Arbitration Process Issues

Third Circuit Affirms Dismissal of Landlord’s Attempt to Vacate Arbitration Award

January 10, 2019 by Alex Silverman

Sears Roebuck and Co. (Sears) entered a 40-year lease with Century III Mall, PA., LLC (“Century III Mall”), whereby Sears agreed to maintain an anchor store at the Century III Mall. In the event that Sears elected to discontinue operations, the lease provided Century III Mall with an option to acquire the Sears “Building and Improvements,” the valuation to be determined by a formula specified in the lease. The lease also contained an arbitration clause prohibiting the arbitrators from, among other things, changing any terms set forth in the lease. Sears later terminated the lease and Century III Mall exercised its right to acquire the Building and Improvements. Unable to agree on a valuation, Sears commenced arbitration and an arbitration panel awarded Sears nearly $4 million.

Century III Mall filed a petition in a federal district court in Pennsylvania seeking to vacate the award, claiming the panel exceeded its authority by “rewriting” the terms of lease and, in turn, inflating the property value. The district court disagreed and dismissed the action, as well as confirmed the award. The Third Circuit affirmed, noting, as an initial matter, that the district court had subject matter jurisdiction under 9 U.S.C. §§ 9 and 10 and 28 U.S.C. § 1332, and that appellate jurisdiction was proper under 9 U.S.C. § 16(a) and 28 U.S.C. § 1291. Substantively, the Third Circuit agreed with the district court that the panel reasonably interpreted the lease and rationally applied its terms. Thus, citing the “highly deferential standard of review” applicable to arbitration decisions, the Court declined to disturb the district court’s decision not to vacate the award.

Century III Mall, PA., LLC v. Sears Roebuck & Co., Nos. 17-2284 and 17-2759 (3d Cir. Dec. 20, 2018).

This post written by Alex Silverman.
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Ninth Circuit Finds That Party was a Third-Party Beneficiary of Arbitration Agreement, and Affirms Order Compelling Arbitration of Putative Class Action

December 27, 2018 by Michael Wolgin

Three delivery drivers sued a transportation broker for failure to pay overtime and minimum wages, failure to provide rest and meal breaks, failure to timely pay wages upon termination, and willful refusal to pay wages on behalf of a proposed class of current and former drivers. The transportation broker moved to dismiss or stay the proceedings and compel arbitration, asserting that the plaintiffs were required to submit their claims to arbitration because the broker was a third-party beneficiary to arbitration agreements between the delivery drivers and a third party administrator. The district court granted the motion, concluding that the broker was a third-party beneficiary, that the claims were arbitrable, and that arbitration was the proper forum. The individual plaintiffs appealed, but the Ninth Circuit affirmed, holding that, under the applicable state law, the agreements containing the arbitration provisions intended to create a third-party beneficiary contract for the benefit of the broker. The drivers’ “work under the agreement–delivering parcels–was an integral part of [the broker’s] business, and the agreements obligated [the drivers] to indemnify logistics company customers, grant customers the right to subrogate claims and notify customers within four hours of any accidents.” The Ninth Circuit rejected the drivers’ argument that the agreements contained substantively unconscionable provisions, since they were not raised below. Ege v. Express Messenger Systems Inc., Case No. 17-35123 (9th Cir. Dec. 7, 2018).

This post written by Michael Wolgin.

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Fifth Circuit Finds Waiver of Arbitration Where Motion to Dismiss Argued Merits, Omitted Mention of Arbitration, and Created Prejudice

December 24, 2018 by Carlton Fields

A consumer (Forby) filed a proposed class action in Illinois state court alleging that One Technologies, L.P. (One Tech) failed to adequately disclose that consumers who accessed their “free” online credit score on the company’s website would be enrolled in a credit monitoring program and be charged a monthly fee. The case was removed and then transferred to the Northern District of Texas. One Tech filed a motion to dismiss in the Texas district court, seeking dismissal of all of Forby’s claims but omitting any mention of arbitration. After the district court partially denied One Tech’s motion to dismiss, Forby served requests for production, which prompted One Tech to file motions to compel arbitration and to stay discovery. After the court granted these motions, Forby appealed to the Fifth Circuit, arguing that the court erred in finding that One Tech did not waive its right to arbitration. The Fifth Circuit agreed with Forby and reversed the district court’s order compelling arbitration, finding that One Tech substantially invoked the judicial process by seeking a full dismissal on the merits, and caused prejudice to Forby by waiting thirteen months before moving to compel arbitration and by forcing Forby to re-litigate in arbitration the matters already decided by the district court in her favor. The court reasoned: “[a] party does not get to learn that the district court is not receptive to its arguments and then be allowed a second bite at the apple through arbitration.” Forby v. One Technologies, L.P., Case No. 17-10883 (5th Cir. Nov. 28, 2018).

This post written by Gail Jankowski.

