Arbitration Process Issues

In a three-way dispute between Exxon, BP, and a provider of drilling services over the alleged breach of an assignment agreement, a federal appeals court reversed based on the lower court’s improper resolution of a “lapse” in the parties’ ineffective two-party arbitrator selection procedures. The agreement provided that the dispute would be arbitrated before three arbitrators appointed in accordance with the rules of the Arbitration and Conciliation Act of 1990. ACA’s procedures, however, address a two-party dispute, in which each party selects an arbitrator, with the third selected by the arbitrators themselves.

When the three-way dispute arose in this case, and the parties could not agree on how the two-party arbitration selection process could be implemented, suit was filed in federal court under the New York Convention and the FAA. The court found that the arbitration agreement procedure reached a “mechanical breakdown” or “lapse,” and that it would order the appointment of five arbitrators. While the appellate court agreed with the district court’s determination that it was entitled to intervene under the FAA, it reversed the process that the district court instituted, holding that the FAA limited the court to enforce the underlying arbitration agreement, which in this case provided for only three arbitrators. On remand, the appellate court recommended a procedure for the district court to “consider” to achieve the equitable appointment of three arbitrators in a three-party dispute context. BP Exploration Libya Ltd. v. Exxonmobil Libya Ltd., No. 11-20547 (5th Cir. July 30, 2012).

This post written by Michael Wolgin.

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Plaintiff filed a class action complaint alleging wage and hour violations. He had signed an arbitration agreement which did not contain a class arbitration waiver. The trial court denied a motion to compel arbitration on the basis that the employer had waived arbitration by failing to properly and timely demand arbitration. The court of appeal reversed, ordering individual arbitration, holding that: 1) the defendant did not waive its right to arbitration even though it waited 14 months to move to compel arbitration; and 2) Section 7 of the National Labor Relations Act did not bar enforcement of the arbitration agreement at issue. The Supreme Court’s decision in AT&T Mobility v. Concepcion prompted the defendant’s delayed motion to compel. Concepcion held that the Federal Arbitration Act preempts California’s Discover Bank rule, which invalidates class arbitration waivers in consumer contracts of adhesion based on a finding of unconscionability. The court of appeal found that prior to Concepcion, the defendant reasonably perceived it would be futile to seek to compel arbitration in light of the Gentry test, which extended the Discover Bank rule to the employment context. The court reasoned that the risk of invalidation “diminished substantially” after Concepcion, but declined to explicitly “decide whether Gentry remains good law after Concepcion.” The employee contended that an order requiring individual arbitration would deprive him of the right to engage in collective legal action as protected by section 7 of the NLRA. This argument was accepted by National Labor Relation Board in D. R. Horton. The court of appeals followed other California court decisions which found Horton inapplicable in California courts. Reyes v. Liberman Broadcasting, Inc., No. B232511 (Cal. Ct. App. August 31, 2012).

This post written by Abigail Kortz.

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