Carlton Fields

FIFTH CIRCUIT AFFIRMS WAIVER OF ARBITRATION WHERE PLAINTIFF FIRST SOUGHT TO COMPEL ARBITRATION AFTER REMOVAL TO FEDERAL COURT

March 8, 2018 by Carlton Fields

This case concerned a business dispute between two physicians. Despite the arbitration clause contained in their agreement, Dr. Raju sued Dr. Murphy in state court. However, after Dr. Murphy removed the case to the District Court for the Southern District of Mississippi and counterclaimed, Dr. Raju invoked the arbitration clause and moved to stay the court proceedings. The district court denied Dr. Raju’s motion to compel arbitration, which prompted this interlocutory appeal.

The Fifth Circuit affirmed the district court’s decision, reasoning that the right to arbitrate is subject to waiver when, as here, “the party seeking arbitration substantially invokes the judicial process to the detriment or prejudice of the other party.” As the court determined, “Dr. Raju clearly prefer[red] litigation over arbitration, apparently just not in this Court.” The court went on to find that Dr. Murphy had been prejudiced by “being required to answer the complaint, to file a counterclaim, to consult with two law firms, and to gear her legal strategy to court proceedings instead of arbitration” as well as by “the public nature of the lawsuit” as compared to the “private and confidential” nature of arbitration. Raju v. Murphy, No. 17-60550 (5th Cir. Jan. 26, 2018).

This post written by Gail Jankowski.
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ARBITRATION AGREEMENT SELECTING MARYLAND LAW HELD UNENFORCEABLE AS TO PRIVATE ATTORNEY GENERAL CLAIMS BROUGHT UNDER CALIFORNIA LAW

March 7, 2018 by Carlton Fields

A choice of law provision within an arbitration agreement selecting Maryland law was held unenforceable in so far as it would result in waiver of claims under the California Private Attorneys General Act (PAGA), contrary to California’s “fundamental policy.”

Because the diversity action was brought in federal court in California, the court was required to follow California’s choice-of-law rules. California law provides that application of choice of law provisions that would yield results conflicting with California’s fundamental policy is error. The Ninth Circuit stated that PAGA represents a “fundamental California policy.” Therefore, the arbitration agreement’s choice of law rules selecting Maryland law could not be enforced, because they would waive the plaintiff’s PAGA claims.

However, the plaintiff’s claims for unpaid wages under California law were distinguishable from her PAGA claims. Arbitration of the unpaid wages claims was not contrary to any fundamental policy. As a result, the court ordered arbitration of the plaintiff’s personal unpaid wages claims, while prohibiting arbitration of her PAGA claims. Mandviwala v. Five Star Quality Care, Inc., No. 16-55084 (9th Cir. Feb. 2, 2018).

This post written by Benjamin E. Stearns.
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NINTH CIRCUIT REAFFIRMS THAT WASHINGTON STATE’S PROHIBITION OF ARBITRATION CLAUSES IN INSURANCE CONTRACTS REVERSE-PREEMPTS FAA

March 6, 2018 by Carlton Fields

This case concerned a coverage dispute between Technical Security Integration Inc. and its insurer, Philadelphia Indemnity. The District Court for the District of Oregon denied Philadelphia Indemnity’s motion to compel arbitration, which prompted this interlocutory appeal. Because Washington Code § 48.18.200 prohibits mandatory arbitration agreements in insurance contracts, while Oregon lacks any analogous provision, the issue on appeal was whether the district court erred when it applied Washington law, rather than Oregon law, to the dispute. Reviewing de novo and applying Oregon’s multi-factor test for determining “the most appropriate” law in the absence of an effective choice of law provision, the Ninth Circuit affirmed that Washington law applied, and therefore, it affirmed the denial of Philadelphia Indemnity’s motion to compel arbitration. The court found that the district court properly followed Washington Supreme Court precedent interpreting Washington’s statute as prohibiting mandatory arbitration clauses in insurance contracts, and moreover, that the statute “reverse-preempts” the Federal Arbitration Act, rather than being preempted by it. Tech. Sec. Integration, Inc. v. Philadelphia Indem. Ins. Co., No. 15-35683 (9th Cir. Feb. 1, 2018).

