Benjamin Stearns

Fourth Circuit Refuses to Create a Less Deferential Standard of Review for Arbitral Decisions That Implicate Res Judicata or Collateral Estoppel

January 13, 2022 by Benjamin Stearns

In a dispute between Constellium Rolled Products Ravenswood LLC and a labor union, Constellium argued that an arbitrator’s award against Constellium was contrary to a prior court decision involving the same parties and therefore violated the doctrine of res judicata. Despite the existence of an arbitration agreement between the parties, Constellium sued in district court seeking a declaratory judgment that it should prevail in the dispute. The district court denied Constellium’s petition and the parties proceeded to arbitration, which resulted in an award in favor of the union. Constellium appealed to the Fourth Circuit Court of Appeals, arguing that the district court should have determined the preclusive effect of the prior decision in the first instance or, in the alternative, that the appellate court should apply a less deferential standard for reviewing res judicata and collateral estoppel errors than applies to other alleged legal errors in an arbitration.

The Fourth Circuit disagreed, noting that the Supreme Court has identified two categories of threshold questions — procedural questions for the arbitrator, and questions of arbitrability for the court. Questions of arbitrability are “quite limited” and include disputes about the existence and scope of a valid and binding arbitration agreement. “Procedural questions,” on the other hand, grow out of the dispute and bear on its final disposition, and include issues such as the application of statutes of limitations, notice requirements, laches, and estoppel. Such procedural questions do not present any legal challenge to the arbitrator’s underlying power and are the types of questions that the parties would likely expect the arbitrator to determine.

The court found that the preclusive effect of a prior judgment is a “procedural question” for the arbitrator. Similar to laches and estoppel, preclusion is an affirmative defense to the underlying dispute and does not implicate the arbitrator’s power, unlike questions related to the existence or scope of an arbitration agreement. Constellium “highlight[ed] older decisions” holding that courts “have the power to defend their judgments as res judicata, including the power to enjoin or stay subsequent arbitrations,” and argued that the court should exercise “plenary review” of an arbitrator’s preclusion decision rather than applying the typical highly deferential standards for review of an arbitration decision. But the Fourth Circuit found no legal basis for such a distinction in the Federal Arbitration Act or case law. Lacking any legal basis for treating such issues differently, the court declined Constellium’s invitation to expand its review of legal errors in arbitration awards beyond that authorized by the FAA, and affirmed the award against Constellium.

Constellium Rolled Products Ravenswood, LLC v. United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial & Service Workers International Union AFL-CIO/CLC, No. 20-1759 (4th Cir. Nov. 29, 2021).

Fifth Circuit Holds Prior Waiver of Right to Arbitrate State Law Claims Does Not Waive Right to Compel Arbitration of Newly Asserted Federal Claims

September 30, 2021 by Benjamin Stearns

In protracted litigation springing from the sale of “free” credit reports that “were not really free,” the Fifth Circuit Court of Appeals held that a party’s waiver of its right to arbitrate state law claims did not result in a waiver of its right to compel arbitration of newly asserted federal law claims. In a purported class action, the plaintiff originally asserted several claims under Illinois law against One Technologies, L.P. One Tech removed to federal court and filed a motion to dismiss. After that motion was partially denied, One Tech moved to compel arbitration, which was granted by the district court but reversed on appeal, with the Fifth Circuit holding that filing of the motion to dismiss waived the right to arbitrate the state law claims.

On remand, the plaintiff filed an amended complaint asserting, for the first time, claims under the Credit Repair Organizations Act, a federal consumer protection statute that regulates the practices of such organizations. One Tech moved to compel arbitration, arguing in part that it “could not possibly have waived its right to arbitrate” the new claims because they were not raised until after the previous waiver occurred through the filing of the motion to dismiss. The district court denied the motion, but the Fifth Circuit reversed again on appeal.

In so holding, the Fifth Circuit stressed that waiver of arbitral rights is claim-specific. A party waives arbitration by “substantially invoking the judicial process to the detriment or prejudice of the other party.” For waiver purposes, “a party only invokes the judicial process to the extent it litigates a specific claim it subsequently seeks to arbitrate.” One Tech could not have waived its right to arbitrate the CROA claims at issue because they had not even been asserted by the plaintiff when One Tech previously moved to dismiss the state law claims. Because One Tech moved to compel arbitration of the newly asserted federal law claims without first waiving its right to do so, the Fifth Circuit reversed and remanded.

Forby v. One Technologies, L.P., No. 20-10088 (5th Cir. Sept. 14, 2021).

Chinese Arbitration Award Confirmed Despite US Company’s Claim of Unfair Treatment Stemming From US-China Trade War

August 31, 2021 by Benjamin Stearns

The Northern District of New York confirmed this month an arbitration award made in June 2018 by the China International Economic and Trade Arbitration Commission (CIETAC) in favor of two Chinese companies and against a U.S. tool manufacturer. The Chinese companies had contracted to purchase and import machine tools used in the manufacture of automobile engines and other machine parts from New Monarch Machine Tool Inc., a company based in Cortland, New York. New Monarch allegedly defaulted on its delivery and installation obligations under the parties’ sales contracts, which required arbitration of any disputes to take place in Beijing before CIETAC.

The CIETAC panel ultimately awarded the Chinese companies approximately $2.4 million, plus interest, payable within 30 days. When New Monarch failed to pay, a petition for confirmation of the award was filed. New Monarch argued that the award should not be confirmed because the arbitration was not conducted per CIETAC’s own rules and that the award was against the public policy of the United States.

