Arbitration Process Issues

The Ninth Circuit refused last month to disturb a district court order denying a defendant’s motion to compel arbitration against a sailor in a maritime action pursuant to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“Convention Act”) where the defendant company was not a signatory or a party to an employment agreement with an arbitration clause. The sailor (“Yang”) entered into an employment agreement with the vessel’s owner (“Majestic”) that contained an arbitration clause. While defendant Dongwon Industries Co. was responsible for the vessel’s repairs, maintenance, and supplies, it was neither a signatory nor party to Yang and Majestic’s agreement. After Yang died when the ship sank due to inadequate repairs, Yang’s wife sued Majestic and Dongwon for wrongful death. The district court compelled arbitration of her claims against Majestic based on the employment agreement, but denied Dongwon’s motion to compel arbitration.

First, the Ninth Circuit affirmed because the Convention Act does not allow non-signatories or non-parties to compel arbitration. Dongwon attempted to argue that the language in the Convention Treaty limiting arbitration to signatories applied only to a phrase addressing arbitration agreements, but not the phrase addressing arbitration clauses in other contracts. The court relied heavily on a Second Circuit case Kahn Lucas Lancaster, Inc. v. Lark International Ltd., which held that the signatory requirement language applied to both arbitration agreements and clauses in other contracts. Kahn Lucas relied on the last-antecedent rule, the grammar of the Treaty’s foreign texts, and the Treaty’s legislative history. In relying on Kahn Lucas, the court explicitly recognized the punctuation canon, under which a phrase applies to “all antecedents instead of only to the immediately preceding one” when the phrase is separated from the antecedents by a comma. The court also noted that every circuit considering Kahn Lucas’s logic has followed it. Lastly, the court found Dongwon failed to demonstrate that it was a party to the agreement containing the arbitration clause, a foundational requirement to compel under the Convention Treaty.

Second, the court rejected Dongwon’s argument that a non-party may invoke arbitration under the Federal Arbitration Act (“FAA”) if the relevant state contract law allows such a litigant to enforce the agreement. Initially the court noted FAA arbitration was unavailable to Dongwon because it specifically exempts “contracts of employment of seamen.” The court dismissed the argument as a “doctrinal sleight of hand” because arbitrations under the Convention Act require additional prerequisites than those required for arbitrations under the FAA, a conflict which prevents application of the FAA. Furthermore, even if the court were to ignore the additional Convention Act requirements, Dongwon would not be entitled to arbitration because its theories under the applicable state law—California—do not provide a basis to compel arbitration. To conclude, the court noted there was “no reason to depart from the general rule” that the contractual right to compel arbitration may not be asserted by a non-party to the agreement that does not otherwise possess the right to compel arbitration. Yang v. Majestic Blue Fisheries, LLC, Case No. 15-16881 (9th Cir. Nov. 30, 2017).

This post written by Thaddeus Ewald .

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The Eleventh Circuit has determined that a confidentiality provision in an arbitration clause was substantively unconscionable. The case involved a putative class action by David Johnson alleging that KeyBank National Association (“KeyBank”) altered the order of debit card transactions to maximize their collection of overdraft fees. Johnson opened the account at issue in 2001 by signing an agreement stating that “all accounts opened under this Plan are subject to [KeyBank’s] Deposit Account Agreement” (the “2001 Agreement”).  The Deposit Account Agreement was a 1997 agreement with the arbitration clause at issue (the “1997 Agreement”).

KeyBank moved to compel arbitration of Johnson’s claims, arguing that Johnson agreed to be bound by the arbitration provision in the 1997 Agreement. The district court denied the motion, however, finding the arbitration clause to be unconscionable.

On appeal, the Eleventh Circuit first concluded that Johnson agreed to arbitrate because the 2001 Agreement expressly stated that the 2001 account was “subject to” the terms of the 1997 Agreement, including the arbitration clause. The phrase “subject to” was deemed sufficient to incorporate the 1997 Agreement into the 2001 Agreement by reference.  By executing the 2001 Agreement, the court found that Johnson agreed to be bound by the arbitration provision.

The court then reversed the district court’s determination that the arbitration provision was unconscionable. First, the court held that it was not procedurally unconscionable because it was not made without “meaningful choice;” that it was a contract of adhesion did not make it unconscionable per se.  Second, while it was not substantively unconscionable as a whole, the court held that a confidentiality clause in the provision was unconscionable in that it required the parties to “keep confidential any decision of an arbitrator.”  The court agreed that by keeping the outcomes of prior arbitrations concealed, it put KeyBank, a repeat participant in the arbitration process, at an “obvious informational advantage” at the outset of a dispute.  Moreover, prospective claimants would have little context in which to assess the value of their cases, which may discourage those individuals from pursuing valid claims.  As such, the court severed the confidentiality clause and enforced the remainder of the arbitration provision with instructions on remand. Larsen v. Citibank FSB, No. 15-10779 (871 F.3d 1295) (11th Cir. Sept. 26, 2017).

This post written by Alex Silverman.
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On October 30, 2017 the Southern District of New York rejected MF Global Holdings’ (“MF Global”) latest attempt to avoid a bankruptcy court order compelling it to submit to arbitration in Bermuda in its coverage dispute with Allied World Assurance Company (“Allied World”) regarding MF Global’s bankruptcy. The court denied MF Global’s motion seeking leave to appeal the bankruptcy court’s arbitration order and for a stay of the arbitration pending that appeal.

Allied World argued that 9 U.S.C. § 16(b) prohibits interlocutory appeals for orders compelling arbitration, and that the exception to the statute was not satisfied in this case. The listed exception, 28 U.S.C. § 1292(b), provides for district court certification of interlocutory orders for appeal to circuit courts but does not apply to appeals from bankruptcy courts to district courts under § 158(a). The court declined to accept that interpretation, instead concluding that § 16(b) was not intended to cover, and did not apply to, decisions of bankruptcy courts. Additionally, the court noted that accepting Allied World’s argument would lead to like cases being treated differently because cases in bankruptcy court could never obtain an interlocutory appeal while cases in which a district court declines to refer the matter to the bankruptcy court could obtain interlocutory appeal. Therefore, the court held, § 16(b) did not bar MF Global’s attempted appeal.

Nevertheless, the court found there were no “exceptional circumstances” justifying an interlocutory appeal of the bankruptcy court’s order. The proposed issue on appeal was whether a bankruptcy plan provision retaining jurisdiction over future and related disputes supersedes pre-bankruptcy arbitration rights, absent an express provision to that effect and when the adversary proceeding began after confirmation of the bankruptcy plan. The court found this issue to be a controlling question of law, even though a resolution on it would not terminate the case, because it would offer helpful guidance for future parties encountering the issue. It also found there was “substantial ground for difference of opinion” based on cases from other courts reaching conclusions contrary to that of the bankruptcy court. Interlocutory appeal was inappropriate, however, because reversal of the bankruptcy court on this issue would not, by itself, “materially advance the ultimate termination of the litigation” where the defendant made several independent arguments for why the jurisdiction provision should not be enforced that would each need to be addressed.

Because the court denied MF Global’s motion for leave to appeal, it also denied the motion to stay as moot.

In re: MF Global Holdings Ltd., Case No. 17-7332 (S.D.N.Y. Oct. 30, 2017).

This post written by Thaddeus Ewald .

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