Arbitration Process Issues

DISTRICT COURT DENIES MOTION TO COMPEL ARBITRATION

December 4, 2013 by Carlton Fields

A federal court in Missouri denied a defendant’s motion to compel arbitration. Two contracts were at issue. The first was a contract between the plaintiff, a pharmacy benefits manager, on the one hand, and a network of pharmacies – in which defendant, a chain of pharmacies in Oklahoma, participated – on the other. This contract governed the payment of pharmacy claims and did not include an arbitration provision. A separate contract directly between the plaintiff and defendant regarding claims audits contained an arbitration agreement. The plaintiff made claim for reimbursement for certain claims under the former agreement, and the defendant then initiated an arbitration in Missouri. The plaintiff resisted arbitration, and filed an action in court challenging arbitration on the grounds that the contract at issue contained no arbitration provision. The court agreed, noting that the evidence submitted made clear that the claims pertained only to the agreement with no arbitration agreement, and that therefore the claims could and should proceed in court. Express Scripts, Inc. v. The Apothecary Shoppe, Inc., No. 4:12-cv-01035 (USDC E.D. Mo. Sept. 30, 2013).

This post written by John Pitblado.

See our disclaimer.

NINTH CIRCUIT DECLARES ARBITRATION AGREEMENT TO BE UNCONSCIONABLE, AVOIDING CONCEPCION

December 2, 2013 by Carlton Fields

The Ninth Circuit affirmed a ruling holding an arbitration agreement to be unconscionable under California contract law. Attempting to narrow the limits of the U.S. Supreme Court’s ruling in AT&T Mobility v. Concepcion, the Ninth Circuit found the agreement unconscionable in a manner not “uniquely applicable to arbitration.” The arbitration agreement at issue was part of an employment contract, and the district court found the arbitrator selection process to be peculiarly unfair, insofar as it essentially left the choice of arbitrator to the employer. The provision employed a process allowing both sides to nominate three choices, and then strike out choices until only one selection remained. It allowed the party against whom arbitration was sought to make the first deletion from the list, with the parties to take turns thereafter. The district court found that this effectively meant that the last arbitrator standing would be one of the three employer-chosen names. It also found other terms in the contract unfairly balanced in the employer’s favor and “shocked the conscience.” The Ninth Circuit affirmed the district court’s finding that the contract was unconscionable under state contract law, in a way that did not unfairly target its arbitration provision, thus avoiding the strictures of Concepcion and the FAA, which presumptively favor arbitration. Chavarria v. Ralph’s Grocery Co., No. 11-56673 (9th Cir. Oct. 28, 2013).

This post written by John Pitblado.

See our disclaimer.

DESIGNATION OF SPECIFIC ARBITRATOR NOT INTEGRAL TO ARBITRATION AGREEMENT

November 27, 2013 by Carlton Fields

In Virginia, defendant’s employment of plaintiff for house cleaning services became messy when plaintiff sued her employer for numerous torts, statutory violations and breach of contract. With foresight, defendant had required plaintiff to sign a one-page Arbitration Agreement requiring resolution of “any and all claims, disputes, or controversies arising out of” plaintiff’s employment exclusively by the National Arbitration Forum (“NAF”) and sought to enforce that Agreement. The NAF was no longer available to administer the arbitration. Plaintiff argued that designation of the NAF as exclusive arbitrator was integral to the Agreement and the NAF’s unavailability rendered the Agreement unenforceable. The lower court agreed, but the matter was ultimately tidied up in defendant’s favor. On appeal, the supreme court found the NAF designation was not integral to the agreement because: (1) the Agreement included a severability provision, (2) the sole object of the Agreement was to require arbitration, (3) the parties were presumed to know the courts are directed by statute to appoint an arbitrator when an arbitration agreement fails to appoint one, and (4) nothing indicated that the parties considered the contingency that the NAF might not be available. Schuiling v. Harris, slip op (Va. Sept. 12, 2013).

This post written by Abigail Kortz.

See our disclaimer.

THIRD CIRCUIT AFFIRMS ORDER FINDING CONFIDENTIALITY OF DELAWARE CHANCERY COURT’S ARBITRATION PROCEEDINGS UNCONSTITUTIONAL

November 26, 2013 by Carlton Fields

On September 25, 2012, we reported on an order finding unconstitutional the confidentiality provision of Delaware’s novel business arbitration procedures, in which a sitting judge of the Court of Chancery presides in court as arbitrator. The federal district court held that since the arbitration process essentially functions like a civil trial, the confidentiality provision violated the qualified right of access to criminal and civil trials protected by the First Amendment. On appeal, the Third Circuit affirmed (with one dissenting judge), but not before conducting the First Amendment “experience and logic test,” which the lower court had failed to do. As to “experience” the court explored the history of both civil trials and arbitrations and concluded that “both the place and process of Delaware’s proceeding have historically been open to the press and general public.” Regarding the “logic” of public access to the arbitration proceedings, the court held that the “benefits of openness weigh strongly in favor of granting access to Delaware’s arbitration proceedings” and in “comparison, the drawbacks of openness” are relatively slight. The court did not give much weight to the Delaware chancellor and judges’ arguments that: (1) privacy is necessary to protect closely held information, (2) privacy is necessary to prevent the “loss of prestige and goodwill” of the disputants, (3) privacy encourages a “less hostile, more conciliatory approach,” and (4) that public access would “effectively end Delaware’s arbitration program.” The court concluded, “the interests of the state and the public in openness must be given weight, not just the interests of rich businesspersons in confidentiality.” Delaware Coalition for Open Government, Inc. v. Strine, Case No. 12-3859 (3d Cir. Oct. 23, 2013).

This post written by Michael Wolgin.

See our disclaimer.

SECOND CIRCUIT FINDS ARBITRATION WAIVER DUE TO PROTRACTED LITIGATION

November 13, 2013 by Carlton Fields

Although federal policy strongly favors arbitration and waiver of a right to arbitrate is not lightly inferred, the Second Circuit recently affirmed the Southern District of New York’s finding of waiver in a case involving “protracted litigation that prejudice[d] the opposing party.” While bright-line rules do not exist for determining when a party has waived its right to arbitration, there are certain factors that courts consider: (1) the time elapsed from commencement of litigation to the request for arbitration, (2) the extent of litigation (including any substantive motions and discovery), and (3) proof of prejudice. The Second Circuit found waiver because the defendant, with knowledge of the arbitration provision, had waited fifteen months after the complaint was filed to raise its contractual rights and had already argued two substantive motions to dismiss, engaged in extensive written discovery requests, and deposed a key plaintiff witness. Additionally, the court defused the defendant’s argument that Second Circuit arbitration jurisprudence conflicted with the Federal Arbitration Act, ultimately holding that its waiver case law “derives from the uncontroversial premise that affirmative defenses like arbitrability ‘are subject to forfeiture if not raised in a timely fashion.’” Technology in Partnership, Inc. v. Rudin, No. 12-3699-cv (2d Cir. Sept. 17, 2013).

This post written by Kyle Whitehead.

See our disclaimer.