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Brendan Gooley

First Circuit Weighs in on FAA’s Transportation Worker Exception

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The First Circuit Court of Appeals recently clarified the standards for invoking the “transportation worker” exception to the Federal Arbitration Act. The court noted that fact-finding on that exception should focus on the frequency with which workers transport goods as part of their duties (regularly or only occasionally) and whether that transportation constitutes engaging in interstate commerce.

Sara Fraga worked as a merchandiser for Premium Retail Services Inc., a company that supported brands at their stores by having its merchandisers create advertising displays, update pricing and signage, and perform a number of other tasks. Premium and Fraga agreed that Fraga would receive marketing and promotional materials at her home and bring them to stores as part of her job. But Fraga and Premium disagreed about how frequently Fraga did so. Fraga claimed she received materials at her home and transported them to retail stores almost daily while Premium claimed it sent materials to merchandisers’ homes rarely.

Fraga filed a putative class action lawsuit against Premium under the Fair Labor Standards Act and Massachusetts law. She claimed that Premium failed to pay her and other merchandisers for overtime, time spent traveling to and between worksites, and work performed before arriving at a worksite, such as sorting and preparing display materials.

Premium moved to compel arbitration under Fraga’s employment contract, which also included a class action waiver. Fraga opposed Premium’s motion on the ground that she fell within the FAA’s exception for transportation workers. She argued that the FAA therefore did not apply and that Massachusetts law, which prohibits class action waivers, governed the dispute.

The district court denied Premium’s motion. It concluded that Fraga had plausibly alleged that she fell within the FAA’s exemption for transportation workers.

The First Circuit vacated and remanded. It concluded that further fact-finding was needed to determine whether Fraga and her co-workers fell within the transportation worker exception.

The First Circuit also provided guidance on what facts would allow Fraga to invoke the exception. In short, the First Circuit instructed the district court’s further fact-finding to focus on the work in which Fraga and other merchandisers were actually engaged rather than exclusively or even primarily focusing on the industry in which they worked (i.e., whether they worked in the transportation industry or another industry). The First Circuit emphasized that the “frequency” that Fraga and other merchandisers in the putative class worked on transporting goods was a key question (particularly given that the parties disputed the frequency that Fraga transported goods). If Fraga did not frequently deliver materials to retailers, then Fraga’s FAA exemption argument fails and the matter should be referred to arbitration. Conversely, if sorting, loading, and then transporting materials to retailers were frequently performed job duties, then the exemption would be met if the merchandisers were engaged in interstate commerce.

With respect to interstate commerce, the First Circuit noted that an employee need not necessarily drive across state lines to be engaged in interstate commerce for purposes of the FAA’s relevant exception. At the same time, intrastate deliveries of goods that previously traveled in interstate commerce might not be enough to meet the exception. The First Circuit instructed the district court to analogize this case to its relevant decisions based on the fact-finding that needed to be performed to determine whether interstate commerce existed.

Fraga v. Premium Retail Services, Inc., No. 22-1101 (1st Cir. Mar. 3, 2023).

Fifth Circuit Refuses to Vacate Arbitration Award, Holds That Party’s Arguments Merely Ask for Merits Review

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The Fifth Circuit Court of Appeals recently rejected a claim that an arbitration award should be vacated by holding that the challenging party’s arguments improperly asked the court to review the merits of the arbitration panel’s decision and noting that proving fraudulent inducement to sign a contract is not enough to evade arbitration because the fraud must relate to the arbitration clause itself.

Brendan Church of Old South Trading Company LLC and Joseph Agresti of Dream Medical Group LLC entered into a business arrangement whereby Old South supplied Dream Medical with personal protective equipment that Dream Medical then distributed. Dream Medical subsequently sent Old South a resolution agreement that contained an arbitration clause. Church initially refused to sign the agreement but later did so after Agresti purportedly told him that Dream Medical would never enforce the agreement. Dream Medical later sought to enforce the agreement to obtain a refund on a transaction, which led to arbitration when Old South refused to provide the full refund. Old South argued that it had been fraudulently induced to enter the agreement, but the arbitration panel rejected that argument and concluded in relevant part that Old South breached the agreement. Dream Medical applied to confirm the award and Old South moved to vacate it.

