Arbitration Process Issues

SUPREME COURT HOLDS FEDERAL ARBITRATION ACT PREEMPTION APPLIES TO CONTRACT FORMATION RULES

May 22, 2017 by Carlton Fields

Last week, the U.S. Supreme Court rejected the Kentucky Supreme Court’s use of a clear-statement rule to require that powers of attorney specifically authorize a representative to enter into an arbitration agreement, finding that the rule violated the Federal Arbitration Act’s (“FAA”) equal treatment principle. The plaintiffs in two consolidated cases were the wife and daughter of individuals who lived and died at a Kindred Nursing Centers facility. They each held powers of attorney with broad authority to manage their family members’ affairs. When each plaintiff signed the necessary paperwork to move their family member into the Kindred facility, they signed binding arbitration agreements.

The present dispute arose from a lower court action in which the plaintiffs sued Kindred over allegations that substandard care caused their family members’ deaths. Kindred moved to dismiss the suits on the basis of the arbitration agreements, the lower courts denied those motions, and the Kentucky Supreme Court affirmed. The state’s highest court found that one plaintiff’s (Wellner) power of attorney was not broad enough to permit her to enter into an arbitration agreement on behalf of her husband, but that the other plaintiff’s (Clark) power of attorney was sufficiently broad. However, the Kentucky court invalidated both arbitration agreements based upon a so-called clear-statement rule—that a power of attorney must specifically state that the representative has the power to enter into an arbitration agreement lest the individual’s “sacred” right of access to the courts and to trial by jury be violated. This rule complied with FAA’s demands that arbitration agreements be treated equally, the court explained, because it would apply to arbitration and other contracts implicating “fundamental constitutional rights.”

Justice Kagan authored an opinion for seven justices that squarely rejected the Kentucky Supreme Court’s reliance on the clear-statement rule, holding that it failed to put arbitration agreements on “an equal plane” with other contracts. The FAA includes an equal treatment principle that courts may invalidate arbitration agreements based upon generally applicable contract defenses, but not on legal rules singling out arbitration. The Supreme Court found that the clear-statement rule did exactly what its prior precedent (Concepcion) barred: it adopted a legal rule turning on the distinctive, primary characteristic of an arbitration agreement—the waiver of the right of access to the court and to a jury trial.

The Supreme Court dismissed the Kentucky court’s attempt to sidestep the equal treatment principle by suggesting the clear-statement rule could apply to other fundamental constitutional rights, referring to the hypothetical examples as “patently objectionable and utterly fanciful contracts.” The Court stated that adopting the respondents’ view “would make it trivially easy for States to undermine the Act—indeed, to wholly defeat it.”

Importantly, the Supreme Court rejected an argument by respondents attempting to salvage the clear-statement rule by characterizing it as only affecting contract formation, and thus, outside of the FAA’s purview. In rejecting that characterization, the Court relied upon the FAA’s text as well as case law. By its terms, the FAA states arbitration agreements be treated as “valid, irrevocable, and enforceable,” thus covering the initial “valid[ity]” of arbitration contracts.” The Court explained that its discussion of duress in Concepcion, a doctrine involving unfair dealing at the contract formation stage, would not make sense if the FAA did not apply to the contract formation stage. Furthermore, if respondents were correct, states could easily make an end-run around it by declaring everyone incompetent to sign arbitration agreements—a rule only affecting contract formation.

In dispensing with the consolidated cases, the Court reversed and ordered enforcement of Clark’s arbitration agreement because the Kentucky court had invalidated that agreement only based on the clear-statement rule. On the other hand, the Court vacated and remanded Wellner’s case for the state court to determine whether its interpretation of the power of attorney was independent of the clear-statement rule.

Kindred Nursing Ctrs. Ltd. P’ship v. Clark, No. 16-32 (USSC May 15, 2017).

