Contract Interpretation

Third Circuit Addresses Interplay Between LMRA and FAA and Affirms Arbitration Award in Favor of Union Under Collective Bargaining Agreement

March 31, 2020 by Michael Wolgin

The case relates to the disposition of accrued vacation time of unionized nurses after a new employer (Prospect) assumed a collective bargaining agreement. Prospect construed the collective bargaining agreement differently than the prior employer and refused to allow more than 200% of the annual vacation time limit. An arbitrator ultimately decided in favor of the nurses’ ability to maintain the full amounts of their previously accrued vacation time, determining that the collective bargaining agreement did not curtail the nurses’ right to the full amount of their accumulated leave. The arbitrator further found that Prospect assumed the collective bargaining agreement and that Prospect, therefore, was obligated to honor the excess accumulated leave. After the district court upheld the arbitration award, Prospect appealed to the Third Circuit.

As an initial matter, the Third Circuit found that Prospect’s attempt to vacate the award was timely, rejecting the union’s argument that the state 30-day statute of limitations period authorized by the Labor Management Relations Act applied. Because Prospect was entitled to sue under the Federal Arbitration Act, which applies to collective bargaining agreements, it could rely on the lengthier three-month limitations period of the FAA.

Next, the Third Circuit rejected Prospect’s three arguments attempting to show that the award should be vacated under the FAA. First, the court rejected Prospect’s argument that the award was in excess of the arbitrator’s powers because the arbitrator failed to arguably interpret the collective bargaining agreement. The court found that the arbitrator’s ruling could be supported by a canon of contract construction and that “[w]hether or not that is the best reading of the CBA, it is certainly sufficient to uphold the arbitrator’s award.” Second, the court rejected Prospect’s argument that the arbitrator manifestly disregarded federal labor law pertaining to successor employers. Because the arbitrator “did not foreclose the possibility that Prospect, as a successor employer, could have, as an initial condition of employment, capped the nurses’ carry-over of vacation time” but, instead, found only that there was “no evidence that Prospect did so in time” it was not a manifest disregard of the principles of successor employment. And third, the court rejected Prospect’s argument that the arbitrator was guilty of misconduct in “refusing to hear evidence pertinent and material to the controversy” about a similar National Labor Relations Board decision in a different case. The Third Circuit ruled that the evidentiary ruling was “not patently incorrect,” and it was “certainly not an error that deprived Prospect of a fair hearing.” The Third Circuit, therefore, affirmed the order confirming the award.

Prospect CCMC LLC v. Crozer-Chester Nurses Association, Nos. 19-1439 & 19-1440 (3d Cir. Feb. 26, 2020).

Court Upholds Arbitration Provision Despite Allegations of Fraud in Contract’s Execution

March 10, 2020 by Michael Wolgin

The dispute involved the potential trade-in of a car and the purchase of a pickup truck by two customers at a car dealership. During the course of the transaction, one of the customers signed a document that he later learned was a contract including an arbitration provision. Before the transaction was completed, the customers had second thoughts and requested the return of their trade-in and deposit. The dealership refused, insisting that the customers had a binding contract to buy the truck. The customers sued the dealership and certain employees, alleging common law fraud and violations of state consumer protection laws. The defendants moved to dismiss and compel arbitration.

The court granted the motion to compel arbitration and stayed the case. As to the customer who signed the contract containing the arbitration provision, the court found that, although the customer contended that he was deceived into signing the contract, the arbitration provision would be enforced. The provision included a delegation of issues involving arbitrability to the arbitrator. Upon review of New Jersey and federal case law, the court held that unless a plaintiff challenges the validity of the arbitration provision itself, the dispute over the validity of the contract as a whole must be arbitrated. The court found that “precedent compels only one conclusion,” namely, that the arbitrator must decide the validity of their sales contracts and the arbitrability of the dispute.

The court also rejected the argument that the court should permit discovery on the issue of whether the signing customer was fraudulently induced into signing the contract. The court observed, “Importantly, [the customer] is arguing he was fraudulently induced into entering the entire contract, and not just the arbitration provision. A challenge based on fraud in the inducement of the whole contract (including the arbitration clause) is for the arbitrator, while a challenge based on the lack of mutuality of the arbitration clause would be for the court.”

Last, the court stayed the second customer’s claims that were not subject to arbitration because if “the arbitrator finds that the contract, including the arbitration agreement, is invalid, then he will likely return to litigate in this Court, where his action is stayed. In the event that this occurs, it would be sensible for [the two customers] to litigate their claims together, as they initially attempted to do, to avoid inconsistent rulings.” The court therefore stayed the entire case.

Lomonico v. Foulke Management Corp., No. 1:18-cv-11511 (D.N.J. Feb. 20, 2020).

Court Declines to Compel Arbitration Based on Third-Party Agreement

March 5, 2020 by Brendan Gooley

The U.S. District Court for the Southern District of Florida recently refused to compel arbitration in a putative class action based on an arbitration clause a plaintiff agreed to on a third party’s website he used to book a rental car from the defendant.

Ancizar Marin used Orbitz to book a rental car from rental car company Sixt. During that process, he agreed to Orbitz’s terms of use. Those terms included an arbitration clause that provided: “You and Orbitz agree that any and all Claims will be resolved by binding arbitration, rather than in court.” Marin subsequently picked up and returned his rental car from Sixt. After he returned his car, he received an email claiming that the car had been damaged. Marin filed a putative class action against Sixt claiming violations of Florida’s Deceptive and Unfair Trade Practices Act and Consumer Collection Practices Act. Sixt sought to compel arbitration.

