Arbitration Process Issues

A New York state trial court has denied a motion to stay arbitration in an action brought by plaintiffs, a private equity firm and its affiliate, against defendants, two of plaintiffs’ former officers, despite plaintiffs’ argument that the employment and separation agreements containing the relevant arbitration clauses were invalid.

Plaintiffs’ lawsuit alleged, inter alia, that defendants breached their fiduciary duties and committed fraud by engaging in multiple transactions in plaintiffs’ names for defendants benefit. Defendants responded with five counterclaims and nine affirmative defenses, including that the dispute was subject to arbitration. In opposing arbitration, Plaintiffs relied upon a case in which a court held that the plaintiff had “raised a threshold issue regarding the validity of the parities’ agreement” and that “the validity of the arbitration provision was thus an issue for the court to decide.” The court found this case inapposite, finding that defendants’ employment and separation agreements left no doubt that matters regarding their employment would be resolved by arbitration. Emphasizing that doubts regarding whether an arbitration clause covers a particular dispute should be resolved in favor of coverage, the court held that the arbitration provisions were valid and binding, even if the rest of the employment agreements were not valid, because plaintiffs had failed to show “that the arbitration agreements were permeated by fraud.”

Plaintiffs also challenged a portion of the arbitration agreement stating that plaintiffs “shall pay all fees in excess of those which would be required if the dispute was decide in a court of law,” arguing that the burden of this cost would prevent them from pursuing their claims against defendants. However, emphasizing that courts are loathe to interfere “with the freedom of consenting parties in structuring their arbitration relationship,” the court found that plaintiffs had not provided evidence showing that litigating the matter in court would be cheaper or that they were unable to bear these costs. The court also refused to dismiss defendants’ counterclaims for reimbursement of their legal fees and violation of a non-disparagement clause. However, it dismissed defendants’ claim for defamation, which was based on the allegations of plaintiffs’ complaint, because such statements are absolutely privileged, and dismissed their claim for harassment because New York does not recognize this as an independent cause of action.

Southport Lane Management, LLC et al. v. Adler et al., Index No. 155915/2016 (N.Y. Sup. Ct., April 14, 2017)

This post written by Jason Brost.

See our disclaimer.

Plaintiffs-Appellees brought suit against short-term lender PLS Financial Services, Inc., and PLS Loan Store of Texas, Inc. (collectively “PLS”), alleging the following scheme. First, as part of the application process, PLS would require customers to provide a blank or post-dated check for the amount borrowed plus fees. PLS assured its customers that the checks would only be used to verify checking accounts and would not be cashed. However, PLS did cash the checks of customers who defaulted, and, if the check bounced, PLS would submit worthless check affidavits to the local district attorney. As a consequence, those customers were notified that they would face criminal charges if they did not pay PLS for the outstanding balance.

Plaintiffs alleged that they fell victim to this scheme and asserted several causes of action against PLS, including malicious prosecution, fraud, and related violations of Texas’s Financial Code. PLS moved to dismiss the proceedings and compel Plaintiffs to arbitrate their claims pursuant to an arbitration clause in the loan agreement. The District Court for the Western District of Texas denied PLS’s motion to dismiss, finding that PLS had waived its right to compel arbitration of Plaintiffs’ claims when it submitted affidavits regarding their checks in the context of the litigation. PLS appealed and this decision followed.

Reviewing de novo, the Fifth Circuit affirmed. PLS first argued that the district court erred by deciding whether PLS waived its right to compel arbitration by participating in litigation conduct when it submitted the affidavits. On this issue, the Fifth Circuit reaffirmed its position that the court, not the arbitrator, is in the best position to decide whether certain conduct amounts to a waiver under applicable law. The panel rejected PLS’s argument that this position was inconsistent with the Supreme Court’s 2014 decision in BG Group, PLC v. Republic of Argentina, and further stressed that unlike other types of waiver, litigation-conduct waiver implicates courts’ authority to control judicial procedures or to resolve issues arising from judicial conduct.

The panel also rejected PLS’s second argument – that the district court erred by ignoring the parties’ express agreement to arbitrate all disputes, including any litigation-conduct waiver claims. Here, the panel found that PLS had waived this issue by raising it for the first time in its motion to reconsider, and in any event, the arbitration did not contain “clear and unmistakable evidence” of an intent to arbitrate the instant litigation-conduct waiver issue.

Last, regarding PLS’s argument that the district court erred in concluding that PLS waived its right to arbitrate by submitting the subject affidavits to the court, the panel found plausible Plaintiffs’ allegation that PLS waived arbitration through such conduct. In so finding, the panel determined that Plaintiffs had demonstrated prejudice from PLS’s submission of the worthless check affidavits, and that by submitting those affidavits, PLS “invoke[d] the judicial process to the extent it litigate[d] a specific claim it subsequently [sought] to arbitrate.”

