Kenneth Cesta

In Payne v. Savannah College of Art and Design Inc., the Eleventh Circuit Court of Appeals affirmed a district court order denying a motion to compel arbitration of plaintiff Isaac Payne’s discrimination-based claims. The court found the mandatory arbitration agreement in Payne’s underlying employment agreement was fair, and not unconscionable, and defendant Savannah College of Art and Design (SCAD) did not waive its right to arbitrate with Payne.

Payne was hired by SCAD in August 2015 as the school’s head fishing coach. Among the documents that Payne signed as part of the new hire process was a “staff handbook acknowledgment,” which provided that Payne agreed to “comply with the policies contained in the handbook, including the Alternative Dispute Resolution Policy and Agreement.” The staff handbook also stated the school’s alternative dispute resolution policy and agreement was binding on the parties. The agreement included a dispute resolution process including arbitration in the event either party brought a claim. Payne did not dispute he signed the staff handbook acknowledgment.

After he was terminated from his position, Payne brought discrimination and retaliation claims against SCAD in federal court, alleging he was fired for reporting “race-based abuse and threats by white student-athletes to SCAD leadership.” SCAD filed a motion to dismiss the complaint and to compel arbitration. Payne opposed the motion, arguing the arbitration agreement was unconscionable for several reasons, including the cost-shifting provision that negatively impacted his rights, the process for selecting arbitrators limited the potential arbitrators to two white men, and the agreement included a confidentiality provision. Payne also argued SCAD waived its right to compel arbitration when it allegedly sought to settle claims with a student who raised similar complaints to SCAD leadership and had withdrawn from the team, and sought limited discovery related to that issue. The magistrate judge issued a report and recommendation that SCAD’s motion to dismiss and compel arbitration should be granted, which was adopted by the district court.

The Eleventh Circuit affirmed the district court’s order finding the fee-shifting provisions included in the arbitration agreement did not make it unconscionable. The court addressed precedent in the circuit confirming that to establish the arbitration’s fee-shifting provision was unconscionable, Payne would have to provide evidence of “(1) the amount of fees he is likely to incur and (2) his inability to pay those fees.” The court concluded Payne could not establish these facts and further rejected Payne’s arguments that the terms that controlled the arbitrator selection process were contradictory. The court also rejected Payne’s contention that SCAD waived its right to arbitrate, concluding: “We have never held that a party waives its right to arbitrate based on its actions taken in a previous legal action — especially when that party did not bring the lawsuit at bar and has repeatedly insisted that arbitration is the proper dispute resolution channel.” The court affirmed the order of the district court dismissing the action and compelling arbitration.

Payne v. Savannah College of Art & Design, Inc., No. 22-11556 (11th Cir. Aug. 31, 2023).

The Third Circuit Court of Appeals has reversed a district court decision compelling arbitration, finding that the parties’ designation of an accounting expert to resolve certain issues did not constitute an agreement to arbitrate their claims.

Kevin Sapp and Jamie Hopper entered into an asset purchase agreement with Industrial Action Services (IAS) memorializing the terms of Sapp and Hopper’s sale of their industrial businesses to IAS. The agreement included an “earn-out consideration” provision as part of the sale proceeds to be paid to Sapp and Hopper depending upon the performance of IAS over a three-year term and whether IAS reached certain performance benchmarks. The agreement included a provision that IAS would provide an earn-out statement at the end of the earn-out period, and Sapp and Hopper could submit a “notice of disagreement” with the statement, which would be resolved by an accounting firm. IAS provided an earn-out statement that showed the company did not meet its financial targets. Sapp and Hopper filed a notice of disagreement under the agreement and filed a declaratory judgment action in district court that its claims against IAS were outside the dispute resolution process set forth in the agreement. The district court granted IAS’ motion to compel arbitration, concluding that the agreement did include an arbitration agreement. The accounting firm selected by the parties to hear the dispute concluded that no additional compensation was owed to Sapp and Hopper. Sapp and Hopper moved to vacate the decision. The district court denied the motion and entered judgment for IAS. Sapp and Hopper appealed.

The Third Circuit reversed the district court’s order and vacated the judgment. The court first recognized that arbitration and expert determinations are “two distinct forms of private alternative dispute resolution that produce binding results,” noting that expert determinations involve a less formal process with the expert deciding more narrow issues. Reviewing the terms of the asset purchase agreement, the court concluded that the parties intended the accounting firm hearing disputes would be acting as an expert, not an arbitrator. The court pointed to the fact that the agreement did not include procedural rules that would govern an arbitration and further provided that disputes should be “submitted to non-binding mediation” and if unsuccessful, “either party may initiate litigation.” The court concluded that these and other terms of the agreement show the parties intended the accounting firm would serve as an expert, and not an arbitrator, and the parties were free to continue to litigate their claims in court. The court reversed the district court’s order, vacated the judgment, and remanded the case for further proceedings.

