Arbitration Process Issues

FIFTH CIRCUIT: DIVERSITY JURISDICTION DETERMINED BY AMOUNT SOUGHT IN ARBITRATION, NOT AMOUNT OF AWARD

May 3, 2016 by Carlton Fields

In a recent interlocutory appeal of a matter involving an arbitration of a claim for $80 million, but in which only $10,000 was awarded, the Fifth Circuit held that the amount in controversy for purposes of establishing diversity jurisdiction over petitions to confirm or vacate arbitration awards, is the amount sought in the arbitration, and not the amount ultimately awarded. In choosing the “demand approach” over the “award approach,” the court analyzed both positions, and noted that treatment by other circuits has varied. The Fifth Circuit found that the demand approach is the better of the two because it takes into account the true scope of the dispute between the parties. The court also reasoned that the demand approach avoids the application of two conflicting jurisdictional tests for the same controversy (jurisdiction for petitions to compel arbitration are based on the amount of the demand). Further, the court explained, the award approach might promote frivolous motions to compel, where demands for less than the jurisdictional requirement may be filed in federal court and then stayed pending the result of the arbitration. Last, the court explained, the demand approach permits jurisdiction consistent with that which would be present if the case were litigated rather than arbitrated. Pershing, LLC v. Kiebach, Case No. 15-30396 (5th Cir. Apr. 6, 2016).

This post written by Barry Weissman.

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SEVENTH CIRCUIT HOLDS NO AGREEMENT ENTERED INTO WITH RESPECT TO ON-LINE CONTRACT

April 28, 2016 by Carlton Fields

This case arises from an appeal from an Illinois federal district court, which ruled that TransUnion, a credit reporting agency, did not give a putative class of its website users proper notice of an arbitration agreement, and thus no contract was formed.

By way of background, lead plaintiff Sgouros filed suit in Illinois federal court, alleging that he had paid nearly $40 for a credit report, including a numbered score, through TransUnion’s website, which was “materially misleading” and “essentially worthless” because TransUnion did not base the score on the same information on which lenders rely. TransUnion’s terms of use on its website were provided for in a Service Agreement, which contained an arbitration clause and class action waiver. Thus, TransUnion moved to compel arbitration, arguing that Sgouros’ claim is subject to arbitration and that he can only bring his claim as an individual, not as part of a class. The Illinois district court ruled that the parties did not form a binding contract, including the agreement to arbitrate.

In its decision, the Seventh Circuit analyzed TransUnion’s website and the user experience. It noted that the user was required to take steps through a scroll-through menu, with a button to click through to authorize TransUnion to request the user’s financial information. However, the court noted that the website did not call the user’s attention to the Service Agreement, which contained the arbitration clause “buried at page 8”, nor did the scroll-through buttons advise the user of the agreement or that he or she was agreeing to its terms. Thus, the court noted that there was no notice to the TransUnion customers that they were agreeing to the terms of the Service Agreement, and that it was not enough that the website provided a scroll-through menu and a hyperlinked copy of the agreement. Rather, according to the court, TransUnion was required to notify its customers that the purchase was subject to the terms of the agreement.

Thus, the Seventh Circuit agreed with the district court order, holding that no agreement that contained an arbitration clause was formed, and it thus affirmed the denial of TransUnion’s motion to compel arbitration. Sgouros v. TransUnion Corp., No. 15-1371 (7th Cir. Mar. 25, 2016).

This post written by Jeanne Kohler.
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CALIFORNIA SUPREME COURT ENFORCES ARBITRATION AGREEMENT, FINDING IT IS NOT UNCONSCIONABLE

April 26, 2016 by Carlton Fields

In this case, a former employee of a retail store appealed to the California Supreme Court seeking reversal of an appellate court decision which found that an arbitration agreement in her employment application was not unconscionable.

An employee originally filed a suit against Forever 21 and individual defendants for harassment, race and sex discrimination and retaliation. The defendants moved to compel arbitration based on the arbitration agreement in the employment application which was executed by the employee. The California trial court denied the motion, finding that the agreement was unconscionable. A California Court of Appeal reversed, finding that there was no substantive unconscionability in the agreement. The California Supreme Court granted the employee’s petition to review, and affirmed the Court of Appeal’s judgment.

