Arbitration Process Issues

BANKRUPTCY COURT HOLDS BERMUDA INSURERS VIOLATED BARTON DOCTRINE BY SEEKING ANTI-SUIT INJUNCTIONS IN BERMUDA COURTS

March 7, 2017 by Rob DiUbaldo

Two separate courts in the Southern District of New York have recently issued opinions relating to a complicated bankruptcy proceeding following the collapse of MF Global Holdings Ltd. in 2011. The underlying dispute involves MF Global Holdings and MF Global Assigned Assets’ (“Plaintiffs”) attempts to recover insurance proceeds from the defendants (“Bermuda Insurers”) under certain excess errors & omissions policies following a global settlement of MDL litigation in SDNY. In August 2016, the Bankruptcy Court for the Southern District approved the global settlement.

On November 8 2016, the Bermuda Insurers filed an adversary proceeding in the Supreme Court of Bermuda (“the Bermuda action”), obtaining ex parte anti-suit injunctions prohibiting Plaintiffs from prosecuting their insurance claims in the Bankruptcy Court and requiring them to arbitrate such disputes in Bermuda. On November 22—the same day the Bankruptcy Court entered an order to show cause why the Bermuda Insurers should not be held in contempt for filing the Bermuda action—they filed a motion to compel arbitration in the Bankruptcy Court, to which the Plaintiffs were unable to respond because of the Bermuda action’s anti-suit injunctions.

On December 21, 2016, the Bankruptcy Court entered a temporary restraining order barring the Bermuda Insurers from enforcing the Bermuda action’s anti-suit injunctions. On January 12, 2017, the court granted a preliminary injunction extending the TRO’s relief. The Southern District issued an opinion on February 10, 2017 denying the Bermuda Insurers’ motion for leave to appeal the TRO, which it filed shortly after the TRO was initially granted. The district court denied the motion seeking interlocutory appeal of the Bankruptcy Court’s TRO decision, because the subsequent issuance of the preliminary injunction rendered the appeal moot and because of the lack of a fully developed record.

On January 31, 2017, the Bankruptcy Court issued an opinion finding that the Bermuda Insurers violated the Barton Doctrine by initiating the Bermuda action and ordering them to dismiss that proceeding. The Barton Doctrine provides that suits may not be brought against receivers without leave of the receiver’s appointing court. The Bankruptcy Court surveyed case law extending this doctrine to other contexts including, most significantly, bankruptcy proceedings. It held that Plaintiffs were entitled to the protections of the Barton Doctrine by virtue of MF Global Holdings’ role as Plan Administrator, and MF Global Assigned Assets’ role as a company created to retain assets assigned in satisfaction of debtor claims. The court found the Bermuda action was effectively an attempt by the Bermuda Insurers to delay Plaintiffs’ administration of the bankruptcy estate, and as such, ran afoul of the Barton Doctrine. Following the Bankruptcy Court’s order on January 23, the Bermuda Insurers dismissed the Bermuda action.

This post written by Thaddeus Ewald .
See our disclaimer.

NEW JERSEY COURT COMPELS ARBITRATION, DECLINES TO APPOINT SUBSTITUTE ARBITRATOR DESPITE “EXORBITANT” ADMINISTRATIVE FEE

March 6, 2017 by John Pitblado

Terra Finance LLC brought an action to compel arbitration. Defendant Acrow Corporation moved to dismiss the action under Fed. R. Civ. P. 12(b)(6), arguing that the arbitration clause was unconscionable, and therefore unenforceable. Defendant attached two other arbitration agreements as evidence that the subject provision was unconscionable. As a result, the Court converted the motion to a motion for summary judgment.

To support unconscionability, Acrow argued: “(1) the clauses constitute contracts of adhesion; (2) at the time that each arbitration clause was executed, [Plaintiff] did not seek assistance of legal counsel; and (3) during negotiations over the… agreement, [Defendant’s] representative stated that arbitration before the ICC would be cheaper than litigation in U.S. courts.”

The Court rejected Acrow’s arguments, and compelled arbitration as Acrow “failed to come forward with evidence from which the Court might conclude that the arbitration clauses are procedurally or substantively unreasonable.”

The Court further declined Acrow’s request for the Court to appoint a substitute arbitrator in ICC’s place, on the grounds that ICC is “unavailable” due to the “exorbitant administrative fee.” Pursuant to Section 5 of the FAA, “exorbitant” administrative fee does not amount to a “lapse in the naming of an arbitrator” which would allow the Court to appoint a substitute.

Terra Finance, LLC, et al. v. Acrow Corp. of Am.a>, 16-0075 (USDC D.N.J. Feb. 7, 2017)

This post written by Nora A. Valenza-Frost.

See our disclaimer.

