Michael Wolgin

FIFTH CIRCUIT REMANDS TO DETERMINE WHETHER JURISDICTION EXISTED FOR APPEAL OF DENIAL OF MOTION TO COMPEL ARBITRATION

November 8, 2016 by Michael Wolgin

The underlying dispute involved allegations of breach of warranty and deceptive trade practices based on a sale of an allegedly defective car. The Fifth Circuit explained that the FAA, which governed the alleged arbitration agreement in the purchase contact, does not supply jurisdiction in the federal courts, that there was no federal question jurisdiction here, and that there was insufficient information in the record to show that diversity jurisdiction existed. The court ruled: “This Court is not satisfied, based on the record before it, that AutoNation does not share citizenship with the [plaintiffs]. For that reason, we VACATE the district court’s order and REMAND for a determination of subject matter jurisdiction. If diversity is not established, the district court must dismiss the parties’ suit.” Roman v. AutoNation Ford Gulf Freeway, Case No. 16-20047 (5th Cir. Oct. 13, 2016).

This post written by Michael Wolgin.

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NINTH CIRCUIT REVERSES CONFIRMATION OF ARBITRATION AWARD, REQUIRES EVIDENCE AS TO CONTRACT INTERPRETATION

November 7, 2016 by Michael Wolgin

The hotel management agreement (HMA) between hotel manager Four Seasons and hotel owner Burton Way provided that Four Seasons could not license any of the “Four Seasons Operational Benefits” within 14 miles of the Four Seasons Los Angeles, but provided an exception permitting Four Seasons to “manage or operate” the Regent Beverly Wilshire hotel. A dispute arose as to whether Four Seasons’ provision of Four Seasons Operational Benefits to the Regent Beverly Wilshire was permitted under the “manage or operate” exception. Both parties at arbitration presented extrinsic evidence as to the interpretation of the exception, and the panel made determinations as to the credibility of both interpretations.

On appeal of the district court’s order confirming the arbitration award, the Ninth Circuit reversed, holding that such fact-finding at summary judgment by the panel was legal error and required an evidentiary hearing. The court also reversed the confirmation of the panel’s determination of sanctions against Four Seasons for spoliation of evidence, remanding for purposes of re-determining the question of prejudice to Burton Way. The Ninth Circuit affirmed, however, on the issues of fiduciary duty and fraudulent inducement. On the issue of fiduciary duty, the court held that it was not legal error for the panel to conclude that negotiations between the two parties over the terms of their management agreement fell outside the scope of the principal-agent relationship. Regarding the inducement claim, the court held that it was not legal error for the panel to conclude that Burton Way waived its fraudulent inducement claim where, despite the fact that it included a clause reserving its claims, it signed a later agreement continuing the relationship. Burton Way Hotels, Ltd. V. Four Seasons Hotels Ltd., Case No. 14-56846 (9th Cir. Oct. 18, 2016).

This post written by Gail Jankowski, a law clerk at Carlton Fields in Washington, DC.

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SECOND CIRCUIT UPHOLDS REFUSAL TO COMPEL ARBITRATION DUE TO UNAVAILABLE FORUM, RECOGNIZING SPLIT IN FEDERAL CIRCUITS

October 20, 2016 by Michael Wolgin

A borrower had previously entered into three payday loan agreements that contained arbitration provisions mandating that all claims be arbitrated in the National Arbitration Forum (NAF), and under the Code of Procedure of the NAF. As of 2009, however, NAF did not accept consumer arbitrations. When the borrower filed a class action lawsuit against certain banking institutions involved with her loans, the banks initially compelled arbitration. When the NAF was unable to serve as the forum for the arbitration, the borrower successfully returned the proceedings back to court. The banks appealed this result to the Second Circuit, contending that section 5 of the FAA, which authorizes the court to substitute an arbitrator if there is a “lapse in the naming of an arbitrator,” permitted the court to substitute arbitrators here. But the Second Circuit disagreed with the banks, ruling that the arbitration in this case contained “numerous indicators that the parties contemplated one thing: arbitration before NAF.” “Further,” the court explained, “the agreement makes no provision for the appointment of a substitute arbitrator should NAF become unavailable.” As to the FAA, the court followed Second Circuit precedent and held that an unavailable forum does not constitute a “lapse” within the meaning of section 5 of the FAA. The court noted that the position of its circuit is aligned with the Eleventh and Fifth Circuits, but at odds with the Seventh and Third Circuits. The court affirmed, ruling that the banks could not enforce the arbitration agreements, and that the borrower’s lawsuit should proceed in court. Moss v. First Premier Bank, et al., Case No. 15-2513-cv (2d Cir. Aug. 29, 2016).

