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Michael Wolgin

Sixth Circuit Reverses District Court for Exceeding Its Authority by Ruling on Arbitrability in the Presence of an Unchallenged Delegation Clause

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The plaintiff alleged that she was a victim of an illegal predatory loan orchestrated by the defendant’s company. The loan allegedly charged excessive interest but was shielded from U.S. law by tribal sovereign immunity.

The plaintiff filed suit, alleging that the loan was illegal and that the defendant had committed RICO and other consumer protection violations. The loan contract, however, included an arbitration provision, providing that “any dispute … related to this agreement will be resolved through binding arbitration” under tribal law, subject to review in tribal court. The defendant moved to compel arbitration, contending that the plaintiff agreed to a delegation clause to arbitrate issues “concerning the validity, enforceability, or scope” of the arbitration agreement, but the district court denied the defendant’s motion. The court found that the enforceability of the arbitration agreement “has already been litigated, and decided against [the defendant], in a similar case commenced in Vermont.”

The Sixth Circuit reversed, finding that the district court exceeded its authority by resolving the issue of arbitrability and finding that the arbitration agreement was enforceable. The provision delegating the question of arbitrability to an arbitrator was invoked by the defendant but was never specifically challenged by the plaintiff or addressed by the district court. “Only a specific challenge to a delegation clause brings arbitrability issues back within the court’s province.” Accordingly, the “district court should have enforced [the delegation clause] and referred the case to arbitration.”

The Sixth Circuit was not persuaded by the plaintiff’s argument that the issue of arbitrability related to the defendant’s standing, and therefore could be adjudicated in court. In response, the Sixth Circuit noted that a “logical conundrum” exists because courts still must determine the existence of the contract even when a delegation clause exists in the underlying arbitration agreement. The court, however, relied on its prior decision in another case that “signaled” that a “nonsignatory’s ability to enforce an arbitration agreement concerned a question of arbitrability.” The court determined that it would “follow suit and find that whether [the defendant] can enforce the arbitration agreement against [the plaintiff] presents a question of arbitrability that [the] arbitration agreement delegated to an arbitrator.”

 Swiger v. Rosette, No. 19-2470 (6th Cir. Mar. 4, 2021).

Fourth Circuit Affirms Denial of Vacatur of Arbitration Award, Finding No Deprivation of a Fair Hearing or Manifest Disregard of the Law

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A former vice president of a division within Oracle Corp. filed a demand for arbitration against Oracle, claiming that he was owed additional bonus compensation under the terms of his employment contract and the Maryland Wage Payment and Collection Law (MWPCL). After the parties conducted discovery and filed the equivalent of cross-motions for summary judgment briefing and oral argument in arbitration, the arbitrator ruled that the plaintiff was not due any additional compensation. The arbitrator determined that there were no material facts in dispute that would require a hearing on the merits, Oracle did not breach the parties’ compensation plan by its decision not to pay a larger bonus, and Oracle did not violate the MWPCL. The arbitrator ruled that the compensation plan gave Oracle the right to correct “administrative errors” and that, although the compensation plan omitted a cap on the plaintiff’s potential bonus compensation, it was an “administrative error” that Oracle had the right to rectify. The plaintiff then filed a petition to vacate the award in a Maryland state court, which Oracle then removed to the District of Maryland.

In the district court, the plaintiff argued that the arbitrator ignored the essence of the compensation plan, that the arbitrator deprived him of a fundamentally fair hearing, and that the arbitrator manifestly disregarded the MWPCL. The district court, however, denied the plaintiff’s petition to vacate the award, ruling that there was undisputed evidence that the failure to insert a cap into the plan was, indeed, an “administrative error,” which Oracle was entitled to correct. The court also ruled that the arbitrator had the discretion to decide the case like a summary judgment proceeding and that the arbitrator afforded a full and fair hearing that included discovery, the presentation of evidence, ample briefing, and oral argument. Regarding the MWPCL, the court ruled that the award was not made in manifest disregard of that statute, since the arbitrator had identified and used controlling legal principles to analyze the plaintiff’s claim.

On appeal, the Fourth Circuit affirmed, explaining that the review of an arbitration award is limited and that the district court properly disposed of the issues.

Balch v. Oracle Corp., No. 19-2433 (4th Cir. Feb. 17, 2021).

Ninth Circuit: Website Visit Four Years After Assent To a Contract Containing a Change-of-Terms Provision Does Not Bind Parties To New Contract Terms Addressing Arbitration

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The Ninth Circuit affirmed the district court’s order compelling arbitration in a case brought under the Fair Credit Reporting Act (FCRA) and state law, based on the plaintiff’s purchase of Experian’s Credit Score subscription service in 2014. The plaintiff agreed in 2014 to Experian’s terms of use, which included an arbitration provision and a “change-of-terms” provision, specifying that she would be bound to future versions of the contract by continuing to access Experian’s website. In 2018, on the day before the plaintiff filed her lawsuit, the plaintiff accessed Experian’s website, and subsequently argued that she became subject to new contract terms exempting FCRA claims from arbitration.

