Arbitration Process Issues

NO MUTUAL ASSENT TO ARBITRATE WHEN ONE PARTY EMAILS ARBITRATION PROVISION AFTER CONTRACT FORMATION

November 7, 2012 by Carlton Fields

In a class action suit against a company that sells online programs offering discounts on goods and services, the Second Circuit affirmed the district court’s denial of defendant’s motion to compel arbitration. Defendants argued that they provided plaintiffs with notice about the arbitration provision through a hyperlink on a webpage plaintiffs would have seen before enrolling in defendants’ service and in an email sent to plaintiffs after enrollment. The court held that an unsolicited email from an online consumer business sent after enrollment does not put recipients on inquiry notice of its terms and that failure to cancel the membership does not, by itself, constitute assent. The court declined to decide the issue of whether the hyperlink on the enrollment screen provided notice of the arbitration provision because defendants failed to raise the issue in the district court. However, the court hinted that the hyperlink “might have created a substantial question as to whether the [arbitration] provision was part of a contract between the parties.” Schnabel v. Trilegiant Corp., No. 11-1311 (2d Cir. Sept. 7, 2012).

This post written by Abigail Kortz.

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COURT REVERSED FOR STRAYING FROM ARBITRATION AGREEMENT DESPITE “LAPSE” IN ARBITRATOR SELECTION PROCESS

November 6, 2012 by Carlton Fields

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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COURT DECLINES APPLICATION FOR PRE-AWARD SECURITY IN REINSURANCE ARBITRATION

October 31, 2012 by Carlton Fields

The defendant was the managing general agent for a book of reinsurance business for the plaintiff reinsurer. The parties disputed commission amounts owed by defendant to the plaintiff. Plaintiff initiated an arbitration seeking recoupment of approximately $2 million in commissions it claimed it was owed, as well as approximately $70,000 in other expenses arising from the dispute. An interim order in the arbitration established that plaintiff was owed the $70,000 portion of the claim, and the parties agreed to resolve the larger portion later, as they needed information to develop the claim. In the meantime, the plaintiff filed an application in district court seeking security from the defendant, pursuant to a Texas statute allowing for the posting of security in arbitrations. It sought security for the $70,000 already established by the interim award, as well as the $2 million it continued to seek in the arbitration. The Court denied both, arguing that plaintiff had not made out a case that is was likely to secure the $2 million award it sought, and that there was no basis to require security for the “de minimis” $70,000. General Fidelity Insurance Co. v. WFT Inc., 3-11-CV-0448 (USDC N.D. Tex. Oct. 15, 2012).

This post written by John Pitblado.

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COURT APPLIES CONCEPCION AND REJECTS UNCONSCIONABILITY ARGUMENT

October 25, 2012 by Carlton Fields

On remand from the Supreme Court and the Second Circuit in light of AT&T Mobility v. Concepcion, a district court granted defendant’s motion to compel arbitration over plaintiff’s arguments that: 1) defendant could not compel arbitration because it was not a party to the contract containing the arbitration clause; and 2) the arbitration clause is unconscionable. Applying California law, the court held that the plaintiff was estopped from avoiding arbitration against the defendant because the defendant was the agent of a signatory to the contract and the plaintiff’s claims were intertwined with the contract that included the arbitration clause. Regarding the unconscionability issue, the court reasoned that even though Concepcion overruled the Discover Bank rule, it did not entirely do away with the unconscionability defense to arbitration agreements. Applying a California rule governing the unconscionability of all contracts, not just arbitration agreements, the court analyzed whether the arbitration clause was procedurally and substantively unconscionable and found that it was not. Fensterstock v. Education Finance Partners, Case No. 08-03622 (USDC S.D.N.Y. Aug. 30, 2012).

This post written by Abigail Kortz.

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CALIFORNIA COURT OF APPEAL APPLIES CONCEPCION AND COMPELS INDIVIDUAL ARBITRATION

October 23, 2012 by Carlton Fields

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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