As to the request for dismissal, Pre-Paid argued that the appellate court lacked jurisdiction to hear the interlocutory appeal. Id. at *3. More specifically, it argued that although section 16(a)(1)(A) allows an appeal of an order “refusing a stay”, the district court’s ruling lifting the stay was not an order “refusing a stay” and hence not appealable under section 16(a)(1)(A). The appellate court disagreed, finding that the order was “effectively one refusing a stay.” Id. at *4. The court also held that, in essence, Cahill was seeking relief under FAA section 3, even if he did not expressly ask for relief under that section. Id. at *5. Thus, the court found that it had jurisdiction to hear the appeal. Id. at **5–6.

 

As for the merits, however, the court found that the district court correctly lifted the stay. Id. at *6. Section 3 of the FAA provides that courts should enforce arbitration agreements by staying lawsuits until such arbitration “has been had in accordance with the terms of the agreement.” Id. at *7 (quoting 9 U.S.C. §3). Pre-Paid and Cahill’s arbitration agreement provided that “[a]ll disputes and claims . . . shall be settled totally and finally by arbitration . . . in accordance with the Commercial Arbitration Rules of the American Arbitration Association.” Id. The court held that the arbitration proceeding had “gone as far as it could,” and Cahill could not continue to maintain the stay under FAA section 3 after breaching the arbitration agreement by failing to pay fees in required by the AAA’s rules. Id.

 

The court alternatively found that the district court properly lifted the stay because “Cahill was in default in proceeding with [the] arbitration,” as set forth in section 3 of the FAA. Id. Cahill did not dispute that he failed to pay the required arbitration fees, but argued that the arbitration panel never formally made a finding of default, and the federal courts could not make such a finding. Id. at *8. The court disagreed, finding that the federal courts have authority to interpret the phrase “default” in section 3. Id. The court also held that, in any event, the arbitrators’ termination of the arbitration proceeding did constitute a finding of default. Id. at **11–12.

 

Cahill stands as a reminder that parties seeking to take advantage of arbitration agreements need to comply with the arbitration administrative requirements, including prompt payment of all required fees.

 

Keywords: adr, litigation, stay, failure to pay, arbitration fees, interlocutory appeal


Adam Waskowski, Novack and Macey LLP, Chicago, IL

 


 

June 23, 2015

Court Refuses to Compel Mediation under the FAA


In Trujillo v. Gomez, 2015 WL 1757870 (S.D.Cal. 2015), the defendant moved to dismiss or stay the lawsuit based on the plaintiff’s failure to comply with a contractual requirement that the parties first mediate, and then arbitrate, any disputes. The defendant argued that the requirement to both mediate and arbitrate was enforceable under the Federal Arbitration Act. The court agreed that under the FAA the plaintiff was required to arbitrate, but it did not order the parties to mediation. The court held that the remedies of the FAA apply only to arbitration, not mediation.


There is a limitation on the effect of this ruling, however, because the defendant relied solely upon the FAA as authority for ordering mediation. No argument was made that the court should require mediation under common law contract principles. This distinction is important because the court relied on a prior Eleventh Circuit decision, Advanced Bodycare Solutions, LLC v. Thione Int’l, Inc., 524 F.3d 1235, 1241 (11th Cir. 2008), which similarly refused to order mediation under the FAA, but noted this limitation on the scope of its ruling:


Finally, we emphasize that we do not hold that stays in aid of mediation are per se impermissible. To the contrary, district courts have inherent, discretionary authority to issue stays in many circumstances, and granting a stay to permit mediation (or to require it) will often be appropriate. We merely hold that the mandatory remedies of the FAA may not be invoked to compel mediation.


Courts in prior cases have not hesitated to enforce contractual mediation clauses under basic contract law principles. See, e.g., A. Raymond Tinnerman Mfg., Inc. v. Tecstar Mfg. Co., 2012 WL 1191617 (E.D. Wisc. 2012).


Keywords: alternative dispute resolution, adr, litigation, mediation, stay, FAA, contract principles, discretion


Jonah Orlofsky, The Law Offices of Jonah Orlofsky, Chicago, IL

 


 

June 18, 2015

Delaware Enacts Streamlined Arbitration Process


The Delaware Rapid Arbitration Act (DRAA), 10 Del. C. § 5801 et seq., is designed to be a streamlined arbitration process that will allow for “prompt, cost-effective, and efficient” resolution of business disputes. (10 Del. C. § 5802.) It was signed into law on April 2, 2015, and became effective on May 4, 2015.

 

Who Can Use the DRAA?
The DRAA is completely voluntary. All parties must explicitly agree to arbitration under the DRAA for such an arbitration to occur. Specifically, in order to be subject to the DRAA, there must be a written agreement (either forming the basis for the dispute or a separate agreement consenting to arbitration under the DRAA) that is signed by all parties to the arbitration and includes an express reference to the “Delaware Rapid Arbitration Act”. Moreover, the agreement must provide that it shall be governed by or construed under the laws of Delaware regardless of whether Delaware law governs the parties’ other rights, remedies, liabilities, powers, and/or duties. Additionally, at least one party to the agreement must be a business entity formed or organized under the laws of Delaware or having its principal place of business in Delaware. Finally, no party to the agreement may be a consumer as that term is defined in 6 Del. C. § 2731. (10 Del. C. § 5803(a).)

 

How Does the DRAA Work?
After the parties opt into the DRAA process, the first step is the selection of an arbitrator. While the DRAA provides for arbitration by one or more arbitrators, this article refers to only one arbitrator. Under the DRAA, the parties may specifically identify which arbitrator they want to hear their disputes or designate a process for selecting an arbitrator. If the parties’ agreement does not specifically identify either of these alternatives, then the parties may petition the Delaware Court of Chancery to appoint an arbitrator. Moreover, if the arbitrator selected by agreement is unable or unwilling to act as the arbitrator in the case or if the parties are unable to select an arbitrator in accordance with their agreement, then the Court of Chancery may also select an arbitrator. (10 Del. C. § 5805.)

 

The DRAA requires that every party to an agreement invoking the DRAA consent to the exclusive submission to an arbitrator on all issues of substantive and procedural arbitrability. (10 Del. C. § 5803(b)(2).) This is designed to avoid a party’s attempt to delay or prevent arbitration by seeking an injunction of the arbitration from a court at the outset of a case. The parties to the arbitration also waive objection to the exclusive personal and subject matter jurisdiction in Delaware’s courts for certain limited purposes including the appointment of an arbitrator, entering judgment after an arbitration, enforcing a subpoena upon the request of an arbitrator, determining an arbitrators fee, and, before an arbitrator accepts appointment, issuing an injunction in aid of an arbitration. (10 Del. C. § 5803(b)(4); 10 Del. C. § 5804(b).)

 

The point of the DRAA is to get a fast resolution to a case. To that end, unless agreed otherwise, the arbitrator must issue a final award within 120 days of the appointment. (10 Del. C. § 5808(b).) The parties (with the arbitrator’s consent) may extend this period by up to 60 days. (10 Del. C. § 5808(c).) If the arbitrator does not issue the final award by the deadline, his/her fees are reduced or eliminated. (10 Del. C. § 5806(b).) This will likely result in reduced discovery and a reduced cost for the parties. Indeed, to facilitate the timely resolution of disputes, the arbitrator has the authority to make interim rulings and issue interim orders to determine what evidence and which witnesses will be presented at the hearing, and those rulings cannot be appealed or challenged. (10 Del. C. § 5807(a).) Moreover, the arbitrator has the authority to administer oaths, compel the attendance of witnesses and production of documents and evidence, issue subpoenas if provided for by the agreement, and to make rulings, issue orders, and impose sanctions to ensure the arbitration is resolved in a timely, efficient, and orderly manner. (10 Del. C. § 5807(b).)

 

In the final award, the arbitrator has broad discretion to grant whatever relief he/she deems appropriate, whether legal or equitable in nature, including money damages, injunctions, and specific performance. (10 Del. C. § 5808.) Once the arbitrator issues the final award, any challenge to it must be made within 15 days and is done directly to the Delaware Supreme Court. (10 Del. C. § 5809(b).) The Supreme Court may only vacate, modify, or correct the final award in conformity with the Federal Arbitration Act. (10 Del. C. § 5809(c).) Additionally, the parties can agree to eliminate appellate review of a final award entirely or agree to appellate review by one or more arbitrators. (10 Del. C. § 5809(d).) Unless the final award is challenged within the 15 day period, the award is automatically confirmed 5 days after that period expires (or 5 days after the final award is issued if the agreement provides for no appellate review). (10 Del. C. § 5810(a).)

 

What Are the Benefits of Using the DRAA?
The most obvious benefits of the DRAA are the speed with which commercial disputes will be resolved and the reduced cost associated with that resolution. By agreeing to forego some procedures that are typical in litigation, disputes will be resolved at less expense and in six months or less. The DRAA enables the parties to streamline their disputes and reduce issues that generally arise at all stages of litigation or a traditional arbitration. Delaware entities and those involved in business with Delaware entities should keep the DRAA in mind as contracts are negotiated and disputes arise. It may be an effective tool for efficiently resolving disputes.

 

Keywords: alternative dispute resolution, adr, litigation, Delaware Rapid Arbitration Act, arbitration, rapid, expedited, efficient

 

Alexander L. Berg, Novack and Macey LLP, Chicago IL


 

June 2, 2015

Web Layout Affects Enforceability of Arbitration Agreement


In Sgouros v. TransUnion Corp., No. 14 C 1850, 2015 WL 507584, at *1 (N.D. Ill. Feb. 5, 2015) the court held that an arbitration agreement that the defendants had on their webpage was not sufficiently clear to bind potential plaintiffs.

 

Plaintiff Gary Sgouros brought a class action against Defendants TransUnion Corp., Trans Union LLC, and TransUnion Interactive, Inc. (collectively, TransUnion). TransUnion sells consumer credit scores and reports over its website for $39.99. Although credit reports are generally free to consumers under federal law, companies will also sell “scores” that supposedly help consumers determine how lenders and businesses will interpret their credit report. Here, the plaintiff alleged that the score itself was an inaccurate reflection of the consumer’s credit status. The specific claims centered on violations of the Fair Credit Reporting Act (FCRA) and the Illinois Consumer Fraud and Deceptive Business Practices Act (ICFA).

 

The defendants moved to compel arbitration pursuant to the Federal Arbitration Act. Sgouros opposed the motion on the grounds that the arbitration agreement on the defendants’ website was unclear. The TransUnion website employed a so-called “clickwrap” agreement. These agreements require users to click a button that indicates that that they “agree” or “accept” certain terms after viewing them on the website. To determine whether such an agreement is valid, courts will consider whether users (i) had reasonable notice of the terms of a clickwrap agreement and (ii) manifested assent to the agreement. Courts generally will not enforce agreements with fine print buried in a small font or on an obscure page of the website, when the consumer lacked a reasonable opportunity to see the terms that they were agreeing to. See, e.g., Hines v. Overstock.com, Inc., 668 F.Supp.2d 362, 367 (E.D.N.Y. 2009), aff'd 380 F. App’x 22 (2nd Cir. 2010) (Arbitration clause and forum selection clause were in a link at the bottom of the pages of the website, but it was not necessary for a consumer to scroll to the bottom of any page to complete a transaction. Clickwrap agreement found not enforceable.)

 

The district court judge denied TransUnion’s motion to compel arbitration. The court analyzed images of the website to determine exactly when and how the consumer would “agree” to the terms and conditions. The court noted that, even though the font was reasonable in size, the placement of the “accept” button was confusing. Because there was separation between the terms and conditions, and the “acceptance” button, and because it was unclear exactly what was being accepted, the court held that “the placement… made it confusing enough to mislead a user…” and held the clickwrap agreement to be invalid.

 

Sgouros is a useful reminder to companies looking to insert arbitration agreements and class action waiver provisions into their website’s terms and conditions. Courts will carefully examine the layout and fonts of such clauses, as experienced by the consumer, to ensure that the arbitration provisions were brought to the consumer’s attention and that the consumer actually manifested agreement. Without both, the clickwrap agreement will not be enforced.

 

Keywords: arbitration, alternative dispute resolution, litigation, clickwrap agreement, browsewrap agreement, class action, waiver

 

Brian Farkas, Goetz Fitzpatrick LLP, New York, NY


 

May 26, 2015

Exhaustion of Administrative Remedies Does Not Apply in Arbitration of Employment Claims


In Virk v. Maple-Gate Anesthesiologists, P.C., No. 14-CV-381S, —F. Supp. 3d—, 2015 WL 268873 (W.D.N.Y. Jan. 21, 2015), the Western District of New York became the second court to consider the validity of an arbitration provision containing a statute of limitations that effectively prevented a plaintiff from exhausting administrative remedies prior to arbitrating federal employment discrimination claims. The court held that statutory exhaustion requirements apply only in federal court and do not implicate private arbitration agreements. Id. at *8.

 

Plaintiff Virk entered into an employment agreement with defendant Maple-Gate Anesthesiologists, P.C. The agreement contained a clause requiring arbitration of “[a]ny controversies or claims arising out of or relating to this Agreement or the breach thereof” except for disputes related to the non-competition clauses of the agreement. Id. at *1. The provision required that arbitration be commenced within six months of the date of any alleged controversy or claim. Id.

 

Maple-Gate thereafter terminated Virk. Virk filed an action in New York state court asserting, among others, federal employment discrimination claims under Title VII of the Civil Rights Act of 1964 and the Americans With Disabilities Act. Id. at *2. Both of these claims require the plaintiffs to exhaust administrative remedies prior to filing a claim. Id. at *8 n.3. After removal to federal court, the defendants sought to compel arbitration. Id. at *2.

 

In deciding arbitrability under the Federal Arbitration Act, courts ask whether a valid arbitration agreement exists and, if so, whether the dispute to be arbitrated falls within the scope of that agreement. Id. at *3. Virk argued that the arbitration agreement was invalid because enforcing it would be unlawful as applied to his claims for employment discrimination. Id. at *8. Because the arbitration provision required arbitration to be commenced within six months—likely before the administrative process would be resolved—Virk argued he was effectively precluded from filing a claim at all. Id. at *8 & n.3.

 

The court recognized that arbitration agreements are subject to typical contract defenses. Thus, courts could invalidate arbitration agreements on public policy grounds where they “operate as a prospective waiver of a party’s right to pursue statutory remedies,” such as those provided by federal employment discrimination statutes. Id. at *8 (internal quotation marks omitted). The court held that there was no such waiver because the exhaustion requirements apply only in federal court and do not implicate private arbitration agreements. Id.

 

The court reasoned that because arbitration is a creature of contract, “an arbitration provision that requires an employment discrimination claim to be arbitrated before statutory exhaustion procedures could possibly be completed is easily construed as reflecting the parties’ agreement to waive such requirement, as well as any defense based on that requirement.” Id. The court noted that its decision was consistent with the only other court to confront the issue, Morris v. Temco Service Industries, Inc., No. 09 Civ. 6194 (WHP), 2010 WL 3291810, at *5 (S.D.N.Y. Aug 12, 2010). Virk, 2015 WL 268873 at *8.

 

This decision is important for potential plaintiffs and defendants who are party to employment agreements with arbitration provisions and statutes of limitation because it moots a common issue in employment discrimination cases. In addition, drafters of employment agreement arbitration provisions should carefully consider the length of contractual statutes of limitation to either avoid, or embrace, the force of Virk. The Second Circuit may provide further guidance regarding the issue, as the case is currently on appeal.

 

Keywords: ADR, litigation, arbitrability, limitations, exhaust administrative remedies, employment discrimination, waiver

 

John Haarlow, Jr., Novack and Macey LLP, Chicago, IL


 

May 21, 2015

Sixth Circuit Determines Defendant Did Not Waive Its Right to Arbitrate


In Shy v. Navistar International Corp, 781 F. 3d 820 (6th Cir. 2015), the Sixth Circuit upheld the district court’s ruling that the parties’ dispute was subject to an arbitration clause contained in a settlement agreement and consent decree related to the defendant’s obligations to its retired employees, but reversed the district court’s finding that the defendant waived its right to arbitrate the dispute.

 

Under the settlement and consent decree, the defendant was required to make certain payments to a Supplemental Benefit Trust, which was managed by a Supplemental Benefit Committee (SBC). Id. at 822. An appendix to the agreement and decree outlined the method for the calculation and enforcement of the defendant’s obligation regarding the payments. This appendix also contained an arbitration clause which required that disputes over the “information or calculation[s]” provided by the defendant be referred to arbitration. Id. at 823.

 

Following this settlement agreement, SBC requested additional information from the defendant and disputed certain calculations, namely that the defendant had misclassified certain Medicare subsidies in its calculations. Id. The defendant provided some additional information and declined to pursue dispute resolution over the disputed calculations, arguing reclassifying the subsidies would not affect its overall obligations. SBC then formally requested arbitration over the disputed calculations, to which the defendant did not directly respond. Id. at 824. After some back and forth, SBC ultimately filed a motion to intervene in the litigation, as well as a motion to enforce the settlement agreement. Id. The defendant responded to these motions. However, after the district court granted SBC’s motion for leave to amend its complaint, the defendant moved to dismiss the amended complaint on the ground that the issues were subject to arbitration. Id. The district court found that the claims fell under the scope of the arbitration clause, but that the defendant had waived its right to arbitrate based on the defendant’s behavior prior to and during the litigation. Id.

 

In upholding the district court’s ruling that the claims were subject to arbitration, the Sixth Circuit stated that the “strong federal policy in favor of arbitration resolves any doubts as to the parties’ intentions in favor of arbitration.” Id. at 827. In reversing the district court’s determination that the defendant waived its right to arbitrate, the Sixth Circuit noted that a party “waives arbitration if it acts in a manner completely inconsistent with any reliance on an arbitration agreement or delays asserting arbitration to such an extent that the opposing party incur[red] actual prejudice.” Id. at 827–28 (internal citations and quotations omitted). The Sixth Circuit determined that neither inconsistency nor actual prejudice were present in this case. For example, the Sixth Circuit interpreted the defendant’s silence in response to SBC’s formal notice of dispute not as a waiver, but rather as “the typical posturing that may occur where one party is attempting to stare down the other party in the hope that the other party will simply give up.” Id. at 829 (internal citations and quotations omitted).

 

In addition, the Sixth Circuit found that the defendant’s “pre-litigation behavior did not delay proceedings in a way that actually prejudiced the SBC” and that the defendant was not the sole reason for any delay, as SBC could have sought a court order compelling arbitration after the defendant initially refused to arbitrate. Id. The Sixth Circuit also found that waiver could not be inferred from the defendant’s delay in seeking arbitration once SBC commenced litigation, as the Sixth Circuit found that the defendant raised arbitration as a defense in its second substantive submission. Id. at 829.

 

The dissent, however, had harsh words for the defendant, stating that it would have found that the defendant waived its right to arbitrate “by engaging in an unmistakable campaign of avoidance and delay,” including sitting quietly on its right to arbitrate until it received an adverse ruling from the district court. Id. at 831. The dissent also stated that the defendant’s conduct caused actual prejudice to SBC because SBC incurred litigation costs prior to the defendant claiming the dispute should be arbitrated and that the defendant did not raise the issue of arbitration until its fourth substantive submission—not its second one. Id. at 837. Not only did the dissent argue that the defendant waived the right to arbitrate, the dissent disagreed that the dispute was even within the scope of the arbitration clause. Id.

 

Following the decision in Shy, it will be interesting to see what sort of conduct is required for the Sixth Circuit to find that waiver of an arbitration clause occurred.

 

Keywords: litigation, ADR, alternative dispute resolution, arbitration, scope of arbitration clause, waiver

 

Elizabeth C. Wolicki, Novack and Macey LLP, Chicago, IL


 

May 6, 2015

Arbitration Clause in Employee Handbook Is Enforced


In McAllister v. Smith Barney/Citigroup (2d Cir. May 5, 2015), the Second Circuit issued a summary order that affirmed a district court decision compelling arbitration. The basis for the decision was a mandatory arbitration agreement in an employee handbook.


Plaintiff Angela McAllister did not have a signed employment agreement, and the district court found, based on her employment application and the absence of any evidence to the contrary, that she had always been an at-will employee. In 1991, when the plaintiff began work, her employer did not have an arbitration provision in its employee handbook, but in 1993 it added one. The district court found that the plaintiff’s continued employment after the amendment to the handbook constituted her acceptance of the new terms in it, including the new arbitration provision.


The Second Circuit reviewed the district court’s decision to compel the plaintiff to arbitrate de novo. The court noted that the Federal Arbitration Act requires arbitration agreements to be in writing but does not require them to be signed. It then applied Connecticut law to determine if the arbitration clause in the handbook was part of the plaintiff’s employment contract.


The court noted that, under Connecticut law, all employment agreements not governed by express contracts “involve some sort of implied ‘contract’ of employment,” the terms of which are determined from the facts and circumstances surrounding the parties’ relationship. The court also noted that, in Connecticut, the issuance of a new employee handbook “constitutes an offer to modify the preexisting terms of employment . . .” which, to become effective, must be accepted.


Because the plaintiff remained employed 15 years after the handbook was modified to include an arbitration provision, and because computer screenshots showed that on three occasions in the past she had electronically accepted the new handbook, the court found that she had consented to the new terms in the handbook, including its arbitration requirement. The court held that the plaintiff’s “bare denials” that she did not receive the new handbooks were not enough to create a genuine issue of fact, and it affirmed the judgment below compelling her to arbitrate her employment claims.


Keywords: alternative dispute resolution, litigation, at-will, employment, handbook, electronic acceptance, implied contract


Mitchell L. Marinello, Novack and Macey LLP, Chicago, IL


 

May 1, 2015

Court Should Not Limit Remedy Before Award Is Issued


On April 28, 2015, the Second Circuit issued an interesting opinion on arbitrability in Benihana, Inc. v. Benihana of Tokyo, LLC Docket No. 14-841. The case arises from a license agreement to operate certain Benihana restaurants and to use the Benihana trademark. The license agreement had a broad arbitration clause, including a provision covering disputes over the “right of termination, or the reasonableness thereof” as well as “any other dispute” that arose between the parties with respect to the agreement.

 

A dispute arose, and in advance of an arbitration commenced by Benihana of Tokyo (the licensor), Benihana America (the licensee) sought an injunction enjoining Benihana of Tokyo from selling certain hamburgers in Hawaii (which it claimed was a breach of the license agreement) and from “arguing to the arbitration panel that it be permitted to cure any defaults if the arbitrators rule that [Benihana of Tokyo] breached the License Agreement.” The district court granted the requested injunction.


The Second Circuit affirmed those portions of the injunction that preserved the status quo pending arbitration. However, it vacated that portion of the injunction that would have prevented Benihana of Tokyo from arguing that an extended cure period could be found under the license agreement. The court saw the issue as being asked to determine whether arbitrators would exceed their power by deciding this issue under the agreement, a question normally reserved for review of an award. The court stated, “Tellingly, Benihana America has not cited, and we have not found, any precedent for a court holding that a particular remedy may not be awarded by an arbitrator before the arbitrator has actually awarded that remedy. On the contrary, courts that have determined that a remedy exceeded the scope of an arbitrator’s power have done so exclusively after the arbitrator’s ruling.”


Given the broad arbitration clause, the court held that it was for the arbitrators in the first instance to rule on whether an extended cure period could be found under the agreement.


Keywords: alternative dispute resolution, litigation, injunction, enjoin, pre-award limit on remedy, remedies

 

Michael S. Oberman, Kramer Levin Naftalis & Frankel LLP, New York, NY


 

April 27, 2015

Three State Courts Follow Federal Decisions on Procedural Arbitrability


In March, the highest courts of Montana, Texas, and Wisconsin all held that, when parties have a valid arbitration agreement, the issue of whether an arbitration demand was timely is presumptively for the arbitrator to decide. That legal principle has been established under the FAA at least since the Howsam decision in 2002 (and confirmed in BG Group in 2014), but it now seems to be firmly taking hold in state courts, even when those courts are interpreting state arbitration acts.

 

In Montana Public Employees’ Assoc. v. City of Bozeman, __ P.3d __, 2015 WL 895731 (Mont. March 3, 2015), the City of Bozeman fired a building inspector. The collective bargaining agreement had a four-step grievance procedure, with time limits, and stated that any grievance not filed within the time limits "shall be deemed permanently withdrawn." The inspector did not complete all the steps within the required time period. Based on that, the city refused to arbitrate. The union sued to force the city to arbitrate, and the city asked the court to find the dispute was time-barred. The Montana Supreme Court noted that it has adopted the distinction between procedural and substantive arbitrability from Howsam (and John Wiley), and that the issue of whether the inspector's claims were time-barred was a "classic question of procedural arbitrability that is for an arbitrator and not for a court to decide."

In G.T. Leach Builders, LLC v. Sapphire V.P., __ S.W.3d __, 2015 WL 1288373 (Tex. March 20, 2015), a developer sued three insurance brokers who had allowed its builder's risk insurance to expire just before a hurricane hit its condominiums (which were still under construction). Later, the developer added the general contractor and others as third parties. The general contractor moved to compel arbitration, and the developer responded that the demand was untimely, because the arbitration agreement incorporated a statute of limitation. The Texas court of appeals ruled that the general contractor's arbitration demand was untimely, but the Texas Supreme Court reversed. Citing to BG Group and Howsam, it held that "courts must defer to the arbitrators to determine the meaning and effect of the contractual deadline."

Addressing the developer's argument that the limitations question was actually one of substantive (not procedural) arbitrability, the Texas court said that it was not substantive because "the parties' dispute over the meaning and effect of the contractual deadline does not touch upon the issue of whether an enforceable agreement to arbitrate [the developer's] claims exists." (The court conceded that timeliness could turn into a substantive issue of arbitrability if the challenger asserted that the contractual deadline made the agreement unconscionable.) Therefore, the Texas Court of Appeals erred by deciding whether the dispute was arbitrable.

 

Similarly, in First Weber Group, Inc. v. Synergy Real Estate Group, LLC, __ N.W.2d __, 2015 WL 1292570 (Wis. March 24, 2015), the Wisconsin Supreme Court held that the timeliness of an arbitration demand was an issue for the arbitrator. Weber involved a brokerage firm that filed an arbitration demand against another broker. The broker refused to arbitrate, and the firm moved a court to compel arbitration. The trial court found the firm's demand for arbitration was untimely, because the governing agreement required arbitration to be demanded within 180 days after the transaction closed. Citing to Howsam, the Wisconsin Supreme Court held that the broker's "timeliness and estoppel defenses against arbitration are to be determined in the arbitration proceedings, not by a court" under Wisconsin's arbitration act. And more broadly, the court adopted the holdings of BG Group and Howsam, so that Wisconsin law now also requires that procedural arbitrability must be decided by an arbitrator, unless the parties agreed otherwise.

These cases should help increase awareness among parties and their counsel that courts can address very limited issues when the parties have a valid arbitration agreement. Essentially, if the arbitration agreement exists, covers the present dispute, is valid under state law and has not been waived by litigation conduct, every other potential dispositive issue is presumptively for the arbitrator to decide.

 

Keywords: alternative dispute resolution, litigation, procedural, substantive, defenses, time limits, timeliness, state law, state arbitration acts

 

Liz Kramer, Stinson Leonard Street, Minneapolis, MN


 

April 15, 2015

Post-Judgment Relief Procedures Cannot Be Used to Alter Arbitration Awards


In City of Chicago v. Chicago Loop Parking LLC, 2014 IL App (1st) 133020, the appellate court rejected an attempt by the City of Chicago to modify a judgment that confirmed a multimillion dollar arbitration award against the city.

 

In Loop Parking, the city had granted Chicago Loop Parking LLC (CLP) the right to operate four public parking garages in downtown Chicago for a 99-year term. In return, CLP paid the city approximately $563 million. Id. at ¶ 2. The parties’ agreement stated that the city would not license any public parking garages within a designated area surrounding those garages. If it did, CLP would be entitled to the immediate recovery of damages from the date of the breach to the end of the term. Id. at ¶ 9.

 

Shortly after the agreement was made, the city issued a license to a large public garage in the designated area. Id. CLP submitted a claim for compensation to the city under the agreement. The parties’ efforts to resolve the situation were unsuccessful. Id. at ¶¶ 9, 10. CLP initiated an arbitration proceeding in accordance with the dispute resolution provisions of the agreement. Id. at ¶ 15.

 

Initially, the city disputed liability, but it eventually decided to dispute only the amount of damages. Id. at ¶ 16. A three-member arbitration panel heard damages evidence over eight days. In January 2013, the panel unanimously awarded nearly $58 million to CLP. Id. at ¶ 19.

 

In May 2013, the city filed a petition in Illinois state court. The petition sought to enter judgment on the award, but also sought a stay and modification of that judgment pursuant to Illinois rules governing post-judgment relief. Id. at ¶ 25. The city argued that although a judgment confirming the award should be entered, the amount of the judgment should be reduced because, after the award was issued, the city had obtained the agreement of the competing parking facility to abandon its public parking license in return for a monetary payment. Id. at ¶¶ 22-23. The city argued that such an agreement (if finalized) would eliminate CLP’s future damages and thereby justify a large reduction in the award. Id. at ¶¶ 25, 76. The city stood to save a considerable sum if the award was so modified.

 

The city conceded that no grounds existed under the Federal Arbitration Act for vacating or modifying the award. Id. at ¶ 25. However, it argued that it could seek modification of a judgment confirming the award. Because Section 13 of the Federal Arbitration Act (FAA) treats judgments confirming awards like all other judgments, the city argued, they are thus “subject to post-judgment relief including vacatur or modification.” Id. at ¶¶ 25, 45.

The trial court rejected the city’s argument:

 

Accepting [the city’s] interpretation . . . would accomplish just what Congress intended the FAA to avoid. It would authorize a court, after the judgment on a concededly legal award, to reconsider it, thereby . . . plunging the parties into further litigation.


Id. at ¶ 28. The city pressed the argument on appeal. The appellate court also was not convinced:

 

Under the City’s interpretation, [S]ection 13 would permit a broader challenge to an award after it has been converted to a judgment than would have been allowed under [the FAA] prior to the conversion of the award into a judgment . . . .

 

Id. at ¶ 48. The appellate court acknowledged some contrary authority existed. However, the appellate court followed what it perceived to be the “majority” rule, namely, that “litigants cannot circumvent” the limited bases for vacating or modifying awards under the FAA “through the use of a ‘post-judgment’ motion.” Id. at ¶¶ 63, 71.

 

During the course of the court proceedings, the city invoked the “equities,” arguing that the taxpayers would lose if the award stood. Id. at ¶ 73. The courts were not swayed. As the appellate court put it:

 

We realize the effect the [] Award will have on blameless taxpayers …. However, the City and CLP agreed to arbitrate any disputes arising out of the [] Agreement, which strictly limits the court's power to address the merits of this matter. The City also chose to gamble that it would succeed at arbitration and lost that gamble.

 

Id. at ¶ 75. Indeed, the appellate court implied that the equities favored CLP, not the city. It remarked that “[t]here is nothing ‘fair’ about reversing the outcome of a years-long arbitration process . . . because one party does not like the result, even where significant public funds are at stake.” Id. at ¶ 75.

 

Loop Parking stands as a stark reminder that courts will not permit parties to use inventive procedural arguments in an attempt to avoid unfavorable awards.

 

Keywords: alternative dispute resolution, litigation, confirmation awards, modifying awards, vacating awards, post-judgment review


Christopher S. Moore, Novack and Macey LLP, Chicago, IL


 

April 2, 2015

Non-Signatories Successfully Enforce Arbitration Clause


Applying controlling Second Circuit precedent, the district court for the Eastern District of New York compelled arbitration between the plaintiffs and five defendant-banks in a RICO action. The banks successfully argued that, although they had not signed the arbitration agreement at issue, they should be able to avoid litigation based on principles of equity and the plaintiffs should have to arbitrate their claims against the banks. Moss v. BMO Harris Bank, N.A., 24 F. Supp. 3d 281 (E.D.N.Y. 2014).


The plaintiffs brought this class action based on the banks’ alleged role in facilitating high-interest payday loans, which are illegal in some states but remain available online. The plaintiffs had contracts with the payday lenders but did not sue them; instead, they sued the banks that facilitated the fund transfers relating to the plaintiffs’ loans. Each of the loan agreements contained an arbitration clause. Though none of the banks were parties to those loan agreements, the agreements stated that the “plaintiffs must arbitrate not only with the [payday] lenders, but also with the lenders’ ‘agents’ and ‘servicers.’” The banks argued that they were “agents” and “servicers” under the loan agreements and therefore entitled to enforce the arbitration requirement.


The district court agreed, granting the banks’ motion to compel arbitration. The court applied the Second Circuit’s “two-part intertwined-ness test, under which the court examines whether: (1) the signatory’s claims arise under the subject matter of the underlying agreement and (2) whether there is a close relationship between the signatory and the non-signatory party.” Id. at *4. Here, the plaintiffs claimed that the banks facilitated the loans in violation of New York usury law. In addition, the plaintiffs and banks had a sufficiently close relationship, as it was foreseeable that the banks would be included among the lenders’ agents and servicers.


Moss v. BMO Harris Bank provides a good example of when equitable estoppel applies in an arbitration setting: “a non-signatory to an arbitration agreement may compel a signatory to that agreement to arbitrate a dispute where… ‘the issues the non-signatory is seeking to resolve in arbitration are intertwined with the agreement that the estopped party has signed.”’ Ragone v. Atl. Video at Manhattan Ctr., 595 F.3d 115, 126–27 (2d Cir. 2010) (citation omitted); see also Smith/Enron Cogeneration Ltd. P'ship v. Smith Cogeneration Int'l, Inc., 198 F.3d 88, 98 (2d Cir. 1999) (same); Crewe v. Rich Dad Educ., LLC, 884 F. Supp. 2d 60, 75 n.6 (S.D.N.Y. 2012) (Holding that “even if a defendant herein was held to fall outside the broad language of the Agreement’s arbitration provision, equitable estoppel would oblige [plaintiff] to include that defendant in arbitration here, given the Amended Complaint’s pervasive allegations of interdependent and coordinated misconduct between the non-signatories and signatory….”).


Put differently, under the equitable estoppel test, a court will consider whether a party who has not signed an arbitration agreement nonetheless has a sufficiently close relationship to one of the signing parties that the contracting parties, in effect, have consented to extend their arbitration agreement to the non-signatory. In Moss, the court found that such a close relationship did exist.


Key words: alternative dispute resolution, litigation, equitable estoppel, non-signatory, RICO arbitration, class action


Brian Farkas, Goetz Fitzpatrick LLP, New York, NY


 

March 24, 2015

SCOTUS to Review Another Case Rejecting Class Action Waiver


Continuing to focus on arbitration, on March 24, 2015, the U.S. Supreme Court granted certiorari in DIRECTV, Inc. v. Imburgia, Docket No. 14-462. The issue in Imburgia is again the preemption relationship between the Federal Arbitration Act and local state law concerning consumer class actions and arbitration. As posed by petitioner DirectTV, the Question Presented is


[w]hether the California Court of Appeal erred by holding, in direct conflict with the Ninth Circuit, that a reference to state law in an arbitration agreement governed by the Federal Arbitration Act requires the application of state law preempted by the Federal Arbitration Act.


Even though the Imburgia dispute focuses on state law regarding class arbitration waivers, the preemption relationship between the FAA and state arbitration law is of course important to commercial disputes as well.


According to DirectTV, the California Court of Appeals, 170 Cal. Rptr. 3d 190 (April 7, 2014), erred in holding that the contractual language in DirectTV’s standard Customer Agreement operated to make the arbitration clause in that agreement unenforceable due to California law preventing waivers of consumer class arbitration. Therefore, it may be possible to dispose of this case as a simple matter of contract interpretation (although the contract clauses in question are messy, to say the least), or alternatively by addressing again the preemption relationship between the FAA and state law. DirectTV’s explanation of the state court’s decision naturally stresses the latter approach.


The California Court of Appeal’s decision in this case does precisely what Concepcion prohibits: it applies state law to invalidate an arbitration agreement solely because that agreement includes a class-action waiver. The Court of Appeal purported to reconcile that result with Concepcion by holding that the parties here contractually opted out of FAA preemption, even though they specified that their arbitration agreement “shall be governed by the Federal Arbitration Act.” Ironically, the Court based that holding on a “non-severability” clause designed to prevent class arbitration. Under that clause, the parties agreed that the arbitration agreement as a whole would be unenforceable if “the law of [the customer’s] state” would find the class-action waiver unenforceable. The Court of Appeal seized on that clause to declare that the parties intended to rely on state law preempted by the FAA to avoid enforcement of an arbitration agreement governed by the FAA.


In 2013, the U.S. Ninth Circuit Court of Appeals, addressing the same issue, had reached the exact opposite conclusion on the basis of the exact same arbitration agreement in Murphy v. DIRECTV, Inc., 724 F.3d 1218, 1226 (9th Cir. 2013). In Imburgia, the California Court of Appeals declined to follow the Murphy opinion, regarding the Ninth Circuit ruling as “unpersuasive.” The California court thereby set up a classic “State vs. Federal” conflict attracting the Supreme Court’s attention.


Three clauses of the DirectTV Customer Agreement are relevant to this dispute: 1) the arbitration clause; 2) a general choice of law clause with a specific choice for the arbitration agreement; and 3) the severability clause.


The Customer Agreement at issue here includes a dispute-resolution provision (Section 9) that specifies:


[I]f we cannot resolve a Claim informally, any Claim either of us asserts will be resolved only by binding arbitration. The arbitration will be conducted under the rules of JAMS that are in effect at the time the arbitration is initiated . . . and under the Rules set forth in this Agreement.
* * *
Neither you nor we shall be entitled to join or consolidate claims in arbitration by or against other individuals or entities, or arbitrate any claim as a representative member of a class or in a private attorney general capacity. Accordingly, you and we agree that the JAMS Class Action Procedures do not apply to our arbitration. If, however, the law of your state would find this agreement to dispense with class action procedures unenforceable, then this entire Section 9 is unenforceable.


In addition, the Customer Agreement contains a choice of law provision (Section 10(c)) that states:


Applicable Law. The interpretation and enforcement of this Agreement shall be governed by the rules and regulations of the Federal Communications Commission, other applicable federal laws, and the laws of the state and local area where Service is provided to you. This Agreement is subject to modification if required by such laws. Notwithstanding the foregoing, Section 9 shall be governed by the Federal Arbitration Act.


The Customer Agreement also contains a general severability provision (Section 10(d)): “If any provision is declared by a competent authority to be invalid, that provision will be deleted or modified to the extent necessary, and the rest of the Agreement will remain enforceable.”


Oral argument in Imburgia will occur during the Fall 2015 Term of the Supreme Court.


Keywords: alternative dispute resolution, litigation, Federal Arbitration Act, consumer, class action waiver, preemption


Mark Kantor, Member of College of Commercial Arbitrators, Washington, D.C.


 

March 18, 2015

Why Your Arbitrator Is Biased


Yes, your arbitrator, your mediator, your judge, your jury is biased. Litigators seek an unbiased panel when what they should really do is to understand that no panel, or jury, or judge will ever be without bias. Everyone has biases, including you—explicit and implicit. We are all the product of our culture, our surroundings, our innate preferences. In spite of our best intentions to act objectively and with complete neutrality, everyone views the world through a personal lens, a subjective perspective and… with a particular set of biases.

 

What can you do if you know that the field is never perfectly level? Understanding the science is a first step. It helps to explain what we may know intuitively. It is never exclusively about your message or your arguments.


When trying to eliminate bias, we generally focus on explicit bias. We may research a potential arbitrator for clues to his or her biases based on background and experience.
We ourselves are likely to be aware of our own explicit bias. We know whether we are Yankee fans or Red Sox fans. We know whether we are conservative or liberal because we hold certain beliefs and as a result we tend to vote for the Democrat or the Republican.


These preferences influence how we perceive and interpret information. Therefore, we will likely believe either that the stories on Fox or on MSNBC are factual depending on whether we are already a Republican or a Democrat. It is unlikely that the reporting on the NBC Nightly News, let alone Fox or MSNBC, will change our mind.


We are also subject to implicit or unconscious bias. These biases are more insidious because they may be irrational and outside of our knowledge and control. We do not choose or even want these implicit biases and would be unlikely to list them on an arbitrator disclosure form.


In his speech on race during the 2008 campaign, President Obama told a story about his beloved white grandmother.


I can no more disown [Reverend Jeremiah Wright] than I can my white grandmother—a woman who helped raise me, a woman who sacrificed again and again for me, a woman who loves me as much as she loves anything in this world, but a woman who once confessed her fear of black men who passed by her on the street, and who on more than one occasion has uttered racial or ethnic stereotypes that made me cringe.


In spite of her devotion to her grandson, even President Obama’s grandmother had implicit racial bias. Had she been on a jury, it is likely that implicit bias would have influenced her perceptions of witnesses, their testimony, and the narrative. It is also likely that voir dire would not have disclosed her bias.


Whether presenting arguments to a jury, seeking to persuade a mediator, or eliciting testimony before an arbitration panel, a litigator should recognize the relationship between form and substance. In fact, implicit bias explains why we tend to conflate the messenger with the message. We form a first impression of someone based largely on appearance and presentation. Thereafter we have a bias for maintaining coherence with our first impression. If we form a favorable impression, we are likely to believe the message. If the first impression is unfavorable, the messenger and the message are less likeable and credible going forward.


You may have read about the Nixon/Kennedy debate. Implicit bias explains why demeanor and appearance trumped content. Those who listened on the radio focused exclusively on the debaters’ content. They overwhelmingly judged Nixon the winner. TV viewers reached a different conclusion. They much preferred Kennedy’s athletic, energetic presentation to Nixon’s who, having declined make-up, had a 5:00 shadow and perspired profusely. TV viewers reacting to non-verbal messaging overwhelmingly judged Kennedy the winner.


A more recent example is the first Obama/Romney debate in 2012. Romney was overwhelmingly thought to have trumped Obama in the first debate. Romney made eye contact and was forceful and energetic. Obama looked down at his papers and seemed uninterested and detached. Once again, when the speaker was perceived favorably, the message resonated more strongly than when the speaker was not.


Credibility—yours and your witnesses’—will depend on a first impression. You will be judged by how you present yourself physically, how quickly or slowly you speak, the volume and pitch of your voice, your posture, and eye contact. What you and your witnesses wear may be even more important than your well-constructed arguments.


If you, your client, or your witnesses are initially perceived as credible, you will benefit from the resulting bias that whatever you say is more likely to be believed. Similarly, if the initial impression is unfavorable, you will have a challenge trying to overcome that bias going forward. The old cliché "you never get a second chance to make a first impression" is rooted in the psychology of implicit bias.


So, in spite of a sincere dedication to remaining as fair and impartial as possible, your judge, your jury, your arbitrator, your mediator, and you are subject to implicit and explicit bias. Understanding it is the best way to deal with it.


Many are surprised at what they learn about their own submerged biases. Take the short test today!


Keywords: alternative dispute resolution, litigation, bias, credibility, impartiality


Joan Stearns Johnsen, JSJ-ADR , West Newton, MA


 

March 16, 2015

What the New CFPB Report Teaches Us about Arbitration Clauses


The Consumer Financial Protection Bureau (CFPB) released an “Arbitration Study” exceeding 700 pages to Congress this week. Most commentators assume that the CFPB will use the study to support an effort to restrict or regulate the use of “pre-dispute” arbitration in financial transactions. But let’s not get ahead of ourselves. The study itself is worth digging into—the CFPB was able to access lots of information that us regular folks cannot. Indeed, one complaint about arbitration is that it happens inside a black box, out of reach of statistical analysis or scholarly study, and precluding development of legal precedent. Here’s part one of my peek inside that black box, courtesy of the CFPB.

 

What the Cool Kids Are Putting in Their Arbitration Clauses
About a year ago, CFPB published its findings on the frequency of arbitration agreements in financial agreements. This report does not add much in that area, but it has new information on the features of arbitration clauses that are prevalent in contracts in the industries studied (credit cards, checking accounts, general purpose reloadable prepaid accounts, private student loans, payday loans, and mobile wireless third-party billing).

 

  • Would you guess that 50 percent of payday loan agreements and 83 percent of private student loan agreements allowed their customers to opt out of arbitration? More than a quarter of credit cards and checking account agreements did also.

  • A majority of all types of financial agreements carved out small claims from their arbitration agreements.

  • The AAA is king. It is listed as either the sole provider or an arbitral option in about 9 out of 10 financial agreements (other than student loans). By comparison, JAMS is an option for about half of the agreements (but only 14 percent of mobile).

  • Roughly 9 of 10 arbitration clauses in these industries preclude class actions in arbitration. Most also stated that if the class waiver is unenforceable, the entire arbitration clause is unenforceable as well. (CFPB calls it the “anti-severability provision.”)

  • What are financial institutions not putting in the agreement? They are not shortening statutes of limitations often, they are not limiting damages very often, they are not authorizing the arbitrator to award attorneys’ fees to the prevailing party often, and they are generally not addressing confidentiality.

 

What the Public Understands about those Arbitration Clauses
The CFPB surveyed 1,007 people about their dispute rights with respect to their credit cards, and found they know nothing. The study explains partly why that is: Dispute resolution clauses do not factor into a consumer’s choice of credit card. When all 1,007 people were asked what features they considered in acquiring their credit cards, literally no one mentioned the ADR clause.

 

The 1,007 people were asked what credit cards they had, and whether they could sue the company if there was a dispute. The people who thought they could sue their credit card issuer in court were wrong 80 percent of the time.


One of the most surprising things about the survey results was just how passive people are about disputes. When confronted with a hypothetical example of a credit card refusing to correct a billing mistake, most people would cancel their cards and take no further action. Only 2 percent of people said they would consider going to court or talking to an attorney.

 

In the next post (part two), I will highlight statistics and findings from the CFPB’s comparison of how consumer disputes are resolved in arbitration and how they are resolved in court.

 

Keywords: alternative dispute resolution, litigation, CFPB, credit cards, consumers, financial arbitration, class actions, survey

 

Liz Kramer, Stinson Leonard Street, Minneapolis MN


 

March 11, 2015

Second Study on Consumer Arbitration Completed


The Consumer Finance Protection Bureau (CFPB) has completed its second study of consumer arbitration for Congress. A study was required under the Dodd Frank Act before regulations could be imposed by the CFPB on pre-dispute arbitration agreements in covered products, generally consumer financial products and services. The CFPB has authority to ban or regulate if "it is in the public interest and for the protection of consumers." It seems to have concluded that measures need to be taken—whether that will be a complete ban on pre-dispute arbitration agreements or a ban on class action waivers or some other remedy remains to be seen.


Bloomberg, in an article titled CFPB Finds Arbitration Harms Consumers in Study Presaging Rules, reports the head of the Consumer Financial Protection Bureau saying in a press release on March 10:


These arbitration clauses restrict consumer relief in disputes with financial companies by limiting class actions that provide millions of dollars in redress each year,” Richard Cordray, the CFPB’s director, said in an e-mailed statement. “Now that our study has been completed, we will consider what next steps are appropriate.


The CFPB held public hearings in Newark, New Jersey on March 10, 2015.


Keywords: alternative dispute resolution, litigation, arbitration, CFPB, consumer, class action


Edna Sussman, SussmanADR LLC, New York, NY


 

March 10, 2015

Principal’s Signature Does Not Bind Its Agent to an Agreement to Arbitrate


A patient who signed an arbitration agreement with a medical facility cannot compel a doctor at that facility who did not sign the agreement to arbitrate. Walker v. Collyer, 9 N.E.3d 854 (Mass. App. Ct., Suffolk, 2014).


Collyer was admitted to a medical facility following hip replacement surgery. At the time of his admission, Collyer and the facility entered into an arbitration agreement. The agreement provided that it would cover the parties as well as the facility’s employees and agents. Walker worked at the facility both as an attending physician and as its rehab program’s medical director.

 

Walker conducted a physical examination of Collyer and discharged him three days later. Less than three days after Collyer was discharged, he died when a blood clot traveled to his lung. Collyer’s family brought an arbitration proceeding against Walker and the facility alleging medical malpractice. The arbitrator determined that Walker was bound by the arbitration agreement between the facility and Collyer.

 

Walker commenced an action in Massachusetts Superior Court seeking relief from the arbitrator’s order. The superior court affirmed the arbitrator’s decision requiring that Walker submit to the arbitration proceeding. Walker appealed.

 

In the appeals court, Collyer asserted exceptions to the general rule binding parties to arbitration agreements only if they have signed them. First, Collyer raised the “direct benefits estoppel” exception, which allows a signatory to compel a nonsignatory to arbitrate when the nonsignatory knowingly exploits an agreement containing an arbitration clause. Collyer argued that because Walker could have enforced the agreement as an agent of the facility, and because Walker received income from the facility for treating Collyer, Walker received benefits from the agreement. Collyer also cited the “agency” exception, arguing that Walker was bound by the clause in the agreement that said it included agents of the facility.

 

Relying on the tests laid out by Federal courts interpreting the Federal Arbitration Act, the appeals court rejected Collyer’s arguments. The court found that Walker would have had the opportunity to treat Collyer irrespective of whether Collyer signed the agreement because signing the agreement was not a condition to receiving medical care. The appeals court also held that because Walker was neither aware of the agreement nor had taken any action to enforce it, it was improper to enforce the agreement against him. Finally, the appeals court determined that it was immaterial whether Walker was an agent of the medical facility because the “agency” exception only allows agents to bind principals by their actions, rather than vice versa.

 

The general rule is that a person is not bound by an arbitration agreement unless he has signed it. The exceptions to this rule are very limited. The “agency” exception allows agents to bind principals to agreements, including agreements to arbitrate, but the opposite is not true.

 

Keywords: alternative dispute resolution, litigation, Massachusetts Arbitration Act, Federal Arbitration Act, nonsignatories, agency, estoppel

 

Scott D. Simon, Goetz Fitzpatrick LLP, New York, NY


 

March 4, 2015

Order Requiring Mediation Not Appealable


In Hangartner v. Alexander, 2015 ILApp (4th) 140272-U, the trial court enforced a contractual dispute resolution clause and ordered the parties to “mediate/arbitrate” the dispute before the suit could proceed. It seemed to have been the court’s intent to order mediation, but the order included the reference to arbitration, as well. The defendant, although it was the party that moved to enforce the clause, sought to appeal because the trial court did not specify how the dispute resolution process would work and because the court failed to award the defendant fees for prevailing on the motion. The appellate court ruled that it lacked jurisdiction over the appeal.


The court first noted that, while orders compelling or denying arbitration are appealable, orders concerning pre-trial mediation are not appealable. Orders addressing motions to compel arbitration are considered injunctions and therefore immediately appealable. Citing Short Brothers Construction, Inc. v. Korte & Luitjohan Contractors, Inc., 356 Ill.App.3d 958, 960–61, 828 N.E.2d 754, 756 (5th Dist. 2005), the court held that orders compelling or refusing to compel mediation, even though they require the parties to take a certain action, are not injunctions. Rather, they are administrative actions taken by courts to control their docket. Thus, appellate courts do not have any jurisdictional basis for hearing an appeal of an order compelling or denying a request for pre-dispute mediation. Since the order in question was ambiguous and may have only been intended to order mediation, the appellate court ruled that it lacked jurisdiction to hear an appeal from that order.


Keywords: alternative dispute resolution, litigation, mediation, compel, arbitration, appeal, jurisdiction


Jonah Orlofsky, The Law Offices of Jonah Orlofsky, Chicago IL


 

February 26, 2015

District Court Rejects Pre-Award "Stacked Deck" Challenge to Arbitrator Selection Process


A United States District Court in Avic International USA, Inc. v. Tang Energy Group, Ltd., No. 3:14-CV-2815-K, 2015 WL 477316 (N.D. Tex. Feb. 5, 2015), ruled that it lacked jurisdiction to reconstitute an arbitration panel based on claims that there had been a “lapse” in the arbitration selection process and that the panel selected by the parties amounted to a “stacked deck” against the plaintiffs.

 

In Avic, two plaintiffs (Plaintiffs) and five defendants (Defendants) had entered into a contract forming Soaring Wind Energy, LLC (Contract). The Contract contained a dispute resolution clause that required disputes to be resolved in binding arbitration (Arbitration Clause). The Arbitration Clause, in turn, provided a process for selecting the arbitrators (Selection Process). Each party to the dispute was to select an arbitrator and the arbitrators thus selected were then to select one or two additional arbitrators to serve on the panel. Id. at *1.

 

A Contract dispute arose, and one of the Defendants filed an arbitration demand. All parties to the Contract joined in the dispute and engaged in the Selection Process. Nine arbitrators were selected—two by each of the Plaintiffs; five by each of the Defendants. The seven party-selected arbitrators then chose two additional arbitrators to resolve the dispute. Id.

 

The Plaintiffs filed suit in the Northern District of Texas shortly thereafter. They argued that: (1) there was a “lapse” in the Selection Process; and (2) that the panel as constituted amounted to a “stacked deck” against the Plaintiffs and violated “their constitutional rights to an impartial decision maker.” Id. at *2–4. The Plaintiffs’ stacked-deck challenge was based on the fact that five arbitrators had been selected by the Defendants, but only two had been selected by the Plaintiffs. The Plaintiffs asked the district court to “reconstitute” the panel to eliminate that problem, i.e., so that the panel consisted of “one arbitrator for Defendants collectively and one for Plaintiffs collectively, with a third arbitrator selected by those two arbitrators.” Id. at *2.

 

The district court dismissed the Plaintiffs’ suit, finding “that it has no jurisdiction under the FAA to entertain Plaintiffs’ claim prior to an arbitration award issuing.” Id. at *5. In reaching its decision, the district court observed that a court’s power to become involved in a pre-award arbitrator selection process dispute was limited to three situations:


(1) if the arbitration agreement does not provide a method for selecting arbitrators; (2) if the arbitration agreement provides a method for selecting arbitrators but any party to the agreement has failed to follow that method; or (3) if there is “a lapse in the naming of an arbitrator or arbitrators.”

Id. at *3 (quotations and citation omitted).

 

The district court then rejected the Plaintiffs’ “lapse” argument. According to the court, a “lapse” in the selection process was limited to situations in which there was an arbitrator vacancy, or some other “mechanical breakdown” in the selection process. Because “[e]ach party to this action [had] named an arbitrator, with no resulting delay” there had been no “lapse,” the court ruled. Id. at *4.

