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New reinsurance-related and arbitration developments from Carlton Fields

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Christina Gallo

Seventh Circuit Holds EEOC Right-to-Sue Letter Does Not Trump a Binding Arbitration Agreement

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This case involved a dispute between Bruce Melton and his former employer, Pavilion Behavioral Health System, for unlawful discharge after a routine background check revealed Melton’s criminal convictions.

Melton first filed a charge with the Equal Employment Opportunity Commission, alleging discrimination based on his carpal tunnel disability, but the investigator found no evidence of discrimination, closed the file, and issued a right-to-sue letter. Melton thereafter sued Pavilion in federal court, claiming he was wrongfully discharged because he was in the process of expunging his criminal record and also because Pavilion discriminated and retaliated against him for taking medical leave for carpal tunnel surgery.

Relying on the parties’ arbitration agreement that required workplace concerns to be resolved through final and binding arbitration, the district court granted Pavilion’s motion to compel arbitration, finding Melton’s claims were covered by the arbitration agreement, which Melton adopted by signing the acknowledgment form and never opting out.

Ruling in favor of Pavilion, the arbitrator found there was no evidence to support Melton’s claims. Pavilion thereafter moved to confirm the award in district court. Melton opposed confirmation, claiming he was entitled to proceed in court under the EEOC’s right-to-sue letter. The district court granted Pavilion’s motion to confirm the award, reasoning that, although the arbitration agreement permitted Melton to file administrative charges with the EEOC, it prohibited him from pursuing any claims in court. Melton appealed, claiming he never signed the arbitration agreement himself but rather merely signed a form that referred to it.

On appeal, the Seventh Circuit affirmed, finding that the parties entered into an enforceable arbitration agreement and Melton presented no valid ground to vacate, modify, or correct the arbitration award.

The circuit court noted that it was undisputed that Melton signed a form acknowledging he received a copy of the arbitration agreement, which covered the claims Melton wanted to pursue, and understood that if he did not opt out within 30 days, he was bound by it. “True, the form that he signed was not the arbitration agreement itself, but by signing it he committed himself to that agreement.” The circuit court also found that the EEOC’s right-to-sue letter did not override the arbitration agreement; it merely allowed Melton to move beyond the administrative process and pursue any rights that he may have in court — rights that Melton had waived by previously entering into the binding arbitration agreement.

Melton v. Pavilion Behavioral Health System, No. 20-2399 (7th Cir. Apr. 9, 2021)

North Carolina District Court Dismisses Action Where Plaintiff Had Full and Fair Opportunity to Pursue Claim Through Arbitration

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This case arose out of a dispute between the plaintiff and his former employer American National Red Cross for incorrect calculation of lost wages and health insurance premiums.

The plaintiff was hired by the Red Cross in February 2015 and terminated in September 2017. As a member of the Teamsters Local 71 union, the plaintiff brought a grievance against the Red Cross, which was submitted to arbitration pursuant to the collective bargaining agreement between the union and the Red Cross.

After two arbitration hearings in May 2018, the arbitrator awarded the plaintiff reinstatement to his job as well as lost wages and benefits. Months later, the arbitrator clarified her ruling stating that the award included actual overtime earnings before the plaintiff’s termination. The parties agreed on the amounts to be paid in accordance with the arbitration award.

In November 2019, the plaintiff filed a complaint in North Carolina state court alleging that the arbitration award was miscalculated, and the Red Cross owed him additional compensation for additional wages and out-of-pocket medical expenses. The state court dismissed the complaint on the grounds that the arbitrator retained jurisdiction over the subject matter. The plaintiff requested the arbitrator reopen the matter, and the arbitrator subsequently declined to award any additional compensation, since the parties agreed to the terms of the award and the Red Cross had paid accordingly. After another failed attempt at initiating suit in state court, the plaintiff filed a complaint against the Red Cross in the U.S. District Court for the Western District of North Carolina for the incorrect calculation of lost wages and health insurance premiums.

The Red Cross moved to dismiss the complaint. The magistrate judge recommended that the motion be granted, finding that a valid arbitration agreement existed between the union and the Red Cross and that the disputed issue regarding miscalculation of the award was within the scope of the agreement. The magistrate judge also found that the plaintiff was collaterally estopped from pursuing his claim in federal court because, through his union representative, the plaintiff had a full and fair opportunity to pursue his claim under the collective bargaining agreement through arbitration. The magistrate judge emphasized that the arbitrator’s decision was final — she decided in the plaintiff’s favor and refused to reopen the proceeding because the parties agreed on the calculation of the award and the plaintiff actually received the award.

The magistrate judge’s report and recommendation was adopted, and the Red Cross’ motion to dismiss was ultimately granted.