The district court confirmed the award and Old South appealed. It argued that the arbitrators violated section 10(a)(3) of the FAA “by not fully considering its fraudulent inducement claim” and violated section 10(a)(4) of the FAA “by failing to fully review Old South’s evidence of, and the applicable law regarding, fraudulent inducement.” The Fifth Circuit concluded that neither of these arguments warranted reversal. It explained that both arguments “functionally invite[d] [it] to reassess the merits of [the arbitration panel’s] fraudulent inducement claim and reach a different conclusion than the” panel, which was “not something [the court could] do.” Old South also argued “that it didn’t voluntarily consent to arbitration because it was fraudulently induced to sign the … Agreement,” but the Fifth Circuit rejected that claim, noting that “even if a contract had been induced by fraud, the arbitration clause is enforceable unless the plaintiffs were fraudulently induced into agreeing to the arbitration clause itself.”

Dream Medical Group, LLC v. Old South Trading Co., No. 22-20286 (5th Cir. Mar. 6, 2023).

Arbitrability Is Question for Court in Case Alleging Fraud Regarding Agreement Between Parties

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The Court of Appeals of Maryland recently held that the question of arbitrability was for a court, not an arbitrator, to decide where the plaintiffs alleged that the defendants had fraudulently induced them to enter agreements they did not understand contained arbitration clauses.

Several Maryland residents obtained structured settlements to compensate them for injuries allegedly caused by their purported exposure to lead-based paint. Access Funding, LLC and Assoc, LLC (collectively the “Factoring Companies”) entered into agreements with those residents whereby the Factoring Companies paid them a discounted lump sum and the residents assigned their rights to periodic future payments to the Factoring Companies. The agreements contained arbitration clauses that stated “[o]nce your transaction has closed any claim or dispute . . . shall be resolved by mandatory binding arbitration.” Under Maryland law, the agreements were contingent on court approval, which the parties obtained.

The residents subsequently filed a putative class action complaint alleging, among other things, that the Factoring Companies engaged in fraud and other misconduct in inducing them to execute the agreements. To make a procedurally complex story much more simple, the Factoring Companies moved to compel arbitration. The Maryland trial court granted the motion to compel, reasoning that arbitrability was for the arbitrator to decide, but Maryland’s intermediate appellate court reversed. The Court of Appeals of Maryland reviewed the case and agreed with the intermediate appellate court that the motion to compel should have been denied.

The court held that “the question of whether a valid arbitration agreement exists is a question for the court to determine” where a plaintiff alleges that the “approval of the transfer of their structured settlement payment rights was procured through fraud and deceit” and the plaintiff denies “the existence of a valid agreement to arbitrate.” The court explained, “a plaintiff’s alleged inability to understand the terms of an arbitration clause in a written agreement, on the ground that the other party procured the agreement through fraud and deceit, places the existence of a valid agreement to arbitrate at issue and raises an issue to be decided by the court, not the arbitrator.” In this case, the court explained that the plaintiffs allegedly suffered from cognitive deficiencies and had pleaded that the Factoring Companies and other defendants had colluded to “interfere with their ability to obtain independent professional advice and sought to prevent them from fully understanding and appreciating the agreement’s provision with respect to binding arbitration.” The court found these allegations sufficient to place the existence of a valid agreement in question.

Alternatively, the court also held that because “the plain language of the arbitration clause expressly conditions arbitration on closure of the transaction” the plaintiffs “challenge[d] the existence of an agreement to arbitrate, which is an issue for the court” not the arbitrator.

Of note, the court also explained that the Maryland Uniform Arbitration Act, which governed the arbitration issues in this case, was meant to mirror the FAA.

Access Funding, LLC, et al. v. Chrystal Linton, et al., No. 5, September Term 2022 (Ct. App. Md. Dec. 1, 2022).

 

Tenth Circuit Affirms Refusal to Vacate Confirmation Despite Foreign Court’s Annulment of Underlying Arbitration Award

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The Tenth Circuit recently affirmed a district court’s decision not to vacate a confirmation award even though the underlying arbitration award had been annulled by a Bolivian court following the confirmation. The Tenth Circuit agreed that public policy considerations, including concerns about encouraging endless litigation, rendered the district court’s decision not to vacate the confirmation as within that court’s discretion.

