Arbitration Process Issues

Seventh Circuit Affirms Ruling Denying Motion to Compel Arbitration, Holding That Company Waived Right to Arbitrate

November 7, 2018 by Carlton Fields

GC Services Limited Partnership (“GC Services”), a debt collector hired by a bank to collect an allegedly unpaid balance on a credit card, advised plaintiff Francina Smith (“Smith”) that it would commence a collection proceeding unless she disputed the debt in writing. In July 2016, Smith filed a class action suit in Indiana federal court against GC Services, alleging violations of the Fair Debt Collections Practices Act. The credit agreement between the creditor and Smith contained an arbitration clause and a class waiver for all disputes. In August 2016, GC Services filed a motion to dismiss the suit on several grounds but did not mention the arbitration clause in the agreement. Plaintiff then amended her complaint, to which GC Services responded and filed a second motion to dismiss that also did not mention the arbitration agreement. In March 2017, while several discovery disputes were ongoing, GC Services notified Smith of the arbitration agreement and demanded arbitration. In response, Smith refused to arbitrate. In April 2017, GC Services filed an answer to the complaint that again did not mention the arbitration agreement. In June 2017, the Indiana district court denied GC Services’ motion to dismiss. Thereafter, in August 2017, GC Services then filed its motion to compel arbitration. The Indiana district court denied the motion to compel arbitration on two grounds: 1) as a non-signatory, GC Services could not enforce the arbitration agreement; and 2) GC Services waived its right to arbitrate “by not diligently asserting that right.” GC Services appealed.

The Seventh Circuit initially noted that it did not need to address the issue of whether GC Services, a non-signatory to the underlying agreement, can compel arbitration if the district court was correct that the right to arbitrate was waived. Thus, the Seventh Circuit first analyzed whether GC Services waived the right to arbitrate. In analyzing the issue, the Court first found that “GC Services acted inconsistently with the right to arbitrate.” It noted that GC Services did not demand arbitration until eight months after suit was brought and then waited another five months thereafter before moving to compel arbitration. The Seventh Circuit also noted that GC Services, a sophisticated debt collection agency, would be aware that credit card agreements usually include arbitration clauses and it could have found the agreement at issue by simply searching the internet. The Court also noted that even after GC Services discovered the existence of the arbitration agreement, it made no mention of it in its answer filed in court nor did it request to supplement its briefing on the pending motions to dismiss and for class certification. The Seventh Circuit found that such actions were “unjustified and manifestly inconsistent with an intention to arbitrate” and held that the district court’s conclusion that GC Services waived its right to arbitrate was not erroneous. The Seventh Circuit also noted that Smith would be prejudiced if the case were to go to arbitration at that time because GC Services waited to move to compel arbitration until after it received the decisions on the motion to dismiss and class certification against it, which the Court noted was an attempt to “play heads I win, tails you lose.” The Seventh Circuit affirmed the district court’s decision that GC Services waived its right to compel arbitration.

Smith v. GC Services Limited Partnership, No. 18-1361 (7th Cir. Oct. 22, 2018).

This post written by Jeanne Kohler.
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Illinois Appellate Court Holds Nebraska Arbitration Act Reverse Preempts Federal Arbitration Act and Renders Arbitration Clause in Reinsurance Agreement Unenforceable

October 31, 2018 by Rob DiUbaldo

An Illinois appellate court recently affirmed a lower court decision granting summary judgment and denying defendant insurers’ motion to compel arbitration where Nebraska law governed, reverse preempted the Federal Arbitration Act (FAA), and rendered a mandatory arbitration provision in a reinsurance agreement unenforceable. Plaintiffs were required to enter reinsurance agreements to obtain workers’ compensation insurance and the agreement at issue contained provisions requiring mandatory arbitration of disputes and the application of Nebraska law. A dispute arose over the cost of the insurance policies and plaintiffs filed suit for various unfair and deceptive business practices violations. Defendants served an arbitration demand on plaintiffs, who refused to arbitrate. The lower court accepted plaintiffs’ argument that the arbitration clause was invalid under the Nebraska Arbitration Act (NAA) and therefore denied defendants’ motion to compel arbitration and granted summary judgment to plaintiffs.