Vine v. PLS Fin. Servs., Inc., No. 16-50847 (5th Cir. May 19, 2017).

This post written by Thaddeus Ewald .

See our disclaimer.

A New York court compelled the arbitration of a claim under a reinsurance agreement, rejecting the plaintiff reinsurer’s claim that the reinsurance policy is void because the reinsured issued an underlying insurance policy which did not comply with the requirements stated in the reinsurance contract. In doing so, the court held that the plaintiff raised an issue of the interpretation of the reinsurance contract, rather than the formation of the contract.

The plaintiff reinsurer and the defendant reinsured agreed to a reinsurance policy which contained a following form provision which provided that the reinsurance covered risks written by the ceding insurer on a specifically named policy form, “Form LEX CM PL 7.” Despite the defendant’s representation that it issued Form LEX CM PL 7, it turned out not to be the case. Instead, the defendant had issued an insurance policy called “2002 Sound Transit Policy” which provided broader coverage than the form referenced in the reinsurance contract. The ceding insurer settled and paid a claim which allegedly was not within the scope of coverage of the form specified in the reinsurance contract. A dispute arose and the ceding insurer demanded arbitration. The reinsurer filed suit, asking the court to stay the arbitration and declare the reinsurance policy void, and the ceding insurer moved to compel arbitration. The court rejected the reinsurer’s motions and granted the ceding insurer’s motion to compel arbitration.

The reinsurer argued that the case calls for the court’s determination on the existence of the reinsurance policy because the ceding insurer’s use of the wrong insurance policy form constituted a lack of mutual assent. The court rejected that position, noting that it is undisputed that the two parties signed and agreed to the reinsurance contract. The court stated that, instead, the issue is whether the loss reported by the ceding insurer is covered by the terms of the reinsurance contract. Because the reinsurance contract included a valid arbitration clause, the question was reserved for an arbitrator. While acknowledging the limited exception to the requirement of arbitration where a party questions whether a contract was ever made, the court held that the reinsurance contract at issue was clearly entered into and there remains no question as to its “formation.” HDI Global SE v. Lexington Ins. Co., Case No. 16-07241 (USDC S.D.N.Y. Feb. 7, 2017)

This post written by Rollie Goss.

See our disclaimer.

Recently, the National Labor Relations Board (NLRB) ordered Dish Network, LLC to rescind or revise its arbitration agreement, finding that provisions in the agreement violated the National Labor Relations Act (NLRA).

Beginning in October 2013, Dish required all applicants for employment to sign an arbitration agreement, which required that any claim, controversy or dispute arising out of the employee’s application for employment, employment, or termination of employment shall be resolved by arbitration (the “Arbitration Agreement”). The Arbitration Agreement also required that the arbitration shall be kept confidential. There was no procedure in the Arbitration Agreement for the employee to opt out. In this particular case, the charging party, employee Brett Denney, signed the Arbitration Agreement. He was later suspended for an alleged violation of a workplace policy. Denney was directed to not discuss his suspension with his coworkers. Denney then filed a complaint with the NLRB, alleging a violation by Dish of Section 8(a)(1) of the NLRA by prohibiting him from discussing the suspension with coworkers and for maintaining and enforcing the Arbitration Agreement.

In addressing the Arbitration Agreement, the NLRB noted that an employer violates Section 8(a)(1) of the NLRA if it maintains an arbitration policy that employees would reasonably believe interferes with their ability to file a charge with the NLRB or access the NLRB’s processes. The NLRB found that Dish’s Arbitration Agreement violated Section 8(a)(1) because the employees would reasonably construe it from prohibiting them from filing NLRB charges or accessing the NLRB’s processes. The NLRB noted that the Arbitration Agreement was very broad in that it applied to “any claim, controversy, and/or dispute between them, arising out of and/or in any way related” to the employee’s application, employment or termination. Further, the NLRB found that the confidentiality requirement of the Arbitration Agreement independently violated Section 8(a)(1) because a workplace rule that prohibits discussion of terms and conditions of employment is unlawfully broad. As to Dish’s instruction to Denney to not discuss the suspension with his coworkers, the NLRB also found that the instruction violated Section 8(a)(1) of the NLRA.

Under the NLRB’s order, Dish must cease and desist from using the Arbitration Agreement and must take affirmative actions to effectuate the policies of the NLRA. It also required that Dish rescind the Arbitration Agreement or revise it, making clear that it does not restrict the employee’s right to file NLRB charges or access NLRB’s processes and that it does not require confidentiality of arbitration proceedings. The NLRB also ordered Dish to notify current and former employees of the action, and post and distribute electronically notices at certain Dish locations of the action and order. Dish Network LLC and Brett Denney, No. 27-CA-158916 (NLRB April 13, 2017).

This post written by Jeanne Kohler.

See our disclaimer.