Arbitration Process Issues

In this case, Jeffrey Hedrick brought an action in Kansas federal court on behalf of himself and others similarly situated under the Fair Labor Standards Act (“FLSA”) against BNC National Bank, Hedrick’s employer. The bank filed a motion to stay, or dismiss, the action pending arbitration, under the Federal Arbitration Act, or in the alternative, to dismiss under Fed. R. Civ. P. 12(b)(6) for failure to state a claim. Given that his employment agreement contained an arbitration clause, Hedrick did not dispute his claim is subject to arbitration and did not oppose staying the case pending arbitration. However he argued that the arbitrator, rather than the court, should decide whether the arbitration can proceed as a class claim under the FLSA. The bank argued that the court should decide the class arbitration issue, and that the claim should proceed to arbitration as an individual claim.

Given that the bank’s motion to stay the action pending arbitration was unopposed, the Kansas federal court granted the motion. The court also noted that the Tenth Circuit has not directly addressed the question of who determines the availability of class arbitration. However, the court noted that that there are “fundamental differences” between bilateral and class-wide arbitration that “presumably create gateway issues of arbitrability that should be resolved by the court, rather than the arbitrator”. However, the court went on to hold that “even assuming that the availability of class arbitration is a ‘question of arbitrability’, … the arbitrator [in this case] must determine this question as the Employment Agreement provides ‘clear and unmistakable evidence’ that the parties intended the arbitrator to determine questions of arbitrability.” In this regard, the court noted that the arbitration clause provided that the arbitration would be administered by the American Arbitration Association under its National Rules for the Resolution of Employment Disputes, which state that “[t]he Arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement.” Thus, the court found that the parties’ incorporation of these rules into their arbitration clause constitutes “clear and unmistakable” delegation of questions of arbitrability to the arbitrator, and thus, that the class arbitration issue must be determined by the arbitrator.

Hedrick v. BNC National Bank, No. 15-9358 (D. Kan. May 16, 2016).

This post written by Jeanne Kohler.

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Late last month, the Ninth Circuit reversed a decision out of the Western District of Washington finding that a third party was not able to assert an arbitration provision. The underlying claim revolved around premium text messaging services, and a putative class action was brought against the companies that serve as billing aggregators for the content providers. The billing aggregators filed a motion to compel arbitration, attempting to utilize an arbitration provision contained in the terms and conditions of a content provider. The lower court denied the motion to compel arbitration, finding that the billing aggregators were not intended third-party beneficiaries to the terms and conditions and, therefore, could not assert the arbitration provision contained in a contract to which they were not a party.

On appeal, the Ninth Circuit issued a per curiam opinion holding that the district court was incorrect and that it was possible for third parties to claim the benefits of a contract under Washington law, so long as “the terms of the contract necessarily require the promisor to confer a benefit upon a third person.” Here, the terms and conditions between the content providers and consumers provided in one section that the consumer waived all claims “against . . . any of the content provider’s suppliers,” and provided in another section that “any dispute will be resolved by binding arbitration.” Given that the terms and conditions could reasonably be interpreted to inure to the benefit of the content provider’s suppliers, the Ninth Circuit returned the case to the lower court for determinations of whether the billing aggregators were the content provider’s suppliers and whether the consumer assented to the terms and conditions.

Geier v. m-Cube Inc., No. 13-36080 (9th Cir. May 26, 2016) (per curiam).

This post written by Zach Ludens.
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This appeal is from an order by a district court in California, affirming a bankruptcy court’s denial of a motion to compel arbitration in a Chapter 7 bankruptcy trustee’s adversary proceeding, in which the trustee sought avoidance of fraudulent transfers.

The trustee for EPD Investment Co. and Jerrold Pressman (collectively “EPD”) had filed an adversary proceeding against defendant John Kirkland, an attorney who acted as counsel for EPD, claiming that Kirkland transferred assets from EPD, a purported Ponzi scheme, to a family trust named the “Bright Conscience Trust.” Kirkland moved the bankruptcy court to compel arbitration of the bankruptcy proceeding, which was denied. Kirkland then appealed the bankruptcy court’s decision to the California district court, which affirmed the bankruptcy court’s decision, and an appeal followed to the Ninth Circuit.

The Ninth Circuit noted that the bankruptcy court has jurisdiction over “core proceedings,” and that in a core proceeding, “a bankruptcy court has discretion to decline to enforce an otherwise applicable arbitration provision only if arbitration would conflict with the underlying purposes of the Bankruptcy Code.” The Ninth Circuit agreed with the bankruptcy court that the trustee’s causes of action for fraudulent conveyance, subordination, and disallowance were core proceedings, “thereby giving the bankruptcy court discretion to weigh the competing bankruptcy and arbitration interests at stake.” The Ninth Circuit found that the bankruptcy court did not abuse its discretion by determining that the arbitration provisions in Kirkland’s agreements with EPD conflicted with the Bankruptcy Code’s purposes of having bankruptcy law issues decided by bankruptcy courts, of centralizing resolution of the dispute and protecting parties from piecemeal litigation, and thus affirmed the district court’s ruling.

In the Matter of EPD Investment Co., No. 14-56478 (9th Cir. May 9, 2016).

This post written by Jeanne Kohler.

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A New Jersey appellate court affirmed an order dismissing a class action and compelling individual (non-class) arbitration. The underlying arbitration agreements provided that the defendant car dealership would pay all costs of the arbitration, which would be arbitrated pursuant to the rules of the American Arbitration Association (AAA). The putative class members interpreted the sole forum as the AAA and central to the purposes of the agreement. When the putative members attempted to initiate arbitration with the AAA, the defendant did not pay the filing and arbitrator fees, resulting in AAA refusing to arbitrate the claims. The putative class members alleged that due to the defendant’s inaction, the arbitration agreement was materially breached. The lower court disagreed, and the appellate court affirmed, holding that the agreement was neither voluntarily breached nor waived. The defendant’s failure to pay the costs of arbitration to the AAA did not evidence an intent to avoid arbitration; the defendant was legitimately disputing whether the AAA was the obligatory forum. Roach v. BM Motoring, LLC, No. A-0749-14T4 (N.J. Super. Ct. App. Div. Jan. 20, 2016).

This post written by Joshua S. Wirth.

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