Arbitration Process Issues

The Supreme Court will hear argument on whether arbitration provisions in employment agreements which waive class actions are a violation of the National Labor Relations Act (“NLRA”). The three cases are as follows:

In Epic Systems Corp. v. Lewis (USSC 16-285), which we previously reported on June 6, 2016, the Seventh Circuit held a provision of an employment agreement mandating that wage-and-hour claims could be brought only through individual arbitration and that employees waived collective action was prohibited under Section 7 of the NLRA.

In Ernst & Young, et al. v. Morris, et al. (USSC 16-300), which we previously reported on September 12, 2016, the Ninth Circuit similarly held that the waiver in the Ernst & Young employment agreement violated Sections 7 and 8 of the NLRA.

In NLRB v. Murphy Oil USA, Inc., et al. (USSC 16-307), which we previously reported on September 6, 2016, the Fifth Circuit held the opposite, finding that requiring employees to sign arbitration agreements requiring them to resolve employment-related claims through individual arbitration and waiving their rights to pursue a class arbitration to be valid.

The three cases were consolidated and a total of one hour is allotted for oral argument.

This post written by Nora A. Valenza-Frost.

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The National Association of Insurance Commissioners has taken a firm stance on the Consumer Financial Protection Bureau’s proposed ban of “mandatory arbitration” clauses that make financial product consumers waive their right to join class actions.

Because consumer loans are generally financial products within the CFPB’s purview, the CFPB stated that the proposed ban would extend to arbitration clauses used for whole life insurance policy loans, if (a) the insurance company is a “creditor” under the Equal Credit Opportunity Act (ECOA) and (b) the activity is not the “business of insurance” under the Dodd –Frank Act. In a comment letter, however, the NAIC has urged the agency to remove altogether policy loan features from the scope of the rule.

In drawing a line between insurance policy loans and consumer finance, the NAIC argued that whole life policy loans do not make insurance companies ECOA “creditors.” Insurers do not extend, renew, or continue credit; nor do they arrange for such transactions. Rather, despite the use of the word “loan,” a policy loan is in substance an advance payment of the policy’s cash surrender value. It more closely resembles a structured temporary conversion from one type of asset into cash, particularly because, if a policyholder does not repay the loan, the insurance company’s recourse is simply to reduce the policy benefits by the outstanding balance of the loan.

Finally, the NAIC pointed to Dodd-Frank Act language stating that the bureau has no authority to alter, amend, or affect the authority of any state insurance regulator. Because states regulate the issuance of insurance policy loans and none of the CFPB’s enumerated statutes—like the Truth in Lending Act or Real Estate Settlement Procedures Act—expressly incorporates policy loans into their purview, the NAIC concluded that the CFPB’s purported encroachment into this territory is “beyond the appropriate jurisdiction of the bureau.”

For more analysis of this CFPB rule proposal, and how state insurance law is not the only area of regulation as to which it is engendering line-drawing controversies, see “CFPB Grabs for SEC/CFTC Turf.”

This post written by Sarah J. Auchterlonie.

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This case involves a dispute between Shandong Linglong Tire Co. Ltd., a Chinese tire manufacturer, its Thai and U.S. subsidiaries (collectively, “Linglong”) and Horizon Tire, Inc., Linglong’s U.S. distributor.

A brief history of the case is as follows. In 2015, Horizon sued Linglong in California federal court, alleging that Linglong had not repaid a $3.6 million loan, failed to fulfill a November 2014 order for tires, and failed to honor Horizon’s exclusive distributorship rights for Linglong’s tires. Linglong then sued Horizon in Ohio federal court, seeking, among other things, a declaration that Horizon did not have an exclusive distributorship arrangement with Linglong. Horizon dismissed its California suit, and filed an answer and counterclaims in Ohio. Linglong amended its complaint, and Horizon then filed an answer and amended counterclaims for declaratory relief, breach of contract, and misappropriation of trade secrets, among other claims. Linglong filed a motion under Rule 12(b)(1) to dismiss or stay Horizon’s amended counterclaims pending arbitration based on an arbitration clause in a Collaboration Agreement between them entered into in 2006, which expired in 2011 (the “Agreement”). The Ohio district court denied the motion, reasoning that Horizon’s claims were not based on the Agreement, that the Agreement had expired, and that Linglong had waived any right to arbitrate. Linglong then appealed to the Sixth Circuit, arguing that the arbitration clause survived the expiration of the Agreement.

The Sixth Circuit, in reviewing the Ohio district court’s refusal to compel arbitration de novo, noted that an arbitration clause survives the expiration of a contract only when the dispute at issue “arises under the contract,” which occurs in two circumstances relevant to the current dispute. First, the Court stated that a dispute arises under the contract when a “majority of the material facts and occurrences” giving rise to the dispute occurred prior to the expiration of the contract at issue. In this case, the Court noted that the vast majority of events at issue occurred after the expiration of the Agreement. Second, a dispute arises under the contract when the contractual right at issue survives the expiration of the contract itself. Although the Sixth Circuit noted that one might interpret Horizon’s claims for permanent right of exclusive distributorship to arise out the Agreement, the Court also noted that Horizon itself had stated that “to the extent that Horizon had a claim based on a continuing obligation created by the Collaboration Agreement, Horizon has unequivocally and irrevocably waived it.” The Sixth Circuit then found that the Agreement’s arbitration clause does not apply to Horizon’s claims and that Horizon is estopped from making any claim based upon the Agreement. Thus, the Court affirmed the Ohio district court’s order denying Linglong’s motion.

Linglong Americas Inc. et al. v. Horizon Tire Inc., No.16-3520 (6th Cir. Dec. 1, 2016).

This post written by Jeanne Kohler.

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The Ninth Circuit, as a matter of first impression, ruled that the Federal Arbitration Act (“FAA”) is subject to equitable tolling. Plaintiff Move, Inc. (“Move”) moved to vacate an arbitration panel’s adverse decision, claiming it was prejudiced by the chairperson’s fraudulent misrepresentation that he was a licensed attorney (when he was not), and that such criteria was required for the chairperson’s service on the panel. Move did not discover the chairperson’s misrepresentation until four years after the arbitral award, and thus outside the FAA’s three month timeline for an aggrieved party to petition to vacate an arbitration decision. The court analyzed the FAA’s text, purpose, and structure, concluding that they did not preclude the application of equitable tolling with respect to vacatur of the award or bar Move’s application based on timeliness.

The court then determined that the arbitrator’s misrepresentation constituted sufficient grounds to vacate the panel’s decision. Move had made clear throughout the arbitrator selection process how important it was that the chairperson of the arbitration panel be an experienced, licensed attorney. Even though it was impossible to determine whether the imposter’s presence influenced other panel member’s decisions, or the outcome itself, the prejudice came from his inclusion on the panel as chairperson, when his misrepresentation should have disqualified him from the list of eligible arbitrator candidates.

Move, Inc. v. CitiGroup Global Markets, Inc., No. 14-56650 (9th Cir. Nov. 4, 2016).

This post written by Thaddeus Ewald .

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