Arbitration Process Issues

Third Circuit Affirms Order Denying Motion to Compel Arbitration After AAA Declines to Administer Arbitration

January 23, 2024 by Kenneth Cesta

The Third Circuit Court of Appeals has affirmed a district court decision denying defendant MicroBilt Corp.’s motion to compel arbitration, finding the plaintiff had fully complied with all provisions of her arbitration agreement with MicroBilt.

In connection with a loan plaintiff Maria Del Rosario Hernandez applied for in 2020, the lender utilized a product offered by MicroBilt, referred to as an “instant bank verification report,” which allowed the lender to verify Hernandez’s identity and financial information. The verification report included information for other persons with the Hernandez name, including a person who was on a government watch list that caused the lender to deny Hernandez’s loan application.

After Hernandez filed a lawsuit alleging MicroBilt violated the Fair Credit Reporting Act, MicroBilt filed a motion to compel arbitration, relying on an arbitration provision that was part of the loan application process. The arbitration provision included an “exclusive resolution” clause, which required that any disputes or claims be resolved exclusively by binding arbitration. The arbitration provision also stated the arbitration would be conducted by a single arbitrator in accordance with AAA rules, punitive and consequential damages were not recoverable, and each party would be responsible for its own attorneys’ fees. Hernandez dismissed her lawsuit and submitted the claim to the AAA. Treating the matter as a “consumer agreement” under the AAA Consumer Arbitration Rules, the AAA administrator assigned to the matter notified MicroBilt that the damages limitation included in the arbitration provision conflicted with Principle 14 of the consumer due process protocol of the rules, which requires that an arbitrator “should be empowered to grant whatever relief would be available in court under law or equity.” MicroBilt refused to waive the damages limitation and the AAA declined to administer the arbitration under Rule 1(d). Hernandez then reinstated her claims in the district court and MicroBilt moved to compel arbitration. The district court denied the motion to compel, finding Hernandez had fully complied with the arbitration provision.

In affirming the district court’s denial of the motion to compel, the Third Circuit recognized the arbitration provision covered Hernandez’s claims but noted that under 9 U.S.C. § 4, it “may compel arbitration only where there is a ‘failure, neglect, or refusal … to arbitrate under a written agreement.’” The court found the district court’s denial of MicroBilt’s motion was correct because Hernandez was in full compliance with the relevant arbitration provisions. As a result, the court concluded it lacked authority under section 4 to compel arbitration. The court also rejected MicroBilt’s argument that the AAA administrator’s requirement that MicroBilt waive the damages limitation was an “arbitrability” issue that should have been resolved by the arbitrator. The court found that, under Consumer Rule 14(a), arbitrators have the exclusive power to rule on “the existence, scope, or validity” of an arbitration provision, and the administrator’s decision to dismiss the arbitration did not implicate any of those issues. The court also rejected MicroBilt’s argument that the “exclusive resolution” clause of the arbitration provision conflicts with Hernandez pursuing her claims in court. The court noted that Hernandez has fully complied with the AAA rules, and “[s]everal courts have allowed plaintiffs to return to court after administrative dismissals under Rule 1(d), despite general agreements to arbitrate.” The court affirmed the district court’s decision denying defendant MicroBilt’s motion to compel arbitration.

Hernandez v. MicroBilt Corp., No. 22-3135 (3d Cir. Dec. 5, 2023).

Second Circuit Affirms Schwab Victory in FINRA Arbitration

December 20, 2023 by Benjamin Stearns

The Second Circuit Court of Appeals recently affirmed a decision confirming an arbitration award in favor of Charles Schwab & Co. over allegations of discovery abuses that purportedly rendered the arbitration proceeding unfair. We previously wrote about the district court decision confirming the arbitration award in a prior post.

The appellant again argued to the Second Circuit that the arbitration panel had “refused to hear evidence pertinent and material to the controversy and thereby rendered the proceedings fundamentally unfair.” But the Second Circuit found the appellant failed to carry its burden to demonstrate the panel’s discovery-related decisions rendered the proceeding unfair. To the contrary, the court noted that the panel considered numerous discovery motions, including hearing oral argument, and further that Schwab produced more than 5,500 documents to the appellant over 14 different document productions.

In concluding, the court stated that “in light of the ‘great deference’ accorded to arbitrators ‘in their evidentiary determinations,” the court found the arbitration proceeding was not fundamentally unfair.

Evan K. Halperin Revocable Living Trust v. Charles Schwab & Co., No. 22-2748 (2d Cir. Nov. 29, 2023).

Federal Circuit Vacates Arbitrator’s Decision Removing Federal Employee From Position, Remands for Further Review

July 28, 2023 by Kenneth Cesta

The Federal Circuit Court of Appeals vacated an arbitrator’s final decision upholding the petitioner’s removal from a position with the Federal Bureau of Prisons, finding that the arbitrator failed to conduct an independent analysis to determine if alternative sanctions, other than removal, were appropriate.

The petitioner, Jacquana Williams, was employed by the BOP as a correctional officer at a Texas federal correctional complex. She had a relationship with a former prisoner who she was aware had been incarcerated but did not know had been in federal custody. The two became engaged and had a child. The BOP placed Williams on administrative leave and conducted an internal investigation, after which it determined that she had engaged in improper contact with a former inmate and did not timely report the contact. After she was removed from her position, Williams challenged the removal with an arbitrator per the established grievance procedure. The arbitrator sustained the improper contact charge, rejected the failure-to-timely-report charge, and upheld the penalty of removal.

The court of appeals vacated the arbitrator’s ruling, concluding that because the arbitrator did not sustain all of the BOP’s charges, he was required to independently determine the maximum reasonable penalty to be imposed on Williams. The court then found the arbitrator failed to conduct the required independent analysis, vacated the decision of removal, and remanded the matter with direction to the arbitrator to “pay close attention to the adequacy of lesser sanctions.”

