Arbitration Process Issues

EIGHTH CIRCUIT RULES THAT NLRB ERRED BY INVALIDATING EMPLOYMENT AGREEMENTS REQUIRING INDIVIDUAL ARBITRATION

July 5, 2016 by Carlton Fields

We previously reported on a federal circuit split that has developed over the enforceability of arbitration provisions waiving class actions in employment agreements. Compare December 19, 2013 (D. R. Horton) and November 9, 2015 (Murphy Oil) with June 6, 2016 (Lewis). The Eighth Circuit recently fortified its position on the side of holding that such class waivers are enforceable. Specifically, the Eighth Circuit analyzed whether the NLRB erred by finding that a mandatory individual arbitration clause in an employment agreement violated sections 7 and 8(a)(1) of the National Labor Relations Act by (1) requiring the employee to arbitrate “[a]ll claims, disputes, or controversies” related to employment; (2) waiving the employee’s right to maintain a class action; and (3) allegedly leading employees to believe that they could not file a grievance with the National Labor Relations Board.

Following a prior ruling of the Eighth Circuit as well as rulings by the Fifth Circuit in D.R. Horton and Murphy Oil, the court held that the employer “did not violate section 8(a)(1) by requiring its employees to enter into an arbitration agreement that included a waiver of class or collective actions in all forums to resolve employment-related disputes.” The Court did find, however, that NLRB properly ruled that the language of the arbitration clause, which included a broad requirement that “[a]ll claims, disputes, or controversies arising out of, or in relation to” employment with the company “shall be decided by arbitration,” was overly broad and should have contained language informing the employee that they retained the rights to file charges with the NLRB. Cellular Sales of Missouri, LLC v. National Labor Relations Board, No. 15-1620 (8th Cir. June 2, 2016).

This post written by Barry Weissman.
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COURT GRANTS MOTION TO STAY ACTION PENDING ARBITRATION, AND FOUND THAT ISSUE OF WHETHER ARBITRATION CLAUSE ALLOWS FOR CLASS ARBITRATION IS QUESTION FOR ARBITRATOR, NOT COURT

June 29, 2016 by Carlton Fields

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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NINTH CIRCUIT REMANDS DISPUTE OVER ARBITRATION, FINDING THAT THIRD PARTY MAY BE ABLE TO ASSERT ARBITRATION PROTECTIONS

June 22, 2016 by Carlton Fields

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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NINTH CIRCUIT AFFIRMS DISTRICT COURT’S DECISION THAT BANKRUPTCY COURT DID NOT ABUSE ITS DISCRETION IN DENYING MOTION TO COMPEL ARBITRATION

June 8, 2016 by John Pitblado

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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CIRCUIT SPLIT DEVELOPS OVER THE ENFORCEABILITY OF CLASS WAIVERS IN EMPLOYMENT AGREEMENTS

June 6, 2016 by Carlton Fields

Affirming a district court’s denial of a motion to compel arbitration, the United States Court of Appeals for the Seventh Circuit has held unenforceable a provision of an employment agreement mandating that wage-and-hour claims could be brought only through individual arbitration and that employees waived “the right to participate in or receive money or any other relief from any class, collective, or representative proceeding.” The provision further provided that if the waiver provision was unenforceable, “any claim brought on a class, collective, or representative action basis must be filed in a court of competent jurisdiction.” Employees were not permitted to opt out of this provision; it was a requirement of continued employment. The Court found the waiver of collective action prohibited by the National Labor Relations Act (“NLRA”), and rejected the contention that the case involved any conflict between the NLRA and the Federal Arbitration Act (“FAA”). This decision appears to conflict with decisions of the Second, Fifth, Eighth and Ninth Circuits, laying the potential basis for the review of this issue by the Supreme Court.

The Court found that the contractual waiver of the right to proceed in a collective manner was an unlawful restriction of the exercise by the employee of the right to collective action protected by section 7 of the NLRA, a right it termed substantive and “at the heart” of the purpose of the NLRA rather than a procedural right. Addressing the employer’s contrary interpretation of section 7, the Court found persuasive interpretations of the scope of the protections of section 7 by the National Labor Relations Board, which the Court found to be “a sensible way to understand the statutory language, and thus we must follow it.”

The Court then rejected the employer’s assertion that the case involved a conflict between the NLRA, as it interpreted it, and the FAA, as interpreted by the Supreme Court. The Court reasoned that since the contractual provision at issue is unlawful under section 7 of the NLRA, “it is illegal, and meets the criteria of the FAA’s savings clause for nonenforcement.” The FAA’s savings clause provides that agreements to arbitrate “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” Stating that finding the NLRA in conflict with the FAA “would render the FAA’s savings clause a nullity,” the Court rejected the contention that its decision created a Circuit split, contending that none of the opinions from the other four Circuits “has engaged substantively with the relevant arguments.” Regardless of the analytical claim, the result of the Seventh Circuit’s opinion does conflict with the result of the decisions of the other Circuits on the same issue, and accords the FAA a different role and emphasis than do the opinions of other Circuits. Lewis v. Epic Systems Corp., No. 15-2997 (7th Cir. May 26, 2016).

This post written by Rollie Goss.
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