Carlton Fields

Sixth Circuit Holds Company Did Not Waive Its Right To Arbitration Through Pre-Trial “Posturing” Correspondence

December 3, 2020 by Carlton Fields

The Sixth Circuit recently reversed a decision from an Ohio federal court that denied an apartment owner’s motion to compel arbitration on the basis that the apartment owner waived its right to arbitration through its pre-trial “posturing” correspondence.

Oro Karric North LLC and its sister entities (collectively “Oro”) contracted with Borror Property Management LLC for Borror to manage Oro’s residential apartments. Each management contract included the following arbitration provision: “If either party shall notify the other that any matter is to be determined by arbitration,” the parties would proceed to arbitration unless they first resolved the dispute amongst themselves.

A dispute arose which resulted in Borror’s ceasing to manage Oro’s properties. Oro responded by letter asserting that Borror was in breach of the parties’ contracts, and advised that Oro planned “to proceed directly to litigation in either state or federal court,” as the contracts “do not limit litigation exclusively to arbitration.” Oro asked Borror to notify it within six days if Borror preferred arbitration; otherwise, Oro would assume that Borror wanted to proceed with litigation.

Instead, Borror filed a complaint in federal court asserting its own breach of contract claims. Oro moved to compel arbitration. The District Court for the Southern District of Ohio denied Oro’s motion to compel arbitration, holding that Oro had waived its contractual right to arbitration through its pre-litigation conduct. Oro timely appealed.

On appeal, the Sixth Circuit reversed, finding that Oro did not waive its right to arbitration because its pre-complaint, litigation-threatening letter did not amount to conduct “completely inconsistent” with Oro’s arbitration rights. The panel recognized that pre-litigation letters exchanged between parties serve a variety of purposes, and are more often a “rhetorical art than legal science.” The panel cautioned that a finding that one could waive its right to arbitration through pre-filing communications “would leave parties with little room to maneuver as they seek to work out their differences short of litigation” and inevitably “make pre-filing settlement elusive, an unfortunate development not only for parties, which often settle disputes to avoid litigation risk, but also for the courts, which historically have counted on the resolution of disputes to conserve limited judicial resources.”

The panel further noted that, even if Oro’s letter was inconsistent with a right to arbitration, Borror was not materially prejudiced by Oro’s actions, and thus no implied waiver occurred. The panel similarly found the letter was not an express waiver of right to arbitration, where nothing in the letter disavowed Oro’s right to arbitration.

The case was remanded for further proceedings.

Borror Prop. Mgmt., LLC v. Oro Karric N., LLC, No. 20-3146 (6th Cir. Oct. 29, 2020).

Third Circuit Affirms District Court’s Vacatur of Arbitration Award Where There Was No Agreement To Arbitrate, Leaving the Arbitrator Without Power To Act

December 1, 2020 by Carlton Fields

In early 2017, Transco received authorization from the federal government to construct a natural gas pipeline that required rights-of-way over several tracts of private property, including property owned by Regec. After failed negotiations as to how much money Regec should be paid for Transco’s use of his property, Transco brought a condemnation action, under the Natural Gas Act 15 U.S.C. § 717, against Regec in the United States District Court for the Middle District of Pennsylvania.

Regec filed a copy of a “foreign final judgment via arbitration award,” which described an alleged breach by Transco of a “contract” it entered into with Regec via “tacit acquiescence.” Transco did not participate in the arbitration, yet the arbitrator awarded Regec approximately $55 million and mailed a copy of the arbitration award to Transco’s office in Texas.

Even though the filing containing the arbitration award was struck by the district court, Regec nevertheless requested confirmation of the award under the Federal Arbitration Act. Transco responded with a motion to vacate the award under § 10(a) of the FAA, claiming that the award is “null and void.” The district court granted Transco’s motion by order entered October 8, 2019. Regec appealed.

On appeal, the Third Circuit held that it had jurisdiction under the FAA to review the October 8 order because the FAA provides grounds for immediate appeal distinct from principles of “finality” under 28 U.S.C. § 1291, certain grounds which were present in this case.

Addressing the merits of the October 8 order, the panel affirmed the district court’s vacatur of the arbitration award.

The panel rejected Regec’s jurisdictional challenge, finding that the district court had supplemental jurisdiction under 28 U.S.C. § 1367(a) to rule on Transco’s motion to vacate because the subject of the arbitration award was “so related” to the claims in the condemnation action, such that the contract giving rise to the arbitration award was formed as a result of litigation events in the condemnation action.

The panel also rejected Regec’s service-related challenge, holding that the district court did not err in finding Transco used a proper method to serve the motion to vacate, since service of a motion to confirm the arbitration award by a U.S. Marshal is unnecessary where a party is already before the court. Because service was proper, the panel also concluded that the motion to vacate was timely under the FAA.