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SDNY Compels Arbitration of Payment Obligation Dispute Under General Liability “Fronting” Policies

December 20, 2018 by John Pitblado

A New York district court has granted a motion to compel arbitration of matters arising out of general liability “fronting” policies issued by member companies of AIG. The policies were issued to Building Materials Holding Corporation (“BMHC”) and obligated AIG to “front” litigation costs incurred by BMHC’s additional insureds to defend third-party claims. BMHC was then required to reimburse AIG for such costs. The parties’ duties were further defined in a separate Payment Agreement (“Agreement”). AIG was to provide insurance under the policies, and BMHC agreed to pay its “Payment Obligation” to AIG, defined essentially as amounts AIG was required to front for claims covered under the polices. Pursuant to the Agreement, disputes as to the amount of any claim to be reimbursed by BMHC “must immediately be submitted to arbitration.” For any “other unresolved dispute arising out of this Agreement,” such dispute “must be submitted to arbitration.” The arbitrators were to “have exclusive jurisdiction over the entire matter in dispute, including any question as to its arbitrability.”

BMHC disputed whether certain costs paid by AIG were in fact covered under the policies. It refused to reimburse AIG for such amounts and sought declaratory relief in a California action. AIG filed a petition in the Southern District of New York to compel arbitration of the matters in the California action. BMHC argued that the disputed issues were not subject to arbitration. The SDNY identified two issues: (1) did the parties “clearly and unmistakably” reserve arbitrability issues for the arbitrators; and if not (2) is the California action subject to arbitration?

On the first issue, the court held that, under these facts, the “exclusive jurisdiction” language in the Agreement did not unequivocally reserve arbitrability issues for the arbitrators. Because a subsequent addendum to the Agreement contemplated that a court might in certain instances decide such issues, and the Agreement provided no guidance as to which arbitrability issues were reserved for arbitrators, the court found it had jurisdiction to decide whether the matters in the California action fall within the scope of the arbitration.

As to this second issue, however, the court found it “readily apparent” that the California action was subject to arbitration because the complaint was “clearly” predicated on a dispute over BMHC’s “Payment Obligation.” The court rejected BMHC’s attempt to recast the dispute as one involving insurance coverage issues to be determined before triggering any obligations under the Agreement. Even if there were coverage issues to be decided, the court found nothing in the Policies foreclosing arbitration of coverage issues necessary to resolve payment obligations. The court also declined to follow factually similar decisions by the Sixth and Ninth Circuits, finding the arbitration clauses in those cases to be materially different.

National Union Fire Insurance Company of Pittsburgh, PA v. BMC Stock Holdings, Inc., No. 18-CV-5777 (USDC S.D.N.Y. Dec. 3, 2018)

This post written by Alex Silverman.

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California Appellate Court Holds Parties Cannot Contract Around Service Requirements of Hague Service Convention

December 19, 2018 by John Pitblado

Changzhou Sinotype Technology Co., Ltd. (“Changzhou”) is a Chinese company that develops fonts. Changzhou and Los Angeles-based investment firm Rockefeller Technology Investments (Asia) VII (“Rockefeller”), entertained the idea of a joint venture to create a Silicon Valley-based company to develop and market international fonts.

The parties signed what Rockefeller characterized as a memorandum of understanding, and which Rockefeller believed was binding. However, Changzhou characterized the document as a “bei wang lu,” a type of memorandum understood in Chinese to merely record the current state of negotiations, and that the signing of a “bei wang lu” “does not create a binding contract.

After negotiations ultimately broke off, Rockefeller initiated an arbitration, citing the memorandum’s arbitration provision. Changzhou did not respond to the demand for arbitration, nor did it appear or participate in the arbitration Rockefeller filed in California. The arbitrator entered a default award in excess of $414 million against Changzhou.

Rockefeller brought an action to confirm the award in California state court. It effected service on Changzhou in China via mail, as had been “agreed” in the memorandum. Changzhou did not appear in the action, and judgment confirming the award entered in Rockefeller’s favor.

Approximately 15 months later, Changzhou moved to set aside the judgment on the grounds that it had never entered into a binding contract with Rockefeller, had not agreed to contractual arbitration, and had not been served with the summons and petition to confirm the arbitration award in the manner required by the Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters (the “Hague Service Convention”).

The court denied Changzhou’s petition to vacate, finding service was effective in the action to confirm the award, even though it had not complied with the Hague Service Convention, as the parties were free to contract around the Convention, and had done so.

Changzhou appealed and a California intermediate appellate court reversed, finding that parties may not ‘contract around’ the Hague Service Convention. “[T]he Hague Service Convention does not permit Chinese citizens to be served by mail, nor does it allow parties to set their own terms of service by contract. [Changzhou] therefore was never validly served with process.”

The Appellate Court also did not credit the argument that Changzhou waited too long to challenge service, finding that a lack of personal jurisdiction is not curable, and that “[t]here is a wealth of California authority for the proposition that a void judgment is vulnerable to direct or collateral attack ‘at any time.’” (emphasis added).

Rockefeller Technology Investments (Asia) VII v. Changzhou Sinotype Technology Co., Ltd., No. B272170 (Cal. Ct. App. June 1, 2018)

This post written by John Pitblado.

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