John Pitblado

FEDERAL COURT FINDS ARBITRATOR HAD AUTHORITY TO DETERMINE IT HAD JURISDICTION OVER CORPORATION’S PRINCIPALS AND NON-SIGNATORIES WERE BOUND TO ARBITRATE

August 11, 2016 by John Pitblado

New World Solutions, Inc. (“NWS”) and Asta Funding Inc. (“Asta”) entered into an agreement which contained an arbitration clause. After a dispute arose and the parties undertook arbitration, the arbitrator entered an award against NWS and its principals. Asta sought to confirm the award, while the principals challenged the arbitrator’s jurisdiction and sought to vacate the award.

Acknowledging that it is the court which decides the issue of the arbitrator’s jurisdiction to hear a case, the Court noted that a party’s agreement “may validly provide that the arbitrator is to determine his or her own jurisdiction.” Here, the arbitration clause provides arbitration will be conducted “in accordance with the Commercial Arbitration Rules of the American Arbitration Association.” Section R-7(a) of the Rules provides that “the arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement.” This conferred the authority to determine jurisdiction over the principals to the arbitrator.

The Court further determined the claims against NWS’ principals were arbitrable under New Jersey law. Even though the principals were non-signatories to the arbitration agreement, they were bound under the theories of corporate veil-piercing/alter ego, estoppel and successor in interest.

The award was ultimately confirmed, despite the principals’ objections on a number of substantive grounds including: alleged false statements made to the arbitrator by Asta; alleged refusal of the arbitrator to hear evidence; that the arbitrator exceeded his authority by issuing pre-hearing subpoenas and by awarding injunctive relief and damages. The Court held that none of these grounds were supported by the record.

Asta Funding, Inc. v. David Shaun Neal, et al., 14-2495 (UDSC D.N.J. June 30, 2016)

This post written by Nora A. Valenza-Frost.

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NINTH CIRCUIT AFFIRMS DENIAL OF MOTION TO COMPEL ARBITRATION

August 10, 2016 by John Pitblado

In an unpublished decision, the Ninth Circuit recently affirmed a California district court’s denial of a motion to compel arbitration.

The case involves claims brought by a putative class action of exotic dancers under the Fair Labor Standard Act. The defendant SFBSC Management, LLC (“BSC”) made a motion to compel arbitration of the labor claims. The district court denied the motion, and BSC appealed.

The Ninth Circuit held that BSC was not a party to the performer contracts and failed to establish that it has standing to enforce the arbitration clause. BSC argued that alter ego or agency allegations in the complaint conclusively establish its non-party standing for purposes of arbitration. The Court noted that BSC had the burden under the Federal Arbitration Act (the “FAA”) to show the existence of a valid, written agreement to arbitrate and that the agreement to arbitrate encompasses the dispute at issue. The Ninth Circuit stated that while plaintiffs’ complaint contained allegations that BSC acted as “agent” of the nightclubs and that BSC managed the clubs, BSC denied those allegations in its answer, and submitted evidence contradicting plaintiffs’ allegations. Thus, the Court found that under these circumstances, plaintiffs’ allegations in the complaint do not conclusively establish BSC’s standing to compel arbitration. The Court also noted that BSC’s own evidence failed to establish it had a principal-agent relationship with the nightclubs (or vice versa), or that it was an alter ego of the nightclubs. Thus, the Ninth Circuit affirmed the district court’s decision, denying the motion to compel arbitration.

Roes v. SFBSC Management, LLC, No. 3:14-cv-03616 (9th Cir. July 28, 2016).

This post written by Jeanne Kohler.

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DISTRICT COURT OF NEBRASKA DETERMINES NON-SIGNATORY OF ARBITRATION AGREEMENT IS NOT BOUND TO ARBITRATE

August 9, 2016 by John Pitblado

A signatory may bind a non-signatory to an arbitration agreement through principles of contract and agency law such as: (1) incorporation by reference; (2) assumption; (3) agency; (4) veil-piercing/alter-ego; and (5) estoppel. A Nebraska federal court held that none of the theories required Plaintiff to arbitrate its claims.

Defendant entered into a reinsurance participation agreement (“Agreement”) with Applied Underwriters Captive Risk Assurance Company (“AUCRA”) which contained an arbitration agreement. A schedule to the Agreement added an additional 22 parties. Plaintiff was not a party to the Agreement. Years later, the defendant executed a promissory note (“Note”) with plaintiff. The Note included the same additional 22 parties as in the “Agreement”. Defendant defaulted on the note, and litigation ensued. Although the complaint initially included a cause of action for breach of the Agreement, it was later amended to include a single cause of action for breach of the Note. The Defendant moved to dismiss or stay the action pending arbitration under the theory that Plaintiff was bound as a non-signatory to the arbitration agreement.

Under the theories of agency and veil-piercing, the Court stated “a corporate relationship is not enough to bind a non-signatory to an arbitration agreement.” It found defendant did not present any evidence AUCRA had actual, implied, or apparent authority to bind Plaintiff to the Agreement or the corporate relationship was sufficiently close or the formalities were disregarded so the corporate veil was pierced or the two entities acted as each other’s alter ego. In fact, Plaintiff was the indirect parent of AUCRA.

Defendant also argued the Agreement was incorporated by reference in the Note. “When determining whether an arbitration provision was incorporated … the new agreement must either incorporate by reference the entire previous contract, or must expressly incorporate the portion containing the arbitration provision.” Here, the Court found the Note neither directly referenced the Agreement, nor incorporated any of its terms – particularly its arbitration provision.

