Arbitration Process Issues

On June 25, 2012 and July 7, 2014, we reported on the issue of waiver of representative claims under California’s Private Attorneys General Act of 2004 (“PAGA”). In Iskanian v. CLS Transportation of Los Angeles, LLC, the California Supreme Court held that a representative claim under PAGA was not waivable. Following a district court’s dismissal of a claim under PAGA following a motion to compel arbitration, the United States Court of Appeals for the Ninth Circuit was asked to decide whether the California rule from Iskanian was preempted by the Federal Arbitration Act (“FAA”). The Ninth Circuit held that it was not.

The case involved a dispute regarding overtime wages between a former employee and Luxottica Retail North America, Inc. Prior to the California Supreme Court’s holding in Iskanian, Luxottica moved to compel arbitration under a dispute resolution agreement, and the district court agreed, dismissing the case to arbitration. However, in so doing, the district court reached a holding that ultimately was in conflict with Iskanian, which was decided during the pendency of the appeal. Finding that, among other purposes, the purpose of PAGA was to “permit aggrieved employees to act as private attorneys general to collect civil penalties for violations of the Labor Code,” the Ninth Circuit held that the FAA did not preempt the Iskanian rule because its saving clause permits invalidation by “generally applicable contract defenses, such as fraud, duress, or unconscionability,” and that the Iskanian rule was one of those generally applicable contract defenses that may be persevered by the savings clause. The court then found that the Iskanian rule expresses no preference regarding whether such representative claims must be litigated or arbitrated, and, therefore, it did not conflict with the FAA because it did not “conflict with arbitration.” Sakkab v. Luxottica Retail North America, Inc., No. 13-55184 (9th Cir. Sep. 28, 2015).

This post written by Zach Ludens.

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On interlocutory appeal, the Second Circuit affirmed a district court decision denying arbitration because a later-signed compensation agreement did not retroactively apply as it contravened the intent of a prior independent contractor agreement.

Plaintiff-Appellees Timothy Pratt, William Burrell (“plaintiffs”) and others brought a putative class action suit against Cellular Sales of New York and its parent company (together “Cellular”) for a denial of compensation and other benefits as plaintiffs were considered independent contractors instead of employees. Cellular required plaintiffs to create a separate corporate entity and also sign an independent sales agreement before acting as a representative to sell Verizon Wireless services. Cellular later hired plaintiffs as full-time employees and where the parties executed a new compensation agreement, which contained an arbitration provision. At issue was whether plaintiffs were required to arbitrate claims that occurred prior to the new compensation agreement.

Plaintiffs argued that the compensation agreement should not be applied retroactively and only prospectively. Defendants argued that the compensation agreement did not contain an “express temporal limitation” and therefore could apply to claims prior to the memorialization of the compensation agreement. The court noted that the plaintiffs and Cellular had an evolving relationship, whereby Cellular only started to provide employee benefits to plaintiffs after the new compensation agreement was executed. Additionally, the court noted that Cellular “affirmatively stated that [plaintiffs] were not employees for over a year, it rings hollow for them to now argue that the parties intended the word “employment” in the Compensation Agreements to apply retroactively as to this dispute.” For these and other reasons, the court denied Cellular’s motion to compel arbitration. Holick v. Cellular Sales of New York, LLC, No. 14-4323 (2nd Cir. Sept. 22, 2015).

This post written by Matthew Burrows, a law clerk at Carlton Fields in Washington, DC.

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A Second Circuit 3-judge panel affirmed a district court decision denying a request for declaratory and injunctive relief while subsequently compelling arbitration in a licensing infringement suit. On appeal, LG Electronics, Inc. and its US affiliate (together “LG”) alleged that Wi-LAN, Inc. and its US affiliate (together “Wi-LAN”) waived their right to arbitrate and further alleged that Wi-LAN should not be allowed to arbitrate the parties’ patent licensing agreement (“PLA”) while also litigating the infringement suit.

The panel considered three factors to determine whether Wi-LAN waived its right to arbitrate the PLA agreement, specifically: “(1) the time elapsed from when litigation was commenced until the request for arbitration; (2) the amount of litigation to date, including motion practice and discovery; and (3) proof of prejudice.” Considering these factors, the panel determined that LG did not suffer from either substantive prejudice or prejudice based on cost or delay. The panel noted that LG had not yet produced discovery and the litigation’s limited motion practice mostly occurred after Wi-LAN’s arbitration demand. Additionally, Wi-LAN’s two week demand for arbitration was not sufficient to cause delay.

Finally, the court considered LG’s claim splitting argument noting that the “doctrine does not bar arbitration of claims or defenses that the parties have agreed to arbitrate, while litigating overlapping claims or defenses that the parties have not agreed to arbitrate.” Citing Supreme Court precedent, the court found that because the parties had agreed to arbitrate the PLA, arbitration is appropriate to determine whether the agreement is effective. LG Electronics, Inc. v. Wi-LAN USA, No. 14-3035 (2nd Cir. Sept. 10, 2015).

This post written by Matthew Burrows, a law clerk at Carlton Fields in Washington, DC.

See our disclaimer.