Arbitration Process Issues

EIGHTH CIRCUIT: DELAY IN ASSERTING RIGHT TO ARBITRATE AND USING LITIGATION MACHINERY RESULTS IN WAIVER

May 23, 2016 by Carlton Fields

The plaintiff, a terminated employee, had signed a two year employment agreement and a separate arbitration agreement with a home décor company. The plaintiff was terminated after six months and sued the defendant in Minnesota state court for wrongful termination. After defendant removed the case to federal court in Minnesota it filed an answer with various affirmative defenses but never mentioned the arbitration agreement. Additionally, the parties engaged in various motion practice and meetings but the arbitration agreement was never raised. The defendant raised the separate arbitration agreement for the first time, eight months after the initiation of the lawsuit and after it lost a motion to transfer the matter to the Eastern District of California. The lower court denied the motion to compel arbitration on the ground of waiver. On appeal, the Eighth Circuit affirmed, finding that the defendant knew of the right to arbitrate, acted inconsistently with the right, and prejudiced the plaintiff causing him to incur litigation costs. The court noted that the defendant had filed the Joint Rule 26(f) report requesting that the court set the matter for trial, and then engaged in motion practice attempting to transfer venue. The actions of the defendant in using the litigation machinery until it lost, clearly prejudiced the Plaintiff and constituted waiver of the right to arbitrate. Messina v. North Central Distributing, Inc., Case No. 15-2323 (8th Cir. May 10, 2016).

This post written by Barry Weissman.

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THIRD TIME’S THE CHARM: EASTERN DISTRICT OF MICHIGAN REMANDS ARBITRATION AWARD FOR FAILING TO ALLOW PARTY TO PRESENT EVIDENCE

May 19, 2016 by John Pitblado

On motion to vacate an arbitration award, a Michigan federal court held that the award lacked fundamental fairness and remanded to the same arbitrator with instructions to allow Plaintiffs their “opportunity to present pertinent and material evidence.”

The parties had agreed to submit to the arbitrator the threshold issue of whether a certain indemnity agreement was enforceable. However, the arbitrator did not address Plaintiffs’ alternative claims that if the indemnity agreements were unenforceable: (1) Plaintiffs were fraudulently induced to enter into an agreement Defendant believed to be void; and, (2) Defendant should be estopped from denying its indemnification obligations, as Plaintiffs relied to their detriment on Defendant’s indemnification promises.

For additional background and appellate history, see our prior post here.

Bernard J. Schafer, et al. v. Multiband Corp., No. 12-cv-13152 (USDC E.D. Mich. April 27, 2016).

This post written by Nora A. Valenza-Frost.

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NEW YORK APPELLATE DIVISION REVERSES ORDER COMPELLING ARBITRATION AND REINSTATES COMPLAINT BASED UPON TERMINATED AGREEMENT’S FORUM SELECTION CLAUSE

May 16, 2016 by John Pitblado

New York’s First Department finds there was no clear manifestation parties had abandoned a forum selection clause by a later agreement which mandated arbitration in London. In 2000, the parties entered into two agreements: (1) the Quennington Agreement (with a U.S. forum selection clause); and, (2) the First Aurdeley Agreement (with an England forum selection clause). In 2009, the parties entered into two more agreements: (1) the Second Aurdeley Agreement (with an arbitration clause), which referenced both of the 2000 agreements and a merger clause, but only expressly terminated the First Aurdeley Agreement; and (2) the Quennington Termination Agreement (with an arbitration clause), which terminated the Quennington Agreement.

Plaintiffs commenced a lawsuit in New York Supreme Court for breach of fiduciary duty and breaches of the various agreements. Defendants moved for a stay of the action and an order compelling arbitration in London, as some of the claims arose under the 2009 agreements which both provided for arbitration. Alternatively, Defendants argued “only an arbitration tribunal could determine whether the forum selection clause” controlled.

On appeal, the Plaintiffs argued the claims alleged in the complaint related to conduct under the 2000 Quennington Agreement – which provided for litigation in the United States – and that they did not nullify the agreement’s forum selection clause “since they did not explicitly disavow it.” The Court agreed: “[t]he mere termination of a contract containing such a clause does not mean that the clause is not still effective”. At best, the parties intended only to arbitrate disputes that arose after 2009, when the agreements containing arbitration clauses were entered into. The Court also found the legal relationship established by the 2000 agreements survived, and since the complaint alleges a breach of fiduciary duty born out of that relationship, the forum selection clause survived. Moreover, any claims under the 2009 agreements were “inextricably bound together” with any claims subject to arbitration, and thus litigation of all claims was appropriate. Lastly, as to the issue of arbitrability, that question is for the court, as the parties did not “clearly and unmistakably” agree that the arbitrators should decide that issue.

