Arbitration Process Issues

EIGHTH CIRCUIT UPHOLDS ARBITRATION AGREEMENT IN ABSENCE OF ACTUAL PROOF OF UNCONSCIONABILITY DUE TO COST

June 30, 2015 by Carlton Fields

The Eighth Circuit affirmed a decision by the U.S. District Court for the Eastern District of Missouri which rejected the contention that an arbitration agreement was unconscionable, and unenforceable under the Federal Arbitration Act, because (1) the prohibitively high costs associated with an individual arbitration proceeding prevented plaintiffs from pursuing their claims; and (2) it included a waiver of punitive damages and attorneys’ fees. In this case, a class of cleaning business franchisees sued a franchisor and related companies for RICO violations. Plaintiffs also contended that some defendants were non-signatories and therefore could not enforce the arbitration agreement. In response, defendants moved to compel individual arbitration citing the arbitration provision language in the respective franchise agreements.

Plaintiffs supported their claims with several figures including average loss per plaintiff, a range of individual filing fees, average daily fees for arbitrators in four cities, and a likely hearing length of three days. Altogether, plaintiffs asserted that their individual arbitration costs would exceed their respective damages. Ultimately, the court found that plaintiffs’ proof was insufficient because (1) the arbitrations would not take place in any of the four cities for which daily fees were provided and (2) plaintiffs did not submit individual affidavits demonstrating their inability to afford arbitration costs. The court emphasized that rather than a hypothetical inability to pay, plaintiffs must provide specific evidence of their individual inability to pay the actual arbitration fees likely to be incurred in order to overcome the federal policy favoring arbitration. The court also rejected plaintiffs’ claim that even if enforceable, the arbitration agreement prohibited non-signatories from compelling arbitration. The court also held that the arbitration agreement language was broad enough to include various non-signatory third parties, and deemed them capable of enforcing the arbitration provision. Torres v. Simpatico, Inc., No. 14-1567 (8th Cir. Mar. 25, 2015).

This post written by Rollie Goss.

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FIFTH CIRCUIT AFFIRMS INTERPRETATION OF TWO AGREEMENTS AND DENIAL OF MOTION TO COMPEL ARBITRATION

June 25, 2015 by Carlton Fields

The Fifth Circuit addressed the question of whether a subcontract between the parties requires arbitration, a question that turned on the interpretation of the term “contract documents” in the subcontract. TRC Environmental Corporation hired LVI Facilities Services, Inc. as a subcontractor in an effort to decommission a power plant in Austin, Texas. The Fifth Circuit agreed with the district court’s interpretation that (1) the phrase “Contract Documents” in the subcontract, includes the subcontract itself; and (2) claims arising under the Contract Documents requires an alternative dispute resolution process as laid out in the separate Project Agreement, which did not require arbitration. Based on this interpretation of the two documents, the Fifth Circuit held, the district court correctly denied LVI’s motion to compel arbitration. TRC Environmental Corp. v. LVI Facility Servs., Inc., No. 14-51269 (5th Cir. May 22, 2015).

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

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ADMINISTRATIVE CLOSING OF EMPLOYMENT DISCRIMINATION CASE SUBJECT TO ARBITRATION AGREEMENT BARS APPELLATE REVIEW

June 18, 2015 by John Pitblado

In Walker v. TA Operating, LLC et. al., Case No. 14-41046 (5th Cir. May 22, 2015), the Fifth Circuit Court of Appeals dismissed an appeal of an employment discrimination case subject to an arbitration agreement due to lack of jurisdiction. In the underlying case, the district court granted the defendant’s motion to compel arbitration and administratively closed the case because the district court determined that the parties were subject to a valid and applicable arbitration agreement. The district court’s decision was dictated by the Federal Arbitration Act (the “FAA”), which grants district courts two powers: 1) the authority to issue an order directing that arbitration proceed in the manner provided for in such agreement; and 2) the authority to stay an arbitrable proceeding pending the outcome of the contractually-required arbitration. On appeal, the Fifth Circuit dismissed the cased due to lack of jurisdiction because an order by the district court administratively closing a case is tantamount to a stay, and bars appellate review. The Fifth Circuit explained that a district court has jurisdiction over final decisions of the district court and that Congress explicitly provided that appellate courts lack jurisdiction over a district court order granting a stay of any action under section 3 of the FAA or directing arbitration to proceed under section 4 of the FAA.

This post written by Kelly A. Cruz-Brown.

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TENTH CIRCUIT AFFIRMS LIFT OF ARBITRATION STAY FOR FAILURE TO PAY REQUISITE FEES

June 17, 2015 by John Pitblado

In late May, the Tenth Circuit Court of Appeals affirmed a district court decision to lift an arbitration stay for Plaintiff Pre-Paid Legal Services, Inc. (“Pre-Paid”) as Defendant Todd Cahill (“Cahill”) failed to pay his respective share of the arbitration fees.

Pre-Paid sells legal service contracts whereby members deal with a network of attorneys. Cahill was a sales associate for Pre-Paid. His employment contract contained an arbitration provision as well as several non-compete provisions. Pre-Paid sued Cahill alleging that Cahill used information from his prior employment to recruit new associates after he left the company. Cahill removed the state filed action to federal court whereby the action was stayed pending arbitration. Cahill failed to pay his respective share of the arbitration fees, however, and the arbitration was cancelled. On appeal, Pre-Paid argued that the appellate court did not have jurisdiction to hear the appeal. Cahill argued that arbitration must be heard on the merits before any stay could be lifted.

Federal arbitration laws requires a court to stay an action pending arbitration provided that “the applicant for the stay is not in default in proceeding with the arbitration.” The court reasoned that Cahill’s failure to pay the required arbitration fees made him in default and therefore the federal stay guarantee should not apply. The court also found that they had jurisdiction to review the district court’s lift to stay the proceedings, citing to circuit court and supreme court authorities.

Pre-Paid Legal Serv., Inc. v. Cahill, No. 14-7032, (10th Cir. May 26, 2015)

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

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COURT DENIES MOTION TO COMPEL ARBITRATION, FINDING TERMS OF AGREEMENT TO ARBITRATE INADEQUATELY DISCLOSED

June 4, 2015 by Carlton Fields

A New York district court denied defendant Gogo LLC and Gogo Inc. (collectively “Gogo”) motions to transfer venue, compel arbitration, and dismiss for lack of standing in a lawsuit relating to internet services.

Plaintiffs filed a putative class action against Gogo alleging common law breach of the implied covenant of good faith and fair dealing, unjust enrichment, and violation of various consumer protection statutes. The lawsuit stems from the purchase of wireless internet connectivity services, available in airports and aboard air flights. Plaintiffs’ allege that Gogo mislead customers into purchasing a single one-month wireless internet service subscription, but then automatically renewed those services without obtaining their signatures or authorization.

The court looked into whether plaintiffs were given effective notice of the terms and conditions for their online purchases. As such, the offeror, in this case Gogo, “must show that a reasonable person in the position of the consumer would have known about what he was assenting to.” The court found that Gogo did not effectively draw plaintiffs’ attention to their terms and conditions nor did they provide their terms and conditions to purchasers via email or other methods of delivery. The court finally addressed Gogo’s jurisdictional argument. Gogo alleged that because plaintiffs were eventually fully reimbursed for subsequent internet charges, they lacked standing to sue. The court, citing Second Circuit precedent, found that since plaintiffs have “a practical stake in the dispute,” they continue to have standing to sue. Berkson v. Gogo, Case No. 14-CV-1199 (USDC E.D.N.Y. April 9, 2015).

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

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