Benjamin Stearns

New Hampshire Supreme Court Vacates Arbitration Award Based on “Plain Mistake” of Law

July 20, 2023 by Benjamin Stearns

The city of Portsmouth terminated a police officer in the wake of a bequest made to the officer by a 92-year-old woman he had met while on duty. The officer had assisted the woman in finding an attorney to draft a new will leaving the majority of her estate to him, which she executed months before her death. Afterward, the city convened a task force to conduct an independent inquiry into the officer’s relationship with the decedent. The task force concluded that the officer’s actions violated the Portsmouth Code of Ethics and the Portsmouth Police Department Duty Manual, and the city terminated him based on the task force’s recommendation.

The beneficiaries of the decedent’s prior will had also initiated an action to contest the new will. That action resulted in a probate decision that concluded the new will must be invalidated due to undue influence by the officer. The probate decision was issued approximately one month after the city had already terminated the officer.

Meanwhile, the police union had filed a grievance under the collective bargaining agreement, which had been referred to arbitration. The city notified the union that it intended to introduce the probate decision at the arbitration hearing to justify the termination and as mitigating evidence relative to any remedy. After litigation of the issue, the probate decision was admitted as “after-acquired evidence” for purposes of determining the appropriate remedy but was not admitted to supply the “just cause” for the termination itself.

The arbitrator found that the officer’s misconduct was “severe” but nevertheless determined the city wrongfully terminated the officer due to its failure to correctly enforce its own rules and to properly supervise him. The arbitrator awarded the officer back pay from the date of his termination to the date the arbitrator held the firing to be unsupported by just cause. The city challenged the award in the New Hampshire Superior Court, arguing the arbitrator had made a “plain mistake” of law in determining the period of back pay, based in part on her rulings related to the introduction of the after-acquired evidence. The superior court confirmed the award.

On appeal, however, the New Hampshire Supreme Court reversed. The court noted that the “after-acquired evidence” doctrine applies to evidence of an employee’s misconduct — discovered by the employer after it has terminated the employee for an unlawful reason — which is so severe that the employer would have terminated the employee on those grounds alone had it known of the misconduct at the time of the discharge. After-acquired evidence may be introduced to bar or limit an employee’s recovery, but it may not be introduced to provide a basis for the termination itself.

Here, the arbitrator held that the city had not complied with due process requirements (imposed by Cleveland Board of Education v. Loudermill) to provide notice to an employee of the grounds for termination and an opportunity to be heard. However, the Loudermill requirements do not apply to after-acquired evidence, which concerns the calculation of damages resulting from a wrongful termination as opposed to the basis for the termination itself. As such, the city was not required to comply with the Loudermill notice requirements when it sought to introduce and rely on the after-acquired evidence in support of its argument to limit the officer’s recovery. The Supreme Court held that the arbitrator had committed a plain mistake of law, and vacated the lower court’s confirmation and directed it to remand the case to the arbitrator to reconsider the back pay award.

City of Portsmouth v. Portsmouth Ranking Officers Association, NEPBA, Local 220, No. 2021-0511 (N.H. June 7, 2023).

New York Appellate Court Reverses Order Compelling Arbitration, Holds Collective Bargaining Agreement Arbitration Provisions Unenforceable

June 28, 2023 by Benjamin Stearns

New York statutes classify certain civil service positions as exempt where such positions are confidential in nature and require personal qualities that cannot practicably be tested by an examination. These positions are typically appointed positions, such as deputies and secretaries to political officers. As such, the nature of the positions requires that the officer exercising the appointment and removal power possess largely unrestricted authority and unlimited responsibility for appointments to positions in that class. As a result, exempt civil service positions are terminable at will, unlike most other New York civil service positions. At-will employment status allows elected officials and political appointees to hire their preferred officers, deputies, and secretaries in place of incumbent exempt class employees.

In 2015, the town of Monroe entered into a collective bargaining agreement with labor union Teamsters Local 445 that provided certain grievance procedures for covered employees, including binding arbitration regarding terminations. The agreement defined the employees covered by its provisions to include the secretary to the town planning board. In 2017, the town fired the employee. The union filed a grievance with the town alleging violations of the collective bargaining agreement’s “just cause” termination provisions and subsequently sought to compel arbitration of the dispute. The New York Supreme Court compelled arbitration of the dispute, and the Appellate Division affirmed. The New York Court of Appeals reversed, holding that for-cause termination protections, including requiring binding arbitration of related disputes, cannot be made applicable to an exempt class employee: “The statutory framework, the criteria for exempting positions, and the policy concerns underlying the exempt class’s historical terminable-at-will status together compel this conclusion.”