The Ninth Circuit held that the plaintiff’s claims were arbitrable under the 2014 terms of the contract, and that the 2018 terms did not apply. In order to bind parties to new terms pursuant to a change-of-terms provision, both parties must have notice that the terms have changed and an opportunity to review the changes. The plaintiff did not allege facts sufficient to conclude that this occurred. The court observed that “the opposite rule would lead to absurd results: contract drafters who included a change-of-terms provision would be permitted to bind individuals daily, or even hourly, to subsequent changes in the terms.”

The Ninth Circuit also held that there was no concern that the 2014 contract required parties to waive their rights to seek public injunctive relief, which would have rendered the agreement unenforceable under California law (the “McGill rule”). Because the 2014 arbitration agreement subjected to arbitration “all disputes to the fullest extent allowed by law,” the court found that the arbitration agreement did not prohibit a plaintiff seeking public injunctive relief in court. The court also found that the McGill rule was inapplicable because the plaintiff failed to allege Article III standing to bring public injunctive relief.

Stover v. Experian Holdings, Inc., Case No. 19-55204 (9th Cir. Oct. 21, 2020).

Ninth Circuit Affirms Denial of DIRECTV’s Motion To Compel Arbitration, Creating Circuit Split on Procedure for Determining Scope of Arbitration Agreements

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The plaintiff had filed a class action alleging that DIRECTV made calls to his cell phone in violation of the Telephone Consumer Protection Act. DIRECTV attempted to compel arbitration by relying on an agreement that the plaintiff had signed with AT&T Mobility, which had become an affiliate of DIRECTV subsequent to the formation of the agreement. The agreement included an arbitration clause extending to “all disputes and claims between” the plaintiff and AT&T Mobility, “includ[ing], but … not limited to … claims arising out of or relating to any aspect of the relationship between” them. As defined in the contract, AT&T Mobility also included its “affiliates.”

The Ninth Circuit explained that the proper procedure for interpreting the arbitration agreement at issue was first to determine whether a valid agreement was formed between the plaintiff and the party attempting to compel arbitration, i.e., DIRECTV. Relying on California law, the Ninth Circuit approved the district court’s holding that, at the time of the arbitration agreement, the reasonable expectation of the parties would not have considered DIRECTV to be included as an affiliate of AT&T Mobility. The Fourth Circuit, in contrast, would have determined whether the arbitration agreement was formed between the plaintiff and the party named in the arbitration agreement (AT&T Mobility), and then would have determined whether the scope of that agreement would include the party seeking to compel arbitration (DIRECTV).

The Ninth Circuit supported its view by reasoning that its approach avoids an “absurd result,” which it must avoid under the California rules of contract interpretation. In so doing, the court distinguished the U.S. Supreme Court’s Lamps Plus decision, which held that the “contra proferentem” rule of contract interpretation was preempted by the FAA.

Revitch v. DIRECTV, LLC, Case No. 18-16823 (9th Cir. Sept. 30, 2020).

Fifth Circuit Affirms Significant Arbitration Award of Attorney’s Fees, Clarifying the Limited Scope of Review and Ruling That the Panel Did Not Exceed Its Authority

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Beyond International, Inc. and an individual (“Beyond”) appealed the district court’s order granting plaintiffs’ motion to confirm an arbitration award in favor of Diverse Enterprises, Ltd., Co., LLC and other parties (“plaintiffs”). The dispute arose out of an alleged failure to meet minimum sales requirements under a distribution agreement (“Agreement”), which contained an arbitration clause. The arbitration panel entered an award in favor of the plaintiffs, which included $432,135.60 in attorneys’ fees. Beyond moved to modify the fee award, contending, in pertinent part, that one of the plaintiffs’ law firms charged only $225 an hour instead of the $400 hourly rate to which the parties had stipulated. The panel denied Beyond’s motion.

In the district court, Beyond sought vacatur or modification of the award of attorney’s fees, contending that the panel exceeded its authority. The district court rejected Beyond’s argument and confirmed the arbitration award, concluding that there was no limiting language concerning the arbitrator’s authority in the Agreement, and that there was no “evident material miscalculation” or “mistake” in the award. The court also found that the panel “reasonably relied on the parties’ stipulation that attorneys’ fees ranging from $200 to $400 would be reasonable.”

On appeal, Beyond argued that the panel was limited to awarding “reasonable fees” and not “multiples” of fees, and that the panel violated Texas law by “awarding fees not actually incurred.” The Fifth Circuit rejected these arguments, explaining that the scope of its review would address only the question of whether the award was “rationally inferable” from the Agreement. Here, the court held, the Agreement broadly authorized the panel to settle “any claim or controversy arising out of or relating to” the Agreement, and granted the prevailing party “reasonable attorneys’ fees … and related costs and expenses.” The court held that this language did “not necessarily limit the parties to fees actually incurred.” The court then affirmed the district court’s denial of vacatur of the panel’s fee award, noting that it would not reach “the merits of Beyond’s excessive fee claim because that argument goes beyond our power to review the arbitration decision.”

Diverse Enterprises, Limited Company, L.L.C. v. Beyond International, Inc., Case No. 19-51121 (5th Cir. Sept. 17, 2020).