NINTH CIRCUIT REVERSES DISTRICT COURT DECISION ON UNCONSCIONABILITY OF DISPUTE RESOLUTION AGREEMENT, SEVERS PROBLEMATIC PROVISIONS

March 2, 2017 by Rob DiUbaldo

The Ninth Circuit reversed a district court’s finding that a dispute resolution provision (“the Provision”) of an employment agreement was substantively and procedurally unconscionable, upholding the provision as not tainted by illegality and severing the few problematic sections. The dispute arose when Lorrie Poublon claimed her former employer misclassified her as exempt from overtime pay requirements and demanded mediation. After mediation failed, Poublon filed a putative class action complaint, and the employer moved to compel arbitration under the Provision. The federal district court denied the employer’s motion on the grounds that the Provision was procedurally and substantively unconscionable and thus unenforceable.

On appeal, the Ninth Circuit rejected most of Poublon’s arguments that the Provision was unconscionable. First, the court dismissed her contentions regarding procedural unconscionability. Although the employer conceded it was a contract of adhesion, the Provision did not contain sufficient other indications of oppression or surprise to render it procedurally unconscionable.

Second, the court systematically considered each of Poublon’s arguments that specific parts of the Provision was substantively unconscionable. One specific clause—a requirement that employees submit all claims to arbitration, even though the employer maintained a right to seek judicial resolution of certain claims—was classified by the court as substantively unconscionable, on the grounds that the employer waived the argument. The court, however, held that six of the remaining seven challenged parts of the Provision were not substantively unconscionable. The upheld clauses included a waiver of representative claims, a choice of venue, a confidentiality clause, a provision governing sanctions, a provision allegedly granting the employer unilateral rights to modification, and clause limiting discovery. The court also held that the arbitrator, not the court, was the appropriate entity to decide whether the reaffirmation clause rendered the contract unenforceable.

Finally, because the employer waived its argument regarding the enforceability of the judicial carve-out exception in the Provision, the court analyzed whether that made the entire Provision unenforceable. The court found it did not, severing the unconscionable aspect of the Provision, concluding that they did not so taint the contract with illegality to render it unenforceable as a whole and relying in part on language in the Provision allowing for modifications to make it enforceable.

Poublon v. C.H. Robinson Co., No. 15-55143 (9th Cir. Feb. 3, 2017).

This post written by Thaddeus Ewald .

See our disclaimer.

NINTH CIRCUIT AFFIRMS ORDERS DENYING ARBITRATION IN TWO CLASS ACTION LAWSUITS AGAINST SAMSUNG

February 22, 2017 by Michael Wolgin

The Ninth Circuit issued two similar opinions arising out of Samsung’s appeals of orders denying arbitration in two putative class actions filed against it. The claims against Samsung allege that the smartphone maker misrepresented the performance of the Galaxy S3 and S4 smartphones. Samsung attempted to compel arbitration based on an arbitration clause in the “Product Safety and Warranty Brochure” included in the packaging of the phones. Applying California law, the Ninth Circuit found that the arbitration clause in the warranty brochures was not binding on the plaintiffs with respect to the claims here. The court further held that Samsung failed to establish an exception to the rule that an offeree’s silence cannot satisfy affirmative consent. Further, the court held that the brochure was not an “in-the-box” contract. The Ninth Circuit also rejected Samsung’s argument that it could rely on the arbitration provisions in the plaintiffs’ respective customer agreements with their cell phone carriers; Samsung was neither a signatory to, nor a third-party beneficiary of those agreements. Norcia v. Samsung Telecommunications America, LLC, Case No. 14-16994 (9th Cir. Jan. 19, 2017); Dang v. Samsung Electronics Co., Ltd., Case No. 15-16768 (9th Cir. Jan. 19, 2017).

This post written by Michael Wolgin.

See our disclaimer.

THIRD CIRCUIT AFFIRMS REJECTION OF CLASS ARBITRATION WHERE EMPLOYMENT AGREEMENT WAS SILENT ON WHETHER ARBITRATION COULD PROCEED ON A CLASS BASIS

February 21, 2017 by Michael Wolgin

Plaintiffs, former staffing managers of defendants’ international staffing agency, alleged that defendants misclassified them as overtime-exempt employees in violation of the Fair Labor Standards Act. Following earlier rulings of the trial court permitting an arbitrator to determine the availability of class arbitration, the Third Circuit established precedent that it was the role of the court, not the arbitrator, to make this determination. The trial court then found that the relevant employment agreements did not specifically provide for class arbitration, and therefore no class arbitration could go forward. At issue on appeal were first, whether the availability of class arbitration was indeed for the court or the arbitrator to decide; and second, whether the trial court erred in determining that the parties’ agreements did not permit class arbitration.

Regarding the issue of availability of class arbitration, the Third Circuit reaffirmed its previous decision that the question of arbitrability of class claims is for the court, and not the arbitrator to decide. As to the issue of whether the employment agreements permitted class arbitration, the court held that silence regarding class arbitration generally indicates a prohibition against it. Moreover, the court stated that “[e]ven assuming arguendo that class arbitration may be permitted without express authorization in an arbitration clause, Plaintiffs ha[d] set forth nothing suggestive of any implicit intent to permit class arbitration here.” The court therefore affirmed the dismissal of the case due to the lack of authority to hold a class arbitration. Opalinski v. Robert Half Int’l Inc., Case No. 15-4001 (3d Cir. Jan. 30, 2017).

This post written by Gail Jankowski.
See our disclaimer.