Arbitration Process Issues

SIXTH CIRCUIT AFFIRMS DISTRICT COURT’S COLORADO RIVER ABSTENTION AND THAT STATE COURT APPROPRIATELY DETERMINED ARBITRATION AGREEMENT’S ENFORCEABILITY

February 15, 2017 by John Pitblado

An earlier-filed state court action determined the enforceability of an arbitration agreement, before a federal district court could rule on a motion to compel arbitration. The federal district court thereafter abstained from ruling on the motion to compel, finding that the state court decision controlled. The Sixth Circuit upheld the abstention, finding it satisfied five of the six factors for abstention under Moses H. Cone Mem. Hosp. v. Mercury Constr. Corp., 460 U.S. (1983).

A Kentucky state court determined that the power of attorney did not give anyone sufficient authority to sign an arbitration agreement waiving the constitutional right to a jury trial under Ping v. Beverly Enterprises, Inc., 376 S.W.3d 581 (KY 2012), and Extendicare Homes, Inc. v. Belinda Whisman, 2013-SC-000426-I. Prior to that ruling, the defendant had separately filed a petition in federal court seeking to compel arbitration. Deferring to the state court’s ruling, the federal court thereafter abstained from acting on the petition to compel arbitration. The petitioner appealed.

The Sixth Circuit went through the Moses H. Cone factors. Notably, the fifth factor – the source of governing law – was found not clearly to favor or disfavor abstention. The Court noted that “when determining the enforceability of an arbitration agreement – the question primarily at issue here and in the state courts – this court is bound to apply the state law of contract formation… placing state law at least as much at issue as federal law.” Thus, it was not improper for the federal court to defer to the state court’s ruling in a prior-filed action. Preferred Care of Delaware, Inc., dba Preferred Care, Inc., et al. v. Simm VanArsdale, as Administrator of Estate of, Judith VanArsdale, No. 16-5209 (6th Cir. Jan. 13, 2017)

This post written by Nora A. Valenza-Frost.

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ARBITRATOR’S DECISION ON AVAILABILITY OF COLLECTIVE AND CLASS ARBITRATION WITHSTANDS PROCEDURAL AND SUBSTANTIVE CHALLENGES

February 9, 2017 by Rob DiUbaldo

A Colorado federal court recently denied DISH Network (“DISH”)’s petition to vacate an arbitration award that decided an arbitration agreement with former employee Ray permitted collective or class certification. The arbitrator had decided as a jurisdictional matter that he had authority to determine whether the agreement permitted collective or class arbitration, and then held on the merits that the disputed agreement permitted arbitration of this kind.

First, the court upheld the arbitrator’s decision that he had authority to determine whether the agreement permitted collective or class arbitrations, but on slightly different grounds than the arbitrator decided the issue. The arbitrator found that the question of whether an agreement permits collective or class arbitration is not a “gateway” issue—or “question of arbitrability”—so she therefore had jurisdiction to decide the substantive issue. Alternatively, the arbitrator found that the agreement itself clearly and unmistakably indicated the parties’ intent to submit the issue to the arbitrator. The court, on the other hand, followed persuasive authority from other circuits holding that the question of whether an agreement permits collective or class arbitration is a question typically decided by a court and not the arbitrator. It still upheld the finding of jurisdiction, however, because it found that the parties manifested an intent to delegate questions of arbitrability to the arbitrator by incorporating the American Arbitration Association’s National Rules for the Resolution of Employment Disputes—which provide for determination of such issues by the arbitrator—into their arbitration agreement.

Second, the court refused to vacate the arbitrator’s decision that the agreement permitted collective or class certification, based primarily on the limited review applicable to arbitration awards under the Federal Arbitration Act. The arbitrator weighed a series of six features of the agreement’s language, three of which counseled for construing the agreement to permit collective or class arbitration of Ray’s claims and three counseled against permitting collective or class arbitration. Regarding the permissibility of collective arbitration provided by the Fair Labor Standards Act, the arbitrator decided that the three features supporting collective arbitration outweighed the three opposing it. Regarding the permissibility of class arbitrations, the arbitrator found a closer case and proceeded to interpret the agreement against DISH as the drafter to permit class arbitration.