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DISTRICT COURT REFUSES TO BIND SURETY TO SUBCONTRACT ARBITRATION CLAUSE

October 19, 2016 by Michael Wolgin

An engineering company was hired to perform work in connection with construction and renovation of the South African Embassy, and subcontracted for sheet metal work with a third party. The subcontract contained an arbitration provision covering “any controversy or claim of Contractor against Subcontractor or Subcontractor against Contractor.” The third party then negotiated with a surety company for a surety bond, which incorporated the subcontract by reference. After a dispute between the engineering company and its subcontractor arose, the engineering company terminated the subcontract, notified the surety company that it intended to make a claim under the surety bond, and filed a request to join the surety company as a party in arbitration proceedings with its subcontractor. The surety company refused to consent to joinder and both parties moved for summary judgment on the issue of whether they must arbitrate the dispute over the bond. The engineering company argued that because the surety bond incorporated the subcontract by reference, the engineering company had agreed to arbitrate not only claims on the bond but also any issues of arbitrability. Relying on the disjunctive “or” in the language of the arbitration clause, the engineering company argued the subcontract required that “any controversy” involving any parties must be arbitrated, as well as any “claim of Contractor against Subcontractor” or vice versa. The court disagreed, applying a heightened standard of “clear and unmistakable evidence” that the surety company agreed to arbitrate. The court reasoned that although the surety company was bound by the subcontract as a whole, the surety company was not bound by the arbitration clause because the language clearly limited it to claims between the engineering company and its subcontractor. Western Surety Co. v. U.S. Engineering Co., No. 15-cv-327 (USDC D.D.C. Sept. 30, 2016).

This post written by Gail Jankowski, a law clerk at Carlton Fields in Washington, DC.

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COURT COMPELS ARBITRATION TO DETERMINE THE ARBITRABILITY OF REINSURANCE DISPUTE WITH CAPTIVE INSURANCE COMPANY

October 18, 2016 by Michael Wolgin

In a suit by an auto body company against a captive insurance company for rescission of certain workers compensation reinsurance participation agreements, for disgorgement of $70,000 paid thereunder, and for fraud, breach of contract, and unfair business practices, the court compelled arbitration of all claims. The auto body company argued that arbitration should not be compelled because a clause within the arbitration agreement stated that it was “only intended to provide a mechanism for resolving accounting disputes in good faith” (the dispute here did not involve an accounting dispute). The court, however, interpreted the entire arbitration agreement to find that the agreement “was intended to govern all disputes arising from the parties’ commercial transaction, not merely accounting disputes.” The court further found that the language in the arbitration agreement providing that the arbitrator would decide the “construction and enforceability” of the agreement delegated to the arbitrator the threshold question of whether the dispute was arbitrable. The court bolstered this finding by holding that the agreement’s incorporation of the AAA Rules, which provide that parties must arbitrate the arbitrability of a dispute, is another “clear and unmistakable delegation provision.” Accordingly, the court delegated to the arbitrator the auto body company’s contentions that the reinsurance agreements were unlawful and that a condition precedent to arbitration had not been satisfied. Mike Rose’s Auto Body, Inc. v. Applied Underwriters Captive Risk Assurance Co., Case No. 16-cv-01864 (USDC N.D. Cal. Sept. 28, 2016).

This post written by Michael Wolgin.

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