Fonseca v. American National Red Cross, No. 3:20-cv-00526 (W.D.N.C. Feb. 1, 2021), report and recommendation adopted, No. 3:20-cv-00526 (W.D.N.C. Feb. 17, 2021).

West Virginia District Court Rejects DirecTV’s Bid to Compel Arbitration Finding Breadth of Arbitration Agreement “Absurd” and “Unconscionable”

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In 2012, the plaintiff entered into a cellphone service contract with AT&T Mobility in which she agreed to arbitrate all disputes and claims with AT&T Mobility and its “subsidiaries, affiliates, agents, employees, predecessors in interest, successors, and assigns.” Three years later, AT&T Inc., the parent company of AT&T Mobility, acquired DirecTV, which, unlike AT&T Mobility, provided satellite television service, not cellphone service.

In 2017, the plaintiff sued DirecTV in the U.S. District Court for the Northern District of West Virginia claiming that DirecTV violated the Telephone Consumer Protection Act (TCPA) by calling her cellphone to advertise DirecTV products and services even though her phone number is listed on the National Do Not Call Registry. Recognizing that the plaintiff had never been a DirecTV customer, DirecTV nonetheless moved to compel arbitration, asserting that the dispute was covered by an arbitration agreement in the contract governing the plaintiff’s cellphone service from AT&T Mobility, a DirecTV “affiliate.”

The district court denied DirecTV’s motion to compel arbitration, finding that the plaintiff’s claims did not fall within the scope of the arbitration agreement. DirecTV appealed to the Fourth Circuit, arguing that the plaintiff had signed the arbitration agreement that included AT&T and its “affiliates.” The plaintiff argued that the agreement did not apply to DirecTV despite AT&T Mobility’s acquisition of the company in 2015.

The Fourth Circuit vacated the district court’s decision, finding that the plaintiff formed an agreement to arbitrate with DirecTV and that the dispute fits within the broad scope of that agreement. However, noting the district court’s observation that a construction that does “not so limit the scope of the arbitration clause would be unconscionably overbroad,” the Fourth Circuit remanded the matter to further address unconscionability under West Virginia law.

On remand, the district court once again denied DirecTV’s motion to compel arbitration, holding that the arbitration provision was “overbroad, absurd and unconscionable, and far exceeds anything contemplated by Congress in enacting the FAA.”

The district court determined that the provision was procedurally unconscionable, not only because of the “huge imbalance” between the AT&T conglomerate and the plaintiff who may be somewhat knowledgeable as to the TCPA but unlikely to have expertise in arbitration clauses but also because the provision was a “non-negotiable term” that the plaintiff was not permitted to opt out of or alter if she wanted to obtain AT&T Mobility’s services.

The district court also determined that the arbitration provision was substantively unconscionable because no reasonable AT&T Mobility customer would believe that by signing the arbitration agreement, she was consenting to arbitrate not only with AT&T Mobility but also with any entity that ever might share a corporate umbrella with AT&T Mobility. “[C]onstruing ‘affiliate’ to cover entities like DirecTV would lead to results so absurd that no reasonable person could have intended or anticipated that they would follow from her cell-phone service agreement.”

Mey v. DirecTV, LLC, No. 5:17-cv-00179 (N.D. W.Va. Feb. 12, 2021).

Eleventh Circuit Holds University Cannot Arbitrate Student’s Breach of Contract and Misrepresentation Claims

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In Young v. Grand Canyon University, the Eleventh Circuit Court of Appeals held that the U.S. District Court for the Northern District of Georgia was wrong to compel arbitration of a student’s breach of contract and misrepresentation claims against a university, as federal regulation 34 C.F.R. § 685.300(e)-(f) prohibits a college or university that accepts federal student loan money from enforcing pre-dispute arbitration agreements when a student brings a “borrower defense claim.”

Plaintiff Donrich Young was enrolled in a doctoral degree program at Grand Canyon University in Arizona and took out federal loans to pay for the program. As part of Young’s admissions process, GCU required him to sign a comprehensive arbitration agreement, which stated that any dispute arising from his enrollment would be resolved by binding arbitration.

Young and seven other students filed a class action suit against GCU claiming that GCU misrepresented to students that they could finish a doctoral degree in 60 credit hours — but in reality, GCU designed its program so that finishing in 60 credit hours is unlikely, which then required students to take and pay for additional research continuation courses. Young and the other students asserted claims for breach of contract, intentional misrepresentation, unjust enrichment, and violations of the Arizona Consumer Fraud Act. The district court dismissed the claims brought by all plaintiffs, except Young, on personal jurisdiction grounds.

GCU then moved to compel arbitration pursuant to the agreement Young had signed as part of his admissions application. The district court granted GCU’s motion to compel, holding that Young’s breach of contract, misrepresentation, and statutory fraud claims were not “borrower defense claims” as defined by the federal regulation at issue and, therefore, were not subject to the regulation’s prohibition on pre-dispute arbitration agreements.