Most significantly, the panel held that the district court did not err in granting Transco’s motion to vacate the arbitration award, which was based primarily on its conclusions that “the parties never agreed to arbitrate and so the arbitrator here had no jurisdiction,” and that “Transco received no notice of the ex parte arbitration proceeding or opportunity to be heard, and … suffered prejudice as a result.” The panel found that arbitrator acted outside the scope of his contractually delegated authority—issuing an award that simply reflects his own notions of economic justice rather than drawing its essence from the contract—because there is no discernable agreement between the parties to arbitrate the dispute described by Regec. The panel made clear that absent an arbitration agreement, the arbitrator was without power to act.

Transcon. Gas Pipe Line Co LLC v. Permanent Easement for 2.59 Acres, Temp. Easements for 5.45 Acres & Temp. Access Easement for 2.12 Acres in Pine Grove Twp., Schuylkill Cty., PA, Tax Parcel No. 21-04-0016.000 361, Chapel Drive, Pine Grove, Pine Grove Twp., Schuylkill Cty. PA, No. 19-2738 (3d Cir. Oct. 28, 2020).

Fifth Circuit Holds “Tacit Acquiescence” Insufficient to Create Valid Contract to Arbitrate

October 14, 2020 by Carlton Fields

This appeal concerns the validity of arbitration proceedings in a dispute between a seller of a power generator, Imperial Industrial Supply Company, and its buyer, Quintina Maria Thomas. In October 2018, Thomas’s home in Hawaii caught on fire, which she claimed was caused by a power generator purchased from Imperial.

Thomas initiated arbitration proceedings against Imperial. She began by sending Imperial an alleged agreement that purported to be a “binding self-executing irrevocable contractual agreement” evidencing Thomas’s acceptance of Imperial’s offer. The alleged agreement did not define what Imperial offered but stated that “a product sale-purchase agreement and warranty for the [generator] creat[ed] an ongoing contractual relationship between [Imperial] and [Thomas].” The alleged agreement further provided that Imperial would need to propound 15 different “Proofs of Claim” to Thomas in order to avoid (1) breaching the alleged agreement; (2) admitting, by “tacit acquiescence,” that the generator caused the fire; and (3) participating in arbitration proceedings.

Thereafter, Imperial received a notice of arbitration hearing and timely objected. Without responding to Imperial’s objections, the arbitration association sent Imperial the final arbitration award, which awarded Thomas $1.5 million for breach of the alleged agreement on the basis that Imperial consented to the arbitration by “tacit acquiescence.”

Imperial sued Thomas seeking to vacate the arbitration award. The United States District Court for the Southern District of Mississippi vacated the award, and Thomas appealed.

Applying Mississippi law, the Fifth Circuit panel held “tacit acquiescence” to the alleged agreement is insufficient to constitute a valid contract. The panel noted that tacit acquiescence between relative strangers ignores the basic tenets of contract law because, absent a long-standing relationship between the parties, silence or inaction does not constitute acceptance of an offer. “If Thomas’s argument was valid, it would turn the notion of mutual assent on its head in ordinary purchase cases like this one: buy an item from a dealer or manufacturer, then mail a letter saying ‘you agree if you don’t object,’ and you can have whatever deal you want if the dealer/manufacturer doesn’t respond,” the panel wrote.

Because Thomas offered no evidence of previous dealings with Imperial, the panel found that the conspicuous lack of mutual assent means that a valid contract was never formed. The panel did not address Thomas’ other challenges, finding them to be without merit, and affirmed the district court’s judgment vacating the arbitration award.

Imperial Indus. Supply Co. v. Thomas, No. 20-60121 (5th Cir. Sept. 2, 2020)

Seventh Circuit Adds to Circuit Split, Holds Section 1782 Does Not Authorize Federal Courts to Compel Discovery for Use in Private Foreign Arbitration

October 12, 2020 by Carlton Fields

On a question of first impression in the Seventh Circuit regarding whether U.S. law allows federal courts to compel discovery for use in a private foreign arbitration, the Seventh Circuit joins the Second and Fifth Circuits in ruling that Section 1782 of the U.S. Code does not apply to private international arbitrations. This decision departs from recent rulings in the Fourth and Sixth Circuits, which concluded that Section 1782 applies to private commercial arbitrations.

This case arises out of an indemnification dispute over losses incurred when an aircraft engine caught fire during testing in South Carolina. Rolls-Royce PLC manufactured and sold a Trent 1000 engine to the Boeing Company for incorporation into a 787 Dreamliner aircraft. In January 2016, Boeing tested the new aircraft at its facility near the Charleston International Airport. A piece of metal became lodged in an engine valve, restricting the flow of fuel to the engine. As Boeing employees attempted to fix the problem, the engine caught fire, damaging the aircraft. Boeing demanded compensation from Rolls-Royce, and in 2017 the companies settled for $12 million. Rolls-Royce then sought indemnification from Servotronics, Inc., the manufacturer of the valve.