The New York Convention governs the enforcement of arbitral awards stemming from disputes that are commercial and not entirely between citizens of the United States. Article V of the convention provides the grounds for refusing to recognize or enforce a foreign arbitral award, which include the grounds raised by New Monarch. However, the party opposing enforcement of an arbitral award under the convention has the “heavy” burden of proving that one of the grounds applies.

New Monarch failed to meet that burden. It argued that CIETAC failed to follow its own rules by taking more than a year to render a decision despite the rules imposing a six-month deadline. The court noted that the rules permit the deadline to be extended if the panel receives permission from the president of the arbitration court, which the panel did in this case.

New Monarch also argued that the deterioration of U.S.-Chinese trade relations during the yearlong delay made it “impossible for an American company like New Monarch to get a fair shake before the Chinese-based CIETAC.” The court rejected this argument, noting that the public policy defense must be “construed very narrowly to encompass only those circumstances where enforcement would violate our most basic notions of morality and justice.” The court “boil[ed] down” this argument to an “assertion that the confirmation of a foreign arbitral award somehow hinges on the current state of trade relations between signatories to the New York Convention.” The court stated that such a finding would be contrary to the goals and purpose of the New York Convention, which is “to encourage the recognition and enforcement of commercial arbitration agreements in international contracts and to unify the standards by which agreements to arbitrate are observed and arbitral awards are enforced in the signatory countries.”

Chongqing Loncin Engine Parts v New Monarch Machine Tool, No. 5:21-cv-00084 (N.D.N.Y. Aug. 3, 2021).

Eleventh Circuit Denies Petition to Vacate Arbitration Award Based on Alleged Bias Where Arbitrator’s Prior Employment by Opposing Law Firm Was Disclosed

August 12, 2021 by Benjamin Stearns

A pro se litigant sought to vacate an adverse summary judgment in arbitration that rejected her wrongfully termination claim. At the outset of the arbitration proceeding, the parties agreed on the selection of the proposed arbitrator, even though his curriculum vitae showed that he had previously served as the managing shareholder of an office of the law firm representing the employer adverse to the pro se litigant. This fact was further mentioned by the law firm in an email to the pro se litigant, and again by the arbitrator himself in another email to the parties.

After the arbitrator entered judgment for the employer, the pro se litigant sought to vacate the award, alleging that the arbitrator had failed to disclose his friendship with one of the lawyers representing the employer. The pro se litigant based her argument in part on the discovery of a photograph of the arbitrator and opposing counsel “standing arm in arm in celebration of [the arbitrator’s] 50th birthday” and further that this “undisclosed relationship and their friendship demonstrates bias.”

The Eleventh Circuit found these arguments insufficient to demonstrate the requisite bias. The court noted that the arbitrator’s prior employment by the law firm had been disclosed and stated that “it follows necessarily from this disclosure that he likely has friendships with many of [the firm’s] employees.” Further, to the extent the alleged friendship “should have been separately disclosed, we have explained that standing alone, the fact that an arbitrator had previous contacts with counsel for one of the parties does not suggest evident partiality.” To demonstrate bias, the pro se litigant had to produce some additional basis, such as “financial incentives” or “concurrent representations” involving opposing counsel that “might give a reasonable impression of partiality.” The evidence that was presented offered “mere speculation of unfair bias … which is too remote, uncertain and speculative to create a reasonable impression of partiality.”

Perez v. Cigna Health & Life Insurance Co., No. 20-12730 (11th Cir. July 13, 2021).

Court Compels Employment Dispute to Arbitration, Rejecting Defenses That Arbitration Clause Did Not Survive Termination and That Clause Was Unconscionable

July 23, 2021 by Benjamin Stearns

The dispute surrounded the employee’s termination due to an inability to be physically present at the workplace. The employee filed suit in Rhode Island state court, alleging that the employer failed to provide reasonable accommodations for her known disability. The employer removed the case to federal court and then filed a motion to compel arbitration.

The employee contended that the employment agreement and its arbitration provision ended with the employment relationship, but the court found that the arbitration clause survived the underlying contract. The court found that the language of the agreement “along with common sense” indicated that employment-related disputes, including termination, were governed by the arbitration provision. The court further ruled that whether the employment agreement was still in effect was a matter of contract interpretation that was for the arbitrator to decide.

The court also rejected the employee’s argument that the arbitration provision was unconscionable under governing state law (Utah). Regarding substantive unconscionability, the court found that the contract was not “so one-sided as to oppress or unfairly surprise an innocent party” and that there was no “overall imbalance in the obligations and rights imposed by the bargain.” The court disagreed with the employee that the arbitration provision lacked mutuality or that the required venue of Utah, the employer’s home state, was unfair. Regarding mutuality, the court held that it required only that both parties would be bound to the terms of any dispute that would be required to be submitted to the arbitrator (not that the contract must be equally balanced or that every dispute needed to be arbitrated). And regarding the venue, the court found that a Utah-based arbitration did not increase the likelihood of partiality (noting that the agreement required an arbitrator from the AAA) or create undue expense and inconvenience (the employer agreed to conduct arbitration remotely).

Regarding procedural unconscionability, the court was not persuaded by the employee’s argument that she did not have a reasonable opportunity to understand the terms of the employment agreement. The court found that the employee’s allegations went to the unconscionability of the contract as a whole, rather than the arbitration provision, which was an issue for the arbitrator, not the court.

The court compelled arbitration and elected to dismiss the complaint rather than enter a stay of the proceedings since all of the employee’s claims were subject to arbitration.

Trainor v. Primary Residential Mortgage, Inc., No. 1:20-cv-00426 (D.R.I. June 16, 2021).