Arbitration Process Issues

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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FAILURE TO PAY COSTS DID NOT MATERIALLY BREACH ARBITRATION AGREEMENT IN LIGHT OF LEGITIMATE DISPUTE AS TO THE FORUM

May 25, 2016 by Carlton Fields

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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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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