Sapp v. Industrial Action Services, LLC, No. 22-2181 (3d Cir. July 20, 2023).

In Perez v. Discover Bank, the Ninth Circuit Court of Appeals affirmed a district court order denying a motion to compel arbitration of the plaintiff’s discrimination claims, finding that the mandatory arbitration provisions included in student and consolidation loan agreements signed by the plaintiff did not require arbitration. The plaintiff is a recipient of the Deferred Action for Childhood Arrivals program who applied for a student loan in 2010 from Citibank to attend graduate school. The loan agreement with Citibank included an arbitration agreement providing that the parties “could elect binding arbitration for any claims ‘arising out of or in connection with [the] loan.’” In October 2011, Citibank acquired ownership of the plaintiff’s note. In 2018, the plaintiff submitted a loan application for a Discover Bank consolidation loan, which extinguished the original student loan. The application for the consolidation loan included an arbitration provision, and a provision permitting the plaintiff to opt out of the arbitration provision within 30 days after consummation of the loan. The plaintiff did not opt out because she believed her loan application was rejected.

The plaintiff then filed a discrimination action in district court alleging that she was told by a representative of the bank that she could not refinance her loan because she was not a U.S. citizen or lawful permanent resident. Discover filed a motion to compel arbitration, which was initially granted by the district court when the plaintiff did not confirm she wanted to opt out of the arbitration agreement. However, after the plaintiff informed the court that she wished to opt out of the agreement and filed a motion for reconsideration, the district court reversed its order requiring the plaintiff to arbitrate her discrimination-based claims, rejecting Discover’s argument that the opt-out provision did not apply to the discrimination claims because that claim had accrued before the plaintiff elected to opt out.

On appeal to the Ninth Circuit, Discover argued that both agreements required arbitration of the plaintiff’s discrimination claims. After recognizing the de novo standard of review of a district court’s order denying a motion to compel arbitration, the court found the positions taken by Discover during the hearing in the district court and on appeal were inconsistent, and Discover was judicially estopped from arguing that the plaintiff’s opt out of the arbitration agreement did not apply to her discrimination claims. The court then found the parties “never formed an agreement to arbitrate [the plaintiff’s] discrimination claims via the Citibank agreement,” and affirmed the district court’s order denying the motion to compel arbitration.

Perez v. Discover Bank, No. 22-15322 (9th Cir. July 24, 2023).

In Travelers Casualty Insurance Company of America v. Papagiannopoulous, the U.S. District Court for the District of Maryland addressed the issue of whether a real estate “appraisal provision” included in an insurance policy can be considered an enforceable arbitration clause under the Federal Arbitration Act.

The case, a declaratory judgment and insurance coverage dispute, was brought by Travelers, which disputed the qualifications of appraisers selected by the defendants to conduct an appraisal of a commercial building. The building had been damaged by a fire and the defendants submitted a claim for losses incurred as a result of the incident. The insurance policy included an appraisal provision, which set forth the procedures for the selection of appraisers in the event of a loss. The policy provided that each party would select “a competent and impartial appraiser” and the two appraisers would then select an umpire. The defendants selected an appraiser to conduct a site inspection of the property. Travelers retained an estimator to inspect the property. The defendants then made a written demand under the policy for an appraisal, selecting the same appraiser who conducted the prior inspection, as well as another appraiser. Travelers objected to the defendants’ designated appraisers, contending they were not impartial. Travelers refused to designate an appraiser and filed a declaratory judgment action seeking a declaration that defendants’ appraisers were not qualified, and directing the defendants to designate competent appraisers. The defendants filed a motion to compel appraisal and to stay the case pending the appraisal award, and to dismiss for improper venue.

The district court first recognized that, when considering whether an appraisal provision constitutes an arbitration clause under the FAA, it is “irrelevant that the contract language in question does not employ the word ‘arbitration’ as such. Rather, what is important is whether the parties clearly intended to submit some disputes to binding review by a third party.” The court concluded that the insurance policy section that included the appraisal provision was sufficient to qualify as an agreement to submit disagreements to a third-party appraiser and, as such, the FAA governed the dispute. The court then concluded that it lacked subject matter jurisdiction over the dispute, granted the defendants’ motion, and dismissed the action. The court also concluded that Travelers’ request for a declaration that the defendants’ appraisers were not qualified was premature, since objections to an arbitrator’s qualification may not be entertained by the court until after the arbitration has been concluded and an award has been entered.

Travelers Casualty Insurance Company of America v. Papagiannopoulous, No. 8:22-cv-02314 (D. Md. July 27, 2023).