The court found that excluding exempt civil service employees from such protections was consistent with the legislature’s omission of such employees from the statutory tenure protections provided to other classes of employees. The exclusion was also consistent with the legislature’s intent to closely guard exempt class positions, which demonstrates an intent that positions properly classified as exempt remain so unless the applicable statutory procedure for reclassification is followed. Lastly, the court stated that public policy weighed against enforcement of the collective bargaining agreement’s termination protections, as “appointing officers must be free to choose their employees as they please. A contrary result would require officers to continue to employ in the most sensitive positions employees who do not meet the officers’ preferred qualifications.”

As a result, the court held the arbitration provisions of the collective bargaining agreement unenforceable as applied to exempt class employees, and reversed the decision to compel arbitration.

In re Teamsters Local 445 v. Town of Monroe, No. 40 (N.Y. Ct. App. May 23, 2023).

Court Enforces Nine-Figure Chinese Arbitration Award, Finding Notice Requirements of New York Convention Were Satisfied

May 1, 2023 by Benjamin Stearns

The U.S. District Court for the Southern District of New York recently denied a motion to reconsider its prior confirmation of a “multihundred-million-dollar” arbitration award by a Chinese arbitration panel. In the underlying arbitration, the China International Economic and Trade Arbitration Commission (CIETAC), the Chinese arbitral authority, issued the award after attempting three separate times to provide notice of the arbitration to the respondent. Mailed notice was sent to three different addresses, including the address designated in the relevant agreement, as well as two other addresses known to be associated with the respondent. Ultimately, the respondent appeared at the arbitration, which yielded a large award against it.

In a prior ruling, the court granted summary judgment in favor of the petitioner confirming the Chinese arbitration award pursuant to the provisions of the New York Convention. The respondent moved for reconsideration under Federal Rule of Civil Procedure 60(b), which permits “a party to seek relief from a final judgment, and request reopening of his case, under a limited set of circumstances,” including where the judgment is based on “mistake, inadvertence, surprise, or excusable neglect.” The respondent argued the judgment should be set aside because he never received proper notice of the arbitration.

The court declined the respondent’s invitation. While the New York Convention permits non-enforcement of a foreign arbitral award where proper notice was not provided, the notice does not have to meet the requirements of the federal rules. Instead, notice is required only to be sufficient to afford due process. “Because the due process inquiry is limited to determining whether the procedure used was fundamentally unfair, it often demands less than” the federal rules or the applicable arbitration agreement.

Here, the court found the procedures used by CIETAC to provide the respondent with notice were reasonable under the circumstances and sufficient to afford due process. This finding was buttressed by the fact that the respondent actually participated in the arbitration despite the reported difficulties in obtaining service. The arbitration panel’s attempts to provide service via multiple mailings to addresses known to be associated with the respondent met “the relatively low burden imposed by due process.”

Huzhou Chuangtai Rongyuan Investment Management Partnership v. Qin, No. 1:21-cv-09221 (S.D.N.Y. Mar. 31, 2023).

Arizona Permits Unilateral Modifications of Standard Consumer Contracts Upon Reasonable Notice and Opt-Out Opportunity

April 6, 2023 by Benjamin Stearns

In October 2018, Eva Cornell opened checking and savings accounts with Desert Financial Credit Union. In so doing, Cornell agreed to terms and conditions, including an agreement that Desert Financial could “change those terms and conditions from time to time.” In addition, Cornell also consented to the electronic delivery of all future communications from Desert Financial, including all disclosures, notices, and account statements. Notably, at the time Cornell opened the accounts, the parties’ contract did not include an arbitration clause.

In February 2021, Desert Financial updated its terms, adding a mandatory arbitration clause. The updated terms specified that agreement to the arbitration clause was not a mandatory condition of the customer maintaining an account with Desert Financial and that clients could opt out by providing notice by April 30, 2021, or 30 days after opening their account, whichever was later. Desert Financial did not directly contact its account holders regarding these updated terms. Rather, it posted on monthly account statements an orange-and-blue banner stating Desert Financial was making a “change-in-terms” and providing a link to the complete updated terms. Cornell received a notification from Desert Financial that her account statement was available for viewing but would only see the notice of the changed terms if and when she accessed the digital account statement.