 

The court was similarly unimpressed with the Plaintiffs’ argument that the panel—as constituted—was a “stacked deck” that violated the Plaintiffs’ “constitutional rights to an impartial decisionmaker.” Id. at *4. It held that such challenges were “procedural” and thus, for an arbitrator to decide, and found that it lacked jurisdiction to resolve such a challenge, at least pre-award:

 

Under the FAA, courts have no authority to remove an arbitrator prior to an arbitration award being made …. “[E]ven where arbitrator bias is at issue, the FAA does not provide for removal of an arbitrator from service prior to an award, but only for potential vacatur of any award.”

 

Id. at *5.

 

Avic stands as an important reminder that there are very few circumstances that justify a court’s intervention in the pre-award arbitration process. It also serves to remind parties of the care that needs to be taken when drafting dispute-resolution clauses.

 

Keywords: alternative dispute resolution, litigation, arbitrator bias, selection process, lapse, impartial decisionmaker, court intervention, jurisdiction

 

Christopher S. Moore, Novack and Macey LLP, Chicago, IL


 

February 23, 2015

District Court Holds that Arbitrator May Decide Class Arbitration


Disagreeing with the Third and Sixth Circuits, the district court in Harrison v. Legal Helpers Debt Resolution, LLC, No. 12-2145 ADM/TNL, 2014 WL 4185814 (D. Minn. Aug. 22, 2014), concluded that the arbitrator, rather than the court, was empowered to decide whether arbitration may proceed on a classwide basis. The court also ruled that the defendants had waived any objection to the arbitrator’s power to decide the question of class arbitrability by unreservedly submitting the question to the arbitrator.

 

The plaintiff contracted with the defendants to provide debt settlement and credit repair services. The parties’ contract contained an arbitration clause. Id. at *1. The plaintiff filed a putative class-action lawsuit, alleging that the defendants misrepresented themselves as a law firm to circumvent consumer protection laws, charge higher fees, and omit necessary disclosures. Id. The defendants moved to stay the suit pending arbitration, and the plaintiff consented to submit the case to arbitration. Id. The parties then asked the arbitrator “to decide whether the arbitration clause encompassed class claims.” Id. at *2. After the parties briefed the issue, the arbitrator concluded that the plaintiff could pursue arbitration on a classwide basis. Id. The defendants moved to vacate this decision, on the ground that the arbitrator exceeded his authority by allowing class arbitration to proceed. Id.

 

The court first determined that, by agreeing to submit the question to the arbitrator, the defendants had waived any argument that the court (rather than the arbitrator) should determine class arbitrability. Id. at *3. The court relied on Oxford Health Plans LLC v. Sutter, 133 S. Ct. 2064, 2068 n.2, in which the Supreme Court declined to address whether class arbitration is a “gateway matter” for the court to decide, because the parties had agreed to submit the question of class arbitrability to the arbitrator. In Harrison, similarly, the court concluded that the defendants, who voluntarily submitted the issue to the arbitrator, had to “live with that choice.” Harrison, 2014 WL 4185814, at *3. They could not, after losing before the arbitrator, obtain a “rerun” in court on the same issue. Id.

 

The court went further, concluding that even if the defendants had properly preserved the issue, class arbitration would presumptively be a matter for the arbitrator to decide, rather than a “gateway” matter reserved for the court. Id. The court acknowledged recent contrary authority from the Third and Sixth Circuits, see Opalinski v. Robert Half Int’l, 761 F.3d 326, 331–335 (3d Cir. 2014); Reed Elsevier, Inc. v. Crockett, 734 F.3d 594, 599 (6th Cir. 2013), but wrongly stated that there was a circuit split on the issue. Harrison, 2014 WL 4185814, at *4. The court wrote that Quilloin v. Tenet HealthSystem, Phila., 673 F.3d 221 (3d Cir. 2012) was a Tenth Circuit case standing for the proposition that class arbitration is a matter for the arbitrator, but Quilloin is actually a Third Circuit case whose reasoning on this issue was rejected in Opalinski. See Opalinski, 761 F.3d at 331–32.

 

The court decided to follow the plurality decision in Green Tree Fin. Corp. v. Bazzle, 539 U.S. 444, 452 (2003), in which four justices agreed that class arbitration was for the arbitrator to decide. Harrison, 2014 WL 4185814, at *3–5. The court reasoned that, in light of Congress’s strong preference for arbitration, courts should hesitate to expand the categories of “gateway” issues reserved for decision by the court. Harrison, 2014 WL 4185814, at *4. The court acknowledged that the Supreme Court’s decision in Stolt-Nielsen v. AnimalFeeds Int’l Corp., 559 U.S. 662, 684–87 (2010), emphasized “the practical differences between bilateral and class arbitration,” but this language did not convince the court that class arbitration should be a gateway matter reserved for a court’s decision. Harrison, 2014 WL 4185814, at *5. In the end, the court relied on Bazzle to determine that the arbitrator was allowed to decide class arbitrability, because “although Bazzle lacked a controlling majority, the plurality opinion dealt with precisely the same issue pending in the present motion, and no Supreme Court decision has subsequently offered clearer guidance.” Id.

 

Harrison teaches two important lessons: (1) a party that voluntarily submits the question of class arbitrability to an arbitrator may be precluded from later arguing that a court should have decided the question; and (2) even after the Third and Sixth Circuit’s recent decisions in Opalinski and Reed Elsevier, it remains an open question in other jurisdictions whether class arbitration is for the court or an arbitrator to decide.

 

Key Words: litigation, ADR, alternative dispute resolution, class arbitration, classwide arbitration, gateway issue, waiver

 

Matthew J. Singer, Novack and Macey LLP, Chicago, IL


 

February 20, 2015

Arbitration Panel Issues $10 Million Sanction Against Lance Armstrong


An arbitration panel has issued a $10 million sanction against Lance Armstrong arising out of perjured testimony he provided to the panel over 9 years ago. Armstrong and Tailwind Sports Corp v. SCA Promotions, Inc., SCA Insurance Specialists, Inc., Final Arbitration Award (Feb. 4, 2015). A dissenting arbitrator would have held that the panel did not have authority to issue such a sanction and that it was contrary to the terms of a final settlement between the parties.

 

SCA Promotions, Inc. (SCA) agreed to pay Lance Armstrong certain sums if he won the Tour de France in successive years. After Armstrong won the requisite Tours, SCA contested its obligation to pay because it asserted that he had cheated. The parties engaged in arbitration. Before the arbitration was decided, the parties resolved their dispute in a settlement agreement that provided for SCA to pay Armstrong $7.5 million. In the settlement, the parties also consented to future arbitration. Thereafter, the parties engaged in multiple additional arbitration proceedings before the panel. Among other things, Armstrong sought sanctions against SCA.

 

Armstrong later publicly admitted that he cheated to win the Tour de France. SCA then went back to the arbitration panel and asked that Armstrong be sanctioned. In a strongly worded decision, the majority of the panel held that

 

[t]he case yet again before this Tribunal presents an unparalleled pageant of international perjury, fraud and conspiracy. It is almost certainly the most devious sustained deception ever perpetrated in world sporting history. Tailwind Sports Corp. and Lance Armstrong have justly earned wide public condemnation. That is an inadequate deterrent. Deception demands real, meaningful sanctions.

 

The panel awarded $10 million—the approximate amount of SCA’s prior payment to Armstrong and its attorneys’ fees.

 

Armstrong disputed the panel’s jurisdiction, but the panel concluded that it had jurisdiction because of the consent to its jurisdiction in the parties’ settlement agreement. The panel also held that Armstrong’s prior assertion that the panel had authority to sanction SCA constituted consent to its issuance of sanctions against him.

 

Armstrong further argued that that the panel did not have authority to issue sanctions even if it had jurisdiction over the issue. The panel found that it did have authority under the settlement agreement. It tied the sanction to the settlement agreement by finding that Armstrong’s perjury prevented SCA from performing its duties under the parties’ agreement, breached Armstrong’s contractual duty to arbitrate and interfered with the panel’s proper discharge of its duties.

 

One member of the panel strongly dissented. He would have held that the parties’ prior settlement was a final resolution that could not be set aside. He noted that the settlement arose in a situation wherein SCA was open to significant liability for selling insurance without a license. He also noted that the settlement was final, that the parties agreed not to challenge it and agreed that it was not based on any representations. According to the dissent:

 

The final decision by the Panel reminds me about the “do right rule.” It doesn’t matter what the law is, let’s just do what is right. Arbitrators, like judges don’t have that luxury, and the Panel exceeded its authority by indulging itself here.


If one accepts this sanction for what it is, it could only be done in equity. Equity demands that one will not suffer an injury for lack of a remedy at law, but equity also demands clean hands from one seeking to invoke it. As neither party comes with clean hands, then equity should not provide a remedy.


SCA has filed a complaint to confirm the arbitration award in the Dallas Texas District Court. It will be interesting to follow the course of the litigation and see whether the Dallas District Court confirms the award, and whether it agrees with the majority or the dissent.

 

Keywords: alternative dispute resolution, litigation, arbitration, settlement agreement, jurisdiction, sanctions

 

Timothy J. Miller, Novack and Macey LLP, Chicago, IL


 

February 18, 2015

In Second Circuit an Arbitrator Decides Claim Preclusion in the First Instance


The All Writs Act (Act) empowers federal courts to “issue all writs necessary or appropriate in aid of their respective jurisdictions,” including “to effectuate or prevent the frustration of orders it has previously issued.” Citigroup, Inc. v. Abu Dhabi Inv. Auth., No. 13-4825-cv, — F.3d —, 2015 WL 161745, at *3, *4 (2nd Cir. Jan. 14, 2015) (citations omitted); see also 28 U.S.C. 1651(a). In Citigroup, the Second Circuit held that the Act cannot be used to enjoin an arbitration on the theory that the arbitration is barred by the res judicata effect of a prior judgment that confirmed an earlier arbitration award between the parties. Citigroup, 2015 WL 161745, at *1.

 

Citigroup brought an action pursuant to the All Writs Act to enjoin an arbitration on the ground that it was barred by res judicata because the claims asserted therein could have been raised by Abu Dhabi Investment Authority (ADIA) in a prior arbitration between them. Citigroup characterized the second arbitration as an “assault” on the district court’s judgment confirming the first arbitration. Id. The district court granted ADIA’s motion to dismiss the action, holding that the All Writs Act did not apply to enjoin the arbitration, and that the res judicata issue should be decided in the second arbitration. Citigroup appealed. Id. at *1–*2.

 

The Second Circuit affirmed, indicating that the case presented “a high order challenge” involving balancing two competing considerations. Id. at *3 (citation and quotation marks omitted). On the one hand, the FAA expresses a national policy favoring arbitration. Id. On the other, there is a “weighty” concern for the integrity of federal judgments that would be offended if parties felt free to relitigate in arbitration claims previously resolved in federal court. Id.

 

The court held that All Writs Act did not, under the circumstances presented, authorize district courts to enjoin arbitration to prevent relitigation of prior federal judgments. Rather, Citigroup’s assertion of res judicata would be evaluated by the arbitrators in the first instance. According to the Second Circuit, this is because res judicata is an affirmative defense asserted in arbitration and thus part of the arbitration’s merits, not a question of arbitrability, which is an issue for the court. Id. at *5. The court noted that it had previously decided that arbitrators decide the res judicata effect of an arbitration award confirmed by a state court and the collateral estoppel effect of an arbitration award confirmed by a federal court. Id.

 

The Second Circuit distinguished cases in which other circuit courts sanctioned the use of the All Writs Act to enjoin arbitrations threatening to undermine federal judgments. Id. at *5. In those cases, the district courts addressed the merits of the underlying claims, so the main justification given for the applicability of the All Writs Act was that the district court was in the best position to protect its judgment. Id. at *5.

 

By contrast, a district court—like the one in Citigroup—that engages in the summary proceeding of confirming an arbitration award does not deal with the merits of the case and is not the best interpreter of what was decided in the arbitration. Id. at *5–*6. The court left open the possibility that there might be circumstances in which the All Writs Act could be used to enjoin an arbitration, but not where the district court merely confirmed an arbitration award. Id. at *6.

 

Keywords: alternative dispute resolution, litigation, All Writs Act, res judicata, arbitrability

 

John Haarlow, Jr., Novack and Macey LLP, Chicago, IL


 

January 29, 2015

Dual Request for Attorneys' Fees Could Not Be Withdrawn


The American Rule precludes the award of attorney fees unless allowed by contract, statute, or some exception such as insurance bad faith. Rule 47 of AAA Commercial Rules and Rule 45 of the AAA Construction Rules recognize these same grounds but also provide for "an award of attorneys’ fees if all parties have requested such an award . . .” Many litigators are not aware of this rule and make a pro forma request for attorney fees by checking the box on the AAA form or otherwise including it in their demand or answer without understanding or discussing with their client the implications of that request.

 

So what happens when a litigator makes a knee jerk request for attorney fees and then finds that he is losing the case? Can he withdraw his request for attorney fees at that time and divest the arbitrator of the authority to award attorney fees?

 

That scenario occurred in Viatech Corp. v. DCS Corp., CIV 14-4603, 2014 WL 5089740 (D. N.J. October 9, 2014). Viatech made what it referred to as a "pro forma"request for attorney fees when it filed its answer and counterclaim. After discovery, but prior to trial, Viatech withdrew that request and argued that the withdrawal removed the arbitrator's authority to award attorney fees under the AAA rules, because there no longer was a request for fees by both parties. The arbitrator rejected Viatech’s argument. He ruled that once both parties requested attorney fees, the authority to award those fees vested with the arbitrator and could not be divested through a subsequent withdrawal of the request by one party; otherwise a party could make an initial request, wait to see how the case progressed, and withdraw the request at the last minute. The District Court for the District of New Jersey affirmed the award, concluding that Rule 8 of the AAA rules grants the arbitrator the right to interpret the rules, and that, since his interpretation of the rules was not precipitous, ill-considered, or unreasonable, the court would not vacate or modify it.

 

This should be a warning to litigators to think before making a request for attorney fees in an arbitration administered under the AAA rules. Though other arbitrators might not interpret the rules in the same way, the risk that they will is clearly present. An open question is whether the ruling would have been different if Viatech had withdrawn its request for attorney fees at or before the prehearing conference and argued that the request had been made in error and that there was no prejudice?

 

Keywords: litigation, alternative dispute resolution, attorney fees, AAA Commercial Rules, AAA Construction Rules


Adrian L. Bastianelli, III, Peckar & Abramson, P.C., Washington, D.C.


 

January 22, 2015

What Is the Remedy for Breaching a Mediation Confidentiality Clause?


Most mediation contracts include a confidentiality clause providing that all statements made and information exchanged during the mediation cannot be used for any purpose outside of the mediation. But what happens if someone violates that clause? This question was raised before the Federal Circuit in Higbie v. U.S., 2015 WL 162660 (Fed.Cir. 2015), when, after a failed mediation, the government submitted affidavits to the court citing statements made in mediation. It was undisputed that this violated the contractual confidentiality clause, but the plaintiff sought money damages and the government argued that no monetary damages could be awarded.

 

The language of the mediation contract was standard issue: “Any documents submitted to the mediator(s) and statements made during the mediation are for settlement purposes only.” A two-judge majority ruled that this language provided only one remedy—exclusion of the material from the court proceeding. They ruled there was no evidence of an intent to provide a monetary remedy. A dissenting judge, however, said that there was no reason to depart from the default rule that contract provisions implicitly carry a monetary remedy. Since the confidentiality clause did not, in this judge’s view, exclude monetary damages, such a remedy should be available.


Keywords: alternative dispute resolution, litigation, mediation, confidentiality, privilege, breach, exclusion, monetary, remedy


Jonah Orlofsky, The Law Offices of Jonah Orlofsky, Chicago IL


 

January 20, 2015

Arbitration Claims Down at National Futures Association


Statistics published by the National Futures Association (NFA), the industry-wide, self-regulatory organization for the U.S. futures industry, show that the total number of arbitration claims it has received from members and customers are sharply down over the past five years.

 

The following chart shows the number of Claims filed with the NFA since 2010:

 

Calendar Year

Customer

Member

Total

2014

21

8

29

2013

43

5

48

2012

71

10

81

2011

79

9

88

2010

126

12

138

 

(N.B. Customer cases are cases where at least one party is a public customer; member cases are primarily cases between and among NFA members and associates.)

 

The following chart shows the reason that NFA cases were closed in each year since 2010:

 

Percentage of Closed Cases by Reason


Calendar Year

Hearings

Settlements

Other

2014

22%

48%

30%

2013

25%

38%

37%

2012

21%

33%

46%

2011

42%

28%

30%

2010

28%

37%

35%

 

(N.B. “Other” cases are cases that are rejected, withdrawn, or terminated for other reasons such as bankruptcy.)


Keywords: alternative dispute resolution, litigation, National Futures Association, NFA, number of arbitration cases


Mitchell L. Marinello, Novack and Macey LLP, Chicago IL


 

January 13, 2015

Developing Business: Mediation as an Opportunity


One of the priorities of the Section of Litigation is to increase membership by making members and potential members aware of the business development opportunities that can be provided by the ABA. One path to that end is to provide examples, such as the one detailed below, of practices that are not just good lawyering, but smart business development practices.

 

I recently represented a neighborhood association in a long-running dispute with a railroad. I arranged for a daylong meeting of the board of directors, conducted by professional facilitators, to help them understand how mediation works and, more importantly, to arrive at a list of priorities.

 

At the start of the session, each board member (approximately 15 members) seemed to have a different goal, many of which were not legally available. But by the end of the day, we identified one priority, and everyone agreed that it was so important that the other goals need not be achieved. So I had my marching orders as we entered the mediation.

 

I made sure that a critical mass of board members attended the mediation. These were leaders of the neighborhood association who had important positions with organizations having nothing to do with the neighborhood association or the dispute. Some of them were decision-makers for hiring legal counsel at those organizations. At the mediation, these board members had the opportunity to see how I represented them and what it took to achieve their priority. This has since paid off.

 

Our office represents many nonprofit organizations. These range from start-up do-gooder organizations that consist of the founder and a few volunteer board members, to large institutions with significant budgets and all-star boards. The directors of these nonprofits are almost always what would be referred to as outside directors in the for-profit world. In other words, these directors have “day jobs” unrelated to the nonprofit I am representing. They also often serve on other boards—both nonprofit and for-profit.

 

My goal is to draw in the board when it comes to resolving legal disputes. Actually, I start well before the mediation. I start as soon as I’ve been hired to help resolve the dispute. I want the board members to know about the dispute, the risks, the potential gains and losses, and the estimated costs. This is not just good governance and information that a savvy executive director of a nonprofit should want. It gets the board members invested in the dispute, so when the time comes to attempt to resolve it, they have traveled the path to a solution rather than have simply shown up to vote on a proposed resolution. And it gives them the opportunity to consider hiring me the next time they know of a problem that needs a solution.


Keywords: alternative dispute resolution, litigation, business development, mediation, resolution


Bruce Rubin, Miller Nash Graham & Dunn LLP, Portland OR


 

January 12, 2015

Equitable Estoppel Entitles Non-Signatories to Compel Arbitration


Parties that did not sign an arbitration agreement were nonetheless entitled to compel arbitration, the Fifth Circuit ruled in Crawford Professional Drugs, Inc. v. CVS Caremark Corp., 748 F.3d 249 (5th Cir. 2014). The court arrived at that conclusion based on the state-law doctrine of equitable estoppel.

 

In Crawford, a group of mom-and-pop drug stores sued Caremark and three related entities, alleging that defendants misused confidential patient and prescription information. Crawford, 748 F.3d at 254–55. Plaintiffs had entered into “Provider Agreements” with Caremark-related entities; each agreement contained an arbitration clause. Id. Three defendants that were not parties to the Provider Agreements moved to compel arbitration based on the Provider Agreements’ arbitration clauses. Id. at 254. Plaintiffs opposed the motion. They argued that they could not be compelled to arbitrate against defendants that were not parties to the Provider Agreements. Id. The district court sided with defendants and compelled arbitration. Id. at 255.

 

The Fifth Circuit affirmed. Id. It began its analysis by discussing the Supreme Court’s decision in Arthur Andersen LLP v. Carlisle, 556 U.S. 624 (2009). Id. at 257. In Arthur Andersen, the Supreme Court reversed the Sixth Circuit’s ruling that nonparties to a contract were categorically barred by federal law from obtaining a stay of arbitration under the Federal Arbitration Act. 556 U.S. at 631. The Supreme Court wrote that the Federal Arbitration Act did not “purport[] to alter background principles of state contract law regarding the scope of agreements (including the question of who is bound by them),” and concluded that non-signatories to an arbitration agreement could seek stays of arbitration based on state-law doctrines such as equitable estoppel. Id. at 631–32. Based on Arthur Andersen, the Fifth Circuit looked to state law (rather than federal law) to determine whether the non-signatory defendants could benefit from the arbitration agreement and also modified its “prior decisions allowing non-signatories to compel arbitration based on federal common law, rather than state contract law.” Crawford, 748 F.3d at 255, 261–62.

 

After concluding that Arizona law applied, the court considered whether Arizona courts would allow the non-signatory defendants to compel arbitration, but did not find an Arizona case directly on point. Id. at 259–60. Because Arizona courts look approvingly to California law, the court turned to California’s doctrine of equitable estoppel, which applies when a signatory relies on a written agreement to assert claims against a non-signatory. Id. at 260. The court concluded that equitable estoppel applied because plaintiffs’ claims were based on misuse of information that plaintiffs provided under the Provider Agreements, and whose use was governed by the Provider Agreements. Id. at 260–61. Thus, because the claims against the non-signatory defendants were “inextricably bound up with” the Provider Agreements, the court concluded that equitable estoppel allowed these defendants to benefit from the arbitration clause and compel arbitration. Id.

 

Crawford demonstrates that, in the wake of Arthur Andersen, state-law doctrines such as equitable estoppel may allow a party to benefit from an arbitration provision it did not sign.


Keywords: alternative dispute resolution, litigation, motion to compel arbitration, Federal Arbitration Act, equitable estoppel, non-signatory, non-party


Matthew J. Singer, Novack and Macey LLP, Chicago, IL


 

December 31, 2014

Non-Signatory Employee Entitled to Compel Arbitration


In Grand Wireless, Inc. v. Verizon Wireless, Inc., 748 F.3d 1 (1st Cir. 2014), the First Circuit concluded that an employee was entitled to compel arbitration based on an arbitration agreement that her employer signed, but she did not. The court based its decision partly on what it described as uniform federal precedent allowing an employee to benefit from her employer’s arbitration clause when the employee acted within the scope of her employment.

 

In Grand, plaintiff Grand Wireless entered into an agreement with Verizon Wireless to serve as an exclusive sales agent for Verizon; that agreement included an arbitration clause. 748 F.3d at 4. Grand alleged that after Verizon gave notice that it was terminating the agreement, but before the agreement ended, Verizon sent a postcard to Grand’s customers, stating that Grand was closed and referring the postcard’s recipients to the nearest Verizon outlet. Id. at 5. Grand brought civil RICO and state-law claims against Verizon and its employee, Erin McCahill, who was not a party to the agreement. Id. Both defendants moved to compel arbitration, and the district court denied the motion without explanation. Id. at 5–6.

 

The First Circuit reversed, concluding that both defendants were entitled to arbitration. Id. at 13. The court first relied on New York state-law contract-interpretation principles to reject Grand’s argument that McCahill was barred from enforcing an arbitration clause that did not explicitly refer to employees. See id. at 10-11.But the court also emphasized that the federal circuit courts addressing the issue had created a uniform federal rule that “an agent is entitled to the protection of her principal’s arbitration clause when the claims are based on her conduct as an agent.” Id. at 11 & n.25. This rule, the court wrote, recognizes that a business can operate only through its agents, and that allowing plaintiffs to evade arbitration agreements by suing a business’s agents would undermine the federal policy favoring arbitration. Id. at 11. Because all of McCahill’s alleged actions were done in her capacity as Verizon’s agent, the court concluded that she was protected by the agreement’s arbitration clause. Id. at 10, 13.

 

The court acknowledged, however, the tension between its discussion of federal law and the Supreme Court’s decision in Arthur Andersen LLP v. Carlisle, 556 U.S. 624 (2009). See id. at 11–12. Although the court recognized that Arthur Andersen established a “general principle” that state-law governs whether a non-signatory is protected by an arbitration agreement, the court reasoned that Arthur Andersen “leaves unclear . . . whether the Court intended to disturb the uniform body of [federal] precedent” holding that employees acting within the scope of their employment can benefit from their employers’ arbitration clauses. Id. at 12. The court noted that, in Arthur Andersen, the Supreme Court had no occasion to address the danger that parties would improperly attempt to avoid arbitration clauses by naming employees as defendants, and reasoned that “[n]othing in [Arthur Andersen] specifically disapproves the fashioning of federal law to avoid this specific abuse.” Id. Regardless, the court wrote that it did not have to decide whether Arthur Andersen abrogated the line of federal cases on point, because Grand failed to identify any principle of New York law that pointed in the opposite direction. Id. at 13. Thus, regardless of whether federal law or state law principles governed, the court concluded that McCahill was entitled to the benefit of her employer’s arbitration clause. Id. at 13 & n.27.

 

The First Circuit’s opinion is noteworthy not only for its holding—that a non-signatory employee is entitled to compel arbitration based on an agreement her employer signed—but also because of its extensive discussion of federal law. Grand suggests that even after Arthur Andersen, federal law may still have some role to play in determining whether a non-signatory can benefit from an arbitration agreement.


Keywords: alternative dispute resolution, litigation, motion to compel arbitration, Federal Arbitration Act, non-signatory, non-party, employee, agency


Matthew J. Singer, Novack and Macey LLP, Chicago, IL


 

December 18, 2014

District Court Enforces Arbitration Clause in Employment Contract


A district court in Tennessee has enforced an arbitration clause in an employment contract despite the former employee’s claim that it was an unenforceable contract of adhesion.

 

In Kyles v. TRG Customer Solutions, Inc., 2014 WL 6908969 (M.D. Tenn. Dec. 5, 2014), Kyles filed an action alleging that TRG, his former employer, violated his rights under the Family and Medical Leave Act and the Tennessee Human Rights Act. TRG moved to stay or dismiss the action based on an arbitration agreement between the parties. In his response, Kyles argued that the arbitration agreement was an unenforceable contract of adhesion.

 

Tennessee law defines adhesion contracts as contracts presented on a “take it or leave it” basis that do not provide the weaker party a realistic opportunity to bargain and where the weaker party can obtain the desired service (here, employment) only by agreeing to the contract as presented to him. Kyles submitted an affidavit attesting to the difficulty he had had in obtaining a job and explaining in detail the many places to which he had applied for a job without success before being hired by TRG. He contended that, if he had not signed the arbitration agreement, he likely would not have been able to find suitable work elsewhere, and that he had no choice but to sign the agreement with its arbitration clause in the form that TRG presented it. The court found Kyles’ testimony to be specific enough to show that he likely would not have found alternate suitable employment had he not signed the arbitration agreement that TRG required.

 

The court then analyzed whether the arbitration agreement was unconscionable. The court noted that the agreement was mutual in that it required both parties to submit their claims to arbitration and gave both parties the right to bring certain types of claims in a court of law. For example, any claims that Kyles had for workers’ compensation or unemployment benefits were not covered by the arbitration clause. The court also noted that the agreement gave Kyles sufficient notice that it contained an arbitration provision. The court further found that there was consideration for the arbitration agreement. Consideration was present both in the fact that TRG hired Kyles and because both parties promised to arbitrate rather than litigate certain categories of future claims.

 

The upshot was that the arbitration agreement was found to be valid and enforceable.


Keywords: alternative dispute resolution, litigation, adhesion, unconscionable, choice, mutual, consideration


Mitchell L. Marinello, Novack and Macey LLP, Chicago IL


 

December 12, 2014

Refusal to Compel Non-Signatory to Arbitration in Negligence Case


The United States Court of Appeals for the Fifth Circuit has refused to enforce a mandatory arbitration provision against the spouse of a customer.


In Joy Zinante v. Drive Electric, LLC, No. 14-20072 (5th Cir. 2014), a Texas couple’s home was damaged in a fire that was apparently caused by a defective electric golf cart. After the wife filed a lawsuit against Drive Electric, the distributor of the golf cart, in a Texas court, the company removed the case to federal court. Drive Electric then moved to compel arbitration based on the arbitration clause included in a sales contract the husband signed when he purchased the golf cart online. The district court denied the company’s motion, and Drive Electric appealed.


The Fifth Circuit acknowledged that it was required to compel arbitration if the parties had agreed to arbitrate and that “no federal statute or policy” made the plaintiff’s claims non-arbitrable. The federal court next stated that Drive Electric must demonstrate that the parties “entered into a valid arbitration agreement” under Texas law. Although the plaintiff’s husband had agreed to arbitrate any future claims when he purchased the golf cart online, the company offered no evidence that his wife Joy had agreed to arbitration. Instead, Drive Electric relied on the doctrines of equitable estoppel and third-party beneficiary to allege that Joy should be compelled to arbitrate her claims.


The court rejected Drive Electric’s equitable estoppel argument. The court held that Drive Electric’s argument failed because Joy’s lawsuit was based on negligence and did not rely on any of the terms in the contract. According to the Fifth Circuit:


Drive Electric contends that pursuant to a variation of equitable estoppel—the doctrine of "intertwined claims"—[Joy] is suing on the contract. . . . Under the intertwined claims doctrine, when a non-signatory defendant has a "close relationship" with a signatory to a contract that contains an arbitration agreement, a court can compel the non-signatory defendant to arbitrate disputes that are "intimately founded in and intertwined with the underlying contractual obligations”. . . The doctrine does not apply here because . . . [Joy’s] claims are neither derived from, nor intertwined with, the terms of the contract between Mark and Drive Electric . . .


The court also rejected Drive Electric’s argument that Joy was a third-party beneficiary of the contract. After stating that Texas law presumes a party to a contract acted solely on his or her own behalf absent evidence to the contrary, the court stated that:


Drive Electric offers no evidence that Mark intended for his spouse, [Joy], to benefit from his purchase of the golf cart. Instead, Drive Electric contends that [Joy] is bound to the sales contract as the wife of a signatory because the purchase of the golf cart benefits the community estate. Drive Electric points to no case law that supports finding third-party beneficiary status based solely on the basis of shared community property.

Texas law does not confer third-party beneficiary status automatically upon one spouse when the other spouse enters a sales contract. . . . Accordingly, the spousal relationship alone does not make [Joy] a third-party beneficiary.


Because Drive Electric failed to demonstrate that Joy agreed to arbitrate her claims, the Fifth Circuit affirmed the denial of Drive Electric’s motion to compel arbitration.


Keywords: alternative dispute resolution, litigation, arbitration, non-signatory, equitable estoppel, intertwined claims, third party beneficiary, spouse, community property


Karl Bayer, Karl Bayer Dispute Resolution, Austin TX


 

December 3, 2014

Statutory Attorney Fees Claim Ruled Arbitrable Despite Contrary Illinois Precedent


In Hennessy Indus., Inc. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, No. 14-1277, 2014 WL 5449490 (7th Cir. Oct. 28, 2014) (Posner, J.) the Seventh Circuit reversed a district court order denying the appellant’s motion to compel arbitration of a suit under section 155(1) of the Illinois Insurance Code (Section 155). In doing so, it had to overcome a directly contrary line of Illinois Appellate Court cases.

 

In 2008, Hennessy, a manufacturer faced with numerous asbestos claims, entered into an agreement with National Union whereby National Union would indemnify Hennessy for certain costs related to the claims. The agreement contained an arbitration clause. When a dispute arose as to amounts owed by National Union, the parties initiated arbitrated.

While the arbitration was pending, Hennessy filed a federal court action under Section 155. Section 155 provides that “a court” may award an insured its attorney fees in an action against an insurer for failure to pay, or delay in paying, on a policy, where the insurer’s conduct was “vexatious and unreasonable.” 215 ILCS 5/155(1). Hennessy complained that National Union’s actions had been vexatious and unreasonable.

 

National Union moved to compel arbitration. The district court denied the motion on the grounds that (1) the arbitration clause expressly stated that “the arbitrators shall not be empowered or have jurisdiction to award punitive damages, fines or penalties”, and (2) the Section 155 claim did not arise under the parties’ agreement, but under the Illinois Insurance Code. National Union appealed. The Seventh Circuit reversed.

 

Noting that the arbitration clause mandates arbitration of “any dispute” requiring “interpretation” of the agreement, the court found persuasive National Union’s argument that resolution of the “vexatious or unreasonable” issue would require interpretation of the agreement. Regarding the language the district court relied on to deny the motion—“the arbitrators shall not be empowered or have jurisdiction to award punitive damages, fines or penalties”—it also found persuasive National Union’s argument that this simply meant that Hennessy had waived the Section 155 claim—not that the arbitrators could not hear it.

 

Having addressed the arguments related to the arbitration clause, the court next had to overcome Hennessy’s statutory argument based on a line of Illinois Appellate Court cases that culminated in Amerisure Mut. Ins. Co. v. Golbal Reinsurance Corp. of Am., 927 N.E.2d 740, 751-52 (Ill. App. 2010). The Amerisure cases applied rules of statutory construction to Section 155, which provides that “the court” may award attorney fees. Notably, the Amerisure cases had clearly held that “a party may not recover attorneys fees under section 155 by way of an arbitration proceeding.” Id. at 751. Notwithstanding this clear holding, the court held that Section 155 claims could be arbitrated. The court noted that Amerisure line of case were all intermediate appellate cases, and stated that Amerisure is “highly vulnerable, because it is wooden.” Perhaps explaining what it meant, the court said that Section 155 is about remedies, not jurisdiction or venue, in that it creates a remedy but not a separate cause of action. The court further noted that parties to arbitration clauses frequently agree to arbitrate disputes that could have been brought in a court.

 

The Seventh Circuit’s opinion is noteworthy because, faced with a clear line of Illinois appellate court cases holding that an Illinois statute did not permit arbitration, the court nevertheless held to the contrary, and directed the trial court to order arbitration.


Keywords: alternative dispute resolution, litigation, arbitration, arbitrability, enforceability, statutory interpretation, insurance, Illinois Insurance Code


Courtney D. Tedrowe, Novack and Macey LLP, Chicago, IL


 

November 30, 2014

Mutual Assent To Arbitrate Not Found In Mass-Market Transaction


In Knutson v. Sirius XM Radio, a class-action case, the Ninth Circuit reversed a district court's order compelling arbitration. The opinion provides an instructive discussion, with extensive review of case law, concerning the requirements for forming a binding contract in a mass-market transaction. The following is an excerpt from the summary by court personnel:

 

The plaintiff purchased a vehicle from Toyota that included a 90-day trial subscription to Sirius XM satellite radio. 

 

About a month after his trial subscription was activated, plaintiff received a “welcome kit” from Sirius XM that contained a Customer Agreement with an arbitration clause.

 

The panel held that Sirius XM failed to prove by a preponderance of the evidence the existence of an agreement to arbitrate. The panel held that a reasonable person in plaintiff’s position could not be expected to understand that purchasing a vehicle from Toyota would simultaneously bind him or her to any contract with Sirius XM. The panel further held that plaintiff’s continued use of the satellite radio service after his receipt of the Customer Agreement did not manifest his assent to the provisions in the Customer Agreement.

 

Because the arbitration clause in the Customer Agreement was unenforceable for lack of mutual assent, the panel held it need not decide whether the arbitration provision in the Customer Agreement was unconscionable.


Keywords: alternative dispute resolution, litigation, mass-market, lack of mutual assent, class action, continued use


D.C. Toedt III, Attorney at Law Office of D.C. Toedt III, Houston TX


 

November 25, 2014

Arbitrators Determine the Preclusive Effect of Prior Arbitrations


Arbitrators—not courts—determine the preclusive effect of a prior arbitration. So ruled the First Circuit in Employers Ins. Co. of Wausau v. OneBeacon Am. Ins. Co., 744 F.3d 25 (1st Cir. 2014).

 

In Employers Ins. Co. of Wausau, the plaintiffs, National Casualty Company and Employers Insurance Co. of Wausau (collectively, Wausau), sought a declaration that an arbitration initiated by defendants, OneBeacon American Insurance Co. and others (OneBeacon), had previously been arbitrated and was, therefore, collaterally estopped.

 

Between 1966 and 1986, OneBeaon entered into annual reinsurance contracts with Wausau, Swiss Reinsurance America Corp. (Swiss Re) and others. Id. at 26. In 2007, OneBeacon demanded arbitration against Swiss Re for reinsurance recovery for certain claims made by its policyholders. Id. The arbitration panel ruled in Swiss Re’s favor and the District Court of Massachusetts confirmed that award. Id.

 

Years later, OneBeacon demanded arbitration against Wausau seeking reinsurance, allegedly for the same claims that were decided in the earlier arbitration. Id. Based on the earlier arbitration award, Wausau sought a declaratory judgment in district court that OneBeacon was collaterally stopped from bringing a new arbitration proceeding. Id. The district court denied Wasau’s declaratory judgment petition, holding that the preclusive effect of the prior arbitration was to be decided by an arbitrator, and not the court. Id. at 26–27. Wausau appealed and the First Circuit affirmed.

 

On appeal, Wausau argued that the district court should have decided the preclusive effect of the Swiss Re arbitration because the confirmation of the earlier award constituted a district court judgment, and arbitrators lack the authority to determine the preclusive effect of such judgments. Rejecting this argument, the First Circuit noted that the party’s arbitration clause was broad—it required “any irreconcilable dispute” between the parties to be resolved in arbitration, and so “appeare[ed] to include disputes over the preclusive effect of prior arbitrations.” Id. at 27. In addition, the court observed that it was widely accepted that “the effect of an arbitration award on future awards . . . is properly resolved through arbitration.” Id. (internal quotation marks omitted, collecting cases).

 

Wausau argued that allowing arbitrators to determine the preclusive effect of an earlier, confirmed, arbitration award would violate Section 13 of the Federal Arbitration Act (FAA), which provides that orders confirming arbitration awards are given the same effect as federal court judgments. Id. at 28. Wausau asserted that because the enforcement of a judgment is in the “exclusive province of the federal courts,” only federal courts can determine the preclusive effect of an arbitration award once it is confirmed. Id.

 

That issue was one of first impression in the First Circuit. Id. The court held that arbitrators can determine the preclusive effect of earlier arbitration awards, finding that an arbitration award is distinct from the order confirming it. Id. It noted that the federal courts “very rarely” consider the merits of an arbitration award. Instead, it said, the purpose of the reviewing district court is to ensure that the arbitration award was not the product of specific bases for vacating an award (e.g., fraud) and to give the award a mechanism for enforcement. Id. In contrast, a collateral estoppel analysis requires a detailed examination of the prior arbitration to determine, among other things, whether the issue raised in the two actions was the same and whether the issue was actually litigated in the earlier action. Because a collateral estoppel inquiry is beyond the scope of a court’s limited review of an arbitration award, there is no reason why a confirmation order should give the court exclusive power to determine the preclusive effect of the arbitration. Id. at 29. That is, because a federal court’s order regarding an arbitration rarely goes to the merits, a subsequent arbitrator does not “infringe on the prerogatives of the federal court” by deciding the preclusive effect of an earlier arbitration decision. Id.

 

Wausau also argued that at the time the parties’ contracts were negotiated, the courts—not arbitrators—decided the preclusive effect of an earlier arbitration. Hence, according to Wausau, the collateral estoppel issue should have been decided by the court under the principle that then-existing law is a part of the party’s contract. The court declined to address this argument, holding that it had been waived because it was not raised in the district court. Id.

 

The court’s holding that the preclusive effect of a prior arbitration should be decided by the arbitrator in the first instance does not appear to be particularly controversial. However, it will be interesting to see whether other courts will follow suit, and whether, in particular, Wausau’s second (albeit waived) argument will gain any traction.


Keywords: alternative dispute resolution, litigation, collateral estoppel, preclusive effect, arbitrability, waiver


Christopher Moore, Novack and Macey LLP, Chicago IL


 

November 18, 2014

Petition in Alleged Arbitrator Partiality Case Denied


The Supreme Court of Texas recently declined to consider whether an arbitral decision should be set aside based on a member of an arbitration panel’s alleged evident partiality. In Port Arthur Steam Energy LP v. Oxbow Calcining LLC, No. 01-12-01165-CV (Tex. – App. – 1st [Houston], October 22, 2013), Oxbow Calcining initiated arbitral proceedings with Port Arthur Steam Energy (PASE) before the American Arbitration Association (AAA) over a number of environmental compliance costs related to an industrial facility. The parties selected a three-member arbitration panel and participated in both discovery and an evidentiary hearing.

Before the arbitral panel came to a decision, Oxbow learned that a former law firm—at which a jointly selected, neutral arbitrator was a shareholder—was engaged in a pending attorneys’ fees dispute with a client represented by Oxbow’s own attorneys. After learning of the alleged conflict, Oxbow sought to disqualify the arbitrator. The AAA denied Oxbow’s request and the three-member panel issued a unanimous decision awarding $3.4 million to PASE.

Next, PASE filed a motion to confirm the arbitration award in district court. Instead, the trial court vacated the award on Oxbow’s motion due to the arbitrator’s partiality. PASE appealed the decision to Texas’ First District Court of Appeals in Houston. The appellate court reversed the lower court’s order because the facts of the case did not demonstrate evident partiality.

According to the Houston court, it was reasonable for the arbitrator to warn Oxbow’s counsel prior to his selection that he could not check old case files for potential conflicts because his former law firm was closed in 2001. In addition, the appeals court stated the arbitrator had no way of knowing Oxbow’s firm was involved in the ongoing fee dispute because the arbitrator was replaced by another attorney three years before the company’s firm became involved in the dispute.

After the First District ordered the trial court to reinstate the arbitration award, Oxbow sought review by the Supreme Court of Texas. On October 24, 2014, the Texas high court let the multi-million dollar judgment stand when it declined to consider the case.


Keywords: alternative dispute resolution, litigation, potential conflicts, evident partiality, old case files


Karl Bayer, Karl Bayer Dispute Resolution, Austin TX


 

November 4, 2014

Preliminary Injunctive Relief Issued Despite Exclusive Arbitration Agreement


In EMC Corp. v. LeBlanc, 14-CV-12524-IT, 2014 WL 3943032 (D. Mass. Aug. 11, 2014), the district court held that it had the power to issue preliminary injunctive relief despite an agreement between the parties stating that arbitration was the parties’ sole remedy and referencing rules that gave the arbitrator power to decide issues of arbitral jurisdiction.

 

EMC is a technology company that designs, manufactures and sells information storage systems for large-scale high-technology environments. LeBlanc worked for EMC twice—once from 1999 through 2005 and then again from 2012 until May 2014. Upon resigning from EMC the second time, LeBlanc went to work for Pure Storage, one of EMC’s top competitors.

 

EMC’s request for a preliminary injunction alleged that LeBlanc was soliciting some of the EMC’s customers and was using EMC’s confidential information in the process. EMC asked the district court to enjoin LeBlanc from “directly or indirectly soliciting or attempting to solicit the business of” two major EMC customers.

 

EMC requires employees such as LeBlanc to enter into an employment agreement at the start of their employment. That agreement provides that:

 

[B]inding arbitration shall be the sole and exclusive remedy for resolving any individual Legal Dispute… arising out of or relating to your employment by the Company… provided, however, that you or the Company may file and pursue litigation in a court proceeding for temporary, preliminary and permanent injunctive relief, or for declaratory judgment…. Any such arbitration shall be conducted pursuant to the Company’s arbitration policy….

 

EMC’s separate arbitration policy provides that “[t]he rules governing the procedures for discovery and the conduct of the arbitration hearing shall be those found in the then current JAMS Employment Arbitration Rules and Procedures...” The JAMS Employment Arbitration Rules and Procedures, in turn, provide that “[j]urisdictional and arbitrability disputes ... shall be submitted to and ruled on by the Arbitrator.... [T]he Arbitrator has the authority to determine jurisdiction and arbitrability issues as a preliminary matter.”

 

LeBlanc moved to dismiss on the grounds that the JAMS Rules reserve all questions of arbitrability to the arbitrator. Thus, he argued, an arbitrator must decide whether EMC’s claims for preliminary relief must be arbitrated.

 

Judge Indira Talwani disagreed, stating that the question whether parties agreed to arbitrate a dispute is generally a question for the court. Here, the court noted that EMC’s arbitration policy provides only that the JAMS Rules govern “the procedures for discovery and the conduct of the arbitration hearing.” The threshold question of arbitrability does not fall within either of these categories. For that reason, the court—not an arbitrator—must determine whether the parties agreed to arbitrate this dispute.

 

The court also noted that the employment agreement allows EMC or its employee to “file and pursue litigation in a court proceeding for temporary, preliminary and permanent injunctive relief” (the Carve-Out). The arbitration policy provides that “[a]ny damage claims related to the subject matter of such litigation will, however, be submitted to arbitration.” LeBlanc argued that the only way to harmonize the Arbitration Policy with the Carve-Out “is to allow the parties to seek equitable relief in court only to the extent that it aids the arbitration process rather than circumvents it.”

 

The district court again disagreed, stating: “It is perfectly consistent with the language of the Arbitration Policy, given the Carve-Out, for this court to consider whether EMC is entitled to preliminary injunctive relief needed to preserve the status quo until the parties arbitrate this matter.” The court further stated that whether it did or did not issue a preliminary injunction “would not hinder an arbitrator’s ability to resolve the underlying dispute.” The court then issued a separate opinion denying EMC’s request for preliminary injunctive relief. EMC Corp. v. Jeremy LeBlanc, 14-CV-12524-IT, 2014 WL 3943091 (D. Mass. Aug. 11, 2014). But the key point is that it retained the right to decide that request on its merits.


Keywords: alternative dispute resolution, litigation, preliminary injunction, exclusive remedy, jurisdiction


Brian Farkas, Goetz Fitzpatrick LLP, New York, NY


 

October 29, 2014

What NOT to Do When Drafting an Arbitration Clause


Merkin v. Vonage America Inc., No. 2:13-cv-08026-CAS (MRWx), 2014 WL 457942 (C.D. Cal. Feb. 3, 2014), shows that unconscionability is more than a theoretical threat to the enforceability of contractual arbitration clauses. While arbitration provisions are permissible in “take-it-or-leave-it” contracts of adhesion and, undoubtedly, there is a “liberal federal policy favoring arbitration agreements,” courts will not compel arbitration if a contract containing an arbitration provision is unconscionable.

 

In Merkin,the plaintiffs brought a putative class action in California state court, alleging that Vonage America Inc. (Vonage) billed customers for a monthly “Government Mandated” fee, despite the fact that no government agency mandated such a fee. Id. at *1. Vonage removed the case to the U.S. District Court for the Central District of California and subsequently moved to compel arbitration based on an arbitration clause (the Arbitration Clause) in the Vonage Terms of Service Agreement (the Agreement). Id. Based on the lack of “clear and unmistakable evidence” that the parties agreed to delegate questions of arbitrability, the court held that it—not an arbitrator—should determine the unconscionability of the Arbitration Clause. Id. at *5. The court then denied Vonage’s motion to compel arbitration, holding that although the plaintiffs had agreed to the Agreement, the Agreement and Arbitration Clause were nevertheless procedurally and substantively unconscionable.

Id. at *11.

 

The court’s analysis regarding the details of, and circumstances surrounding, the Agreement and Arbitration Clause provides guidance as to what not to do when drafting and modifying contractual arbitration clauses. “Procedural unconscionability concerns the manner in which the contract was negotiated and the respective circumstances of the parties at that time, focusing on the level of oppression and surprise involved in the agreement.” Id. at *5 (citations and internal quotation marks omitted). “[T]he question of oppressiveness turns on the relative balance of bargaining power between the parties.”

Id. at *7.

 

The court began this analysis by holding that the Agreement was per se oppressive because it was a “take-it-or-leave-it” contract of adhesion and, thus, gave the subscriber no opportunity to negotiate. Id. at *6–7. The court then highlighted Vonage’s authority to modify the Agreement at will—authority that Vonage exercised 36 separate times between 2004 and 2013. Id. at *2, 7. Particularly because of these actual and repeated modifications of the Agreement over the years, and the fact that subscribers were not notified of modifications so they would have to constantly check Vonage’s website to make sure they did not miss any new updates to the Agreement, the court found that surprise was present in the case. Id. at *8–9. Accordingly, the court found that the Arbitration Clause was “suffused with a high degree of procedural unconscionability.” Id. at *9.

 

Against this backdrop, the court stated that “only a moderate finding of substantive unconscionability [was] required to render the [Arbitration Clause] unconscionable.” Id. The “paramount consideration” when assessing substantive unconscionability is mutuality. Id. (citation and internal quotation marks omitted). In Merkin, the Arbitration Clause was “unfairly one-sided” because it “carve[d] out exceptions for the categories of claims likely to be brought by Vonage”—e.g., “collection disputes, intellectual property disputes and unauthorized use of service disputes.” Id. at *9–10. In its ruling, the court made clear that “[f]ederal law favoring arbitration is not a license to tilt the arbitration process in favor of the party with more bargaining power.” Id. at *11 (citations and internal quotation marks omitted).

 

The court, thus, denied Vonage’s motion to compel arbitration. The case is now on appeal, so the U.S. Court of Appeals for the Ninth Circuit will add to this story, one way or another. Regardless of the ultimate outcome of the case, however, the district court’s opinion offers a cautionary tale: “fairness” is ignored at the drafter’s peril.


Keywords: alternative dispute resolution, litigation, unconscionability, arbitrability, enforceability


Amanda M. H. Wolfman, Novack and Macey LLP, Chicago, IL


 

October 28, 2014

$600 MM Award Based On Sanction Is Confirmed


In Seagate Technology LLC vs. Western Digital Corporation, et al., (October 8, 2014), the Minnesota Supreme Court confirmed an arbitral award in excess of $600 million that was based on an arbitrator’s sanction. The case concerned the alleged theft of trade secrets and breach of a non-compete agreement. The facts are as follows.


Dr. Mao, a departing employee of Seagate, went to work for Western Digital, a competitor of Seagate, and allegedly took trade secrets with him. Seagate sued Dr. Mao and Western Digital for theft of trade secrets and for Dr. Mao’s breach of a non-compete agreement. Western Digital and Dr. Mao successfully moved to compel arbitration pursuant to Dr. Mao’s employment agreement with Seagate.


At the arbitration, Dr. Mao claimed that three of Seagate’s alleged trade secrets were in the public domain because he had publicly disclosed the trade secrets in a presentation he had made at a past industry conference. Dr. Mao tried to prove this by introducing into evidence the PowerPoint deck from his conference presentation. Seagate discovered that Dr. Mao had added new slides to his PowerPoint deck and moved for sanctions on grounds that Dr. Mao had fabricated evidence.


As a sanction, the arbitrator precluded Western Digital and Dr. Mao from introducing any evidence in opposition to Seagate’s claims with regard to the three trade secrets that were the subject of the fabricated evidence. After a 34-day hearing, the arbitrator entered a finding of liability as to those three trade secrets and ruled in favor of Western Digital and Dr. Mao on all of the other trade secrets in dispute.


The arbitrator calculated damages of about $525 MM based on the “unjust enrichment” method. With pre-judgment interest, the total award exceeded $600 million. Western Digital and Dr. Mao challenged the award on the grounds that the arbitrator had exceeded his authority by entering the default as a sanction for fabrication of evidence and by refusing to hear evidence on the relevant issues. The district court vacated the award in part in that respect.


The Minnesota Supreme Court reversed, holding that the arbitration agreement and the AAA Employment Rules authorized the arbitrator to enter the punitive sanctions that he did. The court rejected the respondents’ pleas that Dr. Mao’s fabrication of evidence did not warrant the extreme sanction imposed. The court stated, in essence, that the respondents made their bed by requesting arbitration, which was subject only to limited judicial review. The court quoted one of its earlier holdings that “Where the arbitrators are not restricted by the submission to decide according to principles of law, they may make an award according to their own notion of justice without regard to the law.”


Keywords: alternative dispute resolution, litigation, sanction, fabrication, evidence, limited judicial review


D.C. Toedt III, Attorney at Law Office of D.C. Toedt III, Houston TX


 

October 22, 2014

Third Circuit Rejects Estoppel Finding and Reverses Order Compelling Arbitration


On October 9, 2014, in Flintkote Co. v. Aviva PLC, No. 13-4055, the Third Circuit reversed an order holding on an estoppel theory that an insurer was required to arbitrate even though it had no written arbitration agreement with the debtor. The Third Circuit held that the debtor had not presented clear and convincing proof that estoppel should apply.


The Flintkote Company (Flintkote) manufactured asbestos-based products and purchased insurance from leading insurers including Aviva PLC (Aviva). In 1985, Flintkote entered into an agreement with insurers other than Aviva that contained an arbitration clause (the 1985 Agreement). In 1989, Flintkote entered into a similar agreement with Aviva, but Aviva did not consent to arbitration and expressly reserved its right to litigate any disputes.


In 2004, Flintkote filed for bankruptcy. Two years later, Flintkote initiated mediation with its insurers pursuant to a mediation agreement that did not contain an arbitration clause or waive any of the parties’ rights. Aviva participated in the mediation and was represented by the same counsel as the other insurers.


Flintkote reached a settlement with some insurers, but not with Aviva, among others. On July 16, 2012, counsel for Aviva and the remaining insurers made demands on Flintkote under the 1985 Agreement and said they would proceed to arbitration absent a resolution. Flintkote took no action in response to the letter except to exchange proposed arbitration agreements with Aviva.


By December 2012, Aviva had separate counsel and was acting independently of the remaining insurers. Aviva moved to lift the automatic stay to pursue a declaratory judgment action concerning the coverage available under its policies. Flintkote filed its own declaratory action in the Delaware district court.


The Bankruptcy Court granted Aviva’s motion and lifted the automatic stay. Flintkote then moved in the district court to compel arbitration. The district court granted Flintkote’s motion on the grounds that Aviva was equitably estopped from avoiding arbitration due to its extensive participation in the prior mediation process and Flintkote’s reliance on Aviva’s participation in that process.


