Arbitration Process Issues

Plaintiffs, former insurance agents for defendants New York Life Insurance Company and its related companies, brought a putative class action seeking recovery for allegedly illegal wage deductions and violations of overtime and minimum wage laws. The main issue on appeal, and an issue of first impression for New York state courts, was the validity of an arbitration provision in one plaintiff’s agent contract that waived any right to a jury trial and agreed that no claim could be brought or maintained “on a class action, collective action or representative action basis either in court or arbitration.” The court held that arbitration provisions which prohibit class, collective, or representative claims violate the National Labor Relations Act (NLRA) and are therefore unenforceable. In addition, the Court agreed with the Seventh Circuit’s reasoning that arbitration provisions like the one at issue here fail to meet the criteria of the FAA’s Saving Clause for nonenforcement because the provision is unlawful under the NLRA. In holding that class waivers violated the NLRA, the court aligned itself with the Seventh and Ninth Federal Circuits and disagreed with the Second, Fifth, and Eighth Circuits. The Court noted that the Supreme Court would soon address this circuit split. Gold v. New York Life Ins. Co., Case No. 653923/12 (N.Y. App. Div. July 18, 2017).

This post written by Gail Jankowski.

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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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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.

See our disclaimer.