Arbitration Process Issues

Ninth Circuit Finds Foreign Bank Did Not Waive Personal Jurisdiction by Litigating Other Defenses and Counterclaims in a Related Matter

October 15, 2018 by John Pitblado

The Ninth Circuit recently reversed a California District Court’s finding of personal jurisdiction against a foreign bank, and found it did not waive appeal on that issue by asserting defenses. The Ninth Circuit stated that “[o]ur cases are clear that once the issue of personal jurisdiction has been adjudicated on the merits against a party, that party may fully participate and defend the litigation up to and including filing its own counterclaim.” It distinguished cases relied upon by the Central District of California as inapposite, as they involved circumstances where: (1) the defense was listed in the answer but never affirmatively litigated; and (2) where the defendant did not avail himself of the opportunity to conduct discovery on the jurisdictional issue and renew its motion to dismiss if the evidence supported a lack of personal jurisdiction. Here, the Bank timely asserted personal jurisdiction as a defense and litigated the issue to a decision from the district court: “[n]othing more was required to preserve the issue, and subsequent litigation of defenses and counterclaims did not waive the Bank’s properly preserved defense of personal jurisdiction.”

The Court further found that the Bank did not have sufficient contacts with the United States to establish personal jurisdiction over the contract claims asserted by Plaintiffs. The Bank “entered into a contract with a Cayman Islands corporation to provide pre-paid cards in the UAE. There is no indication that the Bank conducted any unilateral activities in California… [and] certainly no evidence that any minimal contacts with California, through email and phone calls to California or through an investigation conducted in California by one of the Bank’s agents, form the basis for [Plaintiff’s] contract-focused claims, which raise from the Bank’s and [Plaintiff’s] conduct in the UAE.”

The Court also reversed the judgment compelling arbitration the contract claims and remanded for dismissal due to the lack of personal jurisdiction over the Bank.

InfoSpan, Inc. v. Emirates NBD Bank PJSC, 16-55090 (USCA 9th Cir. Sept. 7, 2018)

This post written by Nora A. Valenza-Frost.

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Second Circuit Affirms Denial of Arbitration in Case Involving Misappropriation of Trade Secrets

October 2, 2018 by Michael Wolgin

Medidata brought suit against its competitor, Veeva, alleging that Medidata’s former employees, who eventually left the company to work for Veeva, violated their employment agreements which required them to protect Medidata’s confidential information and to refrain from competing with Medidata during their employment there and for up to one year thereafter. Specifically, Medidata alleged that the former employees misappropriated Medidata’s trade secrets and other confidential information. Three of the five former employees’ agreements included an arbitration clause that mandated arbitration of “any dispute or controversy arising out of or relating to” their agreements. Veeva urged the court to compel arbitration based on the former employees’ arbitration agreements under a theory of equitable estoppel.

The district court denied the motion, and on appeal, the issue was whether Veeva demonstrated the requisite “relationship among the parties” that would make it unfair to decline to require arbitration of this dispute. The Second Circuit, in a summary order, affirmed, reasoning that no such relationship existed: “Veeva was not involved at all in those relationships until it intruded by allegedly poaching Medidata employees and inducing them to divulge Medidata’s secrets; in other words, by ‘wrongfully inducing’ the former employees to breach their contract with Medidata.” As such, because Veeva was in no such relationship at the time the arbitration agreements were signed, no equitable estoppel justification existed to compel arbitration. Medidata Solutions Inc., et al. v. Veeva Systems Inc., Case Nos. 17-2694(L) & 18-681(CON) (2d Cir. Sept. 6, 2018).

This post written by Gail Jankowski.

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Ninth Circuit Holds Putative Class Action ERISA Claims Fall Outside Scope of Individual Arbitration Agreements

September 28, 2018 by John Pitblado

Plaintiffs, current and former employees of the University of Southern California (“USC”), were participants in two USC-sponsored ERISA contribution plans. In order to participate in the plans, individual employees were required to sign arbitration agreements covering all claims between the parties. The arbitration agreements expressly covered claimed violations of federal law, including ERISA. Plaintiffs filed a putative class action against USC alleging breach of fiduciary duty pursuant to ERISA § 502(a)(2). The action sought various forms of equitable relief for the benefit of the plans only, rather than for employees in their individual capacity. USC moved to compel arbitration, arguing that the arbitration agreements prohibited employees from litigating claims on behalf of the ERISA plans. The district court denied USC’s request, and the Ninth Circuit affirmed.