On appeal, the Third Circuit stated that arbitration is a question of contract and if “a party has not agreed to arbitrate, the courts have no authority to mandate that he do so.” Instead, the presumption in favor of arbitration applies only “when interpreting the scope of an arbitration agreement, and not when deciding whether a valid agreement exists.” The court stated that, in the absence of an express agreement to arbitrate, a non-signatory to arbitration can be compelled to arbitrate under traditional principles of contract and agency law, including assumption, piercing the corporate veil, alter ego, incorporation by reference, third-party beneficiary theories, waiver, and estoppel.


The court then looked to Delaware state law to determine whether Flintkote had met its burden of demonstrating that Aviva was equitably bound to arbitration on the grounds (as argued by Flintkote) that (i) Aviva “knowingly exploited” and benefitted from the 1985 agreement and (ii) Aviva’s participation in the mediation process had caused Flintkote detrimentally to change its position. Delaware imposes a burden of clear and convincing proof on the party asserting estoppel. The doctrine of “knowing exploitation” requires a party to “embrace” a contract in order to be held to the entirety of the terms thereof. Delaware further provides that a party may be found to “embrace” a contract where the non-signatory (i) directly rather than indirectly benefits from the agreement, (ii) consistently maintains that certain provisions of the contract should be enforced to benefit it, or (iii) sues to enforce the provisions it likes. When evaluating these factors, however, a court “must proceed with a good deal of caution . . . lest nuanced concepts of equity be allowed to override established legal principles of contract formation.”


The court held that Flintkote failed to establish that Aviva had “embraced” the 1985 agreement. The court noted that the mediation in Flintkote’s bankruptcy case occurred pursuant to a mediation agreement, not the 1985 Agreement, and therefore Aviva was not “embracing” the 1985 Agreement by participating in mediation. Moreover, Aviva’s counsel’s July 16, 2012 letter and related reference to arbitration under the 1985 Agreement were not sufficient to show that Aviva had “consistently” sought any benefit under the 1985 Agreement.


The court also held that Flintkote had not changed its position in justifiable reliance on Aviva’s actions. The court noted that Flintkote was a signatory to the 1989 agreement under which Aviva expressly retained its right to litigate, and therefore, Flintkote knew that Aviva had negotiated for and specifically reserved this right. Moreover, the mediation agreement did not waive Aviva’s rights. Accordingly, Flintkote’s reliance on the idea that, after participating in the mediation for six years, Aviva would arbitrate any unresolved disputes was not reasonable and could not, on an estoppel theory, require Aviva to arbitrate. The court also refused to infer an implied-in-fact contract mandating arbitration because an express contract (the 1989 agreement) already addressed the arbitration issue.


Keywords: alternative dispute resolution, litigation, arbitration, compel, estoppels, knowingly exploit, implied contract


Marcos A. Ramos and Rachel L. Biblo, Richards, Layton & Finger, P.A., Wilmington, DE


 

October 21, 2014

An Inquiry into Materials Exchanged in a Class Action Settlement


In Ogbuehi v. Comcast of California/Colorado/Florida/Oregon, 2014 WL 4961109 (E.D.Cal. Oct. 2, 2014), the court was asked to grant preliminary approval of a class action settlement reached through mediation before class certification. Preliminary approval of a class action settlement requires only that the court determine whether the proposed settlement is within a range of possible approval. Final approval—particularly before a class is formally certified—requires a more rigorous review and a determination as to whether the settlement is fair, reasonable, and adequate.


The court granted the requested preliminary approval, but noted that it had reservations on whether it would grant final approval of the settlement. In order to make the required fairness determination, which included examining the settlement process for evidence of collusion or other conflicts of interest, the court ruled that the parties would have to submit “more detailed evidence concerning the mediation and negotiation of the proposed settlement agreements.” The court stated that it would need to “understand the nature of the negotiations” before making its final determination. Of particular concern were certain estimates of potential liability that were disclosed and discussed during the mediation. The court therefore ordered the parties to submit “information exchanged during their private mediation including, but not limited to, mediations statements and any relevant communications during the parties’ negotiations.” Recognizing that such materials might be confidential, the court permitted the parties to request that confidential materials be reviewed in camera.


Keywords: alternative dispute resolution, litigation, mediation, class settlement, proposed class settlement, final approval


Jonah Orlofsky, The Law Offices of Jonah Orlofsky, Chicago, IL


 

 

October 6, 2014

Arbitration Clause Held Unenforceable Under New Jersey’s Arbitration Act


In Atalese v. U.S. Legal Services Group, L.P., 2014 WL 4689318 (N.J. 2014), the New Jersey Supreme Court held that an arbitration clause that “waives” the right to sue in court is unenforceable unless it states “its purpose clearly and unambiguously.”


The plaintiff had contracted with U.S. Legal Services Group, L.P. (USLSG) for debt-adjustment services. The plaintiff sued in state court alleging that USLSG had violated New Jersey’s Consumer Fraud Act and Truth-in-Consumer Contract, Warranty and Notice Act by failing to deliver its services as promised, misrepresenting that various attorneys had been working on her case, knowingly omitting that it was not a licensed debt adjuster and violating New Jersey’s usury law.


The contract between the plaintiff and USLSG contained an arbitration clause (the “Arbitration Clause”). It provided that


[i]n the event of any claim or dispute between [the plaintiff] and [] USLSG related to this Agreement or related to any performance of any services related to this Agreement, the claim or dispute shall be submitted to binding arbitration upon the request of either party . . . . Any decision of the arbitrator shall be final and may be entered into any judgment in any court of competent jurisdiction.


USLSG moved to compel arbitration based on the Arbitration Clause. The trial court granted the motion and dismissed the plaintiff’s complaint without prejudice. It found that the Arbitration Clause was “sufficiently clear, unambiguously worded, satisfactorily distinguished from the other [a]greement terms, and . . . provide[d] a consumer with reasonable notice of the requirement to arbitrate.’” (citation omitted). The plaintiff appealed, but the appellate court affirmed the ruling. The plaintiff then sought an appeal to the New Jersey Supreme Court, but the court took the appeal and reversed it.


Applying the New Jersey Arbitration Act, which it claimed was “nearly identical” to the Federal Arbitration Act, the court noted that New Jersey’s Act favors arbitration and places arbitration agreements on an “equal footing” with other contracts. However, the court stated that “[a]rbitration’s favored status does not mean that every arbitration clause, however phrased, will be enforceable.” Instead, according to the court, an arbitration agreement, “like any other contract, ‘must be the product of mutual assent,’” which “requires that the parties have an understanding of the terms to which they have agreed.” It also stated that an “average member of the public may not know—without some explanatory comment—that arbitration is a substitute for the right to have one’s claim adjudicated in a court of law.” Further, the court noted, New Jersey law requires that “waiver of rights” provisions be sufficiently clear to place a consumer on notice that she is waiving constitutional or statutory rights, and that every consumer contract must be “‘written in a simple, clear, understandable and easily readable way.’”


Applying those principles, the court held that the Arbitration Clause was unenforceable. It stated that “[n]owhere in the [A]rbitration [C]lause [was] there any explanation that [the] plaintiff is waiving her right to seek relief in court . . . .” According to the court, the clause did “not explain what an arbitration is, nor [did] it indicate how arbitration is different from a proceeding in a court of law.” It held that the clause was not written in “plain language” that an “average consumer” would understand as waiving the right to sue in court, and distinguished the Arbitration Clause from other, enforceable clauses that “at least in some general and sufficiently broad way” had explained to consumers that they were giving up the right to bring their claims in court.


It is questionable that the same result would have been reached under the Federal Arbitration Act. Further, and in all events, it is questionable that the Atalese decision will have significant consequences. For one thing, New Jersey consumer contracts almost certainly will be revised in light of Altalese to include language the court thought was missing from the Arbitration Clause, namely, language that advises consumers that they are agreeing to arbitrate their disputes and giving up the right to seek relief in a court of law. For another, Atalese appears limited to New Jersey consumer contracts, and it is doubtful that consumers would refuse to sign such contracts even if revised in a manner Atalese requires.


Keywords: litigation, alternative dispute resolution, arbitration clause, consumer contracts, enforceability, waiver


Christopher Moore, Novack and Macey LLP, Chicago, IL


 

 

September 23, 2014

New York Court Rejects Award as Imperfectly Executed


By order issued on September 10, 2014, an intermediate New York appellate court affirmed the vacatur of an award under the New York statutory ground: that the award was “so imperfectly executed…that a final and definite award upon the subject matter submitted was not made.” Matter of Andrews v County of Rockland.


The parties had agreed to arbitrate the question of negligence and to use a high-low limit on the amount of damages. They did not disclose the high-low amounts to the arbitrator but asked him to decide liability and, if liability were found, to determine the amount of damages. After a hearing, the arbitrator determined that, without regard to any negligence, the plaintiff was barred from any recovery because she was not wearing her seatbelt. He then nonetheless awarded her the “low” sum of damages as the parties had agreed in their “high-low” arrangement. The court analyzed the arbitrator’s award and rejected it as follows:


Although judicial review of arbitration awards is limited . . . an award will be vacated when the arbitrator making the award "so imperfectly executed it that a final and definite award upon the subject matter submitted was not made" (CPLR 7511[b][1][iii]; see Papapietro v Pollack & Kotler, [*2]9 AD3d 419, 420). An award will be vacated as indefinite or nonfinal for purposes of CPLR 7511 if it does not "dispose of a particular issue raised by the parties" (Hamilton Partners Limited v Singer, 290 AD2d 316, 316; see Papapietro v Pollack & Kotler, 9 AD3d at 419-420), or " if it leaves the parties unable to determine their rights and obligations, if it does not resolve the controversy submitted or if it creates a new controversy'" (Matter of Westchester County Corr. Officers Benevolent Assn., Inc. v Cheverko, 112 AD3d 840, 841, quoting Matter of Meisels v Uhr, 79 NY2d 526, 536).

Here, the arbitrator's award was neither definite nor final, as it failed to resolve the controversy submitted, to wit, the negligence of each party and the amount of damages, if any. The arbitrator did not make any specific findings of fact or credibility or dispose of the issues raised by the parties. Instead, the arbitrator pointed to a fact not in dispute—that the petitioner was not wearing a seatbelt—and determined that he did not need to decide whether the county was negligent. In doing so, the arbitrator failed to dispose of the controversy with which he had been charged (see Matter of Westchester County Corr. Officers Benevolent Assn., Inc. v. Cheverko, 112 AD3d at 841; Matter of Scott v. Bridge Chrysler Plymouth, 214 AD2d 675, 676).

Moreover, the arbitrator also failed to determine damages and instead referred to the parties' agreement, to which he was not privy, and awarded the petitioner "the low" sum of damages, despite finding that the petitioner was barred from recovering any damages (see Matter of Westchester County Corr. Officers Benevolent Assn., Inc. v Cheverko, 112 AD3d at 841; Papapietro v Pollack & Kotler, 9 AD3d at 420; Hamilton Partners v Singer, 290 AD2d at 316). In so doing, the arbitrator did not perform the job he was required to do pursuant to the parties' arbitration agreement.


Keywords: litigation, ADR, vacatur, judicial review, imperfect execution, award neither definite nor final


Michael S. Oberman, Kramer Levin Naftalis & Frankel LLP, New York, NY


 

 

September 3, 2014

AAA Unveils Enhanced International Arbitration Rules


The International Centre for Dispute Resolution (ICDR) of the American Arbitration Association (AAA) recently issued revisions to its International Dispute Resolution Procedures (Including Mediation and Arbitration Rules), effective June 1, 2014. This is the first time the AAA’s international rules have been substantially refreshed since 1996.


Significant changes effected by the revisions include the following:


1. International expedited procedures (Articles 1(4) and E-1 to E-10): These new procedures provide for the appointment of a sole arbitrator and apply in any case where no disclosed claim or counterclaim exceeds US$250,000 exclusive of interest and the costs of arbitration, unless the parties agree or the ICDR determines otherwise. Parties may also agree to use these expedited procedures in other cases. These provisions are unique because other arbitral institutions do not include expedited procedures in their rules.
2. Mediation (Article 5): The new rules state that, following the time for submission of an answer, the ICDR may invite the parties to mediate, and the parties may thereafter agree to mediation at any stage of the proceedings. Unless the parties agree otherwise, any mediation shall proceed concurrently with the arbitration, and the mediator shall not be an arbitrator appointed to the case. Other arbitral institutions do not include such a provision in their rules.
3. Joinder (Article 7): A party may join an additional party by submitting a notice of arbitration against the additional party. No additional party may be joined after the appointment of any arbitrator, unless all parties, including the additional party, otherwise agree.
4. Consolidation (Article 8): A party may request the administrator to appoint a consolidation arbitrator, who will have the power to consolidate two or more arbitrations pending under the rules or under other arbitration rules administered by the AAA or ICDR. The appointment of a consolidation arbitrator is unique to the ICDR.
5. Default arbitrator selection method (Article 12(6)): The old rules provided for the ICDR to appoint arbitrators in the event the parties cannot agree on either the designation or the selection process. In lieu of direct appointment by the ICDR, parties typically agreed to use the list method of selection described in the AAA’s Commercial Arbitration Rules, but not in the old ICDR rules. The enhanced rules now explain that, in the absence of party agreement on the method of appointment, the ICDR will send to each party a list of arbitrator candidates and, failing agreement, the parties have 15 days to strike names and number the remaining names in order of preference. The ICDR will then invite an arbitrator to serve from among the persons who have been approved on the parties’ lists and in accordance with the designated order of mutual preference.
6. Impartiality, independence, and disclosure of potential conflicts (Article 13): Prospective arbitrators are required under the new rules to sign a notice of appointment affirming their independence, impartiality, and availability and to disclose any circumstances that could give rise to justifiable doubts as to their independence or impartiality.
7. Conduct of party representatives (Article 16): The ICDR is in the process of finalizing its review of guidelines regarding the conduct of party representatives. The new rules in anticipation of issuance of guidelines provide that the conduct of party representatives shall be in accordance with such guidelines as the ICDR may issue on the subject.
8. Exchange of information (Article 21): Among other streamlining provisions, the revised rules mandate that the tribunal manage information exchange among the parties with a view toward maintaining efficiency and economy.
9. Express exclusion of U.S. litigation procedures (Article 21(10)): Depositions, interrogatories, and requests to admit are generally not appropriate procedures for obtaining information in an arbitration under the new rules.
10. Time of the award (Article 30): Unless otherwise agreed by the parties, specified by law, or determined by the ICDR, the final award shall be made no later than 60 days from the date of the close of the hearing.


Keywords: litigation, ADR, American Arbitration Association, International Centre for Dispute Resolution, International Dispute Resolution Procedures, expedited procedures, joinder, default arbitrator


P. Jean Baker, American Arbitration Association, Washington, D.C.


 

September 3, 2014

Classwide Arbitration Is Gateway Issue for the Courts


On July 30, 2014, the United States Court of Appeals for the Third Circuit decided that whether an arbitration agreement authorizes arbitration of a class action is a “gateway” issue for the court to decide rather than a procedural question for the arbitrator. In Opalinski v. Robert Half International, Inc., No. 12-4444 (3d Cir. July 30, 2014), the court of appeals became the second federal appeals court to decide that the issue of bilateral vs. classwide arbitration is so important that it should be treated as a substantive issue of arbitrability, rather than a procedural matter: “Because of the fundamental differences between classwide and individual arbitration, and the consequences of proceeding with one rather than the other, we hold that the availability of classwide arbitration is a substantive ‘question of arbitrability’ to be decided by a court absent clear agreement otherwise.” The Sixth Circuit earlier reached the same conclusion in Reed Elsevier, Inc. v. Crockett, 734 F.3d 594 (6th Cir. 2013), using similar reasoning.


Opalinski arose from a lawsuit filed by former employees of Robert Half International, Inc. (RHI) alleging that they had not been paid for overtime as required by the wage and hour laws. RHI moved to compel arbitration on an individual basis; in October 2011, the district court compelled arbitration but ruled that the question of whether the case should proceed on a classwide basis was for the arbitrator. RHI returned to the district court in December 2012, after the arbitrator issued a partial award ruling that the arbitration agreements permitted classwide arbitration, and moved to vacate that award.


In analyzing the issue, the Third Circuit noted that the Supreme Court has traditionally ruled that the question of whose claims an arbitrator has authority to decide is one for the courts. Proposed classwide arbitrations implicate the rights and privacy of absent class members. Whether their claims should be arbitrated is a question more suited to the courts than an arbitrator. The Third Circuit also ruled that a second independent reason supported treating the class question as a gateway issue: Whether the parties have agreed to submit a particular case to arbitration is treated as a gateway issue, and the differences between bilateral and classwide arbitration are so large that the court must consider whether the parties have agreed to arbitrate the class claims. The Third Circuit cited the following portion of the Sixth Circuit’s Reed Elsevier opinion, stating that the “analysis is persuasive and guides our own”:


Gateway questions are fundamental to the manner in which the parties will resolve their dispute—whereas subsidiary questions, by comparison, concern details. And whether the parties arbitrate one claim or 1,000 in a single proceeding is no mere detail. Unlike the question whether, say, one party to an arbitration agreement has waived his claim against the other—which of course is a subsidiary question—the question whether the parties agreed to classwide arbitration is vastly more consequential than even the gateway question whether they agreed to arbitrate bilaterally. An incorrect answer in favor of classwide arbitration would “forc[e] parties to arbitrate” not merely a single “matter that they may well not have agreed to arbitrate[,]” but thousands of them.


Opalinski, No. 12-4444 (first alteration in original) (quoting Reed Elsevier, 734 F.3d at 598–99). Both courts analyzed the debate engendered by the Supreme Court’s plurality opinion in Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003) (Breyer, J., joined by Scalia, Souter & Ginsberg, JJ.), which stated that whether an arbitration clause allows classwide arbitration is not a gateway issue. However, that view was not endorsed by five members of the Court, a fact stressed in Stolt-Nielsen S.A. v. AnimalFeeds International Corp., 559 U.S. 662 (2010), which established the principle that parties may not be compelled to arbitrate classwide claims unless they have expressly agreed to do so. In Stolt-Nielsen, the Supreme Court stressed the large differences between bilateral and classwide arbitration, differences that cannot be described as purely procedural. Citing this discussion and a similar one in AT&T Mobility LLC v. Concepcion, 563 U.S. 321 (2011), the Third Circuit concluded that the better view was to treat the bilateral vs. classwide arbitration issue as a fundamental arbitrability issue and thus a gateway issue reserved to the courts.


Keywords: litigation, ADR, collective bargaining, bilateral vs. classwide arbitration, gateway issue, class action, arbitrability, substantive vs. procedural


Sheila J. Carpenter, Carpenter ADR LLC, Vienna, VA


 

September 3, 2014

Forum-Selection Clause Supersedes Right to FINRA Arbitration


In Goldman, Sachs & Co. v. Golden Empire Schools Financing Authority, ___ F.3d ___, 2014 WL 4099289, at *1 (2d Cir. Aug. 21, 2014), the Court of Appeals for the Second Circuit held that “a forum selection clause requiring ‘all actions and proceedings’ to be brought in federal court supersedes an earlier agreement to arbitrate”—even when the earlier agreement to arbitrate is set forth in the rules of the Financial Industry Regulatory Authority (FINRA). By so holding, the Second Circuit agreed with the holding of the Ninth Circuit in Goldman, Sachs & Co. v. City of Reno, 747 F.3d 733 (9th Cir. 2014), and rejected that of the Fourth Circuit in UBS Financial Services, Inc. v. Carilion Clinic, 706 F.3d 319 (4th Cir. 2013).


Read the full case note.


Keywords: litigation, ADR, alternative dispute resolution, arbitrability, FINRA, forum selection clause


Amanda M.H. Wolfman, Novack and Macey LLP, Chicago, IL


 

August 28, 2014

Third Circuit Joins Sixth : Class Arbitration Is for Courts to Decide


In Opalinski v. Robert Half Int’l Inc.,____ F.3d ____, No. 12-4444, 2014 WL 3733685 (3d Cir. July 30, 2014), the Third Circuit held that whether class arbitration was available was a “substantive issue of arbitrability” for the court, not the arbitrator, to decide absent clear agreement otherwise. In so holding, the Third Circuit joined the Sixth Circuit’s decision in Reed Elsevier, Inc. v. Crockett, 734 F.3d 594 (6th Cir. 2013).


Both named plaintiffs were former employees of defendant Robert Half International (RHI). They brought a class action against RHI alleging violations of the Fair Labor Standards Act. The plaintiffs signed employment agreements that contained an arbitration clause stating that “‘[a]ny dispute or claim arising out of or related to Employee’s employment, termination of employment or any provision of this Agreement’ shall be submitted to arbitration.” Neither agreement mentioned class arbitration.


Based on these agreements, RHI moved to compel arbitration with each of the plaintiffs individually. The district court granted that request, but held that the propriety of individual versus class arbitration was for the arbitrator to decide. The arbitrator then issued a partial award and ruled that the employment agreements permitted class arbitration. RHI moved to vacate the partial award. The district court denied the motion to vacate, and RHI appealed.


The Third Circuit observed that neither the Supreme Court nor the Third Circuit had clearly decided whether courts or arbitrators are supposed to decide the availability of class-wide arbitration. However, it compared that question to one that has long been recognized as being within the court’s prerogative, namely, “whose claims” an arbitrator may decide. Id. at *4. The court noted that the named plaintiffs were contending that their arbitration agreements empowered the arbitrator not only to decide their personal claims but also the claims of additional individuals who were not parties to the action. It held that it was the court’s responsibility to decide whose claims were subject to arbitration, those of the individual plaintiffs or those of an entire class.


The Third Circuit also noted the many substantial differences between a typical, bilateral arbitration and a class arbitration as discussed in Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662 (2010). Id. at *5. It said that it believes the Supreme Court signaled that the availability of class-wide arbitration is a “substantive gateway dispute qualitatively [different] from deciding an individual quarrel.” “Traditional individual arbitration and class arbitration are so distinct that a choice between the two goes, we believe, to the very type of controversy to be resolved.” Id. It found this to be a second and independent reason for its holding that the availability of class arbitration was for the courts, and not the arbitrator, to decide.


The Third Circuit recognized that a different result would be reached if “the parties clearly and unmistakably provide otherwise” in their arbitration agreement. Here, however, the agreement was silent on class arbitrability. Thus, the parties had not “clearly and unmistakably” provided that the arbitrator was to determine the availability of class arbitration.


The Supreme Court has not yet decided whether the availability of class arbitration presumptively should be decided by the courts. It will be interesting to see how other courts address this issue, and whether the Supreme Court will put it to rest.


Keywords: litigation, ADR, alternative dispute resolution, class arbitration, classwide arbitration, gateway issue, question of arbitrability, clear and unmistakable, arbitration clause


Christopher Moore, Novack and Macey LLP, Chicago IL


 

August 18, 2014

Seventh Circuit Re-Affirms Courts' Limited Review of Arbitration Awards


In United Steel Workers International Union v. PPG Industries, Inc., 751 F.3d 580 (7th Cir. 2014), the Seventh Circuit affirmed the trial court’s refusal to alter an arbitration award that interpreted a collective bargaining agreement (CBA).


In United Steel, unions representing workers in a manufacturing facility (collectively, the “union”) claimed that the employer, PPG Industries, failed to provide adequate notice of its proposed wage cuts. Before ending up in federal court, the parties submitted their dispute to arbitration.


Read the full case note.


Keywords: litigation, ADR, collective bargaining, labor management relations act, unenforceable, clarification, arbitration award


Christopher Moore, Novack and Macey LLP, Chicago IL


 

August 18, 2014

Third Circuit Distinguishes Arbitrator Error from Misconduct


In Bellantuono v. ICAP Securities USA, LLC, 557 Fed. Appx. 168 (3rd Cir. 2014), the Third Circuit affirmed an arbitration award even though it disagreed with the arbitration panel’s rulings on discovery. The opinion distinguishes arbitrator error from the arbitrator misconduct required for an award to be overturned.


Defendant ICAP Securities USA, LLC, terminated plaintiff Joseph Bellantuono from its mortgage-backed securities desk for violations of its trading policies. Bellantuono commenced a Financial Industry Regulatory Authority (FINRA) arbitration, alleging that ICAP terminated him as a sacrificial lamb for the Securities and Exchange Commission (SEC), which had begun an investigation of ICAP. The FINRA panel awarded Bellantuono only partial relief and the district court denied Bellantuono’s petition to vacate the award and instead confirmed it. On appeal, Bellantuono argued that the panel manifestly disregarded the law and engaged in misconduct in refusing to hear relevant evidence.


Read the full case note.


Keywords: litigation, alternative dispute resolution, ADR, circuit split, discovery, sanctions, manifest disregard, misconduct


John Haarlow Jr., Novack and Macey LLP, Chicago, IL


 

August 12, 2014

Battle of Forms and Arbitral Jurisdiction


Nebraska Machinery Co. vs. Cargotec Solutions, LLC (8th Cir., Aug. 7, 2014) combines a battle of the forms-contract dispute with the question of arbitral jurisdiction. It provides an interesting comparison to the discussion of arbitral jurisdiction in the Eckert/Wordell case, also decided by the Eighth Circuit, described in the July 29 posting on this site.


In Eckert/Wordell, a contract contained an arbitration clause that incorporated the AAA Commercial Rules. A party who had not signed the contract brought an arbitration claim against a party who had signed the contract. The party asserted that it had no obligation to arbitrate with a non-signatory, but lost its bid for a declaratory judgment to that effect. The Eighth Circuit reasoned that by signing a contract that incorporated the AAA Rules, the party had unmistakably agreed that the arbitrator, not the court, was to decide questions of arbitral jurisdiction. Thus, the arbitration brought by the non-signatory was allowed to proceed with the arbitrator to decide if the non-signatory had the right to bring its claims in an arbitral setting.


Read the full case note.


Keywords: litigation, alternative dispute resolution, ADR, arbitral jurisdiction, battle of the forms, trial, AAA Commercial Rules


Mitchell L. Marinello, Novack and Macey LLP, Chicago


 

August 5, 2014

Dodd-Frank Does Not Prevent Arbitration of Non-WhistleBlower Claims


Dodd-Frank does not invalidate pre-dispute arbitration agreements in employment contracts except when they are applied to whistleblower claims. Santoro v. Accenture Federal Services, LLC, 748 F.3d 217 (4th Cir. 2014).


Santoro, a 66-year-old account lead for Accenture, was terminated and replaced with a younger employee. Santoro sued Accenture in the Eastern District of Virginia, asserting age discrimination. Santoro’s employment contract contained an arbitration clause that covered all disputes relating to Santoro’s employment, and Accenture moved to compel arbitration.


In opposing the motion, Santoro argued that the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010  invalidated all arbitration agreements by publicly traded companies that lack a carve-out for whistleblower claims, even if the plaintiff is not a whistleblower. The district court rejected Santoro’s argument and granted Accenture’s motion. Santoro appealed.


Read the full case note.


Keywords: litigation, alternative dispute resolution, ADR, Federal Arbitration Act, Dodd-Frank Act, Congressional intent, whistleblower claims


Scott D. Simon, Goetz Fitzpatrick LLP, New York, New York


 

July 29, 2014

Under AAA Rules, Arbitrator Decides Jurisdiction


The Eighth Circuit held that the incorporation of the American Arbitration Association (AAA) Rules into a contract requiring arbitration is a “clear and unmistakable indication that the parties intended for the arbitrator to decide threshold questions of arbitrability.” Eckert/Wordell Architects, Inc. v. FJM Props. of Willmar, LLC, 2014 WL 2922343 (8th Cir., June 30, 2014). The case provides procedural guidance for arbitrators and parties on what to do when there is an objection to arbitration based on the ground that one of the parties did not sign the arbitration contract.


In 2005, Fischer Laser Eye Center, Inc. bought land on which to build a new clinic. It hired plaintiff Eckert/Wordell Architects, Inc. to design and construct the clinic. Eckert Wordell drafted the architectural-services contract. The contract, which both parties signed, contained a broad arbitration clause and incorporated the AAA’s Construction Industry Arbitration Rules.


Later, Fischer’s shareholders formed a separate corporation to own and develop the land. Fischer transferred the property to that entity, which later changed its name to FJM Properties of Willmar, Inc. After the clinic was built, FJM filed an arbitration demand with the AAA against Eckert Wordell, claiming that the clinic’s HVAC system was defective.


In April 2011, Eckert Wordell and FJM agreed to have their dispute decided by a privately chosen arbitrator and proceeded to take discovery. The evidentiary hearing was scheduled for May 2012.


One month before the evidentiary hearing, however, Eckert Wordell stated that it would not participate in the arbitration, because FJM was not a signatory to the architectural-services contract. The arbitrator directed the parties to proceed with the arbitration and to submit arguments about whether they were required to arbitrate their dispute as part of the arbitration process.


Eckert Wordell was unwilling to proceed in this manner. It filed suit seeking a declaratory judgment that it was not required to arbitrate with FJM. The district court granted summary judgment in FJM’s favor. The court acknowledged that FJM had not signed the arbitration agreement, but it held that the contract committed the question whether FJM could require Eckert to arbitrate the dispute to the arbitrator for decision. The Eight Circuit affirmed.


The Eighth Circuit stated that whether a particular arbitration provision can be used to compel arbitration between a signatory and non-signatory is a threshold question of arbitrability that is for a court to decide “unless there is clear and unmistakable evidence the parties intended to commit questions of arbitrability to an arbitrator.” The court went on to hold that:


We have previously held the incorporation of the AAA Rules into a contract requiring arbitration to be a clear and unmistakable indication the parties intended for the arbitrator to decide threshold questions of arbitrability. See Green v. SuperShuttle Int’l, Inc., 653 F.3d 766, 769 (8th Cir. 2008) (noting the AAA Rules empower the arbitrator to determine his or her own jurisdiction over a controversy between the parties.). Eckert Wordell’s drafting of the architectural services contract here [incorporating] the AAA Rules requires the same result.


In this case, Eckert Wordell clearly had agreed to arbitrate disputes arising under its design-and-build contract. It also had agreed to the AAA Construction Rules. Accordingly, any objection that it had to arbitrating claims under its contract had to be raised in the arbitration proceeding, even if the party bringing those claims was a non-signatory.


Keywords: litigation, alternative dispute resolution, ADR, jurisdiction, incorporation, AAA Rules, non-signatory


Mitchell L. Marinello, Novack and Macey LLP, Chicago IL


 

July 25, 2014

Arbitrator May Raise Dispositive Issue Sua Sponte


On July 18, 2014, the District Court for the Southern District of New York issued a memorandum and order in Cellu-Beep, Inc v. Telecorp Communications, Inc. that addressed a recurring legal question: Is it appropriate for an arbitrator to ask the parties to brief a dispositive issue that neither of them has raised?


In Cellu-Beep, the respondent pled the statute of limitations in its answer, but did not raise that defense in its motion to dismiss. The arbitrator asked for briefing on the statute-of-limitations defense, and each side submitted its position. When the arbitrator dismissed the case on statute-of-limitations grounds, the claimant challenged the award. The claimant argued that the arbitrator’s request for briefing on a defense that the respondent did not present showed that the arbitrator was guilty of “evident partiality.” The court rejected claimant’s argument:


Soliciting briefing on a potentially dispositive issue, especially when both parties are afforded an opportunity to brief the matter, is certainly legitimate. In fact, it is within the purview of the arbitrator to dismiss a case sua sponte on statute of limitations grounds, even without granting petitioner a briefing opportunity.


This language gives guidance on the appropriateness of an arbitrator raising an issue not advanced by a party—at least in terms of the effect of such action on the award.


The claimant also challenged the award on the ground that it was in manifest disregard of the law, because the arbitrator did not stay the statute of limitations for the time the parties had spent in mediation. The court rejected this argument as well:


Petitioner maintains that the arbitrator's decision that the parties' attempted mediation was not relevant in determining the timeliness of Cellu-Beep's arbitration demand was in manifest disregard of the law. . . . This position is unsustainable. In support of its assertion, Cellu-Beep fails to cite a single case or statute from this jurisdiction which demonstrates that the law on this issue either "clear" or "well defined." . . . In fact, petitioner concedes that "there may be a split in authorities" on the question of whether a mediation tolls the statute of limitations for bringing a claim to arbitration. . . . When the legal question resolved by the arbitrator is one where reasonable minds may differ, a petitioner's claim of manifest disregard cannot succeed. Given the unclear state of the law, the heavy burden levied on the party advocating vacatur, and the "extreme deference" afforded to arbitrators in this context, petitioner's manifest disregard argument must fail. DiRussa v. Dean Witter Reynolds, Inc., 121 F.3d 818, 821 (2d Cir. 1997).


The court noted that whether participation in a mediation tolls the statute of limitations is still an open issue.


Keywords: litigation, alternative dispute resolution, ADR, sua sponte, dispositive issue, statute of limitations, evident partiality, manifest disregard


Michael S. Oberman, Kramer Levin Naftalis & Frankel LLP, New York NY


 

July 22, 2014

Arbitration Agreement Incorporated by Reference and Not Waived by Sub's Acts


In Al Rushaid v. Nat’l Oilwell Varco, Inc., ___ F.3d ___, No. 13-20159, 2014 WL 2971701 (5th Cir. July 2, 2014), the Fifth Circuit Court of Appeals considered the creation and potential waiver of an arbitration provision. First, the court considered whether a separate document referenced in a contract could create an enforceable arbitration agreement. Then, the court decided whether the actions of several affiliates could waive the right to arbitrate.


The plaintiff accepted a written price quotation for oil-rig equipment from defendant NOV Norway, which created a binding contract under Texas law. The price quotation itself did not include an arbitration clause, but it provided that its terms and conditions were “based on the general conditions stated in the enclosed ORGALIME S2000.” The ORGALIME document clearly included an arbitration clause. So, the question was whether the price quotation’s general reference to the ORGALIME was sufficient to create an agreement to arbitrate a dispute regarding the price quotation.


Read the full case note.


Keywords: litigation, alternative dispute resolution, price quotation, incorporation of agreement to arbitrate, actions of affiliates, waiver


Steven J. Ciszewski, Novack and Macey LLP, Chicago IL


 

July 14, 2014

District Court Confirms Award Despite Lack of Express Consent Provision


In Tube City IMS, LLC v. Anza Capital Partners, LLC, the Southern District of New York considered whether it had jurisdiction to confirm an arbitration award under section 9 of the Federal Arbitration Act (FAA) in Tube City’s favor even though the parties had not expressly consented in their arbitration agreement to a judgment being entered on the award by a court. The district court held that it had jurisdiction to confirm the award and confirmed the award.


The district court acknowledged that parties “must have consented in advance to judicial confirmation” under section 9 of the FAA. And it recognized that the arbitration agreement did not contain a consent-to-judicial confirmation clause. It nevertheless held that Section 9’s consent requirement was satisfied. In reaching its decision, the district court relied primarily on Kallen v. District 1199, 574 F.2d 723 (2d Cir. 1978), and I/S Stavborg v. Nat’l Metal Converters, Inc., 500 F. 2d 424 (2d Cir. 1974).


Read the full case note.


Keywords: litigation, alternative dispute resolution, ADR, arbitration, confirmation, consent to confirmation


Michael Oberman, Kramer Levin Naftalis & Frankel LLP, New York NY


 

July 11, 2014

Federal Circuit: Magistrate Judge Violated Duty to Disclose


In CEATS, Inc. v. Continental Airlines, et al., 2013-1529 (June 24, 2014), the Federal Circuit held that a magistrate judge who served as a mediator failed to meet his duty to disclose a prior relationship with defense counsel. The case provides a valuable discussion of a mediator’s duty to disclose.


CEATS sued several defendants for patent infringement in the U.S. District Court for the Eastern District of Texas. The parties participated in several mediation sessions before Magistrate Judge Robert Faulkner. When no settlement was reached, they tried the case to a jury in the district court. The jury found that the defendants had violated CEATS’s patents but that the patents were invalid. Afterward, CEATS discovered that the mediator had relationships with Fish & Richardson, P.C., counsel to several defendants, which had not been disclosed.


CEATS appealed from the finding of patent invalidity, but lost on the merits. CEATS also moved under Rule 60(b) for relief from the final judgment based on the lack of disclosure of the mediator’s relationship with defense counsel. The district court denied that motion and held that neither Faulkner nor defense counsel had a duty to disclose the matters in question. As part of its analysis, the district court reasoned that mediators, unlike judges, did not sit in judgment of a case and therefore had less of a disclosure obligation than judges. CEATS appealed that 60(b) ruling.


The Undisclosed Relationship
The potential conflict of interest became evident due to an unrelated state-court case that preceded CEATS’s patent lawsuit by about three years and that partly overlapped it. In that unrelated case, the Fish firm represented a party in a partnership dispute in Texas state court. The parties agreed to arbitrate their dispute, and the state court appointed Faulkner, who at that time was with JAMS, to act as the arbitrator. Faulkner disclosed that he had participated in arbitrations and mediations with the named Fish attorneys on prior occasions but made no other disclosures. He did not amend his disclosures when Johnson, another Fish attorney, entered his appearance in the case and, in fact, acted as if he did not know Johnson. Ultimately, Faulkner entered an award in favor of Fish’s client for $22 million, including $6 million in attorney fees. After learning that Faulkner and Johnson were previously acquainted, opposing counsel asked for permission to take discovery on the extent of their relationship. The state court denied that request and confirmed the $22 million arbitration award that Faulkner had issued.


On appeal, the Texas appellate court ruled that the lower court should have permitted discovery of the relationship between Faulkner and Johnson, and it vacated the order confirming the arbitration award. After discovery, the trial court confirmed the arbitration award again, but the Texas appellate court reversed again. This time it vacated the arbitration award altogether, holding that it was tainted by an enduring social relationship between Faulkner and Johnson that included expensive outings and gifts and an active business relationship between Faulkner and the Fish law firm. Subsequently, Faulkner was added as a codefendant with Fish, Johnson, and others in a new state-court lawsuit that sought damages for breach of the arbitration agreement and fraud in concealing the Faulkner-Johnson-Fish relationship.


The Federal Circuit’s Analysis
The question for the Federal Court was whether the Faulkner-Johnson-Fish relationship—as revealed by the state-court action—should have been disclosed by Faulkner before or during the time that he mediated CEATS’s patent-infringement case.


The Federal Circuit discussed at length the vital role that mediators play in the federal-court system and rejected the district court’s conclusion that a mediator’s duty to disclose is any less exacting than the duty that federal judges have to recuse themselves under 28 U.S.C. § 455(a). It held that mediators are required to disclose, “as soon as practicable, all actual and potential conflicts of interest that are reasonably known to the mediator and could reasonably be seen as raising a question about the mediator’s impartiality.”


Applying this standard, the court had no difficulty in finding that Faulkner had failed to meet his disclosure obligations:


at the same time Faulkner served as the court-appointed mediator [here], the Faulkner-Johnson-Fish relationship was directly at issue in a state appellate court. Importantly, this meant that Fish, as a firm, was actively defending Faulkner’s personal disclosure decisions while he was mediating this case. . . . [The] fact that Faulkner testified in support of the arbitration award and was asked, not just about his relationship with Johnson, but with the Fish firm and its clients as well, further emphasizes the need for disclosure on these facts.


Furthermore, the Texas appeals court’s decision holding that Faulkner breached his disclosure obligations in the [Texas state court action] was released . . . between the first two mediation sessions in this [federal] case and well before the third . . . [T]he state court found that the Faulkner-Johnson-Fish relationship was a disqualifying, social and business relationship . . . [That relationship] could reasonably be seen as raising a question about the mediator’s impartiality [in this case as well].


What Consequence for Nondisclosure?
Despite its holding that Faulkner had breached his duty of disclosure with respect to the mediation, the court did not reverse the judgment denying CEATS’s patent claims. Instead, it analyzed the factors for relief from a judgment under Rule 60 (b) that are discussed in Liljeberg v. Health Servs. Acquisition Corp.,486 U.S. 847, 863-64 (1988) and found that reversal was not warranted.


The court expressed concern that it was failing to provide a remedy for the mediator’s non-compliance with his disclosure obligations and conceded that to some extent its failure to do so would undermine the public’s confidence in the mediation process. Nonetheless, because CEATS had had a full opportunity to present its case before a neutral judge and jury, the court did not believe that refusing to grant CEATS a new trial would undermine public confidence in the judicial system as a whole. Accordingly, despite the mediator’s failure to meet his disclosure obligations, the final judgment was allowed to stand.


Keywords: litigation, alternative dispute resolution, ADR, mediator, duty to disclose, mediation, recusal, Rule 60(b)


Mitchell L. Marinello, Novack and Macey LLP, Chicago IL


 

June 27, 2014

No Meeting of the Minds Regarding Agreement to Arbitrate


In Doe v. Vineyard Columbus, 2014 WL 2781594 (Ohio Ct. App. June 17, 2014), the Ohio Court of Appeals affirmed the trial court’s denial of a motion to stay the litigation and compel arbitration, holding that there was insufficient evidence that the parties agreed to arbitrate.


Plaintiffs Jane and John Doe sued their former pastor, Steven Robbins, and his church, Vineyard Columbus, in Ohio state court. The plaintiffs asserted tort claims allegedly based on a sexual relationship between Robbins and Jane Doe that arose when she sought counseling.


The church filed a motion to stay the case and compel arbitration. The trial court held an evidentiary hearing, and denied the motion on the ground that there was no “meeting of the minds regarding arbitration. . . .” The church appealed to the Tenth District of Ohio Court of Appeals. The court of appeals affirmed.


Read the full case note.


Keywords: litigation, alternative dispute resolution, arbitration, meeting of the minds, motion to stay


Courtney D. Tedrowe, Novack and Macey LLP, Chicago IL


 

June 17, 2014

Federal Law Governs Mediation Privilege in Federal Court


Many states have statutes that create a privilege for mediation communications. There is no parallel federal statute, and federal courts have declined to create a federal common-law privilege for mediation communications. Consequently, it is fairly well settled that cases in federal court that involve solely federal-law claims do not apply a mediation-communication privilege (unless provided for by local court rule), and that federal court diversity cases that involve solely state-law claims will apply a state-law mediation privilege.


It is more difficult, however, to determine what law controls the mediation privilege in a federal court case involving both federal and state law claims. This issue arose in Wilcox v. Arpaio, 2014 WL 2442531 (9th Cir. 2014), a federal court case involving both federal and state-law claims that appeared to have settled in mediation. A dispute arose over whether a binding settlement had actually been reached. The Ninth Circuit held that state law governed whether a settlement had been reached for both the state and federal claims. A question then arose as to whether evidence from the mediation was admissible to determine if a settlement had been reached. The Ninth Circuit ruled that where a case involves both federal and state-law claims, and the same evidence will be received on both claims, a federal court is not bound by state evidentiary rules. Thus, the court ruled that it need not apply the applicable state statutory mediation privilege.


Read the full case note.


Keywords: litigation, alternative dispute resolution, mediation privilege, settlement, governing law, state law, federal law


Jonah Orlofsky, The Law Offices of Jonah Orlofsky, Chicago IL


 

June 16, 2014

Arbitrator's Prior Ruling Against Party Is Not Basis to Disqualify


In Morgan Keegan & Co. v. Smythe, 2014 WL 2462853 (Tenn. Ct. App. May 29, 2014), the Tennessee Court of Appeals held that an arbitrator will not be disqualified for evident partiality unless there is actual direct and concrete evidence of it. In particular, the court held that an arbitrator need not be disqualified for: (1) having ruled against a party in a prior arbitration; and (2) serving as a broker for a client who filed an arbitration claim against one of the parties. In so holding, the court of appeals reversed and remanded the trial court, which had vacated the arbitration award based on “evident partiality.”


Read the full case note.


Keywords: litigation, alternative dispute resolution, arbitration, vacatur, evident partiality, disqualification


Alexander L. Berg, Novack and Macey LLP, Chicago IL


 

June 5, 2014

U.S. Supreme Court Denies Certiorari in Delaware Arbitration Case


In 2009, the Delaware State Legislature amended the rules governing the resolution of disputes in the Court of Chancery. The law gave chancery judges the power to privately arbitrate business disputes when agreed to by the parties. The dispute must involve at least one business entity and one party must be a citizen of Delaware. Business disputes involving consumers could not be submitted to the program. If the only remedy sought was monetary relief, the amount in controversy must exceed one million dollars.


On January 5, 2010, the Chancery Court adopted rules governing administration of the program. The rules, mirroring the wording of the legislation, provided that the arbitrator would be a sitting judge of the Chancery Court, and the arbitration would be conducted at the courthouse out of public view. To maintain the confidentiality of the proceedings, the arbitrator’s final award could not be made public.


In October 2011, the Delaware Coalition for Open Government (Coalition) filed suit, challenging the secrecy of the proceedings. The Coalition argued that the proceedings violated the First Amendment’s requirement that the public have qualified access to civil and criminal trials. The Chancery Court countered by claiming that the program was pure arbitration and distinct from a civil trial.


On August 30, 2012, U.S. District Judge Mary A. McLaughlin of the Eastern District of Pennsylvania, sitting by designation, issued an opinion declaring that the program was a civil trial. The court concluded that the proceedings function like a nonjury trial because: (1) the Court Chancellor, not the parties, selects the judge; (2) the Chancery Court discovery rules apply instead of the limited discovery rules typically available in arbitration; and (3) a sitting judge of the Chancery Court, rather than a third-party arbitrator, presides.


Relying on the reasoning in Publicker Industries, Inc. v. Cohen, 733. F.2d 1059 (3rd Cir. 1984), that openness in criminal trials apply equally to civil trials, the judge held that the confidentiality provision violates the qualified right of access to criminal and civil trials protected by the First Amendment. “The public benefits of openness are not outweighed by the defendants’ speculation that such openness will drive parties to use alternative nonpublic fora to resolve their disputes . . . [T]he judiciary as a whole is strengthened by the public knowledge that its courthouses are open and judicial officers are not adjudicating in secret.” Delaware Coal. for Open Gov’t v. Strine, 894 F. Supp.2d 493 (Del. 2012).


The Chancery Court appealed the ruling to the Third Circuit, which upheld McLaughlin’s decision in a 2–1 split decision. Delaware Coal. for Open Gov’t v. Strine, 733 F.3d 510 (3rd Cir. 2013).


In January 2014, the Chancery Court filed a 116-page petition with the U.S. Supreme Court. The petition stated that numerous state and federal laws provide for confidential government-sponsored arbitration, some of which closely resemble the Delaware court arbitration program. The Court wrote, “Invalidating the Delaware program would create significant uncertainty regarding the ability of state and federal courts to utilize innovative ADR techniques, which are critical to addressing the overcrowding that plagues the judiciary.”


On April 24, 2014, the Supreme Court denied certiorari in the case. The high court’s decision means the Third Circuit ruling that the program violated the public’s access to civil trials under the First Amendment will stand. It is not known if the Chancery Court will seek to revise the program—for example, by using retired judges or allowing public access to the proceedings.


Keywords: litigation, alternative dispute resolution, ADR, First Amendment, arbitration, Delaware


P. Jean Baker, American Arbitration Association, Washington, D.C.


 

June 5, 2014

Enforceability of Forum Selection Clauses


It is not unusual for parties to agree to settle disputes in a preselected court or arbitration proceeding, in a preselected location. These are referred to as “forum selection” provisions. The Supreme Court recently addressed the enforceability of such clauses in Atlantic Marine Construction Co., Inc. v. United States District Court for the Western District of Texas, 2013 WL 6231157 (U.S. Dec. 3, 2013).


Atlantic Marine, a Virginia corporation, entered into a contract with the U.S. Army Corps of Engineers to construct a facility at Fort Hood in Texas. Atlantic Marine subcontracted some of the work to J-Crew Management, a Texas corporation. The subcontract included a clause stating that all disputes would be litigated in Virginia. J-Crew filed suit in federal district court in Texas alleging breach of contract. Citing the forum selection provision, Atlantic Marine sought to have the Texas suit dismissed or transferred to Virginia.


The Texas federal district court, citing the convenience and availability of witnesses in Texas, denied both motions. The U.S. Court of Appeals for the Fifth Circuit affirmed. The Fifth Circuit found that institutional concerns, such as the availability of witnesses, cannot be contracted away by private parties.


The Supreme Court disagreed, holding that courts should not consider the parties’ “private-interests,” such as the availability of witnesses, in determining whether to enforce a forum selection clause. The party seeking to avoid enforcement of the forum selection clause has the burden of showing “institutional concerns” sufficient to ignore the parties’ agreement. The court then remanded the case to allow the lower courts to decide whether there are any public interest factors that would warrant nonenforcement, thereby leaving it to the lower courts to decide what public interests demonstrate a compelling enough reason to defeat enforcement of forum selection clauses. The Court’s decision, however, makes it clear that the plaintiff carries a heavy burden of showing that public interest factors “overwhelmingly disfavor a transfer.” As the Court noted, “those factors will rarely defeat a transfer motion.”


The Supreme Court did not address the enforceability of forum selection clauses in states where, by statute, such clauses are void or voidable if litigation is required in a state other than where the construction project is located. Such states include Texas and Virginia. Nor did the Court address whether forum selection clauses trump mandatory venue statutes, such as the Miller Act. Fifth Circuit Judge Haynes’s concurring opinion noted that while Congress has provided that any action under the Miller Act must be brought in the district in which the contract was performed and executed, venue may be varied by agreement of the parties unless, under the circumstances, such agreement is unreasonable.


A number of states have passed statutes that address whether a resident can be forced to arbitrate a dispute out of state. Most of these statutes are limited to disputes involving contractors and/or subcontractors; others include disputes involving public works or improvements to real property. Section 15-7-120(B) of the South Carolina Code is one of the broadest, purporting to apply to any type of arbitration agreement. Some states require an in-state venue only when the dispute arises out of an in-state transaction. Others only bar out-of-state arbitration venues when at least one of the parties has its home base in-state and the dispute arises out of an in-state transaction. The Federal Arbitration Act will preempt these provisions if a court concludes that there is a nexus to interstate commerce and in-state venue requirements conflict with the purpose of the FAA. It will be interesting to see what impact the recent Supreme Court decision will have on enforcement of these state statutes.


Keywords: litigation, alternative dispute resolution, ADR, forum selection, arbitration, litigation


P. Jean Baker, American Arbitration Association, Washington, D.C.


 

May 28, 2014

2nd Cir. Denies Motion to Compel Insurer to Arbitrate Fraud Claims


In an opinion issued in Allstate Insurance Co. v. Mun, (May 6, 2014), the Second Circuit affirmed the denial of a motion to compel arbitration. The dispute was between a medical-practice group and an auto insurer. Between October 2007 and October 2011, the medical practice had billed Allstate a total of about $500,000 for "electrodiagnostic testing" purportedly performed on various persons who had been involved in auto accidents and were covered by an Allstate auto policy. Allstate paid each of the invoices within the short time period required by New York’s no-fault auto-insurance laws, but later brought an action against the medical practice, alleging in substance that the submitted claims were fraudulent.


The medical practice moved to compel arbitration under New York’s insurance law that gives anyone making a first-party claim the option of pursuing that claim in arbitration and under a provision in the Allstate policies that, under New York law, was required to be substantially the same. The Second Circuit held that the Allstate arbitration clause, while broad, did not apply to claims by the insurance company to recover payments made to the medical practice. Instead, it held that New York’s insurance statutes provided for arbitration only when an insurance company is refusing to pay a first-party claim. Here is an excerpt in which the court addresses the arbitration clause:


The arbitration provision in the Allstate policies appears quite broad. It contemplates arbitration if the claimant and insurance company “do not agree regarding any matter relating to the claim.” N.Y. Comp. Codes R. & Regs. tit. 11,§ 65-1.1(d); see J.A. 146-47. But it is not as broad as it may seem.


An arbitrable dispute is one between the insurance company and a “person making a claim for first-party benefits.” N.Y. Comp. Codes R. & Regs. tit. 11, § 65-1.1(d). Defendants are no longer “making a claim.” They made a claim; they made many claims. And those claims were promptly paid by Allstate. Allstate’s fraud suit therefore does not raise a dispute between it and a person “making a claim for first-party benefits.” The arbitration provision does not apply. (pp. 7–8)


The court explained that New York’s no-fault-insurance law was specifically designed to create a fast and efficient way to provide accident victims with compensation without regard to fault. It stated that the arbitration created by New York law was an “expedited, simplified affair” with discovery that was “limited or non-existent” and that it was unsuited to complex cases, such as the one involving Allstate’s fraud claims against the medical group, which concerned many transactions over several years. The court also stated that requiring arbitration in this kind of situation would undercut certain anti-fraud measures that the New York legislature had enacted.


Keywords: litigation, alternative dispute resolution, ADR, no-fault, first-party, insurance, motion to compel arbitration, fraud


Michael S. Oberman, Kramer Levin Naftalis & Frankel LLP, New York, NY


 

May 21, 2014

FINRA Holds Class-Action Waiver Is Invalid for Investor Disputes


On April 24, 2014, the board of governors of the Financial Industry Regulatory Authority (FINRA) issued a decision finding that Charles Schwab & Co., Inc. violated FINRA rules when the firm attempted to keep investors from participating in judicial class actions by adding waiver language to its customer account agreements.


The ruling by the board affirms in part and reverses in part an earlier FINRA Hearing Panel decision. The panel found that Schwab's waiver violated FINRA rules that limit the language that firms may place in pre-dispute arbitration agreements but concluded that FINRA could not enforce those rules because they were in conflict with the Federal Arbitration Act (FAA). The board overturned this finding and determined that the FAA does not preclude FINRA's enforcement of its rules.


In addition, the board upheld the hearing panel's determination that Schwab's attempt to prevent FINRA arbitrators from consolidating more than one party's claims in a FINRA arbitration forum violated FINRA rules.


The board’s ruling that Schwab cannot have a class-action waiver in its arbitration clause arguably is inconsistent with the FAA as interpreted by the U.S. Supreme Court in such decisions as AT&T v. Concepcion, 131 S.Ct.1740 (2011), American Express Co. v. Italian Colors Restaurant, 12-133, 130 S. Ct. 2401 (June 20, 2013), and CompuCredit Corp. v. Greenwood, 132 S. Ct. 665 (2012). The Concepcion case held that a state statute that prohibited the waiver of class arbitrations was invalid under the FAA. The American Express decision held that, under the FAA, a court could not invalidate a class arbitration waiver on the ground that the plaintiff’s cost of arbitrating his individual claim exceeded its potential recovery and, thus, effectively denied its rights under antitrust law. CompuCredit held that, in the absence of a contrary congressional command, the FAA required arbitration clauses in a credit-card agreement to be enforced as written; the Court found no such contrary congressional command in the Credit Repair Organizations Act.