This post written by Gail Jankowski.
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PARTICIPATION IN LITIGATION TO AVOID A DEFAULT JUDGMENT DOES NOT WAIVE A PARTY’S RIGHT TO COMPEL ARBITRATION

March 5, 2018 by Carlton Fields

An employer did not waive its right to compel arbitration under an employment agreement by seeking to set aside a default in an employment discrimination suit brought against it by its employee. Due to an “administrative oversight,” the employer’s counsel did not become aware it had been served with a complaint until after a default had been entered. The employer was successful in its effort to set aside the default, however, the employee argued that the employer’s participation in the litigation resulted in a waiver of its right to compel arbitration.

The Eleventh Circuit disagreed. A two-part test controls whether a party has waived its right to arbitration. The first prong inquires whether, under the totality of the circumstances, the party has “acted inconsistently with the arbitration right.” This occurs when the party “substantially invokes the litigation machinery prior to demanding arbitration.” The second prong asks whether the invocation of litigation has prejudiced the other party.

The employer’s participation in the litigation was not substantial enough to be considered inconsistent with an intent to arbitrate. In so holding, the court noted that moving to set aside the default was the only procedure the employer could have used to permit it to seek arbitration of the employee’s claims. Because the employer’s participation in the litigation failed to satisfy the first prong of the two-part test, the employer did not waive and was permitted to enforce its right to compel arbitration. Sherrard v. Macy’s Sys. and Tech. Inc., Case No. 17-11766 (11th Cir. Feb. 5, 2018).

This post written by Benjamin E. Stearns.
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NINTH CIRCUIT AFFIRMS MONTANA DISTRICT COURT’S ORDER CONFIRMING ARBITRATION AWARD

February 8, 2018 by Carlton Fields

This case involves an appeal to the Ninth Circuit Court of Appeals by Appellants Schilling Livestock, Inc., Kenneth Schilling and Lesley Schilling (collectively, the “Schillings”), of a Montana federal district court’s order confirming an arbitration award in favor of Appellee Umpqua Bank, FKA Sterling Savings Bank (“Sterling”). On appeal, the Schillings contended that the arbitration award should be vacated on two grounds: 1) that the arbitrators engaged in misconduct by allowing Sterling to rely on an undisclosed defense premised on the Gramm-Leach-Bliley Act (“GLBA”); and 2) that Sterling’s expert falsely testified that Sterling was not liable for fraudulent investment advice due to a networking exception to the GLBA.

The Ninth Circuit held that the Schillings failed to meet the high standard for vacating an arbitration award. First, the Court noted that the Schillings’ assertion that they were deprived of adequate notice of Sterling’s reliance on the GLBA defense was not supported by the record. The Court further noted that the district court correctly found that the Schillings opened the door to Sterling’s introduction of a rebuttal witness concerning the bank’s statutory duties, and that they were afforded an opportunity to submit supplemental briefing on the GLBA defense, but did not do so. Thus, the Court held that the arbitrators did not engage in misconduct in permitting rebuttal expert testimony regarding the GLBA defense, and that the arbitrators’ decision did not deprive the Schillings of a fair hearing. The Ninth Circuit also found that the record did not support the Schillings’ argument that Sterling’s expert falsely testified concerning the GLBA defense. Rather, it noted that the district court found that the expert responded to an ambiguous question and did not otherwise provide false testimony. The Court further noted that the arbitrators’ award did not refer to the expert’s testimony in finding that Sterling was not liable. Thus, the Ninth Circuit held that the Schillings failed to demonstrate by clear and convincing evidence that any fraud or false testimony warranted vacating the arbitration award. Based on the foregoing, the Ninth Circuit affirmed the Montana district court’s order confirming the arbitration award.

Schilling Livestock, Inc. et al v. Umpqua Bank, FKA Sterling Savings Bank, No. 15-35995 (9th Cir. Dec. 28, 2017).

This post written by Jeanne Kohler.
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