Michael Wolgin

FRANCHISEES LOSE BID TO VACATE ARBITRATION AWARD ENFORCING NON-COMPETE CLAUSE DESPITE CLAIM THAT ARBITRATOR MANIFESTLY DISREGARDED THE LAW

December 20, 2017 by Michael Wolgin

A set of former franchisees are prohibited from violating the terms of a non-compete clause with franchisor Wild Bird Centers of America (“WBCA”) for two years after the Fourth Circuit recently upheld the denial of their petition to vacate an arbitration award imposing the injunction. The franchisees had continued to operate a Wild Bird Center store after their ten-year franchise agreement expired and they chose not to renew it. WBCA submitted the dispute to mandatory arbitration, and the arbitrator issued an injunction prohibiting the franchisees from violating the non-compete.

First, the franchisees argued the arbitrator manifestly disregarded the law, exceeded his powers, and failed to issue an award from the essence of the franchise agreement by applying the non-compete clause. The court rejected these claims as merely alleging the arbitrator misinterpreted the agreement. The non-compete clause’s language suggesting application “after termination” in contrast to a later section’s language suggesting application “[i]n the event of termination or expiration” of the franchise agreement was “at worst ambiguous” and “at best, support[ed] WBCA’s position.” Therefore, the arbitrator’s application “arguably” construed the contract sufficient to warrant confirmation.

Second, the franchisees claimed that, even if the non-compete clause applied, the arbitrator erred by extending the clause’s terms to two years because such an interpretation did not draw from the essence of the agreement. The court rejected these claims based on another case which held it reasonable to enforce compliance with a non-compete to include the total time which the aggrieved party was entitled to under the non-compete clause. Further, the franchisees failed to show the arbitrator acted from personal notions of right and wrong or disregarded the correct legal standards. Specifically, the court noted the limited nature of the injunction term and lack of demonstrated prejudice from the extension because the franchisees had yet to stop operating the competing business. The court affirmed the district court’s order confirming the award. Frye v. Wild Bird Ctrs. of Am., Inc., Case No. 17-1346 (4th Cir. Nov. 27, 2017).

This post written by Thaddeus Ewald .

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COURT FINDS STATE LAW BARRING INSURANCE ARBITRATIONS REVERSE-PREEMPTS FEDERAL ARBITRATION ACT

December 19, 2017 by Michael Wolgin

The case involved a dispute between the parties to a Reinsurance Participation Agreement (RPA). Defendants moved to compel arbitration, citing the Federal Arbitration Act and a provision in the RPA agreeing to resolve “[a]ll disputes arising with respect to any provision of this Agreement” in arbitration. However, the RPA also contained a choice of law provision providing that “[t]his Agreement shall be exclusively governed by and construed in accordance with the laws of Nebraska.” Plaintiffs argued that the Nebraska Uniform Arbitration Act (NUAA), which prohibits enforcement of an arbitration clause in any “agreement concerning or relating to an insurance policy,” made the arbitration provision unenforceable.

In most cases, the FAA would preempt a state law regarding arbitration, but the McCarran-Ferguson Act allows state laws “regulating the business of insurance” to preempt any federal statute that is not specifically related to the business of insurance and impairs a state insurance law. Defendants argued that the FAA preempts the NUAA and that the RPA requires all questions concerning construction or enforceability of the arbitration clause, including the applicability of the NUAA, to be decided by the arbitrator.

The court rejected defendants’ arguments, finding first that the question of whether the FAA preempts the NUAA is not a question of arbitrability that an arbitrator can decide. The court then determined that the FAA does not regulate the business of insurance, that the relevant portion of the NUAA was “enacted for the purpose of regulating the business of insurance,” and that application of the FAA would operate to impair the NUAA. Thus, all of the conditions set by the McCarran Ferguson Act for a state law to preempt the FAA were met. As a result, the court found that the NUAA rendered the arbitration clause in the RPA unenforceable and denied plaintiffs’ motion to compel arbitration. Citizens of Humanity v. Applied Underwriters, Inc., Case No. B276601 (Cal. Ct. App. Nov. 22, 2017).

This post written by Jason Brost.

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ESTATE AVOIDS ARBITRATION IN WRONGFUL DEATH MARITIME SUIT BECAUSE DEFENDANT WAS NOT A SIGNATORY OR PARTY TO CONTRACT WITH ARBITRATION CLAUSE

December 18, 2017 by Michael Wolgin

The Ninth Circuit refused last month to disturb a district court order denying a defendant’s motion to compel arbitration against a sailor in a maritime action pursuant to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“Convention Act”) where the defendant company was not a signatory or a party to an employment agreement with an arbitration clause. The sailor (“Yang”) entered into an employment agreement with the vessel’s owner (“Majestic”) that contained an arbitration clause. While defendant Dongwon Industries Co. was responsible for the vessel’s repairs, maintenance, and supplies, it was neither a signatory nor party to Yang and Majestic’s agreement. After Yang died when the ship sank due to inadequate repairs, Yang’s wife sued Majestic and Dongwon for wrongful death. The district court compelled arbitration of her claims against Majestic based on the employment agreement, but denied Dongwon’s motion to compel arbitration.

