Arbitration Process Issues

NINTH CIRCUIT FINDS ARBITRATION AGREEMENT IN EMPLOYMENT APPLICATION WAS UNCONSCIONABLE

August 2, 2017 by John Pitblado

In this case, Ritarose Capili, a sales associate, brought an action against her former employer The Finish Line, Inc. (“Finish Line”), an athletic retailer in California federal court. Finish Line made a motion to compel arbitration based on an arbitration agreement in its employment application, which was denied. Finish Line appealed to the Ninth Circuit.

First, the Ninth Circuit agreed with the California federal court’s finding that the arbitration agreement was adhesive, and thus at least “minimally procedurally unconscionable” because it was essentially offered on a “take it or leave it” basis. Next, the Court also concurred with the district court’s finding that a cost-sharing provision in the arbitration agreement — which required the plaintiff to pay up to $10,000 at the outset of arbitration, not including the fees and costs for legal representation — was substantively unconscionable because it imposes substantial non-recoverable costs on low-level employees just to get in the door, effectively foreclosing vindication of employees’ rights. The Ninth Circuit also found that the district court correctly determined that a provision in the arbitration agreement that allowed Finish Line, but not the employee, to seek judicial resolution of specified claims, was substantively unconscionable. Thus, the Ninth Circuit held that based on the entire record, the district court did not err in finding that the arbitration agreement was both procedurally and substantively unconscionable. The Ninth Circuit also found that the district court did not abuse its discretion by declining to sever the unconscionable portions of the arbitration agreement, noting that “[w]here unconscionability permeates the entire agreement, California courts may refuse to sever unconscionable provisions.” Thus, the Ninth Circuit held that the district court properly denied Finish Line’s motion to compel arbitration.

Capili v. The Finish Line, Inc., No. 15-16657 (9th Cir. July 03, 2017).

This post written by Jeanne Kohler.

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COURT COMPELS ARBITRATION OF NON-SIGNATORY PARTY SEEKING TO RECOUP DAMAGES FLOWING FROM CONTRACT CONTAINING ARBITRATION CLAUSE

July 27, 2017 by Rob DiUbaldo

A federal district court has required Scottsdale Insurance Company to arbitrate a claim against Kinsale Insurance Company based on an arbitration clause in a contract between Kinsale and its insured – a contract to which Scottsdale was not a party – based on the doctrine of equitable estoppel, because “Scottsdale’s claims are entirely dependent on Kinsale’s obligations to provide insurance coverage” under the contract containing the arbitration clause.

The case arose because Scottsdale paid to defend and then settle a personal injury claim against its insured, P. Tamburri Steel, LLC, which resulted from a construction project. AJA Services, Inc. had agreed to indemnify Tamburri for any personal injury claims that resulted from that project. Another entity, AJA Skies the Limit, Inc., was insured by Kinsale under a policy containing a broad arbitration provision. In another matter, Tamburri had sought and received an order reforming its subcontract with AJA Services to name AJA Skies the Limit as the actual party, making the Kinsale policy available to pay Tamburri’s claim against AJA Services. Scottsdale then sued Kinsale in federal court to recover the sums it paid to settle and defend the personal injury case.

Kinsale moved to compel arbitration pursuant to the arbitration clause in its contract with AJA Skies the Limit. While it was undisputed that Scottsdale was not a party to that contract, Kinsale argued that Scottsdale was bound to arbitrate under the theory of equitable estoppel, because Scottsdale’s claims relied upon certain terms of the insurance policy. Scottsdale argued that it was not seeking to enforce any right under the insurance contract, but was instead seeking to enforce “the equitable right to recover amounts that should have been paid by Kinsale.” However, the court found that “Scottsdale’s claims depend almost entirely on the scope of Kinsale’s policy and the coverage Kinsale owes Tamburri under that policy,” as that the policy “is what provides Tamburri with (and Scottsdale, as subrogee) the defense and indemnity that Scottsdale ultimately seeks”. Thus, the court granted Kinsale’s motion to compel arbitration.

Scottsdale Inc. Co. v. Kinsale Inc. Co., No. 17-0350 (E.D. Penn. May 26, 2017).

This post written by Gail Jankowski.

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NINTH CIRCUIT FINDS INCORPORATION OF ICC RULES INTO ARBITRATION AGREEMENT CONSTITUTES CLEAR AND UNMISTAKABLE EVIDENCE OF DELEGATION OF ARBITRABILITY TO ARBITRATOR

July 25, 2017 by Rob DiUbaldo

In a case involving three related contracts, only one of which contained an arbitration agreement, the Ninth Circuit has held that incorporation of the rules of the International Chamber of Commerce (ICC) into an arbitration agreement constitutes clear and unmistakable evidence of delegation of arbitrability to the arbitrator. The first contract was one between Portland General Electric Company (PGE) and a contractor to build a power plant. It required the contractor to obtain a performance bond, which was issued by two insurers (the Sureties). Neither the construction contract nor the bond contained arbitration provisions. The construction contract also required the contractor to obtain a guaranty of performance from Abengoa S.A. Abengoa issued a guaranty to PGE, under which Abengoa and PGE agreed to submit any disputes to arbitration conducted by and under the rules of the ICC. The guaranty further stated that once arbitration commenced, either party could implead or raise any claim against any other entity, provided the claim arose out of or in connection with an agreement with a subcontractor or the guaranty.