In its decision, the California Supreme Court found that an arbitration agreement, which authorized the parties to seek provisional relief in a judicial action while still compelling the remainder of the dispute to arbitration, was enforceable, noting that the clause “does no more than restate existing law . . . [and] does not render the agreement unconscionable.” The court also held that an arbitration agreement remains enforceable when the claims it specifically lists that are subject to arbitration are claims that would likely be brought by an employee because the employer’s claims, even though not listed, would also be subject to arbitration. It also found that a provision in the arbitration agreement that required both parties to agree that during arbitration “all necessary steps will be taken” to protect from disclosure the company’s trade secrets and proprietary and confidential information, was not unduly one-sided. Lastly, the court held that the fact that the arbitration agreement stated that the arbitration would be conducted under the model rules of the American Arbitration Association, and the employee was not provided with a copy of the AAA rules, did not make the agreement procedurally unconscionable.

Thus, the California Supreme Court concluded that the arbitration agreement was not unconscionable and was enforceable. Baltazar v. Forever 21, Inc. et al., No. S208345 (Cal. Mar. 28, 2016).

This post written by Jeanne Kohler.
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FOURTH CIRCUIT COURT OF APPEALS DECIDES ISSUE OF CLASS ARBITRABILITY IS A QUESTION FOR THE COURT, NOT ARBITRATOR

April 25, 2016 by Carlton Fields

A South Carolina federal court dismissed a petition to compel class arbitration, reasoning “that whether the arbitration clause permits class arbitration is a simple contractual interpretation issue, and because the question ‘concerns the procedural arbitration mechanisms available to the [respondent]’, the threshold inquiry is a question for the arbitrator rather than for the court.” The Fourth Circuit Court of Appeals reversed the decision, and found the question of whether a sales agreement authorized class arbitration should be determined by the court. Other circuit courts have similarly held.

Relying on Supreme Court precedent, the Court identified two categories of threshold questions: (1) procedural questions to be decided by the arbitrator and; (2) questions of arbitrability for the court. As to the latter category, whether or not the underlying controversy will proceed to arbitration on the merits is a question of arbitrability for the court to decide. Moreover, it cautioned that, “courts should not assume that the parties agreed to arbitrate arbitrability absent “clear and unmistakable evidence”.

The Court concluded by noting in class arbitrations, as compared to bilateral arbitrations, there are higher risks for defendants as the result of the limited scope of judicial review. While this is a cost defendants may be willing to accept in bilateral arbitration – since any errors impact only the limited size of the individual dispute – “betting the company” without such review “is a cost of class arbitration that defendants would not lightly accept.” Lastly, class arbitrations require more procedural formality, and thwart the benefits of arbitration by increasing cost and decreasing the speed of proceedings. Dell Webb Communities, Inc. v. Roger F. Carlson, No. 15-1385 (4^th Cir. Mar. 28, 2016).

This post written by Nora A. Valenza-Frost.
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ARBITRATOR, NOT COURT, MUST DETERMINE ARBITRABILITY OF DISPUTE UNDER REINSURANCE PARTICIPATION AGREEMENT

April 20, 2016 by Carlton Fields

Adopting in part a magistrate judge’s recommendation, a federal court in Maine recently held that the enforceability of an arbitration clause in a reinsurance agreement must be determined by an arbitrator, as opposed to a federal judge. Mountain Valley Property, Inc. and Applied Risk Services, Inc. entered into a reinsurance participation agreement that contained an arbitration clause which provided, among other things, that all disputes between the parties relating “in any way to the execution and delivery, construction, or enforceability” of the agreement be decided by binding arbitration. Applied Risk sought to arbitrate a dispute that arose between the parties. Mountain Valley opposed arbitration on the grounds that the subject clause was invalid under Nebraska law, and argued that the court (and not an arbitrator) should determine the validity of the clause.

Agreeing with the Magistrate Judge’s recommendation, the court found that “[b]y including the ‘enforceability’ of the agreement within the scope of arbitration, the parties clearly and unmistakably agreed to arbitrate the issue of arbitrability.” Therefore, the court held that the parties’ dispute, including the issue concerning the validity of the arbitration clause, must be referred to arbitration, and ordered a stay of the lawsuit. For reasons of judicial economy, the court also ordered a stay of the suit as between Mountain Valley and two other defendants that were not signatories to the operative agreement, pending the outcome of the arbitration between Mountain Valley and Applied Risk. Mountain Valley Property, Inc. v. Applied Risk Services, Inc., No. 15-cv-00187 (USDC D. Me. Feb. 25, 2016).

This post written by Rob DiUbaldo.

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