The FINRA board rejected the view that its decision was barred by the FAA and held that Congress had issued the equivalent of a contrary congressional command when it granted the Securities and Exchange Commission the authority to approve self-regulatory-organization limitations on arbitration agreements. Noting that the SEC had approved FINRA’s limits on customer arbitration agreements, the board concluded that such limitations were valid and enforceable.


To read the board’s full decision, go to the FINRA website and put case number 2011029760201 into the search field.


Keywords: litigation, alternative dispute resolution, ADR, FINRA, class action, waiver


Mitchell L. Marinello, Novack and Macey LLP, Chicago, IL


 

May 16, 2014

Question on Mediated Settlement Not Appropriate Issue for Interlocutory Appeal


In Miller v. Basic Research, LLC, 13-4048, 2014 WL 1778046 (10th Cir. May 6, 2014), the parties mediated a class-action lawsuit. At the conclusion of several mediation sessions, they informed the court that the mediation had been successful and that they had a handwritten document stating the “Proposed Terms” of the settlement. When the parties attempted to draft the final agreement, however, negotiations broke down. The plaintiff filed a motion to enforce the mediated agreement, and the defendant opposed that motion. The district court ruled that the parties had reached a binding settlement because they “had in fact agreed to the material terms of a settlement and any ongoing disagreements concerned only “linguistic changes.”


The defendant then sought to appeal that ruling. The defendant acknowledged that the ruling was interlocutory because, under Federal Rule 23, a class-action settlement must be approved by the court after a fairness hearing in which class members, after receiving notice, are entitled to participate. Because the fairness hearing had not yet taken place, the settlement was not final, and therefore the order finding that the parties had reached a binding settlement was interlocutory.


Read the full case note.


Keywords: litigation, alternative dispute resolution, mediation, binding settlement, class action, collateral order, interlocutory appeal


Jonah Orlofsky, The Law Offices of Jonah Orlofsky, Chicago, IL


 

May 9, 2014

SDNY Holds Arbitrators May Exclude Evidence, Affirms FINRA Award


Setting aside allegations of bias and error stemming from the arbitration panel’s exclusion of evidence, the U.S. District Court for the Southern District of New York confirmed a Financial Industry Regulatory Authority (FINRA) arbitration award. Rubenstein v. Advanced Equities, Inc., Case No. 13-Civ-1502(PGG) (S.D.N.Y. March 31, 2014).


In March 2007, Advanced Equities, Inc. (AEI), a private equity firm, recruited several brokers to join its recently opened New York City office. The brokers were presented with employment contracts that guaranteed them the greater of a minimum draw or a “gross commission” payout. In connection with their employment agreements, the brokers executed promissory notes, pursuant to which AEI agreed to make a loan to the each broker that would be forgiven over the first five years of employment but that would become immediately due and payable upon the employee’s termination.


Read the full case note.


Keywords: litigation, alternative dispute resolution, FINRA, manifest disregard, bias, and exclusion of evidence


Scott D. Simon, Goetz Fitzpatrick LLP, New York, New York


 

May 6, 2014

Order to Compel Arbitration Is Not Appealable


The Supreme Court has consistently held that § 16(b) of the Federal Arbitration Act (the FAA) bars appeals of interlocutory orders compelling arbitration and staying judicial proceedings. See 9 U.S.C. § 16. However, the Ninth Circuit’s ruling in Johnson v. Consumerinfo.com, Inc. addressed the issue of whether an immediate appeal may be taken from a similar order if that decision could be deemed “final” under the collateral order doctrine that has developed under 28 U.S.C. § 1291. No. 11-57184, 2014 WL 1085078 (9th Cir. Mar. 20, 2014).


In Johnson, the named plaintiffs each filed putative class action suits in the Central District of California alleging that Consumerinfo.com, Inc. (ConsumerInfo) had violated numerous California consumer protection laws. Johnson, *1. The district court granted ConsumerInfo’s motion to compel arbitration and stayed plaintiffs’ suit. Johnson, *1. The plaintiffs appealed and argued that the Ninth Circuit had jurisdiction under the collateral order doctrine that permits the appeal of non-final orders that resolve critical questions that are isolated from the merits of the case.


The Ninth Circuit dismissed the appeal after examining the "design" of the FAA "as a whole . . . ." Johnson, *2. The court read § 16(b) of the FAA as removing appellate jurisdiction from all interlocutory orders “regardless of whether any such order could otherwise be deemed collateral.” Johnson, *2. The court then confirmed what it called the “plain meaning” of the statute by reviewing the FAA’s legislative history and demonstrating that the FAA was designed to limit appeals of an order staying proceedings and compelling arbitration to those that are truly final.


The Ninth Circuit noted that its conclusion was consistent with the holdings of other circuits. For example, in ConArt, Inc. v. Hellmuth, Obata + Kassabaum, Inc., a subcontractor appealed an interlocutory order that denied the subcontractor’s claim for a declaratory judgment and an injunction against the requirement that it arbitrate his claims. 504 F.3d 1208, 1209–10 (11th Cir. 2007). The Eleventh Circuit held that it did not have jurisdiction over the appeal because the district court’s order left the subcontractor’s original claims pending before the district court until the parties’ arbitration was concluded. The court stated that the FAA reflected an “unequivocal congressional command” that the court could not supersede. ConArt, at 1211.


The court’s holding in Johnson is also consistent with Supreme Court cases holding that orders staying proceedings and compelling arbitration are appealable if they are final orders. The Supreme Court has held that an order compelling arbitration is final and appealable only if the district court dismisses all of the claims before it. See, e.g., Green Tree Fin. Corp.-Alabama v. Randolph, 531 U.S. 79 (2000).


In sum, Johnson confirms that orders compelling arbitration and staying judicial proceedings are not appealable unless they are final orders that completely dispose of the case before the district court.


Keywords: ADR, litigation, arbitration, FAA, collateral order, interlocutory, appeal


Brian E. Cohen, Novack and Macey LLP, Chicago, IL


 

May 1, 2014

Preliminary Injunction Reversed and Arbitration Allowed To Proceed


In Savers Property and Casualty Insurance Co., et al. v. National Union, the Sixth Circuit reversed a district court that had enjoined an arbitration panel from issuing any further orders without its approval. The case reached the district court after the panel had issued a partial award on liability and damages but had retained jurisdiction to complete the damage phase.


The petitioners argued various improprieties including the failure of a party-appointed arbitrator to make certain disclosures, that same arbitrator’s ex parte communications with the party who appointed him, and its complaint that its own party-appointed arbitrator had been “disenfranchised” because the other two arbitrators decided certain procedural issues when he was not available. The district court—recognizing limits on judicial review before a final award—had recast the action as one for breach of contract concerning the rules under which the arbitration was to be conducted. It then found that the elements for a preliminary injunction were satisfied and enjoined the arbitration from proceeding.


Read the full case note.


Keywords: ADR, litigation, preliminary injunction, Section 2, interim judicial review, failure to disclose, ex parte communication, party-appointed


Michael S. Oberman, Kramer Levin Naftalis & Frankel LLP, New York, NY


 

April 25, 2014

Confidentiality in International Arbitration Cannot Control in U.S. Courts


In Veleron Holding, BV v. Morgan Stanley, 2014 WL 1569610(SDNY April 16 2014), an insider trading and stock manipulation case, the district court addressed two important questions: (1) will a U.S. court respect the total confidentiality and “utmost secrecy” imposed by a London Court of International Arbitration for any information generated in the arbitration or provided by the parties to the arbitration?; and (2) can the decisions in that arbitration collaterally estop a party to the U.S. proceeding?


The context was a motion for summary judgment and a separate motion to unseal portions of the record in the district court case that had been permitted to proceed “entirely under seal” during the pendency of the London arbitration. The arbitration had recently concluded, and the award was to be held in confidence. Plaintiff Veleron based its complaint for insider trading on documents that its parent, a party to the arbitration, improperly disclosed to it in violation of the arbitral confidentiality.


Read the full case note.


Keywords: ADR, litigation, international, arbitration, confidentiality, secrecy, collateral estoppel


Laura A. Kaster, Appropriate Dispute Solutions, Princeton, NJ


 

April 21, 2014

Mediation Agreement Not Unconscionable


In The McCaffrey Group, Inc. v. Superior Court, 2014 WL 1153392 (5th Dist. Cal. 2014), the homeowners sought to sue a builder for alleged construction defects. The construction contract required a number of pre-litigation dispute resolution mechanisms, including mediation, and the parties had to split the costs of the mediation. The homeowners argued that this mediation requirement was unconscionable because the mediation costs could be quite high, and therefore act as a tax that had to be paid before they could have access to the courts. The homeowners noted, in this regard, that the mediator had the discretion to conduct the mediation as he or she saw fit, which could lead to a very lengthy, and therefore very expensive, process.


The court rejected the unconscionability argument, finding that it was reasonable to require the parties to split this expense. The court also noted that the homeowner had made no attempt to show that the mediation fees actually, rather than hypothetically, presented an unreasonable burden. The court, therefore, left the door open to a finding of unconscionability if, in a particular case, it could be shown that the mediation fees created an unreasonable financial burden.


Keywords: ADR, litigation, mediation, unconscionability, split fees, financial burden, hypothetical


Jonah Orlofsky, The Law Offices of Jonah Orlofsky, Chicago, IL


 

April 8, 2014

SCOTUS Denies Writ Re Manifest Disregard


A petition for certiorari in Walia v. Dewan, Docket No. 13-722, asking the United States Supreme Court to decide whether the doctrine of “manifest disregard of the law” is a viable basis for vacatur under the Federal Arbitration Act was considered by the Court at its regular conference on April 4, 2014 and denied on April 7, 2014. It is, of course, entirely discretionary for the Supreme Court to grant or deny certiorari, and the Court usually does not explain the reason for its decision.


In the underlying case, the Fourth Circuit concluded that the manifest disregard doctrine remained viable though it noted some uncertainty about that subject arising from the Supreme Court’s decision in Hall Street Assocs., L.L.C. v. Mattel, Inc., 552 U.S. 576 (2008). The Court then used the doctrine as its basis for vacating an award in favor of Petitioner Walia who had signed a broad release of all his claims in return for a payment of $7,000. The Court noted that the arbitrator had found Walia’s release valid and applicable to all claims brought in state or federal court but nonetheless appeared to conclude that the release did not apply to claims brought in an arbitration setting. The Fourth Circuit found no basis for the arbitrator’s decision stating, “We do not know how the Arbitrator reached her interpretation of the Release. However, it is clear to us that neither linguistic gymnastics, nor a selective reading of Maryland contract law, could support her conclusion that the Release was enforceable but that Walia’s claims were arbitrable anyway.” Walia’s petition for certiorari asked the Supreme Court to review and overturn the Fourth Circuit’s decision. As stated above, that request was denied.


Read additional details of the dispute, including links to the underlying appellate decision, the cert petition, opposition and reply, and an amicus brief in support of granting the petition that was authored by Prof. George Bermann of Columbia University School of Law and David Lindsey (counsel of record), James Hosking, Jennifer Gorskie, and Yujing Yue of Chaffetz Lindsey on behalf of 16 prominent law professors and practitioners.


Keywords: ADR, litigation, SCOTUS


Mark Kantor, Member of College of Commercial Arbitrators, Washington D.C.


 

April 8, 2014

FINRA Award Confirmed Where Bias of Industry Arbitrator Not Proven


In Maury Bronstein, IRA v. Morgan Keegan & Company, Inc., (No. W2011-01391-COA-R3-CV, April 1, 2014) a Tennessee trial court vacated a FINRA panel’s arbitration award because it found evident partiality on the part of one of the panel members, a “non-public” arbitrator. The trial court did not review a transcript of the arbitration hearing, and received no evidence, relying solely on the representations of the plaintiff’s counsel. The basis for the trial court’s ruling is vague, reciting only alleged statements from Morgan Keegan about there being no need for an impartial panel, supposedly made in other cases, and unspecified statements from the allegedly biased panel member that the trial court found could create an impression of partiality. The party objecting to the award did not file a transcript of the arbitration proceeding until after the appeal had been perfected, and nothing in the record showed that the trial court had considered the transcript in making its decision.


Read the full case note.


Keywords: ADR, litigation, FINRA, evident partiality, vacatur, Uniform Arbitration Act


Robert Arrington, Wilson Worley, Kingsport, TN


 

April 3, 2014

Mandatory Discovery Prior to a Voluntary Mediation?


It is hard to have a successful mediation if one side feels it is missing information necessary to fully assess the case. Because mediation is generally a voluntary process, however, any pre-mediation exchange of information is generally left up to the parties, with hopefully the guidance of the mediator.


In Selective Way Insurance Company v. Schulle, 2014 WL 462807 (D.W.D.Va. 2014), after the parties agreed to mediate, the plaintiff filed a motion to compel the production of certain documents, and part of its argument was that information in those documents was necessary to fully assess its settlement position. The court granted the motion, first finding the documents relevant, but then adding:


[T]he court is a proponent of transparency in the mediation process and believes that disclosure of the requested information will facilitate the upcoming mediation. As other courts have recognized, discovery of [certain] information permits the remaining parties to assess their liability and “evaluate their risks in continuing with the litigation” and, thus, may ultimately “promote settlement of the remaining claims.” [citation omitted.]


The court also addressed a request by the producing part to limit the required production due to confidentiality and additional relevance concerns. The court rejected this, once again noting the potential impact on the upcoming mediation:


Moreover, as a practical matter, the proposed limitation would impact the likelihood of resolution at the upcoming mediation.


There is something odd about preceding mediation—a voluntary process based on cooperation—with a motion to compel. In the cited case, however, the timing of the motion to compel appears to have been advantageous to the moving party, not only because the documents would be an aid in the mediation, but also because the court seemed more inclined to grant a motion to compel on what might be considered a close call due to the potential impact the discovery material would have on the possibility of settlement.


Of course, one must weigh the dynamics of each situation. In some cases, filing a motion to compel discovery could be viewed as a hostile act and result in one’s opponent canceling the mediation. Nonetheless, the filing of such a motion is certainly worth considering.


Keywords: ADR, litigation, mediation


Jonah Orlofsky, The Law Offices of Jonah Orlofsky, Chicago, IL


 

April 1, 2014

Supreme Court Denies Cert Re Delaware Arbitration Program


On Monday, March 24, 2014, the United States Supreme Court denied certiorari in Strine v. Delaware Coalition For Open Government, a case that concerned the experimental arbitration program that Delaware created in its state courts.


Under the Delaware program, in cases where no party is a “consumer,” at least one party is a business entity formed under Delaware law, and the amount in dispute is $1 million or more, the parties could agree to have their dispute decided in a confidential arbitration proceeding in the Delaware state courts. The federal district court determined that such arbitrations were akin to civil bench trials and that, pursuant to the First Amendment and prior Supreme Court decisions, the arbitrations could not be confidential but instead had to be open to the public and the press. In October of last year, the Third Circuit affirmed the district court’s decision. Though it took issue with some of the district court’s reasoning, it too found that it was unconstitutional for Delaware’s arbitration proceedings to be closed to the public. A group of Delaware judges sought review in the Supreme Court but their petition for certiorariwas denied. (As is typical, the Supreme Court did not explain why it denied certiorari.)


The denial of certiorari leaves standing the decision of the Third Circuit and means that any arbitration proceedings in the Delaware state court system must be open to the public and the press. Thus, parties who want their commercial disputes resolved through a confidential arbitration proceeding will not be able to use the Delaware program. The impact of this decision on the viability of court-sponsored arbitration programs remains to be seen.


Keywords: ADR, litigation, Delaware arbitration program, First Amendment, public access, press


Amanda M. Hinkley, Novack and Macey LLP, Chicago IL


 

March 26, 2014

Equitable Estoppel Denied and Arbitration Avoided For Antitrust Claims


A divided panel of the Eighth Circuit permitted an antitrust case to go forward in federal court even though each plaintiff had signed an arbitration agreement with one of the two defendants alleged to have engaged in the antitrust conspiracy. The case is interesting for its analysis of when equitable estoppel does and does not require a party to arbitrate claims against a party who has not signed the relevant arbitration agreement.


Facts
Wholesale involved a putative class-action alleging a conspiracy between two wholesale grocery suppliers to artificially inflate grocery prices. The defendants were C&S Wholesale Grocers, Inc. (C&S) and SuperValue, Inc. (SuperValue) (singly, a Wholesaler, and collectively, the Wholesalers). The plaintiffs were five retail grocers (singly, a Retailer, and collectively, Retailers) who had supply contracts and separate arbitration agreements with one Wholesaler or the other but not with both of them.


The problems supposedly started when the Wholesalers entered into an Asset Exchange Agreement (AEA) in which they exchanged certain business assets, including some customer contracts, and agreed not to do business with or to solicit any of the exchanged customers for a certain time period. Although the AEA did not contain any pricing provisions, the Retailers alleged that the AEA was part of a conspiracy to limit competition and inflate prices.


The Retailers did not want to arbitrate their claims. They cleverly organized into two groups and each group filed a putative class-action antitrust case against the Wholesaler that it did not have a supply or arbitration agreement with. The Wholesalers cried foul and moved to dismiss. They asserted that each Retailer should be equitably estopped from litigating its claims and instead should be required to arbitrate. The district court agreed and dismissed the case.


Read the full case note.


Keywords: ADR, litigation, equitable estoppel, antitrust, class action, non-signatory


Mitchell L. Marinello, Novack and Macey LLP, Chicago, IL


 

March 17, 2014

Does the FAA Authorize an Order to Compel Mediation?


In a summary order issued March 13, 2014 in Holick v. Cellular Services of N.Y., the Second Circuit declined to address whether the district court had properly enforced a contractual mediation clause by invoking the FAA; the mediation had occurred, so the circuit treated the issue as moot.


Read the full case note.


Keywords: ADR, litigation, FAA, contractual mediation clause


Michael S. Oberman, Kramer Levin Naftalis & Frankel LLP, New York, NY


 

March 12, 2014

Second Circuit Declines to Vacate International Arbitral Award


The U.S. Court of Appeals for the Second Circuit has refused to vacate Citigroup Inc.’s arbitration victory in a dispute over a $7.5 billion investment that the Abu Dhabi Investment Authority (ADIA) made in the bank before the 2008 financial crisis. In Abu Dhabi Inv. Auth. v. Citigroup, Inc., 13-1068-CV, 2014 WL 628354 (2d Cir. Feb. 19, 2014), the court held that ADIA did not meet the “high hurdle” of showing that the American Arbitration Association (AAA) panel demonstrated a “manifest disregard of the law” or exceeded its powers in ruling for Citigroup. The case’s procedural history illustrates the federal courts’ limited role in overseeing arbitration proceedings.


The underlying controversy dates back to just before the Great Recession. The ADIA’s investment agreement allowed Citigroup to replenish capital after losses decimated its market value in 2007. But thereafter, ADIA claimed that its investment was severely diluted when the bank issued preferred shares—later converted to common stock—to other investors on better terms than those given to it. (Citigroup ultimately required three federal bailouts, but is now the third-largest American bank). ADIA commenced arbitration proceedings against Citigroup in December 2009. Each party nominated one arbitrator, and these nominees jointly selected the third, neutral member of the tribunal, who was designated its chair. All three were American attorneys.


In the arbitration, ADIA argued that it had been fraudulently induced into the investment and asserted claims of common law fraud, securities fraud, negligent misrepresentation, breach of fiduciary duty, breach of contract, and breach of the implied covenant of good faith and fair dealing. ADIA’s claims were rejected completely by the AAA panel in October 2011. In February 2012, ADIA moved in the Southern District of New York to vacate the award. In March, 2013, the district court rejected the motion and confirmed the award.


On appeal, ADIA argued that the district court erred by failing to vacate the award because the arbitration panel incorrectly applied New York’s interest analysis in deciding to apply the law of New York—rather than the law of Abu Dhabi—to ADIA’s common law fraud and negligent misrepresentation claims. ADIA argued that this choice-of-law decision was in manifest disregard of the law and exceeded the panel’s powers, in violation of the Federal Arbitration Act (FAA), 9 U.S .C. § 10(a)(3)-(4).


The Second Circuit began its analysis by noting that an arbitration award may be vacated if it results from the arbitrators’ “manifest disregard of the law” or if the “arbitrators exceeded their powers.” Porzig v. Dresdner, Kleinwort, Benson, North America LLC, 497 F.3d 133, 138, 139 n. 3 (2d Cir.2007). It noted, however that “A party seeking to vacate an award under the FAA must surmount a high hurdle [since] awards are vacated for manifest disregard only in those exceedingly rare instances where some egregious impropriety on the part of the arbitrator is apparent.” (Internal citations omitted).


Here, the Second Circuit noted that the underlying investment agreement did not specify what law should govern tort claims between the parties. The agreement merely directed that any dispute the parties could not resolve was to be decided by the International Centre for Dispute Resolution rules (the international arm of the AAA). Those rules state that in the absence of a choice of law designation, “the tribunal shall apply such law(s) or rules of law as it determines to be appropriate.” ICDR Rules, Art. 28(1). Consistent with this provision, the AAA panel conducted research and concluded that New York law governed ADIA’s claims. The Second Circuit found that the federal courts should not disturb that determination.


Interestingly, this appeal is only part of the story of this case. After losing its first round of arbitration, ADIA launched a second round of arbitration proceedings in August 2013 against Citigroup on separate but related claims. Citigroup quickly went back to the Southern District, filing a complaint to stop the new proceedings because they were based on largely the same claims as the first. But the district court refused to do so, holding that it was the arbitrators, not the courts, who had the authority to decide on the validity of the new proceedings.


In short, Abu Dhabi Inv. Auth. v. Citigroup, Inc. is an example of courts taking a hands-off approach to decisions properly vested in arbitral panels. Both the district court and the Second Circuit declined to find that the AAA panel had acted in manifest disregard of the law or exceed its powers in violation of the FAA when it decided to apply law of New York rather than the law of Abu Dhabi. Similarly, a different district judge allowed the AAA, and not the court, to determine whether ADIA could bring a second round of arbitration.


Keywords: ADR, litigation, manifest disregard, FAA, choice of law provision


Brian Farkas, Goetz Fitzpatrick LLP, New York, New York


 

March 7, 2014

Supreme Court Defers to Arbitrators in International Case


In BG Group v. Republic of Argentina, the Supreme Court of the United States overturned the Court of Appeals for the D.C. Circuit and deferred to the arbitrators’ decision as to whether BG Group, PLC, a United Kingdom company, had to comply with a treaty requirement that it submit claims to the courts of Argentina before taking them to arbitration. The decision provides guidance on the authority of arbitrators to decide whether pre-arbitration requirements have been satisfied and the role of the courts in the enforcing international arbitration awards. Six Justices joined fully in the opinion, authored by Justice Breyer. Justice Sotomayor joined in part and concurred in part. Chief Justice Roberts and Justice Kennedy dissented.


The case concerned a dispute between BG Group and Argentina arising out of BG Group’s investment in an Argentine gas distribution company. Argentina changed the laws applicable to the investment and thereby caused BG Group substantial losses. BG Group filed an arbitration claim against Argentina pursuant to an arbitration clause in an investment treaty between the United Kingdom and Argentina. The treaty required each party to submit its claims to the courts of the respondent’s home country first and entitled it to pursue those claims in an international arbitration forum if the local court did not issue a decision within 18 months or if, after the court issued its decision, the parties were still in dispute. BG Group did not satisfy this “local litigation” prerequisite. Instead, it by-passed Argentina’s courts and filed an arbitration claim. The arbitration panel, citing actions Argentina had taken that interfered with the operation of its court system, excused BG Group’s non-compliance with the local litigation requirement and ultimately issued an award in excess of $180 million in BG Group’s favor. Argentina challenged the award in U.S. federal court. The D.C. Court of Appeals vacated the award, holding that BG Group’s failure to satisfy the local litigation prerequisite left the arbitration tribunal without jurisdiction to hear BG Group’s claims.


Read the full case note.


Keywords: ADR, litigation, international arbitration awards, local litigation prerequisite, Federal Arbitration Act


Mark Kantor, Member of College of Commercial Arbitrators, Washington D.C.


 

March 6, 2014

SDNY Affirms Heavy Burden to Overturn Arbitrator's Award


An arbitrator’s award allowing an individual to file class-action litigation, despite a mandatory arbitration provision forbidding it, is confirmed. Emilio v. Sprint Spectrum L.P., d/b/a Sprint PCS, Case No. 11-Civ-3041 (JPO) (S.D. N.Y. February 11, 2014)


In early 2005, one of Sprint’s wireless telephone customers filed a demand for class arbitration, claiming, on behalf of more than two million New York Sprint customers, that Sprint had wrongly passed along New York State’s Excise Tax to customers when the tax was intended to fall solely on the cellphone provider. Sprint’s customer agreement, however, provided that the customer agreed not to “assert a claim in a representative capacity on behalf of anyone else.”


An arbitrator was appointed by JAMS as designated by the parties. Following the arbitrator’s October 2006 ruling that Kansas’s Unfair Trade and Consumer Protection Act (KCPA)—which prohibits customers from waiving a class-action remedy—applied to the dispute, the parties briefed the customer’s motion for class certification during 2009.


On April 27, 2010, the United States Supreme Court decided Stolt–Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662 (2010), holding that a party cannot be forced to submit to class arbitration without having agreed to do so. Sprint asked the arbitrator to reconsider her earlier decision in light of Stolt-Nielsen, and on December 27, 2010, she agreed that Sprint could not be compelled to participate in class arbitration. She also ruled, however, that it would be unfair to enforce the arbitration provision as written (denying the class arbitration remedy) when she had already found the KCPA applicable. Accordingly, the arbitrator ruled that the customer could proceed with class-action litigation if the parties could not agree to class or bilateral arbitration.


Read the full case note.


Keywords: ADR, litigation, class action, manifest disregard, Stolt-Nielsen, and JAMS rules


Scott D. Simon, Goetz Fitzpatrick LLP, New York, New York


 

February 25, 2014

SCOTUS Vacates CA Decision Upholding "Gentry" Rule


In its Orders released February 24, 2014, the U.S. Supreme Court vacated the decision of the Second Appellate District of the Court of Appeal of California in Carmax Auto Superstores v. Fowler applying the so-called Gentry rule relating to class action waivers in arbitration agreements, and remanded the case back to the California state appellate court for further consideration in light of American Express Co. v. Italian Colors Restaurant.


As posed by petitioner Carmax, the issue in the Carmax certiorari petition was “Whether California’s “Gentry rule”—under which class-action waivers in employment arbitration agreements are invalid if “a class arbitration is likely to be a significantly more effective practical means of vindicating the rights of the affected employees than individual litigation or arbitration,” Gentry v. Superior Court of L.A. County, is preempted by the Federal Arbitration Act in light of this Court’s decisions in AT&T Mobility LLC v. Concepcion and American Express Co. v. Italian Colors Restaurant.


The California Second Appellate District had determined in Carmax that California’s Gentry rule survived the U.S. Supreme Court’s 2010 decision in Concepcion. The Carmax appellate decision was issued March 26, 2013, about three months before the U.S. Supreme Court ruled in Amex v. Italian Colors, but the denial of further review by the California Supreme Court in Carmax came in July 2013, a month after the Amex v. Italian Colors ruling.


It would appear that the U.S. Supreme Court is giving the California state courts another chance to take the Amex v. Italian Colors decision into account.


Keywords: ADR, litigation, class action waivers, employment arbitration, Gentry, Italian Colors


Mark Kantor, Member of College of Commercial Arbitrators, Washington D.C.


 

February 19, 2014

New York and Florida Create Special Courts for ICA Matters


Recognizing the growing importance and prevalence of international commercial arbitration (ICA), late last year, courts in New York and Florida established procedures whereby all ICAs are assigned to judges specifically trained to hear such matters. On October 3, 2013, the New York State Supreme Court for New York County issued an Administrative Order designating a particular judge to handle all ICA proceedings brought before the court. Two months later, on December 3rd, the Eleventh Judicial Circuit of Florida in Miami-Dade County—one of the leading venues in the Americas in which to conduct ICA proceedings—followed suit. By Administrative Order No. 13-08, it created an ICA court consisting exclusively of specially trained judges to which all ICA proceedings are assigned. According to the Orders, these programs will benefit courts and litigants alike by improving the processing of ICA proceedings, fostering judicial expertise and understanding in the area of law, leading to more uniform decisions and establishing a consistent body of case law.


Keywords: ADR, litigation, International Commercial Arbitration, ICA proceedings


Christopher G. Dean, Novack and Macey LLP, Chicago, IL


 

February 19, 2014

Failure to Disclose Leads to Vacatur


The Hawaii Intermediate Court of Appeals vacated an arbitration award due to the failure of the arbitrator, a former judge, to disclose the relationships that he had with counsel for one of the parties. Nordic PCL Construction, Inc. v. LPIHGC, LLC, No. CAAP-11-0000350 (App. February 14, 2014) (mem.).


The Nordic case involved a dispute over the quality of concrete work that Nordic performed for LPIHGC, LLC (LPI), the general contractor for a condominium project in Maui. The parties used Dispute Prevention & Resolution, Inc. (DPR), a private ADR company, to administer their arbitration and selected a retired judge as the arbitrator.


At the time of his appointment, the judge disclosed that while serving on the bench, “counsel and members of their law firms appeared before me.” He also disclosed that “Since retirement, I have served as a neutral for counsel and members of their law firms.” He stated that he would provide “additional disclosures, as necessary, throughout this proceeding.”


Issues in the case included the test standard that applied to the concrete work, whether Nordic’s test results on its concrete work were valid, and whether LPI’s loss of its own concrete testing data had any implications for the case. The judge ruled in LPI’s favor on these issues and, after 31 days of hearings, issued an award in favor of LPI.


Read the full case note.


Keywords: ADR, litigation, disclosure, burden, evident partiality, vacatur


Mitchell L. Marinello, Novack and Macey LLP, Chicago, IL


 

February 18, 2014

Fourth Circuit's Decision Is "Emblematic" Of Circuit Divide Over "Manifest Disregard of the Law"


In Dewan v. Walia, --- F. App’x ---, 2013 WL 5781207, at *1 (4th Cir. Oct. 28, 2013), petition for cert. filed, the Court of Appeals for the Fourth Circuit vacated an arbitration award that it found to be “the product of a manifest disregard of the law by the [a]rbitrator.” The continued viability of the “manifest disregard of the law” standard is a matter of sharp debate. As certain amici curiae discuss in detail in their brief, the Fourth Circuit’s decision in Dewan is “emblematic of an entrenched circuit divide over the availability and meaning of manifest disregard in vacatur proceedings.” Brief of Professors and Practitioners of Arbitration Law as Amici Curiae in Support of Petition for a Writ of Certiorari, Walia v. Dewan, 2014 WL 250946, at *5 (U.S. Jan. 16, 2014) (No. 13-722).


Walia concerns an arbitration award in favor of claimant Arun Walia (Walia) and against his former employer, an accounting firm (the Firm). Dewan v. Walia, --- F. App’x ---, 2013 WL 5781207. When the Firm and Walia parted ways, Walia signed a broadly-worded release (the Release) that covered all of his potential claims against the Firm in exchange for $7,000. Both the Release and Walia’s employment contact contained an arbitration clause.


Read the full case note.


Keywords: ADR, litigation, vacatur, manifest disregard, employee, employer


Amanda M. Hinkley, Novack and Macey LLP, Chicago, IL


 

February 13, 2014

Availability of Class Arbitration Is For the Courts to Decide


In Reed Elsevier, Inc. v. Crockett, 734 F.3d 594 (6th Cir. 2013) the Sixth Circuit affirmed a district court’s rulings that: (a) whether class arbitration was available was for the court to decide, not the arbitrator; and (b) the arbitration clause at issue did not permit class arbitrations.


The defendant and his law firms, subscribed to LexisNexis legal-research plans (the Subscription Plans). A billing dispute arose when the defendant contended that LexisNexis—a division of the plaintiff—improperly charged for accessing research databases without warning that there would be additional charges.


The Subscription Plans each contained an arbitration clause (the Arbitration Clause) requiring that the arbitration to take place where LexisNexis was located and the parties to split the arbitration costs. These requirements made it financially unfeasible for the defendant to arbitrate his claims. The defendant filed an arbitration demand for fraud, breach of contract, and violation of the New York Consumer Protection Act and seeking class status.


Read the full case note.


Keywords: ADR, litigation, class arbitration, unsconscionability, arbitration clause


Christopher Moore, Novack and Macey LLP, Chicago, IL


 

February 7, 2014

Illinois Court Dismisses Claim Against Mediator, But Implies That Valid Claim Exists


In Pales v. Carrillo, 2013 IL App (1st) 123107-U (Dec. 12, 2013) (unpublished order), the Illinois Appellate Court addressed the rare issue of the viability of a claim against a mediator by a disappointed litigant. The plaintiff hired the defendant, a non-lawyer, who agreed to “negotiate and mediate” a divorce settlement. When the plaintiff was disappointed with the outcome, she sued, alleging in a pro secomplaint that the defendant violated the standard of care set forth in the American Arbitration Association’s rules of conduct for mediators. The court upheld a dismissal of the complaint for two primary reasons. First, the court ruled that there is no cause of action created by the AAA’s rules of conduct. The court noted that those rules might serve as “evidence of a breach of a duty in a negligence action,” but they cannot form the sole basis for a claim. Second, the court held that no mediation took place. A mediation, the court ruled, is a “process by which parties submit their dispute to a neutral third party (the mediator) who works with the parties to reach a settlement.” The plaintiff did not plead that a mediation occurred nor was there any indication that a mediation had taken place.


Read the full case note.


Keywords: ADR, litigation, AAA’s rules of conduct, mediation, negligence, claim


Jonah Orlofsky, The Law Offices of Jonah Orlofsky, Chicago, IL


 

January 23, 2014

Ohio Arbitration Clauses Are Enforceable Despite Their "Substantive Unconscionability"


On December 20, 2013, in a multi-party case involving oil and gas contracts, the Ohio appellate court reversed a lower court decision refusing to enforce the parties’ arbitration clauses. Applying Ohio law, the court found that, although the arbitration clauses at issue were substantively unconscionable, they were not procedurally unconscionable. Under Ohio law, an arbitration clause will be enforced unless it suffers from what Ohio law characterizes as both procedural and substantive unconscionability. New Hope Community Church v. Patriot Energy Partners, L.L.C., 2013-Ohio-5882.


Read the full case note.


Keywords: ADR, litigation, unconscionability, substantive, procedural, failure to read, failure to hire counsel


Michael H. Diamant, Taft Stettinius & Hollister LLP, Cleveland, OH


 

January 23, 2014

American Arbitration Association Launches Updated Commercial Rules


Effective October 1, 2013, the American Arbitration Association issued revisions to the AAA's Commercial Arbitration Rules. The revised Rules include amendments that directly address preferences of users for a more streamlined, cost effective, and tightly managed arbitration process that avoids the high costs of litigation.


Among the significant changes are the following:


Mediation
Mediation is increasingly relied upon and is an accepted part of the dispute resolution process. In recognition that mediation has proven to be highly effective in resolving parties’ disputes, new Rule R-9 provides that unless a party unilaterally elects to opt out, mediation shall take place concurrently with arbitration in all cases where claims exceed $75,000.


Access to Dispositive Motions
New Rule R-33 specifically grants to the arbitrator the authority to make rulings on a dispositive motion, provided the moving party has shown that the motion is likely to succeed and dispose of narrow issues in the case.


Availability of Emergency Measures of Protection
Amended Rule R-38 incorporates much of the language of the prior Optional Rules of Emergency Measures with one major exception—availability of emergency relief is no longer optional, provided the arbitration agreement was entered into on or after October 1, 2013.


Remedies for Nonpayment
To address issues and increasing concerns where parties refuse to deposit their share of arbitrator compensation or administrative charges, new Rule R-57 authorizes arbitrators to take specific measures related to nonpayment. Arbitrators may elect to limit the nonpaying party’s ability to assert or pursue its claim. In no event, however, may the arbitrator preclude the nonpaying party from defending a claim or counterclaim; and the nonpaying party must be granted an opportunity to oppose imposition of this remedy. The paying party that is making a claim must submit evidence as required by the arbitrator for the making of an award.


Sanctions for Bad Conduct
When asked, parties to commercial arbitration indicated a strong desire to grant arbitrators the power to address objectionable and abusive conduct in arbitration. New Rule R-58 grants to the arbitrator the authority, if requested by a party, to order sanctions when a party fails to comply with its obligations under the rules or with an order of the arbitrator. If the sanction limits any party’s participation in the arbitrator or results in an adverse determination, the arbitrator must explain in writing the reason for the order and require the submission of evidence and legal argument prior to making an award. The arbitrator may not, however, enter a default award as a sanction and the party against whom the sanction is to be levied has the right to respond prior to its imposition.


Conditions Precedent/Filing Deadlines
To address the increased inclusion of mandatory, multistep dispute resolution requirements in commercial contracts, a new filing requirement has been added to Rule R-4. It is now the responsibility of the filing party to ensure that any conditions precedent to the filing of a case or time requirements associated with the filing have been met prior to filing for arbitration. If a disagreement arises as to whether the conditions or timelines have been met, the dispute shall be referred to and resolved by the arbitrator.


Conflicting Arbitration Provisions
If the responding party alleges that a different arbitration provision is controlling, Rule R-5(c) clarifies that the matter shall be administered in accordance with the arbitration provision submitted by the initiating party subject to a final determination by the arbitrator.


Determining the Location of the Hearing
Rule R-11 has been changed to reflect the fact that complex legal arguments may be raised regarding the appropriate locale of an arbitration. The rule now includes specific procedures governing resolution of disputes arising from three potential scenarios. R-11(a) provided that when the arbitration agreement is silent and the parties cannot agree upon the hearing location, AAA shall make an initial determination, subject to the rendering of a final determination by the arbitrator following appointment. R-11(b) provides that when a specific location is required by the arbitration agreement, the hearing shall be conducted at that location absent agreement of the parties to change the location or a determination by the arbitrator that applicable law requires a different locale. R-11 (c) states that if the reference to a locale is ambiguous and the parties are unable to resolve the ambiguity, the AAA shall make an initial determination, subject to a final determination by the arbitrator following appointment.


Disclosure of Potential Conflicts
Rule R-17 now places a duty upon the parties and their representatives to make disclosures about possible conflicts in connection with an appointed arbitrator. Failure of a party or representative to disclose a potential conflict may result in waiver of the right to object to an arbitrator.


Majority Decision
Rule R-44(b) is new and is intended to streamline decision making regarding discovery issues. Absent an objection of a party or another member of the panel, the chairperson is authorized to resolve disputes related to the exchange of information or procedural matters without the need to consult with the full panel.


Keywords: ADR, litigation, arbitration, Commercial Arbitration Rules, sanctions, dispositive motions


P. Jean Baker, Esq., American Arbitration Association, Washington, D.C.


 

January 23, 2014

New Optional Appellate Arbitration Rules


Effective November 1, 2013, parties involved in arbitrations will be able to take advantage of new optional procedures introduced by the American Arbitration Association that enable a streamlined, high-level review of arbitral awards.


  • •Parties may use the Appellate Rules only when there is an agreement of the parties, either by contract or stipulation.

  • •The Appellate Rules do not apply to disputes involving consumers.

  • •Appeals must be initiated within 30 days of receipt of an underlying award.

  • •Parties are permitted to appeal on the grounds that the underlying award is based on errors of law that are material and prejudicial and/or on determinations of fact that are clearly erroneous. The standard of review, therefore, is more expansive than that allowed by existing federal and state statutes to vacate an award.

  • •The Appellate Rules anticipate a process that can be completed in about three months.

  • •Appeals generally will be determined using the written documents submitted by the parties, with no oral argument unless the tribunal directs otherwise.

  • •A panel of three appellate arbitrators will be appointed unless the parties agree to utilize a single arbitrator.

  • •The Appellate Panel shall consist of former federal and state judges and neutrals with strong appellate backgrounds.

  • •The appeal tribunal may (1) adopt the underlying award as its own or (2) substitute its own award for the underlying award (incorporating those aspects of the underlying award that are not vacated or modified); or (3) request additional information and notify the parties of the tribunal’s exercise of an option to extend the time to render a decision, not to exceed 30 days.

  • •The appeal tribunal may not order a new arbitration hearing or send the case back to the original arbitrator(s) for corrections or further review.

  • •The parties must agree that the underlying award will not be considered final for purposes of any court actions to modify, enforce, correct, or vacate; and the time period for commencement of judicial enforcement proceedings is tolled during the pendency of the appeal.

  • •The parties also must agree to stay any already initiated judicial enforcement proceedings until the conclusion of the appeal process.

  • •Parties may use the Optional Appellate Rules to review awards rendered in arbitrations that were not conducted pursuant to the AAA’s or ICDR’s rules.

  • •Parties should consider requiring the underlying award to be a reasoned award.

  • •Parties should also consider what types of record of the underlying arbitration they would like to have in place for the purposes of any appeal.


Keywords: ADR, litigation, arbitration, Appellate Rules


P. Jean Baker, Esq., American Arbitration Association, Washington, D.C.


 

January 10, 2014

Legal Malpractice Claims Must Be Arbitrated; Arbitration Clause Not Unconscionable


In Bezio v. Draeger, __ F.3d __ (1st Cir. December 16, 2013), the U.S. Court of Appeals for the First Circuit posed the question on appeal as “whether the district court erred in enforcing an arbitration clause in an attorney-client engagement letter as to malpractice and unfair practice claims brought by a former client under Maine law.” Bezio (the client) sued his former law firm of Bernstein, Shur, Sawyer & Nelson, P.A. (BSSN) and individual defendants, alleging, inter alia, malpractice and a fee dispute. The district court granted the defendants’ motion to compel arbitration and dismiss the action, and the court of appeals affirmed.


In 2011, the Maine Office of Securities notified Bezio, a licensed agent and investment advisor, of its intention to revoke his license and seek penalties. Bezio hired BSSN to represent him in connection with that matter and was dissatisfied with the legal services he received. The arbitration clause in Bezio’s engagement letter with BSSN provided in part that “[a]ny fee dispute that you [Bezio] do not submit to arbitration under the Maine Code of Professional Responsibility, and any other dispute that arises out of or relates to this agreement or the services provided by the law firm shall also, at the election of either party, be subject to binding arbitration.”


Read the full case note.


Keywords: ADR, litigation, arbitration, malpractice, unconscionability, informed consent


Stephen P. Gilbert, The Law Office of Stephen P. Gilbert, Larchmont, NY


 

January 9, 2014

Mayer Brown Study Finds Class Actions Offer Little Benefit to Consumers


The Chicago-based law firm of Mayer Brown LLP recently issued a study that it performed for the Chamber of Commerce Institute for Legal Reform on how class actions benefit class members. The disturbing answer was very little. So, while the recent study by the Consumer Finance Protection Agency (reported on in another article below) implicitly criticizes the fact that arbitration agreements in consumer finance agreements often prevent consumers from bringing their claims as class actions, the evidence suggests that class actions do not benefit consumers much, if at all, anyway. In short, what’s purportedly been lost may not have any value.


Mayer Brown studied a sample of putative consumer and employee class action lawsuits filed in or removed to federal court in 2009. Here is a summary of its findings:


  • Not one of the class actions went to trial or ended in a final judgment on the merits for the plaintiffs;

  • The vast majority of the class actions produced no benefits to most members of the class.


Thus:


    About 14 percent of the cases were still pending four years after filing without even a determination as to whether they could go forward as a class action.
  • About 35 percent of the cases that were resolved were voluntarily dismissed by the plaintiff. In many of these cases, the named plaintiff and the plaintiff’s attorneys were paid, but in each case the class received nothing.

  • About 31 percent of the class actions that were resolved were dismissed by the court on the merits—so again, class members got nothing.

  • About 33 percent of the resolved cases were settled on a class basis but, at least from the limited data available, class members got nothing or virtually nothing in those settlements.


The "bottom line" conclusion of the study was that the:


hard evidence shows that class actions do not provide class members with anything close to the benefits claimed by their proponents . . . Any decision-maker wishing to rest a policy determination on the claimed benefits of class actions would have to engage in significant additional empirical research to conclude­­––contrary to what our study indicates––that class actions actually do provide significant benefits to consumers, employees and other class members.


Keywords: ADR, litigation, consumer contracts, class arbitration, employee class action


Mitchell L. Marinello, Novack and Macey LLP, Chicago, IL


 

January 9, 2014

Fourth Circuit Sidesteps Looming Agency vs. Arbitration Battle


In Seney v. Rent-a-Center, Inc. (No. 13-1064, 4th Cir., Dec. 11. 2013), the Fourth Circuit avoided deciding whether the limits that Federal Trade Commission (FTC) regulations place on arbitration agreements that apply to consumer warranty claims are consistent with the Federal Arbitration Act (FAA). The court concluded that the FTC regulations simply did not apply to the parties’ dispute: “The FTC regulations limit suppliers’ ability to require binding arbitration of “written warranties” in sales agreements: they do not reach warranties included in leases.” Nonetheless, the court’s discussion of the topic was instructive:


[The parties’ argument exposes] an important tension between two major doctrines of statutory interpretation. In Shearson/American Express, Inc. v. McMahon, the Supreme Court instructed courts to evaluate the arbitrability of statutory rights in light of the liberal “federal policy favoring arbitration.” …. McMahon established that if a statute is silent with respect to arbitration, courts should presume its permissibility. …. McMahon, however, did not address whether agencies should also presume the permissibility of arbitration. The FTC, the agency that promulgated regulations interpreting the MMWA, did not employ a pro-arbitration presumption. …. Rather . . . it concluded that pre-dispute binding arbitration was impermissible under the Act. …. Pursuant to the Supreme Court’s directive in Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., that interpretation, if reasonable, should control. ….

The way in which Chevron squares with McMahon, however, is uncertain, and courts have divided on the question. . . .

We need not enter the fray. This is so because the FTC ban on binding arbitration does not apply to the Seneys’ contract with RAC.


Of course, this issue does not arise where Congress has been explicit in authorizing the competent federal regulatory agency to limit pre-dispute arbitration agreements, as Congress did in the Dodd-Frank financial reform act for disputes under consumer finance agreements and for broker-dealer/investment advisor disputes. Rather, the issue arises only when the federal agency is seeking to exercise its general regulatory authority.


Keywords: ADR, litigation, Federal Trade Commission, pre-dispute arbitration agreement, Dodd-Frank reform


Mark Kantor, Member of College of Commercial Arbitrators, Washington D.C.


 

December 19, 2013

Parties Cannot Block All Judicial Review of Arbitration Awards


Earlier this week, in what it described as a case of first impression, the Ninth Circuit held that parties cannot contractually divest federal courts of all jurisdiction to review an arbitration award that is subject to the Federal Arbitration Act. In re Wal-Mart Wage and Hours Employment Practices Litigation, No. 11-17718 (9th Cir. Dec. 17, 2013) (affirming confirmation of arbitration award).


The dispute being arbitrated was ancillary to the main wage-and-hour case against Wal-Mart. Different counsel for plaintiffs had agreed to arbitrate a dispute between them over allocation of the district court's award of attorney fees in the main case.


Here is the critical excerpt from the opinion:


"Just as the text of the FAA compels the conclusion that the grounds for vacatur of an arbitration award may not be supplemented, it also compels the conclusion that these grounds are not waivable, or subject to elimination by contract. 

A federal court "must" confirm an arbitration award unless, among other things, it is vacated under § 10. 9 U.S.C. § 9; Hall St. Assocs., 552 U.S. at 582. This language "carries no hint of flexibility" and “does not sound remotely like a provision meant to tell a court what to do just in case the parties say nothing else." Id. at 587. 

By contrast, other provisions in the FAA expressly permit modification by contract. Id. at 587–88. For example, § 5 provides rules for appointing an arbitrator that apply "if no method [is] provided [in the arbitration agreement] . . . ." 9 U.S.C. § 5

If the text of the statute trumps a contractual arrangement to expand review beyond the statute, then it follows that the statute forecloses a contractual arrangement to eliminate review under its terms, and we reject [the] contention that § 22.9 [of the agreement to settle the fee dispute] can be so read.

Permitting parties to contractually eliminate all judicial review of arbitration awards would not only run counter to the text of the FAA, but would also frustrate Congress's attempt to ensure a minimum level of due process for parties to an arbitration. Through § 10 of the FAA, Congress attempted to preserve due process while still promoting the ultimate goal of speedy dispute resolution. ... If parties could contract around this section of the FAA, the balance Congress intended would be disrupted, and parties would be left without any safeguards against arbitral abuse." Id., slip op. at 11–12.


Keywords: ADR, litigation, confirmation, vacatur, non-waivable, due process, jurisdiction, section 10


D. C. Toedt III , Attorney at Law Office of D.C. Toedt III, Houston, TX


 

December 19, 2013

CFPB Issues Preliminary Study on Use of Arbitration in Consumer Finance


The Consumer Finance Protection Agency (CFPB) just released a report on the use of arbitration clauses in connection with consumer financial products. "Under the Dodd-Frank Act, the CFPB was charged by Congress with conducting a study on arbitration agreements in consumer financial products. This is the first phase of the study. When the process is complete, the CFPB may adopt regulations that "prohibit or impose conditions or limitations" on the use of arbitration agreements if it finds such measures to be "in the public interest and for the protection of consumers" and such findings "are consistent” with the agency’s study."


Here are some of the report’s summary findings:


The preliminary results of the [CFPB] study . . . are based on a review of hundreds of consumer contracts, as well as on filings from the American Arbitration Association (AAA). Based on the CFPB’s research, the AAA is the predominant administrator of consumer financial arbitrations in the markets covered by the study to date. The CFPB looked at AAA filings about credit cards, checking accounts, payday loans and prepaid cards between 2010 and 2012. The CFPB observed that fewer than 1,250 consumer arbitrations about those four products were filed. Many of these concerned debt collection.

CFPB research indicates that consumers filed around 900 of these disputes. The remaining disputes are filed by companies or submitted by both sides together. In comparison, in that same three-year time period, over 3,000 cases were filed by consumers in federal court about credit card issues alone. More than 400 of these federal court cases were filed as class actions, whereas CFPB’s research found only two class filings in arbitration and neither was about credit cards.


Other preliminary results for the markets the CFPB has studied include:


Larger institutions are most likely to use arbitration clauses. The CFPB’s preliminary results indicate that larger institutions are more likely than community banks or credit unions to include an arbitration clause in consumer contracts for credit cards or checking accounts. For example, while the CFPB estimates that only 7.7 percent of banks use arbitration clauses for their checking accounts, 62 percent of the top 50 banks have arbitration clauses in their checking account contracts. With respect to prepaid cards, however, arbitration clauses are seen more uniformly across almost every consumer contract.

Arbitration clauses are more complex than the rest of the contract. The CFPB’s preliminary results indicate that, in credit card contracts, the arbitration clause section of the contract was almost always more complex and written at a higher grade level than the rest of the contract.

Around 9 out of 10 arbitration clauses expressly bar consumers from filing class arbitration. In the contracts the Bureau studied, around 90 percent of the arbitration clauses specifically bar consumers from filing class arbitrations. The few clauses without this provision were in smaller bank contracts. This means that, for the products the CFPB studied, almost all of the market that is subject to arbitration is also subject to terms that effectively preclude class actions in court or in arbitration.

Consumers do not choose arbitration over class action settlements. While its study of class actions remains ongoing, the Bureau has already identified a number of class actions involving credit cards, deposit accounts, or payday loans in which the contract allowed for arbitration before the AAA. More than 13 million class members made claims or received payments under these settlements, while 3,605 individuals opted out of participating in the settlements, which gave them the right to bring their own cases. At most, only a handful of these individuals chose instead to file an arbitration case.

Consumers do not file arbitrations for small-dollar disputes. In looking at the data, the Bureau observed that almost no consumers filed arbitrations about disputes under $1,000. For arbitration filings involving debt disputes, the average amount of debt at issue was over $13,000. For other arbitration filings, the average consumer claim was for over $38,000.

Few consumers file small claims court actions. A number of arbitration clauses allow a consumer, and sometimes the company, to use small claims courts rather than arbitration for dispute resolution. The CFPB’s preliminary analysis indicates that not many consumers initiate small claims court cases in credit-card disputes. Rather, the analysis shows that small claims court cases are much more likely to be brought by banks than by consumers. In the states and counties studied, the Bureau was able to identify at most 870 credit card cases brought by consumers in small claims court against large credit card issuers, but more than 41,000 cases brought by these banks against consumers in small claims court.


Keywords: ADR, litigation, consumer contracts, class arbitration, Consumer Finance Protection Agency


Mark Kantor, Member of College of Commercial Arbitrators, Washington D.C.


 

December 9, 2013

Arbitration Clause Does Not Apply To Unsuccessful Job Applicant


In Gove v. Career Systems Development Corporation, 689 F.3d 1 (1st Cir. 2012), the First Circuit held that an unsuccessful job applicant was not bound by the arbitration clause contained in her job application.


The plaintiff completed an online job application for a position with the defendant. The final section of the application included a provision requiring that any dispute with the employer “with respect to any issue prior to your employment, which arises out of the employment process” to be arbitrated. The provision stated that all “pre-employment disputes” would also be arbitrated. The plaintiff was required to check a box stating that she accepted these terms, which she did.


The plaintiff was interviewed for the position when she was approximately eight months pregnant. The plaintiff was not hired by the defendant and subsequently filed a complaint with the Maine Human Rights Commission which found reasonable grounds to conclude that she was denied the job because of her pregnancy. The plaintiff then filed suit in the U.S. District Court for the District of Maine, alleging discrimination on account of her gender and pregnancy.


The defendant moved to compel arbitration, arguing that the plaintiff was bound by the arbitration clause in the job application. The district court found that the arbitration clause was not valid, reasoning that the provision was ambiguous as to whether it covered job applicants who were never hired and construed that ambiguity against the defendant, the drafter of the agreement.


Read the full case note.