The relevant agreement between Rolls-Royce and Servotronics required any dispute not resolved through negotiation or mediation be submitted to binding arbitration in Birmingham, England, under the rules of the Chartered Institute of Arbiters. After failed negotiations, Rolls-Royce initiated arbitration with the Charted Institute of Arbiters in London.

Servotronics filed an ex parte application in the U.S. District Court for the Northern District of Illinois asking the court to issue a subpoena compelling Boeing to produce documents for use in the London arbitration pursuant to Section 1782(a). The judge initially granted it and issued the requested subpoena. Rolls-Royce intervened and moved to quash the subpoena, arguing that Section 1782(a) does not permit a district court to order discovery for use in a private foreign commercial arbitration. Boeing intervened and joined the motion to quash. The judge reversed course and quashed the subpoena, agreeing with Rolls-Royce and Boeing that Section 1782(a) does not authorize the court to provide discovery assistance in private foreign arbitrations. Servotronics appealed.

Focusing on the statutory phrase “foreign or international tribunal” – or more particularly, the word “tribunal” – the Seventh Circuit held that the London arbitration does not qualify as a “foreign tribunal” under Section 1782. The panel concluded that a “foreign tribunal” as written in the statute means a governmental, administrative, or quasi-governmental tribunal operating under a foreign country’s practices and procedures. “Private foreign arbitrations, in other words, are not included.”

The panel also noted that a narrower interpretation of the word “tribunal” would conflict with the Federal Arbitration Act, which allows only the arbitration panel (and not the parties) to summon witnesses before the panel to testify and produce documents and to petition the district court to enforce the summons. Section 1782, however, permits both foreign tribunals and litigants to obtain discovery orders from district courts. “If § 1782(a) were construed to permit federal courts to provide discovery assistance in private foreign arbitrations, then litigants in foreign arbitrations would have access to much more expansive discovery than litigants in domestic arbitrations,” the panel wrote.

The panel found it difficult to “conjure a rationale” for giving parties to private foreign arbitrations such broad access to federal court discovery assistance in the United States while precluding such discovery assistance for litigants in domestic arbitrations.

Servotronics, Inc. v. Rolls-Royce PLC and the Boeing Company, No. 19-1847 (7^th Cir. Sept. 22, 2020)

Fifth Circuit Finds Incorporation of AAA Rules Into Arbitration Agreement Presents “Clear Unmistakable Evidence” of Parties’ Intent To Have Arbitrator Decide Issue of Arbitrability

September 23, 2020 by Carlton Fields

This appeal arises from a class action suit alleging violations of the Telephone Consumer Protection Act (TCPA), 47 U.S.C. § 227. In 2015, plaintiff Manuel Mendoza bought a car from defendant car dealer Fred Haas Motors, and signed an arbitration agreement and a personal information notice. The arbitration agreement was broadly worded, covering “all claims, demands, disputes, or controversies of every kind or nature” relating to the transaction between the parties. Any arbitration was to be conducted pursuant to the provisions of the Federal Arbitration Act and “according to the Commercial Rules of the American Arbitration Association” (AAA Rules).

Years later, in 2019, the plaintiff alleged that the defendant sent four prerecorded voicemail marketing messages to his phone, and filed a class action lawsuit asserting TCPA violations. The defendant moved to compel arbitration based on the arbitration agreement, arguing that the plaintiff’s execution of the personal information notice constituted prior written consent and any dispute over the meaning of the document is subject to arbitration. The defendant also contended that the arbitration agreement delegates questions of arbitrability to the arbitrator.

The U.S. District Court for the Southern District of Texas denied the motion to compel arbitration, and the defendant thereafter filed an interlocutory appeal.

On appeal, the Fifth Circuit reversed and remanded, noting that the issue of whether a particular claim is covered by an arbitration agreement “changes when the parties include a delegation clause giving the arbitrator the primary authority to rule” on that question. The focus then shifts to whether there is “‘clear unmistakable’ evidence” that the parties intended to have an arbitrator make that decision. The Fifth Circuit found that the incorporation of the AAA rules into the arbitration agreement presented that clear unmistakable evidence, particularly where Rule 7(a) provides in relevant part that “the arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect…to the arbitrability of any claim or counterclaim.”

The Fifth Circuit further rejected the plaintiff’s argument that the delegation only related to claims regarding the vehicle transaction, finding that the plaintiff waived this argument by raising this theory for the first time on appeal.

In closing, the Fifth Circuit cautioned that it was expressing “no views on the scope of the arbitration clause or the merits of the underlying dispute,” and was simply respecting the parties’ decision to delegate the threshold issue of arbitrability to the arbitrator.

Mendoza v. Fred Haas Motors, Limited, No. 20-20123 (5^th Cir. Sept. 1, 2020).