This post written by Thaddeus Ewald .
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ARBITRATOR’S PRE-ISKANIAN DECISION THAT PAGA CLAIM MUST PROCEED ON AN INDIVIDUAL BASIS WAS NOT A “MANIFEST DISREGARD OF THE LAW”

May 18, 2017 by Michael Wolgin

A refinery operator (“Wulfe”), sued his former employer alleging several employment related claims, including a claim under the California Private Attorneys General Act (PAGA). The court compelled arbitration, and the arbitrator ordered Wulfe to proceed with his PAGA claim on an individual basis. While that decision was pending on appeal before the Ninth Circuit, the California Supreme Court and the Ninth Circuit issued opinions (Iskanian and Sakkab, respectively) holding that agreements to waive the right to bring a representative PAGA claim are unenforceable. The Ninth Circuit then remanded this case to the district court to consider the intervening case law, directing “the district court to consider in the first instance Wulfe’s argument that, in light of those subsequent decisions, the arbitrator’s award should be vacated because she exceeded her powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.” The district court subsequently declined to vacate the award.

On appeal, the Ninth Circuit affirmed the district court’s decision to let the award stand. The Ninth Circuit found that the arbitrator had not exceeded her powers by committing a “manifest disregard of the law.” The Ninth Circuit explained that “the issue is not whether, with perfect hindsight, we can conclude that the arbitrator erred. Rather, the issue is whether the arbitrator recognized the applicable law and then ignored it.” Because at the time the arbitrator ordered the PAGA claim to proceed on an individual basis the law was unsettled, there could have been no manifest disregard of the law. A failure “to correctly predict future judicial decisions” does not meet the test for “manifest disregard.” Wulfe v. Valero Refining Co., Case No. 16-55824 (9th Cir. Apr. 19, 2017).

This post written by Michael Wolgin.

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THIRD CIRCUIT HOLDS OVERTIME CLASS ACTION IS NOT SUBJECT TO ARBITRATION

May 11, 2017 by John Pitblado

The Third Circuit recently affirmed the decision of a Pennsylvania district court, holding that a class action involving overtime compensation filed against the operating companies of a senior care facility is not subject to arbitration.

The background of the case is as follows. Plaintiffs filed their putative class and collective action against the defendants under the Fair Labor Standards Act (FLSA) and Pennsylvania wage and hour statutes. Plaintiffs alleged that the defendants failed to pay proper overtime compensation. The defendants moved to compel arbitration, based on an arbitration clause in an Employment Dispute Resolution Program book that plaintiffs agreed to as a condition of employment. The clause provides that arbitration is “the only means of resolving employment related disputes.” However, the clause also states that it “covers only claims by individuals and does not cover class or collective actions.” The Pennsylvania district court read the clause as unambiguously carving out class and collective actions from mandatory arbitration and accordingly denied defendants’ motion to compel arbitration. The defendants appealed to the Third Circuit.

The Third Circuit noted the question presented: “Does an arbitration clause stating that it ‘covers only claims by individuals and does not cover class or collective actions’ nonetheless require that a putative class and collective action for overtime pay be sent to arbitration?” The Third Circuit affirmed the district court’s decision. Recognizing the strong federal policy favoring arbitration, the Court noted that policy has its limits, and the text of the arbitration clause controls. The Court then held the clause at issue “unmistakably provides that plaintiffs’ class and collective actions need not be subject to arbitration.”

Novosad v. Broomall Operating Company LP, No. 16-2089 (3d Cir. April 10, 2017).

This post written by Jeanne Kohler.

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THIRD CIRCUIT VACATES DISTRICT COURT’S DECISION AND REMANDS FOR FURTHER PROCEEDINGS REGARDING WHETHER THE PARTIES AGREED TO ARBITRATE

May 10, 2017 by John Pitblado

In this case, plaintiff Aliments Krispy Kernels, a Canadian “snack purveyor,” brought suit to confirm an arbitration award it received against Nichols Farms, a pistachio grower, in New Jersey federal district court. Nichols Farms moved to vacate the award. The New Jersey district court granted Nichol’s motion to vacate the arbitration award. Aliments appealed to the Third Circuit.