Williams v. Federal Bureau of Prisons, No. 22-1575 (Fed. Cir. July 6, 2023).

Second Circuit Affirms Order Denying Application to Adjourn Enforcement of Arbitration Award Pending Outcome of Parallel Foreign Proceeding

May 3, 2023 by Kenneth Cesta

In Iraq Telecom Ltd. v. IBL Bank S.A.L., defendant IBL appealed an order from the district court that denied its application to stay the enforcement of a $3 million arbitration award rendered in favor of plaintiff Iraq Telecom. Without going into the underlying facts or procedural history, the court focused on whether the district court erred in its application of the factors set forth in Europcar Italia v. Maiellano Tours, 156 F.3d 310 (2d Cir 1998), for considering a request to stay enforcement proceedings pending the outcome of a parallel foreign proceeding. The court held the district court did not err in determining that the factors set forth in Europcar, on balance, weighed against staying enforcement of the award despite a pending Lebanese annulment action.

The court first noted that under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, a district court may, if it considers it proper, adjourn the decision on the enforcement of the award if an application for the setting aside or suspension of the award has been made in the jurisdiction in which the award was made. Applying the factors set forth in Europcar, the court noted that it reviews a district court decision in these matters for abuse of discretion, including (1) basing its decision on an error of law or wrong legal standard; (2) basing its decision on a clearly erroneous factual finding; or (3) reaching a conclusion that, “though not necessarily the product of a legal error or a clearly erroneous factual finding, cannot be located with the range of permissible decisions.”

Applying this standard of review, the court found the district court properly applied the Europcar factors in denying the application to stay the enforcement proceedings pending the outcome of the parallel foreign proceeding. The court noted the district court’s determination that the two most important factors (the general objectives of arbitration and the status of the foreign proceeding) weighed against staying enforcement of the foreign award was reasonable. With regard to these factors, the court rejected IBL’s arguments that the district court erred by not considering future delay and the ramifications for international comity should the award be annulled in Lebanon, declining to disturb the district court’s findings on these factors. The court also concluded that the district court’s determination of the other Europcar factors was reasonable, including the conclusion that the balance of the possible hardships to each of the parties weighed against IBL’s request for a stay, and the district court did not abuse its discretion in determining that IBL was not likely to succeed in its Lebanese annulment action. The court affirmed the judgment of the district court, rejecting IBL’s application for a stay.

Iraq Telecom Ltd. v. IBL Bank S.A.L., No. 22-832 (2d Cir. Apr. 17, 2023)

Arizona District Court Confirms Arbitration Award, Denies Cross-Motion to Vacate

April 10, 2023 by Kenneth Cesta

Relying on the Federal Arbitration Act (FAA) and noting that the FAA “enumerates limited grounds on which a federal court may vacate, modify, or correct an arbitral award,” the U.S. District Court for the District of Arizona granted defendants UBS Financial Services Inc. and UBS Credit Corp.’s motion to confirm an arbitration award and denied the plaintiff’s motion to vacate that award.

The plaintiff was employed as a financial adviser for UBS and obtained loans from UBS during his employment through a financial adviser loan program. As part of the loan process, the plaintiff signed promissory notes, which set forth the terms of repayment and included a choice-of-law provision and an arbitration clause or agreement. In addition to the notes, the plaintiff also signed “transition agreements,” which provided UBS would pay the plaintiff “‘on an annual basis in the amount totaling the loan principal and accumulated interest due under the associated note’” while the plaintiff was employed with UBS. All of the arbitration agreements also provided that arbitration of covered claims would be “conducted under the auspices and rules of FINRA in accordance with the FINRA Code of Arbitration for Industry Disputes.” Upon the termination of the plaintiff’s employment, the loans became due and payable and UBS initiated proceedings with FINRA alleging that the plaintiff failed to repay the loans and misappropriated UBS’ confidential customer information. The plaintiff filed various counterclaims against UBS regarding the notes and his employment, including breach of contract, fraud, constructive discharge, and violation of the Fair Labor Standards Act, among other claims. The FINRA arbitration panel issued a final award in part for UBS and in part for the plaintiff. The panel concluded that the plaintiff was liable for repayment of the notes but also found for the plaintiff on his negligent misrepresentation and constructive discharge claims. UBS filed a motion to confirm the award and the plaintiff filed a motion to vacate part of the award.

After rejecting UBS’ arguments that the plaintiff’s motion was procedurally deficient, the district court addressed the substantive issues raised by the parties, including whether the panel’s finding that the plaintiff was liable for the notes constituted “manifest disregard of the law,” whether the panel exceeded its powers in issuing an “irrational award,” and whether one of the arbitrators showed “evident partiality” against the plaintiff. First, the court noted the standard for manifest disregard of the law “affords an extremely limited review authority” and requires a showing that the arbitrators “knew of the relevant legal principle, appreciated that this principle controlled the outcome of the disputed issue, and nonetheless willfully flouted the governing law by refusing to apply it.” The court concluded that the panel’s findings were not in manifest disregard of the law. Second, the court rejected the plaintiff’s contention that the panel exceeded its powers in issuing an “irrational award,” noting the “completely irrational” standard for setting aside an award under the FAA is satisfied “only where the arbitration decision fails to draw its essence from the agreement.” Finally, the court rejected the plaintiff’s argument that one of the arbitrators showed “evident partiality” against the plaintiff, concluding that the plaintiff did not establish specific facts showing actual bias or partiality. The court also concluded that the plaintiff waived his evident partiality argument by not raising it in a timely manner.

Paynter v. UBS Financial Services Inc., No. 2:21-cv-02024 (D. Ariz. Mar. 2, 2023).