On appeal, the appellate court affirmed. First, the court rejected defendants’ argument that plaintiffs were required to arbitrate because they failed to “specifically and directly” challenge delegation clauses in the reinsurance agreement. In defendants’ view, the delegation clauses precluded judicial determination of arbitrability based in part on the Supreme Court’s decision in Rent-A-Center, West, Inc. v. Jackson. The court ultimately concluded that the plaintiffs had challenged the delegation clauses specifically enough via their arguments on the arbitration provision, and therefore the lower court was entitled to consider the arbitrability challenge rather than compel arbitration on that issue.

Second, the court found the NAA applied and invalidated the arbitration clause of the reinsurance agreement. The court applied the three-part test to determine whether the McCarran-Ferguson Act allows a state law to reverse preempt a federal statute and concluded that: (1) the FAA does not specifically relate to the business of insurance, (2) the relevant provision of the NAA was enacted to regulate the business of insurance, and (3) the NAA applied in this case; thus the NAA reverse preempted the FAA. Because the NAA prohibits arbitration of agreements concerning or relating to insurance, the court held the arbitration clause was unenforceable and the lower court did not err in denying defendants’ motion to compel arbitration.

Onken’s Am. Recyclers, Inc. v. Cal. Ins. Co., Case No. 4-18-0240 (Ill. App. Ct. Sept. 10, 2018).

This post written by Thaddeus Ewald .

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Fifth Circuit Affirms Dismissal Without Prejudice After Plaintiff Compelled to Arbitrate Refuses To Do So

October 29, 2018 by Rob DiUbaldo

The Fifth Circuit affirmed a dismissal without prejudice of a plaintiff’s putative class action related to a multi-level marketing program selling electricity after the plaintiff refused to submit his claims to arbitration despite the district court compelling arbitration and staying the case pending arbitration. The case languished for over a year after the district court’s order compelling arbitration while plaintiff refused to arbitrate the putative class claims. Twice the court requested status reports in which the plaintiff indicated his failure to arbitrate and lack of intent to do so, at which point the district court ordered plaintiff to show cause why the case should not be dismissed for lack of prosecution. The plaintiff responded by reiterating his disagreement with the court’s conclusions as to arbitration, his intent not to arbitrate, and his readiness to litigate the case to conclusion before the court. The court ultimately dismissed the case without prejudice for lack of prosecution.

On a threshold issue, the Fifth Circuit concluded that it had appellate jurisdiction over the dismissal as a “final decision with respect to an arbitration.” Defendants argued that plaintiff, through his response to the show-cause order, voluntarily dismissed the case, which is not a final appealable decision. The court disagreed, holding that plaintiff’s inaction in failing to submit his claims to arbitration was not sufficient to constitute voluntary dismissal. Specifically, the court determined that plaintiff’s response to the show-cause order did not serve as notice of dismissal, but rather were “statements of inaction,” and therefore did not constitute a voluntary dismissal.

Additionally, the court found that it could appropriately hear an appeal of a dismissal without prejudice. The court surveyed circuit precedent and distinguished the present case from those finding no appellate jurisdiction over dismissals without prejudice. Here, there were no concerns about piecemeal appeals of interlocutory issues because the dismissal concluded the litigation on the merits. Nor, as the court previously established, was the dismissal voluntary such that the litigant was voluntarily dismissing as a tactic to seek expedited appeal of interlocutory issues.

