Arbitration Process Issues

PROCEDURAL ARBITRABILITY QUESTIONS ARE FOR THE ARBITRATOR, NOT THE JUDGE, UNLIKE SUBSTANTIVE ARBITRABILITY QUESTIONS

October 12, 2017 by John Pitblado

Allegations of failure to follow the contractually-required dispute resolution procedure raise “procedural questions,” which must be asked of the arbitrator. In contrast, “substantive arbitrability questions,” also referred to as “gateway questions” of arbitrability, are for the court to decide. Questions of substantive arbitrability address two issues: whether the parties have a valid arbitration agreement, and whether the issue is within the scope of the arbitration agreement.

In determining whether an issue is within the scope of a valid arbitration agreement, the court must initially decide whether the arbitration clause is “broad” or “narrow.” Clauses that provide for arbitrating “any claim arising out of or relating to the contract” are considered broad as a matter of law. When answering questions of scope, courts “must liberally construe a valid arbitration clause, ‘resolving doubts in favor of arbitration. . . .” As a result, even where claims sound in tort, rather than contract, they will be determined to be within the scope of a broad arbitration clause if the claims “touch matters covered by the arbitration clause.”

Finding that plaintiff’s claims against defendant were within the scope of the parties’ agreement, and that questions raised about arbitrability were procedural, and thus for the arbitrator to decide, the Court granted defendant’s motion to compel arbitration.

Dlorah, Inc. v. KLE Constr., Inc., Civ. 16-5102-JLV (W.D.S.D. July 17, 2017).

This post written by Benjamin E. Stearns.

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NINTH CIRCUIT ALLOWS CLASS ARBITRATION TO PROCEED DESPITE ABSENCE OF EXPRESS REFERENCE TO CLASS ARBITRATION

October 9, 2017 by John Pitblado

Lamps Plus appealed an order permitting class arbitration of claims related to a data breach of personal identifying information of its employees, alleging negligence, breach of contract, invasion of privacy, and other claims. The district court previously found that the arbitration agreement was ambiguous as to class arbitration and denied Lamps Plus’s motion to compel bilateral arbitration, allowing class-wide arbitration to proceed.

On appeal, the Ninth Circuit affirmed, all the while acknowledging the Supreme Court’s finding in Stolt-Nielsen that under the Federal Arbitration Act, a party may not be compelled to submit to class arbitration unless “there is a contractual basis for concluding that the party agreed to do so.” However, the Court went on to find that the lack of an express reference to class arbitration was “not the ‘silence’ contemplated in Stolt-Nielsen.” As such, the Court construed the language “arbitration shall be in lieu of any and all lawsuits or other civil legal proceedings relating to my employment” as to authorize class arbitration and further found that its interpretation of that clause “require[d] no act of interpretive acrobatics” and was “the most reasonable” interpretation possible.

Varela v. Lamps Plus, Inc., No. 16-56085 (9th Cir. Aug. 3, 2017).

This post written by Gail Jankowski.

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ALABAMA FEDERAL COURT FINDS CEDENT DID NOT WAIVE ARBITRATION, AND ORDERS REINSURANCE DISPUTE TO BE ARBITRATED

October 4, 2017 by Michael Wolgin

Alabama Municipal Insurance Corp. (“AMIC”), an Alabama non-profit public insurer, brought suit in Alabama federal court against Munich Reinsurance America Inc. (“Munich Re”), alleging breach of a reinsurance contract for failing to fully reimburse a settlement of flood claims asserted against an insured city. Munich Re answered, denying liability under the reinsurance contract alleged in the complaint, and stated that another reinsurance contract (Agreement No. 1236-0009, endorsed by Agreement No. 1236-0009-E003) applied to the claims. After the parties submitted their Rule 26(f) report and a Scheduling Order was entered by the court, AMIC amended its complaint without opposition from Munich Re, asserting a claim under another reinsurance contract, Agreement No. 1236-0013, endorsed by Agreement No. 1236-0009-E003. Munich Re answered the Amended Complaint and AMIC noticed the depositions of two Munich Re employees. AMIC then filed a Motion to Stay Pending Arbitration under Agreement No. 1236-0013, endorsed by Agreement No. 1236-0009-E003. Thereafter, the depositions of the two Munich re employees took place.

