Arbitration Process Issues

Stephen Evans, doing business as Roof n’ Box, Inc. (“RNB”), had a contract with Building Materials Corp. of America, (“BMCA”) to promote RNB’s “Roof N Box” product, a three-dimensional roofing model, to building-construction contractors affiliated with BMCA. The contract contained an arbitration provision. BMCA validly terminated the contract about a year after inception. RNB later sued BMCA, arguing that, post-termination, BMCA appropriated RNB’s intellectual property. BMCA moved to compel arbitration, citing the parties’ previous contract. A federal district court in Virginia denied the motion to compel arbitration, finding that the dispute did “arise from” the parties’ previous contract, and/or was beyond the scope of the arbitration agreement. BMCA appealed, but the Federal Circuit Court of Appeals affirmed, finding that the “wholly groundless” standard governing when courts may decide issues of arbitrability applied, thus allowing the district court to decide arbitrability, which it did, in favor of allowing the lawsuit to proceed. Evans v. Building Materials Corp. of America, No. 2016-2427 (Fed. Cir. June 5, 2017)

This post written by John Pitblado.

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A buyer of a manufactured home sued the manufacturer, seller and lender in connection with toxic mold that was found in the home’s water system. The underlying retail installment contract contained an arbitration agreement which included a provision providing, “[t]his Arbitration Agreement also covers all co-signors and guarantors who sign this Contract and any occupants of the manufactured Home (as intended beneficiaries of this Arbitration Agreement).” Notwithstanding that provision, the buyer, along with her husband and children, brought a civil action for damages against the manufacturer, seller, and lender. The manufacturer and seller (the “Defendants”) moved to compel arbitration and stay the court proceedings pursuant to the arbitration agreement in the installment contract. The trial court granted the motion as to the buyer’s claims, but denied the motion as to her husband and children, finding that they were not parties to the installment contract, and as such, were not bound by the arbitration provision.

The Defendants appealed the denial of their motion to compel the claims of the husband and children to the Tenth Circuit, which affirmed. The court rejected both of Defendants’ arguments – first, that the husband and children were third party beneficiaries and were therefore bound to arbitrate, and second, that they were bound to arbitrate under the doctrine of equitable estoppel. As to the first argument, the court found unpersuasive Defendants’ reliance on the arbitration provision which defined occupants of the home as third party beneficiaries. Specifically, the court found that Defendants did not meet their burden of establishing that the non-signatory plaintiffs were bound to arbitrate and declined to bind “unwitting third parties” to a contract without their first knowing of its terms or ever realizing some benefit. As to Defendants’ second argument, the court rejected Defendants’ equitable estoppel theories asserting “intertwined claims” and “direct benefits.” The former does not govern a case “where a signatory-defendant seeks to compel arbitration with a non-signatory-plaintiff,” and the latter is not a recognized doctrine under Oklahoma law. Jacks v. CMH Homes, Case No. 15-6197 (10th Cir. May 17, 2017).

This post written by Gail Jankowski.

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The case presented two issues to the court: 1) whether a court must determine the applicability of the FAA to the case when asked to compel arbitration, where parties delegated questions of arbitrability to the arbitrator; and 2) whether the FAA’s transportation worker exemption applies to independent contractors. The court answered both questions in the affirmative.

Oliveira, a truck driver, participated in an apprenticeship program established by New Prime (“Prime”), a trucking company. Upon completion of the program, Prime told Oliveira that he would make more money as an independent contractor than as a company driver. Thereafter, Oliveira signed an independent contractor operating agreement with Prime. Oliveira brought suit against Prime for violation of the Fair Labor Standards Act (FLSA). He claimed that the FAA transportation worker exemption covers his contract, and Prime moved to compel arbitration under the FAA arguing that applicability of the FAA exemption is a question the parties had delegated to the arbitrator. The district court held that the applicability question was for the court and that the section 1 exemption does not apply to independent contractors. Prime appealed.

On the first issue, Prime relied on the Eighth Circuit’s holding that “application of the FAA’s transportation worker exemption is a threshold question of arbitrability” which the parties delegated to an arbitrator. However, the court found the Eighth Circuit’s characterization of the issue as “a question arbitrability” a flawed premise. In doing so, the court borrowed the reasoning of a Ninth Circuit case and explained that for a district court to compel arbitration, the FAA must first apply to the case and confer on a district court the authority to compel arbitration. Following this reasoning, the First Circuit held that the question of the court’s authority to act under the FAA is an antecedent determination for the district court before it can compel arbitration.

On the second issue, Prime argued that the exemption does not apply to independent contractors, citing numerous district court decisions. The First Circuit disagreed, noting that statutory interpretation is not simply a “numbers game.” The court explained that the ordinary meaning of “contracts of employment” is simply “agreements to do work,” which encompasses works of independent contractors and that such interpretation is consistent with Congress’s concern with transportation workers and their necessary role in the free flow of goods at the time Congress enacted the FAA. As such, the court affirmed denial of Prime’s motion to compel arbitration. Oliveira v. New Prime, Inc., No. 15-2364 (1st Cir. May 12, 2017).

This post written by Rollie Goss.

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