Arbitration Process Issues

NINTH CIRCUIT DISMISSES INTERLOCUTORY APPEAL OF ORDER DENYING MOTION TO STAY UNDER FEDERAL ARBITRATION ACT FOR LACK OF JURISDICTION

April 18, 2016 by Carlton Fields

Western Security Bank brought an action in the United States District Court for the District of Montana against certain doctors seeking to enforce commercial loan guaranties. The doctors asserted that a non-party, Meridian Surgical Partners, fraudulently induced them to guarantee the loan, and moved to stay the lawsuit pending the outcome of their separate arbitration with Meridian. The doctors based their motion, in part, on Section 3 of the Federal Arbitration Act, which provides that a court may stay an action where an issue involved is referable to arbitration pursuant to a written agreement. Significantly, however, the doctors did not actually seek to compel Western Security to arbitrate its claims against them.

After the district court denied the motion to stay, the doctors filed an interlocutory appeal under Section 16 of the Act, which permits an appeal “from…an order…refusing a stay of any action under section 3.” Relying on precedent from other federal circuit courts, the U.S. Court of Appeals for the Ninth Circuit dismissed the appeal for lack of jurisdiction. Specifically, the circuit court found that in order to invoke appellate jurisdiction under § 16(a), a party must “either move to compel arbitration and stay litigation explicitly under the FAA, or must make it plainly apparent that he seeks only the remedies provided for by the FAA—namely, arbitration rather than any judicial determination.” The court held that while the doctors styled their motion as one brought under Section 3, the motion plainly did not seek relief under the Act, as the doctors made clear they did not seek to compel Western Security to arbitrate any of the claims brought against them in the district court. Western Security Bank v. Winzenreid, No. 15-cv-35617 (9th Cir. Mar. 14, 2016).

This post written by Rob DiUbaldo.

See our disclaimer.

NINTH CIRCUIT: ARBITRATION PROVISION CONTAINED IN SHAM AGREEMENT IS NOT ENFORCEABLE

April 12, 2016 by Carlton Fields

The Ninth Circuit reversed a district court ruling that had compelled arbitration, holding that a party may not enforce an arbitration agreement where the clause is contained in a nonbinding contract. The parties had entered into two contracts in Italy. The first contract was a commercial franchise agreement containing an arbitration clause. The second contract disclaimed any liability on the parties resulting from the first contract until a new franchise agreement was signed in the United States. The party seeking to avoid arbitration argued that the first contract was signed to allow them to obtain proper visas into the United States and not actually confer any contractual rights. The district court ruled that “the issue of whether the broad arbitration clause contained in the first contract survives after the second contract should be submitted to the arbitrator.” The Ninth Circuit, however, disagreed. Turning to traditional principles of contract interpretation, the appellate court held that the parties did not manifest express or implied consent to be bound to the original contract, because the original contract was a sham. The court concluded: “Because we find that the document the parties described as the Commercial Contract was a sham, the arbitration clause is no more enforceable than any other provision in that document.” Casa Del Caffe Vergnano S.P.A. v. ItalFlavors, LLC, Case No. 13-56091 (9th Cir. Mar. 15, 2016).

This post written by Joshua S. Wirth.

See our disclaimer.

SECOND CIRCUIT RULES ON ARBITRABILITY QUESTION

March 30, 2016 by Carlton Fields

After a de novo review of the District Court’s ruling denying a bank’s motion to compel arbitration, the United States Court of Appeals for the Second Circuit reversed and remanded a district’s court order. The plaintiff argued that there was a factual issue whether a valid overdraft protection agreement existed and this needed to be determined by the court prior to order the matter to arbitration. However, this argument “put the cart before the horse.” As far as the motion to compel arbitration, the court considered whether a valid arbitration clause existed and if so, was the dispute within the scope of the arbitration agreement. There was a valid arbitration agreement and the dispute was covered by it. Therefore, the issue of whether there was a valid overdraft protection should be decided pursuant to the arbitration agreement. The matter was reversed and remanded to the district court to comply with the order. Hatemi v. M&T Bank, No. 14-4338-cv (2d Cir. Mar. 4, 2016).

This post written by Barry Weissman.

See our disclaimer.

UK COURT ADDRESSES ARBITRATOR’S PURPORTED CONFLICT OF INTEREST

March 28, 2016 by Carlton Fields

A dispute arose over a project in Iraq between a British Virgin Island claimant and a Malaysian defendant with a sole Canadian QC arbitrator. The claimant’s challenge of the arbitrator’s award was based upon bias because of the arbitrator’s purported conflict of interest. The basis of the conflict was that members of the arbitrator’s firm regularly represented the claimant’s affiliate, deriving substantial financial income from the representation. The arbitrator neither advised nor received income from the firm’s representation of the affiliate. Further, for the past dozen years or so, the arbitrator served almost solely as an international arbitrator, did not participate in partnership matters, nor really represented clients and is treated by the firm as a sole practitioner. In accepting the appointment, the arbitrator never disclosed that his firm represented the affiliate because the firm’s conflict system never disclosed the representation and he was not aware of it.

In finding that there was no possibility of bias, the court considered these facts: (i) the arbitrator was a partner in a law firm; (ii) the law firm earns a substantial amount of money from another entity that has the same corporate parent as the party in the arbitration; (iii) the party in the arbitration was not advised by the firm or the arbitrator; (iv) the arbitrator operated as a sole practitioner only using the firm for secretarial and administrative support; and (v) the arbitrator made all disclosures of which he was advised, although the firm’s conflict system had not advised him of its representation of the affiliate. The court then examined the 2014 International Bar Association Guidelines on Conflicts of Interest in International Arbitrations, pointing out that these were only guidelines and not the force of law. While the Guidelines contain a section entitled “Non-Waivable Red List” which encompassed this situation, the court took issue with them since he believed that this situation was clearly one that should be waivable. Finding that the challenge must fail, the award was confirmed. In the High Court of Justice Queen’s Bench Division Commercial Court, W Limited v. M SDN BHD, Neutral Citation Number [2016] EWHC 422 (Comm).

This post written by Barry Weissman.

See our disclaimer.

NINTH CIRCUIT REMANDS PAGA CASES TO LOWER COURTS TO DETERMINE THE PROPER FORUMS FOR ARBITRATION OR LITIGATION

March 23, 2016 by Carlton Fields

We previously reported on California courts refusing to enforce waivers contained in arbitration agreements of representative claims under California’s Private Attorneys General Act of 2004 (“PAGA”). These cases have generally held that rights provided under PAGA were not waivable (the “Ishkanian rule”) and not preempted by the Federal Arbitration Act (“FAA”). Two recent cases within the Ninth Circuit upheld these rulings, but held that arbitration agreements containing provisions purporting to waive representative claims do not automatically render the whole agreement unconscionable; the purported waivers may be severed, if possible. Hopkins v. BCI Coca-Cola Bottling Co. of Los Angeles, Case No. 13-56126 (C.D.Ca. Feb. 19, 2016); Sierra v. Oakley Sales Corp., Case No. 13-55891 (9th Cir. Feb. 18, 2016).

This post written by Joshua S. Wirth.

See our disclaimer.