Arbitration Process Issues

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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On May 11, 2016 we reported on a dispute between certain captive insurance administrative service providers (Capstone) against various defendants concerning the rights to certain intellectual property related to a captive insurance arrangement. Following a mediation and a settlement between the parties of other claims between them (excluding the intellectual property claims), a dispute arose regarding whether the defendants’ affirmative defenses were released in the settlement. To resolve that issue, Capstone sought arbitration pursuant to an engagement letter that was part of the operative administrative services contract they and their attorneys entered into with the defendants as part of the captive insurance arrangement. The defendants opposed arbitration under the engagement letter, arguing that the parties’ claims and affirmative defenses were not arbitrable. The court compelled arbitration, holding that arbitrability was to be decided in arbitration under the terms of the arbitration clause in the engagement letter.

The defendants then filed the instant motion for rehearing, arguing that an order in a related case which denied arbitration under the same engagement letter, precluded arbitration in this case under res judicata. The court rejected that argument and denied rehearing, distinguishing between the claims for relief at issue in the order in the related case, and the affirmative defenses to those claims at issue in this case. While the claims for relief implicate a particular section of the administrative services agreement based on which the related order denied arbitration, the defenses at issue in this case do not directly implicate that section of the agreement. Consequently, the court ruled, the related order denying arbitration “did not decide the issue before the Court,” res judicata did not apply, and the court correctly compelled arbitration to decide arbitrability. Capstone Associated Services, Ltd., et al. v. Organizational Strategies, Inc., et al., No. H-15-3233 (USDC S.D.Tex. May 20, 2016).

This post written by Michael Wolgin.

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Last month, a California appellate court reversed an order compelling legal malpractice claims to arbitration under an arbitration provision found in a business operating agreement. The dispute arose after an attorney and existing clients decided to go into business together. Some time later, it came to light that the attorney continued to bill his own company for the legal services that he was rendering through his law firm, and his business partners brought suit against him. Under the business’s operating agreement, the parties agreed that “any controversy between the parties arising out of this Agreement” shall be submitted to arbitration. Following a full arbitration, the attorney appealed whether the claims should have been arbitrated in the first place.

Originally, the lower court compelled all of the claims between the parties to arbitration, including claims for legal malpractice, breach of fiduciary duty, and rescission of the legal fees paid. However, the appellate court found that the arbitration language was meant to be narrow – in the same operating agreement where the choice of law provision stated that it applied to “any action on a claim arising out of, under or in connection with this Agreement or the transactions contemplated by this Agreement.” The court reasoned that the legal malpractice, breach of fiduciary duty, and rescission claims preexisted the operating agreement and did not arise from it. The lower court erred in compelling these claims to arbitration. Rice v. Downs, No. B261860 & B264964 (Cal. Ct. App. June 1, 2016).

This post written by Zach Ludens.

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