Arbitration Process Issues

CALIFORNIA FEDERAL DISTRICT COURT COMPELS ARBITRATION IN REINSURANCE DISPUTE

December 23, 2014 by Carlton Fields

Randazzo Enterprises sued its reinsurer, Applied Underwriters Captive Risk Assurance Company, Inc. in California federal court over Applied’s calculation of premiums of the reinsurance agreement entered between them. Invoking the arbitration clause set forth in the reinsurance agreement, Applied filed a demand for arbitration and, in the pending federal case, moved to compel arbitration and to dismiss Randazzo’s complaint. The court determined it must first consider whether a valid arbitration clause exists and, if so, whether the arbitration encompasses the dispute at issue. To do so, the court found it must apply ordinary state law principles governing the formation and construction of contracts. Applying these principles to the facts before it, the court first rejected Randazo’s argument that the arbitration clause was unenforceable under Nebraska law which the parties agreed would govern. Nebraska law only applied to issues of substantive law and not to arbitration. Moreover, even if Nebraska law were to apply, it was preempted by the Federal Arbitration Act.

The court then turned to Randazzo’s argument that the arbitration agreement was unconscionable. Under California law, a contract must be unconscionable both procedurally and substantively in order to be rendered invalid. Here, because Randazzo had no opportunity to negotiate the arbitration provision, the agreement was an adhesion contract and therefore procedurally unconscionable. The Court then analyzed whether two specific provisions were substantively unconscionable. Under California law, a contract is substantively unconscionable when it is so one-sided that “it shocks the conscience.” The provision regarding the choice of arbitrator, requiring the arbitrators to be active or retired disinterested officials of insurance or reinsurance companies, was not substantively unconscionable. However, the provision which allowed only Applied to seek injunctive relief in Court was found substantively unconscionable, since it exceeded the rights afforded parties in an arbitration under California law and was so one-sided that it could not be justified as a legitimate commercial need. However, because California law permits a court to sever an unconscionable provision from an agreement, the parties’ agreement was not invalid because that one clause could easily be stricken without the need to reform the agreement. Finally, the court concluded that Randazzo’s claims related to the execution, delivery, construction or enforceability of the reinsurance contract, such that all of Randazzo’s claims were subject to arbitration. Randazzo Enterprises, Inc. v. Applied Underwriters Captive Risk Assurance Company, Case No. 5:14-CV-02374-EJD (USDC N.D. Cal. Dec. 11, 2014).

This post written by Leonor Lagomasino.

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COURT REJECTS MANIFEST DISREGARD OF LAW CLAIM

December 17, 2014 by Carlton Fields

A district court in Pennsylvania has denied a motion to vacate a prior arbitration award based on the arbitrator’s alleged manifest disregard of the law, and instead granted a motion to confirm the award in a case arising out of the termination of the claimant’s employment. The claimant, Mrs. Cartwright, contended that the arbitrators committed manifest disregard of the law when they dismissed her Title VII retaliation claim. The Court found that based on the evidence and testimony from the President and CEO the bank which had employed Mrs. Cartwright, Ms. Cartwright’s own efforts to hinder the company’s planned merger could well have been the reason for her firing. While the Court noted that evidence stood both for and against Ms. Cartwright’s claims, this fact did not mean “that particular claim was a ‘but for’ cause of her dismissal.”

Ms. Cartwright also contended that the arbitrators committed manifest disregard of the law when they awarded damages on her breach of contract claim but dismissed an additional fraud claim. The Court noted that fraud claims can be enmeshed with breach of contract claims. As both the fraud and breach of contract claims were based on the same set of facts, the arbitrators had a basis to bar the fraud claim. Cartwright v. Fidelity Bank, No. 2:12-cv-01502 (W.D.Pa. Sep. 24, 2014).

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

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NLRB REAFFIRMS ITS D.R. HORTON DECISION, RULING THAT EMPLOYMENT AGREEMENTS REQUIRING INDIVIDUAL ARBITRATION ARE UNLAWFUL

December 16, 2014 by Carlton Fields

On February 16, 2012, we reported on the National Labor Relations Board’s D.R. Horton decision, which ruled that arbitration agreements that are signed as a condition of employment and preclude employees from bringing joint, class or collective claims over working conditions are unlawful. Subsequently, that opinion was rejected by the Fifth Circuit Court of Appeals, on which we reported on December 19, 2013, and disagreed with by other courts. Notwithstanding these adverse court decisions, on October 28, 2014, the NLRB reaffirmed D.R. Horton, ruling that the arbitration agreements of Murphy Oil USA Inc., which barred employees from pursuing class actions, were unlawful. The majority held that Murphy Oil violated the National Labor Relations Act by requiring employees to arbitrate employment claims on an individual basis, and by seeking to enforce its agreements in court after the employee filed a Fair Labor Standards Act suit. While the dissent accused the NLRB of ignoring “clear instructions” from the U.S. Supreme Court about the interpretation of the NLRA and the FAA, the majority disagreed, although it acknowledged that its opinion was likely not “the last word on the subject.” Murphy Oil USA, Inc., Case No. 10-CA-038804 (N.L.R.B. Oct. 28, 2014).

This post written by Michael Wolgin.

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FEDERAL COURT ISSUES SUBPOENAS FOR USE IN FOREIGN ARBITRATION

December 11, 2014 by Carlton Fields

A federal judge in New Jersey recently granted an ex parte application for issuance of subpoenas for use in a London arbitration. The court’s basis for the ruling was 28 U.S.C.A. § 1782, the federal statute titled “Assistance to Foreign and International Tribunals and to Litigants Before Such Tribunals.” Without discussion, the court concluded that a proceeding before the London Maritime Arbitrators Association constitutes a “foreign tribunal” for the statute’s purposes. The court found that all of the statutory factors had been met and that the discretionary factors weighed in favor of issuing the subpoenas. In re Application of Owl Shipping, LLC & Oriole Shipping, LLC, No. 14-5655, 2014 WL 5320192 (D.N.J. filed Oct. 17, 2014).

This post written by Catherine Acree.

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COURT REVERSES DENIAL OF PETITION TO COMPEL ARBITRATION

December 8, 2014 by Carlton Fields

In Mahmud v. Ralph’s Grocery Company, No. B237636 CA 2/4 (Nov. 10, 2014), the California Second Appellate District reversed and remanded a trial court denying the petition of an employer (Ralph’s) to compel arbitration of a wage dispute with its former employee (Mahmud), which also includes certification of multiple classes of similarly situated Ralph’s employees. The California Second Appellate District relied upon the U.S. Supreme Court’s opinion in AT&T Mobility L.L.C. v. Concepcion, 563 U.S. ___,131 S.Ct. 1740 (2011), which effectively overruled Gentry v. Superior Court, 42 Cal.4th 443 (2007) and concluded that the National Labor Relations Act did not override the FAA. Furthermore, the Court determined that Mahmud would not prevail on demonstrating that Ralphs’ arbitration policy was unconscionable on both procedural or substantive grounds because she presented no evidence of the circumstances surrounding her application for employment or her decision to sign the arbitration agreement and failed to cite to any provisions of the arbitration policy to explain how the arbitration procedures set forth in the policy demonstrate unconscionability.

This post written by Kelly A. Cruz-Brown.

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