Arbitration Process Issues

FEDERAL COURT HAS SUBJECT-MATTER JURISDICTION TO DECIDE PETITION TO COMPEL; DETERMINES PARTY DID NOT WAIVE ARBITRATION BY AGREEING TO MEDIATION

August 23, 2016 by Carlton Fields

Despite a pending motion to compel arbitration in state court, a party (MetLife) petitioned a Tennessee district court under the Federal Arbitration Act for the same relief. As that Act itself does not create federal-question jurisdiction, the court sua sponte looked to the citizenship of the parties and the amount in controversy. Finding both requirements met, and declining to invoke the doctrine of abstention as the respondent requested, the court determined the merits of the parties’ claims. Applying federal law, the court looked at the contract created by the parties’ exchange of emails while the issue of arbitrability was pending before the state court. The pertinent email from MetLife stated that it was agreeable to mediating within 90 days of the state court’s ruling on the arbitration issue. In the Sixth Circuit, a party waives a contractual right to arbitrate by “(1) taking actions that are completely inconsistent with any reliance on the arbitration agreement; and (2) delaying its assertion to such an extent that the opposing party incurs actual prejudice.” MetLife merely expressed its openness to mediation. The respondent also challenged the validity of the arbitration provisions themselves, characterizing them as unenforceable contracts of adhesion, which the court could determine under the Federal Arbitration Act. As the parties agreed that New York law governed the arbitration provisions, the court looked at the elements of adhesion and determined the account application the respondent signed contained enforceable and valid arbitration provisions. As to the account applications respondent directed her MetLife representative to sign, the court reserved a ruling on the issue of agency. Metlife Securities, Inc. v. Holt, Case No. 2:16-cv-32 (USDC E.D. Tenn. July 21, 2016).

This post written by Nora A. Valenza-Frost.

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NINTH CIRCUIT AFFIRMS DENIAL OF MOTION TO COMPEL ARBITRATION

August 10, 2016 by John Pitblado

In an unpublished decision, the Ninth Circuit recently affirmed a California district court’s denial of a motion to compel arbitration.

The case involves claims brought by a putative class action of exotic dancers under the Fair Labor Standard Act. The defendant SFBSC Management, LLC (“BSC”) made a motion to compel arbitration of the labor claims. The district court denied the motion, and BSC appealed.

The Ninth Circuit held that BSC was not a party to the performer contracts and failed to establish that it has standing to enforce the arbitration clause. BSC argued that alter ego or agency allegations in the complaint conclusively establish its non-party standing for purposes of arbitration. The Court noted that BSC had the burden under the Federal Arbitration Act (the “FAA”) to show the existence of a valid, written agreement to arbitrate and that the agreement to arbitrate encompasses the dispute at issue. The Ninth Circuit stated that while plaintiffs’ complaint contained allegations that BSC acted as “agent” of the nightclubs and that BSC managed the clubs, BSC denied those allegations in its answer, and submitted evidence contradicting plaintiffs’ allegations. Thus, the Court found that under these circumstances, plaintiffs’ allegations in the complaint do not conclusively establish BSC’s standing to compel arbitration. The Court also noted that BSC’s own evidence failed to establish it had a principal-agent relationship with the nightclubs (or vice versa), or that it was an alter ego of the nightclubs. Thus, the Ninth Circuit affirmed the district court’s decision, denying the motion to compel arbitration.

Roes v. SFBSC Management, LLC, No. 3:14-cv-03616 (9th Cir. July 28, 2016).

This post written by Jeanne Kohler.

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DISTRICT COURT OF NEBRASKA DETERMINES NON-SIGNATORY OF ARBITRATION AGREEMENT IS NOT BOUND TO ARBITRATE

August 9, 2016 by John Pitblado

A signatory may bind a non-signatory to an arbitration agreement through principles of contract and agency law such as: (1) incorporation by reference; (2) assumption; (3) agency; (4) veil-piercing/alter-ego; and (5) estoppel. A Nebraska federal court held that none of the theories required Plaintiff to arbitrate its claims.

Defendant entered into a reinsurance participation agreement (“Agreement”) with Applied Underwriters Captive Risk Assurance Company (“AUCRA”) which contained an arbitration agreement. A schedule to the Agreement added an additional 22 parties. Plaintiff was not a party to the Agreement. Years later, the defendant executed a promissory note (“Note”) with plaintiff. The Note included the same additional 22 parties as in the “Agreement”. Defendant defaulted on the note, and litigation ensued. Although the complaint initially included a cause of action for breach of the Agreement, it was later amended to include a single cause of action for breach of the Note. The Defendant moved to dismiss or stay the action pending arbitration under the theory that Plaintiff was bound as a non-signatory to the arbitration agreement.

Under the theories of agency and veil-piercing, the Court stated “a corporate relationship is not enough to bind a non-signatory to an arbitration agreement.” It found defendant did not present any evidence AUCRA had actual, implied, or apparent authority to bind Plaintiff to the Agreement or the corporate relationship was sufficiently close or the formalities were disregarded so the corporate veil was pierced or the two entities acted as each other’s alter ego. In fact, Plaintiff was the indirect parent of AUCRA.

