Arbitration Process Issues

SDNY Denies Plaintiff’s Attempt To Vacate Arbitral Awards In Administrative Charge Dispute With Verizon

May 14, 2018 by Rob DiUbaldo

Verizon Wireless prevailed recently in confirming certain arbitration awards related to a dispute based on allegedly unlawful administrative charges for a cellular contract. Verizon’s customer agreement contained an arbitration clause prohibiting class arbitrations, and an arbitrator issued two relevant decisions during the course of the dispute. The first decision held the plaintiff could not pursue general injunctive relief. The second decision held, in part, that plaintiff did not have standing because, while he continued to pay the phone bill, he had assigned his account to his partner, thus rejecting plaintiff’s request for individual injunctive relief. The arbitrator also ordered Verizon to pay $1,500 without interest—the full amount of disputed administrative charges that Verizon had previously tendered and plaintiff rejected—$500 in attorney’s fees, and arbitrator compensation. The parties cross-moved to confirm and vacate various aspects of the arbitral decisions.

First, the court declined plaintiff’s request to vacate the arbitrator’s first decision. It disagreed with plaintiff’s argument that the arbitrator exceeded his authority by precluding general injunctive relief where the claim for such relief should have been non-arbitrable, because the “narrowest of circumstances” required to overturn an arbitrator’s decision on that ground were not present. The court also refused to find the arbitrator manifestly disregarded the law by precluding injunctive relief because plaintiff’s contention constituted a “mere disagreement” with the arbitral decision and because the arbitrator had valid grounds for his decision.

Second, the court likewise refused plaintiff’s attempt to vacate the second decision. The court concluded the arbitrator did not exceed his powers in awarding $500 in attorney’s fees because attorney’s fees issue was properly before the arbitrator. It determined the arbitrator did not manifestly disregard the law because plaintiff failed to establish the arbitrator “intentionally defied the law” as required to overturn on that ground. Similarly, the court rejected plaintiff’s arguments of arbitral misconduct and partiality. There was no misconduct because the limited nature of permitted discovery, challenged by plaintiff, was entirely within the arbitrator’s broad discretion. Further, the arbitrator was not partial where Verizon paid the mandatory arbitrator fees because the arbitration agreement provided for such payment by Verizon. Lastly, the court declined to find the arbitration violated plaintiff’s due process rights because the “law of the case”—via a prior finding of the court—determined the signing of the arbitration agreement could not constitute state action required for a due process claim.

Thus, the court confirmed the arbitrator’s two decisions and closed the case.

Katz v. Cellco P’ship, Case No. 12-9193 (USDC S.D.N.Y. Apr. 17, 2018).

This post written by Thaddeus Ewald .

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Decade-Long Battle Between Policyholder, Reinsurer, And Retrocessionaire To Continue As Reinsurer Files Notice Of Appeal

May 8, 2018 by Michael Wolgin

A Brazilian mining and steelmaking company (Companhia Siderurgica Nacional, S.A. (“CSN”)), a Brazilian insurance company (IRB Brazil Resseguros, S.A. (“IRB”)), and an American insurance company (National Indemnity Company (“NICO”)) have been locked in battle for a decade over liability stemming from a $167 million loss suffered by CSN. We have previously written about this litigation here.

On January 23rd, the Southern District of New York ordered IRB to pay NICO $5 million pursuant to an arbitration award. On February 22, 2018 IRB appealed this order to the Second Circuit. On March 26th a $5.55 million supersedeas bond was filed with the court on behalf of IRB to stay execution of the order pending the outcome of the appeal. National Indemnity Co. v. IRB Brazil Resseguros, S.A., No. 15-CV-3975 (USDC S.D.N.Y. Feb. 22, 2018 & March 26, 2018).

This post written by Benjamin E. Stearns.
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Fifth Circuit Affirms Federal Court’s Injunction Of State Court Proceeding That Attempted To Stay Arbitration

May 7, 2018 by Michael Wolgin

The case originated from the alleged violation of a noncompete and nonsolicitation agreement between the Shaw Group, later partially acquired by Aptim Corporation, and Dorsey McCall, its former employee. Shaw originally filed the case in state court, but after Aptim’s acquisition, Shaw moved to dismiss its state action while Aptim pursued a federal court action to enforce the arbitration clause in McCall’s employment contract Aptim initiated arbitration, but the state court ordered the arbitration stayed, finding that Shaw and Aptim waived arbitration by filing suit in state court. The district court for the Eastern District of Louisiana, however, declined to abstain from proceeding with its case, and then compelled arbitration and entered an order staying the state court proceeding. McCall appealed.

On appeal, the Fifth Circuit explained that “[w]hether to abstain is not a question answered by the recitation of ‘a mechanical checklist’ but instead rests ‘on a careful balancing of the important factors as they apply in a given case, with the balance heavily weighted in favor of the exercise of jurisdiction.’” The Fifth Circuit weighed the factors and affirmed the district court’s decision against abstention based in part on the strong federal policy favoring arbitration. Notably, the Fifth Circuit was not persuaded by the fact that the state court’s order staying arbitration preceded the federal court’s ruling compelling arbitration, as the former was not a final judgment. The Fifth Circuit also agreed with the district court that Aptim had not waived arbitration since Aptim demanded arbitration only one month after the state court action had begun, and McCall could not demonstrate the he was prejudiced. Aptim Corp. v. McCall, Case No. 17-30772 (USDC E.D. La. Apr. 17, 2018).

This post written by Gail Jankowski.