Applied Underwriters, Inc. v. Top’s Personnel, Inc., 8:15CV90 (USDC D. Neb. May 26, 2016), recommendation adopted (June 16, 2016).

This post written by Nora A. Valenza-Frost.

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CALIFORNIA SUPREME COURT HOLDS THAT ARBITRATOR, NOT COURT, MAY DETERMINE IF ARBITRATION AGREEMENT PERMITS CLASS ARBITRATION

August 8, 2016 by John Pitblado

The California Supreme Court has held that an arbitrator, rather than a court, has the power to decide whether class claims can proceed in arbitration, where the parties’ arbitration agreement is ambiguous on the question.

The background of this case is as follows. When Plaintiff Timothy Sandquist was hired by Defendant Lebo Automotive (“Lebo”), a car dealership, he signed multiple arbitration agreements as a condition of employment. Plaintiff later sued Lebo and its owners, alleging racial discrimination, harassment, and retaliation. The complaint sought to bring claims on behalf of a “class of current and former employees of color.” Defendants filed a motion to compel arbitration based on the arbitration agreements. The trial court granted the motion but struck the class allegations, concluding that the arbitration agreements did not permit class arbitration. On appeal, the California court of appeal reversed in part, ruling (1) the trial court erred in concluding that existing precedent compelled the court to determine whether class arbitration was available; and (2) the availability of class proceedings under an arbitration agreement is for an arbitrator to decide in the first instance. Defendants petitioned for review to the California Supreme Court, contending that the court of appeal’s decision contributed to an existing state and federal split over who should decide whether an arbitration agreement permits class arbitration, and review was granted.

In a closely divided opinion, the California Supreme Court affirmed the court of appeals decision but on different grounds, holding that (1) there is no universal rule as to whether courts or arbitrators should decide the availability of class arbitration, but rather, who decides is in the first instance a matter of agreement with the parties’ agreement subject to interpretation under state contract law (and decided on a case by case basis); and (2) applying state law, that the parties’ arbitration agreement in this case included broad and all-encompassing language requiring an arbitrator to resolve the question of who decides whether class arbitration is permissible. In its analysis, the Court, specifically focusing on the agreements’ terms and resolving any ambiguities in favor of the non-drafting party, noted that the arbitration agreements at issue contained several indications that the parties intended for an arbitrator to decide the class arbitration issue. First, the agreement to submit any claim, dispute, or controversy to an arbitrator suggested a choice to have an arbitrator decide the class arbitration issue. Second, since the agreements give an arbitrator authority to decide any claim connected to employment, the class arbitration question that directly arises from underlying employment claims should be answered by an arbitrator. Third, because Lebo specifically excluded certain claims from the arbitration agreements, it “might well have specified other matters not for the arbitrator, such as the availability of class arbitration at issue here, but did not.” Finally, disagreeing with several federal courts of appeals, the California Supreme Court also held that the Federal Arbitration Act (the “FAA”) does not contain any presumption in favor of a court deciding this issue.

Sandquist v. Lebo Automotive, Inc., No. S220812 (Cal. July 28, 2016).

This post written by Jeanne Kohler.

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SDNY DETERMINES COMMISSIONER OF INSURANCE’S REPORT ON CAPTIVE INSURER IS NOT PRIVILEGED UNDER MONTANA LAW

June 10, 2016 by John Pitblado

In a case of first impression, the Southern District of New York determined Montana Code § 33-28-108(3) did not mandate the Montana Commissioner of Insurance’s report on a captive insurer was privileged. The Code provision stated:

[A]ll examination reports, preliminary examination reports or results, working papers, recorded information, documents, and their copies produced by, obtained by, or disclosed to the commissioner or any other person in the course of an examination made under this section are confidential, are not subject to subpoena, and may not be made public by the commissioner or an employee or agent of the commissioner without the written consent of the company or upon court order.

The Court required the subject documents be produced for three reasons. First, statutory interpretation did not support the privilege, as interpreting the statute so broadly would sweep in almost any company record – such as discoverable business records – that played a part in the Commissioner’s examination. Instead, the statute should be found to protect documents in the possession of the Commissioner, not the examined company. Furthermore, the statute noted the documents are “confidential,” and did not expressly create an evidentiary privilege.

Second, the Court looked at the interpretation of similarly worded statutes from other jurisdictions, as this was a case of first impression under Montana law. Statutes surveyed included Indiana, Rhode Island, New Hampshire, West Virginia and New Jersey – all of which prohibited the state insurance agency from disclosing company records but not information in the company’s control. Notably, California Insurance Code § 735.5, which was also analogous to the Montana statute yet interpreted very broadly to support the withholding of such documents, was not considered by the Court because of the “odd” result such a statutory interpretation would yield.

Finally, the Court looked at the Commissioner’s conduct: it declined to submit any formal administrative interpretation of the statute; it appeared at a deposition to discuss the company; and, it freely discussed the allegedly privileged documents over objections. The documents were thus subject to the case’s confidentiality order, but were not privileged.

Amtrust North America, Inc., et al. v. Safebuilt Insurance Services, Inc., et al., Nos. 16-MC-169 and 16-MC-170 (USDC S.D.N.Y. May 16, 2016)

This post written by Nora A. Valenza-Frost.
See our disclaimer.