The regulation defines “borrower defense claim” as a “claim that is or could be asserted as a borrower defense as defined in § 685.222(a)(5), including a claim other than one based on § 685.222(c) or (d) that may be asserted under § 685.222(b) if reduced to judgment.” The main disagreement between the parties was whether the phrase “including a claim other than” means to include or exclude claims based on section 685.222(c) or (d) — i.e., claims alleging breach of contract and substantial misrepresentation. The district court interpreted the phrase to exclude breach of contract and substantial misrepresentation claims from the regulation’s definition of “borrower defense claim” and ordered Young’s claims to arbitration.

On appeal, the Eleventh Circuit disagreed, finding that the regulation’s definition of “borrower defense claim” includes breach of contract and substantial misrepresentation claims and therefore shields those claims from arbitration. The panel noted that the district court’s interpretation defies common sense, questioning: “Why would a regulation that all acknowledge was designed to protect student-loan borrowers exclude the most basic, heartland claims that they are likely to bring?” The panel also recognized that the district court’s strained interpretation would include non-contract and non-misrepresentation claims only if reduced to judgment, which would render the “if reduced to judgment” aspect of the borrower defense claim protection meaningless. As a result, the panel reversed the district court’s decision.

Young v. Grand Canyon University, Inc., No. 19-13639 (11th Cir. Nov. 16, 2020).

Fourth Circuit Declines to Vacate Arbitration Award Where Challenge to the Award Was Nothing More Than an Ordinary Disagreement With Its Outcome

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Tecnocap LLC appealed a decision by the U.S. District Court for the Northern District of West Virginia, where it declined to vacate an arbitration award in favor of an employee and labor union in a grievance proceeding related to Tecnocap’s termination of an employee covered by the parties’ collective bargaining agreement.

The parties’ collective bargaining agreement prohibited Tecnocap from “summarily discharging” covered employees and required that termination of employment be “for just cause.” The agreement also subjected grievances involving the interpretation of express provisions of the arbitration agreement. Separate from the agreement, Tecnocap instituted an attendance program wherein employees accrued points for certain absences from work and were then subject to different disciplinary procedures based on the number of accrued points.

After a Tecnocap employee accrued nine points in the attendance program and failed to timely submit paperwork that would allocate one of his absences to FMLA leave, Tecnocap terminated his employment. The union then filed a grievance protesting the employee’s termination, which proceeded through arbitration.

The arbitrator determined that the grievance was arbitrable, rejecting Tecnocap’s argument that the grievance was untimely and should be denied or dismissed on procedural grounds, pointing to the parties’ past conduct of inattentiveness to grievance deadlines as evidence of a waiver of such deadlines. The arbitrator also ruled that Tecnocap did not have “just cause” to terminate the employee because it improperly assessed him with a ninth point.

Tecnocap filed an action in the U.S. District Court for the Northern District of West Virginia under section 301 of the Labor Management Relations Act, 29 U.S.C. § 185, to vacate the arbitrator’s award, and the union filed an action under the same provision to enforce the arbitrator’s decision, which it alleged Tecnocap had refused to follow.

The district court found Tecnocap failed to present evidence that would warrant overturning the arbitrator’s award, including any evidence that the award: (i) was the product of the arbitrator’s bias; (ii) ignored the evidence in favor of the arbitrator’s own brand of “industrial justice”; or (iii) altered the language of the collective bargaining agreement.

Tecnocap then appealed, arguing that the district court should have concluded that the arbitrator’s award did not draw its essence from the collective bargaining agreement and therefore should have been vacated. Affirming the district court’s decision, the panel rejected Tecnocap’s challenge, finding that Tecnocap presented nothing more than an ordinary disagreement with the outcome of the arbitration award based on Tecnocap’s preferred application of the collective bargaining agreement to the underlying facts.

The panel determined that the collective bargaining agreement plainly delegated authority to the arbitrator to adjudicate grievances involving the interpretation or application of the express provisions of the agreement and that upon being delegated with that authority, the arbitrator had the authority to review whether Tecnocap fulfilled its obligations under the agreement and whether the termination comported with the agreement’s “just cause” limitation. The panel held that the arbitrator’s decision was a clear exercise in applying the agreement’s provisions and that Tecnocap failed to point to any limitation in the agreement that prevented the arbitrator from making her decision.

Tecnocap, LLC v. United Steel, Paper & Forestry, Rubber, Mfg., Energy, Allied Industrial & Serv. Workers Int’l Union AFL-CIO/CLC, Local Union No. 152M, No. 19-1263 (4th Cir. Jan. 19, 2021).