Keywords: ADR, litigation, arbitration, job applicant, pre-employment, ambiguous, employment law


Elizabeth C. Wolicki, Novack and Macey LLP, Chicago, IL


 

December 5, 2013

Arbitration Panel Has Power to Decide All Ancillary Issues


Trustmark Insurance Co. v. John Hancock Insurance Co., 631 F.3d 869 (7th Cir. 2011) provides some useful guidance for parties and panelists involved in contentious arbitration cases.


Trustmark and Hancock disagreed about Trustmark’s contractual obligation to reinsure certain risks. Each side appointed an arbitrator and they, in turn, selected the third panel member. Ultimately, an award was entered in Hancock’s favor. The parties entered into a broad confidentiality agreement that prevented them from disclosing the evidence, proceedings and award. The confidentiality agreement did not contain its own arbitration clause.


Later, Hancock submitted invoices to Trustmark that Hancock believed were governed by the award, but Trustmark refused to pay them. Hancock brought a second arbitration in which it argued that the first award required Trustmark to pay the invoices. Trustmark asserted that the first award was procured by fraud because Hancock had not produced certain documents in discovery. Once again, each party appointed an arbitrator, and they, in turn, selected a third.


Trustmark appointed an arbitrator who had not been involved in the first arbitration; in contrast, Hancock appointed the same arbitrator it had chosen the first time. Trustmark raised preliminary objections, and the panel rejected them. The panel ruled that the confidentiality agreement did not prevent the parties from disclosing the prior proceedings and the first award to the panel itself. In reaction, Trustmark filed suit to enjoin the arbitration from going forward.


Read the full case note.


Keywords: ADR, litigation, injunction, ancillary, disqualification, disinterested, motive, confidentiality, knowledge


Mitchell L. Marinello, Novack and Macey LLP, Chicago, IL


 

November 20, 2013

When Whacky Is Good Enough


In Johnson Controls, Inc. v. Edman Controls, Inc., 712 F.3d 1021 (2013), the Seventh Circuit made clear that, in most cases, it will not look kindly on parties who pursue judicial review of arbitral awards. Indeed, the court established this point in the very first paragraph of its opinion, stating that, “[a]lthough arbitration is supposed to be a procedure through which a dispute can be resolved privately, with the narrowest exceptions for court intervention, losers sometimes cannot resist the urge to try for a second bite at the apple.” Id. at 1022. In case the point was missed, the court asserted in the opinion’s last paragraph that “[a]ttempts to obtain judicial review of an arbitrator’s decision undermine the integrity of the arbitral process” and “challenges to commercial arbitral awards bear a high risk of sanctions.” Id. at 1028.


The relevant facts of the case are straightforward. The plaintiff entered into a distribution agreement with the defendant. Id. at 1022. The parties agreed to resolve any disputes under the Agreement through arbitration. Id. When a dispute arose, the plaintiff initiated arbitration proceedings and brought four claims under Wisconsin law. Id. at 1023. The arbitrator found in favor of the plaintiff on three of its four claims and rendered an award of more than $700,000. Id. at 1023–24. The arbitrator dismissed the plaintiff’s fourth claim that was based on damages to one of the plaintiff’s subsidiary corporations. Id. at 1023.


Read the full case note.


Keywords: ADR, litigation, Federal Arbitration Act, exceeded powers, vacatur, judicial review


Amanda M. Hinkley, Novack and Macey LLP, Chicago, IL


 

November 7, 2013

Sixth Circuit Affirms Refusal to Compel Arbitration


In Day vs. Fortune Hi-Tech Marketing, Inc., Nos. 12-6304 and 12-6305, (Sept. 12, 2013), the Sixth Circuit affirmed the district court’s refusal to compel arbitration, holding that the contract containing the arbitration clause was illusory and unenforceable.


Defendant Fortune was a multi-level marketing company that sold other companies’ services. It hired sales representatives (like the plaintiffs), charged them a sign-up fee, and paid them a commission for each sale that they made and a bonus for each sales representative that they recruited. The plaintiffs alleged that the defendant was engaged in an illegal pyramid scheme and that it was far more lucrative to recruit new sales representatives than to sell services.


When Fortune hired sales representatives, it required them to sign an agreement that incorporated by reference Fortune’s “Policies and Procedures.” Those policies and procedures contained a broad arbitration clause and a provision stating that Fortune could change the policies and procedures at any time and that such changes were effective when issued.


Read the full case note.


Keywords: ADR, litigation, arbitration clause, illusory contract, Kentucky law


––Mitchell L. Marinello, Novack and Macey LLP, Chicago, IL


 

November 4, 2013

Kentucky Law Purports to Limit Reach of Federal Arbitration Act


A Kentucky intermediate appellate court has held that the McCarran-Ferguson Act negates the FAA’s preemption of a Kentucky statute outlawing the arbitration of insurance contract disputes. Scott v. Louisville Bedding Co., No. 2012-CA-000252-MR (Ky. Ct. App. July 12, 2013) (applying Kentucky law).


In Scott, a bedding company that self-insured a group health plan for its employees sought excess insurance through a trust. The trust agreement contained a binding arbitration clause. The trial court initially compelled arbitration, concluding that the trust agreement and arbitration provisions were valid and enforceable. The bedding company filed a motion to amend or vacate, arguing that the trust agreement was unenforceable under the Kentucky Uniform Arbitration Act (KUAA) because: (1) the agreement was an insurance contract; and (2) the agreement did not specify Kentucky as an arbitration site.


In an amended opinion, the trial court held that it lacked jurisdiction under the KUAA to enforce the arbitration provisions because the agreement did not specify arbitration would take place in Kentucky. It then found on the facts before it that the Federal Arbitration Act preempted the KUAA, giving the court jurisdiction.


In a later amended opinion, the trial court held that the trust agreement was an insurance contract and thus unenforceable under the KUAA. It also held that the FAA did not preempt the KUAA’s exemption of insurance contracts from arbitration. The trust appealed the trial court’s denials of the motion to compel arbitration.


On appeal, the intermediate appellate court found that the trust agreement was an insurance contract and was, therefore, unenforceable under the KUAA. The court then considered if the FAA preempted the KUAA’s exemption for insurance contracts. The court held that the McCarran-Ferguson Act negated the FAA’s apparent preemption of the KUAA. Relying on National Home Ins. Co. v. King, 291 F. Supp. 2d 518, 530 (E.D. Ky. 2003), the court noted that “state statutes that invalidate arbitration clauses specifically as to insurance contracts are indeed ‘enacted for the purpose of regulating the business of insurance’ and thus not preempted by the FAA. . . .” The court also considered whether, because the trust was a foreign corporation, the trust agreement was bound by the Convention on the Recognition and Enforcement of Foreign Arbitral Awards. The court held that the Convention did not preempt the KUAA exemption for insurance contracts for the same reasons that the FAA did not.


Keywords: ADR, litigation, McCarran-Ferguson Act, Kentucky Uniform Arbitration Act, insurance regulation, preemption


Sandra Tvarian Stevens, Wiley Rein LLP, Washington D.C.


 

November 1, 2013

Employment Arbitration Provision Held Unconscionable


In Chavarria v. Ralphs Grocery Company (No. 11-56673, October 28, 2013), the Court of Appeals for the Ninth Circuit held that the arbitration provision in an employment agreement was “procedurally unconscionable because it was a condition of applying for employment and was presented on a “take it or leave it” basis. In addition, its terms were not provided to the plaintiff until three weeks after she had agreed to be bound by it.” The panel held that the arbitration policy was substantively unconscionable because it was unjustifiably one-sided to such an extent that it “shocked the conscience.” Specifically, the policy’s arbitrator selection process would always produce an arbitrator proposed by the defendant in employee-initiated arbitration proceedings; the policy precluded institutional arbitration administrators, which have established rules and procedures to select a neutral arbitrator; and the policy’s arbitrator-fee-apportionment provision would have the effect of pricing employees out of the dispute resolution process.” Moreover, “Ralphs’ terms required that the arbitrator impose significant costs on the employee up front, regardless of the merits of the employee’s claims, and severely limited the authority of the arbitrator to allocate arbitration costs in the award.” 


Keywords: ADR, litigation, employment agreement, unconscionable, conscience, arbitration selection process, costs


Mark Kantor, Member of College of Commercial Arbitrators, Washington D.C.


 

November 1, 2013

Eleventh Circuit Upholds Arbitrator's Class Certification


In Southern Commc’ns Services, Inc. v. Thomas, 720 F.3d 1352 (11th Cir. 2013), the Eleventh Circuit held that an arbitrator’s decisions (a) construing a contract to allow for class arbitration and (b) certifying the class, should not be vacated under Section 10 of the Federal Arbitration Act (FAA), 9 U.S.C. § 1 et seq. The Eleventh Circuit so held even though the arbitration clause contained no reference to class arbitration and the nature of the claims arguably made it “impossible for the putative class to satisfy the commonality, typicality and predominance requirements” of class certification. Id. at 1355, 1360.


Plaintiff Derek Thomas (Thomas) was a customer of Defendant Southern Communications Services, Inc. (Defendant), a wireless-service provider. Id. at 1355. Defendant charged Thomas an early-termination fee when Thomas terminated his wireless-service contract (Contract). Id. A dispute arose, and Thomas brought a class-arbitration against Defendant “on behalf of himself and a nationwide class of consumers.” Id. Among other things, Thomas claimed that Defendant’s early-termination fees were unlawful penalties under Georgia law, and unjust, unreasonable, and unlawful charges under the Federal Communications Act, 47 U.S.C. § 201(b). Id. at 1355–56. The Contract contained an arbitration clause (Clause), but it “contained no reference to class arbitration.” Id. at 1355.


A few months after bringing the claims, Thomas filed a motion asking the arbitrator to “allow class action treatment” of the claims. Id. at 1356. The arbitrator granted the motion. Id. Though he acknowledged that the Clause was “silent” as to class arbitration, he interpreted the Contract and construed the Clause in light of the arbitral rules selected by the parties, together with the fact that, in his view, Georgia law favored class actions in cases with small individual stakes. Id. at 1356, 1359–60. He found that it was “fair to conclude that the intent [of the Clause] was not to bar class arbitration.” Id. at 1359–60.


Read the full case note.


Keywords: ADR, litigation, Federal Arbitration Act, Section 10(a)(4), class arbitration, class certification, vacating awards, exceeded their powers, manifest disregard of the law


Christopher S. Moore, Novack and Macey LLP, Chicago, IL


 

October 30, 2013

Delaware Business Arbitration Program Is Unconstitutional


The Third Circuit recently confirmed that the Delaware Business Arbitration program is unconstitutional. View the appellate court decision, Delaware Coalition for Open Government v. Strine.


The Court of Appeals concluded that the denial of public access to arbitrations employing state judges and state facilities is contrary to the First Amendment because (a) access to the place and process of Delaware judicial proceedings and Delaware State-sponsored arbitration proceedings “have historically been open to the press and general public” and (b) the benefits of openness “weigh strongly” in favor of access to the arbitrations and the drawbacks of openness are "relatively slight."


Read the full case note.


Keywords: ADR, litigation, arbitrator, First Amendment, Delaware Business Arbitration, public access


Mark Kantor, Member of College of Commercial Arbitrators, Washington D.C.


 

October 3, 2013

An Arbitrator Cannot Act As a Mediator and Then Switch Back


In Minkowitz v. Israeli, A-2335-11T2, 2013 WL 5336454 (N.J. Super. Ct. App. Div. Sept. 25, 2013), the parties agreed to submit a divorce and custody dispute to binding arbitration. Prior to conducting the arbitration, however, the parties entered into discussions, with the assistance of the arbitrator, which led to the settlement of many of the issues in the case. When it came time to arbitrate the remaining issues, however, the plaintiff’s counsel moved for the arbitrator’s recusal, arguing that having acted as a mediator, he could no longer serve as an impartial arbitrator. The arbitrator denied that he had acted as a mediator, rejected the recusal request, and conducted the arbitration. The trial court subsequently affirmed his arbitration award.


Read the full case note.


Keywords: ADR, litigation, arbitrator, mediator, incompatible roles, arbitrator impartiality


Jonah Orlofsky, The Law Offices of Jonah Orlofsky, Chicago, IL


 

Septmeber 23, 2013

Party that Litigates Waives the Right to Arbitration


In Technology in Partnership v. Rudin, No. 12-cv-3699 (September 17, 2013), the Second Circuit summarily denied an appeal from an order denying the appellant’s motion to compel arbitration on the ground of waiver. The court noted that federal policy strongly favors arbitration and that waiver of the right to arbitrate is not lightly inferred. Nonetheless, “a party can waive its right to arbitration ‘when it engages in protracted litigation that prejudices the opposing party [citations omitted].’”


The court rejected the appellants’ argument that the doctrine of waiver is inconsistent with Section 2 of the FAA finding that the Second Circuit’s “waiver case law does not invalidate arbitration agreements on grounds peculiar to such agreements” but on the general principle that affirmative defenses are lost if not raised in a timely fashion. The court then affirmed the district court’s determination that the appellants waived their right to arbitration by waiting 15 months after the complaint was filed to assert that right. The court added that:


Given the Rudins’ active participation in pretrial discovery after spending a year litigating a motion to dismiss on the merits, all while having knowledge of the arbitration provision, and considering the prejudice to TIP in moving to the arbitration forum while awaiting reciprocal discovery from the Rudins, we conclude that the district court did not err in denying Appellants’ motion to compel arbitration due to waiver.


Keywords: ADR, litigation, waiver of arbitration, FAA Section 2, substantive prejudice


Mitchell L. Marinello, Novack and Macey LLP, Chicago, IL


 

 

Septmeber 23, 2013

Delaware S. Ct. Explains Difference between Substantive and Procedural Arbitrability


In Viacom Int’l v. Winshall, ___ A.3d ___, No. 513,2012, 2013 WL 3679786 (Del. July 16, 2013), the Delaware Supreme Court held that an arbitrator’s decision that certain arguments and evidence were not arbitrable was a procedural matter for the arbitrator to decide in the first instance. In reaching its decision, the Delaware Supreme Court explained the difference between substantive and procedural arbitrability and overruled two earlier lower-court decisions that reached the opposite conclusion on similar facts.


In 2006, Viacom International, Inc. (Viacom) and stockholders of Harmonix Music System, Inc. (Harmonix) entered into a merger agreement (Merger Agreement) pursuant to which Viacom agreed to “cash out” Harmonix stockholders. In addition to making an initial payment, Viacom agreed to make “Earn-Out” payments to shareholders based on Harmonix’s 2007 and 2008 financial performance. Viacom prepared a “2008 Earn-Out Statement,” but Walter A. Winshall (Winshall), the representative of the Harmonix stockholders, disagreed with Viacom’s calculations of the Earn-Out.

Viacom and Winshall were unable to resolve their disagreements over the correct Earn-Out payment. They submitted the unresolved issues (collectively, the Earn-Out Disagreements) to arbitration by BDO USA LLP (BDO) pursuant to the Merger Agreement and a separate engagement letter (Engagement Letter).


Read the full case note.


Keywords: ADR, litigation, Federal Arbitration Act, Section 10(a)(3), procedural arbitrability, substantive arbitrability, misconduct, fundamentally unfair


Christopher S. Moore, Novack and Macey LLP, Chicago, IL

 


 

Septmeber 16, 2013

Sixth Circuit Vacates Award Due to Arbitrator’s Evident Partiality


In Thomas Kinkade Co. v. White LLC, 711 F.3d 719, 720 (6th Cir. 2013), the parties’ dispute involved Nancy and David White’s agreement to be dealers of Kinkade’s artwork. Pursuant to an arbitration clause, they began arbitration in 2002 over Kinkade's claim that the Whites had not paid for artwork, and the Whites' counterclaim that they were fraudulently induced to enter into the dealer agreements. The parties selected two arbitrators who then chose Mark Kowalsky, the "purportedly neutral arbitrator." During the arbitration, the AAA denied Kinkade’s motion to disqualify Kowalsky. Kowalsky also denied a demand to disqualify. Pursuant to 9 U.S.C. §10, the court affirmed a district court order vacating an arbitration award due to Kowalsky’s "evident partiality." As noted by the court, the case is an example of how not to conduct or participate in an arbitration, even without regard to the partiality issue. Among other things, the arbitration involved almost 50 hearings over five years. During one of those years, the White’s attorney surreptitiously sent a live feed of hearing transcripts to a disgruntled former Kinkade employee who transmitted suggested cross-examination questions to that attorney.


As for the partiality issue, the court relied on the following principles: 1) A motion to vacate an arbitration award must show that a reasonable person would have to conclude that the arbitrator was partial to one of the parties; 2) the challenging party must show greater than an appearance of bias, but less than actual bias; and 3) the challenging party must establish specific facts indicating the arbitrator’s improper motives. The following facts established evident partiality:


  • The Whites had presented a weak case on causation and damages. After closing arguments, the "neutral" arbitrator (Kowalsky) gave the Whites another chance in December 2006 to fix their proof.

  • Four years into the arbitration, the Whites and their appointed arbitrator hired Kowalsky’s firm where expected fees were substantial, as disclosed by Kowalsky to the parties. Kowalsky did not attempt to separate himself from the financial benefits of his firm’s representation of David White in an unrelated NASD arbitration.

  • Although the Whites failed to include any evidence to support their damage calculations (even after Kowalsky’s December 2006 instructions), Kowalsky gave the Whites another chance to remedy that failure in July 2007 when he ordered production of backup for their damages calculations. The Whites then produced more than 8,000 pages of financial records—records the Whites had claimed did not exist in response to discovery requests four years earlier. Those documents showed the Whites had paid cash to six fact witnesses, ranging from $5,000 to $10,000. Kowalsky denied Kinkade’s objection to admitting to those documents into evidence.

  • The arbitration panel’s Interim Award granted $567,300 in damages to the Whites and denied any recovery by Kinkade on its virtually uncontested breach of contract claim for paintings the Whites had not paid for. The arbitrator selected by Kinkade dissented on a number of grounds, including denial of a fair hearing.

  • Although the Interim Award stated that all claims not expressly granted were denied, Kowalsky ordered the parties to submit applications for fees and costs. Over the dissent of the arbitrator selected by Kinkade, the panel awarded attorney fees, costs, and prejudgment interest, resulting in a total net award to the Whites in excess of $1.4 million.

The court concluded that the undisputed facts showed "a motive for Kowalsky to favor the Whites and multiple, concrete actions in which he appeared actually to favor them." Kowalsky's full disclosure of his firm’s relationships with David White and with the arbitrator chosen by the Whites did not remedy the situation. These disclosures occurred five years into the arbitration. The court agreed with the district court’s comment that "[w]hen the neutral arbitrator engages in or attempts to engage in mid-arbitration business relationships with non-neutral participants, it jeopardizes what is supposed to be a party-structured dispute resolution process."


Additional facts and discussion are available in the district court's opinion and order denying a motion for reconsideration.


Keywords: ADR, litigation, arbitration, vacatur, arbitrator partiality


Margaret M. Huff, Margaret Huff Mediation, Nashville TN


 

September 16, 2013

The Supreme Court Rejects Application of the "Effective Vindication" Exception to the Enforcement of Arbitration Agreements under the Federal Arbitration Act


In a sweeping 5–3 decision the Court held that the Federal Arbitration Act does not allow a court to strike a class-action waiver provision in an arbitration agreement based on evidence that the cost of arbitrating on an individual basis would be greater than the potential recovery. American Express Co. v. Italian Colors Restaurant 12-133, 130 S. Ct. 2401 (June 20, 2013).


The case concerned the contract governing the relationship between American Express and a group of merchants that accepted American Express charge cards. The arbitration clause in the contract prohibited arbitration of disputes on a class-action basis. The merchants filed a class action accusing American Express of violating federal antitrust laws.


In response to a motion by American Express to compel arbitration, the merchants submitted an economist’s declaration stating that the cost of pursuing their claims individually would exceed the maximum recovery available to an individual plaintiff. The federal district court granted the motion to compel arbitration, but the Second Circuit reversed, finding that enforcement of the class-action waiver would "grant Amex de facto immunity from antitrust liability by removing the plaintiffs' only reasonably feasible means of recovery."


The Supreme Court vacated the Second Circuit’s decision and remanded the case for reconsideration in light of its 2010 decision in Stolt-Nielsen v. AnimalFeeds International Corp., No.08-1198 (April 27, 2010) in which the Court held that parties cannot be forced to submit to class arbitration unless they contractually agreed to do so.


The Second Circuit reconsidered its ruling in light of another Supreme Court case, AT&T Mobility v. Concepcion, 131 St. Ct. 1740 (2011), in which the Court held that the FAA preempted a state law prohibiting enforcement of a contract’s waiver of class arbitration. The Second Circuit then ruled in favor of the merchants a second time and the Supreme Court agreed to hear the case.


Reversing the Second Circuit, the Court began its analysis by concluding that the "antitrust laws do not evince an intention to preclude a waiver of class-action procedure." Next the Court rejected the judge-made "effective vindication" exception to the FAA designed to "harmonize competing federal policies by allowing courts to invalidate agreements that prevent the 'effective vindication' of a federal statutory right." As the Court stated, "[T]he exception finds its origin in the desire to prevent the prospective waiver of a party’s right to pursue statutory remedies." Because the expert testimony focused solely on the costs of pursuing an antitrust claim as an individual regardless of whether that claim was pursued in arbitration or in court, the Court rejected the argument that waiver of class arbitration prevents the “effective vindication” of the rights of the merchants. "The fact that it is not worth the expense involved in proving a statutory remedy (in individual arbitration) does not constitute the elimination of the right to pursue that remedy."


Keywords: ADR, litigation, class arbitration, class-action waivers, effective vindication


P. Jean Baker, Esq., Vice President, American Arbitration Association, Washington, DC, and editor of the ABA Section of Litigation, ADR Committee eNewsletter


 

September 16, 2013

Under The AAA and UNCITRAL Rules, The Arbitrators Determine Arbitrability


In Oracle America, Inc. v. Myriad Group, A.G. (9th Circ. Docket No. 11-17186, July 26, 2013), the Court of Appeals for the Ninth Circuit unanimously held that incorporation of the rules of the United Nations Commission on International Trade Law (UNCITRAL) into an arbitration agreement “clearly and unmistakably” authorizes the arbitral panel to determine its own jurisdiction or, in other words, the arbitrability of the claims presented.


The arbitration clause in a Source License Agreement between Oracle and Myriad provided that any dispute arising out of the agreement would be settled by arbitration but it also contained the following carve-out provision (the Carve-Out Provision):


except that either party may bring any action, in a court of competent jurisdiction (which jurisdiction shall be exclusive), with respect to any dispute relating to such party’s Intellectual Property Rights” [or compliance with a separate technology license that was encompassed within the Source License Agreement.]

The arbitration clause also provided that the American Arbitration Association would administer the arbitration in accordance with the UNCITRAL rules then in effect.


When a dispute broke out between the parties, Oracle filed suit in the Northern District of California asserting claims for breach of contract, violation of the Lanham Act, copyright infringement, and unfair competition. Oracle also sought an injunction preventing Myriad from proceeding with arbitration. Myriad responded with a motion to compel arbitration. The district court granted arbitration with regard to Oracle’s breach of contract claims, but denied it as to all other claims. The district court reasoned that because the 2010 UNCITRAL rules state that the arbitrator has authority, but not exclusive authority, to decide its own jurisdiction, and because the parties agreed that the court would have “exclusive” jurisdiction over claims involving intellectual property or the technology license, the parties intended for the court to decide questions of arbitrability.


On appeal, the Ninth Circuit rejected that holding.


The Ninth Circuit followed the DC Circuit and the Second Circuit and held that the incorporation of the UNCITRAL rules “constitutes clear and unmistakable evidence that the parties intended to arbitrate arbitrability.” In support of its conclusion, the court also noted that:


Virtually every circuit to have considered the issue has determined that incorporation of the American Arbitration Association’s (AAA) arbitration rules constitutes clear and unmistakable evidence that the parties agreed to arbitrate arbitrability. . . . The AAA rules contain a jurisdictional provision . . . almost identical to Article 23(1) of the 2010 UNCITRAL rules.

In making this ruling, the court did not ignore the Carve-Out Provision. Instead, it held that it was the arbitrators’ job to apply the Carve-Out Provision and to decide which claims did or did not fall within its ambit. This might not be such a simple matter, because the same claims that were excepted from arbitration by the Carve-Out Provision also arguably were claims “arising out of or relating to” the Source License Agreement and therefore subject to arbitration.


The take-away from the decision is that when the parties select the AAA or the UNCITRAL arbitration rules, it is the arbitrators, not the courts, who are responsible for determining which claims are subject to arbitration.


Keywords: alternative dispute resolution, litigation, 2010 UNCITRAL rules, jurisdiction, arbitration clause


Mark Kantor, Member of College of Commercial Arbitrators, Washington D.C.


 

August 06, 2013

Arbitrators Have Discretion to Exclude Evidence


In Doral Financial Corporation v. García-Vélez (Docket No. 12-1519, July 31, 2013), the Court of Appeals for the First Circuit rejected the respondent's argument that an arbitration award should be vacated because the arbitrators’ refused to issue subpoenas for evidence necessary to the respondent's case. The decision is significant because it explains the considerable discretion arbitrators have under the FAA to exclude evidence.


The underlying dispute concerned claimant García-Vélez’s right to severance pay under the termination provisions of his employment agreement. Respondent Doral asserted that García-Vélez had violated a "non-compete" provision in the agreement and was not entitled to any severance. Doral twice asked the tribunal to issue subpoenas to García-Vélez’s new employer to help establish its defense—once before the hearing and once to require the new employer to present evidence at the hearing.


The arbitration panel rejected both of Doral's subpoena requests as untimely and too broad. Ultimately, it issued an award in favor of Garcia-Velez in the sum of $2,396,609, including $163,008 in pre-award interest. Doral sought to vacate the award on the ground that the denial of its subpoena requests was "misconduct [under FAA §10(a)(3)] in refusing to hear evidence pertinent and material" to the case. Doral also argued that the panel exceeded its powers by awarding pre-award interest. The district court rejected these arguments and confirmed the award. Doral then appealed to the First Circuit.


The First Circuit explained the deference generally due to arbitrators under the FAA and the limited exception to this deference under Section 10:


Our review … honors the parties’ decision “to have disputes settled by an arbitrator,” and recognizes that the arbitration process seeks to ameliorate the time and expenses generally associated with judicial proceedings…. For those reasons, our de novo review in this area is extremely narrow and exceedingly deferential…, so deferential indeed that we have stated that “[a]rbitral awards are nearly impervious to judicial oversight” …. (citations omitted)

The limited scope of our review, however, is not equivalent to granting limitless power to the arbitrator. … Although we do not sit to hear claims of factual or legal error by an arbitrator as an appellate court does in reviewing decisions of lower courts, there are limited exceptions to the general rule that arbitrators have the last word. . . . One of those exceptions is encompassed in 9 U.S.C. § 10(a) (3).

As relevant here, § 10(a) (3) requires vacatur of an award when the arbitrators were guilty of misconduct in refusing to . . . hear evidence pertinent and material to the controversy . . . . Of course, § 10(a) (3) does not require arbitrators to consider every piece of relevant evidence presented to them. … Vacatur is appropriate only when the exclusion of relevant evidence so affects the rights of a party that it may be said that he was deprived of a fair hearing. (internal quotations and citations omitted)


The court then analyzed the conduct of the arbitration panel and determined that it had not denied Doral a fair hearing.


The tribunal . . . provided Doral ample opportunity to present its position regarding the subpoenas. In fact, the tribunal allowed Doral three opportunities at bat: (1) the application for pre-hearing subpoenas; (2) the application for hearing subpoenas; and (3) the motion to reconsider the pre-hearing subpoenas order. On all three occasions, Doral had the opportunity to argue why the subpoenas were warranted even though the deadline to request information had lapsed, the hearings were already underway, and García-Vélez had already testified at length.

The tribunal afforded Doral many other procedural safeguards, including the health-related two-month continuance its counsel obtained as well as the opportunity to (1) weigh in on the scheduling order governing the arbitration proceedings; (2) cross-examine García-Vélez; (3) introduce evidence of its own; and (4) file a post-hearing memorandum and a proposed award. Furthermore, the tribunal provided Doral with ample support, in written and unequivocal form, for its decision to deny the subpoenas and for its arbitration award, despite having no obligation to do so. . . . We are therefore not persuaded by Doral’s arguments that the tribunal failed to satisfy the “fair hearing” exigencies behind § 10(a) (3).


The court also rejected Doral’s attack on pre-award interest. The court noted that the parties had agreed to arbitrate in accordance with the AAA’s Commercial Rules. Rule 43(d)(1) of those rules specifically states that the award “may include . . . interest at such rate and from such date as the arbitrators(s) may deem appropriate.” The court held that, in light of the parties’ adoption of this explicit rule, Doral’s argument that the arbitrators lacked authority to grant pre-award interest was simply without basis.


Keywords: alternative dispute resolution, litigation, vacatur, exclusion of evidence, FAA Section 10, pre-award interest


Mitchell L. Marinello, Novack and Macey LLP, Chicago, IL


 

August 06, 2013

Employee Can Be Fired For Bad Conduct in a Mediation


In Benes v. A.B. Data, Ltd., 2013 WL 3838112 (7th Cir. 2013), the plaintiff filed a Title VII claim against his current employer alleging sex discrimination. During the mediation, at a point where the mediator had the parties in separate rooms, the plaintiff, without permission from the mediator, stormed into the defendant’s room and told them to “take their proposal and shove it up your … and fire me and I’ll see you in court.” Within an hour, the defendant fired plaintiff. The plaintiff then abandoned his claim of sex discrimination and instead argued that the firing was an unlawful retaliation for his bringing a Title VII action. The Seventh Circuit upheld the dismissal of this claim because Title VII bars retaliation only for the act of filing a claim, and the plaintiff was fired for misconduct during mediation. The court noted that the plaintiff could surely be fired if he assaulted the defendant’s representatives during the mediation, and his conduct (going into the other side’s room without the mediator’s permission), while less serious, was nonetheless a clear breach of mediation protocols. The plaintiff was therefore lawfully fired for misconduct, not for the act of bringing a Title VII claim. The court also noted from a policy standpoint that allowing an employer to fire an employee for this kind of misconduct would not deter any reasonable person from pursuing a Title VII claim.


Keywords: alternative dispute resolution, litigation, misconduct, Title VII claim, mediation protocols


Jonah Orlofsky, The Law Offices of Jonah Orlofsky, Chicago IL

 


 

August 01, 2013

Arbitrator May Exclude Hearsay Evidence


The Second Circuit reversed a district court’s vacatur of an award, where the district court held that exclusion of certain hearsay evidence denied the petitioner the ability to prove the value of certain real estate, rendering the proceeding fundamentally unfair. LJL 33rd Street Association vs. Pitcairn Properties, Inc. (No. 11-5425, July 31, 2013). The Second Circuit noted that while "arbitrators are not bound by the rules of evidence and may consider hearsay, it does not follow that arbitrators are prohibited from excluding hearsay evidence, especially when (a) the evidence could be presented without reliance on hearsay and (b) its hearsay nature is unfairly prejudicial to the adversary." Along these lines, the circuit stated: "While [Defendant] Pitcairn may well have been harmed by the exclusion of its exhibits, it is not clear that this harm can be considered unfair when Pitcairn could have cured the problem simply by calling the makers of the exhibits as witnesses." For this reason, the court distinguished a 1985 First Circuit case that had vacated an award where the arbitrator gave no weight to trial testimony that the First Circuit found central to a party’s position and that was the only evidence available. The Second Circuit ended its opinion by reiterating that "Arbitrators have substantial discretion to admit or exclude evidence."


Separately, the court upheld the district court's ruling that the arbitrator properly refused to exercise jurisdiction to determine the purchase price for the real estate interest at issue, because the arbitration clause called for a determination of only a stated value that factored into what would be the purchase price. The court held that the agreement "expressly provides for arbitration to determine Stated Value…. Nowhere in the agreement is there a suggestion that the Purchase Price be determined by arbitration."


Keywords: alternative dispute resolution, litigation, hearsay, exclusion, weight, vacatur of an award


Michael S. Oberman, Kramer Levin Naftalis & Frankel LLP, New York NY

 


 

August 1, 2013

Cleaning Up After Discover Bank


In Murphy vs. Direct TV, No. 11-57163 (July 30, 2013), the Ninth Circuit affirmed a district court’s decision to require plaintiffs in a putative class action to arbitrate their individual claims against Direct TV and reversed the district court’s decision that plaintiffs arbitrate with co-defendant Best Buy. Murphy is another case arising from the confusion caused by the decision in Discover Bank v. Superior Court, 113 P.3d 1100 (Cal. 2005) that was overruled in AT&T Mobility v. Concepcion, 131 S. Ct. 1740 (2011).


In Murphy, plaintiffs alleged that Direct TV and Best Buy misled customers into believing that they were buying various television equipment when in fact they were only leasing it and thereby becoming subject to recurring and exorbitant fees. The defendants’ initial motions to dismiss the case in favor of arbitration were denied based on the Discover Bank decision that had enforced a California statute nullifying arbitration agreements that prevented collective or class actions in consumer transactions. After the Supreme Court held in Concepcion that California’s statute was preempted by Section 2 of the Federal Arbitration Act, Direct TV and Best Buy renewed their motion to dismiss in favor of arbitration. The district court granted those motions despite the fact that, to that point, the case had been litigated for one and a half years.


On appeal, the Ninth Circuit had no trouble affirming the decision to require plaintiffs to arbitrate their individual claims against Direct TV, because the plaintiffs’ agreements with Direct TV contained an arbitration clause that prohibited collective or class actions. It reversed the district court’s order that plaintiffs arbitrate with Best Buy, because Best Buy was not a party to the customers’ agreements with Direct TV and did not have an arbitration provision in its own contracts. Best Buy argued that, under California law, it was entitled to invoke the benefits of the arbitration clause in Direct TV’s contracts. The Ninth Circuit analyzed the limited circumstances in which California law permits a non-signatory to enjoy the benefits of an arbitration agreement and found that none of them applied. Accordingly, the class action against Best Buy was allowed to proceed.


Keywords: alternative dispute resolution, litigation, putative class action, FAA Section 2, Discover Bank


Mitchell L. Marinello, Novack and Macey LLP, Chicago, IL


 

July 26, 2013

No Discovery Is No Basis for Vacating Award


In Bain Cotton Company (5th Cir. Docket No. 12-11138, June 24, 2013), the Fifth Circuit, in a per curiam decision, rejected an attack on an arbitration award based on the complaint that the arbitrators, through “evident partiality or corruption,” refused to permit any of the discovery requested by the claimant.


Read the full case note.


Keywords: alternative dispute resolution, litigation, discovery, Federal Arbitration Act, per curiam decision


Mark Kantor, Member of College of Commercial Arbitrators, Washington D.C.

 


 

July 24, 2013

Arbitration Demand Comes Too Late


Gutierrez v. Wells Fargo Bank, NA, 704 F.3d 712 (9th Cir. 2012), concerned Wells Fargo’s “posting” practices—its procedures for applying account holders’ debit, checking, and automated clearing house payments against the money in its customers’ accounts. Plaintiff Gutierrez and other class members alleged that by reordering an account’s payment of a day’s claims from the largest to smallest, Wells Fargo significantly increased its customers’ overdraft charges and that this was a violation of California law.


On a matter of first impression, the court denied Wells Fargo’s request to overturn a class action judgment and to require the parties to arbitrate the case. The court’s refusal to enforce the parties’ arbitration agreement was largely due to the late and prejudicial timing of Wells Fargo’s request.


Read the full case note.


Keywords: alternative dispute resolution, litigation, arbitration, class action, Discover Bank, futile


David A. Golanty, Boodell & Domanskis, LLC, Chicago, IL

 


 

July 23, 2013

Court Upholds Arbitrator's Decision to Authorize Class Arbitration


In Oxford Health Plans LLC v. Sutter, 133 S. Ct. 2064 (2013) (Oxford Health) the Supreme Court reaffirmed the limited nature of judicial review of arbitrators' decisions in upholding an arbitrator's decision to authorize class arbitration in the face of a silent arbitration clause.


The defendant, a pediatrician, provided services to patients insured by the plaintiff pursuant to a contract that contained an arbitration clause. Despite the arbitration clause, the defendant filed a proposed class action in New Jersey Superior Court on behalf of himself and other New Jersey physicians under contract with the plaintiff, alleging that the plaintiff failed to make payments to the doctors. The court granted the plaintiff's motion to compel arbitration. The parties then agreed that the arbitrator should decide whether their contract authorized class arbitration. The arbitrator concluded that it did.


The plaintiff filed a motion in federal court to vacate the arbitrator's ruling, alleging that the arbitrator had "exceeded [his] powers" under §10(a)(4) of the Federal Arbitration Act. The district court denied the motion, and the decision was affirmed by the Third Circuit. The arbitration proceeded. After the Supreme Court's decision in Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662 (2010), which held that an arbitrator may employ class action procedures only if the parties have authorized them, the plaintiff asked the arbitrator to reconsider his decision. The arbitrator found that Stolt-Nielsen had no effect on the case because unlike in Stolt-Nielsen, where the parties stipulated they had not reached an agreement on class arbitration, the parties to this case disputed the meaning of their contract, which required the arbitrator to interpret it. The arbitrator interpreted the parties’ contract to allow for class arbitration.


Following the arbitrator's decision, the plaintiff renewed his motion to vacate. The district court denied the motion and the Third Circuit again affirmed.


The Supreme Court stated that the "sole question” was “whether the arbitrator (even arguably) interpreted the parties’ contract, not whether he got its meaning right or wrong." The Supreme Court then found that the arbitrator’s decisions were "through and through, interpretations of the parties' agreement." The Supreme Court focused on the fact that the arbitrator carefully considered the language of the parties' contract and determined whether it reflected an agreement to allow for class arbitration.


The plaintiff relied on Stolt-Nielsen, but the Supreme Court found that the plaintiff's reading of Stolt-Nielsen was erroneous. The Court explained that the arbitrator's decision in Stolt-Nielsen was overturned because the decision lacked any contractual basis at all for ordering class arbitration—not, as the plaintiff argued, a "sufficient" one. In addition, the Supreme Court distinguished Stolt-Nielsen, finding that the situation in that case was unusual because the parties had stipulated that they had not reached an agreement on class arbitration. Here, in contrast, the Supreme Court found that the arbitrator construed the contract and found that it allowed for class arbitration. To overturn that decision, the Supreme Court would have to find that the arbitrator incorrectly interpreted the parties' agreement. Such a result is not permitted under §10(a)(4), which allows courts to vacate an arbitrator's decision "only when the arbitrator strayed from his delegated task of interpreting a contract, not when he performed that task poorly." The Supreme Court went on to state that "[s]o long as the arbitrator was 'arguably construing' the contract—which this one was—a court may not correct his mistakes under §10(a) (4)."


In conclusion, the Supreme Court stated that the arbitrator did exactly what the parties had asked him—he interpreted their contract—and whether his decision was correct was not to be decided by the courts. Under Section 10(a) (4), "the question for a judge is not whether the arbitrator construed the parties' contract correctly, but whether he construed it at all." Because the arbitrator in Oxford Health clearly construed the parties’ agreement, the Supreme Court affirmed the decision of the Third Circuit.


In a footnote, the Supreme Court left open a remaining issue—whether or not the availability of class arbitration is a question of arbitrability for the courts to decide.


In a concurrence, Justice Alito expressed concern for absent class members who "never conceded that the contract authorizes the arbitrator to decide whether to conduct class arbitration." Justice Alito went on to write that because there is "no reason to think that the absent class members ever agreed to class arbitration, it is far from clear that they will be bound by the arbitrator's ultimate resolution of this dispute." Alito warned that "[c]lass arbitrations that are vulnerable to collateral attack allow absent class members to unfairly claim the 'benefit from a favorable judgment without subjecting themselves to the binding effect of an unfavorable one.'" Alito concurred in the Court's decision because the plaintiff had consented that the availability of class arbitration was a question for the arbitrator.


Following the Oxford Health decision, should parties wish to avoid the potential for class arbitration, it would be wise to explicitly prohibit such in the arbitration agreement. It will be interesting to see whether the Supreme Court has the occasion in the future to address the arbitrability issue as well as any res judicata issues that could occur from class arbitration decisions.


Keywords: alternative dispute resolution, litigation, arbitration clause, class arbitration, Stolt-Nielsen


Elizabeth C. Wolicki, Novack and Macey LLP, Chicago IL


 

July 9, 2013

First and Foremost: Who Decides Questions of Arbitrability?


VRG Linhas Aereas S.A. v. MatlinPatterson Global Opportunities Partners II L.P., ___ F.3d ___, 12-593-CV, 2013 WL 2372286 (2d Cir. June 3, 2013), highlights the basic, yet potentially outcome-determinative question of whodecides whether a dispute is to be arbitrated—the court or the arbitrator? In VRG Linhas Aereas S.A., the district court’s failure to address this question prompted the Second Circuit to vacate the district court’s judgment concerning the scope of the parties’ arbitration agreement and remand the case “in order to provide the district court an opportunity to make this determination in the first instance.” Id. at *3–4. Despite the complicated, factual, and procedural background of the case, the Second Circuit’s opinion is a straightforward reminder of the importance of fundamentals.


The underlying dispute in VRG Linhas Aereas S.A. involved, among other entities, VRG Linhas Aereas S.A. (VRG), the subsidiary of a Brazilian airline, and MatlinPatterson Global Opportunities Partners II L.P. and MatlinPatterson Global Opportunities Partners (Cayman) II L.P. (collectively MatlinPatterson), a New York-based private equity fund. Id. at *1. In 2007, VRG and other entities executed a Share Purchase and Sale Agreement (the Agreement) as well as six addenda to the Agreement. Id. VRG did not sign the Agreement, which contained an arbitration clause subjecting disputes to the rules and procedures of the International Chamber of Commerce (ICC) International Court of Arbitration, but it did sign one of the six addenda (the Addendum), a single page document that did not reference arbitration specifically. Id.


Since late 2007, when a dispute arose and was referred to arbitration in Brazil, VRG and MatlinPatterson argued over whether MatlinPatterson agreed to arbitration and, if so, whether that agreement to arbitrate encompassed the parties' dispute. Id. at *2. In August 2010, a three-member Arbitral Tribunal held that the dispute was arbitrable and later ruled in favor of VRG on the merits. Id. In January 2011, VRG filed a petition in the Southern District of New York for confirmation of its award in accordance with the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention), 9 U.S.C. § 207. Id. Because MatlinPatterson sought to avoid confirmation by proving that "'[t]he subject matter of the difference is not capable of settlement by arbitration under the law of' the county [sic] in which enforcement is sought," id. (quoting New York Convention, art. V(2)(a), June 10, 1958, 21 U.S.T. 2517), United States law regarding arbitrability was inherent to its defense.


The holding in VRG Linhas Aereas S.A. ultimately amounts to the Second Circuit's application of settled law, given that the U.S. Supreme Court already established that "questions of arbitrability are to be sent to arbitration if and only if the parties clearly and unmistakably expressed their intention to do so." Id. at *3 (citing First Options of Chi., Inc. v. Kaplan, 514 U.S. 938, 945 (1995)). The Second Circuit refused to permit "the district court [to] decide[] the scope of an agreement whose existence it assumed arguendo, instead of determining whether the parties actually reached an agreement to arbitrate and, if so, whether it included a clear and unmistakable intention to arbitrate questions concerning the agreement’s scope." Id. (emphasis in original).


The Second Circuit stated that the district court's task on remand was simplified by existing Second Circuit precedent, which held “that an arbitration clause subjecting disputes to the rules and procedures of the ICC International Court of Arbitration clearly and unmistakably commits to arbitration any questions about the arbitrability of particular disputes,” and thus squarely governed the arbitration clause in the Agreement. Id. at *4 (citing Shaw Grp. Inc. v. Triplefine Int'l Corp., 322 F.3d 115, 122 (2d Cir. 2003)). The only question for the district court was whether MatlinPatterson agreed to the Agreement's arbitration clause and therefore agreed to the Arbitral Tribunal's deciding the arbitrability of the dispute. Id. Either answer would be dispositive, as it would compel either confirmation of the award, in accordance with the Arbitral Tribunal's ruling, or denial of VRG's petition, due to the absence of MatlinPatterson's agreement to arbitration. Id.


Though determining whodecides questions of arbitrability will not compel an outcome in most cases, VRG Linhas Aereas S.A. makes clear that parties and potential parties to arbitration agreements—like the courts—would do well in considering the question in the first instance.


Keywords: ADR, litigation, arbitration, question of arbitrability, New York Convention


Amanda M. Hinkley, Novack and Macey LLP, Chicago, IL


 

June 27, 2013

When Can Conduct in Mediation Be the Basis for a Tort Claim


Although mediation is intended to end disputes, there unfortunately are occasions when the mediation leads to an attempt to bring a new claim based on conduct that occurred during the mediation. In Hydroscience Technologies, Inc. v. Hydroscience, Inc., 2013 WL 1897149 (Tex.App.-Dallas 2013), the plaintiff claimed that there was an agreement made in a mediation to transfer certain shares of stock and that the agreement had not been honored. Although the plaintiff was not a party to the mediation, the plaintiff contended that it was the intended recipient of the disputed shares. The written settlement agreement that resulted from the mediation, however, did not mention any transfer of shares, and so the plaintiff sought to introduce evidence of communications that took place during the mediation to prove the existence of an oral agreement.


Read the full case note.


Keywords: ADR, litigation, mediation, mediation communications, tort claim


Jonah Orlofsky, The Law Offices of Jonah Orlofsky, Chicago, IL


 

June 21, 2013

Florida's High Court Enforces Class-Action Waiver Clause


In McKenzie Check Advance of Florida, LLC v. Betts, ____ So. 3d ___, 2013 WL 1457843(Fla. 2013) (McKenzie) the Florida Supreme Court enforced a class-action waiver provision in an arbitration clause, relying on AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011) (Concepcion) and Cruz v. Cingular Wireless, LLC, 648 F.3d 1205 (11th Cir. 2011).


The defendant operated a payday loan/check-cashing service. The plaintiffs were among its customers. The plaintiffs brought a class action against the defendant claiming violations of several Florida statutes, including Florida’s lending practices statute, as well as its consumer finance act. The crux of the plaintiffs’ claims was that the defendant “under the deceptive guise of a check cashing service, was in reality loaning money at usurious and exorbitant rates.” One of the plaintiffs (Kelly) had entered into contracts with the defendant that contained an arbitration clause and class-action waiver (collectively, the Clause). The defendant moved to compel arbitration based on the Clause. The plaintiffs opposed the motion arguing that the Clause was unenforceable and violated Florida public policy.


After a two-day evidentiary hearing, the trial court denied the motion to compel, finding the arbitration agreement void as against public policy because, among other things, the relatively small stakes at issue for each individual claim made it virtually impossible for the plaintiffs to obtain competent individual representation. Thus, the trial court determined that enforcement of the class action ban would effectively deprive Kelly and similarly situated consumers of any remedy and would defeat the implicated statutes’ remedial purposes.


Read the full case note.


Keywords: ADR, litigation, arbitration clause, class-actions, waiver, preemption, Concepcion, Cruz, public policy


Donald G. Gavin, Akerman Senterfitt LLP, Vienna, VA


 

June 21, 2013

Supreme Court Holds Waiver of Class Arbitration Enforceable


In an opinion authored by Justice Scalia, the U.S. Supreme Court today overturned the decision of the Second Circuit Court of Appeals in American Express Co. v. Italian Colors Restaurant.  The Court (5-3, with Justice Kagan writing in dissent) held that a waiver of class arbitration cannot be defeated on the ground that the arbitration is too expensive for claims to be pursued on an individual basis—the "effective vindication" theory. 


The official syllabus for the decision explains further that:


The Federal Arbitration Act (FAA) does not permit courts to invalidate a contractual waiv­er of class arbitration on the ground that the plaintiff’s cost of individually arbitrating a federal statutory claim exceeds the potential recovery….


(a) The FAA reflects the overarching principle that arbitration is a matter of contract…. Courts must “rigorously enforce” arbitration agree­ments according to their terms . . . even for claims alleging a violation of a federal statute, unless the FAA’s mandate has been “ ‘overridden by a contra­ry congressional command,’ ”….


(b) No contrary congressional command requires rejection of the class-arbitration waiver here. The antitrust laws do not guarantee an affordable procedural path to the vindication of every claim … or "evince an in­tention to preclude a waiver" of class-action procedure…. Nor does congressional approval of Federal Rule of Civil Procedure 23 establish an entitlement to class proceedings for the vindication of statutory rights. The Rule imposes stringent requirements for certi­fication that exclude most claims, and this Court has rejected the as­sertion that the class-notice requirement must be dispensed with be­cause the "prohibitively high cost" of compliance would "frustrate [plaintiff's] attempt to vindicate the policies underlying the antitrust" laws….


(c) The "effective vindication" exception that originated as dictum in Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U. S. 614, also does not invalidate the instant arbitration agreement. The exception comes from a desire to prevent "prospective waiver of a party's right to pursue statutory remedies," ; but the fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy….  AT&T Mobility LLC v. Concepcion, 563 U. S. ___, all but resolves this case. There, in finding that a law that conditioned enforcement of arbitration on the availability of class procedure inter­fered with fundamental arbitration attributes, id., at ___, the Court specifically rejected the argument that class arbitration was neces­sary to prosecute claims “that might otherwise slip through the legal system”….


Keywords: Federal Arbitration Act, effective –vindication, waiver, class arbitration


Mark Kantor, Member of College of Commercial Arbitrators, Washington D.C.


 

June 12, 2013

Texas Enforces Arbitration Clause in Trust Agreement


In Rachal v. Reitz, ___ S.W.3d ___, 2013 WL 1859249 (Tex. May 3, 2013), the Texas Supreme Court held that a trust agreement’s arbitration clause was binding on a trust beneficiary. The court held that, under the Texas Arbitration Act (TAA), the trust was “a written agreement to arbitrate” because the plaintiff—a non-signatory—had assented to the trust agreement under the direct benefits estoppel doctrine.


The plaintiff was one of the beneficiaries of a trust (Trust) established by his father. He brought suit in Texas state court against the defendant, the Trust’s trustee. Among other things, the plaintiff alleged that the defendant had misappropriated Trust assets. The defendant denied the allegations and moved to compel arbitration under the TAA. The defendant’s motion to compel was based on the Trust’s arbitration clause that stated, in relevant part:


[A]s to any dispute of any kind involving this Trust or any of the parties . . . concerned herewith (e.g., beneficiaries, trustees), arbitration . . . shall be the sole and exclusive remedy, and no legal proceedings shall be allowed . . . .

The trial court denied the motion to compel. A divided appellate court, sitting en banc, affirmed. It held that, under the TAA, a “binding arbitration provision must be the product of an enforceable contract between the parties.” The appellate majority reasoned that because no contract exists in the trust context—in part, because beneficiaries do not consent to trust provisions—the Trust’s arbitration provision was not the “product of an enforceable contract.” The trustee appealed. The Texas Supreme Court reversed.


The Texas Supreme Court began its analysis by stating that Texas courts will "endeavor" to enforce trusts "according to the settlor’s intent" and finding that the Trust settlor’s intent to require arbitration was clear. It then focused on determining whether the Trust’s arbitration provision was enforceable. On that issue, the court disagreed with the appellate majority, holding that the TAA does not require the existence of a written contract to arbitrate, but instead only a written agreement to arbitrate:


The Legislature specifically chose to enforce "agreements" to arbitrate. It knew how to enforce only "contracts" . . . . The language of the TAA indicates legislative intent to enforce arbitration provisions in agreements. (Citations omitted.)

The court next evaluated whether the Trust was an agreementunder Texas law.


The court recognized that the terms "agreement" and "contract" were not synonymous. However, the court found that an agreement, like a contract, requires "a manifestation of mutual assent by two or more legally competent persons to one another," and thus focused on whether the plaintiff had manifested assent to the Trust. The court acknowledged that the plaintiff did not sign the Trust, which is how assent typically is manifested. Nevertheless, applying the direct benefits estoppel doctrine, the court found that the plaintiff had assented to the Trust—and its arbitration clause—by bringing suit against the defendant and attempting to enforce rights that would not have existed without the Trust. It held:


[I]t would [be] incongruent to allow a beneficiary to hold a trustee to the terms of the trust but not hold the beneficiary to those same terms. . . .

* * *


In accepting the benefits of the [T]rust and suing to enforce its terms . . . [Plaintiff's] conduct indicated acceptance . . . of the [T]rust. In sum, we hold the doctrine of direct benefits estoppel applies to bar [Plaintiff’s] claim that the arbitration provision in the [T]rust is invalid. (Citations omitted.)

The plaintiff argued that the direct benefits estoppel doctrine cannot apply when there is no contract. The Texas Supreme Court rejected that argument, stating that the doctrine is based on equity and fairness, not the existence of a formal contract.


The plaintiff also argued that Arizona and California appellate decisions supported his view that arbitration provisions in trusts are unenforceable. The Texas Supreme Court distinguished both cases. With respect to the Arizona decision, the court observed that it was based on a now superseded Arizona arbitration statute which, unlike Texas, required arbitration provisions to be in a written contract. The court refused to follow the California decision, noting that the California Supreme Court had instructed that decision to be vacated and reconsidered in light of a subsequent California decision. The Texas Supreme Court also found support in other state court decisions that had favorably viewed arbitration provisions in trusts, although those decisions did not address the "precise issue" raised in the case at hand.


It remains to be seen if other courts will follow Rachal's lead in applying the direct benefits estoppel doctrine.


Keywords: ADR, litigation, Texas Arbitration Act, direct benefits estoppel, trust, trustee, beneficiary, motion to compel arbitration


Christopher S. Moore, Novack and Macey LLP, Chicago, IL


 

June 12, 2013

Dancing on the Head of a Pin?


In SBRMCOA, LLC v. Bayside Resort, Inc, __ F.3d __, 2013 WL 491254 (3d Cir. Feb. 11, 2013), the Third Circuit Court of Appeals addressed the mystical dividing line between a court’s presumptive authority to adjudicate challenges to the formation of a contract containing an arbitration clause and an arbitrator’s authority to handle challenges to the validity of an entire contract containing an arbitration clause.


