Carlton Fields

Eighth Circuit Holds Claims Against Parent Company Were Precluded by Prior Arbitration Award and Confirmation Denying the Same Claims Against Company’s Subsidiary

July 27, 2021 by Carlton Fields

Cellphone network developer Daredevil Inc. brought an action in a Missouri federal district court against Chinese technology firm ZTE Corp., which manufactured and sold telecommunications infrastructure and cellular network equipment, asserting claims for breach of contract, fraud, unjust enrichment, and tortious interference with contract.

Daredevil’s case against ZTE was stayed pending a Florida arbitration of Daredevil’s claims against a New Jersey-based wholly owned subsidiary of ZTE. The arbitrator ultimately denied Daredevil’s claims against ZTE’s subsidiary, and a Florida federal district court confirmed the arbitration award, which was affirmed by the Eleventh Circuit Court of Appeals. Daredevil then reopened its case against ZTE in the Missouri district court, and ZTE moved for summary judgment on the grounds that Daredevil’s claims were precluded by the prior arbitration award and confirmation.

Agreeing with ZTE that Daredevil’s claims were precluded under Florida law by the arbitration award and confirmation, the Missouri district court granted ZTE’s motion for summary judgment. Daredevil appealed, arguing that the district court erred when it applied Florida law instead of Missouri law to the issue of claim preclusion and that its claims against ZTE were also not barred under Florida law because the parties and causes of action did not meet Florida law’s requirement of “identity” for claim preclusion to apply.

On appeal, the Eighth Circuit Court of Appeals held that Florida law governed the preclusive effect of the arbitration award that took place in Florida and was confirmed by the Florida federal district court. The Eighth Circuit also held that ZTE satisfied Florida’s “identity” requirement for claim preclusion to apply, finding that privity existed between ZTE and its subsidiary, and Daredevil’s claims against ZTE were “so closely related to” Daredevil’s arbitration claims against the subsidiary. As a result, the Eighth Circuit affirmed the Missouri district court’s decision.

Daredevil, Inc. v. ZTE Corp., No. 19-3769 (8th Cir. June 18, 2021).

Fourth Circuit Holds Estate of Assisted Living Facility Resident Required to Arbitrate Wrongful Death and Survival Claims

July 7, 2021 by Carlton Fields

In 2017, the plaintiff’s father was admitted as a resident to an assisted living facility in Greenville, South Carolina. As part of the admissions process, the plaintiff, pursuant to a durable general power of attorney, signed the residence services agreement and the attached binding arbitration agreement. A few months later, an employee at the assisted living facility administered incorrect medication to the plaintiff’s father, which ultimately led to his death.

The plaintiff, on behalf of her father’s estate, filed wrongful death and survival actions against the assisted living facility and related entities in federal district court in South Carolina. The defendants moved to dismiss and compel arbitration under the arbitration agreement.

Finding the plaintiff’s claims concerning her father’s care at the assisted living facility fell within the scope of the arbitration agreement, the district court focused on the enforceability of such agreement. The plaintiff challenged the agreement’s enforceability, claiming that the residence services agreement and arbitration agreement should be merged, and since certain provisions of the residence services agreement were purportedly unconscionable, so too were the provisions of the arbitration agreement.

The district court noted that merger has no relevance on the unconscionability of the arbitration agreement because arbitration provisions are severable from the remainder of the contract. The district court therefore looked only to whether the specific provisions of the arbitration agreement were unconscionable and found that, contrary to the plaintiff’s arguments, they were not so oppressive that a fair and honest person would not accept them. The district court therefore granted the motion to dismiss and compel arbitration.

On appeal, the plaintiff argued that the mandatory arbitration agreement and the underlying residence services agreement should be considered as one merged contract, the terms of which were unconscionable under state law and therefore unenforceable.

The Fourth Circuit Court of Appeals affirmed the district court’s decision, finding the lower court properly limited its consideration to the terms of the arbitration agreement and that nothing in the record established that the terms of the arbitration agreement were unconscionable under South Carolina law.

Kelly v. Capital Senior Living Corp., No. 19-2263 (4th Cir. June 17, 2021).

Sixth Circuit Holds Former Employee Required to Arbitrate “Gateway” Questions Concerning Arbitration Agreement’s Coverage, Enforceability, and Formation

July 5, 2021 by Carlton Fields

The plaintiff sued his former employer, Charter Communications, asserting Kentucky state law claims arising out of his termination. After the case was removed to federal court in the Western District of Kentucky, Charter moved to compel arbitration and dismiss, or in the alternative, stay, the lawsuit.

Before the plaintiff’s termination, Charter had announced a dispute resolution program that would require all employees to arbitrate any employment dispute with Charter unless the employee opted out within 30 days. The plaintiff did not opt out, and as a result, the district court dismissed the plaintiff’s suit against Charter and compelled him to arbitrate his employment claims.

The plaintiff appealed to the Sixth Circuit Court of Appeals, arguing that the arbitration agreement did not cover his employment claims, that it was unconscionable, and that Charter failed to give adequate consideration in return for his agreement to arbitrate.

The Sixth Circuit affirmed the district court’s decision to compel arbitration, holding that the arbitration agreement expressly reserved these “gateway” questions concerning coverage and enforceability of the arbitration agreement for the arbitrator to resolve.