Finally, the Fifth Circuit affirmed the lower court’s use of its discretion in dismissing for failure to prosecute. Regardless of whether the heightened standard for dismissal without prejudice—where statutes of limitations risk barring any future litigation—applied, the court held that defendants would prevail. Dismissal was warranted for failure to prosecute because plaintiff demonstrated a “clear record of delay and contumacious conduct” by persistently refusing to arbitrate the claims as the district court so ordered and explicitly stating it would not pursue arbitration. Thus, the Fifth Circuit concluded the lower court acted within its discretion and affirmed.

Griggs v. S.G.E. Mgmt., L.L.C., No. 17-50655 (5th Cir. Sept. 27, 2018).

This post written by Thaddeus Ewald .

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Court Finds New York Convention Applies to Arbitration Agreement in Insurance Policy That Would Otherwise be Invalid Under State Law

October 24, 2018 by Michael Wolgin

Lloyd’s issued an insurance policy with an arbitration provision, covering direct physical loss or physical damage caused by windstorm and/or hail. The insured filed suit in state court alleging nonpayment of claims for damages from Hurricane Isaac. Lloyd’s removed to federal court, asserting that the court had original subject matter jurisdiction for the arbitration agreement in the policy pursuant to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, also known as the New York Convention. The insured sought remand, arguing that the New York Convention did not apply.

The court denied remand, finding that the Convention applied because the dispute arose out of an insurance policy, a commercial legal relationship, with Lloyd’s, a citizen of the United Kingdom. The court also rejected the insured’s argument that the “Conformity to Statute” clause effectively amended the policy to comply with Louisiana state law, which would result in the arbitration provision being rendered unenforceable. The court held that because the Convention preempts state law, state law is inapplicable and cannot change the policy. The court also rejected the insured’s arguments that the Convention was reverse-preempted by the McCarran-Ferguson act, and that the Convention applies only to instances of enforcement of foreign arbitration awards. The plaintiff has appealed the court’s rulings. Gulledge v. Certain Underwriters at Lloyd’s, London, Case No. 2:18-cv-06657 (USDC E.D. La. Sept. 27, 2018); Notice of Appeal (Oct. 2, 2018).

This post written by Gail Jankowski.

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Uber Drivers’ Class Action Thrown Into Reverse: Ninth Circuit Overturns Class Certification Order and Denial of Uber’s Motion to Compel Arbitration

October 23, 2018 by Michael Wolgin

A putative class action against Uber filed by some of the company’s California-based drivers has crashed. The Ninth Circuit reversed rulings denying Uber’s motion to compel arbitration, certifying the class of drivers, and enjoining Uber from distributing and enforcing a new arbitration agreement. Relying on its decision in a previous class action against Uber (Mohamed v. Uber Technologies, Inc., 848 F.3d 1201 (9th Cir. 2016), the Ninth Circuit held that the arbitration agreements delegated the threshold question of arbitrability to the arbitrator. Thus, the determination of arbitrability was not within the district court’s province.

The plaintiffs argued the district court’s determination that the arbitration agreements were unenforceable should be upheld because the named class representatives had “constructively opted out of arbitration on behalf of the entire class.” The Ninth Circuit held the plaintiffs had no authority to take that action on behalf of and binding the other drivers. Although the plaintiffs found a Georgia Supreme Court case (Bickerstaff v. Suntrust Bank, 788 S.E. 787 (Ga. 2016)) supporting their position, they were unable to point to any federal case doing so. Bickerstaff relied exclusively on state law grounds and did not discuss the Federal Arbitration Act.

The plaintiffs’ second argument, that the arbitration agreements were unenforceable because they contain class action waivers that violate the National Labor Relations Act, was extinguished by the United States Supreme Court in Epic Systems Corp. v. Lewis, 138 S.Ct. 1612 (2018). Because the arbitration agreements were enforceable, Uber’s motion to compel arbitration should have been granted, and because the plaintiff’s claims would be arbitrated, the district court’s order certifying the class and restricting Uber’s communications with the class were also reversed. O’Connor v. Uber Technologies, Inc., Case No. 14-16078 (9th Cir. Sept. 25, 2018).

This post written by Benjamin E. Stearns.

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