Subsequently, PGE declared the contractor in default and terminated the construction contract, prompting Abengoa to file a request for arbitration with the ICC, naming PGE as respondent and the contractor as an impleaded party. Abengoa then moved to join the Sureties in the arbitration. The Sureties denied liability under the performance bond, and PGE sued them in federal court and moved to enjoin them from arbitrating their claims against PGE. The Sureties argued that PGE had expressly agreed in the guaranty that the ICC tribunal would decide whether Abengoa could join the Sureties and for what purposes, but the court granted PGE’s request for a preliminary injunction and refused to stay the litigation.

On appeal, the Ninth Circuit disagreed, finding that the parties, by agreeing to arbitration under the ICC Rules, had delegated the authority to decide the “gateway” questions of arbitrability at issue because the ICC rules expressly vest arbitrators “with the authority to determine questions of arbitrability.” The Ninth Circuit thus vacated the District Court’s order, concluding that the litigation must be stayed while the tribunal determined whether PGE was required to arbitrate its claims against the Sureties.

Portland Gen. Elec. Co. v. Liberty Mut. Ins. Co., No. 16-35628 (9th Cir. July 10, 2017)

This post written by Gail Jankowski.

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EIGHTH CIRCUIT AFFIRMS ORDER COMPELLING ARBITRATION, REJECTING CONTRACT DEFENSES OF UNCONSCIONABILITY AND LACK OF CONSIDERATION

July 20, 2017 by Michael Wolgin

The Eighth Circuit affirmed an order compelling arbitration in a case filed by a volunteer concession worker against an operator of concessions at a sports stadium in St. Louis. The concession worker had volunteered to work at the stadium to raise funds for Washington University. The worker sued in state court claiming that the amount of the donation made by the concession operator violated the federal and state minimum wage, and that the operator committed fraud. The operator moved to compel arbitration based on a release the volunteer signed that included an agreement to submit any dispute arising from the volunteer activities to arbitration. The trial court compelled arbitration and the volunteer appealed to the Eighth Circuit, arguing that the arbitration agreement was unconscionable and lacked consideration. The Eighth Circuit rejected both arguments. The agreement was not unconscionable because it was “easy to understand, with no evidence that it [was] non-negotiable,” and the agreement did not contain onerous provisions. And the agreement was supported by consideration, namely, the volunteer’s release of his right to sue the operator in exchange for the opportunity to volunteer at the sports stadium and procure a donation to Washington University. The Eighth Circuit also found that the arbitration agreement, which encompassed “any dispute arising from the [volunteer] Activity,” is broad and encompassed the volunteer’s claim that he was defrauded from the alleged insufficient wage. The claim depended on whether the plaintiff was “a volunteer or an employee, and the underlying factual allegations touch matters covered by the arbitration provision.” Leonard v. Delaware North Companies Sport Service, Inc.a>, Case No. 16-3246 (8th Circuit June 27, 2017).

This post written by Michael Wolgin.

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COURT FINDS CALIFORNIA INSURANCE CODE SECTION 11658.5 REVERSE-PREEMPTS SECTION 4 OF THE FAA

July 17, 2017 by Michael Wolgin

National Union Fire Insurance Company of Pittsburgh, PA provided Seneca Family of Agencies with workers’ compensation and employers’ liability insurance for Seneca’s operations in California from 2004 to 2013. The parties entered into a payment agreement that governed the parties’ financing and credit obligations with respect to the insurance policies. The agreement’s arbitration provision provided that, among other things, “any action or proceeding concerning arbitrability, including motions to compel or to stay arbitration, may be brought only in a court of competent jurisdiction in the City, County, and State of New York.” In 2013, the parties amended the arbitration provision to include: “any action or proceeding concerning arbitrability, including motions to compel or to stay arbitration, may be brought only in a court of competent jurisdiction in the City, County, and State of New York.”

Years later, a dispute over the amount of collateral to be paid under the payment agreement arose and National Union moved to compel arbitration. At issue before the court was Seneca’s objection based on the application of Cal. Ins. Code § 11658.5, which requires arbitration provisions in workers’ compensation policies to be disclosed to potential insureds. The court approached this issue in two parts— first, addressing claims related to policies issued on or after July 1, 2012, the effective date of § 11658.5, (the “Post-July 2012 policies”) and second, addressing claims related to policies issued prior to July 1, 2012 (the “Pre-July 2012 policies”).

With regard to claims related to the Post-July 2012 policies, the Court denied National Union’s motion to compel arbitration. The Court analyzed an issue not previously addressed in the case of Monarch Consulting (see blog post dated March 15, 2016)— that is, whether the McCarran-Ferguson Act reverse-preempts the FAA with respect to § 11658.5. Applying the three-prong test to determine if a state statute reverse-preempts a federal statute, the Court found all prongs to be met: (1) the FAA did not specifically relate to insurance; (2) § 11658.5 was enacted to regulate the business of insurance; and (3) the FAA would invalidate, impair, or supersede § 11658.5 because § 4 of the FAA directly conflicted with § 11658.5 in this case.

With regard to the Pre-July 2012 policies, the Court found that any claims related to those policies must be arbitrated, primarily because § 11658.5 did not apply to those policies, and any claims related to Pre-July 2012 policies plainly fell within the scope of the payment agreement’s arbitration provision. As such, the Court granted National Union’s motion to compel arbitration of claims related to the Pre-July 2012 policies. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa. v. Seneca Family of Agencies, Case No: 17-cv-01061 (USDC S.D.N.Y. June 12, 2017).

This post written by Gail Jankowski.

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