First, the Ninth Circuit affirmed because the Convention Act does not allow non-signatories or non-parties to compel arbitration. Dongwon attempted to argue that the language in the Convention Treaty limiting arbitration to signatories applied only to a phrase addressing arbitration agreements, but not the phrase addressing arbitration clauses in other contracts. The court relied heavily on a Second Circuit case Kahn Lucas Lancaster, Inc. v. Lark International Ltd., which held that the signatory requirement language applied to both arbitration agreements and clauses in other contracts. Kahn Lucas relied on the last-antecedent rule, the grammar of the Treaty’s foreign texts, and the Treaty’s legislative history. In relying on Kahn Lucas, the court explicitly recognized the punctuation canon, under which a phrase applies to “all antecedents instead of only to the immediately preceding one” when the phrase is separated from the antecedents by a comma. The court also noted that every circuit considering Kahn Lucas’s logic has followed it. Lastly, the court found Dongwon failed to demonstrate that it was a party to the agreement containing the arbitration clause, a foundational requirement to compel under the Convention Treaty.

Second, the court rejected Dongwon’s argument that a non-party may invoke arbitration under the Federal Arbitration Act (“FAA”) if the relevant state contract law allows such a litigant to enforce the agreement. Initially the court noted FAA arbitration was unavailable to Dongwon because it specifically exempts “contracts of employment of seamen.” The court dismissed the argument as a “doctrinal sleight of hand” because arbitrations under the Convention Act require additional prerequisites than those required for arbitrations under the FAA, a conflict which prevents application of the FAA. Furthermore, even if the court were to ignore the additional Convention Act requirements, Dongwon would not be entitled to arbitration because its theories under the applicable state law—California—do not provide a basis to compel arbitration. To conclude, the court noted there was “no reason to depart from the general rule” that the contractual right to compel arbitration may not be asserted by a non-party to the agreement that does not otherwise possess the right to compel arbitration. Yang v. Majestic Blue Fisheries, LLC, Case No. 15-16881 (9th Cir. Nov. 30, 2017).

This post written by Thaddeus Ewald .

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THE ALLEGATION OF NON-ARBITRABLE PRIVATE ATTORNEY GENERAL CLAIMS DOES NOT PREVENT ARBITRATION OF INDIVIDUAL CLAIMS RAISED SIMULTANEOUSLY

December 14, 2017 by Michael Wolgin

A contractual arbitration clause may not be avoided by the allegation of “private attorney general” claims that are not arbitrable on public policy grounds in conjunction with claims raised on an individual basis that would otherwise clearly be subject to arbitration. A plaintiff claiming to have suffered harm as a result of misclassification as an independent contractor rather than as an employee raised a “smorgasbord of claims … in a mix of capacities,” including as an individual, a putative class representative, and a private attorney general under California’s Private Attorneys General Act (“PAGA”).

The contract between the plaintiff and his employer provided that arbitration will occur on only an individual basis and expressly waived claims as a representative. However, California law prohibits PAGA claims from being waived in such a manner. The plaintiff argued that because the PAGA claims could not be submitted to arbitration, his related individual and class representative claims should not be arbitrated either. The Ninth Circuit disagreed. The court simply restricted the contractual arbitration provision from applying to the PAGA claims and ruled that arbitration should be compelled on the other claims. Furthermore, the court held that the PAGA claims should be stayed until the arbitration of the plaintiff’s individual claims made a critical determination. Depending on the outcome of that determination, the plaintiff may be allowed to pursue his PAGA claims in district court. Aviles v. Quik Pick Express, LLC, Case No. 15-56951 (9th Cir. Nov. 24, 2017).

This post written by Benjamin E. Stearns.

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FIRST CIRCUIT AFFIRMS DENIAL OF MOTION TO COMPEL ARBITRATION OF NON-SIGNATORY EMPLOYEE’S WAGE AND HOUR CLAIMS

December 13, 2017 by Michael Wolgin

As a condition of plaintiff Ouadani’s employment with defendant TF Final Mile LLC (f/k/a/ Dynamex Operations East, LLC (Dynamex)) as a delivery driver, Ouadani was required to associate with Dynamex’s vendor, Birtha Shipping LLC (SBS), from which he received his compensation. Ouadani did not have a written contract with either the Dynamex or SBS. Ouadani ultimately complained to Dynamex that he lacked the independence of a contractor, and that he should be paid as an employee, and he was terminated shortly thereafter.

Later, Ouadani brought various wage and hour claims against Dynamex as a putative class action on his behalf and on behalf of others similarly situated. Dynamex responded by filing a motion to compel arbitration, citing an agreement between it and SBS, which contained a mandatory arbitration clause. The District Court for the District of Massachusetts denied Dynamex’s motion to compel, reasoning that Ouadani had never signed the agreement containing the arbitration clause and had no idea that the agreement even existed.

On appeal, Dynamex argued that Ouadani should nonetheless be compelled to arbitrate under federal common law principles of contract and agency. The First Circuit rejected this argument and refused to bind Ouadani, a non-signatory, to the agreement. The Court was not persuaded by Dynamex’s arguments that (1) Ouadani was bound to arbitrate inasmuch as he was an “agent” of SBS and (2) Ouadani knowingly sought and obtained benefits from the agreement because he performed the “Contracted Services” pursuant to the agreement for compensation. On the latter issue, the Court held that the benefits of the arbitration clause accrue to the contracting signatories – Dynamex and SBS – not to Ouadani, who could “hardly be said to have ‘embraced’ the Agreement when he was unaware of its existence.” Ouadani v. TF Final Mile LLC, Case No. 17-1583 (1st Cir. Nov. 21, 2017).

This post written by Gail Jankowski.

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