The Ninth Circuit agreed that the arbitration agreements did not encompass breach of fiduciary duty claims filed under ERISA § 502(a)(2). The court compared Plaintiff’s claims to a 2017 decision in which the Ninth Circuit held that an individual arbitration agreement did not extend to a qui tam action filed against an employer by its employee because the claim was filed on behalf of the government under the False Claims Act, not in the employee’s individual capacity. Likewise, the court observed that breach of fiduciary duty claims under § 502(a)(2) are filed for the benefit of the ERISA plan, not any individual participant. Thus, as in the qui tam context, the Ninth Circuit concluded that Plaintiffs’ putative class claims against USC fell outside the scope of the arbitration agreements, as the parties consented only to arbitrate claims filed in an employee’s individual capacity. The court specifically declined to rule, however, that individual agreements to arbitrate ERISA claims are per se unenforceable, leaving that issue for another day.

Munro v. Univ. of Southern California, No. 17-55550 (9th Cir. July 24, 2018)

This post written by Alex Silverman.

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Eleventh Circuit Reverses Order Compelling Arbitration between Non-Signatories

September 26, 2018 by John Pitblado

Plaintiff Outokumpu Stainless USA, LLC (“Outokumpu”) contracted with F.L. Industries, Inc. “”FLI”), a German company, to provide cold rolling mills (“CRMs”), which are used in the production of certain steel products. FLI later contracted with GE Energy Conversion France SAS (“GE Energy”). Both contracts contained arbitration agreements.

Outokumpu and GE Energy became involved in a dispute over failed CRMs. Outokumpu filed suit in Alabama state court and GE Energy removed to Alabama federal court, and moved to compel arbitration under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”). Outokumpu sought to remand to state court. The District Court denied remand and granted GE Energy’s motion to compel arbitration. Outokumpu appealed.

The Eleventh Circuit reversed, finding that, while the District Court properly maintained jurisdiction because the dispute “related to” the arbitration agreement at issue, it reversed the granting of the motion to compel arbitration, as the New York Convention requires that the parties signed a written agreement to arbitrate. Here, no agreement was “signed” by both parties, as, at the time Outokumpu entered into the contract with FLI, GE Energy was a stranger to that contract, and had not yet entered into its own contract with GE Energy, through which it ultimately sought to enforce the Outokumpu – FLI arbitration agreement.

The Court remanded for further proceedings before the Alabama federal district court.

Outokumpu Stainless USA, LLC v. Converteam SAS, No. 17-10944 (11th Cir. Aug. 30, 2018)

This post written by John Pitblado.

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Fifth Circuit Finds That Arbitrator Exceeds Authority In Reforming Contract For Mutual Mistake

September 18, 2018 by Rob DiUbaldo

The Fifth Circuit has affirmed a district court’s ruling vacating an arbitrator’s decision reforming a contract for mutual mistake, finding that reformation was outside the authority provided to the arbitrator by the parties’ agreement.

The dispute arose from the sale of a business, which included the assets, customer lists, and customer contracts of the business. The agreement provided for the buyer to make future payments contingent upon the buyer achieving certain levels of ongoing revenue from the seller’s former customers. The seller would receive $7 million if an agreed upon threshold amount of revenue was achieved in the first 9 months after the sale, with this payment reduced proportionately to the extent the revenue was under the threshold and reaching $0 if the revenue was less than 90% of the threshold. At the end of nine months, the parties disagreed regarding whether revenues from two customers should be counted toward meeting the threshold amount, such that the seller claimed that it was owed a payment while the buyer asserted that seller was owed nothing.

The parties submitted the matter arbitration, and the arbitrator adopted the seller’s position that revenues from both excluded customers should be counted toward the threshold. However, the arbitrator also decided that the parties had made a mutual mistake in their initial calculation of the threshold amount. He then reformed the agreement to fix that mistake, leading to a new calculation under which the buyer was owed no payment.

The buyer challenged arbitration award in court, and by the time the matter got before the Fifth Circuit. the only issue was whether the arbitrator had exceeded his authority by deciding the issue of mutual mistake and reforming the contract. The court noted that the parties went to arbitration under the authority of a provision saying that, in the case of a dispute over the revenue calculation, the parties would “select [an arbitrator] to resolve any remaining dispute over the Seller’s proposed adjustments . . . .” This, the court held, only allowed the arbitrator to resolve disputes over the question of “Seller’s proposed adjustments,” and not to decide whether the parties had erred in calculating the threshold amount. In reaching this conclusion, the court noted that the arbitration provision was only one of four separate arbitration provisions in the agreement, each of which was dedicated to different types of disputes, with the agreement further providing that other disputes would be decided by state or federal courts in Texas. Thus, the issue of mutual mistake was outside of the authority given by the parties to the arbitrator, and the court remanded the matter to the district court to decide the issue of mutual mistake.

Hebbronville Lone Star Rentals, L.L.C. et al. v. Sunbelt Rentals Industrial Services, L.L.C., No. 17-50613 (Fifth Cir. Aug. 6, 2018)

This post written by Jason Brost.

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