A condominium association in St. Thomas sued its developer in court under a contract containing an arbitration clause. The developer moved to compel arbitration. Simple, right? Not really, because the plaintiff association had claimed that its board had no authority to enter into the contract—ergo, its arbitration clause and the entire agreement were unenforceable—and that the board was coerced into signing the contract in any event. Complicated, right? Wrong again, said the district court, which dismissed plaintiff’s complaint, compelled arbitration, and rejected the plaintiff’s ultra vires argument on one count while referring it and the coercion claim under other counts to arbitration.


Unperturbed, the plaintiff took its plea to the Third Circuit. Treating the district court’s order as a summary judgment, thereby giving claimant the benefit of all reasonable doubts and inferences, the Third Circuit affirmed in part, vacated in part, and remanded the case back to the district court for more discovery and a decision on the merits of the plaintiff’s ultra vires argument. In its decision, the court applied the Prima Paint rule and held that “a challenge to a contract on the grounds that a signatory was unauthorized to sign it must be decided by a court,” even if the agreement has an arbitration clause.


So we’re done, right? Wrong once again. Addressing the arbitrability of the plaintiff’s coercion claim—which, just for fun, is a claim that the contract is voidable, not void—the Third Circuit found that thisclaim was arbitrable. Why? While coercion, in this case economic duress, may raise an inference that the plaintiff’s negotiating position was weak when it signed the agreement, such weakness does not translate into incapacity to consent to the formation of a contract and its arbitration clause.


So where are we? Well, the decision about whether the contract is void because the board lacked authority is for the court. The decision about whether the contract is voidable because the board was coerced into signing it is for the arbitrator. Any questions???


Keywords: ADR, litigation, arbitrability, void, voidable, ultra vires


Peter A. Scarpato, Conflict Resolved, LLC, Yardley, PA


 

May 31, 2013

New WA Legislation-Statutes of Limitation Apply in Arbitration


In Broom v. Morgan Stanley, 169 Wn. 2d 231, 236 P. 3d 182 (2010), the Washington Supreme Court held that Washington statutes of limitation do not apply in arbitrations. Accordingly, the court held that a FINRA arbitration panel’s dismissal of claims based on the applicable statute of limitations exceeded the arbitrators’ prescribed powers. The Washington legislature has taken measures to upend Broom v. Morgan Stanley. Specifically, the legislature statutorily nullified the Broom decision by amending the Washington Uniform Arbitration Act, RCW 7.04A.090. The recent amendment of the Washington Act, HB 1065, expressly provides that statutes of limitations do apply in arbitration proceedings. The new law is slated to take effect in July 2013.


Keywords: Statute of Limitation, Washington Uniform Arbitration Act, dismissal of claims


Philip E. Cutler, Cutler Nylander & Hayton, Seattle WA


 

May 15, 2013

Arbitrator's Research Ruled Not Prejudicial


In a sexual harassment labor arbitration case, the district court in Hawaii confirmed an award reinstating a terminated employee where the arbitrator conducted an independent fact inquiry without the knowledge or consent of the parties. The issue concerned whether there were alternative sexually suggestive meanings to the local terms "manapua," "aloha," and "holoholo." Not knowing whether such terms have a sexually suggestive meaning, the arbitrator (post hearing and outside the presence of the parties) asked some long term Hawaii residents, including his teenage daughters, researched articles, and did an internet search to see if these terms had some Hawaiian slang meaning. The collective bargaining agreement (CBA) stated:


The arbitrator shall make his decision in the light of the whole record and shall decide the case upon the weight of all substantial evidence presented.


The court confirmed the arbitrator's determination that the employer did not have just cause to terminate the employee.


Read the full case note.


Keywords: ADR, litigation, labor arbitration case, fact research, collective bargaining agreement


Lou Chang, ALC, Honolulu Hawaii


 

May 3, 2013

Mediation and the Federal Arbitration Act


There is a large and well-developed body of law addressing the question of how a court should determine whether a dispute falls within the scope of an arbitration clause. As commercial agreements more frequently include a requirement that the parties first mediate a dispute before they can either arbitrate or litigate in court, courts will have to deal with the similar question of whether a dispute is subject to a mediation provision.


In Holick v. Cellular Sales of New York, 2013 WL 1336608 (N.D.N.Y. 2013), the court was faced with just such a dispute over whether the plaintiff’s claim was subject to a contractual requirement that the parties mediate before filing a lawsuit. The court chose to treat the issue exactly as if it had arisen under an arbitration provision, relying exclusively on Federal Arbitration Act (9 U.S.C. §4) case law. Thus, the court first decided, based on FAA precedent, that it would apply a summary judgment standard in deciding whether the claim should be mediated, holding a trial only if the facts were not in dispute. Then, in response to the argument that the defendant had waived its right to require mediation, the court, again citing FAA precedent, held that waivers should not lightly be inferred because of the strong federal policy favoring arbitration––the court actually talked about arbitration, not mediation. Next, when it came to interpreting the language of the mediation provision, the court cited FAA precedent for the proposition that “any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration.” Finally, in response to an argument that a statutory claim was not subject to the mediation requirement, the court, again citing arbitration precedent, ruled that a statutory claim had to be mediated unless the statute shows a congressional intent that precluded such a requirement.


The court never once questioned the applicability of arbitration precedent to a contractual mediation requirement. While this provided easy access to a well-established body of federal law, an argument could be made that the FAA addresses only arbitration, not all forms of ADR. With more and more contracts requiring mediation, this will be an emerging area of ADR law.


Keywords: ADR, litigation, Federal Arbitration Act, waiver, contractual mediation requirement


Jonah Orlofsky, The Law Offices of Jonah Orlofsky, Chicago, IL


 

April 23, 2013

Arbitrators' Undisclosed Concurrent Service Not Indicative of Bias


In Scandinavian Reinsurance Co. Ltd. v. St. Paul Fire & Marine Ins. Co., 668 F.3d 60 (2d Cir. 2012), the Second Circuit Court of Appeals reversed the granting of a petition to vacate an arbitration award. The court held that the failure of two arbitrators to disclose their concurrent service as arbitrators in a similar arbitration did not constitute “evident partiality” under the Federal Arbitration Act, 9 U.S.C. §10(a)(2), because the arbitrators’ conduct was not “indicative of bias.”


The arbitration award under attack was based on a dispute about the interpretation of a contract in which Scandinavian had assumed certain reinsurance liabilities of St. Paul (the St. Paul Arbitration). The main issue was whether Scandinavian’s financial exposure under the contract was limited based on the parties’ intent or whether the contract’s express terms should be enforced. A majority––the umpire and the arbitrator selected by St. Paul––concluded that the contract was enforceable as written and did not limit Scandinavian’s exposure.


Read the full case note.


 

April 18, 2013

Eighth Circuit Expands the Concept of Severability


In M.A. Mortenson Co. v. Saunders Concrete Co., Inc., 676 F.3d 1153 (8th Cir. 2012), the Eighth Circuit compelled arbitration in an opinion that seems to expand the precedent of Rent–A–Center, West, Inc. v. Jackson, ––– U.S. ––––, 130 S.Ct. 2772 (2010), on the “severability” of an arbitration clause. The concept of severability maintains that an arbitration clause is a separate agreement that may stand, if not subject to a specific attack, regardless of attacks on the enforceability of the contract as a whole. Id. at 2778. Under the severability doctrine, the court decides the validity of the arbitration clause separately from other contractual issues. If the court finds the arbitration clause to be valid, then all other questions under the contract, including any attacks on the validity or enforceability of the contract as a whole, are left for the arbitrator to decide.


Justice Stevens described the severability concept with obvious dissatisfaction in his dissent in Rent-A-Center:


It would seem the Court reads Prima Paint to require, as a matter of course, infinite layers of severability: We must always pluck from an arbitration agreement the specific delegation mechanism that would—but for present judicial review—commend the matter to arbitration, even if this delegation clause is but one sentence within one paragraph within a standalone agreement. And, most importantly, the party must identify this one sentence and lodge a specific challenge to its validity. Otherwise, he will be bound to pursue his validity claim in arbitration.


Id., 130 S. Ct. 2787 (Stevens, J. dissenting).


Mortenson divides a particular arbitration provision into four separate parts, deciding the conscionability of only the single arbitration clause directly in question while leaving the validity of other clauses to the arbitrator to decide.


M.A. Mortenson Company, a general contractor, brought an action to compel arbitration with Saunders Concrete Company, Inc., its sub-contractor, concerning a claim of defective concrete in a wind turbine project. The district court granted the motion to compel arbitration, and Saunders appealed. The Eighth Circuit affirmed. The contract in question had an arbitration clause with four distinct parts.


Section 21.1 stated that the contractor could elect to arbitrate if the “contract documents” provided for arbitration even if the particular subcontract document did not.


Section 21.2, the section of the agreement in question here, provided that “if Mortenson, in its sole discretion, elects to demand arbitration with Subcontractor,” then “any dispute arising between Mortenson and Subcontractor under the Agreement ... shall be decided by arbitration in accordance with [the rules of the American Arbitration Association]” and proceedings “shall be held in Minneapolis, Minnesota.” Saunders challenged this provision on the ground that it was unconscionable.


Section 21.3 provided for exhaustion of administrative procedures in the event the “contract documents” required exhaustion.


Section 21.4 addressed the situation where the subcontractor wanted to sue the owner or architect. Saunders contended that this subsection of the subcontract contained a “pay-if-paid” provision that violated New York lien law, see N.Y. Lien Law § 34, and that therefore the entire Disputes article was unenforceable. Mortenson, 676 F.3d at 1156.


The Eighth Circuit held that the four separate clauses addressing four separate possibilities of how a dispute might arise should not be considered as one clause. Instead, it concluded that each clause was distinct from the others because it addressed a discreet situation and, accordingly, each clause should be analyzed separately.


Each of the four paragraphs in the Disputes article governs a different type of dispute. Only § 21.1 and § 21.2 mention arbitration, but they cannot be part of one “specific agreement to arbitrate” since they are mutually exclusive.


Mortenson, 676 F.3d at 1157–1158. The court therefore focused only on Section 21.2 and avoided the question of New York lien law presented by the challenge to Section 21.4. Id. It held that the question of New York lien law was left for the arbitrator.


The district court thus correctly concluded that Saunders' challenge to § 21.4 based on New York lien law is irrelevant. Any challenge to the validity of the contract as a whole "should ... be considered by an arbitrator, not a court."


Id. at 1158.


Addressing the remaining issue, the court then concluded that Section 21.2 was not unconscionable. It rejected the argument that Saunders had no opportunity to negotiate the form contract and the argument that the arbitration agreement was unconscionable because it gave one party the sole discretion to choose arbitration. Id. at 1158.


Mortenson seems to take the severability doctrine to a new level: when an arbitration clause can be separated into different arbitration agreements, the court need find that only one of those arbitration agreements is valid to compel arbitration. Any challenges to the validity of the contract––including an attack on any other arbitration agreement that it contains––are then for the arbitrator to decide.


Keywords: alternative dispute resolution, litigation, Rent-A-Center, severability, unconscionable, discretion


Thomas Blumenthal, Paule, Camazine & Blumenthal P.C., St. Louis MO


 

April 8, 2013

Are Courts Able to Enforce the Mediation Confidentiality Rule?


In Hand v. Walnut Valley Sailing Club, 475 F. App’x 277 (10th Cir. 2012), the Court of Appeals for the Tenth Circuit affirmed that case dismissal was an appropriate sanction for a plaintiff’s serious violation of the mediation confidentiality rule. The plaintiff had sued his former sailing club after the club revoked his membership. After an unsuccessful attempt to reach settlement through court-ordered mediation––and despite the district court’s express, written confidentiality rule for such mediation––the plaintiff “sent an email to at least forty-four club members (and others) disparaging the club’s positions and relating all the details of the mediation, including what the mediator said and the amount of the club’s settlement offer.” The plaintiff later explained that he believed club members “had a right to know.” The defendant, in turn, sought to dismiss the plaintiff’s lawsuit, with prejudice.


The district court rejected the plaintiff’s argument that dismissal was too harsh a sanction for his undisputed violation of the confidentiality rule.


Read the full case note.



 

March 20, 2013

Court Holds Arbitration Clause to be Unconscionable and Unenforceable


In Gandee v. LDL Freedom Enterprises, Inc., 293 P.3d 1197 (en banc) (Wash. 2013) (Gandee) the Washington Supreme Court affirmed the denial of a motion to compel arbitration, holding that an arbitration clause was unconscionable and unenforceable under Washington state law. The Court also held that its decision did not run afoul of AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011) (Concepcion).


In 2008, the plaintiff––a Washington resident––entered into a debt-adjustment contract with the defendant, a California debt-adjustment company. The contract contained an arbitration clause: (a) requiring disputes between the plaintiff and the defendant to be arbitrated in Orange County, California under the rules of the American Arbitration Association (AAA); (b) entitling the prevailing party to recover reasonable attorney fees and costs; and (c) requiring disputes to be submitted to arbitration within 30 days from the dispute date.


Despite the clause, the plaintiff filed a class action against the defendant in Washington state court, alleging violations of Washington’s debt adjustment act and Consumer Protection Act (CPA). The plaintiff alleged that the defendant charged excessive fees for debt adjustment services under Washington law. The defendant moved to compel arbitration and stay the class action based on the clause. The plaintiff opposed the motion arguing, among other things, that the clause was unconscionable and unenforceable under Washington law. The trial court denied the defendant’s motion to compel, finding that the clause was unconscionable and unenforceable. The defendant appealed.


Read the full case note.



 

March 18, 2013

Attorneys Who Don't Play Well in the Sandbox


All too often the recalcitrant parties in an arbitration (i.e., respondents who do not pay their share of fees and who otherwise try to stultify the process) attempt to play the system to their benefit. At the ABA Section of Litigation Annual CLE Conference in Chicago, April 24–26, the ADR Committee is sponsoring a presentation that will include vignettes that illustrate, in an educational and somewhat comical way, some of the more egregious examples of attorneys and their clients who attempt to derail arbitration.


The speakers will present their insights into what can and should be done to turn the tables and force those parties to deal with the consequences of their tactics/behavior. Among other things, the presentation will address:


  • a number of procedural issues that have been the subject of recent court decisions;
  • ambiguous or contradictory procedures in rules;
  • situations where non-signatories to the arbitration provision maybe compelled to arbitrate;
  • hearing locale disputes;
  • consolidation and arbitrability issues; and
  • a party’s failure to pay for its fair share of the cost of arbitration.

Attorneys who are not aware of these potential impediments are not equipped to effectively deal with them, which inevitably results in additional, and unnecessary, costs and delays.


The panel includes Jean Baker, of the American Arbitration Association; Hon. Rebecca Westerfield of JAMS; Larry D. Harris, Esq., of Fox Rothschild LLP in Washington, D.C.; and Neal M. Eiseman of Goetz Fitzpatrick LLP in New York, NY.


Keywords: alternative dispute resolution, litigation, Annual CLE Conference


Neal M. Eiseman, Goetz Fitzpatrick, New York, NY


 

March 18, 2013

Fifth Circuit Accepts Judicial Estoppel as a Basis for Discovery


In its long-running dispute with Chevron Corporation, the Republic of Ecuador has frequently been on the losing end of discovery applications filed by Chevron pursuant to 28 U.S.C. Section 1782. In Republic of Ecuador, et al. v. John A. Connor, Chevron Corporation, et al., Nos. 12-20122/20123, 2013 WL 539011 (5th Cir. February 13, 2013), Ecuador filed its own Section 1782 application in the U.S. District Court for the Southern District of Texas, seeking discovery from an individual and his company for use in an UNCITRAL arbitration brought by Chevron under the U.S.–Ecuador Bilateral Investment Treaty (the BIT arbitration). Chevron intervened and opposed the application.


Following Fifth Circuit precedent, the district court concluded that the BIT arbitration does not represent a dispute pending in a “foreign or international tribunal,” as Section 1782 requires. See Republic of Kazakhstan v. Biedermann Int’l, 168 F.3d 880 (5th Cir. 1999); El Paso Corp v. La Comision Ejucutiva Hidroelectrica del Rio Lempa, 341 F.App’x 31 (5th Cir. 2009). Accordingly, the district court denied Ecuador’s application for discovery. Ecuador appealed, arguing that (a) the BIT arbitration is a foreign proceeding covered by Section 1782, but (b) in the alternative, Chevron should be judicially estopped from denying that it is covered, given that it has benefitted repeatedly from agreeing to this assertion in other fora. The Fifth Circuit agreed that judicial estoppel is appropriate to make Section 1782 discovery available to Ecuador.


The Fifth Circuit defined judicial estoppel "as an equitable doctrine designed to protect the integrity of judicial proceedings by preventing litigants from asserting contradictory positions for tactical gain." In the present case, the Fifth Circuit noted that in numerous other courts, Chevron asserted that the BIT arbitration is an international proceeding. Its position in the Fifth Circuit is precisely contrary; accordingly, "[W]hy shouldn’t sauce for Chevron’s goose be sauce for the Ecuador gander as well?"


The Fifth Circuit rejected each of Chevron’s attempts to distinguish its goose from the Ecuadorian gander. First, it rejected Chevron’s contention that the status of the BIT arbitration under Section 1782 raises an issue of jurisdiction to which judicial estoppel may not apply. Circuit Judge Jones, writing for the panel, explained that when a claim facially seeks relief “arising under” the Constitution, the federal court has jurisdiction to determine whether the claim is cognizable. The court also rejected Chevron’s argument that judicial estoppel may never be applied to issues of law, commenting that Chevron has misunderstood both Supreme Court and Fifth Circuit authority on this issue.


Chevron further argued that it was entitled to follow the law of the circuit, even if the law may be different in another circuit. The Fifth Circuit found no case law to support this proposition. Moreover, Chevron admitted that the legal standard under Section 1782 must ultimately be uniform. The court observed that following the law of the circuit “is not an antidote” to judicial estoppel in these circumstances.


Finally, Chevron contended that in prior cases its Section 1782 applications were often premised on twin grounds: the existence of Ecuadorian court litigation (a "foreign tribunal") and the BIT arbitration (an "international tribunal"). However, in the prior cases the status of the BIT arbitration "was not irrelevant to Chevron’s success." With all of Chevron’s objections dispatched, the Fifth Circuit noted that what remained was the reality that Chevron had deliberately taken inconsistent positions on Section 1782, thereby seeking to gain an unfair advantage over Ecuador. Judicial estoppel was therefore deemed appropriate, without the Fifth Circuit having to opine on whether the BIT arbitration is an "international tribunal."


The judicial estoppel situations such as the one in the present case will likely multiply, in light of the clear circuit split on the question of whether Section 1782 is available to aid international arbitrations, "private" or investment treaty (Eleventh contrary to the Fifth and Second Circuits, though the Second Circuit decision came before the Supreme Court's decision in Intel Corp. v. Advanced Micro Devices, Inc., 542 U.S. 241 (2004)). As the Fifth Circuit itself says: "The legal standard under Section 1782 must ultimately be uniform. It is clearly time for the U.S Supreme Court to establish that uniformity."


Keywords: litigation, alternative dispute resolution, judicial estoppel, discovery under 28 USC Section 1782


Monique Sasson, Institute for Transnational Arbitration, Plano, Texas.


 

March 11, 2013

Arbitrator Should Decide If Mediation Requirement Has Been Met


It is increasingly common to find arbitration clauses that require the parties to first mediate a claim before proceeding to arbitration. Furthermore, courts have not hesitated to enforce such clauses by ordering parties to mediate before arbitrating. E.g., Clarke’s Allied, Inc. v. Rail Source Fuel, LLC, 2012 WL 6161565 (E.D.Tex. 2012). Such clauses raise the question, however, of whether the court or arbitrator has the authority to decide if a pre-arbitration mediation requirement has been satisfied. In Knowles v. Community Loans of America, Inc., 2012 WL 5868622 (S.D.Ala. 2012), the plaintiff’s employment contract provided that the parties first had to make a “good-faith effort” to resolve any disputes “internally on an informal basis.” If that failed, the dispute had to be submitted to mediation, and if that failed, to binding arbitration. When a dispute arose over whether those pre-arbitration requirements had been complied with, the court first found that they constituted a “condition precedent to arbitration.” The court then ruled that, absent an agreement to the contrary, the arbitrator should decide whether a condition precedent to arbitration has been met. Because there was no agreement to the contrary, the court concluded that the arbitrator should decide whether the pre-arbitration informal resolution and mediation requirements had been satisfied.


Keywords: alternative dispute resolution, litigation, mediation, pre-arbitration requirements, arbitration clauses


Jonah Orlofsky, The Law Offices of Jonah Orlofsky, Chicago, IL


 

March 5, 2013

Are There Consequences to Turning Down an Offer in Mediation?


In Fogh v. Los Angeles Film Schools, 2012 WL 6604709 (Cal.App. 2012), the plaintiff won a $13,972 judgment plus a statutory fee award of $96,800. On appeal, the defendant argued that the plaintiff should not get any fees incurred after counsel turned down a settlement offer of $20,600 made during a mediation. The defendant made the equitable argument that fees expended after turning this offer down were not reasonable because the ultimate award was for a lower amount than the settlement offer.

The trial court rejected defendant’s argument, and the appellate court affirmed, on two grounds: (1) all discussions that occurred during the mediation were privileged, so the settlement offer could not be considered for any purpose, and (2) it was reasonable for plaintiff to have turned down the settlement offer because the defendant had failed to provide any documentation supporting the amount of the offer. The court also noted that California had an offer of judgment procedure (similar to Federal Rule 68), but that the defendant had not used that procedure.

While one can see a defendant’s frustration with paying a substantial fee award when a plaintiff has turned down a settlement offer in excess of the ultimate judgment, had the court come out the other way, a chilling effect on mediation would be the likely effect. Counsel dependent upon a statutory fee award would have to think twice about entering into a mediation if there could be consequences on the ability to recover fees incurred after that date. Parties will generally agree to mediation only if the process is viewed as voluntary and with no downside other than the minimal time and expense of the mediation itself.


Keywords: litigation, alternative dispute resolution, settlement offer, mediation, statutory fee award


Jonah Orlofsky, The Law Offices of Jonah Orlofsky, Chicago, IL


 

February 20, 2013

Courts Can Exercise Appointment Power


In a three-party dispute under an agreement to arbitrate that contemplated a two-party dispute, the Fifth Circuit held that a federal district court was authorized to exercise appointment power under Section 5 of the Federal Arbitration Act (FAA), 9 U.S.C. § 5, when there was a breakdown in the parties’ appointment process. The Fifth Circuit also held, however, that in exercising its power, the district court erred in deviating from the parties’ express agreement to arbitrate before a three-member panel. BP Exploration Libya Ltd. v. ExxonMobil Libya, 689 F.3d 481 (5th Cir. July 30, 2012).


The dispute arose from an offshore drilling services contract through which a contractor agreed to provide a certain rig to drill deep water oil wells in Libyan waters for ExxonMobil Limited Libya (Exxon). With the contractor’s consent, Exxon assigned the drilling contract to BP Exploration Libya Limited (BP). After the assignment, the parties disputed whether the rig met required standards and when BP took possession of the rig. Pursuant to the assignment agreement, BP informed the contractor and Exxon that they had materially breached the assignment agreement and disclaimed any payment obligation to either party.


The arbitration clause in the assignment agreement contemplated that a dispute between Exxon and BP would be arbitrated before three arbitrators in accordance with the International Rules of the American Arbitration Association, with each party to appoint one arbitrator who would appoint the third as chair. But it also expressly contemplated a second scenario: any dispute to which the contractor was a party was to be governed by a provision in the drilling agreement which provided for arbitration under the rules of the Arbitration and Conciliation Act 1990 (ACA) (incorporated as part of the Laws of the Federation of Nigeria). The ACA rules called for the first party to appoint its arbitrator, the responding party then to appoint its arbitrator, and the two arbitrators to appoint a presiding arbitrator.


Because neither BP nor Exxon was paying the contractor the rate to which it believed it was entitled, the contractor served an arbitration demand on BP and Exxon as a party to a dispute arising out of the assignment agreement and designated its arbitrator in accordance with the ACA rules. As responding parties, BP and Exxon would neither agree to a joint appointment of an arbitrator, nor for each to designate an arbitrator, as then there would be no neutral arbitrator to preside. With the process breaking down, BP filed suit in federal district court in Houston, Texas. The district court ordered that three arbitrators appointed by the parties would unanimously choose two neutrals, with the arbitration to proceed with a panel of five arbitrators.


The Fifth Circuit Court of Appeals upheld the district court’s determination under the FAA that it could act because there was a “lapse in the naming of an arbitrator or arbitrators” under 9 U.S.C. § 5. However, the Fifth Circuit held that the district court violated the FAA by appointing a number of arbitrators other than the panel of three provided for in the parties’ agreement, and directed the district court on remand to enter an order appointing three arbitrators. The Fifth Circuit further directed the district court to consider entering an order that would require BP and Exxon to appoint a second arbitrator, and if they could not agree, for the court to appoint the second arbitrator, and to appoint the neutral arbitrator if the two selected arbitrators could not agree on the neutral. The Fifth Circuit stated that it was not taking away the district court’s discretion to modify or replace the proposed procedure with any method not inconsistent with its opinion, and that the parties could also reach an agreement among themselves for appointment of arbitrators.


Keywords: litigation, alternative dispute resolution, arbitrators, arbitrator selection, arbitrator appointment, multi-party arbitrations


Gilda R. Turitz, Sideman & Bancroft LLP, San Francisco, California


 

November 2, 2012

Manifest Disregard—Alive and Well in the Fourth Circuit and Beyond


The Fourth Circuit has now joined the Second, Sixth, Ninth, and Tenth Circuits in recognizing “manifest disregard of the law” as either an independent ground or a “judicial gloss” on the enumerated grounds for vacatur of an arbitration award listed in 9 U.S.C. § 10 of the Federal Arbitration Act (FAA). Wachovia Secs., LLC v. Brand, ___ F.3d ___, 2012 WL 507022, at *8 (4th Cir. Feb 16, 2012). But “manifest disregard” is dead in the First, Fifth, Seventh, Eighth, and Eleventh Circuits. So, the chasm widens among the circuits on whether “manifest disregard of the law” has survived the Hall Street and Stolt-Nielsen Supreme Court rulings. We await further clarification from the Supreme Court.


Wachovia appealed to the Fourth Circuit from the South Carolina District Court’s refusal to vacate an adverse Financial Industry Regulatory Authority arbitration award. Wachovia had commenced an arbitration seeking relief from terminated employees who had joined a competitor. In response, the employees called the case “meritless,” because it sought to punish them simply for leaving the company. Their arbitration counterclaim sought attorney fees and costs under South Carolina’s Wage Payment Act (Wage Act) and other common-law doctrines, not citing South Carolina’s Frivolous Civil Proceedings Act (FCPA). The arbitrators denied Wachovia’s claims, and awarded the employees $15,080.67 in Wage Act damages and $1.1 million in attorney fees and costs under the FCPA.


Wachovia argued that the former employees’ demands violated South Carolina’s Arbitration Act because fees could not be demanded in the first instance in response to the arbitration claim. Also, Wachovia objected to the panel’s refusal to afford Wachovia 30 days’ notice and a post-award sanctions hearing, both required under the FCPA. The arbitration panel rejected Wachovia’s arguments.


In the South Carolina District Court, Wachovia moved to vacate the award, asserting two arguments. First, Wachovia said that the panel exceeded its authority and manifestly disregarded the law under FAA 9 § USC 10(a)(4) by (1) awarding sanctions without enforcing the FCPA’s conditions precedent and (2) improperly applying the FCPA, which by its terms (“court,” “verdict,” and “trial”) applies only to litigation. Second, Wachovia said the panel deprived Wachovia of a fundamentally fair hearing by ignoring the FCPA’s procedural safeguards. Wachovia lost and next went to the Fourth Circuit.


There, Wachovia lost again, but in the process the Fourth Circuit held that “manifest disregard” is a legally permissible ground to vacate an award, as both an independent ground and a “judicial gloss” on the grounds for vacating an arbitration award listed in 9 U.S.C. § 10 of the FAA. The Fourth Circuit ruled against Wachovia on the “merits” by applying the requisite narrow standard of review for arbitration awards, noting there was no evidence that the panel intentionally contradicted the law. The court explained that Wachovia failed to prove that state procedural requirements trump a panel’s broad discretion to hear or reject evidence. The court ended by saying that “Wachovia is the architect of its own misfortune,” because in the arbitration Wachovia cut short the hearing on attorney fees, pushed back the filing of its own brief to the last minute, and turned down the panel’s offer to further brief the issues.


Keywords: litigation, alternative dispute resolution, manifest disregard, attorney fees, vacatur


Peter A. Scarpato, Conflict Resolved, LLC, Yardley, PA


 

November 2, 2012

Qualified Right of Access Ends Chancery Court's Arbitration Program


Five Delaware Chancery Court judges were sued by a not-for-profit organization that advocates for government transparency. Delaware Coal. for Open Gov’t v. Strine, No. 1:11-1015, 2012 WL 3744718 (D. Del. Aug. 30, 2012). The organization alleged that section 349 of the Delaware Code and Court of Chancery rules 96, 97, and 98, which created a confidential arbitration program, violated the First Amendment of the U.S. Constitution, which protects the public’s qualified right of access to government proceedings. After considering each of the parties’ cross-motions for summary judgment, the U.S. District Court for the District of Delaware ruled in favor of the plaintiff not-for-profit and found that the confidential arbitration program violated the First Amendment. The rationale was that despite its label of arbitration, the proceeding was the functional equivalent of a civil trial.


Delaware’s confidential arbitration program had only a few prerequisites. First, one party had to be a business entity and/or a citizen of Delaware. Second, the parties had to consent to arbitration. Third, if only monetary damages were sought, there was a $1 million threshold requirement but no amount-in-controversy requirement if equitable damages were sought. Fourth, a party could not be a consumer. If the parties satisfied these requirements then they could file a petition to arbitrate. Once the petition was filed, a Chancery Court judge was assigned, without any input from the parties, and an arbitration hearing held within 90 days.


Although a relatively new program, it had earned a reputation for being an efficient and expedited way to resolve corporate disputes, which in large part was attributed to the prestige of the Delaware Chancery Court. The Chancery Court is considered to be the country’s premier court for corporate issues because of the vast experiences of its judges, the depth of Delaware corporate jurisprudence, and the predictability of outcomes in corporate disputes.


In rendering its decision, the court considered the threshold question of whether Delaware implemented a form of commercial arbitration to which the court must apply the “logic and experience” test adopted by the Third Circuit to determine when the public has a right of access to a particular proceeding or record (N. Jersey Media Group, Inc. v. Ashcroft, 308 F.3d 198 (3rd. Cir. 2002); or, had Delaware created a procedure “sufficiently like a trial” that the holding in Publicker Industries governed? (Publicker Industries, Inc. v. Cohen, 733 F.2d 1059 (3rd Cir. 1984) (court held that the right of public access applies to civil trials).


To determine which holding governed, the court compared and contrasted the Delaware proceeding with traditional arbitration. Unlike a traditional arbitrator, the arbitrator in the Delaware proceeding was a sitting judge acting pursuant to state authority, paid by the state (not the parties), using state personnel and facilities who applied the relevant law and then issued an automatically enforceable order.


Having found that the Delaware proceeding was essentially a civil trial, the court next addressed the level of confidentiality guaranteed by the Delaware program. All memoranda, work product, case files, and communications concerning or relating to arbitration were deemed to be confidential. The judge did not publish his or her rulings or reasoning and the public was not privy to the factual and legal findings of a judge. The court found that the confidential nature of the arbitration program violated the public’s qualified right of access to presumptively open government proceedings under the First Amendment.


The court’s decision does not address exactly how public access to court-conducted arbitrations will have a significant positive impact on the proceedings. The court did note, however, that even if the program falls into disuse, the judiciary as a whole is strengthened by the public knowledge that its courthouses are open and judicial officers are not adjudicating in secret.


An appeal has been filed with the Third Circuit.


Keywords: litigation, alternative dispute resolution, Court of Chancery, Confidentiality, Arbitration, Public Access


Rosalie Valentino, Goetz Fitzpatrick LLP, New York, NY


 

September 13, 2012

4th Cir.: "Manifest Disregard of the Law" Grounds for Vacating Award


In Wachovia Securities, LLC v. Brand, 671 F.3d 472 (4th Cir. 2012), the Fourth Circuit held that an arbitration award may be vacated if it was made in “manifest disregard of the law.” The decision widens a circuit split on this issue.


The plaintiff in Wachovia—a securities firm, with a South Carolina office—filed an arbitration claim against several of its former employees who had gone to work for one of the plaintiff’s competitors after they had been terminated by the plaintiff. The plaintiff claimed that its former employees had misappropriated confidential and proprietary information and were violating other contractual and common-law duties by soliciting the plaintiff’s customers and employees to join them at their new securities firm.


In their answer, the former employees denied the plaintiff’s claims, describing them as “meritless” and as having been brought “to punish the [former employees] for leaving” the plaintiff. The former employees also brought counterclaims for unjust enrichment, conversion, and unpaid wages under South Carolina’s wage-payment act. Although they requested an award of their attorney fees and costs in defending themselves against the plaintiff’s “baseless and unwarranted claims,” they did not plead any claims under South Carolina’s Frivolous Civil Proceedings Act (FCPA) which provided “a mechanism for litigants to seek sanctions against attorneys who file frivolous claims.”


After an “unremarkable” month-long arbitration hearing, during which both sides presented evidence, the arbitration panel asked the parties to submit briefs regarding their respective requests for attorney fees. The briefs were to be submitted during the last two days scheduled for hearings, which were about 30 days later. In its brief, Wachovia argued that neither party was entitled to fees under South Carolina’s arbitration act. In their brief, the former employees argued, for the first time, that they were entitled to fees under the FCPA.


The plaintiff argued that the FCPA afforded it certain safeguards, including a 30-day period to respond to FCPA claims. The plaintiff “expressed concern” to the arbitrators that it was not being given the time to which it was entitled because the former employees had not raised the FCPA claim until the last day or two of the hearing. When asked by the panel whether further briefing would cure the plaintiff’s concerns, counsel for the plaintiff stated: “I don’t know . . . [The FCPA requires] notice and [an] opportunity to be heard. So . . . we need more evidence.” Counsel added that more evidence was not “appropriate” in light of the fact that the “record” was closed, the FCPA claim had not been referred to in the pleadings, and had thus taken the plaintiff by “complete surprise.” The plaintiff did not request any additional briefing on the FCPA claims. The arbitration panel ultimately issued an award against the plaintiff, including attorney fees under the FCPA in excess of $1.1 million.


When the former employees filed a motion to confirm the award, Wachovia filed a motion to vacate it. Among other things, the plaintiff argued that the award of attorney fees under the FCPA should be vacated because it was made in “manifest disregard” of the law. Specifically, the plaintiff argued that the arbitration panel did not give the plaintiff the benefit of the FCPA’s “procedural safeguards,” namely, “thirty days to respond to an [FCPA] sanctions request and a separate hearing on [those] sanctions. . . .”


The Fourth Circuit stated that the Supreme Court’s decision in Hall Street Assocs. v. Mattel, Inc., 552 U.S. 576 (2003) injected “uncertainty” into the “status of manifest disregard as a basis for vacatur” and that a significant split of authority on this issue had developed as a result. While it noted that “manifest disregard” was “an old yet enigmatic ground for overturning arbitral awards” it nevertheless held that “manifest disregard” survived Hall Street as an independent ground for vacating arbitration awards. Key to its holding was Stolt-Nielsen v. Animal-Feeds, 130 S.Ct. 1758 (2010), which the Fourth Circuit read as “closely” tracking the pre-Hall Street “majority view” that manifest disregard was a valid basis to overturn an arbitration award. In further support of its decision, the Fourth Circuit interpreted a Stolt-Nielsen footnote “to mean that manifest disregard continues to exist” in one of two forms: either “‘as an independent ground for review or as a judicial gloss on the enumerated grounds for vacatur set forth’” in the Federal Arbitration Act.


The Fourth Circuit also found that neither Hall Street nor Stolt-Nielsen had loosen[ed] the two-part “manifest disregard” test it had articulated in Long John Silver’s Rests., Inc. v. Cole, 514 F.3d 345 (4th Cir. 2008). Under that test, the party seeking to vacate an award using the manifest-disregard standard had to show: (1) that the arbitrator refused to heed (2) a clearly defined legal principle that was not subject to reasonable debate.


Although it found that manifest disregard provided a basis to overturn an award, and that its two-part test survived Hall Street and Stolt-Nielsen, the Fourth Circuit held that the plaintiff did not meet that test because it had not shown that a clearly defined legal principle required the panel to import the FCPA’s procedural safeguards into an arbitration proceeding.


Through Wachovia, the Fourth Circuit has now joined the First, Second, Sixth, Ninth, and Tenth Circuits, each of which continues to treat the “manifest disregard” standard as a viable basis to overturn an arbitration award. Ramos-Santiago v. United Parcel Serv., 524 F.3d 120, 124 (1st Cir. 2008); T. Co Metals, LLC v. Dempsey Pipe & Supply, Inc., 592 F.3d 329, 340 (2d Cir. 2010); Coffee Beanery, Ltd. v. WW, L.L.C., 300 Fed. Appx. 415, 419 (6th Cir. 2008); Comedy Club, Inc. v. Improv West Assocs., 553 F.3d 1277, 1290 (9th Cir. 2009); Abbott v. Law Office of Patrick J. Mulligan, 440 Fed. Appx. 612, 620 (10th Cir. 2011). The Fifth, Eighth, and Eleventh Circuits have held that the “manifest disregard” standard is not a viable basis on which to overturn an arbitration award. Citigroup Global Mkts., Inc. v. Bacon, 562 F.3d 349, 353 (5th Cir. 2009); Medicine Shoppe Intern., Inc. v. Turner Invs., Inc., 614 F.3d 485, 489 (8th Cir. 2010); Frazier v. CitiFinancial Corp., LLC, 604 F.3d 1313, 1324 (11th Cir. 2010). The Third Circuit has so far declined to expressly address the issue. Rite Aid New Jersey, Inc. v. United Food Comm. Workers Union, Local 1360, 449 Fed. Appx. 126, 129 (3d Cir. 2011).


Keywords: litigation, alternative dispute resolution, arbitration vacaur, manifest disregard, circuit split


Christopher S. Moore, Novack and Macey LLP, Chicago, IL


 

September 6, 2012

Is "Binding Mediation" More Than an Oxymoron?


One of the keys to success in alternative dispute resolution (ADR) is the ability of the participants to be creative. Sometimes, this can involve blending one or more types of ADR into a single process. A recent California case illustrates this point well, by discussing what the court refers to as “binding mediation.”


In Bowers v. Raymond J. Lucia Companies, Inc., 206 Cal. App 4th 724 (2012), the plaintiffs sued multiple defendants for a variety of business torts, and one of the defendants, a Mr. Lucia (Lucia) in turn filed an arbitration proceeding against the plaintiffs containing similar claims. When the trial court ruled that the plaintiffs had to arbitrate their claims against Lucia, the plaintiffs dropped him from their lawsuit so they could arbitrate his claims while continuing to litigate against the other defendants.


Several days into the arbitration, and a few months before trial, the parties arrived at a settlement methodology. Lucia’s counsel informed the arbitration panel that the parties had agreed to dismiss the arbitration with prejudice, with the parties’ respective claims in the arbitration and litigation being submitted to a full-day mediation. If at the end of the mediation, the parties had not reached a settlement, the mediation would become “an arbitration with a range of between $100,000 and $5 million as the range that he [the mediator] will then have the freedom to choose after we present our cases to him or her during mediation.”


The parties subsequently executed a settlement agreement incorporating the foregoing terms, describing the dispute-resolution process they had elected as “a mediation/binding baseball arbitration.” At the mediator’s (wise) request, the parties revised the agreement such that if mediation did not succeed, each party would submit a final offer or demand somewhere between $100,000 and $5 million. The mediator, now wearing an arbitrator’s hat, would choose one of the final proposals, with no discretion to choose a figure in between the two.


After a full day of mediation, the parties failed to settle. Switching to baseball arbitration, the plaintiffs demanded $5 million; the defendant offered $100,000. After taking the matter under advisement for some time, the mediator (now arbitrator) selected the $5 million figure. The plaintiffs then moved the trial court to confirm the arbitration award. The trial court did so, and the defendant appealed.


The Court of Appeals of California upheld the trial court’s decision. The court first examined the defendant’s claim that there was no mutual consent to the settlement agreement. The defendant contended that it had agreed only to a mediation which, if unsuccessful, would be followed by a binding arbitration with an evidentiary hearing. Reviewing the transcript of the arbitration and the settlement agreement itself, the court found nothing suggesting that the parties contemplated an evidentiary arbitration hearing if mediation did not succeed. This finding was bolstered by the fact that the parties were already in the midst of an arbitration at the very time they made the agreement.


Next, the court addressed and rejected the defendant’s claim that the settlement agreement was unenforceable because of the inherent uncertainty of the term “binding mediation.” In addition to observing that the defendant never objected to “binding mediation” until it culminated in an adverse result, the court pointed out that the parties had elaborated, both on the record in the original arbitration and in the settlement agreement itself, on what they intended the term to mean. Thus, no uncertainty existed. Finally, the court quickly disposed of the defendant’s claim that the settlement agreement was unconstitutional, finding that trial by jury had been validly waived.


The parties in Bowers devised a creative method to end a lengthy arbitration and avoid a trial. Their method guaranteed a binding conclusion to multiple claims with but one final day of effort. What’s more, the outcome (and thus the method) withstood an attack based on “buyer’s remorse.” Baseball arbitration or “binding mediation” will not be the answer in every case, but it deserves its place in both the litigator and mediator’s toolbox.


Keywords: litigation, alternative dispute resolution, binding mediation, med/arb, baseball arbitration


Michael S. Orfinger, Upchurch Watson White & Max Mediation Group, Daytona Beach, FL


 

July 13, 2012

Exceeding Powers Vacates Award; Bias Needed for Evident Partiality


Two recent federal circuit court decisions highlight the difficulties encountered by losing arbitration parties in attempting to vacate awards in the face of limited statutory grounds and tough standards applied. An “excessive powers” attack succeeded where the court found that the arbitrator committed outcome-determinative errors in interpreting the language and intent of the contract terms, whereas an “evident partiality” attack failed because two arbitrators’ non-disclosures did not satisfy an objective test to demonstrate bias against the challenging party.


In Muskegon Central Dispatch 911 v. Tiburon, Inc. (6th Cir. Feb. 2, 2012), the Sixth Circuit affirmed the district court’s order vacating an arbitration award for exercise of excessive powers in a dispute over a system implementation agreement (SIA) concerning an integrated public safety computer system provided by the respondent, Tiburon, for the claimant, MCD. The SIA included dispute resolution procedures (DRP) that required the parties to exercise best efforts to negotiate and settle disputes promptly with escalation procedures to higher levels of party representatives; if they were unable to resolve a dispute in accordance with such procedures, the parties could assert their rights under the SIA. MCD initiated the DRP over Tiburon’s performance and when the parties’ settlement efforts failed, MCD notified Tiburon that it was terminating the SIA for cause and seeking damages. In interpreting the SIA, the arbitrator found that the DRP constituted a condition precedent to termination for cause; that MCD as the “Disputing Party” had the responsibility not only to initiate the DRP but to bring the process to conclusion; and that failing to do so, the termination was “for convenience” and not for cause. The Sixth Circuit found that Michigan’s “high standard” statutory to vacate arbitration awards was met because “it clearly appears on the face of the award or the reasons for the decision ... that the arbitrators through an error in law have been led to a wrong conclusion, and that but for such error, a substantially different award must be made.” The arbitrator exceeded his powers by assigning solely to MCD the burden to complete the DRP procedures, ignoring plain contractual language that the parties intended a mutual obligation to carry out the escalation process. He also exceeded his powers by interpreting as mandatory and exclusive a provision that a party terminated “for convenience” was entitled only to payment for invoiced and unbilled work prior to termination, when the contract had no language stating that such provision was the exclusive remedy for a party seeking breach of contract damages.


In Scandinavian Reinsurance Co. Ltd. v. St. Paul Fire & Marine Ins. Co., ___F.3d___ (2d Cir. Feb. 3, 2012), the Second Circuit refused to vacate an arbitration award in a dispute between reinsurers for “evident partiality” of two arbitrators who did not disclose their concurrent service in another arbitration with similar legal issues, a related party, and a common witness. Noting that the evident-partiality standard is directed to the question of bias, the court recognized the principle that where an arbitrator knows of a material relationship with a party but fails to disclose it, a reasonable person would have to conclude that the arbitrator who failed to disclose under such circumstances was partial to one side. The court identified the following factors as helpful, but not mandatory, exclusive, or dispositive: the extent and character of the arbitrator’s personal interest, pecuniary or otherwise, in the proceedings; the directness of the relationship between the arbitrator and the party allegedly favored; the connection of that relationship to the arbitrator; and the proximity in time between the relationship and the arbitration proceeding. The Second Circuit held that the party seeking vacatur had not met its burden of establishing that the two arbitrators’ service in the concurrent arbitration was indicative of bias so as to constitute “a nontrivial conflict of interest” requiring that the award be vacated due to their non-disclosure. To satisfy the standard, the undisclosed facts must both suggest existence of a material conflict of interest and that an objective, disinterested observer would conclude that the arbitrator was biased.


Although the Muskegon and Scandinavian Reinsurance cases examine very different bases for potential vacatur of arbitration awards, their common theme is that the courts continue to maintain and enforce high hurdles for the losing party to overcome to have an adverse award set aside.


Keywords: litigation, alternative dispute resolution, arbitration, vacating award, exceeding powers, dispute resolution procedures, escalation procedures, evident partiality, arbitrator disclosure, arbitrator bias


Gilda R. Turitz, Sideman & Bancroft LLP, San Francisco, CA


 

July 13, 2012

Ninth Circuit Clashes with Other Courts on Arbitrability Issue


In its recent decision in Cape Flattery, Ltd. v. Titan Maritime LLC, 647 F.3d 914 (9th Cir. 2011) a unanimous Ninth Circuit panel held a dispute over damages arising from severe injury to coral formations, which occurred when the MV Cape Flattery was removed from a reef on which it had run aground, was not subject to arbitration under an agreement between the vessel’s owner (Cape Flattery, Ltd. or CFL) and the salvage contractor, Titan Maritime LLC. The decision, while facially plausible, appears to conflict directly with other circuit-court opinions on arbitrability, notably Highlands Wellmont Health Network v. John Deere Health Plan, 350 F.3d 568 (6th Cir. 2003.)


The written agreement between CFL and Titan contained an arbitration clause requiring arbitration of “any dispute arising under this Agreement.” After execution of the agreement, Titan, acting with allegedly gross negligence, inflicted damage to the protected coral, for which CFL was charged. CFL, facing a potential multi-million-dollar liability, sued Titan for indemnity and contribution in U.S. district court in Hawaii. The CFL/Titan agreement included a clause specifying that “Any dispute arising under this Agreement shall be settled by arbitration in London . . . English law and practice to apply.” Titan moved to compel arbitration; the motion was denied by the trial court, on the ground that the dispute did not “arise under” the agreement. The Ninth Circuit affirmed, employing essentially the same reasoning as the trial court.


Both the trial court and the Ninth Circuit panel held that federal law governed the question of arbitrability, even if English law applies to the underlying claims for contribution and indemnity. Both courts also acknowledged the oft-repeated principle that under an arbitration clause a presumption exists in favor of arbitrability of issues going to the merits of the parties’ claims.


But when the issue is not the legal dispute the parties contest, but the right to arbitration itself, different considerations apply. According to the Ninth Circuit’s opinion in Cape Flattery, a narrower focus is required. In Cape Flattery, the court held that the clause providing for arbitration of disputes “arising under” the contract offered no answer to the question of whether the clause covered disputes originating outside the four corners of the contract. Finding an absence of any facts to support such a construction, the panel ruled the arbitrability dispute was not itself arbitrable. The panel relied heavily on the earlier Ninth Circuit opinion in Mediterranean Enterprises, Inc. v. Saangyong Construction, 708 F.2d 1458 (1983). An earlier Second Circuit opinion, In re Kinoshita & Co., 287 F.2d 951 (1961) was also cited by the panel, even though subsequent Second Circuit decisions have limited its impact.


The Cape Flattery decision seems clearly to state a minority position. First, another unanimous Ninth Circuit panel upheld a broad construction of an arbitration clause covering issues “arising out of this Agreement;” see Simula, Inc v. Autoliv, Inc., 175 F.3d 716 (1999). Cape Flattery does not really deal with the seemingly obvious conflict, except to note that Simula is not an en banc decision, and cannot bind other Ninth Cirsuit panels on issues already decided.


Of greater consequence is the appearance of opinions in other circuits, such as Highlands Wellmont v. John Deere Health Plan, 350 F.3d 568 (6th Cir. 2003), which roll right over the distinction between the reach of the arbitration clause on issues on the merits and the separate issue of arbitrability itself. Highlands Wellmont permits the parties to pursue the issue of whether the contract, including its arbitration clause, can be negated in arbitration upon a showing of fraudulent inducement.See also Dreyfus Negoce S.A. v. Blystad. 252 F.3d 218 (2d Cir. 2001).


Finally, the analysis of the Ninth Circuit can be viewed as freighting the words of the arbitration clause in Titan with too much weight. The panel notes that the dispute between the parties (for indemnity and contribution) would be the same whether or not the arbitration clause existed. Indeed, the claim would be apparently viable even in the absence of an explicit written contract. Is it too much to suppose that the wording of the arbitration clause, loose though it may be, was intended to relegate all disputes to arbitration, not just those that fit within the words of the arbitration clause with absolute precision?


It remains for future cases to wrestle with this dilemma.


Keywords: litigation, alternative dispute resolution, arbitrability, Federal Arbitration Act, FAA, procedural federal law, arbitration clause, presumption of arbitrability


James P. Watson, Law Offices of James P. Watson, San Francisco, CA


 

July 2, 2012

Florida Sanctions a Mediator


On May 10, 2012, the Florida Mediator Qualification Board, a committee appointed by and under the supervision of the Florida Supreme Court, sanctioned a mediator for violating two of Florida’s Rules for Certified and Court Appointed Mediators. After a hearing, the board found by clear and convincing evidence that the mediator had violated Rule 10.300 by not maintaining an appropriate demeanor during the mediation and Rule 10.350 by not conducting the mediation in a dignified and courteous manner. Both violations stemmed from the mediator’s making comments about the wife’s appearance and the jewelry that she was wearing. No further details were available.


The board did not de-certify or suspend the mediator. Instead, it required him to complete an additional six hours of mediation training on subjects relating to impartiality and maintaining a proper demeanor, including courses in what the board termed “sensitivity training.” The board required the mediator to obtain pre-approval of these courses by the Dispute Resolution Center and also required him to submit a “reflective report” on what he learned from the experience and the educational materials that he used. The board also required that five separate mediations conducted by the mediator be observed by five different mediators approved by the Dispute Resolution Center and verification submitted. The board also stated that the additional course work and mediation observations had to be completed in what was roughly a 75-day period and imposed the reasonable and necessary costs of the proceedings on the mediator.


Keywords: litigation, alternative dispute resolution, Florida Mediator Qualification Board; mediation rules; sanctions


Mitchell L. Marinello, Novack and Macey, Chicago, IL


 

May 31, 2012

Settlement Negotiation Privilege for Non-Mediated Talks Rejected


In a wide-ranging review of the federal common law of privilege, the Federal Circuit rejected a blanket protection for non-mediated settlement discussions in the mandamus case of In Re MSTG, Inc.


The Federal Circuit is charged with determining the law applicable to those discovery materials that relate to an issue of substantive patent law. The MSTG court held that issues of privilege or other discovery limitations concerning negotiations about reasonable royalties triggered Federal Circuit jurisdiction. In its ruling, the court rejected the Sixth Circuit's application of a settlement privilege for unmediated negotiations.


Contrasting the 50-state adoption of the mediation privilege, the court found no state-based effort to apply privilege to non-mediated settlement negotiations. Neither did the court feel that Congress or the Supreme Court had moved toward such a privilege in its consideration and amendment of Fed. R. Evid. 408, or otherwise. Interestingly, without citation to any study or source, the court determined that "disputes are routinely settled without the benefit of a settlement privilege: it is thus clear that an across-the-board recognition of a broad settlement privilege is not necessary to achieve settlement."


Ultimately, the court felt that the broad discovery control powers in Fed. R. Civ. P. 26 were sufficient to ensure protection in the appropriate case. The court also held that it was premature to assess the scope of restricted admissibility at trial under Rule 408.


On the merits, the Court expressed concern that the patent holder's expert witness had opined that certain "litigation settlement" royalties should be heavily discounted; the expert had relied in part on testimony by a party representative concerning related settlement talks. Perceiving unfairness, the court permitted discovery of those talks.


An article more thoroughly examining the decision and its rationale will be posted in June.


Keywords: litigation, alternative dispute resolution, settlement negotiation, common law privilege, Rule 408, Rule 26


Greg Whitehair, IP Resolution Co., LLC, Denver, CO


 

May 24, 2012

WDMich and DColo Change Court-Annexed ADR Mix


Two district courts recently shifted the focus of their primary court-annexed ADR practices. And now, thanks to the Department of Justice, every federal district court’s ADR approach can be found here.


WDMich: Effective May 9, 2012, the U.S. District Court for the Western District of Michigan repealed its Local Rule 16.6, effectively terminating the court-annexed arbitration program established as one of the ADR mechanisms available through the Court's case-management process. There were no comments objecting to the proposed repeal of this arbitration alternative, which had not been widely used. Other forms of ADR continue to be available under the District's Local Rule 16, including voluntary facilitative mediation, early neutral evaluation, and "case evaluation," which is a somewhat unique Michigan state court process for a three-member panel's settlement valuation of money-damages claims, with a wrongful-rejection potentially resulting in taxation of costs and attorney fees.


DColo: Effective December 1, 2011, the U.S. District Court for the District of Colorado amended its Local Rule 16.6, effectively privatizing the majority of the court-annexed settlement conferences convened in virtually every case by the district’s magistrate judges. There was some controversy regarding the decision to discontinue the no-fee, mediated approach historically used by the court. Nonetheless, citing a desire to refocus on being a “court of adjudication, not a court of settlement,” the district court will now require a motion and some justification to divert the court’s magistrate judges to a settlement conference; the now-standard court-annexed “early neutral evaluation” also now requires a motion. The local federal practice bar association (the Faculty of Federal Advocates) has been asked to help assemble a roster of eligible neutrals (Colorado does not have a certification program for neutrals).