The court noted that the arbitration agreement unambiguously stated that “the arbitrator shall have the sole authority to determine whether a particular claim or controversy is arbitrable.” The court also reasoned that the plaintiff never challenged the district court’s holding delegating the enforceability question to the arbitrator and that the plaintiff’s unconscionability argument attacked the arbitration agreement as a whole, and not just the specific provisions delegating unconscionability claims to an arbitrator.

Having determined that both parties gave adequate consideration by agreeing to arbitrate with each other, the court declined to decide whether the arbitrator could decide the gateway question regarding “formation.”

While the Sixth Circuit found that the district court properly compelled the plaintiff to arbitrate his claims, the court determined that the case should have been stayed, rather than dismissed, and therefore remanded the case with instructions to enter a stay pending arbitration.

Anderson v. Charter Communications, Inc., No. 20-5894 (6th Cir. June 11, 2021).

Minnesota District Court Grants Stay of Entire Action Pending Appeal of Order Denying Motion to Compel Arbitration

June 16, 2021 by Carlton Fields

This case arose from an interpleader action in the federal district court in Minnesota. Benchmark Insurance Co. appointed Sunz Insurance Co. to underwrite and issue large-scale deductible workers’ compensation insurance policies. The policies required the insured to post sufficient cash or cash-equivalent collateral to secure the insured’s obligations for claims within the deductible. Benchmark and Sunz entered into a reinsurance contract that required Benchmark to cede to Sunz all premiums and losses on the policies that Sunz issued on Benchmark’s behalf. Sunz thereafter informed Benchmark that Benchmark was holding too much deductible collateral and demanded it be released to Sunz. Benchmark calculated it was holding approximately $20.5 million in excess collateral of a number of its insureds.

On June 3, 2020, the district court ordered Benchmark to deposit those interpleader funds with the court’s registry. Most of the insureds named in the interpleader complaint disclaimed their interest in the funds, and the funds were subsequently withdrawn by Sunz. Certain insureds who did not disclaim their interests filed counterclaims against Benchmark, some of which also filed cross-claims against Sunz for breach of contract, asserting that the program agreements between each cross-claimant and Sunz were superseded by the insurance policies issued by Sunz to the cross-claimants and thus excluded the program agreement from application. The program agreements each required any dispute arising out of the program agreement to be submitted to binding arbitration.

In July 2020, Sunz moved to dismiss the cross-claims, or in the alternative, to compel arbitration. On February 23, 2021, the district court denied Sunz’s motion. Sunz appealed the portion of the February 23 order denying the motion to compel arbitration to the Eighth Circuit and moved before the district court to stay the entire action pending the appeal. Cross-claimants conceded that the matter should be partially stayed but that the district court should allow the parties to litigate whether the cross-claimants were entitled to the interpleaded funds.

In determining whether to grant a stay, the district court conducted a balancing test of the following four factors:

Whether the stay applicant has made a showing that it is likely to succeed on the merits;
Whether the applicant will be irreparably injured absent a stay;
Whether issuance of the stay will substantially injure the other parties interested in the proceeding;
Where the public interest lies.

The district court found that the factors weighed in favor of a stay, particularly because allowing the parties to litigate the issue of entitlement to the interpleaded funds risked inconsistent rulings and potential costs that should not be expended while the Eight Circuit resolved the issue of whether such issues will be arbitrated.

Benchmark Insurance Co. v. Sunz Insurance Co., No. 0:20-cv-00908 (D. Minn. May 12, 2021).

D.C. Circuit Affirms Award of Fees

June 14, 2021 by Carlton Fields

This case arose out of an employment dispute between Preeminent Protective Services Inc., which provides security services in and around the District of Columbia, and the Service Employees International Union Local 32BJ. When Preeminent took over a contract, it refused to hire two guards who had previously worked there. The union claimed the refusal violated a collective bargaining agreement.

The union filed a petition to compel arbitration of that claim in federal court in the District of Columbia. In May 2018, the district court granted summary judgment to the union and ordered the parties to arbitrate. After Preeminent stalled the arbitration for more than a year, the district court held Preeminent in contempt for failing to comply, and awarded $51,000 in costs and attorneys’ fees to the union based on a “lodestar” figure, reflecting the number of hours worked by each union lawyer multiplied by a reasonable hourly rate for each lawyer.

Preeminent appealed all three orders of the district court: the motion to compel arbitration, the contempt order, and attorneys’ fees. However, the D.C. Circuit lacked jurisdiction to review the arbitration and contempt orders, which were final decisions not timely appealed. On appeal, Preeminent raised three challenges to the fee award.

First, Preeminent argued it was impermissibly punitive to use prevailing market rates as opposed to actual rates. The D.C. Circuit rejected that argument, noting that the court has repeatedly upheld the use of prevailing market rates in determining appropriate awards under statutory fee-shifting provisions.

Second, Preeminent claimed that the district court miscalculated the prevailing market rates. The D.C. Circuit again rejected that argument, finding that although the union’s attorneys charged discounted rates, they were nevertheless worthy of market rates given their experience and credentials.

Finally, Preeminent argued the district court should have lowered the award to account for Preeminent’s inability to pay. The D.C. Circuit rejected that argument based on contradicting evidence that showed Preeminent had active contracts worth more than $2.5 million.

The D.C. Circuit therefore affirmed the district court’s fee award on the merits.

Service Employees International Union Local 32BJ v. Preeminent Protective Services Inc., No. 19-9157 (D.C. Cir. May 18, 2021).