The background of this case is as follows. The underlying arbitration involved a breach of contract claim. Aliments and Nichols, through brokers, had exchanged some sales confirmations for Aliments to purchase pistachios from Nichols, none of which were signed and some, but not all, of the sale confirmations created by the brokers contained arbitration clauses. Nichols ended up refusing to deliver the pistachios without advance payment from Aliments, based on Aliments’ credit application. Aliments eventually bought the pistachios from another seller, and then sought to recoup the extra cost from Nichols in arbitration. Nichols refused to participate in the arbitration because it alleged that the sales confirmations it received did not contain arbitration clauses. Aliments was awarded $222,100 against Nichols in the arbitration, which Nichols refused to pay.

In the action to confirm or vacate the award, the district court allowed months of discovery and then vacated the award, finding no genuine issue of fact on the issue of whether the parties entered into a “an express unequivocal agreement” to arbitrate.

On appeal, the Third Circuit disagreed with the district court, vacated its decision and remanded for further proceedings. In its decision, the Third Circuit noted that its previous expressed standard to be applied in the context of whether to enforce an arbitration agreement under the Federal Arbitration Act — that there must be “an express and unequivocal agreement” to an arbitration contract — is outdated and no longer valid. Rather, the Third Circuit noted that “[t]he legal standard is simply that we apply the relevant state contract law to questions of arbitrability, which may be decided as a matter of law only if there is no genuine issue of material fact when viewing the facts in the light most favorable to the nonmoving party.”

In its analysis, the Third Circuit then found that per New Jersey’s “choice-of-law rules,” New Jersey law (rather than New York) on contract formation, applied to the determination of whether Aliments and Nichols agreed to arbitrate Aliment’s breach of contract claim. The Court then also found that multiple issues of material fact prevented it from concluding that Nichols and Aliments made an agreement to arbitrate. Thus, the Third Circuit vacated and remanded to the New Jersey district court for further proceedings.

Aliments Krispy Kernels, Inc. v. Nichols Farms a/k/a Nichols Family Farms a/k/a Nichols Pistachios, No. 16-1975 (3d Cir. Mar. 21, 2017).

This post written by Jeanne Kohler.

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TEXAS COURT FINDS POLICY CONTAINED DELEGATION CLAUSE REQUIRING ARBITRATION UNDER ENGLISH LAW

May 9, 2017 by John Pitblado

A Texas federal court addressed a dispute as to whether the insurance policy at issue contained an arbitration agreement and whether it required arbitration of the particular claim. Looking at the “Law and Practice” provision of the policy, the Court found it contained an implicit delegation clause because it required arbitration under English law. “Incorporation of English law includes English arbitration law, which unambiguously provides that arbitrators have the power to decide threshold questions as a default unless the parties agree to the contrary. The parties did not do so here. By agreeing to arbitrate under English law, the parties clearly and unmistakably consented to delegate to the arbitrator the power to make threshold determinations about what claims are arbitrable.”

Furthermore, the policy’s choice of law and jurisdiction are governed by the “Law and Practice” clause, which stated arbitration in England is required “notwithstanding anything else to the contrary.” As a final point, the policy stated “in the event of a conflict between this clause and any other provision of this insurance, this clause shall prevail and the right of either party to commence proceedings before any other Court or Tribunal in any other jurisdiction shall be limited to the process of enforcement of any award hereunder.”

The temporary restraining order was dissolved, and the parties were ordered to arbitrate in England.

Gemini Ins. Co. v. Certain Underwriters at Lloyd’s London Subscribing to Policy No. B0973MA1305152 Issued Through the Office of Osprey Underwriting Agency Limited, No. 4:17-cv-01044 (USDC S.D. Tex., April 13, 2017)

This post written by Nora A. Valenza-Frost.

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