Practice Note: The ADR practices in each of the 94 federal districts can now conveniently be found at the Department of Justice’s website for the Office of Dispute Resolution.


Keywords: litigation, alternative dispute resolution, court-annexed ADR; settlement conference; arbitration; early neutral evaluation; case evaluation; privatizing ADR; Faculty of Federal Advocates; DOJ ODR


Charlie Denton, Barnes & Thornburg LLP, Grand Rapids, MI; Greg Whitehair, IP Resolution Co., LLC, Denver, CO


 

April 26, 2012

Third Circuit Upholds Class Arbitration


In Sutter v. Oxford Health Plans, LLC, -- F.3d --, No. 11- 1773, 2012 WL 1088887 (April 3, 2012), the Court of Appeals for the Third Circuit held that an arbitrator did not exceed his powers by ruling that the parties’ arbitration agreement authorized class-wide arbitration. The decision interprets Stolt-Nielsen v. Animal Feeds International, 130 S.Ct. 1758 (2010), which held that an arbitration panel exceeded its authority by allowing class-wide arbitration when the parties’ arbitration agreement was silent on the subject.


In Sutter, the parties’ arbitration provision was broad. It stated that “no civil action concerning any dispute arising under this Agreement shall be instituted before any court” and that “all such disputes” must be arbitrated. The arbitrator determined that this language embraced all conceivable court actions, including class actions. After the arbitrator entered a class-wide award, the defendant moved to vacate, arguing that under Stolt-Nielsen, the arbitrator exceeded his powers by construing the agreement to permit class action arbitration. The Third Circuit disagreed.


The Third Circuit distinguished Stolt-Nielsen on the grounds that the parties to that case stipulated that, when making their arbitration agreement, they never reached an agreement on the permissibility of class arbitration. On that record, the Supreme Court determined that there was no basis for the arbitration panel to conclude that the parties’ agreement permitted class arbitration. In contrast, the parties in Sutter had no such stipulation. The Third Circuit rejected the defendant’s argument that the arbitration agreement was “silent” about class arbitration. The arbitrator had ruled that class arbitration was encompassed within the broad language of the arbitration provision. The court held that the arbitrator’s interpretation of the agreement was “within the bounds of the law” and that his interpretation was not “totally irrational. Nothing more is required under . . . the Federal Arbitration Act.”


The Sutter decision contains a clear lesson for those who want to arbitrate disagreements, but not on a class-wide basis: When drafting an arbitration clause, use clear and straightforward language and recognize that there is no need to be verbose. Stated another way, silence is golden but being overly wordy can come back to bite you.


Keywords: litigation, alternative dispute resolution, class action, arbitrator’s authority, arbitration agreements, Stolt-Nielsen, Federal Arbitration Act


Alison Talbert Schwartz, Novack and Macey, Chicago, IL


 

April 2, 2012

Second Circuit Stands by Public-Policy Decision


In February 2012, the Second Circuit considered for the third time a case dealing with a class-action lawsuit against American Express. In re American Express Merchant’s Litigation, 667 F.3d 204 (2d Cir. 2012) (Amex III). The Second Circuit’s most recent decision in the case came in the wake of the Supreme Court’s decision in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011). Concepcion is a 2011 Federal Arbitration Act (FAA) decision that prevents courts from compelling class arbitration when parties have not clearly agreed to this form of dispute resolution. In Amex III, the merchants and American Express had executed contracts with arbitration agreements containing class-action waivers. For the third time, the Second Circuit voided the class-action waivers on the basis of public policy.


The original Amex appeal (554 F.3d 300 (2d Cir. 2009) (Amex I) came before a three-judge panel after the district court granted a motion to compel arbitration. On appeal, the merchants asserted that the class-action waivers were unenforceable under the Truth in Lending Act (TILA). They also argued that arbitration would not effectively vindicate their rights in matters dealing with antitrust claims.


The three-judge panel, consisting of Judge Pooler, Judge Sack, and soon-to-be Justice Sotomayor, relied on Green Tree Financial Corp.-Alabama v. Randolph, 121 S. Ct. 513 (2000). The court determined that litigants, seeking to invalidate arbitration agreements because of prohibitive expense, must prove the likelihood of incurring these costs. Furthermore, the court reasoned that class-action lawsuits encourage plaintiffs to vindicate statutory rights in situations where individual costs are prohibitive. Because the record contained expert testimony that discussed the high cost of antitrust lawsuits, the Second Circuit concluded that the merchants met their burden. As such, the waivers were unenforceable because they created de facto immunity from antitrust claims. Therefore, Amex I reversed the district-court decision for public-policy considerations.


American Express appealed the reversal to the U.S. Supreme Court, which vacated the decision and directed the Second Circuit to reconsider Amex I in light of Stolt-Nielsen S.A. v. AnimalFeeds International Corp., 130 S. Ct. 1758 (2010). Because Justice Sotomayor had been elevated to the Supreme Court, Judges Pooler and Sack issued the opinion in Amex II(130 S. Ct. 2401 (2010)). The court reasoned Stolt-Nielsen had no impact on the case because the record indicated that antitrust lawsuits can easily cost hundreds of thousands of dollars. These costs made individual litigation or arbitration financially impossible under the agreements. Thus, the class-action waivers in effect shielded American Express from liability for antitrust violations. Accordingly, the court concluded (again) that public policy rendered the class-action waivers unenforceable.


Weeks after Amex II, the U.S. Supreme Court decided Concepcion, and the Second Circuit revisited its decision for the third time in Amex III. The court reasoned that the FAA presumption, which favors arbitration, dissipates when arbitration agreements prevent citizens from vindicating their statutory rights. Because Concepcion and Stolt-Nielsen only support the principle that courts cannot force parties to arbitrate without a previous agreement to do so, the Second Circuit concluded that Randolph still controls its analysis in the case at hand. And public policy dictates that the class-action waivers be voided because they effectively shield American Express from antitrust liability.


On the surface, this case was a simple contract claim where the parties should have been bound by their agreement. However, the Second Circuit’s examination probed into the practical effect of the class-action waivers. The court realized the class-action waivers deprived the merchants of their statutory rights. After years of litigation, the Second Circuit stood by its initial decision that public policy can overcome a presumption created by federal law.


Keywords: litigation, alternative dispute resolution, FAA, Amex, Second Circuit, class action


Dwayne U. Barrs Jr., J.D. candidate, William & Mary Law School


 

April 2, 2012

Mediation Settlement Agreements Must Specify Reimbursable "Costs"


It is important to carefully specify in mediation settlements the fees and costs that each party shall be responsible for incurring. In an unpublished opinion, the Eleventh Circuit Court of Appeals recently held that although the settlement provided for reimbursement of “reasonable attorney’s fees and costs” to be determined by the court, the plaintiff was not entitled to mediation expenses because those costs are not taxed under 28 U.S.C. Section 1920 (Nicholas v. Allianceone Receivables Management, Inc., No. 11-13764 (January 10, 2012).


Appellant Nicholas brought suit against Allianceone Receivables Management for violating the Florida Fair Debt Collection Practices Act (FDCPA) and the Florida Consumer Collection Practices Act (FCCPA). The complaint alleged that Allianceone violated the FDCPA when it left a large number of messages on Nicholas’s voice mail without indicating that Allianceone was a “debt collector.” The parties were subject to court-ordered mediation. The case was eventually settled for $2,001.00 plus reasonable attorney fees and costs to be determined by the court.


Nicholas sought $5,470.50 in attorney fees and $991.75 in costs. The magistrate judge hearing the matter reduced the hourly rate of attorney compensation from $350 to $300 and awarded Nicholas $4,689.00 for attorney fees and $430 for “legal” costs—($350.00 filing fee, $30.00 for service calls, and $50.00 for a cancelled deposition). Nicholas filed an appeal concerning whether a consumer who prevails in a lawsuit brought under the FDCPA may recover fees paid for court-ordered mediation.


The 11th Circuit reviews an award of attorney fees by the district court only for an abuse of discretion. An abuse of discretion occurs if the judge fails to apply the proper legal standard or to follow proper procedures in making the determination, or bases an award upon findings of fact that are clearly erroneous. Johnson v. Breeden, 280 F.3d 1308 (11th Cir. 2002).


Persuaded by the reasoning in Gary Brown & Assoc., Inc. v. Ashdon, Inc.,(268F. App’x 837 (11th Cir. 2008), the court held that Nicholas was not entitled to mediation fees because those costs are not taxable under 28 U.S.C. § 1920.


This case serves as a warning that (1) use of the term “costs” in a settlement is not all-inclusive; and (2) the costs associated with a court-ordered mediation are not automatically recoverable. It is imperative that a settlement agreement specifies exactly what “costs” each party will be responsible for reimbursing.


Keywords: litigation, alternative dispute resolution, mediation settlement, reasonable attorney fees and costs, mediation fee, mediation fee reimbursement


Gabrielle Jackson is a second year law student at Wake Forest University School of Law, in Winston Salem, NC.


 

March 28, 2012

Supreme Court Reverses West Virginia FAA Preemption Decision


The U.S. Supreme Court recently reaffirmed the broad scope of the Federal Arbitration Act’s (FAA) preemption of state-court statutes making arbitration agreements unenforceable. Marmet Health Care Center, Inc. v. Clarksburg Nursing Home & Rehabilitation Center, LLC, 565 U.S. ___ (2012). In so holding, the Court reversed a West Virginia Supreme Court of Appeals decision finding that pre-dispute arbitration agreements regarding personal-injury claims against nursing homes based on negligence are unenforceable.


Background and State Court Proceedings
In Marmet, three plaintiffs (in separate cases) challenged the enforceability of arbitration agreements as to personal-injury claims against nursing homes based on negligence. The West Virginia Supreme Court of Appeals heard these cases as a consolidated appeal, and issued a 49-page decision. See Brown ex rel. Brown v. Genesis Healthcare Corp., Nos. 35494, 35546, 35635, 2011 WL 2611327 (W.Va. June 29, 2011).


The West Virginia court first considered whether the West Virginia Nursing Home Act, which limits the enforceability of waivers of claims against nursing homes, was preempted by section 2 of the FAA. Section 2 provides:


A written provision in . . . a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.


9 U.S.C. § 2.


In addressing whether section 2 preempts the Nursing Home Act, the court stated: “With tendentious reasoning, the United States Supreme Court has stretched the application of the FAA from being a procedural statutory scheme effective only in the federal courts, to being a substantive law that preempts state law in both the federal and state courts.” Id. at *18. The court further held that the doctrine of severability—which means that if a party challenges the validity of an entire contract, and not just the arbitration provision in that contract, then it is the role of the arbitrator, not the court, to assess the validity of the contract—had been created by the U.S. Supreme Court “out of whole cloth.” The court then stated:


[U]nder Section 2 of the FAA, a written provision to settle by arbitration a controversy arising out of a contract that evidences a transaction affecting interstate commerce is valid, irrevocable, and enforceable, unless the provision is found to be invalid, revocable or unenforceable upon a ground that exists at law or in equity for the revocation of any contract.


Id. at *19. Applying this rule, the court held that the act preempted the Nursing Home Act only insofar as the Nursing Home Act attempts to invalidate all arbitration agreements involving nursing homes.


The court then turned to whether the specific arbitration provisions in question were “unconscionable.” The court held that FAA was not intended to be, in any way, applicable to personal-injury claims that only “collaterally derive” from a written agreement. Based on this premise, the court found: “as a matter of public policy under West Virginia law, an arbitration clause in a nursing home admission agreement adopted prior to an occurrence of negligence that results in a personal injury or wrongful death, shall not be enforced to compel arbitration of a dispute concerning the negligence.” Id. at *29.


Supreme Court Reverses
The U.S. Supreme Court reversed in a four-and-one-half page, per curiam decision, which rejected the West Virginia court’s reasoning out of hand. In particular, the Court ruled:


[W]hen state law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward: The conflicting rule is displaced by the [Act]. That rule resolves these cases. West Virginia’s prohibition against predispute agreements to arbitrate personal-injury or wrongful-death claims against nursing homes is a categorical rule prohibiting arbitration of a particular type of claim, and that rule is contrary to the terms and coverage of the [Act].


Marmet, at pp. 3–4. The Court further found that the West Virginia court’s finding that the arbitration agreements at issue were unconscionable appeared to be premised on the court’s misapplication of law regarding preemption. Accordingly, the Court remanded for a determination of whether—“absent [West Virginia’s] general public policy” against pre-dispute arbitration agreements as to nursing home negligence cases—the agreements would be “unenforceable under state common law principles that are not specific to arbitration and pre-empted by the [Act].” Id. at p. 5. The Court did not expand on this statement; however, a fair reading allows the West Virginia court to consider traditional defenses to the enforcement of contracts, such as lack of consideration, but not defenses based on the state’s public policy against arbitration agreements or waiver of claims (whether in the nursing-home context or otherwise).


Keywords: litigation, alternative dispute resolution, waivers of claims, state common law, pre-dispute agreements


Adam Waskowski, Novack and Macey LLP, Chicago, IL


 

March 26, 2012

Second Circuit Finds Waiver Unenforceable for the Third Time


In In re American Express Merchants’ Litigation, 667 F.3d 204 (2d Cir. 2012) (Amex III) the Second Circuit held that an arbitration class-action waiver clause was unenforceable when the plaintiffs—a group of merchants—had demonstrated that the clause, if enforced, would effectively prevent them from pursuing antitrust claims against American Express. Amex III is the third time that the court has held the clause is unenforceable.


The plaintiffs alleged that an “honor all cards” provision in their “card-acceptance agreement” obligated them to honor not only charge cards, but also American Express credit cards. Allegedly, the fees charged to merchants for American Express credit cards were “supracompetitive,” and the “honor all cards” provision constituted an illegal “tying arrangement” in violation of the Sherman Antitrust Act.


The card-acceptance agreement contained an arbitration clause that purported to preclude any claim from being arbitrated “on anything other than an individual basis.” Thus, when the plaintiffs sought to bring a class action in district court, American Express moved to compel arbitration arguing that the class-waiver clause foreclosed litigation as well as collective action. The district court granted the motion to compel, but left open the question as to whether the class-action waiver was enforceable to the arbitrator. Amex III, 667 F.3d at 210. The plaintiffs appealed.


In In re American Express Merchants’ Litigation, 554 F.3d 300 (2d Cir. 2009) (Amex I)—the Second Circuit’s first decision considering these issues—the Court held that: (1) the issue of the class-action waiver’s enforceability was a matter for the court, not the arbitrator; and (2) the class-action waiver provision was unenforceable “because enforcement of the clause would effectively preclude any action seeking to vindicate the statutory rights asserted by the plaintiffs.” Important to the court was that the plaintiffs had submitted evidence demonstrating the “fiscal impracticality of pursuing individual claims” such that enforcing the class-action waiver “would grant [American Express] de facto immunity from antitrust liability.” The Supreme Court granted American Express’s petition for writ of certiorari, vacated Amex I, and remanded the case in light of Stolt-Nielsen S.A. v. AnimalFeeds, Int’l Corp., 130 S. Ct. 1758 (2010). Amex III, 667 F.3d at 210–11.


Following remand, the Second Circuit in In re American Express Merchant’s Litigation, 634 F.3d 187 (2d Cir. 2011) (Amex II) again found that the class-action waiver clause was unenforceable. It held that Stolt-Nielsen did “not require” departure from its “original analysis” because Stolt-Nielsen addressed different issues. According to the Second Circuit, Stolt-Nielsen held that parties cannot be forced into a class-action arbitration unless they clearly agreed to do so, but did not reach the “key issue” in the American Express litigation, namely, “whether the mandatory class action waiver . . . is enforceable even if [P]laintiffs are able to demonstrate that the practical effect of enforcing the waiver” would be to preclude their ability to vindicate statutory rights. Amex III, 667 F.3d at 211–12.


After Amex II, the Supreme Court decided AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011). The Second Circuit “placed a hold” on the Amex II mandate pending supplemental briefing as to Concepcion’s impact on Amex II. Thereafter, the Second Circuit rejected American Express’s argument that Concepcion (which struck down as preempted California law that barred enforcement of class-action waiver provisions in consumer contracts) required reversal of Amex II.


The Second Circuit acknowledged that a “facile” reading of Concepcion supported American Express, but found that neither Concepcion (nor Stolt-Nielsen) altered Amex II because neither case addressed the “key issue” described above. Thus, the court looked to other cases for guidance, including the Supreme Court’s decisions in Mitsubishi Motors Corp. v. Soler Chysler-Plymouth, Inc., 473 U.S. 614 (1985) and Green Tree Fin. Corp.-Alabama v. Randolph, 531 U.S. 79 (2000). It found that those two cases, among others, stood for the proposition that class-action waivers are unenforceable when a party demonstrates that statutory rights cannot be vindicated through individual arbitrations, just as the Second Circuit thought the plaintiffs had done in the American Express litigation. Amex III, 667 F.3d at 212–14, 218–19.


The Second Circuit provided a few caveats to its opinion, including that it was not holding that arbitration class-action waivers were unenforceable per se. American Express has petitioned for rehearing en banc. It remains to be seen if Amex III will be found to conflict with Concepcion or Stolt-Nielsen.


Keywords: arbitration class-action waiver, arbitration collective action waiver


Christopher S. Moore, Novack and Macey LLP, Chicago, IL


 

February 16, 2012

Absence Doesn’t Make the Court’s Heart Grow Fonder


Woody Allen once said, “Eighty percent of success is showing up.” That key ingredient of Allen’s recipe for success has been embodied in Florida’s mediation rules since their inception. The rules serve only to put into writing what should otherwise be self-evident—that having the final decision makers physically present at mediation is critical to reaching a settlement. The appearance requirements in Fla. R. Civ. P. 1.720(b) have never been unclear, at least to those who mediate or advocate in mediation on a regular basis. In an effort to clarify the requirements further, however, the Supreme Court of Florida revised Rule 1.720 effective January 1, 2012. The necessity of revising the rule, together with an ever-growing line of Florida cases, illustrates that some lawyers and parties have yet to “get the memo.”


The most recent of these cases hearkens back to the oldest. In Carden & Assoc., Inc. v. C.O.D. Trees Partnership (Fla. 5th Dist. App. Jan. 6, 2012), the Fifth District Court of Appeal ordered a case to appellate mediation. Under recently enacted Fla. R. App. P. 9.720(a), absent a court order, a party is deemed to appear at appellate mediation only if the following persons are physically present: (a) the party or its representative; (b) the party’s counsel of record; and (c) a representative of the insurance carrier for any insured party. The appellants in Carden failed to physically appear at the mediation, and were represented there only by their attorney and insurance-company representative. The appellee moved for sanctions based upon this violation of the rule.


The Fifth District Court of Appeal granted the appellee’s motion for sanctions. “The law is clear that, absent being excused by the court, the party must appear at mediation and a representative of the insurance company cannot take the party’s place. See Carbino v. Ward, 801 So. 2d 1028 (Fla. 5th Dist. App. 2001). The fact that Carbino involved a trial mediation, rather than an appellate mediation, is of no relevance because the appearance language in the applicable rules is identical. See Fla. R. Civ. P. 1.720(b).” The Carden court ordered the appellants to pay all fees charged by the mediator, as well as the appellee’s reasonable costs incurred in preparing for and attending the mediation, and filing the motion for sanctions.


As noted above, the Carden court relied on its earlier opinion in Carbino v. Ward, 801 So. 2d 1028 (Fla. 5th Dist. App. 2001). In what was then a question of first impression in Florida, the court considered whether an insured defendant was required to attend mediation personally, where a representative of the defendant’s insurer was present with authority to settle up to the policy limits. The court concluded that for two reasons, attendance by the insurance adjuster could not satisfy the requirement of attendance by “[t]he party or its representative having full authority to settle without further consultation.” First, the Carbino court construed the phrase “its representative” to deal with situations involving a corporate, incapacitated, or minor party who could only appear through a representative. Second, the court recognized that while the insurance representative could settle up to the policy limits, nothing prohibited the plaintiffs from demanding a higher figure. The court awarded the plaintiff in Carbino the same sanctions of attorney fees and costs as it did just over 10 years later in Carden.


Effective January 1, 2012, the language of Rule 1.720(b) has been somewhat modified. In no way, however, does the amended rule ease the requirements of “appearance.” To the contrary, it clarifies the meaning of a “party representative having full authority to settle,” and requires the parties to serve and file a certificate at least 10 days prior to mediation identifying who will attend the mediation and confirming that they have the requisite settlement authority. Failure to file the certificate, or for the people identified therein to appear, creates a rebuttable presumption of a failure to appear, exposing that party to the sanctions set forth in the rule. See Fla. R. Civ. P. 1.720(b) (2012).


Florida’s mediation rules and interpretative case law demonstrate how seriously the Florida courts take mediation. Between the language of amended Rule 1.720 and the strong language of Carden, everyone involved in mediation would be well-advised to take Woody Allen’s advice and devote their energies to achieving the other (and more difficult) 20 percent of success.


Keywords: mediation, appearance, sanctions, settlement authority


Michael S. Orfinger, Upchurch Watson White & Max Mediation Group, Daytona Beach, FL


 

February 14, 2012

Seventh Circuit Rejects Consolidation Appeal


In Blue Cross Blue Shield of Massachusetts, Inc. vs. BCS Insurance Company, 2011 WL 6382203 (7th Cir. Dec. 16, 2011), the Seventh Circuit dismissed an appeal from a district court’s refusal to interfere with the anticipated consolidation of twelve arbitration claims. In doing so, the court noted that: (1) an order consolidating arbitration claims is governed by different standards than an order permitting a class arbitration; and (2) interlocutory appeals from arbitrators’ procedural decisions generally are not permitted.


Defendant BCS Insurance Company (BCS) is owned by Blue Cross and Blue Shield insurers (plans); one of these plans exists in each state. BCS is a captive insurer that insures the plans themselves. In 2003, certain healthcare providers filed a class action against all the plans. Twelve plans that had purchased errors-and-omissions policies from BCS asked BCS to defend and indemnify them. When BCS refused, the twelve plans filed a joint demand for arbitration. The plans named one arbitrator, and BCS named another. When the party-appointed arbitrators could not agree on a neutral, seven of the plans filed a petition under Section 5 of the Federal Arbitration Act (FAA) asking the district court to appoint the third arbitrator.


BCS responded with a cross-petition to compel separate arbitration of the twelve matters. BCS argued that Stolt-Nielsen S.A. v. AnimalFeeds International Corp., 130 S.Ct. 1758 (2010), which holds that arbitrators may not certify a class arbitration unless the parties have agreed to class actions in their contract, also means that arbitrators cannot consolidate arbitrations unless the parties have so agreed. The district court denied BCS’s petition, and BCS appealed. While BCS’s appeal was pending, the district court appointed the third arbitrator. BCS appealed from that ruling as well, arguing that the district court had lost jurisdiction due to BCS’s first appeal.


The Seventh Circuit readily disposed of BCS’s appeals. First, it held that BCS’s appeal from the denial of its cross-petition was invalid. The court reasoned that the FAA permits an appeal from the denial of a petition to compel arbitration, but not from an order compelling arbitration to proceed in any particular manner. Thus, BCS could not appeal the district-court order that denied its petition for the arbitration to proceed as twelve separate arbitrations rather than as a single consolidated one. Because BCS’s appeal was invalid, the district court never lost jurisdiction of the case and was authorized to appoint the third arbitrator.


In its opinion, the court discussed many differences between a class action and a consolidation of separate claims. It noted that in class actions, “a self-selected plaintiff represents others, who must be protected from the representative’s misconduct or incompetence.” This often involves “individual notice to class members, a procedure that may be more complex and costly than the adjudication itself.” As a practical matter, because the representative typically has a small stake in the matter, “lawyers are in charge, which creates a further need for the adjudicator to protect the class.” Class actions also can “turn a small claim into a whopping one.” In contrast, consolidation “of suits that are going to proceed anyway poses none of these procedural problems.” Id.at *4–5. In particular:


Consolidating the plans’ claims does not change the stakes; whether it would be simpler and cheaper to handle twelve claims separately or together is the sort of issue an adjudicator -- whether judge or arbitrator -- resolves all the time.


Id. at * 4.


The Seventh Circuit also stated that BCS’s request for the district court to decide if consolidation was appropriate was misguided. Were it otherwise, “every supposed procedural error could be contested in a separate suit (with another appeal) in mid-arbitration” and again afterwards in a proceeding to confirm or vacate the award.” Id. at *3. Instead, the court ruled that it is up to the arbitrators to “resolve procedural questions in the first instance (and usually the last instance) and the “only question that a court should address before an arbitration starts is whether the parties have agreed to arbitrate at all.” Id. at *4. Any disagreements about the arbitrators’ procedural decisions should be addressed in the confirmation hearing after the arbitration is concluded. But parties with procedural objections should not get their hopes up: Blue Cross makes clear that arbitrators have wide latitude in conducting the proceedings.


Keywords: Stolt-Nielsen, consolidation, class action, procedure, jurisdiction


Mitchell L. Marinello, Novack and Macey, Chicago, IL


 

January 30, 2012

Supreme Court Enforces "Right to Sue" Arbitration Agreement


The U.S. Supreme Court recently held that the Credit Repair Organizations Act (CROA), which requires credit-repair organizations to inform consumers that they have the “right to sue” for violations of that statute, does not prevent credit-repair organizations from requiring consumers to arbitrate their claims. Compushare Credit Corp. v. Greenwood, No. 10-946 (Jan.10, 2012). Justice Scalia wrote the opinion, Justice Ginsberg was the lone dissenter, and Justice Sotomayor authored a concurrence joined by Justice Kagan.


The CROA requires a credit-repair organization to inform its customers in writing that they “have a right to sue a credit repair organization that violates [CROA].” The plaintiffs argued that under this language, mandatory arbitration provisions for CROA claims are not enforceable and a plaintiff must have the right to proceed in court. The district court for the Northern District of California and the Ninth Circuit agreed. The Supreme Court did not.


The Court held that “because the CROA is silent on whether claims under the Act can proceed in an arbitral forum, the [Federal Arbitration Act] requires the arbitration agreement to be enforced according to its terms.” The Court ruled that any congressional exclusion of particular classes of contracts from arbitration must be clear. According to Justice Scalia, the “right to sue” language in the CROA does not clearly provide consumers “with a right to bring an action in court.” Instead, “it imposes an obligation on credit repair organizations to supply consumers with a specific statement (in quotation marks) in the statute.” The Court noted that it “repeatedly recognized that contractually required arbitration of claims satisfies the statutory prescription of liability in court.”


In her dissent, Justice Ginsberg disagreed with Justice Scalia’s interpretation of the CROA. In her opinion, the statute provides a consumer with a non-waivable right to sue in court. Justice Sotomayor, in her concurrence, stated that although she disagrees that Congress must explicitly state that a particular type of statutory claim is excluded from arbitration, in this case, nothing in the CROA’s legislative history or its purpose indicates that claims cannot be arbitrated.


Keywords: Credit Repair Organization, Right to Sue


Alison Talbert Schwartz, Novack and Macey, Chicago, IL


 

January 25, 2012

Arbitration Agreement Prohibiting Employment Class Actions Invalid


The National Labor Relations Board recently held that it is a violation of federal law to require employees to sign arbitration agreements that prevent them from pursuing joint, class, or collective claims in an arbitration proceeding, or in court. D.R. Horton, Inc., 357 NLRB No. 184 (Jan. 3, 2012).


As a condition to employment, D.R. Horton required employees to sign a contract agreeing to arbitrate all employment claims, and to waive all rights to pursue class or collective claims in any forum. D.R. Horton asserted the contract as a defense to a class-wide arbitration proceeding brought against it under the Fair Labor Standards Act.


The board found that D.R. Horton’s agreement unlawfully restricts employees from participating in “concerted activity,” a right expressly protected by section 7 of the National Labor Relations Act (NLRA). According to the board, requiring an employee to sign the agreement as a condition to employment constitutes an unfair labor practice because it precludes employees from pursuing class or joint actions in any forum. Thus, it “clearly and expressly bars employees from exercising substantive rights that have long been held protected by Section 7 of the NLRA.”


The board also held that its decision does not conflict with the Federal Arbitration Act (FAA), which generally allows employment-related arbitration agreements. The board relied on section 2 of the FAA, which provides that arbitration agreements may be invalidated upon any “grounds as exist in law or equity for the revocation of any contract.” The board also relied on Supreme Court precedent holding that the FAA protects the rights of parties to resolve statutory claims through arbitration as long as “a party does not forgo the substantive rights afforded by [a] statute.” The board, however, found that the agreement’s “categorical prohibition of joint, class or collective federal state or employment law claims in any forum directly violates the substantive rights vested in employees under Section 7 of the NLRA.”


The board noted that its ruling is narrow in that it applies only to agreements barring protected, concerted activity for “employees,” as defined in the NLRA. It also stated that an agreement would be enforceable if it allows an employee to pursue class or collective claims in a judicial forum, but requires that individual claims be resolved through arbitration.


The board’s decision may be challenged on the grounds that it conflicts with the Supreme Court’s decision in AT&T Mobility v. Concepcion, 131 S. Ct. 1740 (2011). In Concepcion, the Court held that a California law prohibiting class-action waivers in consumer arbitration agreements was preempted by the FAA. Therefore, under Concepcion, class-action waivers in consumer agreements are enforceable. It remains to be seen whether the board’s decision conflicts with Concepcion.


Keywords: NLRA, FAA, employment-related agreements, AT&T Mobility


Alison Talbert Schwartz, Novack and Macey, Chicago, IL


 

January 13, 2012

Supreme Court Invites Piecemeal Litigation and Procedural Gamesmanship


Investors in Madoff feeder funds sued the outside auditor of the entities that had managed the funds (KPMG) for negligent misrepresentation, violation of the Florida Deceptive and Unfair Trade Practices Act (FDUTPA), professional negligence, and aiding and abetting a breach of fiduciary duty. Plaintiffs' basic theory was that KPMG had failed to use proper auditing standards with respect to the financial statements it had prepared for the managing entities and that those improper audits led to misrepresentations about the health of the funds and resulted in plaintiffs' investment losses.


KPMG moved to compel arbitration of the investors’ claims based on the audit services agreement it had with the firms that had managed the subject funds. The agreement provided that "[a]ny dispute or claim arising out of or relating to . . . the services provided [by KPMG] . . . (including any dispute or claim involving any person or entity for whose benefit the services in question are or were provided) shall be resolved" either by mediation or arbitration. Petition for Writ of Certiorari, app. G, at 63a, KPMG LLP v. Cocchi, No. 10-1521 (2011). The trial court denied KPMG's motion and the Florida Court of Appeal affirmed, noting that "[n]one of the plaintiffs . . . expressly assented in any fashion to [the audit services agreement] or the arbitration provision." KPMG LLP v. Cocchi, 51 So. 3d 1165, 1168 (Fla. Dist. Ct. App. 2010). Thus, the Court of Appeal found that the arbitration clause could only be enforced against the plaintiff investors if their claims were derivative and arose from the services KPMG had provided to the managing entities. Applying Delaware law, which both sides agreed was applicable, the Court of Appeal concluded that the negligent misrepresentation and FDUTPA claims were direct claims and thus not arbitrable. Based on that finding, the Court of Appeal refused to compel arbitration of any of the claims stated in the complaint.


In a per curiam opinion, the U.S. Supreme Court reversed the decision by the Florida Court of Appeal. KPMG LLP v. Cocchi, 132 S. Ct. 23 (Nov. 7, 2011). The Court held that when a complaint contains multiple claims, the court must address the arbitrability of each claim and that arbitrable claims must be sent to arbitration even if such a ruling leads to piecemeal litigation. Quoting its decision in Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213 (1985), the Court explained that the Federal Arbitration Act "leaves no place for the exercise of discretion" and requires courts to compel arbitration of pendent arbitrable claims "even when the result would be the possibly inefficient maintenance of separate proceedings in different forums." 132 S. Ct. at 217.


The Cocchi decision sends a clear message to state and federal courts that they must enforce valid agreements to arbitrate and that "[t]he failure to do so is subject to immediate review." Southland Corp. v. Keating, 465 U.S. 1, 6–7 (1984). Because the lower court had not addressed the arbitrability of the plaintiffs’ professional negligence and breach of fiduciary duty claims, the Court found that it had "failed to give effect to the plain meaning of the Act" and its requirement that arbitrable disputes be sent to arbitration. The Court thus remanded the case with instructions to "examine the remaining claims to determine whether either requires arbitration."


The Cocchi decision may be the correct result in terms of the law as it relates to arbitrability and the healthy regard that is to be given to the federal policy favoring arbitration. Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 631 (1985); Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24–25 (1983). But the decision is at odds with the cornerstones of arbitration: namely, to provide dispute resolution that offers finality, efficiency, and economy. Piecemeal litigation offers anything but the foregoing. Moreover, requiring non-signatories to pursue their claims in both a judicial and arbitral forum because they sue defendants who may have a contract relationship that includes an arbitration clause will undoubtedly have a limiting effect on how such plaintiffs plead their cases and who they choose to name (or dismiss) as defendants, and will most likely invite procedural gamesmanship.


Keywords: arbitrability, Federal Arbitration Act (FAA), motion to compel, non-signatory, pendent claims


Rebecca Callahan, Callahan Dispute Resolution, Newport Beach, CA


 

January 12, 2012

California Class Action Survives under the Unconscionability Doctrine


After the U.S. Supreme Court's ruling in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (Apr. 27, 2011), federal district courts around the country used its authority to enforce arbitration agreements with class action waivers. In November, the California Court of Appeal breathed some life into the class action suit when it affirmed a trial court order striking down an arbitration clause that included a class action waiver, in Sanchez v. Valencia Holding Co., LLC, No. B228027 (Cal. Ct. App. 2d Dist. Nov. 23, 2011), a consumer class action against a defendant car dealer.


In Sanchez, the car dealer moved to compel arbitration under an arbitration clause hidden in the sales contract between the dealer and the plaintiff, Sanchez, who had previously purchased a car from the dealer. Besides a class action waiver, the arbitration clause in the sales contract included a "poison pill" provision that would have rendered the entire arbitration clause ineffective if the class action waiver were found unenforceable.


Both the trial court and the California Court of Appeal ruled that the class action waiver was unenforceable, but they based their decisions on different grounds. Relying on section 1281 of California's Code of Civil Procedure, the trial court concluded that the class action waiver was unenforceable because consumers are statutorily entitled to bring class action suits under the state's Consumers Legal Remedies Act, Cal. Civ. Code § 1750. On these grounds, the trial court invalidated the entire arbitration clause, consistent with the sales contract’s severance provision.


The Court of Appeal agreed that the entire arbitration clause was unenforceable but based its decision on the unconscionability doctrine instead, recognizing that generally applicable contract defenses such as unconscionablity may also be used to invalidate arbitration agreements. Outlining the presence of both the procedural and substantive elements of unconscionability in the sales contract’s arbitration clause, the Court of Appeal found the necessary authority to strike it down.


This ruling does not conflict with Concepcion. The Court of Appeal pointed out that California's unconscionability doctrine could still be used to invalidate entire arbitration provisions, which the U.S. Supreme Court did not address in Concepcion, a decision that affected only class action waivers in conflict with arbitration provisions and the Federal Arbitration Act, 9 U.S.C. § 1.


Keywords: unconscionability doctrine, class action, waiver, arbitration clause, poison pill


—Jacqueline A. Chamberlain, Esq. Miami, FL


 

January 11, 2012

The Ten Paces: Guaranteed Arbitration Award in Six Months


There was a time when dispute resolution was fairly simple. Think David and Goliath, Hamilton and Burr. More recently, it might have been on a dusty main street at high noon in Arizona or Texas. Ten paces, turn and shoot.


My how slow and taxing the U.S. dispute resolution process has become. Whether it is litigation or arbitration, the complaints are the same—slow and costly. See “International Arbitration Loses Its Grip” (“expense and time are not perceived as advantages [of arbitration]; indeed, they were the two most commonly cited disadvantages of the process.”)


While 10 paces, turn and shoot certainly has a finality that is attractive (assuming you win), the dispute resolution process should be a reasoned process that allows for due process. First, that is likely what clients want. Second, these concepts are required if the courts are needed for the recognition and enforcement of arbitration awards.


So drawing on my experience in dispute resolution (both in the United States and abroad), I have come up with 10 paces that, if parties agree to, guarantees an arbitration award in six months.


  1. Month one: single arbitrator with compensation a fixed fee (plus costs)
  2. IBA rules on the taking of evidence govern (other than Article 5, no party-appointed experts, only court-appointed experts)
  3. Detailed complaint to initiate proceeding; detailed response and counterclaims in 17 days; detailed response to counterclaims in 10 days
  4. Face-to-face scheduling conference within 40 days of complaint being filed
  5. month two: discovery begins, document and inspection requests only (no ROGS or RTAs); documents to be exchanged by end of second month
  6. Arbitrator available by phone or email for discovery or other disputes on 24-hour notice
  7. Month three: joint framing of the issues by the parties and joint retention of expert witnesses
  8. Month four: submission of joint exhibit list, witness statements, and arbitrator’s brief
  9. Month five: hearing and post hearing submissions (if requested)
  10. Month six: written decision provided by arbitrator

The following are key to the success of this approach: (1) the arbitrator must commit to the schedule, because fixed fee (as opposed to hourly) has no incentive to prolong arbitration; (2) key issues are collectively identified early on; (3) U.S.-style discovery is curtailed; and (4) borrowing from our civil friends, the concept of witness statements to make the process even more focused and efficient.


Keywords: dispute resolution, arbitration award, schedule


J. Chad Mitchell, Summit Law Group, PLLC


 

December 20, 2011

How Reasoned Must a "Reasoned Award" Be?


The Eleventh Circuit decided that the arbitral panel that resolved a dispute over the construction of a yacht provided a sufficiently "reasoned award" as agreed to by the parties and did not exceed their powers under the arbitration agreement under Section 10(a)(4) of the Federal Arbitration Act (FAA). Cat Charter, LLC v. Schurternberger, No. 10-11674 (11th Cir. July 13, 2011).


After the preliminary hearing in this dispute, the panel issued a report and scheduling order, which provided in part that the parties would agree on the form of the ultimate award. The parties informed the panel of their desire for a "reasoned award." The panel then issued their award in favor of the claimants.


In the six paragraph of the award, the panel stated as follows: (1) claimants had proven two of their claims (for violation of the Florida Deceptive and Unfair Trade Practices Act and breach of contract) "by the greater weight of the evidence"; (2) all other claims and counterclaims were denied; (3) claimants were entitled to attorney fees, arbitration expenses, and costs; and (4) on claimants' civil theft claim, there were sufficient factual issues "relating to missing resin and the cost of the skiff" to warrant a denial of attorney's fees to respondents on that claim, even though the panel denied the underlying claim by claimants.


Claimants moved the district court to confirm the award, and respondents moved to vacate the award, arguing that the panel exceeded its authority by not issuing a "reasoned award" as the parties had agreed upon. The district court agreed with the respondents, and vacated the award. Cat Charter LLC v. Schurtenberger, 691 F. Supp. 2d 1339, 1344–45 (S.D. Fla. 2010).


The Eleventh Circuit reversed the district court. First, the Eleventh Circuit addressed the question of what constitutes a "reasoned award." Noting that the FAA, the arbitration rules, and the parties' contract do not define the term, the court analyzed the nature of arbitral awards in general. On one end of the spectrum lies the standard award, in which the arbitrator simply announces the result, and on the other end lies the award in which the arbitrator makes "findings of fact and conclusions of law." United Steelworkers v. Enterprise Wheel & Car Co., 363 U.S. 593, 598, 80 S. Ct. 1358, 1361, 4 L. Ed. 2d 1424 (1960); ARCH Dev. Corp. v. Biomet, Inc., No. 02 C 9013, 2003 WL 21697742, at *4 (N.D. Ill. July 30, 2003). The court held that a "reasoned award" therefore was "something short of findings and conclusions but more than a simple result." Sarofim v. Trust Co. of the W., 440 F.3d 213, 215 n.1 (5th Cir. 2006). The court then also looked at the dictionary definition of "reasoned" and concluded that for something to be reasoned, it would be "marked by a detailed listing or mention of reasons." Webster's Third New Int'l Dictionary: Unabridged (1993).


Armed with this definition, the court held that the panel's award survived scrutiny under Section 10(a)(4) of the FAA. While it could have had more detail, the court held that a "reasoned award" should be interpreted broadly and flexibly so that the parties ultimately receive what they bargained for—a speedy, fair resolution of their dispute.


Although the decision offers some insight as to what a "reasoned award" means, the flexibility inherent in the Eleventh Circuit's analysis will no doubt invite parties to act more strategically and prospectively at the contractual drafting stage to make it abundantly clear that if they want a full-fledged award with findings of fact and conclusions of law, they should not assume that a request for a "reasoned award" will suffice.


Keywords: reasoned, award, vacated


—Manjit Gill, Tenex Health, Inc., Miami, FL


 

December 7, 2011

Changes and Potential Impact on ICC's Revised Rules


This September, the International Chamber of Commerce (ICC) published revisions to its arbitration rules. Unless otherwise agreed to by the parties, the revised rules will apply to any ICC proceedings beginning on or after January 1, 2012. The revised rules enhance the roles of the various ICC bodies (the ICC court and the secretariat, for example), but do not essentially alter their roles in case administration under ICC rules. Intended to increase transparency, clarity, and efficiency (both in regards to cost and time) in the arbitral process, the revisions affect most of the 41 rules and include both procedural and substantive changes. The revised rules respond to the current practices in international arbitration (they were last revised in 1998) while at the same time reaffirming and clarifying the ICC's sole authority in administering arbitration under the ICC rules. This can be seen clearly in the new language of Article 1(2) rejecting "hybrid" arbitration clauses in which the parties agree to arbitration under ICC rules but to administration by an arbitral institution other than the ICC. 


Considering the potential impact these revisions will have on future cases under the ICC, some of the other more significant revisions include the following:


  • New language under Article 1(2) to include the term "disputes." This is intended to include both commercial and investor-state disputes and reflects the growing number of cases involving treaties and state parties.
  • More stringent language intended to improve the beginning stages of the arbitral process, requiring a case management conference early in the arbitral process; requiring that a claimant must include the basis upon which a claim or counterclaim is made; and requiring claimants to provide a specific dollar amount in the request for arbitration.
  • More detailed disclosure requirements for arbitrators.
  • Provision for an "emergency arbitrator" to decide on urgent conservatory or interim measures. The provision intends this only as a temporary solution, as their orders are binding on parties but not on tribunals.
  • Expanded language in procedural rules concerning multiple parties, multiple contracts, and consolidation. 

It should also be noted that the revised rules, like the 1998 rules, allow parties to opt out of some provisions while others remain mandatory and binding on parties. These opt-out provisions include those concerning multiple contracts, amiable compositeur, confidentiality, conservatory and interim measures, evidence, and the availability of an emergency arbitrator. The impacts of some of these revisions on future cases are inevitable, such as that rejecting hybrid clauses and the inclusion of investor-state disputes, while the effects of other revisions remain less foreseeable.


Keywords: international litigation, treaties, opt-out provisions


—Jacqueline A. Chamberlain, Esq. Miami, FL


 

December 2, 2011

Court Rules Against Some Nursing Home Lawsuits Limits


In a pair of rulings this month, the Florida Supreme Court rejected certain crucial parts of arbitration agreements between nursing homes and their residents that would have limited legal damages (punitive and pain-and-suffering) against nursing homes and waived residents' rights to court resolution. Gessa v. Manor Care of Florida, Inc.and Shotts v. OP Winter Haven, Inc. Reasoning that these parts were against public policy, the rulings do not prohibit the use of arbitration agreements but do place limitations on the way these agreements can be used. 


These rulings were decided in the midst of statewide controversy in the nursing-home industry over whether such arbitration agreements are even valid. While the dissenting opinion in one of these rulings supports the nursing home industry's view that arbitration agreements help to cut legal costs and allow for quick resolution of disputes, the majority not only emphasized that judges—not arbitrators—should decide whether these arbitration agreements are valid, but also that arbitration agreements could not remain effective by simply severing its parts that violate public policy.


Keywords: arbitration, pain and suffering, damage limits


—Jacqueline A. Chamberlain, Esq. Miami, FL


 

November 22, 2011

Court Cannot Enforce Arbitration Subpoenas Outside Its District


An Illinois district court recently held that a district court lacks authority to enforce an arbitration subpoena that requires a witness to appear outside its district. Alliance Healthcare Services, Inc. v. Argonaut Private Equity, LLC, --- F.Supp.2d --- 2011 WL 3489807 (N.D. Ill. Aug. 9, 2011).


Alliance Healthcare Services, Inc. (Alliance) initiated arbitration arising from its purchase of a limited partnership. The arbitration was conducted in Chicago before a panel of three arbitrators.


Alliance hired Grant Thornton LP (GT) to conduct due diligence for the purchase. GT is headquartered in Chicago, but the GT employee overseeing the due diligence lived in San Francisco. Respondents obtained arbitration subpoenas from the arbitrators directing GT and its employee to testify and produce documents at a preliminary hearing before one of the three arbitrators in San Francisco. Respondents chose San Francisco for the GT employee's convenience. GT did not comply with the subpoenas, and respondents moved the Illinois district court to enforce them.


The subpoenas were issued under Section 7 of the Federal Arbitration Act (FAA), which empowers arbitrators to "summon in writing any person to attend before them . . . as a witness" and to order such person to bring "any book record, document, or paper which may be deemed material as evidence in the case." Under Section 7, if a person does not obey the summons, "the U.S. district court for the district in which such arbitrators, or a majority of them, are sitting may compel the attendance of such person or persons . . . in the same manner provided by law for securing the attendance of witnesses . . . in the courts of the United States."


The district court held that it lacked authority to enforce the arbitration subpoenas. The court noted that, under Section 7, its ability to enforce arbitration subpoenas is restricted by the territorial limits of Rule 45 of the Federal Rules of Civil Procedure. The arbitration subpoenas were unenforceable under Rule 45 for two reasons. First, in violation of Rule 45(a)(2), the subpoenas were not issued from the district court where the arbitration hearing was being held. Instead, they were issued by the Northern District of Illinois for a hearing to be held in the Northern District of California. Second, the subpoenas were served more than 100 miles away from the Northern District of Illinois, and, thus, outside the territory of the Illinois court.


The respondents argued that the court's refusal to enforce the subpoenas created a "gap" in the FAA and prevented the enforcement of all arbitration subpoenas that compel a witness to appear out of state. On the one hand, Section 7 requires that arbitration subpoenas be enforced in the district court where the arbitrators are located. On the other hand, a federal court's power is limited by Rule 45, and it cannot enforce subpoenas that compel witnesses to appear for hearings outside its district. Relying on the Second Circuit's opinion in Dynegy Midstream Services, LP v. Trammochem, 451 F.3d 89 (2d Cir. 2006), the district court agreed with respondents that the FAA, indeed, contains a "gap," but that it is up to Congress, not a court, to "fill such gaps." Thus, the court refused to enforce the subpoenas in their current form.


The district court noted that the respondents had one remedy, albeit a partial one. GT was headquartered in Chicago, the situs of the arbitration. Respondents could issue a subpoena compelling GT to produce documents in Chicago. That subpoena would be enforceable in the Northern District of Illinois. Indeed, "if a court has jurisdiction over a person or entity—as it does with respect to GT—Rule 45 permits the court to require that person or entity to produce records pursuant to a subpoena even if they are not physically located in the District in which Rule 45 permits the subpoena to be served." Thus, even though respondents could not obtain the employee's testimony given his residence, the FAA still allowed them to obtain GT's due diligence records, even though they were located in San Francisco.


Alison Talbert Schwartz, Novack and Macey, Chicago, IL


 

November 22, 2011

Delaware Chancery Court Arbitration Program Sued


The case is styled Delaware Coalition for Open Government v. The Honorable Leo E. Streine, Jr., and was filed in federal district court in Delaware on October 25, 2011. Plaintiff, the Delaware Coalition for Open Government (DCOG), alleges that the chancery judges have instituted closed-door judicial proceedings that violate the presumptive right of access to judicial proceedings and records in civil and criminal cases—rights guaranteed by the Constitution's first and fourteenth amendments. It asks that the program be struck down and that all proceedings to date be unsealed.


As background, the Delaware legislature several years ago passed a law permitting the chancery court to conduct private arbitrations. "Arbitration Proceedings for Business Disputes" (10-349). The Delaware Supreme Court then adopted implementing rules. The program is voluntary. The chancery court charges $12,000 for filing a petition through its arbitration program and $6,000 for each day of the hearing. All fees are equally divided by the parties and are believed to be significantly lower than private arbitration options.


The controversial feature, according to the lawsuit, is the proceeding’s confidentiality under auspices of the state: "Arbitration proceedings shall be considered confidential and not of public record." (By rule, only judges and state-employed judicial masters can act as arbitrators under the statute.) Confidentiality for all proceedings is broken, however, as soon as a losing party appeals an arbitration decision to the state supreme court.


Are Private Arbitrations in the Public Interest?
Critics of the private arbitration program claim that the judges who moonlight as arbitrators do so in direct opposition to the public interest. The judges, says John Flaherty, president of the DCOG, "[a]re giving up their role as public officials and somehow becoming quasi-private arbitrators in order to create a cash cow for the Chancery Court." DCOG states that if the chancery is poorly funded, the judges should be duty-bound to report this publicly instead of finding other means of remuneration. The judges' dual role as private arbitrators and public officials places additional burdens on the already strained court system since there are only four judges on the chancery court. Moreover, the private proceedings are in conflict with the chancery court's own policies of openness and public legal precedent. According to Charles Elson, a professor at the University of Delaware, "these arbitrations have no precedential value."


Benefits of the Private Arbitration Program
Supporters point to lower costs, speedier resolutions, and limited discovery. Confidentiality has also been touted as of critical importance. Chancery court rule 97(a)(4) requires that while the initial petition must be logged into the public docketing system, all other supporting documents are off the record. Rule 98(b) requires that all hearings are private, attended only by the arbitrating parties and their representatives. Chief Judge Leo Streine responded to the allegations by the DCOG in a public statement, saying that "[n]ot all aspects of the judicial process are subject to public access . . . and the courts . . . can only do so effectively if the confidentiality of the process is respected." Though as noted, aggrieved parties can appeal these arbitrations to the Delaware Supreme Court, which automatically opens the arbitration records to public scrutiny.


Outlook
Despite concerns expressed over this mercantile judicial system, the protocol has been used only a few times. For example, between February 2010 and June 2011, the arbitration program heard only one case. Since June, however, four sets of additional parties have petitioned to have their cases resolved in the Delaware court via the private arbitration program.


For more details on the suit and its policy implications, go to Professor Art Hinshaw's section of the ADR Prof Blog.


Notably, Alternative Dispute Resolution Committee member Charles Miller submitted a proposal recently to the New York State Bar Association urging use of court-annexed arbitrators in select settings involving governmental decisions, such as decisions by the USPTO—but not as a closed, private process. See an early draft of this proposal (which is now in revision to accommodate the America Invents Act).


—Patrick Soon, Whittier Law School, Costa Mesa, CA and Charles Miller, Esq., Dickstein Shapiro LLP, New York, NY


 

October 25, 2011

Manifest Disregard Is Not a Basis for Vacating an Award


The Seventh Circuit recently held that an arbitration panel's "manifest disregard of the law" is not grounds to vacate an arbitration award under the Federal Arbitration Act (FAA). Affymax, Inc. v. Ortho-McNeil-Janssen Pharmaceuticals, Inc., -- F.3d. --, No. 11-2070, 2011 WL 4634222 (7th Cir. Oct. 3, 2011).


Affymax and Ortho-McNeil entered into a joint venture where they agreed that patented inventions created jointly would be jointly owned but patented inventions created by a single party would be owned only by that party. The agreement contained an arbitration clause.


In 2004, Affymax sued in the Northern District of Illinois, seeking a declaration that it owns two patent families generated through the joint venture: the '940 patents and the '078 patents. The district court ordered arbitration. After a 35-day arbitration hearing, the panel ruled that the parties jointly owned the '940 patents and that Ortho owned the '078 patents.


The district court vacated the portion of the award holding that Ortho owned the foreign patents corresponding with the ‘078 domestic patents. The court held that the panel "manifestly disregarded the law" by failing to determine ownership of foreign patents separately from domestic ones. Affymax, Inc. v. Johnson & Johnson, No. 04 C 6216, 2011 WL 1050006 (N.D.Ill. Mar. 21, 2011). Ortho appealed, and the Seventh Circuit reversed.


On appeal, Judge Easterbook noted that section 10(a) of FAA authorizes a court to vacate an award for four reasons.


  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.

Relying on Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576, 584–89 (2008), Judge Easterbook stated that those four grounds are "exclusive; neither judges nor contracting parties can expand [them]" and that "disregard of the law is not on the statutory list." The court held that "the district judge's conclusion that the arbitrators disregarded the law by failing to discuss the foreign patents separately from the domestic patents therefore [did] not justify vacating the award."


The Seventh Circuit also commented that the arbitrators did not have to explain their ruling. Thus, the panel's silence on whether it considered foreign patents separately from domestic ones was of no moment. The court stated that the arbitrators' silence should not be construed to mean that they performed their tasks improperly.


The Seventh Circuit also addressed some related issues. It noted that its prior decisions, including George Watts & Son, Inc. v. Tiffany & Co., 248 F.3d 577 (7th Cir. 2001), allowed a court to set aside an award that directed parties to violate the legal rights of third persons who did not consent to arbitration. The court explained that an award "directing the parties to form a cartel" or "fix prices or output" could be vacated as violating the Sherman Act, even if the FAA did not authorize its vacatur. In the instant case, however, the award did not require Ortho to violate any law and, thus, could not be subject to this challenge.


The Seventh Circuit also stated that if the district court vacated the award because the arbitrators "exceeded their powers" under Section 10(a) (4) of the FAA, that ruling would be incorrect. "Disregard of the law" comes within the FAA only if such disregard results in the arbitrators exceeding the authority granted in the arbitration agreement. The arbitration provision in question granted the arbitrators authority to determine who invented the technology and who owned each patent. That, according to the court, is exactly what the panel did. Moreover, in their arbitration briefs, the parties told the panel to determine patent ownership collectively within a single family, including foreign ones. The Seventh Circuit held that the award reflected that agreement.


