Benjamin Stearns

Court Confirms “Baseball Arbitration” Award, Finds Party Alleging Unfairness Was Caught Looking When It Failed to Object

March 31, 2021 by Benjamin Stearns

The U.S. District Court for the Eastern District of Missouri confirmed an arbitration award in favor of Clayco Inc. in a dispute with its subcontractor arising from a construction contract. The parties’ contract provided detailed dispute resolution procedures comprising 13 paragraphs providing for mediation followed by arbitration if the mediation was unsuccessful. However, the contract also provided for an “alternate condensed and accelerated procedure” that could be “invoked” at Clayco’s option. This condensed procedure called for eight hours of mediation “followed by a ‘baseball arbitration’ in which the mediator immediately takes the role of arbitrator, each side submits a best and final offer and the arbitrator chooses of the two offers as the award.”

Clayco invoked the “baseball arbitration” procedure by letter to the subcontractor and the American Arbitration Association (AAA), as provided in the parties’ contract. More than nine months later, the mediation and arbitration were held according to the condensed procedure, and the arbitrator selected Clayco’s best and final offer as the award, resulting in an approximate $1.7 million award.

The subcontractor sought to vacate the award, arguing that Clayco had not properly “invoked” the procedure because it never received a copy of Clayco’s letter to the AAA selecting the condensed procedure. The court found that whether the subcontractor received a copy of the letter was irrelevant under the terms of the parties’ contract, which only required Clayco to make a “written application” to the AAA. Furthermore, the subcontractor had ample notice of the mediation and arbitration and never “made a formal written objection” to the proceeding. Instead, after the unfavorable arbitration award was rendered, it submitted an affidavit of counsel to the court in support of its motion for vacatur stating that counsel “asserted that [the ‘baseball arbitration’ was unfair.”

The court described the subcontractor’s argument as a “flimsy post hoc excuse[]” and stated that “a party may not sit idle through an arbitration procedure and then collaterally attack that procedure on grounds not raised before the arbitrators when the result turns out to be adverse,” quoting Marino v. Writers Guild of America, East, Inc., 992 F.2d 1480 (9th Cir. 1993). Since the arbitration process took place according to the parties’ contract, and the subcontractor had waived any procedural defects even if it did not, the court confirmed the award.

Clayco, Inc. v. Food Safety Grp., Inc., No. 4:20-mc-00739 (E.D. Mo. Mar. 8, 2021).

Ninth Circuit Affirms Removal to Federal Court and Order Compelling Arbitration, Construing Forum Selection Clause and Scope of Arbitration Agreement

March 8, 2021 by Benjamin Stearns

The representative of former stockholders who sold their shares in a leasing corporation pursuant to a stock purchase agreement had filed identical complaints in state court and before an arbitration tribunal alleging a breach of the stock purchase agreement by the bank and seeking an order for specific performance of the contract. The bank removed the case from state court to the U.S. District Court for the Central District of California and then successfully compelled arbitration and obtained dismissal of the case.

On appeal, the Ninth Circuit held that the forum selection clause in the parties’ stock purchase agreement did not waive the right to remove where the clause required litigation to “be brought and determined in Orange County, California,” which is the seat of both state and federal courts. “Because the clause uses the preposition ‘in,’ the contract contemplates federal as well as state courts as proper courts for adjudication.” This contrasts with a 2019 Ninth Circuit case, City of Albany v. CH2M Hill Inc., wherein the relevant forum selection clause waived the right to remove because “there is no federal courthouse located in the designated county.”

The Ninth Circuit also rejected the plaintiff’s argument that the district court erred by compelling arbitration despite a carve-out from the agreement that preserved the ability to seek in court “temporary or preliminary injunctive relief … in aid of arbitration.” The court determined that the plaintiff’s claims were not “in aid of arbitration” because they were not “aimed at preserving the status quo until the dispute may be resolved by an arbitrator.” Rather, the plaintiff’s complaint sought specific performance, a remedy for the defendant’s alleged breach of contract. Per the parties’ arbitration agreement, only the arbitrator had the power to grant that relief. The federal district court was correct to compel arbitration.

Meyer v. Fifth Third Bank, No. 19-56506 (9th Cir. Jan. 20, 2021).

Sixth Circuit Reverses Order Finding Employment Arbitration Agreement Void Due to Coercion

January 25, 2021 by Benjamin Stearns

An employee sued her former employer and coworkers in the Eastern District of Michigan for sexual harassment, defamation, and for subjecting her to a hostile work environment. The employer argued that the employee’s claims fell within the scope of an arbitration agreement, but the district court held that the agreement was void because the employee had been coerced into signing it.

