Arbitration Process Issues

ORDER COMPELLING ARBITRATION REVERSED DUE TO FAILURE TO DETERMINE THE EXISTENCE AND SCOPE OF ARBITRATION AGREEMENT

September 27, 2016 by Carlton Fields

The Ninth Circuit recently reversed a trial court for compelling arbitration without issuing an order that (1) made “the necessary factual findings as to the parties’ communications,” (2) determined “the law applicable to contract formation,” and (3) ruled “as a matter of law what constituted the offer, acceptance, or terms of the contract.” The appellate court remanded for the trial court to “resolve factual issues and make legal conclusions regarding the scope of the parties’ agreement.” Due to the basic threshold error, the court determined that it did not need to consider the parties’ arguments regarding unconscionability, waiver, and due process. Cunico Corp. v. Custom Alloy Corp., Case No. 14-56544 (9th Cir. Sept. 6, 2016).

This post written by Michael Wolgin.

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SECOND CIRCUIT PANEL ADHERES TO CIRCUIT PRECEDENT AND AFFIRMS ENFORCEABILITY OF EMPLOYMENT CLASS ACTION WAIVERS

September 26, 2016 by Carlton Fields

The Second Circuit issued a summary order affirming a decision by the Southern District of New York compelling arbitration pursuant to class-action and collective-action waivers contained in an employment arbitration agreement. The agreement required employees to submit all employment and compensation-related claims to arbitration and mandated that such claims be decided on an individual basis. The sole issue on appeal was whether the arbitration provision’s “prohibition of class or collective adjudication of work-related claims illegally restrict[ed] employees’ substantive rights under the NLRA and the [Norris-La Guardia Act], and [was] unenforceable under the [Federal Arbitration Act].” The court described the landscape of the Circuit split on this issue, noting that the National Labor Relations Board (NLRB) and the Seventh and Ninth Circuits have rejected the class/collective action waivers, whereas the Fifth and Eighth Circuits have held that such waivers may be enforceable. The Second Circuit panel then followed its own precedent, citing its 2013 decision in Sutherland v. Ernst & Young LLP, which is aligned with position of the Fifth and Eighth Circuits. The court then affirmed the enforceability of the waivers here. Patterson v. Raymours Furniture Co., Inc., Case No. 15-2820-cv (2d Cir. Sept. 2, 2016).

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

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COURT COMPELS NON-SIGNATORY AFFILIATES, BUT NOT BROKER, TO ARBITRATE PREMIUM PAYMENT DISPUTE

September 22, 2016 by John Pitblado

National Union Fire Insurance Company of Pittsburgh brought a petition in a New York federal court, to compel nine related companies to arbitrate a payment dispute relating to certain policies of insurance issued to the Beelman Truck Company. In connection with the insurance, Beelman Truck Company entered into premium payment agreements with National Union that contained an arbitration provision. The agreements were signed by Frank J. Beelman, III, on behalf of the Beelman Truck Company. The payment agreements (and the policies to which they related) defined the signatory, Beelman Truck Company, to include its subsidiaries and affiliates. National Union sought to compel not only Beelman Truck Company, but eight of its affiliates, to arbitrate the payment dispute. Beelman Truck Company conceded it must arbitrate, but the eight affiliates challenged the petition, arguing they were not signatories and should not be bound the agreements’ arbitration provisions. In addition, Beelman Truck Company brought a counter-petition to compel the broker who placed the policies to be included in the arbitration. The Court granted National Union’s petition, finding the payment agreements unambiguously included affiliates. However, it denied the counter-petition, finding no evidence that the broker was a signatory, or could otherwise be bound by the arbitration clause in the payment agreements under principles of estoppel. National Union Fire Insurance Company of Pittsburgh v. Beelman Truck Company, Case No. 15-cv-8799 (USDC S.D.N.Y. Aug. 24, 2016).

This post written by John Pitblado.

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TEXAS APPEALS COURT DENIES PETITION FOR A WRIT OF MANDAMUS THAT TRIAL COURT ERRED IN DENYING MOTION TO VACATE ARBITRATION PANEL’S ORDERS

September 20, 2016 by John Pitblado

A Texas appeals court denied a petition for a writ of mandamus filed by Irving Drobny, on behalf of National Accident Insurance Group (“NAIG”) and National Accident Insurance Underwriters (“NAIU”) (collectively, “NAIU”), challenging a trial court’s denial of NAIU’s motion to vacate an arbitration panel’s pre-hearing security and discovery orders in favor of American National Insurance Corporation (“ANICO”).

