Arbitration Process Issues

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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FEDERAL CIRCUIT AFFIRMS FINDING OF NON-ARBITRABILITY UNDER “WHOLLY GROUNDLESS” STANDARD

July 13, 2017 by John Pitblado

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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COURT MUST RULE ON MOTION TO COMPEL ARBITRATION FIRST

July 5, 2017 by Carlton Fields

Plaintiff sued his former employer in a putative class action alleging that a payroll practice violated Pennsylvania law. The defendant filed a motion to compel arbitration and a separate motion to dismiss. The district court opted to “delay ruling” on the motion to compel arbitration and proceeded to deny the motion to dismiss. The former employer appealed. The Court of Appeal found that the district court erred in not ruling on the motion to compel arbitration first, vacated, and remanded for the district court to consider the motion to compel arbitration in the first instance.

The Court held that the Federal Arbitration Act requires that the gateway issue of arbitrability must be addressed first. Therefore, once a motion to compel arbitration is filed the court must refrain from further action until it determines arbitrability. The court noted that there is an exception if the record is unclear as to the agreement to arbitrate, in which case limited discovery should be permitted limited to the issue of arbitrability. Since the plaintiff did not deny receipt of and consent to the agreement to arbitrate, and did not seek discovery with respect to arbitrability, the district court should have proceeded to consider the motion to compel arbitration before considering the pending motion to dismiss. Silfee v. Automatic Data Processing, Inc., No. 16-3725 (3rd Cir. June 13, 2017).

This post written by Rollie Goss.
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TENTH CIRCUIT AFFIRMS DENIAL OF MOTION TO COMPEL ARBITRATION AS TO THE CLAIMS OF NON-SIGNATORY PLAINTIFFS

June 28, 2017 by Michael Wolgin

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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