Arbitration Process Issues

The Second and Third Circuit Courts of Appeal recently issued conflicting opinions on the enforceability of class arbitration waivers. Jose Ivan Vilches brought a purported class action against his former employer, The Travelers Companies, Inc., for unpaid wages and overtime, in violation of labor laws. Travelers moved to compel arbitration on an individual basis, citing the class arbitration waiver in the employment contract. The district court granted the motion and compelled individual arbitration. On appeal, the Third Circuit held, citing Stolt-Nielsen S.A. v. Animalfeeds Int’l Corp., 130 S. Ct. 1758 (2010), that it was error for the district court to have decided whether the case could be arbitrated as a class action, finding that it should have left decision on that point to the panel. It also rejected plaintiff’s contention that the class action waiver was unconscionable, and therefore unenforceable. It vacated that portion of the district court’s decision, and ordered the parties to arbitrate the question of the applicability of the class arbitration waiver to the panel. Vilches v. The Travelers Companies, Inc., No. 10-2888 (3d Cir. Feb. 9, 2011)

Meanwhile, the Second Circuit came to precisely the opposite conclusions in a case that was remanded back to it after the U.S. Supreme Court vacated its prior decision for consideration in light of Stolt-Nielsen S.A. v. Animalfeeds Int’l Corp., 130 S. Ct. 1758 (2010). The case involved a putative class of vendors who alleged that they were improperly charged by American Express for accepting payments from its cardholders. American Express sought to have the matter arbitrated on an individual, rather than class, basis. The Second Circuit held that: (1) the issue of whether the case can be arbitrated as a class action is for the Court, not the arbitration panel to decide; and (2) the class arbitration waiver was unconscionable and therefore unenforceable because it effectively deprived the plaintiffs of a statutory right. In re: American Express Merchants’ Litigation, No. 06-1871 (2d Cir. March 8, 2011).

This post written by John Pitblado.

The Ninth Circuit Court of Appeals recently issued an opinion holding that it was improper for a District Court to pass initial review of an arbitration award onto an appellate court rather than reviewing the award itself when presented with motions to confirm and to vacate. The parties, following a lengthy discovery process, had submitted to binding arbitration with appeal rights. After the arbitrator issued an award, and plaintiff moved the federal district court to confirm, defendant Wells Fargo informed the district court of an arithmetical error in the arbitrator’s calculations. Wells Fargo indicated that it did not intend to appeal the arbitrator’s judgment, but moved to modify or vacate the award. The district court refused to review the award, stating that such objections should be taken up on appeal. Wells Fargo subsequently filed the instant appeal.

Finding that it was proper to review the procedural error sua sponte, the Ninth Circuit remanded the case to the district court. The appeal court saw no reason justifying the district court’s circumvention of the Congressionally-established structure of the federal courts and the Federal Arbitration Act’s process for the review of arbitration awards. The Supreme Court’s Hall Street Associates opinion prevents parties from contracting for a standard of review different than that contained in the FAA, and similarly, parties should not be able to contract for a different review process. The district court was thus directed to rule on the motion to modify or vacate. Johnson v. Wells Fargo Home Mortgage, Inc., Case No. 05-321 (9th Cir. Feb. 15, 2011).

This post written by John Black.

A federal judge in Illinois compelled arbitration of a defamation suit brought by an ousted board member against other board members of an LLC formed as a joint venture. The LLC was formed by an operating agreement that included a procedure for the designation of governing board members. Plaintiff, the principal of one of the entities forming the joint venture, was designated to the board, but other board members successfully sought to have him removed for reasons they set forth in writing to other members. Plaintiff sued them for defamation. The defendants moved to compel arbitration, citing the operating agreement’s arbitration provision. While the Plaintiff was not a party to the operating agreement, the court still compelled him to arbitration, as it found him to be an agent of one of the signatory companies, citing agency as one of the “five doctrines through which a non-signatory can be bound by arbitration agreements entered into by others.” The court also found the defamation claims to be within the scope of the arbitration agreement, because it pertained to a disagreement “concerning the management or conduct of the affairs” of the joint venture created by the operating agreement. Denari v. Rist, Case No. 10-2704 (USDC N.D. Ill. Jan. 31, 2011).

This post written by John Pitblado.