In reviewing DISH’s merits challenges, the court found that the arbitrator’s decision was entirely consistent with relevant Supreme Court and Colorado precedent. The court also noted that even if the arbitrator’s analysis was inconsistent with the relevant authority, errors in interpreting or applying the law do not constitute grounds for vacating an arbitration award. Furthermore, it found the decision to interpret the contract against DISH was appropriate, because other rules of contract interpretation failed.

Dish Network, L.L.C. v. Ray, Case No. 16-314 (USDC D. Colo. Dec. 28, 2016).

This post written by Thaddeus Ewald .

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COURT AFFIRMS RULING DENYING MOTION TO COMPEL ARBITRATION ON THE BASIS THAT CONTRACT WAS INVALIDATED BY FRAUD

February 6, 2017 by Rob DiUbaldo

The Ninth Circuit, in an unpublished opinion, has found that a contract, and therefore an arbitration clause within it, was unenforceable due to fraud in the inception, despite the fact that both parties had ample opportunity to review the contract in its entirety. This result was required, the court found, because, assuming the allegations of the complaint to be true, the plaintiff did not know that by signing the contract it was agreeing to be a victim of defendants’ scheme.

In the complaint, plaintiff alleged that it was misled into agreeing to a consulting agreement that the defendants used as part of a wide-ranging scheme of fraud, involving forging financial documents, destroying plaintiff’s relationships with clients and creditors, and falsely representing that an employee of one of the defendants had been hired for a non-existent position in order to get plaintiff to issue paychecks for that position. The dissent argued that such fraudulent conduct in the performance of the agreement did not constitute fraud in the inception because plaintiff did not allege that plaintiff signed the contract based on a misunderstanding of its contents or that the arbitration clause was fraudulently induced. The majority disagreed, however, citing a California Court of Appeals decision for the proposition that it was enough that defendants, as the party drafting the contract, drafted the contract “‘in such a way as to not apprise’ the other party of its intentions.” DKS, Inc. v. Corporate Business Solutions, Inc., 15-16589 (9th Cir. Jan. 17, 2017)

This post written by Jason Brost.

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FIFTH CIRCUIT AFFIRMS DENIAL OF MOTION TO COMPEL ARBITRATION AGAINST NON-SIGNATORY TO ARBITRATION AGREEMENT

January 30, 2017 by Michael Wolgin

The appeal arose from a consolidated case, originally three separate class actions, resulting from the alleged underfunding of Singing River Health System’s pension plan and KPMG’s alleged failure to detect that underfunding due to allegedly faulty auditing. The plaintiff from one of these class actions (Lowe) brought claims against KPMG but did not expressly rely upon KPMG’s engagement letters with Singing River – which included arbitration clauses. KPMG argued that, notwithstanding that the members of the Lowe class were not signatories to the engagement letters, the Lowe claims implicitly relied on the engagement letters because the letters “defined the scope of KPMG’s contractual role.” Therefore, KPMG argued, “equitable estoppel compel[led] the submission of Lowe’s claims to arbitration.”

Both the district court and the Fifth Circuit disagreed with KPMG’s argument. The Fifth Circuit explained, “the present case is based on tort rather than contract law. While it might well be easier for Lowe to pursue her claims based on the Engagement Letters, the standard for showing ‘direct dependence’ is what she pled, not what she might have pled … “ And, because Lowe’s tort claims were not “directly dependent” on the engagement letters, the Fifth Circuit found that KPMG’s motion was properly denied. The Court did go on to note, however, that if Lowe “later attempts to claim a remedy under the Engagement Letters, KPMG can seek relief including a renewed request for arbitration.” Thomas Jones, et al. v. Singing River Health Services Foundation, et al., Case No. 16-60263 (5th Cir. Jan. 5, 2017).

This post written by Brooke L. French.

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FIFTH CIRCUIT FOLLOWS PRECEDENT IN UPHOLDING EMPLOYMENT AGREEMENT CONTAINING CLASS ACTION WAIVERS

January 26, 2017 by John Pitblado

Relying on D.R. Horton Inc. v. NLRB and Murphy Oil, USA v. NRLB, the Fifth Circuit found the NLRB’s decision that Citibank violated the National Labor Relations Act by requiring employees to sign an arbitration agreement containing collective/class action waiver was erroneous and reversed the Board’s decision.

As noted earlier this week, the Supreme Court will hear oral argument on this issue.

Citigroup Tech. Inc., et al. v. NLRB, No. 15-60856 (USCA 5th Cir., Dec. 8, 2016)

This post written by Nora A. Valenza-Frost.

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