The district court denied Sixt’s motion.

The court explained that Sixt was not a party to the arbitration clause between Orbitz and Marin. The clause said: “You and Orbitz agree …” Nor was Sixt a third-party beneficiary to that agreement. Although Sixt argued that it was a “supplier” under Orbitz’s terms of use and that this rendered it a beneficiary, the court concluded that Sixt was included in a different category of companies that worked with Orbitz (travel services), and that category was not mentioned in the arbitration clause. Therefore, Sixt could not invoke the arbitration clause.

Even if Sixt could invoke the arbitration clause, the clause did not cover the dispute between Marin and Sixt. Rather, it “cover[ed] disputes between Orbitz’s customers and Orbitz.” Marin’s dispute concerned alleged misconduct by Sixt unrelated to Orbitz.

Calderon v. Sixt Rent A Car, LLC, No. 0:19-cv-62408 (S.D. Fla. Feb. 12, 2020).

Southern District of Texas Compels Arbitration Over Insured’s Claim that Arbitration Clause was Unconscionable

March 3, 2020 by Brendan Gooley

The U.S. District Court for the Southern District of Texas recently compelled arbitration despite an insured’s claim that the operative arbitration clause was unconscionable because it required the arbitration panel to comprise “persons employed or engaged in a senior position in Insurance underwriting or claims.” In a rare decision, the court also compelled arbitration with respect to brokers who created the proposal for the policy at issue even though they were not parties to the arbitration clause because the plaintiff’s claim against the brokers was inherently intertwined with and relied on the policy that was subject to the arbitration agreement.

Four commercial buildings owned by the Bhandara Family Living Trust were damaged during Hurricane Harvey. The buildings were insured by a policy that allocated premiums and liabilities among a number of insurers, including Certain Underwriters at Lloyd’s. The trust made a claim under the policy. When the claim was denied, the trust filed suit against the insurers and brokers who prepared the proposal for the policy in Texas state court. The trust claimed that the insurers had breached the policy, acted in bad faith, and violated the Texas Insurance Code and that the brokers had violated the code by failing to disclose an allegedly unconscionable arbitration clause in the policy. The insurers invoked the arbitration clause, but the trust refused to arbitrate and asserted the clause was unconscionable. The insurers removed the case to federal court under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

The district court compelled arbitration with respect to the trust’s claims against both the insurers and brokers.

The trust claimed that the arbitration clause was unconscionable and therefore null and void because it provided that “the Arbitration Tribunal shall consist of persons employed or engaged in a senior position in Insurance underwriting or claims.” The trust argued that the clause “guarantee[d] a biased decisionmaker” and that the clause’s invocation of New York law precluded damages permitted by Texas law. The court rejected that argument. It distinguished cases in which the arbitrators had to be selected from a list pre-selected by one side and noted that, in this case, the trust was free to select an arbitrator. The arbitrator would not be inherently biased merely because they were engaged in a senior position in underwriting or claims: The trust was “not limited to employees of insurance companies.” It “could select a broker or agent in a senior position in a business that represents insureds in making claims,” for example.

The trust’s challenge to New York law and the limits that the choice-of-law provision imposed on damages was “collateral to and [did] not call into question the parties’ agreement” to arbitrate. Regardless, the trust was free to make its arguments on that front to the arbitrator.

With respect to the claims against the brokers, the court noted that nonsignatories are rarely allowed to invoke an arbitration clause. However, one situation in which it is appropriate to allow a nonsignatory to do so is when “the signatory to a written agreement containing an arbitration clause must rely on the terms of the written agreement in asserting its claims against the nonsignatory.” In this case, the trust’s claims against the insurers and brokers were “substantially intertwined.” Indeed, the core claim against the brokers concerned the allegedly unconscionable arbitration clause itself. “Because [the trust’s] claim against the Broker Defendants relie[d] on and presumes the existence of the terms of the Policy, arbitration [was] required” as to that claim.

Bhandara Family Living Trust v. Underwriters at Lloyd’s, London et al., No. 4:19-cv-00968 (S.D. Tx. February 20, 2020).

Former Employees Not Bound by Their Former Union’s Arbitration Agreement

February 20, 2020 by Benjamin Stearns

The former employees of a waste management company sued their former employer for violations of various federal and state labor laws. The company sought to compel arbitration and dismiss the complaint, relying on an arbitration agreement into which the former employees’ union had entered with the company more than 10 months after the former employees had left the company and commenced litigation. The court found that the determination regarding whether the employees were parties to the agreement was a “threshold inquiry [and] is the type usually decided by a court unless the parties have ‘clearly and unmistakably’ agreed to arbitrate that issue.” Finding no clear agreement to consign such threshold inquiries to the arbitrator, the court went on to hold that the arbitration agreement applied only to “present and future employees,” not past employees, and therefore did not bind the plaintiffs. The court distinguished Raymond v. Mid-Bronx Haulage Corp., No. 1:15-cv-05803 (S.D.N.Y. Nov. 2, 2017), in which the court held that a union contract may require past employees to submit their claims to arbitration. Raymond‘s holding was conditioned on the employee still being a member of the union. In addition, the arbitration agreement in Raymond explicitly applied to “past employees.” Here, no such explicit language was included in the arbitration agreement, nor were the past employees still members of the union. As such, they were not parties to, and therefore not bound by, the agreement to arbitrate. The court therefore denied the motion to compel arbitration.

Orlando v. Liberty Ashes, Inc., No. 1:15-cv-09434 (S.D.N.Y. Jan. 15, 2020).