Arbitration Process Issues

On December 14, 2015, the U.S. Supreme Court applied its landmark Concepcion decision and reversed a California appellate court’s ruling that an arbitration clause containing a class arbitration waiver was unenforceable under state law. We previously provided an in-depth preview of this case after the Supreme Court had granted certiorari.

The case involved claims by two DirecTV customers who sought damages in California state court after being charged early termination fees following cancellation of their DirecTV service. DirecTV’s service agreements contained an arbitration provision that included a class arbitration waiver. The class arbitration waiver included a non-severability article, which nullified the entire arbitration provision in the event that the waiver is deemed unenforceable by the “law of your state.” At the time that the customers entered into their respective service agreements, California law made class-arbitration waivers unenforceable. In Concepcion, however, the U.S. Supreme Court subsequently ruled that the California law was preempted and rendered invalid by the FAA. Notwithstanding Concepcion, the California trial court here denied DirecTV’s motion to compel arbitration, applying the law of California that would exist without preemption by the FAA. A California appellate court then affirmed the decision.

Faced with the question of whether the “law of your state” should incorporate Concepcion, the U.S. Supreme Court has decided in the affirmative, ruling that California’s “interpretation of this arbitration contract is unique, restricted to that field” and is therefore preempted by the FAA as established in Concepcion. The Court found that the non-severability article was not ambiguous and did not provide for the application of “invalid state law.” The Supreme Court also reasoned that California law permits the Legislature to change law retroactively, which supports its determination that Concepcion had such retroactive effect here. The Court also found that “nothing in the Court of Appeal’s reasoning suggests that a California court would reach the same interpretation of ‘law of your state’ in any context other than arbitration,” which further supports FAA preemption here. The key to the Supreme Court’s analysis was a finding that California courts interpreted the language at issue in the manner here only in the context of arbitration agreements, which disadvantages arbitration interests only.  For these and other reasons, the Supreme Court reversed and remanded the California appellate court’s decision.

The Supreme Court’s ruling here furthers its record of enforcing arbitration provisions. This trend may continue, as the Court recently granted certiorari in another case in which the full question presented may be summarized as “whether California’s arbitration-only severability rule is preempted by the FAA,” which appears to present another “arbitration-only” interpretation of a contractual provision which disadvantages arbitration interests only.  DIRECTV, Inc. v. Imburgia, Case No. 14-462 (Dec. 14, 2015).

This post written by Matthew Burrows, a law clerk at Carlton Fields in Washington, DC.
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A California appellate court recently held in Garrido v. Air Liquide Industrial U.S. L.P that the rule set forth in Gentry v. Superior Court, 42 Cal.4th 443 (2007) remains valid so long as the Federal Arbitration Act (“FAA”) does not govern the dispute at issue. Gentry addresses class waivers contained within arbitration agreements that would “interfere with employees’ ability to vindicate unwaivable rights” and sets forth four factors a court should consider when deciding whether to uphold a class waiver.

In Garrido, a former employee filed a class action complaint against Air Liquide, alleging various Labor Code violations and unfair business practices. The trial court denied a motion to compel arbitration brought by Air Liquide, finding that the agreement’s class waiver provision was improper under Gentry’s four factors. Following the trial court’s ruling, the California Supreme Court held in Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal.4th 348, 364 (2014) that Gentry’s rule against employment class waivers was preempted by the FAA.

The Garrido appellate court found that the dispute was not subject to the FAA because Section 1 of the FAA exempts from coverage transportation workers. Further, it found that Gentry’s holding has not been overturned under California law in situations where the FAA does not apply. Accordingly, the appellate court affirmed the trial court, finding that the agreement’s class waiver provision was unenforceable.

Garrido v. Air Liquide Industrial U.S. LP, 246 Cal.App.4th 833 (2015).

This post written by Whitney Fore, a law clerk at Carlton Fields in Washington, DC.

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An Illinois federal court recently granted an insurer’s motion to compel arbitration of a dispute with its insureds and denied the insureds’ motion to dismiss and transfer venue.

This dispute arose under four written program agreements, each containing an arbitration clause. The insurer filed a single demand for arbitration with the American Arbitration Association (the “AAA”), alleging that the insureds failed to pay amounts due under the four program agreements. The insureds raised various objections to the arbitration demand, including that they were entitled to four separate arbitrations. The AAA ruled that the arbitration would continue as one arbitration, and the insureds appointed the sole arbitrator. Shortly thereafter, the insureds filed an action in Texas state court, seeking a Temporary Restraining Order (“TRO”) to stay the arbitration because it had been improperly consolidated. The Texas court granted the TRO, stating that the AAA had failed to follow the arbitration agreements by administering one proceeding, not four, and enjoined the AAA from administering the arbitration. The AAA removed the Texas action to federal court, and filed a motion to dismiss, to which the insureds did not file a response. After the TRO expired, the AAA attempted to resume administration of the arbitration, but the insureds would not participate in the arbitration and informed the AAA that their counsel could not communicate with the AAA given the pending Texas action. Thus, the insurer filed this action in Illinois, where the arbitration was pending, seeking to compel arbitration.

The Illinois federal court denied the insureds’ motion to dismiss and transfer venue, finding that the court had jurisdiction over the insureds as they agreed to arbitrate their disputes related to the program agreements in Illinois and that the venue for the motion to compel was also proper. As for the motion to compel arbitration, the court noted that under the Federal Arbitration Act, the question of whether a given dispute is arbitrable is decided by the courts, but all other disputes concerning the application of the arbitration agreement are for the arbitrators to decide. Thus, the court held that the propriety of consolidated arbitration proceedings is an issue of procedure for the arbitrator to decide, not the court. Thus, the court granted the insurer’s motion to compel arbitration, noting that the insureds’ only means of judicial review on the issue of consolidation is a motion to vacate the arbitration award after the final award is issued.

Zurich American Insurance Company, et al. v. Trendsetter HR, LLC, et al., No. 1:15-cv-08696 (USDC N.D. Ill. Nov. 16, 2015).

This post written by Jeanne Kohler.

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In a short handwritten ruling, a court recently denied Odyssey Reinsurance Company’s challenge to a replacement arbitrator appointed by its opponents, Certain Underwriters at Lloyds London Syndicate 53 and Reliastar Reinsurance Group. The parties had selected their arbitrators and were beginning the process of selecting an umpire, when Lloyd’s and Reliastar informed Odyssey that they had replaced their appointed arbitrator. Odyssey objected to the replacement arbitrator on the ground that the individual did not satisfy the requirements of the underlying arbitration agreements, which provided: “The arbitrators and umpire shall be officials of Insurance and or Reinsurance companies authorized to transact business in one or more states of the United States of America and writing the kind of business about which the difference has arisen.” Odyssey Re contended that, while the replacement arbitrator was an officer of a broker that had corporate affiliates that wrote the type of insurance business at issue in the arbitration, the arbitrator was not an officer of an actual insurance or reinsurance company. The court rejected Odyssey’s objection, ruling simply that the arbitrator “meets the qualifications” of the arbitration agreement. Odyssey Re v. Certain Underwriters at Lloyds London Syndicate 53 et al., Case No. 1:13-cv-09014 (USDC S.D.N.Y. Oct. 9, 2015).

This post written by Barry Weissman.

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