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Arbitration Process Issues

COURTS RULE ON ARBITRATION PROCEDURE ISSUES

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Courts have recently ruled on various issues of arbitrability:

  • A party which commenced, and lost, an arbitration sought vacation of the award on the basis that the arbitration clause was unconscionable. The court rejected the claim, finding the party judicially stopped to make the argument since he had invoked the clause to commence the arbitration after the insurer filed a declaratory judgment action against him. Pegues v. Progressive Northern Ins. Co., No. 2008AP1500 (Wisc. Ct. App. Feb. 25, 2009).

  • A court compelled arbitration, rejecting an argument that mandatory arbitration provisions in an employment contracted were unconstitutional under the due process provisions of the Fifth Amendment to the Constitution because the claimant did not have the same procedural and discovery rights in arbitration that she would have had in litigation, were procedurally and substantively unconscionable and violated her Seventh Amendment right to a jury trial. Forbes v. A. G. Edwards & Sons, Inc., Case No. 08-552 (USDC S.D.N.Y. Feb. 18, 2009).

  • A court denied a motion to compel arbitration, finding that providing an arbitration agreement to a new employee for agreement by e-mail was valid, but that there was insufficient proof that the employee had agreed to the provision. Kerr v. Dillard Store Services, Inc., Case No. 07-2604 (USDC D. Ks. Feb. 17, 2009).

  • An appellate court affirmed the denial of a motion to compel arbitration since the plaintiff did not agree to arbitrate, and the contract containing the arbitration provision did not cover the parties to the action. Ins. Corp. of N.Y. v. Kenning Mgmt. of Ct., LLC, 2009 NY Slip Op 01541 (N.Y. App. Div. Mar. 3, 2009).

This post written by Rollie Goss.

EMERGING TRENDS IN SEALING ARBITRATION AWARDS?

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A trend seems to be emerging in favor of allowing arbitration awards to be sealed. Two district courts recently granted Swiss Re’s and Nationwide Mutual’s respective motions to seal petitions to confirm arbitration awards. In the first instance, Swiss Re argued, and the court agreed, that the existence of a confidentiality agreement between the parties was a sufficient basis to seal the records relating to the award. Swiss Reinsurance Co. v. Lincoln National Reinsurance Co. Ltd, Case No. 1109-036 (USDC N.D. Ind. February 6, 2009). Similarly, the Northern District of Indiana granted Nationwide Mutual’s motion to seal in an effort to comply with a confidentiality order entered by the panel that entered the award. Nationwide Mutual Ins. Co. v. Westchester Fire Ins. Co., Case No. 08 -673 (USDC W.D. Wisc., February 3, 2009). (See also February 10, 2009 post “Court Grants Motion to Seal Arbitration Award” and December 2, 2008 post “Arbitration Award Allowed to be Filed Under Temporary Seal”).

Just last year, however, the Southern District of New York held that despite the confidential nature of arbitration proceedings, a party seeking to confirm an arbitration award in court must establish some justifiable reason as to why the award and any documents filed in conjunction with the petition to confirm should remain confidential in order to overcome the strong judicial presumption against sealing judicial records. The New York court concluded that the risk of impairing the exchange of information between parties to a reinsurance agreement due to fear of ultimate disclosure could not overcome the strong presumption of access afforded to documents filed in court. Global Reinsurance Corp. v. Argonaut Ins. Co., Case No. 07-8196 and 07- 8350 (USDC S.D.N.Y. April 18, 2008). (For full details see May 6, 2008 post “Reinsurance Claims Rejected; Court Refuses to Seal Confirmation.”)

This post written by Lynn Hawkins.

THIRD CIRCUIT ALLOWS STATE LAW UNCONSCIONABILITY LAW TO VOID CLASS ARBITRATION WAIVER PROVISION

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The Third Circuit Court of Appeals has held that the Federal Arbitration Act does not preclude a court from applying state law unconscionability principles to void a class arbitration waiver. At the district court, American Express argued that plaintiff should be required to arbitrate his claims on an individual basis because Utah law governed the class arbitration waiver clause, and expressly allowed class arbitration waivers in consumer credit agreements. In opposition, plaintiff argued that, as a New Jersey resident, New Jersey law applied and that application of Utah law would violate New Jersey’s public policy against class arbitration waivers, so New Jersey choice of law principles dictated that the choice of Utah law was invalid. The district court agreed with American Express and dismissed the complaint.