Defendant also argued the Agreement was incorporated by reference in the Note. “When determining whether an arbitration provision was incorporated … the new agreement must either incorporate by reference the entire previous contract, or must expressly incorporate the portion containing the arbitration provision.” Here, the Court found the Note neither directly referenced the Agreement, nor incorporated any of its terms – particularly its arbitration provision.

Applied Underwriters, Inc. v. Top’s Personnel, Inc., 8:15CV90 (USDC D. Neb. May 26, 2016), recommendation adopted (June 16, 2016).

This post written by Nora A. Valenza-Frost.

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CALIFORNIA SUPREME COURT HOLDS THAT ARBITRATOR, NOT COURT, MAY DETERMINE IF ARBITRATION AGREEMENT PERMITS CLASS ARBITRATION

August 8, 2016 by John Pitblado

The California Supreme Court has held that an arbitrator, rather than a court, has the power to decide whether class claims can proceed in arbitration, where the parties’ arbitration agreement is ambiguous on the question.

The background of this case is as follows. When Plaintiff Timothy Sandquist was hired by Defendant Lebo Automotive (“Lebo”), a car dealership, he signed multiple arbitration agreements as a condition of employment. Plaintiff later sued Lebo and its owners, alleging racial discrimination, harassment, and retaliation. The complaint sought to bring claims on behalf of a “class of current and former employees of color.” Defendants filed a motion to compel arbitration based on the arbitration agreements. The trial court granted the motion but struck the class allegations, concluding that the arbitration agreements did not permit class arbitration. On appeal, the California court of appeal reversed in part, ruling (1) the trial court erred in concluding that existing precedent compelled the court to determine whether class arbitration was available; and (2) the availability of class proceedings under an arbitration agreement is for an arbitrator to decide in the first instance. Defendants petitioned for review to the California Supreme Court, contending that the court of appeal’s decision contributed to an existing state and federal split over who should decide whether an arbitration agreement permits class arbitration, and review was granted.

In a closely divided opinion, the California Supreme Court affirmed the court of appeals decision but on different grounds, holding that (1) there is no universal rule as to whether courts or arbitrators should decide the availability of class arbitration, but rather, who decides is in the first instance a matter of agreement with the parties’ agreement subject to interpretation under state contract law (and decided on a case by case basis); and (2) applying state law, that the parties’ arbitration agreement in this case included broad and all-encompassing language requiring an arbitrator to resolve the question of who decides whether class arbitration is permissible. In its analysis, the Court, specifically focusing on the agreements’ terms and resolving any ambiguities in favor of the non-drafting party, noted that the arbitration agreements at issue contained several indications that the parties intended for an arbitrator to decide the class arbitration issue. First, the agreement to submit any claim, dispute, or controversy to an arbitrator suggested a choice to have an arbitrator decide the class arbitration issue. Second, since the agreements give an arbitrator authority to decide any claim connected to employment, the class arbitration question that directly arises from underlying employment claims should be answered by an arbitrator. Third, because Lebo specifically excluded certain claims from the arbitration agreements, it “might well have specified other matters not for the arbitrator, such as the availability of class arbitration at issue here, but did not.” Finally, disagreeing with several federal courts of appeals, the California Supreme Court also held that the Federal Arbitration Act (the “FAA”) does not contain any presumption in favor of a court deciding this issue.

Sandquist v. Lebo Automotive, Inc., No. S220812 (Cal. July 28, 2016).

This post written by Jeanne Kohler.

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SECOND CIRCUIT REJECTS ARGUMENT THAT ARBITRATION CLAUSE WAS VOID DUE TO INABILITY TO VINDICATE RIGHTS UNDER TITLE VII AND ADA

July 28, 2016 by Carlton Fields

The Second Circuit recently affirmed in relevant part, an order compelling arbitration of claims under Title VII and the Americans with Disabilities Act in connection with the termination of the plaintiff’s employment. The plaintiff alleged that the six-month limitations period in the arbitration clause did not provide a sufficient opportunity to exhaust administrative remedies, thus rendering the arbitration agreement invalid. The court rejected this argument, holding that it was “not clear” under Title VII and the ADA that the plaintiff “would be required to exhaust administrative remedies prior to arbitration.” And even if exhaustion prior to arbitration was required under the law, “an arbitration provision that requires an employment discrimination claim to be arbitrated before statutory exhaustion procedures could possibly be completed is easily construed as reflecting the parties’ agreement to waive such requirement, as well as any defense based on that requirement.” Additionally, the court held, “the arbitrator would seem to be the appropriate party to determine these issues and related ones,” such as whether the exhaustion requirement applies and whether the parties’ agreement should be construed to waive that requirement. Virk v. Maple-Gate Anesthesiologists, P.C., et al., Case No. 15-513-cv (2d Cir. July 1, 2016).

This post written by Joshua S. Wirth.

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