Both parties agreed that Agreement No. 1236-0013, endorsed by Agreement No. 1236-0009-E003 referenced in the Amended Complaint contains an arbitration clause. However, Munich Re contended that AMIC’s claim in the case is not subject to arbitration because that agreement is not applicable to the claims. The Alabama federal court found that the only claim brought in the case was under a contract which contains an arbitration clause, and thus is subject to arbitration. Munich Re, however, claimed that AMIC had waived its right to arbitrate. In response, the court held that AMIC had not waived the right to arbitrate. The court found that the actions taken toward litigation prior to filing the Amended Complaint should not be considered a waiver of the right to arbitrate, as the Amended Complaint was the first time that AMIC had alleged a breach of a reinsurance contract which contained an arbitration clause. Thus, the Alabama federal court granted the motion to stay pending arbitration. Alabama Municipal Ins. Corp. v. Munich Reinsurance America Inc., Case No. 2:16-CV-948-WHA-SRW (USDC M.D. Ala. Sept. 7, 2017).

This post written by Jeanne Kohler.

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EIGHTH CIRCUIT HOLDS THAT A MOTION TO DISMISS BASED ON AN ARBITRATION CLAUSE IS NOT A CHALLENGE TO THE COURT’S JURISDICTION

October 3, 2017 by Michael Wolgin

A municipality sued the company that constructed its water treatment facility, in connection with contaminants found in the water supply. The parties had entered into a series of agreements which contained choice of law and arbitration clauses governing the resolution of any disputes. The company filed a motion to dismiss for lack of jurisdiction based on the contracts’ forum selection and arbitration clauses, and the court construed the motion as falling under Rule 12(b)(1). The court then found that the contracts were inconsistent and ambiguous, and considered extrinsic evidence. The court ultimately granted the motion to dismiss and directed the parties to proceed to arbitration.

On appeal, the Eighth Circuit found that the district court erred by analyzing the motion to dismiss as a 12(b)(1) challenge to its jurisdiction. The court explained that the U.S. Supreme Court has held that “federal venue laws, not forum-selection clauses, govern the propriety of venue under Rule 12(b)(3). The same logic applies where, as here, a party seeks to enforce an arbitration agreement under Rule 12(b)(1). Just as a forum-selection clause has no bearing on the issue of whether venue is ‘wrong’ or ‘improper,’ an arbitration agreement has no relevance to the question of whether a given case satisfies constitutional or statutory definitions of jurisdiction.” The Eighth Circuit found that summary judgment standards should apply on remand because the parties submitted, and the district court considered, matters outside the pleadings. City of Benkelman, Nebraska v. Baseline Engineering Corp., et al., Case No. 16-1949 (8th Cir. Aug. 11, 2017).

This post written by Nora A. Valenza-Frost.

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FEDERAL COURT LOOKS TO PETITION TO COMPEL ARBITRATION, NOT THE FACTS OF THE UNDERLYING LITIGATION, TO DETERMINE WHETHER IT HAS DIVERSITY JURISDICTION OVER DISPUTE

September 27, 2017 by Carlton Fields

The Second Circuit has upheld an order granting a petition by Hermès of Paris to compel arbitration after Matthew Swain, a former employee, sued Hermès and a coworker in state court for alleged violations of state non-discrimination laws. The Second Circuit rejected Swain’s argument that there was no subject matter jurisdiction, finding that only parties to the petition to compel arbitration, not the parties in the underlying lawsuit, should be considered when evaluating diversity jurisdiction.

After Swain was fired by Hermès, he sued asserting claims under New Jersey law. Hermès filed a petition in federal court to compel arbitration, and the district court granted that petition. On appeal, Swain argued that the district court lacked subject matter jurisdiction, which the court had based on complete diversity of citizenship, because, even though Hermès and Swain were citizens of different states, Swain and the coworker defendant in the underlying action were both citizens of New Jersey. Thus, Swain argued that the district court was required to “look through” the arbitration petition to the facts of the underlying state court litigation to determine the jurisdiction issue, citing the Supreme Court’s 2009 ruling in Vaden v. Discover Bank.

The Second Circuit, applying its 1995 decision in Doctor’s Associates v. Distajo, held that the court could only consider the citizenship of the parties to that petition—Hermès and Swain—in evaluating whether diversity jurisdiction existed. The court further held that Vaden, in which the Supreme Court found that the allegations of the underlying lawsuit were relevant to jurisdiction over the arbitration petition, did not apply because it dealt with federal question jurisdiction, not diversity. Diversity jurisdiction raises different concerns, the Second Circuit found, including the possibility that a plaintiff could try to defeat diversity by adding a party from the same state as a defendant.

The court also rejected Swain’s argument that the coworker, as a third-party beneficiary of the contract containing the arbitration clause, was an indispensable party to the federal litigation. In fact, the court held that whether the coworker was a third party beneficiary did not matter, as the district court could afford full relief to Hermès in the form of an order compelling arbitration without the coworker’s presence in the lawsuit, such that the coworker was not an indispensable party.

Hermès of Paris, Inc. v. Swain, Docket No. 16-3182-cv (2d Cir. Aug. 14, 2017)

This post written by Jason Brost.
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