In the ensuing appeal, the Third Circuit passed on its prior opinion in Gay v. CreditInform, 511 F.3d 369 (3d Cir. 2007), where the court applied the parties’ contractual choice of Virginia law in concluding that the waiver was valid, rejecting Pennsylvania cases on the unconscionability issue as being preempted by the FAA. According to the court, this issue in Gay appeared to be dicta. But “[w]hether dicta or not,” the defense New Jersey law provides to class arbitration waivers is “a general contract defense” that applies to all waivers of classwide actions, not simply those that also compel arbitration. Thus, following the Ninth Circuit’s lead in Lowden v. T-Mobile USA, Inc., 512 F.3d 1213 (9th Cir. 2008), the court held that the application to an arbitration provision of a general ban on class action waivers was not preempted by the FAA because the ban applies equally to a contract that permits only individual, not class, litigation. Having so concluded, the court next turned to the question of whether New Jersey courts would enforce Utah law allowing class arbitration waivers. After reviewing the salient New Jersey Supreme Court decisions, the court decided that class arbitration waivers violate fundamental New Jersey public policy “as applied to small-sum cases.” The court next determined that New Jersey’s policy against such waivers conflicted with Utah law and that, although both states had significant contacts with the litigation, it seemed likely that the New Jersey Supreme Court would determine that New Jersey had a materially greater interest than Utah in the enforceability of a class arbitration waiver that could operate to preclude a New Jersey resident from relief under New Jersey law. Accordingly, New Jersey law applied and the waiver was held to be unconscionable. Homa v. American Express Co., Case No. 07-2921 (3d Cir. Feb. 24, 2009).

This post written by Brian Perryman.

PLAN’S ADVISORY BOARD MEMBERS ARE NOT SUBJECT TO ARBITRATION CLAUSE

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Dooley disputed the calculation of certain benefits under an incentive plan incorporated into her employment agreement with her former employer. The incentive plan contained an arbitration clause requiring mediation to settle a dispute and, if unsuccessful, then binding arbitration. In accordance with the arbitration clause, Dooley filed a request for mediation naming only her former employer as the responding party. When the mediation failed, Dooley demanded arbitration against her former employer and three of the plan’s Advisory Board members asserting claims against them personally and individually for breach of fiduciary duty in relation to their administration of the plan. Two of the board members moved to stay arbitration in the Supreme Court of the State of New York. Dooley then removed to US District Court and moved to compel arbitration.

The district court first considered whether the court or an arbitrator decides the issue of arbitrability and concluded that courts decide in instances where the dispute concerns whether a certain party is subject to an arbitration clause. The court next considered whether the claims against the board members were arbitrable. Despite a factual dispute existing as to whether the Advisory Board members were parties to the plan, the court found as a matter of law the board members were not bound by the plan’s arbitration clause because neither Dooley nor the board members could have reasonably expected that the board members would be subject to arbitration for claims against them personally and individually for their administration of the plan. The court thus granted the board members’ motion to stay and denied Dooley’s motion to compel arbitration. Di Martino v. Dooley, Case No. 08-4606 (USDC S.D.N.Y. Jan. 6, 2009).

This post written by Dan Crisp.

SECOND CIRCUIT: ARBITRATION CLASS ACTION BAN UNENFORCEABLE

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On a matter of first impression, the Second Circuit Court of Appeals considered the enforcement of a mandatory arbitration clause in a contract that also contained a “class action waiver” forbidding parties to the contract from pursuing class claims in the arbitral forum. Though the court declined to decide whether class action waiver provisions were void or enforceable per se, it concluded that the plaintiffs had demonstrated that the class action waiver provision at issue should not be enforced because it would effectively preclude any action seeking to vindicate the statutory rights asserted by the plaintiffs.

The court noted that although the Supreme Court has not squarely addressed this issue, it had implicitly recognized that a provision in an arbitration agreement is not per se unenforceable because the question of the validity of an arbitration clause which contained a class action ban was a matter for the arbitrator, not the court, to decide. The court found Green Tree Fin. Corp.v. Randolph, 531 U.S. 79 (2000) controlling to the extent that, based on the costs of individual litigation or arbitration, the agreement entailed more than a speculative risk that enforcement of the class action ban would deprive the plaintiffs of substantial rights under federal antitrust statutes. Further, the court found that, for all intents and purposes, the plaintiffs could only pursue their antitrust claims against American Express through the aggregation of individual claims either in class action litigation or in class arbitration. The court concluded that the class action waiver could not be enforced because the provision would effectively grant American Express de facto immunity from antitrust liability. The court noted by way of caveat that the ruling was in no way dependent on the “size” of any or all of the merchant plaintiffs; rather, it depended on a showing that the size of the recovery of any individual plaintiff would be too small to justify the expenditure of bringing an individual action. Finally, the court emphasized that this decision did not find all class action bans in arbitration agreements per se unenforceable. The case was remanded to the District Court for further proceedings. In re: American Express Merchants' Lit., No. 06-1871 (2d Cir. Jan. 30, 2009).

This post written by John Black.