Arbitration Process Issues

A physician sued several healthcare entities for wrongful termination of employment, negligence, breach of contract, and tortious interference with at-will employment. While two of the defendants were signatories to plaintiff’s employment agreement which contained an arbitration clause, the other defendants were not. Noting that Texas law expressly recognizes the theory of “direct benefits” estoppel, the trial court reasoned that because the defendants’ liability under the tortious interference claim could not be determined without reference to the employment agreement, the plaintiff must arbitrate that claim. Regarding the plaintiff’s other claims, the trial court applied the theory of “intertwined claims” estoppel and required the plaintiff to arbitrate those claims as well.

On appeal, the Fifth Circuit affirmed the trial court’s rulings, including the application of intertwined claims estoppel. The court explained that intertwined claims estoppel involved compelling arbitration when a non-signatory defendant has a “close relationship” with a signatory and the claims are “intimately founded in and intertwined with the underlying contract obligations.” Relying on a Texas Supreme Court case that “intimated at the validity of” the theory, on lower courts in Texas that applied the theory, and on the fact that arbitration of disputes is strongly favored under federal and state policy, the Fifth Circuit determined that the “Texas Supreme Court, if faced with the question, would adopt intertwined claims estoppel.” Finding that plaintiff regarded all of the defendants as closely related by failing to differentiate his factual allegations for each claim, and that the claims at issue closely related to plaintiff’s alleged wrongful termination, the Fifth Circuit affirmed. Hays v. HCA Holdings, Inc., Case No. 15-51002 (5th Cir. Sept. 29, 2016).

This post written by Gail Jankowski, a law clerk at Carlton Fields in Washington, DC.

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The Eleventh Circuit affirmed a district court’s denial of a motion to compel arbitration on the grounds that the designated forum in the arbitration agreement was both unavailable and integral to the agreement. Appellee Jessica Parm acquired a loan from Western Sky Financial, owned by a Cheyenne River Sioux Tribe (“the Tribe”) member. The loan agreement included a binding arbitration clause, specifying the Tribe would conduct the arbitration according to tribal governing rules, but allowed Parm a right to choose amongst certain arbitral organizations to administer the arbitration. At the time of both the agreement and the lawsuit, no tribal arbitral forum nor governing rules existed.

Parm sued the National Bank of California (“Bank”) for illegally permitting Western Sky to initiate electronic fund transfers from her account under the loan agreement. Bank moved to compel arbitration under the provision referenced above. In denying the motion, the court first applied traditional rules of contract construction to reject the Bank’s arguments, interpreting the choice of arbitrator provision as subject to the tribal arbitration provision to give meaning to both. It read an exception clause as applying to its nearest-reasonable referent, the “Dispute[s]” excepted from arbitration, rather than as an exception to the tribal exclusivity provision. It then stated that even if the Bank’s arguments were persuasive, the contract would be ambiguous, and thus construed against the Bank as the draftor. Finally, the court held the arbitration clause unenforceable, rather than substituting an available forum, based on how integral the tribal forum provisions were to the agreement. The mandatory language of and pervasive references to the Tribe and its rules indicated the use of that forum was not merely an ancillary concern. Because the agreement required arbitration in an unavailable forum that was integral to the agreement itself, the arbitration clause was deemed unenforceable. Parm v. Nat’l Bank of Cal., N.A., No. 15-12509 (11th Cir. Aug. 29, 2016).

This post written by Thaddeus Ewald, a law clerk at Carlton Fields in Washington, DC .

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On July 13, 2016, a U.S. Court of Appeals for the Third Circuit panel held that an arbitration clause is not waived simply because a party failed to raise a futile argument. The case arose out of a putative class action alleging over $50 million in untrebled damages relating to purported overcharges of fees stemming from the recording of deeds and mortgage instruments. The case was pending in the District of New Jersey, where strong precedent suggested that a motion to compel bipolar arbitration—that is individual, rather than class-wide—would have been futile. Following the U.S. Supreme Court’s decision in AT&T Mobility v. Concepcion, 563 U.S. 333 (2011), where the Court found that the Federal Arbitration Act preempted state laws that had previously prohibited a party from compelling bipolar arbitrations, the defendants notified the plaintiffs that they would be seeking to compel arbitration of this kind. The U.S. District Court for the District of New Jersey granted the motion.

On appeal, the Third Circuit found that “futility can excuse the delayed invocation of the defense of arbitration.” Examining what other federal courts had held previously, the Third Circuit panel, over a strong dissent, held that “[w]hy would we require a party to make a futile gesture to prevent waiver when we do not require such gestures in other scenarios?” The panel went on to state that the correct test is whether it was almost certain that a motion to compel arbitration would have been denied. Finding that test satisfied in these circumstances, the panel found that because defendants demanded bipolar arbitration less than a month after Concepcion, the plaintiffs were not prejudiced and affirmed the district court’s order compelling the case to individual arbitration.

Chassen v. Fidelity National Financial, Inc., Case No. 15-3789 (3d Cir. July 13, 2016).

This post written by Zach Ludens.

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