The employee argued that her boss told her that if she did not sign the agreement she would be fired. She stated that the agreement was presented to her in the middle of the workday, when she had little time due to her pressing work duties, and that her boss stood behind her and waited while she attempted to review it, ratcheting up the pressure. In addition, the plaintiff employee noted that she was a single mother with a disabled child and could not afford to lose her job.

The Sixth Circuit reversed, holding that “fear of financial ruin alone is insufficient to establish economic duress; it must also be established that the person applying the coercion acted unlawfully.” Where a party does not threaten anything that the party is not legally entitled to do, then there is no duress. Michigan is an at-will employment state, meaning that the employer’s conditioning the plaintiff’s continued employment on her signing the arbitration agreement did not amount to unlawful conduct. Therefore, the employee could not show that she was coerced into signing the agreement.

The plaintiff also argued that she did not knowingly and voluntarily waive her right to a judicial forum for her prospective claims under Title VII of the Civil Rights Act of 1964. The court applied a five-factor test to determine whether the waiver of Title VII claims was valid. The plaintiff had a high school-level education with some post-secondary education and experience reviewing and executing car sales contracts, which was held to be sufficient under the first prong. The court also found that the employee was given sufficient opportunity to review the contract, emphasizing the fact that she failed to request more time or the opportunity to consult a lawyer before signing. The court quickly dispatched the remaining factors, whether the agreement was sufficiently clear, whether sufficient consideration was provided, and the totality of the circumstances, and held that the contract was a valid waiver of the plaintiff’s right to adjudicate her Title VII claims in a judicial forum.

Solomon v. Carite Corporate LLC, No. 20-1020 (6th Cir. Nov. 23, 2020).

Parsing the Sometimes Fine Distinction Between a Broad and a Narrow Arbitration Clause

December 8, 2020 by Benjamin Stearns

In an employment dispute, the District Court of Connecticut dissected an arbitration clause to determine whether its scope was “broad,” resulting in a presumption of arbitrability of collateral issues, or “narrow,” in which case collateral issues would generally not be subject to arbitration. The court ultimately found the clause at issue to be “broad,” but the question was close, as demonstrated by the court’s recognition that “reasonably similar” clauses had been deemed “narrow” by other courts within the Second Circuit.

The clause at issue provided for arbitration of “any controversy or claim arising under federal, state and local statutory or common or contract law … involving the construction or application of any of the terms, provisions or conditions of the Agreement….” The fact that the agreement provided for arbitration of controversies “arising under” essentially any law, as opposed to controversies “arising under” solely the agreement itself, weighed in favor of characterizing the agreement as broad.

The next phrase in the arbitration agreement (“and involving the construction or application of any of the terms, provision, or conditions of the agreement”), “somewhat” limited the disputes subject to arbitration, but the court found it to be very similar to “a classically broad arbitration clause.” The court analogized the clause to another that addressed “claims arising out of or relating to” the construction or application of terms, as opposed to this clause, which pertained to claims “arising under law and involving” the construction or application of terms. Since the arbitration clause at issue was broad, the court applied a presumption in favor of arbitration. The plaintiff failed to rebut this presumption, and therefore the court referred the parties to arbitration.

Tahirou v. New Horizon Enterprises, LLC, Case No. 3:20-cv-00281 (USDC D. Conn. Oct. 29, 2020).

Determination of Valid Arbitration Agreement May Be Dependent on “Outward Manifestations and Circumstances Surrounding the Transaction”

November 17, 2020 by Benjamin Stearns

The Ninth Circuit vacated the denial of a motion to compel arbitration and remanded for determination of whether a valid arbitration agreement exists in a recent lawsuit governed by Washington state law. According to the Ninth Circuit, the district court’s “sparse analysis” left it unclear whether the court had “properly considered all the relevant facts and circumstances” necessary to determine whether there was sufficient “mutual assent required for the formation of a valid contract.” Such a determination requires an “inquiry into [the plaintiff’s] intent – based on the reasonable meaning of his words and acts to assent to the terms of the Agreement.”

The district court “bypassed” that analysis, and instead deemed the facts and circumstances to be “identical in all material facts and circumstances” to those of another plaintiff that the court had previously determined to have assented to the agreement. However, the Ninth Circuit noted that one of the plaintiffs received the agreement beforehand while the other did not, and that the plaintiff relevant to this appeal did not submit a declaration to the court, which would have enabled the court to better determine whether mutual assent existed based on the “outward manifestations and circumstances surrounding the transaction.” As such, the court vacated and remanded for determination as to whether the factual record supported the establishment of a valid and enforceable arbitration agreement.

Reichert v. Rapid Investments, Inc., No. 19-35989 (9th Cir. Oct. 21, 2020).