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New York State Court Denies Motion To Enjoin Arbitration By Non-Party To Arbitration

May 3, 2018 by John Pitblado

In this case, Royal Wine Corporation (“Royal”) moved for a preliminary injunction in a New York state court action to enjoin an arbitration filed by Cognac Ferrand SAS (“Cognac”), against Mystique Brands, LLC (“Mystique”) until the court has resolved the issues raised in Royal’s complaint filed against Cognac and Mystique, which seeks a declaratory judgment that Royal is not the alter ego of Mystique, and a permanent injunction barring Cognac from maintaining an arbitration against Mystique.

The background of the dispute is as follows. In 2008, Cognac and Mystique entered into a five-year contract (the “Agreement”), which granted Mystique the exclusive right to import certain of Cognac’s products to the North American market. Prior to its expiration, Cognac terminated the Agreement due to Mystique’s insolvency. Royal demanded that Cognac pay a $238,000 termination fee. Mystique then initiated an arbitration to obtain the termination fee, and Cognac filed counterclaims for fraud and breach of contract in that matter (the “First Arbitration”). The arbitrator dismissed the claims of Mystique and granted Cognac’s counterclaims, leaving only the issue of damages to be determined. Prior to a resolution as to Cognac’s damages, Mystique filed for bankruptcy, and the First Arbitration was stayed. According to the Bankruptcy Trustee’s Complaint, Royal funded Mystique’s unsuccessful First Arbitration and filed Mystique’s bankruptcy proceeding. Cognac then moved the Bankruptcy Court to lift the stay to permit Cognac to obtain a judgment for damages against Mystique and to proceed against Mystique’s principals on an alter ego theory of liability, which was denied. After the conclusion of Mystique’s bankruptcy action in 2017, Cognac filed a new arbitration against Mystique (the “Second Arbitration”), in which Cognac raised claims nearly identical to its counterclaims in the First Arbitration and sought to recover over $5 million in damages. Royal then filed the instant action in New York state court.

With respect to its motion for a preliminary injunction, Royal argued that Mystique is a defunct entity, that “serial arbitrations” are prohibited, and that the Second Arbitration is untimely. The New York court denied the motion, finding that Royal has no standing to stay the arbitration and is not entitled to assert Mystique’s defenses to the arbitration because Royal is not a signatory to the arbitration agreement between Cognac and Mystique. It further found that Royal failed to satisfy the elements necessary to obtain injunctive relief. In order to obtain injunctive relief, Royal was required to establish (1) a likelihood of success on the merits of its claim, (2) the danger of irreparable harm in the absence of a preliminary injunction, and (3) the balance of the equities favors it. The New York court found that Royal failed to establish a likelihood of success on the merits because it is not entitled to advance arguments on Mystique’s behalf while denying that it is Mystique’s alter ego. In this regard, the court noted that although “serial arbitrations” may be prohibited, such an argument belongs to Mystique, which had yet to be served with notice of the Second Arbitration. Royal also claimed that it will suffer irreparable harm if it is unable to assert Mystique’s defenses because Mystique is a defunct entity and Royal, the alleged alter ego, faces a potential default judgment for over $5 million. By contrast, Royal argued that Cognac would suffer no harm if the arbitration was delayed while the court determined the issue of Royal’s alter ego status.

The court rejected Royal’s argument, finding that if it denied the motion for preliminary injunction and Royal is later successful in its lawsuit, Royal will establish that it is not Mystique’s alter ego and will moot the issue of whether Royal may raise Mystique’s defenses. Accordingly, the court declined to find that extraordinary irreparable harm compensates for Royal’s deficiencies as to the applicable factors for obtaining a preliminary injunction. Thus, the court denied Royal’s motion to stay the Second Arbitration.

Royal Wine Corp. v. Cognac Ferrand SAS, No. 650249/2018 (N.Y. Sup. Ct. Feb. 26, 2018).

This post written by Jeanne Kohler.
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Fourth Circuit Finds Employer Cannot Compel Arbitration of Former Employee’s Discrimination Claims

May 1, 2018 by John Pitblado

The U.S. Court of Appeals for the Fourth Circuit recently ruled that two employment-related arbitration clauses did not “clearly and unmistakably” govern a former employee’s discrimination claims, and that the arbitrability of those claims is rightfully decided by the court, rather than an arbitrator.

Plaintiff signed two arbitration agreements with Rent-A-Center (RAC), his former employer, one when he was initially hired in 2002, and a second when he applied for a new position in 2012. Plaintiff was ultimately hired for a different position in 2013, but did not sign a new arbitration agreement with RAC at that time. Plaintiff later filed this action against RAC for discrimination arising out of his 2013 employment. RAC moved for summary judgment and to compel arbitration, arguing Plaintiff’s claims were subject to the 2002 and 2012 arbitration agreements. The district court denied the motion, however, and the Fourth Circuit affirmed.

Citing seminal arbitrability decisions by the U.S. Supreme Court, including one involving RAC, the Fourth Circuit found the parties did not “clearly and unmistakably” intend to arbitrate claims relating to Plaintiff’s 2013 employment. To the contrary, the court found a reasonable juror could conclude from the parties’ actions that they agreed to modify the arbitration agreements to exclude any disputes relating to Plaintiff’s 2013 employment. Given this uncertainty, the court held that the district court, not an arbitrator, had the authority to decide questions of arbitrability (i.e., whether Plaintiff’s claims were subject to arbitration pursuant to the 2002 and 2012 arbitration agreements). For the same reason, the court also affirmed the district court’s denial of summary judgment, finding a genuine issue material fact as to the parties’ intent to arbitrate these particular claims.

Kabba v. Rent-A-Center, Inc., No. 17-1595 (4th Cir. April 13, 2018)

This post written by Alex Silverman.

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