Compañía de Inversiones Mercantiles S.A. (CIMSA) and Grupo Cementos de Chihuahua S.A.B. de C.V. (GCC) entered into a shareholder agreement in which GCC purchased shares of a Bolivian company from CIMSA. The shareholder agreement included an arbitration clause and provided that CIMSA had a right of first refusal if GCC sought to sell its shares. CIMSA attempted to exercise that right when GCC moved to sell shares, but GCC purportedly claimed that CIMSA’s right was invalid and sold the shares to a third party. The sale triggered lengthy arbitration and court proceedings. In short, an arbitral tribunal in Bolivia awarded CIMSA approximately $34 million in damages plus $2 million in costs and fees, all subject to 6% interest. GCC moved to annul the award in Bolivia but lost. CIMSA then obtained an order from the U. S. District Court for the District of Colorado confirming the award. The Tenth Circuit affirmed that award. GCC then persuaded a different panel of the Bolivian court that had ruled against it to annul the arbitral award. With that annulment in hand, GCC moved to vacate the district court’s confirmation order. The district court denied GCC’s motion. GCC appealed that decision to the Tenth Circuit, which affirmed.

GCC initially  argued that a U. S. court cannot confirm an arbitral award that has been annulled by the primary jurisdiction. The Tenth Circuit disagreed, noting:

[W]hen a court has been asked to vacate an order confirming an arbitral award that has later been annulled, it may balance against comity considerations (1) whether the annulment is repugnant to U.S. public policy or (2) whether giving effect to the annulment would undermine U.S. public policy.

GCC nevertheless argued that the district court erred by considering in conjunction with that analysis not only whether the orders of the Bolivian court were repugnant to U.S. public policy, but “whether giving effect to those orders through vacatur of its Confirmation Judgment would offend U.S. public policy.” The Tenth Circuit disagreed, explaining that the district court properly considered whether giving effect to orders would violate public policy (and holding that it would because doing so would “encourage ‘proceedings without end’”) in addition to the question of whether the orders themselves were repugnant to U.S. public policy. The Tenth Circuit held that the district court did not abuse its discretion in concluding “that (1) giving effect to the [] Bolivian orders [annulling the arbitral award] would offend U.S. public policy and (2) GCC acted inequitably in the United States and Bolivian proceedings[:]”

The interests of the finality of judgments, respecting parties’ contractual expectations, and the U. S. policy favoring arbitral dispute resolution support the district court’s conclusion that vacatur of its Confirmation Judgment would violate U.S. public policy. These considerations correspondingly support the district court’s decision against extending comity to the [relevant] Bolivian orders.

The Tenth Circuit also rejected GCC’s arguments that the district court erred by ordering GCC to turnover property held abroad by third parties, and other challenges to turnover orders.

Compañía de Inversiones Mercantiles S.A. v. Grupo Cementos de Chihuahua S.A.B. de C.V., No. 21-1196 (10th Cir. Jan. 10, 2023)

Supreme Court of Wyoming Confirms Arbitration Award

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The Supreme Court of Wyoming recently rejected claims by a party that had largely prevailed in arbitration, but asserted that it should have received its fees, and that the arbitrator incorrectly decided several issues.

Fork Road, LLC owned part of a building that it purchased from JAMD, LLC. Mountain Business Center, LLC (MBC) was a tenant in that building. JAMD requested, on behalf of Fork Road, that MBC provide information about subtenants. MBC provided certain information, but withheld other information. Fork Road and MBC ended up in arbitration over that withholding and various other issues related to MBC’s lease. The arbitrator ruled in favor of MBC on certain claims and Fork Road on other claims, but ultimately awarded MBC nearly $24,000. MBC argued that it was the prevailing party and sought its fees, but the arbitrator declined to award them because this was a “mixed outcome” case, in which both parties prevailed on certain claims.

MBC challenged the award, arguing that the arbitrator had exceeded his authority because one of Fork Road’s witnesses had “waived” certain claims by Fork Road, but the arbitrator had nevertheless decided those claims. MBC also argued that it was the prevailing party and therefore entitled to fees and that the arbitrator erred by not applying the “first to breach rule” and holding that Fork Road had been the first to materially breach the lease.

The Supreme Court of Wyoming rejected MBC’s claims noting, “MBC cite[d] no authority that testimony by a lay witness on the substantial acts at issue may be used by party to limit its opponent’s claims.” It also held that the arbitrator did not have to award MBC fees even if it was true, as MBC argued, that MBC had prevailed on the “central issue” in the case.  The court also held that the arbitrator did not commit manifest error by not applying the “first to breach rule,” where MBC had stayed in the building after Fork Road allegedly breached the lease.

Mountain Business Center, LLC v. Fork Road, LLC, No. 2-22 WY 147 (Wyo. Nov. 23, 2022).