Arbitration Process Issues

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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Florida Court Finds that Arbitration Agreement Broadening Judicial Review Violates Florida Public Policy

December 10, 2018 by Rob DiUbaldo

In a lawsuit brought by a contractor against a subcontractor and its insurer, Florida’s Fourth District Court of Appeals found a provision in an arbitration agreement allowing for a broad ranging review of any arbitration award to be void as a matter of law and policy.

The subcontractor and insurer moved to compel arbitration under an agreement providing that on review of any award issued pursuant to that agreement, “the court shall be empowered to address on review any failure by the arbitrator(s) to properly apply Florida law to the dispute. To the extent the arbitrator(s) or the court fail to apply the law properly, the Award of the arbitrator(s) is subject to further review through the Florida appellate process.” This is, of course, a much broader judicial review than is normally permitted with respect to arbitration awards, and thus the contractor argued that the provision was void and that the entire arbitration agreement should be discarded.

The trial court granted the motion to compel arbitration, but the appellate court reversed, finding that the subject provision violated public policy as expressed in the Florida Arbitration Code. The Code limits a courts’ ability to vacate an arbitration award to a fairly narrow set of circumstances, such as when an arbitration award is “procured by corruption, fraud, or other undue means,” when there is “evident partiality,” corruption, or misconduct on the part of the arbitrator, or when the arbitrator exceeds the authority provided by the parties’ agreement. The Code also prohibits parties from waiving or agreeing to vary their right to seek judicial confirmation of awards or the grounds for vacating or modifying an arbitration award.
The court found that the Code clearly prohibited expansions of the scope of judicial review of arbitration awards and thus made the contested provision in the arbitration agreement unenforceable. Rather than finding that the arbitration agreement was unenforceable as a whole, however, the court remanded the matter to the trial court to determine whether this provision was severable, such that the arbitration agreement could be enforced with that provision removed.

National Millwork, Inc. v. ANF Group, Inc. and Liberty Mutual Insurance Company, No. 4D18-545 (4th DCA, Sep. 25, 2018)

This post written by Jason Brost.

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Shingled Out: Eleventh Circuit Binds Homeowners to Individual Arbitration Provisions Displayed on Roofing Shingle Packaging

December 6, 2018 by Michael Wolgin

This case involved a twist on the classic “shrinkwrap” agreement. Here, plaintiff homeowners brought a putative class action seeking damages and declaratory relief on behalf of a class of building owners who had used Tamko shingles. In response, Tamko filed a motion to compel arbitration, contending that by unwrapping and retaining its shingles, the homeowners had accepted the terms of its purchase agreement and warranty which were both printed—in full—on the outside wrapper of every shingle package. Specifically, each package wrapper displayed the all-capped word “IMPORTANT” and warned the purchaser in all caps to “READ CAREFULLY BEFORE OPENING [THE] BUNDLE.” The warranty also contained a mandatory arbitration clause, which was similarly printed in capital letters on the outside of every shingle wrapper and specified that any action against Tamko must be arbitrated individually rather than as part of a consolidated or class action. The district court granted Tamko’s motion and dismissed the homeowners’ complaint, reasoning that the homeowners were bound to arbitrate because through their roofers, they had accepted the terms of Tamko’s purchase agreement, including its mandatory-arbitration provision.

On appeal, the Eleventh Circuit affirmed, finding that (1) Tamko’s packaging sufficed to convey a valid offer of contract terms; (2) unwrapping and retaining the shingles was an objectively reasonable means of accepting that offer; and (3) the homeowners’ grant of express authority to their roofers to buy and install shingles necessarily included the act of accepting purchase terms on the homeowners’ behalf. In so finding, the appellate panel reasoned that “[a]s in the shrinkwrap cases, Tamko’s packaging provided conspicuous notice of its offer—something a reasonable, objective person would understand as an invitation to contract.” The panel further stated that, as master of its offer, Tamko was “free to invite acceptance by specified conduct” and rejected the plaintiffs’ arguments that they never saw the shingle packaging and thus never had a reasonable opportunity to consider Tamko’s purchase terms. Instead, the panel found that “acceptance of Tamko’s purchase terms—arbitration clause and all—was incidental to, and reasonably necessary to accomplish, the homeowners’ express grant of agency authority to their roofers to purchase and install shingles” and therefore, notice of the terms printed on the shingle wrappers was properly imputed to the homeowners. Dye v. Tamko Bldg. Prods., Inc., Case No. 17-14052 (11th Cir. Nov. 2, 2018).

This post written by Gail Jankowski.

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Ninth Circuit Enforces Arbitral Immunity Following FINRA Arbitration

November 29, 2018 by John Pitblado

Plaintiff Syed Nazim Ali appealed a Northern District of California judgment dismissing Plaintiffs’ diversity action against FINRA alleging state law claims arising from an arbitration proceeding. The Ninth Circuit affirmed the District Court’s decision to dismiss Plaintiffs’ claims on the basis of arbitral immunity “because the claims alleged effectively seek to challenge the decisional acts of an arbitrator or an arbitration panel” contrary to California precedent.

The District Court had previously confirmed the FINRA arbitration award, as previously reported here.

Global Ebusiness Services, Inc. et al. v. FINRA, No. 18-15716 (USCA 9th Cir. Oct. 29, 2018)

This post written by Nora A. Valenza-Frost.

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Tenth Circuit Strikes Offending Arbitration Provision Clause in Au Pair Agreements

November 27, 2018 by John Pitblado

Plaintiffs had entered into various au pair agreements which contained arbitration provisions, which defendants sought to enforce when a class action was filed. The District Court of Colorado denied the defendants’ motion to compel arbitration, finding the au pair agreements “were contracts of adhesion and procedurally unconscionable because the au pairs were relatively young at the time they signed the contracts, were foreigners, spoke English as a second language, and had no experience with contracts or contract law.”

The Circuit Court agreed that the arbitration provision was unconscionable, but reached “that conclusion for reasons more limited than those found by the district court.” The Court found the agreements were procedurally unconscionable “to a moderate degree,” as contracts of adhesion. As to substantive unconscionability, the Court analyzed three clauses: (1) allowing AuPairCar, Inc. to select unilaterally the arbitration provider has a high degree of substantive unconscionability; (2) a California forum selection clause was not unconscionable; and (3) bilateral fee shifting was not unconscionable. “Because the au pair agreements have moderate procedural unconscionability and significant substantive unconscionability due to the arbitration provider selection clause, the au pair agree is unconscionable and unenforceable as written.”

The Circuit Court ordered the District Court to sever the provision allowing AuPairCar, Inc. to unilaterally select the arbitration provider, as both California and federal law provide a default method for appointing an arbitrator, and, consistent with its opinion, to further compel the parties to arbitrate.

Beltran v. Interexchange, Inc., No. 17-1359 (USCA 10th Cir. Oct. 30, 2018)

This post written by Nora A. Valenza-Frost.

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