The background of this case can be found here. In sum, ANICO and NAIU were parties to an Underwriting Agreement, in which ANICO authorized NAIU to market, underwrite, issue and collect premiums for ANICO insurance policies. A dispute arose between the parties because one of NAIU’s vice presidents allegedly defrauded both NAIU and ANICO of approximately $43 million. The parties participated in an arbitration, in which ANICO filed a motion for pre-hearing security. On October 24, 2014, the arbitration panel granted ANICO’s motion and ordered NAIU to post $20 million in pre-hearing security. On January 12, 2015, the panel issued another order granting a motion to compel discovery responses and depositions, a motion to compel compliance with order requiring pre-hearing security and a motion for continuance. On March 4, 2015, NAIU filed in a Texas trial court a motion for temporary restraining order, temporary injunction and motion to compel arbitration, essentially asking the court to vacate the pre-hearing security order. The Texas court found that it had no authority to grant NAIU’s motion to vacate the panel’s pre-hearing security order because under the Federal Arbitration Act (the “FAA”), NAIU had failed to timely challenge it, and thus, the court denied NAIU’s motion. The court did not expressly rule on any discovery issues. NAIU appealed the trial court’s order, or in the alternative, requested that it be treated as a petition for a writ of mandamus. The Texas appeals court held that it did not have jurisdiction over NAIU’s appeal as it was interlocutory, and thus the appeal was treated as a petition for a writ of mandamus.

In its order, the Texas appeals court found that the trial court did not abuse its discretion in denying NAIU’s motion to vacate the arbitration panel’s pre-hearing security order because it was not timely challenged within the 90-day period under Texas law and the 3-month period under the FAA. With respect to NAIU’s argument that there is no authority for pre-hearing security during arbitration, the court noted while the FAA does not speak to pre-hearing security, Texas law allows for pre-hearing security. The court also noted that the trial court held a hearing on the motion to vacate the pre-hearing security order at which NAIU presented no evidence. Thus, the Texas appeals court held that the trial court did not abuse its discretion in denying the motion to vacate the panel’s award of pre-hearing security. Further, as the trial court did not rule on any discovery issues, the Texas appeals court overruled NAIU’s second issue and denied NAIU’s petition for a writ of mandamus.

In Re Irving Drobny, as Representative of National Accident Insurance Group, et al., No. 01-15-00435-CV (Tex. Ct. App. Aug. 30, 2016).

This post written by Jeanne Kohler.

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Ninth Circuit Holds That Class Action Waiver in Employment Agreement Is Unenforceable, Adding to the Circuit Split on the Issue

September 12, 2016 by Rob DiUbaldo

As a condition of employment, Ernst & Young’s employees were required to sign agreements that contained a “concerted action” waiver requiring employees to pursue legal claims against E&Y exclusively through arbitration, and arbitrate only as individuals in “separate proceedings”. An employee brought a class action against E&Y in the United States District Court for the Northern District of California alleging violations of the Fair Labor Standards Act. E&Y moved to compel arbitration and was granted such relief by the District Court, which dismissed the class action. On appeal, a divided U.S. Court of Appeals for the Ninth Circuit reversed, holding that the concerted action waiver in E&Y’s employment agreements violated Sections 7 and 8 of the National Labor Relations Act – specifically, the National Labor Relations Board’s interpretation that such waivers violate that Act. Moreover, because the Ninth Circuit concluded that an employee’s right to act collectively was substantive, rather than procedural, the court further held that the Board’s ban on class action waivers did not conflict with the Federal Arbitration Act, finding that when an arbitration provision effectively waives a substantive federal right, the so-called “savings clause” of the Federal Arbitration precludes enforcement of that waiver.

Our prior blog posts discussed the developing split among federal circuit courts on this issue. For example, in Cellular Sales of Missouri, LLC v. National Labor Relations Board, No. 15-1620 (8th Cir. June 2, 2016), the Eighth Circuit held that arbitration provisions in employment agreements waiving class actions are enforceable. (See also Fifth Circuit, enforcing such provisions; (same). By contrast, in Lewis v. Epic Systems Corp., No. 15-2997 (7th Cir. May 26, 2016), the Seventh Circuit reached a similar result as the Ninth Circuit. This emerging split, coupled with the use of these types of provisions in employment agreements, may result in the United States Supreme Court ultimately deciding to address the issue. Morris v. Ernst & Young, LLP, No. 13-16599 (9th Cir. Aug. 22, 2016).