Alison Talbert Schwartz, Novack and Macey, Chicago, IL


 

October 13, 2011

$22 Million Award Vacated Due to Arbitrator's Nondisclosures


Vacating a $22 million JAMS arbitration award, the Texas Court of Appeals held that a purportedly neutral arbitrator with a 13-year history of social and business encounters with a party's attorney should have disclosed, at a bare minimum, the general nature of the friendship and thus permit the parties to further investigate the relationship before proceeding with the hearing. Karlseng v. Cooke, 286 S.W.3d 51 (Tex. App. – Dallas 2009, no pet. (Karlseng I) and Karlseng v. Cooke, ---S.W.3d---, 2011 WL 2536504 (Tex. App. – Dallas June 28, 2011, no pet. (Karlseng II).


The party-selected arbitrator had completed a disclosure form in which he generally disclosed that, in the previous five years, he had served as a neutral arbitrator and mediator with one of the attorneys for a party. Four days later, another attorney from the same firm was added as the party's lead counsel. The arbitrator did not supplement his disclosure to disclose his prior contact with the lead counsel, notwithstanding his receipt of wine, sports tickets, and expensive meals from the attorney.


The court acknowledged that there is always a competitive market for an experienced arbitrator whose livelihood depends upon reputation and skill, such that business and social relationships between arbitrators and attorneys are to be expected. At the same time, however, the court pointed out that disclosure of these relationships is essential to the fair and impartial nature of the arbitration process. Such disclosure, the court held, is crucial because of the enormous power, responsibility, and discretion vested in the arbitrator and the limited judicial review of the arbitrator's decisions.


Texas courts adhere to the generally accepted principle that an arbitration award should be vacated when the arbitrator shows "evident partiality." The test is an objective one and asks whether an observer would develop a reasonable impression of partiality from the facts as stated. In this case, the arbitrator's friendship with the attorney dated back to the attorney's clerkship for a district court judge while the arbitrator served as a magistrate for the same judge. Through nearly 10 years leading up to the arbitration, both the attorney and the arbitrator hosted expensive social events and private dinners for each other, and their spouses actively participated in their socializing.


Because "evident partiality" is established objectively by the nondisclosure itself rather than the subjective standard of whether partiality actually exists, arbitrators should always err in favor of disclosure. As the Karlseng court held, "Parties can gauge the neutrality of an arbitrator only if they have access to all the information that could reasonably affect the arbitrator's partiality."


The simple solution is for an arbitrator to disclose any facts that the parties would want to consider, and to understand that this obligation continues throughout the arbitration.


David T. Lopez, David T. Lopez & Assoc., Houston, TX


 

October 3, 2011

Class Arbitration Is Not Considered a Class Action under CAFA


In a case concerning the application of the Class Action Fairness Act (CAFA), the Fifth Circuit ruled recently that a case that presents class claims in arbitration is not a class action. In Williams v. Homeland Ins. Co. of New York, ___ F.3d ___ (5th Cir., No. 11-30646, decided Sep. 19, 2011), the court held that a previous class arbitration filing did not preclude application of the local controversy exception to the CAFA.


Plaintiff filed this class action in Louisiana state court on behalf of a group of medical providers seeking redress from several insurers regarding PPO reimbursements. One of the defendants removed the case to federal court. In a remand proceeding, plaintiff alleged that the class satisfied all the elements of the CAFA exception: Two-thirds of the class members were Louisiana citizens, there was a significant Louisiana defendant, the principal alleged injuries occurred in Louisiana, and no other class actions had been filed within three years. Defendant attacked each element in turn, including that a class arbitration had been commenced by a class member within the prohibited three years, applying "rules that mimic Rule 23 [on class actions]." The district court found for the plaintiff class and remanded the matter. This appeal followed.


In reaching its conclusion, the district court distinguished an arbitration, defined as a form of resolution outside of court, from a class action, a form of a lawsuit. The court of appeals agreed, relying on the definition of a class action in CAFA as any civil action filed under Rule 23 of the Federal Rules of Civil Procedure or similar state statute or procedural rule: "We hold that a class arbitration is not a class action, and consequently, a prior class arbitration does not frustrate the CAFA exception."


David T. Lopez, David T. Lopez & Assoc., Houston, TX


 

September 27, 2011

Does Federal Jurisdiction Exist over a Petition to Compel Arbitration?


In Community State Bank, et. al v. Strong, 2011 U.S. App. LEXIS 17767 (11th Cir. Aug. 25, 2011), the Eleventh Circuit held that federal jurisdiction existed over the bank's petition to compel the arbitration of loan dispute because the dispute involved claims that could have arisen under federal law.


The dispute began after Strong obtained a one-month $200 loan from Community State Bank, a storefront bank located in Georgia. Strong sued the bank and several related persons claiming that the loan was usurious under Georgia law because it carried a finance charge of 36 percent, which was the equivalent of an annual interest rate of 253 percent. The bank argued that the loan was perfectly legal, because federal law permits community state banks to charge interest rates without regard to state law. The only issue on appeal was whether the federal district court had jurisdiction over the bank’s petition to compel arbitration pursuant to §4 of the Federal Arbitration Act (FAA), 8 U.S.C., §4.


In resolving this question, the Eleventh Circuit had the opportunity to apply the recent decision of the United States Supreme Court in Vaden v. Discover Bank, 556 U.S. 49, 129 S.Ct. 1262 (2009).In Vaden, the Supreme Court held that "a federal court may look through a §4 petition and order arbitration if, 'save for the [arbitration] agreement,' the court would have jurisdiction over 'the [substantive] controversy between the parties.'" Specifically, the Supreme Court held that a district court entertaining a §4 petition must decide for itself "what 'a suit' arising out of the allegedly arbitrable controversy would look like"; that is, whether such a suit would involve claims over which there would be federal jurisdiction.


Applying Vaden, the Eleventh Circuit found that Strong's allegations raised potential RICO claims that would be non-frivolous and that would provide a basis for federal jurisdiction. The court then remanded the case to the district court to consider the merits of the Bank’s petition to compel arbitration.


In an interesting corollary issue, the court affirmed the district court's decision to dismiss the claims against the bank's affiliates who were defendants in a parallel lawsuit Strong had brought in state court. Previously, the state court had struck petitioners' arbitration defense, as a sanction for their willful and deliberate discovery abuses. The state court judgment, which was upheld on appeal and had become final, collaterally estopped the bank’s affiliates from re-litigating whether the arbitration clause was enforceable.


Courtney Henry, J.D. candidate, Pepperdine University School of Law


 

September 2, 2011

FINRA Regulatory Notice 11-17 Revises the Discovery Guide for Arbitration Proceedings


The Financial Industry Regulatory Authority, Inc. (FINRA) has issued Regulatory Notice 11-17, entitled Revised Discovery Guide and Document Production Lists for Customer Arbitration Proceedings; Effective Date: May 16, 2011 (Notice 11-17). Notice 11-17 discusses revisions to the parties' document production obligations under the FINRA Code of Arbitration Procedure for Customer Disputes (Customer Code). Rule 12506(a) of the Customer Code explains that documents included on the document production lists established by FINRA "are presumed to be discoverable in all arbitrations between a customer and a [FINRA] member or associated person." As set forth in Notice 11-17, FINRA has consolidated the document production lists from fourteen lists to two lists, one for production by the FINRA member firm/associated person and the other for production by the customer. The revised document production lists apply to all customer arbitration proceedings filed on or after May 16, 2011.


Before the consolidation of document production lists from fourteen to two, the earlier lists were comprised of two general lists and twelve separate lists for particular types of claims. Having now consolidated the lists, FINRA—besides presumptively requiring the production of additional document categories that were not required before the consolidation—has included in the new List 1 ("Documents the Firm/Associated Persons Shall Produce in all Customer Cases") several document categories that apply only to certain types of claims. For example, one item in List 1 applies only to claims alleging unauthorized trading, another applies to claims raising allegations concerning an insurance product that includes a death benefit, and so forth. For its part, List 2 ("Documents the Customer Parties Shall Produce in All Customer Cases") also includes an item that applies only if the Statement of Claim includes an insurance product that provides a death benefit.


Notice 11-17 further elaborates that the introduction to the FINRA Discovery Guide, which serves as a supplement to the discovery rules of the Customer Code, has been revised to "expand its guidance to parties and arbitrators on the discovery process generally, and to clarify how arbitrators should apply the Guide in arbitration proceedings." The document production lists are part of the Discovery Guide. Areas addressed in the revised Discovery Guide introduction include: (1) Flexibility—arbitrators can require the production of documents not included on the document production lists or, alternatively, order that parties do not have to produce certain documents on the Lists; (2) Confidentiality—when deciding contested matters of confidentiality, arbitrators should consider various issues, including whether disclosure would constitute an unwarranted invasion of personal privacy, or whether the information contains proprietary confidential business plans and procedures or trade secrets; and (3) Affirmations—if a party responds that there are no responsive documents in that party's possession, custody, or control, the party (and in the case of the brokerage firm, the appropriate person in the firm who has knowledge) must, upon the request of the party seeking the documents, state in writing that the responding party completed a good faith search for the requested documents, describe the extent of that search, and state that based on the search, there are no responsive documents in the responding party's possession, custody, or control.


The foregoing revisions, which are discussed in further detail in Notice 11-17 and the revised Discovery Guide and Customer Code, represent important changes in discovery practice that deserve careful review and consideration by all who are engaged in representing clients in Customer Cases before FINRA.


Hal M. Lucas P.A., Miami, FL


 

August 29, 2011

FAA Preempts State Law Classifying Collective Arbitration Waivers as Unconscionable


The U.S. Court of Appeals for the Eleventh Circuit refused to stray from the Supreme Court's decision in AT&T Mobility, LLC  v. Concepcion, 131 S.Ct. 1740 (2011), holding that the Federal Arbitration Act (FAA) preempts state law classifying collective arbitration waivers as unconscionable. Cruz v. Cingular Wireless LLC No. 08-16080, 2011 WL 3505016, (11th Cir., Aug. 11, 2011). Customers of AT&T Mobility, LLC (ATTM), formerly Cingular Wireless LLC, brought a putative class action against the phone company claiming it violated the Florida Deceptive and Unfair Trade Practices Act (FDUPTA) by charging them $2.99 a month for a service they never elected. The service agreement included a mandatory arbitration provision specifically precluding participation in class actions.


Plaintiffs appealed the district court decision granting ATTM's motion to dismiss, arguing that the provision was invalid because it is against Florida public policy and hindered rights provided by FDUTPA. Plaintiffs argued that no lawyer would take their case on an individual basis, and many potential plaintiffs would not know of their potential claims. The plaintiffs argued that Concepcion was limited to preemption of state laws that invalidate class waiver provisions without requiring evidentiary proof of whether the parties could vindicate their statutory rights in arbitration. In affirming the dismissal, the Eleventh Circuit held that Concepcion controlled because the plaintiffs' evidentiary proof—in the form of attorney affidavits stating they it would not be financially beneficial to represent individual consumers' claims and statistical evidence of the "infinitesimal" percentage (0.000007 percent) of customers that initiated arbitration against ATTM. Such evidence only substantiated the same public policy arguments that the Supreme Court expressly rejected in Concepcion. The Court acknowledged that the arbitration clause did not deprive the customers of their individual causes of action or other substantive rights under FDUTPA. The arbitration provision allowed recovery of attorney fees and costs and did not contain a confidentiality provision. The court concluded that the arbitration clause is valid and FDUTPA is preempted by the FAA. Notably, the Court left open the issue of whether some other set of facts may result in the invalidation of an arbitration provision on public policy grounds where the claimant is effectively prevented from vindicating his or her statutory cause of action.


Justin Garcia and Michael V. Pepe, Garcia and Milas, P.C., New Haven, CT


 

August 10, 2011

Employer Is Barred from Enforcing Arbitration Clause in Title VII Action


A New York federal district court recently held that an employee can be a named plaintiff in a Title VII lawsuit alleging that her employer engaged in a pattern and practice of gender discrimination even though her employment agreement contained an arbitration clause. Chen-Oster v. Goldman Sachs & Co., No. 10 Civ. 6950, 2011 WL 2671813, at *1 (S.D.N.Y. July 7, 2011).


The plaintiff, Lisa Parisi, and two other female employees sued Goldman Sachs last year, claiming that it engaged in a pattern and practice of paying men more than women and promoting male employees more frequently than equally qualified females. Goldman Sachs moved to compel arbitration of Parisi's individual claims pursuant to the arbitration clause in her employment agreement. On April 28, 2011, Judge James Francis IV denied Goldman Sach’s motion to compel arbitration, holding that Parisi could bring her pattern and practice claims in federal court. Goldman Sachs urged the court to reconsider its ruling in light of the Supreme Court’s decision in AT&T Mobility v. Concepcion, 131 S. Ct. 1740 (2011), which was issued the day before Judge Francis’s opinion but was not cited in his ruling. Concepcion holds that the Federal Arbitration Act and its policy of upholding arbitration agreements preempts California’s common-law rule that certain arbitration clauses containing class action waivers are unconscionable.


Judge Francis denied Goldman Sach's motion to reconsider. He ruled that Concepcion did not apply to Parisi's case. In Concepcion, the issue was whether the Federal Arbitration Act preempted state law. Parisi's case, however, involved two competing federal laws: the FAA and Title VII. Judge Francis held that a plaintiff's right to bring a pattern and practice claim under Title VII—which canonly be brought on a class-wide basis—trumped the FAA. He also noted that "right at the center of [Parisi's] case is not the right to proceed on a class basis but rather the right to vindicate a claim that an employer has engaged in a pattern or practice of discrimination. Under the law as it currently stands, the plaintiff may not do so individually." Parisi, thus, could not be compelled to arbitrate her claims on an individual basis because, under Second Circuit precedent, "an arbitration provision which precludes plaintiffs from enforcing their statutory rights is unenforceable." Judge Francis also emphasized that Parisi's case is markedly different from Concepcion because the arbitration clause at issue in Concepcion did not preclude the plaintiff from litigating a statutory right; it just required it to do so in an arbitral, rather than judicial, forum.


Alison T. Schwartz, Novack and Macey LLP, Chicago, IL


 

August 8, 2011

Dues Checkoff Arbitrability Survives Expiration of Contract


The Court of Appeals for the Second Circuit has held that a dues checkoff agreement between a union and the employer is subject to arbitration despite the collective bargaining agreement having expired. Newspaper Guild/CWA of Albany v. Hearst Corp., ___ F.3d ___ , No. 10-2402-CV (2nd Cir., May 17, 2011). Dues checkoff is an agreement by which the employer deducts union dues from paychecks and remits the dues to the union.


The appeals court upheld a district court decision favoring arbitration. On appeal, the court held that in the union contract the employer had agreed to the dues deduction in accordance with an employee's voluntary assignment, effective in accordance to the terms of the assignment. The assignment provided it would be in effect until revoked. Because there was no provision for the employer to revoke the agreement, according to the court, the obligation survived "under normal principles of contract interpretation," and the obligation was subject to arbitration.


David T. Lopez, David T. Lopez & Assoc., Houston, TX


 

June 27, 2011

Petition Clause Claims Limited


Government employees asserting rights under the First Amendment may not rely on the Petition Clause to assert a claim that challenges action taken against an employee individually or in the capacity of an employee, the U.S. Supreme Court has held. The right to assert such claims on matters of interest to the community as a whole was retained.


The opinion in Borough of Duryea v. Guarnieri, issued June 20, 2011, matches First Amendment protection to the same considerations as those pertaining to claims under the Free Speech Clause. That a claim of interference with a government employee's free speech rights is available only to protect speech on matters of public concern has long been established.


In the Guarnieri opinion, Justice Kennedy recognized the public interest served by the Petition Clause in its history, traceable to the Magna Carta. He commented that when a public employee petitions the government to redress a grievance that involves other citizens, the public employee enjoys the same rights as a private citizen. When a grievance involves individual work-place grievances, however, the employee’s rights must be balanced against the substantial governmental interest in efficient and effective operations. "Restraints are justified by the consensual nature of the employment relationship and by the unique nature of the government's interest."


David T. Lopez, David T. Lopez & Assoc., Houston, TX


 

June 27, 2011

Employment Arbitration Class Claims Reconsidered


The National Labor Relations Board (NLRB) appears to be reconsidering prior advice by its General Counsel that waivers of class or collective claims is permissible in policies providing for mandatory arbitration of employment disputes.


In a presently pending case, D. R. Horton, Inc., No. 12-CA-25764, the Board requested amici briefs on the issue of whether an employer violates Section 8(a)(1) of the National Labor Relations Act by requiring as a condition of employment that employees agree to submit all employment disputes to individual arbitration in which an arbitrator will have no authority to consolidate claims or fashion an arbitration as a class or collective action. Responses to briefs filed in June are due in early August.


Section 8(a)(1) of the NLRA makes it an unfair labor practice for an employer to interfere with, restrain or coerce employees in the exercise of their rights to organize and bargain collectively.


In June, 2010, General Counsel Ronald Meisburg issued a guideline memorandum regarding unfair labor charges pertaining to employers’ mandatory arbitration policies. The memorandum stated that such policies could require waiver of the right to assert class or collective claims without provoking a per se violation of the Act.


In AT&T Mobility v. Concepcion, the U.S. Supreme Court decided in April, 2011, that the use of class arbitration waivers is permissible in consumer contracts, regardless of state law provisions to the contrary.


David T. Lopez, David T. Lopez & Assoc., Houston, TX


 

May 10, 2011

Supreme Court Upholds Arbitration Anti-Class Provisions


Surprising class-action attorneys, consumer activists, and possibly even the defense bar, the U.S. Supreme Court issued its ruling on Wednesday, April 27, in AT&T Mobility v. Concepcion in favor of the defendants. In a 5–4 decision, split perfectly along party-appointment lines (five Republican appointees versus four Democrat appointees), the Court gave a swift karate chop at the knees of consumer class-action cases and may have paved the way for corporations to nail the coffin closed on consumer class actions. The majority held in favor of enforcing arbitration clauses contained in corporate "contracts of adhesion" issued to consumers, which include so-called anti-class provisions preventing arbitrations on a class-wide basis; the Court relied on the Federal Arbitration Act (FAA) to preempt state-court decisions finding such provisions unconscionable toward consumers. Undoubtedly following this decision, anti-class provisions are sure to be the gold-star standard for consumer contracts.


Specifically, in AT&T Mobility, the plaintiffs contracted with AT&T for cellular phone service, and ended up in a $30 dispute with the behemoth. After the plaintiffs filed a lawsuit, AT&T moved to compel arbitration under its contract provision, which not only mandated arbitration, but further prohibited consumers from pursuing arbitration claims on a class-wide basis (a right they would have had in court). The plaintiffs argued against arbitration, contending that under California law the anti-class provision was unconscionable because it was a consumer low-value dispute involving a contract of adhesion. Both the district court and the 9th Circuit agreed with the plaintiffs, finding that this anti-class provision was unconscionable, but the Supreme Court accepted review.


The Supreme Court's narrow majority, led by Justice Antonin Scalia, disagreed with the 9th Circuit, and in so doing reached its arm into California and preempted Discover Bank v. Superior Court, a decision by the state’s supreme court holding that anti-class clauses in consumer arbitration agreements that are small-dollar-amount claims in contracts of adhesion are unconscionable. The court's majority held that state-court cases preventing enforcement of arbitration agreements are inconsistent with the FAA.


Taking AT&T Mobility and the Supreme Court's 2010 decision in Stolt-Nielsen S.A. v. AnimalFeeds Int'l Corp. together (Stolt held that if an arbitration agreement was silent on permissibility of class-wide arbitration, it would not be permitted), the Court’s intention to quell consumer, and likely employment, class actions is clear.


Timothy Blood, nationally known class-action attorney and founding partner at Blood, Hurst & O'Reardon, managing class actions nationwide from their San Diego office, expresses frustration with the decision:


    It's only a matter of time before corporate America takes the gift given them by the Supreme Court and abuses it to the detriment of consumers, swinging the pendulum too far the other direction. Then courts and legislatures will begin to chip away at AT&T Mobility and restore important rights to the consumer. The pendulum always behaves this way in consumer affairs. Because this negatively affects so many citizens (consumers, workers), we are likely to see fallout rather quickly.

William L. Stern, a partner at Morrison & Foerster, LLP, in San Francisco who specializes in the defense of class actions, disagrees. "Concepcion is a momentum changer, to be sure." But he believes


    the decision restores the Federal Arbitration Act to the role Congress envisioned, as a 'favored' means for resolving disputes, instead of the regime we've seen for the last five years in which incantations of arbitration as 'favored' simply preceded the cavalcade of reasons why class action waivers would not be enforced.

As a result of Concepcion, he predicted, every company that engages in consumer transactions—industries as diverse as financial institutions, wireless communications, cable television, and consumer electronics—will want to review their contracts and assess whether to include arbitration and class-action waivers. The same is true for employment agreements, because in Mr. Stern's view the Supreme Court's decision casts doubt on the continuing validity of the California Supreme Court decision restricting arbitration in the employment context. Cf., Armendariz v. Found. Health Psychcare Servs. , 24 Cal. 4th 83, 113 (2000).


Stay tuned for further case development, possible congressional legislation amending the FAA, and expansion of arbitration provisions in more contract settings.


Jobi Halper, ADR Services, Inc., San Diego, CA


Keywords: arbitration class action, AT&T Mobility, Wal-Mart


 

October 26, 2010

District Court Stays Consumer Arbitration Matter Pending Supreme Court Decision


In Homa v. American Express Company, U.S. Dist. Ct., (Arpert, U.S.D.J.), the U.S. District Court for the District of New Jersey joined the ranks of those anxiously awaiting a decision of the Supreme Court in AT&T Mobility v. Concepcion, 2010 WL 303962, 09-893 (May 24, 2010), staying a consumer fraud case because the key issue over whether an arbitration anti-class action provision contained a consumer contract can be enforced awaits the decision of the U.S. Supreme Court.


Parties on both sides of consumer claims involving arbitration provisions are anxiously awaiting this important decision, which may put to rest whether, in the consumer context, a corporation can include anti-class provisions in its sales and service contracts, often referred to as "contracts of adhesion."


The Homa case involves American Express's purported misrepresentation of its awards program and failure to provide cash back as promised. American Express succeeded in the trial court to compel arbitration with its customers on an individualbasis, based on an anti-class action provision included in arbitration requirements of its contracts, and the case was dismissed for court. Plaintiffs appealed to the Third Circuit, who reversed and remanded, allowing discovery to proceed on the limited question of whether the claims were of sufficiently low value to otherwise preclude relief if arbitration could not proceed class-wide, relying on Muhammad v. County Bank of Rehoboth Beach, Delaware, 912 A.2d 88 (NJ 2006), and Laster v. AT&T Mobility LLC, 584 F.3d 849, 856 (9th Cir. 2009).


On American Express's motion, the district court stopped the case from proceeding altogether, finding that proceeding while the issue presented "is squarely before the Supreme Court may be an exercise in futility" (Id. at 14.). Because the argument AT&T Mobility v. Concepcion is scheduled for November 9 and a decision is expected in 2011, the court held no appreciable harm to the plaintiffs would occur.


It appears that courts, in a rare move, intend to hold up expensive class actions and let the Supreme Court speak first on this one.


In anticipation of the Supreme Court’s argument, the merits briefing of the parties is available at Petitioner AT&T Mobility's Brief and Respondent Concepcion's Brief.


Jobi Halper, ADR Services, Inc., San Diego, CA


Keywords: Homa, Class Action, Arbitration, AT&T Mobility, Concepcion


 

Agreements Must Be Decided by a Court, Not an Arbitrator


The United States Court of Appeals for the Third Circuit recently held that judges, not arbitrators, should decide the enforceability of a class action waiver in an arbitration agreement. Puleo v. Chase Bank, N.A., No. 08-3837, 2010 WL 1838762 (3rd Cir. May 10, 2010). The issue was heard en banc and decided 6 to 4 with a dissenting opinion.


In Puleo, plaintiffs filed a putative class action against Chase Bank in federal court challenging a retroactive interest rate increase on their Chase credit cards. The Chase cardmember agreement contained a mandatory arbitration provision that barred class actions. The Puleos filed suit in federal court and argued that the class action waiver was unconscionable. The district court disagreed and ordered the Puleos to arbitrate their claims individually. On appeal, the Puleos argued that the district court should have allowed the issue of unconscionability to be decided by an arbitrator. The Third Circuit disagreed.


The Third Circuit stated that “whether the parties submitted a particular dispute to arbitration, i.e., the question of arbitrability, is an issue for judicial determination unless the parties clearly and unmistakably provide otherwise” (quoting Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83 (2002)). The court noted that “a question of arbitrability arises only in two circumstances”: (a) when there is a “threshold dispute” over whether the parties have a valid arbitration agreement; and (b) when the parties dispute whether a “concededly binding” arbitration agreement applies to a particular controversy (citing Green Tree Fin. Corp. v. Bazzle, 539 U.S. 444, 452 (2003)).


The court held that by contending that the class action waiver was unconscionable, the Puleos raised an issue of arbitrability—whether the arbitration agreement applied to their particular dispute. Furthermore, because their agreement did not “clearly and unmistakably” authorize the arbitrator to decide issues of arbitrability, this question was properly decided by the court. The Third Circuit ultimately held that the class action waiver was not unconscionable and affirmed the district court’s decision to compel the parties to arbitrate their claims on an individual basis.


The dissenting opinion asserted that the validity of the class action waiver did not present an issue of arbitrability, because the parties had already agreed that the case should go to arbitration. The dissent stated that the only issue presented was “how the case will go forward—whether as a class action or as an individual suit.” According to the dissent, the question of “what kind of arbitration proceeding the parties agreed to” should be decided by the arbitrator, not the court.


The First, Second and Eleventh Circuits have also held that the enforceability of a class action waiver is a question of arbitrability.


Alison Schwartz, Novack and Macey LLP, Chicago, IL


 

Ninth Circuit Reaffirms Narrow Scope of Review of Arbitration Awards


The United States Court of Appeals for the Ninth Circuit recently held that the district court should have confirmed a $6,400,000 arbitration award—including $4,000,000 in punitive damages and $1,500,000 in emotional distress damages—in a case for breach of a disability insurance policy. Lagstein, M.D. v. Certain Underwriters at Lloyd’s, London, No. 07-16094, 2010 WL 2303317 (9th Cir. June 10, 2010). The court held that (a) the award was not in manifest disregard of law or completely irrational; (b) the arbitration panel’s determination that it had jurisdiction to award punitive damages more than 30 days after the hearing was supported by a plausible interpretation of the applicable American Arbitration Association (AAA) rules; and (c) one arbitrator’s failure to disclose that he was subject to an ethics investigation more than ten years earlier was not a basis to vacate the award.


Plaintiff Zev Lagstein was a physician who purchased a disability insurance policy at Lloyd’s, London (Lloyd’s). In 2001, Lagstein developed heart disease and other problems and submitted a claim under the policy. As of 2003, Lagstein still had not received a decision on his claim and filed a lawsuit against Lloyd’s, which was stayed pending arbitration. The arbitration panel entered an initial award on August 31, 2006, granting Lagstein the full value of his policy ($900,000) and $1,500,000 for emotional distress damages. Subsequently, after a second hearing in November 2006, the panel awarded Lagstein an additional $4,000,000 in punitive damages. The district court vacated the award, holding that the award was excessive and in manifest disregard of the law.


On appeal, the Ninth Circuit held that the award should have been confirmed. First, Lloyd’s argued that the award was excessive because (a) the panel failed to recognize “firmly established facts” and therefore manifestly disregarded the law; (b) the decision was “completely irrational” in light of the facts; (c) one ground for the panel’s decision was based on an erroneous interpretation of the policy; and (d) the panel incorrectly concluded that Lloyd’s violated the policy. The court held that none of the foregoing arguments provided a basis to vacate the award under section 10 of the Federal Arbitration Act (FAA), emphasizing that it could not second guess the panel’s factual determinations. Lloyd’s argued that the arbitration panel lacked jurisdiction to enter the punitive damages award because the AAA rules required the panel to make a decision within 30 days of the close of the hearing, but the panel did not award the punitive damages until much later.


The court held that the timing of the decision was a procedural matter, and procedural questions should be left to the arbitrators. Further, the court found that the panel’s ruling was justified by two plausible constructions of the AAA rules. First, the court held that the panel may have treated the initial award as an interim award rather than a final award and then reopened the proceedings in November 2006 for the punitive damages hearing. Under that construction, the panel would have issued the punitive damages award less than 30 days after it reopened the proceeding. The court held that the panel may have found that it had the authority to bifurcate the punitive damages portion of the case based on a rule allowing the arbitrators “to take such steps as they . . . deem[ed] necessary and desirable to avoid delay and to achieve a just, speedy, and cost-effective resolution.”


Lloyd’s argued that the award should have been vacated under section 10(a)(2) of the FAA, because one of the arbitrators failed to disclose that he was subject to an ethics controversy—and signed a non-prosecution agreement—when he was a judge in the early 1990s. However, the court determined that the arbitrator was required to disclose “only facts indicating that he might reasonably be thought biased against one litigant and favorable to another” and that the arbitrator’s past difficulties did not meet this criteria. Lagstein, 2010 WL 2303317, at *8.


Adam Waskowski, Novack and Macey, Chicago, IL


 

Supreme Court Holds That Parties Can Delegate Questions of Arbitrability


In a 5–4 decision delivered by Justice Scalia, the United States Supreme Court recently held that an ex-employee's challenge to the enforceability of an arbitration agreement was subject to arbitration, because the agreement specifically provided that disputes relating to enforceability were to be determined by an arbitrator. Rent-A-Center West, Inc. v. Jackson, No. 09-497, 2010 WL 2471058 (U.S. June 21, 2010) (Rent-A-Center).


The backdrop for the Rent-A-Center decision is the Federal Arbitration Act (FAA), which provides that covered arbitration agreements shall be enforced except "upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2. Under the FAA, the issue of "whether the parties have a valid arbitration agreement at all" is to be decided by the courts. Green Tree Financial Corp. v. Bazzle, 539 U.S. 444, 452 (2003). However, because arbitration is a matter of contract, questions relating to arbitrability may be delegated to an arbitrator provided that the delegation is clear and unmistakable. AT&T Technologies, Inc. v. Communications Workers, 475 U.S. 643, 649 (1986); First Options v. Chicago, Inc. v. Kaplan, 514 U.S. 938, 944–945 (1995).


In Rent-A-Center, the parties' agreement to arbitrate had two relevant provisions: One provision provided for the arbitration of all "past, present, or future" disputes arising out of plaintiff's employment, including "claims for discrimination" and "claims for violation of any federal . . . law." The second provision stated that "[t]he Arbitrator, and not any federal, state, or local court or agency, shall have exclusive authority to resolve any dispute relating to the interpretation, applicability, enforceability, or formation of this Agreement including, but not limited to any claim that all or any part of this Agreement is void or voidable." This second provision was referred to by the parties and the Supreme Court as the “delegation provision.”


In the lower court proceedings, the former employee opposed defendant's motion to compel arbitration on the grounds that the arbitration agreement was unconscionable and, thus, unenforceable under state law. The District Court for Nevada granted Defendant's motion. Citing Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83 (2002), the district court found that, through the delegation provision, the parties had clearly given the arbitrator exclusive authority to decide whether the agreement was enforceable. The court also found that because the former employee had challenged the validity of the agreement as a whole, the "severability rule" applied and did not prevent the court from enforcing the parties’ specific agreement to arbitrate any disputes concerning enforceability, irrespective of the nature of the defense being raised.


A divided panel of the Court of Appeals for the Ninth Circuit reversed. Jackson v. Rent-A-Center West, Inc., 581 F.3d 912 (9th Cir. 2009). The majority opinion stated that the general rule is that arbitrability is for the courts to decide unless there is "clear and unmistakable evidence" that the parties agreed to arbitrate arbitrability. 581 F.3d at 917, citing First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 943–944 (1995). The majority held that "where, as here, a party challenges an arbitration agreement as unconscionable, and thus asserts that he could not meaningfully assent to the agreement, the threshold question of unconscionability is for the court." Id.


In a decision issued on June 21, 2010, the Supreme Court reversed the Ninth Circuit and held that it was up to the arbitrator to decide plaintiff’s claim of unconscionability because the parties had delegated enforceability issues to the arbitrator under the terms of their contract. The Court found that the delegation provision of the agreement to arbitrate was severable from the remainder of the contract, citing Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 404–404 (1967), Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 445 (2006), and Preston v. Ferrer, 552 U.S. 346, 353–354 (2008). The Supreme Court reasoned that because the former employee had challenged the agreement to arbitrate as a whole and had not specifically challenge the validity of the delegation provision, the “severability rule” applied and required that the threshold issue of enforceability be submitted to the arbitrator for determination.


The significance of Rent-A-Center is that the underlying contract was a stand-alone arbitration agreement and not a contract unrelated to arbitration that simply contained an arbitration clause. Whether the parties have a valid arbitration agreement is an issue assigned to the courts by the FAA and any agreement to arbitrate arbitrability must be supported by “clear and unmistakable evidence” that the parties intended to submit such matters to an arbitrator. In Rent-A-Center, plaintiff claimed that the terms of and circumstances surrounding the arbitration agreement were unconscionable and that his consent to the arbitration agreement was not valid or legally binding. The Supreme Court acknowledged that the contract at issue in Rent-A-Center was different from the contracts involved in Prima Paint, Buckeye, and Preston, but concluded that that distinction made "no difference." In this regard, the Supreme Court held that absent a specific challenge to validity or enforceability of the delegation provision, that provision would be treated as valid under Section 2 of the FAA and enforced under Sections 3 and 4 of the FAA, thus leaving the determination of the contract revocation defense to the arbitrator.


Justice Stevens wrote a stinging dissent in which he chastised the majority for going beyond the severability rule established by the Court's earlier decisions in Prima Paint and Buckeye and for making the "breezy assertion that the subject matter of the contract at issue . . . 'makes no difference.'"


"Prima Paint and its progeny allow a court to pluck from a potentially invalid contract a potentially valid arbitration agreement. Today the court adds a new layer of severability—something akin to Russian nesting dolls—into the mix: Courts may now pluck from a potentially invalid arbitration agreement even narrower provisions that refer particular arbitrability disputes to an arbitrator."


The dissonance between the majority and the dissent seems to be based on their differing views of Section 2 of the FAA. Because the subject agreement in Rent-A-Center was a stand-alone arbitration agreement, the dissent reasoned that the Court had to decide the challenge to the validity of the arbitration agreement before deciding defendant’s motion to compel arbitration. The majority, on the other hand, found that an agreement to arbitrate a gateway issue "is simply an additional, antecedent agreement the party seeking arbitration asks the federal court to enforce." The FAA "operates on this additional arbitration agreement just as it does on any other" and is valid under Section 2 of the FAA unless grounds are found to exist for revocation. Because plaintiff's challenge was to the arbitration agreement as a whole, the majority reasoned that the delegation provision could be severed from the contract as a whole and enforced in its own right.


It was not until his brief to the Supreme Court that the plaintiff in Rent-A-Center specifically challenged the delegation provision as substantively unconscionable. The Court found that this challenge was made "too late" and, accordingly, was not considered. One lesson to be learned from Rent-A-Center concerns pleading. When the “making” of an arbitration agreement is an issue and that agreement includes a provision that delegates disputes relating to validity or enforceability to arbitration, any challenge to the validity or enforceability of the arbitration agreement must include a specific defense to the enforceability of the delegation provision. Without such specificity in the pleading, an agreement to arbitrate arbitrability is enforceable even when the validity of the arbitration agreement is challenged.


Rebecca Callahan, Newport Beach, CA


 

Another Turn in the Class Action Arbitration Screw


The Supreme Court has thrown down a gauntlet yet again, agreeing to review the important question of whether a judge must adhere to an "anti-class action" requirement in the arbitration provision of a consumer "contract of adhesion." The Court, on May 24, 2010, granted certiorari in AT&T Mobility LCC v. Vincent Concepcion et ux., Case no. 09-893.


There has been a long-standing battle between consumer class-action attorneys and corporations doing business with consumers over the application of Rule 23 in arbitrations. As more arbitrators began allowing class claims in arbitration and courts affirmed those arbitration decisions, businesses began writing the arbitration clauses in their consumer contracts to prohibit class action claims. Class action attorneys decry such measures as counter to public policy and unconscionable, essentially undermining the very protections intended by Rule 23. They argue that because most individual claims are small and do not warrant pursuit even in arbitration proceeding, and because the plaintiff-consumers have no opportunity to negotiate their own contract terms, such provisions should not be enforced. Defendants, on the other hand, argue that the Federal Arbitration Act controls this matter, parties have a right to tailor the arbitration provisions in their contracts as they see fit, and state courts exceed their authority under the Act when they defeat a party’s clear intention to prohibit class action arbitration.


Courts have been all over the board in this debate, some finding that in consumer contracts "anti-class" provisions are unconscionable per se, while others have created threshold tests to determine whether anti-class provisions apply. The AT&T case specifically challenges California's 3-part test for finding an anti-class provision in an arbitration agreement unconscionable under Discover Bank v. Super. Ct., 113 P.3d 1100, 1110 (Cal. 2005). On the other hand, no less than 27 jurisdictions have held that arbitration provisions prohibiting class action claims must be enforced, even in consumer agreements, so long as the cost of arbitration isn’t too high for the consumer and the claimant’s remedies are not limited.


Just last month, the Supreme Court held in Stolt-Nielson that, at least in certain circumstances, where the parties did not intend to agreeto arbitration on a class-wide basis, and the arbitration agreement does not speak to the issue, class claims would not be permitted in arbitration. Now the Court will consider whether express anti-class provisions will be upheld in the consumer arena. Clearly, the decision of the Court will have potent ramifications, either opening a clear pathway for consumers to bring class claims in arbitration or essentially shutting down class arbitration, as no company would agree to it if given the choice. Commentators agree, "This issue has become 'one of the most important—and controversial—issues in modern day class action litigation." Petitioner’s Writ of Certiorari at 15, citing Angela C. Zambrano, et al., Wavering Over Consumer Class Actions, 27 No. 12 Banking & Fin. Servs. Pol'y Rep. 4, 4 (2008).


Jobi Halper, San Diego, CA


 

Illinois Appellate Court Holds That Section 34 Notice Waives Right to Arbitration


The Supreme Court has thrown down a gauntlet yet again, agreeing to review the important question of whether a judge must adhere to an “anti-class action” requirement in the arbitration provision of a consumer “contract of adhesion.” The Court, on May 24, 2010, granted certiorari in AT&T Mobility LCC v. Vincent Concepcion et ux., Case no. 09-893.


There has been a long-standing battle between consumer class-action attorneys and corporations doing business with consumers over the application of Rule 23 in arbitrations. As more arbitrators began allowing class claims in arbitration and courts affirmed those arbitration decisions, businesses began writing the arbitration clauses in their consumer contracts to prohibit class action claims. Class action attorneys decry such measures as counter to public policy and unconscionable, essentially undermining the very protections intended by Rule 23. They argue that because most individual claims are small and do not warrant pursuit even in arbitration proceeding, and because the plaintiff-consumers have no opportunity to negotiate their own contract terms, such provisions should not be enforced. Defendants, on the other hand, argue that the Federal Arbitration Act controls this matter, parties have a right to tailor the arbitration provisions in their contracts as they see fit, and state courts exceed their authority under the Act when they defeat a party’s clear intention to prohibit class action arbitration.


Courts have been all over the board in this debate, some finding that in consumer contracts “anti-class” provisions are unconscionable per se, while others have created threshold tests to determine whether anti-class provisions apply. The AT&T case specifically challenges California’s three-part test for finding an anti-class provision in an arbitration agreement unconscionable under Discover Bank v. Super. Ct., 113 P.3d 1100, 1110 (Cal. 2005). On the other hand, no less than 27 jurisdictions have held that arbitration provisions prohibiting class action claims must be enforced, even in consumer agreements, so long as the cost of arbitration isn’t too high for the consumer and the claimant’s remedies are not limited.


Just last month, the Supreme Court held in Stolt-Nielson that, at least in certain circumstances, where the parties did not intend to agreeto arbitration on a class-wide basis, and the arbitration agreement does not speak to the issue, class claims would not be permitted in arbitration. Now the Court will consider whether express anti-class provisions will be upheld in the consumer arena. Clearly, the decision of the Court will have potent ramifications, either opening a clear pathway for consumers to bring class claims in arbitration or essentially shutting down class arbitration, as no company would agree to it if given the choice. Commentators agree, “This issue has become ‘one of the most important—and controversial—issues in modern day class action litigation.” Petitioner’s Writ of Certiorari at 15, citing Angela C. Zambrano, et al., Wavering Over Consumer Class Actions, 27 No. 12 Banking & Fin. Servs. Pol’y Rep. 4, 4 (2008).


Brandon Hummel, Chicago, IL


 

Michigan Court Reverses Motion to Dismiss in Arbitration


In Shaler Interiors v. MKK Technologies, Inc., 2010 WL 173 637 (January 19, 2010), the Michigan Court of Appeals reversed a trial court decision that had refused to dismiss a case in favor of arbitration.


MKK Technologies, Inc. (MKK) was the general contractor for a student housing project and needed a drywall contractor. Rick Schneider could not take the drywall job himself because he was a union member and the job was non-union, so Schneider approached David Shaler, who was not a union member, and asked him to perform the work. Schneider and Shaler agreed that Schneider would arrange to obtain the job for Shaler’s company, Shaler Interiors, and that Schneider would receive one-third of the contract price. Schneider signed a subcontract with MKK for the drywall work on behalf of Shaler Interiors. Shaler did not sign the subcontract, but he knew of and agreed to the arrangement. The subcontract contained an arbitration clause requiring all claims and disputes to be decided by arbitration unless MKK elected otherwise.


After completing its drywall work, Shaler Interiors filed suit against MKK, claiming that MKK had failed to pay it approximately $59,500. MKK moved to dismiss the case pending arbitration, arguing that discovery had established that Schneider acted as the agent of Shaler Interiors and that, in any event, Shaler Interiors had not only ratified Schneider’s acts, but had signed a change order that incorporated the original subcontract including its arbitration clause. Shaler Interiors acknowledged that Schneider facilitated obtaining the job but denied that Schneider was authorized to sign the subcontract on its behalf.


The Court of Appeals determined that Shaler knew Schneider would sign a contract with MKK on behalf of Shaler Interiors, yet did nothing to dispel the notion that Schneider was authorized to act on behalf of Shaler Interiors. Accordingly, the court ruled that MKK reasonably believed that Schneider was authorized to bind Shaler Interiors. The court also ruled that Shaler Interiors had ratified Schneider’s acts by accepting payments from MKK knowing of Schneider’s efforts on its behalf. Finally, the court agreed that Shaler Interiors became bound by the arbitration provision when it signed the change order. The change order unambiguously stated that it “shall become part of the original subcontract agreement including all terms and conditions without exception.” For all these reasons, arbitration was the appropriate forum, and the trial court erred when it denied the motion to dismiss the litigation.


Timothy J. Abeska, Chicago


 

Right to Bring Class Claims in Arbitration Dealt Blow by Supreme Court in Stolt-Nielsen


On April 27, 2010, the Supreme Court issued the much-anticipated decision in Stolt-Nielsen v. AnimalFeeds International Corp., 559 U.S. ____ (April 27, 2010), responding in the negative to the question of whether arbitration on a class-wide basis can be compelled where the parties’ underlying contract does not authorize it. The Court dealt a blow to consumers, class action attorneys, and arbitrators alike, holding that a contract silent as to whether claims can be pursued on a class-wide basis may not proceed as such, absent local law authorizing it or custom or usage in the industry dictating that a class action was contemplated at the time of contracting. Stolt-Nielsen radically curtails the ability of individuals or companies to consolidate their claims under Federal Rule of Civil Procedure 23—the Class Action Rule—when in arbitration. The decision further incentivizes businesses to include arbitration provisions in contracts to stave off class action litigation.


Companies in the U.S. dealing with consumers commonly use form contracts that impose mandatory binding arbitration provisions—the very contracts that often are considered appropriate for Rule 23 treatment. Thus, class action questions have followed the tide of arbitration, forcing courts and arbitrators to grapple with the relationship between the procedural mandate and the contractual rights of the parties ever since. Typically, contracts containing arbitration provisions either are silent on the availability of class treatment for claims arising under the contract or they contain so-called “anti-class provisions” barring class treatment of such claims. Stolt-Nielsen addresses the former and most-common situation in arbitration cases.


The Court in Stolt-Nielsen began by issuing a sharp reminder to arbitrators across the country that it is not their domain to determine public policy. They are neither elected nor appointed through our federal and or state political process and are not the correct venue to determine arbiters of what is good for the public. Slip Op. 8–9. The Court’s essential message was “stick to the contract, you have limited authority.” The Court then appears to have issued a blanket policy rule removing the right to class treatment for claims in arbitration where the contract is silent on arbitration and neither applicable law nor custom usage at the time of contracting shed light on the parties’ intention.


The majority-minority split was sharply divided along the usual liberal-conservative lines, with Justices Alito, Roberts, Scalia, Kennedy, and Thomas for the majority and Justices Ginsberg, Stevens, and Bryer joining in a stinging dissent. Justice Sotomayer abstained from the matter altogether.


The majority disparages its prior holding in Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003), pointing out that no majority was reached on any point in that decision—there was mere plurality (on only one of the three questions posed). Slip Op. at 14. The Court instructed that at best, Bazzle relegated to the arbitrator the simple decision of whether a contract is or is not silent on class proceedings, which is a question of contract construction properly before an arbitrator. The Court highlighted that it had not, and has not, resolved whether an arbitrator can determine whether class provisions apply where a contract does not expressly so state, or set forth the standard either an arbitrator or court should apply to make that determination. Id.


In rejecting class arbitration for contracts silent on that point, the Court relied heavily on the Federal Arbitration Act, stating that it is fundamental to an agreement to arbitrate that “parties may specify with whom they choose to arbitrate their disputes.” Id. at 19 (emphasis in original.) The Court stated “[A] party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so. In this case, however, the arbitration panel imposed class arbitration even though the parties concurred that they had reached ‘no agreement’ on that issue.”


The Court’s rationale for blocking class arbitration seems broad, sweeping, and applicable to most arbitration clauses. The opinion stressed the unfairness of exposing cases to class treatment without an express agreement, because it changes the nature of arbitration substantially. According to the Court, the “cost-benefit” of an agreement for bilateral arbitration is that parties forgo “the procedural rigor and appellate review of the courts in order to realize the benefits of private dispute resolution: lower costs, greater efficiency and speed, and the ability to choose expert adjudicators to resolve specialized disputes.” However, financial savings, efficiency, and speed are not as likely to be achieved in class arbitration; thus, parties are less likely to trade their fundamental court rights of appeal and discovery protections for illusory benefits. Id. at 21. The parties to class arbitration further lose the valuable right otherwise enforced in arbitration to privacy and confidentiality in their matter and the awards, which many parties to arbitration value substantially. Michael Geibelson, a class action attorney with Robins, Kaplan, Miller & Ciresi LLP, says


Stolt-Nielsen simply reconfirms what the Supreme Court and many other courts have said many times before—there must be an enforceable agreement to arbitrate before arbitration will be compelled. All the public policy in the world favoring arbitration cannot outweigh the absence of an agreement to arbitrate. Absent such an agreement, parties should not be deprived of their right to a jury trial.


The Court allowed some hope to class action attorneys concerning the future of class arbitration, embedding into its final analysis specific factual aspects of Stolt-Nielsen that eventually may be differentiated from typical consumer cases (although the Court does not actually rely on these differences anywhere in the opinion). The Court highlights that (i) the parties are sophisticated business entities, (ii) there is no tradition of class arbitration under maritime law, and (iii) the plaintiff—and not the defendant—chose the contract form (called a “charter party”) for the shipment. But, notwithstanding those factors, the Court states “the panel regarded the agreement’s silence on the question of class arbitration as dispositive. The panel’s conclusion is fundamentally at war with the foundational FAA principle that arbitration is a matter of consent.” Id. at 20.  


Undoubtedly, how and if Stolt-Nielsen will be applied when these factors change will likely take several more years for the courts and arbitrators to consider before the Supreme Court speaks further on this point. The Court also states that “[w]e have no occasion to decide what contractual basis may support a finding that the parties agreed to authorize class-action arbitration. Here, as noted, the parties stipulated that there was “no agreement” on the issue of class-action arbitration.” Id. (emphasis added).


Joseph Guglielmo, national class action attorney at Scott & Scott LLP in New York, reads the opinion more narrowly:


Although I do not agree with the decision, I believe it is distinguishable based on the specific facts the Court was faced with. Specifically, the Court in Stolt-Nielsen applied principles of maritime law to sophisticated parties who presumably negotiated the provisions of their contract, which did not contain a class action provision. Thus, the decision should have no applicability to individuals and consumers who are forced to enter into unilateral contracts that are either silent or prohibit class arbitrations. It would be tragic if future courts interpret this decision as a means to further restrict the rights of individuals to otherwise bring legitimate disputes to a court.

Practice Tip for Neutrals
The Stolt-Nielsen decision pointedly reminds arbitrators of the limited scope of their appointment: Neutrals are to interpret the contract and its adherence by the parties, nothing more. In doing so, they are not to forget the basic tenets of contract law for determining the nature of the agreement, including express and implied terms, when to consider custom and usage, how to resolve ambiguity, where parole evidence is admissible, when to ascertain the intention of the parties, and how to determine if there is lack of clarity. The Court ostensibly cautioned arbitrators not to think of themselves as judges by the severity of its tone towards the role of arbitrators. The Court also reminded arbitrators that their decisions are not “precedent” like court decisions. Parties looking to arbitration must remember, particularly after this decision, that where arbitrators exceed this limited authority, their rulings may be further subject to challenge in court.


—Jobi Halper, San Diego, CA


 

FINRA Expands Pilot Program to Benefit Investors


FINRA (the Financial Industry Regulatory Authority) Dispute Resolution announced in early October that it will expand its pilot program for eligible investors; the program allows investors to strike all industry arbitrators from the three-person panel selected to hear the investor’s case. Typical FINRA cases require panels to include two “public” arbitrators and one “industry” arbitrator, or someone who works in the securities industry. The two-year pilot program, started in 2008, now expands the number of broker-dealer companies who have agreed to participate in the program and the number of cases committed to the program. Broker-dealer firms must agree to participate and commit a number of cases they will place into the program, but the firms have no involvement in which cases actually are submitted to the FINRA pilot program. Instead, eligible investors decide whether to participate.


To be considered eligible, investors must name only a participating firm in their complaint and be entitled to a three-person panel. FINRA expects that the expansion will increase the number of cases arbitrated through the pilot program by nearly 505 to 411. Chase Investment Services, Oppenheimer & Co., and Raymond James Financial Services are the newest participating broker-dealers. Larger broker-dealers such as Citigroup Global Markets, Merrill Lynch and Morgan Stanley Smith Barney, and eight other firms, were the first companies to have agreed to participate. FINRA is monitoring the success of the program based both on the number of investors who elect an all-public arbitrator panel and the different results in awards between the all-public panels and public-industry panels.



 

Second Circuit Holds That Claims Under SOX Are Arbitrable


On October 2, 2008, the Second Circuit Court of Appeals affirmed a decision of the District Court of Connecticut holding that claims brought under the whistleblower protection provision of the Sarbanes-Oxley Act are arbitrable.


 

FAA Does Not Allow for Expandable Judicial Review


On March 25, 2008, the U.S. Supreme Court issued its decision in Hall Street Associates, LLC v. Mattel, Inc., holding that the Federal Arbitration Act (FAA) precludes expanding the grounds available for review of arbitral awards by agreement of contracting parties. While the U.S. Supreme Court rejected Hall Street's arguments of an expandable judicial review of arbitration awards by contract under an FAA analysis, it remanded to the district court for consideration other possible authority for the judicial enforcement of arbitral awards independent of the Federal Arbitration Act.


 

Supreme Court Supports Arbitrator Authority in Preston v. Ferrer


On February 20, 2008 the United States Supreme Court issued its opinion in Preston v. Ferrer, where the question presented was whether parties were required to first submit their dispute to a state administrative agency before filing an action in court or submitting the matter to an arbitrator. The controversy between Preston and Ferrer arose after parties had a disagreement about whether certain commissions were owed, and whether the dispute had to be heard in the first instance by a California Labor Commissioner pursuant to a state statute, or whether the dispute should be resolved in arbitration as a result of the parties’ agreement which provided for arbitration pursuant to the rules of the AAA.


In an opinion by Justice Ginsburg, the Court held in an 8-1 decision that when parties agree to arbitrate all questions arising under a contract the FAA supersedes state laws which give primary jurisdiction in another forum such as a state administrative agency. The Preston case therefore reflects the Supreme Court’s continued endorsement and support of the arbitration process and arbitrators’ authority. The opinion is also important because it discusses whether the parties’ incorporation of the AAA’s Rules into their agreement trumps choice of law provisions which might dictate that disputes are resolved in a manner other than arbitration. In connection with that issue, the Court cited to Rule 7(b) of the AAA’s Commercial Arbitration Rules, which states that “[t]he arbitrator shall have the power to determine the existence or validity of a contract of which an arbitration clause forms a party.” That language, the Court held, infers an understanding among the parties that their dispute would not be heard by the Labor Commissioner pursuant to California law, but instead by an arbitrator.


The opinion also reaffirms a number of other important arbitration law principles that have been previously expressed by the Supreme Court. Specifically, the Court stated that a “recurring question” under the FAA is who decides whether grounds exist to invalidate an arbitration agreement, and that attempts to invalidate agreements as a whole are decided by arbitrators, and not courts, unless the attack is made on the arbitration agreement specifically. This outcome is not impacted where an administrative agency has been designated by state law as the forum where disputes are to be resolved, even if the matter could be submitted to an arbitrator subsequently. In addition, the Court emphasized that state laws cannot conflict with the FAA’s “dispute resolution regime” where they grant jurisdiction to an administrative agency or where they impose prerequisites on arbitration agreements that are not applicable to contracts generally.