Garthon Business Inc., et al. v. Kirill Ace Stein, et al., Index No. 653715/14 (N.Y.A.D. 1st Dep’t April 26, 2016).

This post written by Nora A. Valenza-Frost.

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FOURTH CIRCUIT CONSIDERS WHETHER ARBITRATION AGREEMENT WAS BINDING WHERE PARTIES MODIFIED CONTRACT THROUGH CONDUCT

May 12, 2016 by Carlton Fields

In early April, the Fourth Circuit Court of Appeals considered whether an arbitration agreement was “a written provision” for purposes of the Federal Arbitration Act where the parties modified the contract through their conduct. The case arose from an automobile loan, where the loan stated that “any change to this contract must be in writing and we must sign it.” After the borrower was having difficulties making payments, CitiFinancial sent an Amended Agreement for the borrower’s review and signature. In the Amended Agreement, CitiFinancial included an arbitration agreement and a class waiver. The borrower signed the Amended Agreement, but CitiFinancial raised the amount charged per month by 86¢–which the borrower proceeded to pay.

Sometime later, the borrower defaulted on the auto loan, and the new servicer repossessed the vehicle. The borrower initiated a putative class action lawsuit, and the loan holder sought to compel arbitration. The lower court compelled arbitration, but then dismissed the suit so that an immediate appeal could be taken. On appeal, the Fourth Circuit had to address whether there was an agreement between the parties and whether the arbitration clause was “in writing” for purposes of the FAA.

Under the principle of estoppel, the Fourth Circuit held that a proper contract existed between the parties. Moving on to the consideration of “in writing,” the Fourth Circuit held that because “the arbitration agreement was in writing and [the borrower] assented to be bound by that agreement when she made payments in the amount CitiFinancial requested, it does not matter, for purposes of enforceability under the FAA, that she also assented to other terms that may not have been in writing.” The Fourth Circuit reasoned that all that is required is that the arbitration agreement be in writing—not that there be any written assent to these obligations, following the lead of the Second, Sixth, and Eleventh Circuits. As such, the Fourth Circuit affirmed the dismissal so that the case could be taken to arbitration.

Galloway v. Santander Consumer USA, Inc., Case No. 15-1392 (4th Cir. Apr. 8, 2016).

This post written by Zach Ludens.

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FEDERAL COURTS COMPELS ARBITRATION OF CAPTIVE INSURANCE DISPUTE

May 11, 2016 by Carlton Fields

Plaintiffs Capstone Associated Services, Ltd. And Capstone Associated Services (Wyoming), Limited Partnership (collectively, “Capstone”) brought suit against various defendants concerning the use of and rights to certain intellectual property related to a captive insurance arrangement. The parties agreed to mediate their dispute, resulting in the execution of a Mediated Settlement Agreement (“MSA”) that covered all of the claims between the parties except the intellectual property claims pending the lawsuit. The MSA contained an arbitration provision.

Thereafter, Capstone moved to compel arbitration under the MSA. After the arbitrator designated by the MSA declined his appointment, Capstone sought arbitration pursuant an arbitration agreement in an engagement letter that was part of the operative contract they and their attorneys (“Feldman”) entered into with the defendants as part of the captive insurance arrangement. Capstone argued that the affirmative defenses asserted by the defendants in the lawsuit were encompassed by the arbitration provision because those defenses challenged the propriety of the services provided by Capstone and Feldman under the engagement letter. The defendants opposed arbitration under the engagement letter, arguing that the parties’ claims and affirmative defenses were not arbitrable under the relevant provision.

Applying the standard set forth in the Federal Arbitration Act, the court denied Capstone’s motion to compel arbitration under the MSA, ruling that because the designated arbitrator declined his appointment, compelling arbitration in an alternative manner would be inconsistent with the express terms of the MSA’s arbitration agreement. However, the court granted Capstone’s motion to compel pursuant to the arbitration clause in the engagement letter, holding that the arbitrability of the parties’ claims and defenses were to be decided in arbitration, and not by the Court, under the terms of the operative clause. Capstone Associated Services, Ltd., et al. v. Organizational Strategies, Inc., et al., No. H-15-3233 (USDC S.D.Tex. Apr. 8, 2016).

This post written by Rob DiUbaldo.

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