Ultimately, Cornell never viewed or opted out of the updated terms. On May 5, 2021, Cornell filed a class action suit against Desert Financial alleging ambiguous and misleading language concerning overdraft fees. Desert Financial moved to compel arbitration. Cornell argued she never agreed to the updated terms and thus her agreement with Desert Financial did not include an arbitration clause. The District Court of Arizona certified a question to the Arizona Supreme Court as to whether Arizona law permits the unilateral modification of standard consumer contracts, and if so, what conditions must be satisfied to do so.

The Arizona Supreme Court answered the question in the affirmative, adopting Restatement Consumer Contracts § 3 in the process. The court found the Restatement “offers an effective modification procedure that fairly balances the public policies of economic efficiency and consumer protection.” The court summarized the requirements of Restatement § 3 as follows: “Consumers must (1) receive express and reasonable notice of the business’s right to unilaterally modify the agreement; (2) receive reasonable notice of new terms and the opportunity to opt out without penalty; and (3) upon receiving actual or constructive notice of new terms, continue the business relationship past a reasonable opt-out period.”

Per the court, adoption of the Restatement’s approach permits businesses to readily update their terms, facilitating economic efficiency in the context of standardized contracts, while simultaneously subjecting such changes to several safeguards designed to protect consumers from unfair exploitation.

Cornell v. Desert Financial Credit Union, No. CV-22-0071-CQ (Ariz. Mar. 2, 2023).

Ninth Circuit Recognizes Precedent Restricting Arbitration-Favoring Rules, Compels Parties to Arbitrate Anyway

March 16, 2023 by Benjamin Stearns

In litigation “bookended by two Supreme Court decisions on arbitration,” namely, Epic Systems Corp. v. Lewis and Morgan v. Sundance Inc., the Ninth Circuit recognized Morgan’s holding prohibiting courts from creating “arbitration-favoring procedural rules” but nonetheless found that the lower court correctly compelled the parties to arbitrate their wage and hour dispute over the plaintiff’s protest.

Teresa Armstrong sued Michaels Stores Inc., alleging violations of California wage and hour laws on behalf of a putative class of Michaels’ employees. Michaels answered and asserted its right to arbitration as an affirmative defense. Thereafter, the parties submitted a joint case management statement listing the legal issues in the case, including whether Armstrong agreed to arbitrate her claims. Michaels represented that it planned to move to compel arbitration after conducting discovery. Michaels subsequently served five interrogatories and required Armstrong to produce 28 pages of documents relevant to certain non-arbitrable claims. Neither party filed any discovery motions.

Michaels moved to compel arbitration in August 2018, approximately 10 months after Armstrong had originally filed suit. Armstrong opposed it, arguing that Michaels had waived its right to arbitration due to delay. The district court ruled in favor of Michaels and the arbitrator awarded summary judgment to Michaels. Armstrong appealed to the Ninth Circuit.

While the appeal was pending, the U.S. Supreme Court decided Morgan, which held that “the plain language of the Federal Arbitration Act restricts courts from creating arbitration-favoring procedural rules.” The Ninth Circuit noted that, before Morgan, “to give voice to the FAA’s policy favoring enforcement of arbitration agreements, we held that waiver of the right to arbitration was disfavored.” Like most other circuits, the Ninth Circuit had created “an arbitration-specific waiver test,” which imposed a “heavy burden” on parties arguing that the right to arbitrate had been waived. After Morgan, courts are now required to treat arbitration agreements just like any other contract and, as such, “may not devise novel rules to favor arbitration over litigation.”

In light of Morgan, parties asserting waiver must now demonstrate (1) knowledge of an existing right to compel arbitration and (2) intentional acts inconsistent with that existing right. Unlike before, parties no longer have to demonstrate prejudice to the person opposing arbitration caused by such inconsistent acts.

The Ninth Circuit applied the precedent to Michaels’ actions in the litigation and found that Michaels had not intentionally acted inconsistently with its right to compel arbitration. On the contrary, Michaels consistently stated its intent to move to compel arbitration. Further, Michaels did not actively litigate the merits of the case in the district court. Its limited discovery requests were related to Armstrong’s non-arbitrable claims. Finally, Michaels’ motion to compel arbitration was filed within a year of the lawsuit originally being filed against it. Even under the post-Morgan regime for analyzing waiver of the right to compel arbitration, the Ninth Circuit held Michaels’ actions in this case insufficient to waive its right.

Armstrong v. Michaels Stores Inc., No. 21-15397 (9th Cir. Feb. 13, 2023)