Contract Interpretation

First Circuit Vacates Order Compelling Arbitration Over Arbitrator Selection Clause

July 28, 2020 by Brendan Gooley

The First Circuit vacated an order compelling arbitration after finding that the arbitrator selection clause was unconscionable. The court nevertheless remanded the case to the district court to determine if the selection clause was severable from the remainder of the arbitration agreement and whether arbitration could therefore proceed. The court also rejected several other challenges to the district court’s arbitration order, including claims based on a forum selection clause, a claim of waiver, and an argument that a statutory claim was not subject to arbitration.

Austin Trout, a boxer from New Mexico, sued the World Boxing Organization (WBO), which is based in Puerto Rico, in New Mexico state court for removing him from the rankings for a certain weight class. The WBO successfully removed the case and had it transferred to the U.S. District Court for the District of Puerto Rico. The WBO then moved to compel arbitration. While its motion was pending, Trout engaged in discovery, which prompted the WBO to do the same. The district court granted the WBO’s motion. It then denied Trout’s motion for reconsideration, which asserted for the first time that the WBO’s discovery precluded arbitration.

Trout appealed, and the First Circuit vacated and remanded.

The court first rejected Trout’s argument that the WBO’s championship regulations precluded arbitration because of a clause allowing claims to be brought in Puerto Rico state or federal court. The regulations contained two clauses. The first, a forum selection clause, provided that claims could only be maintained in Puerto Rico’s state or federal courts. The second, an arbitration clause, provided that “the sole and exclusive remedy for any claim” was an arbitration proceeding through the WBO’s Appeals and Grievance Committee. Trout claimed the former clause rendered the latter clause a nullity. The First Circuit disagreed, concluding that the former clause was more expansive than the latter and that the regulations read as a whole provided that only Puerto Rico courts could hear claims not subject to the arbitration clause.

The court also rejected Trout’s claim that the WBO waived its right to seek arbitration by (1) removing and transferring the case; and (2) engaging in discovery. The First Circuit explained that (1) the WBO did not waive its rights under the forum selection clause to select the forum to have its motion to compel decided; and (2) Trout’s discovery argument was improperly raised because it was first raised in a motion for reconsideration and it was meritless in any event because the WBO’s discovery “was not of a kind or of a scope that made it an abuse of discretion for a district court not to find an implicit waiver based on litigation conduct.”

The First Circuit then rejected Trout’s contention that his claim under the Muhammad Ali Boxing Reform Act was not subject to arbitration. Although the court recognized that Congress can provide that certain statutory claims are not subject to arbitration, the act’s text did not “explicitly preclude[] arbitration” and Trout’s claim therefore failed.

The First Circuit agreed with Trout’s final claim that the WBO’s arbitrator selection provision was unconscionable under Puerto Rico contract law, however. That clause allowed the WBO’s president to designate three arbitrators. Even though the arbitrators could not be members of the WBO’s executive committee, they could, for example, be the president’s “direct aides.” Nevertheless, the First Circuit noted that the WBO’s regulations contained a savings clause that provided that “[i]f any of these Rules are determined to be unenforceable, the balance of these Rules shall remain in full force and effect.” Thus, the court left it to the district court to determine whether that clause allowed arbitration to proceed under a different selection process.

Trout v. Organización Mundial de Boxeo, Inc., No. 19-1068 (1st Cir. July 10, 2020).

Ninth Circuit Remands Order Denying Motion to Compel Arbitration That Failed to Address the Effect of Delegation Clause in Parties’ Arbitration Agreement

July 15, 2020 by Michael Wolgin

The delegation clause in the parties’ arbitration agreement provided that any “questions regarding the validity or enforcement of these Dispute Policies shall be delegated and submitted to the arbitrator, including whether the scope of the claim or dispute is subject to arbitration, and whether these Dispute Policies are enforceable as a matter of law.” The district court, however, ignored the clause and considered the validity and enforceability of the arbitration agreement by analyzing the unconscionability of portions of the agreement other than the delegation clause. That, the Ninth Circuit explained, was error.

The Ninth Circuit explained that the plaintiffs in the proceedings before the district court did not challenge the enforceability or validity of the delegation clause. Instead, the plaintiffs had contended that the defendants abandoned any argument relying on the delegation clause because they did not adequately raise the issue. The Ninth Circuit, however, disagreed that the defendants abandoned it, noting that the defendants had relied on the delegation clause in their briefing in support of their motion to compel arbitration. The Ninth Circuit also rejected the plaintiffs’ argument that the district court had found that the defendants had waived the delegation clause, observing that the lower court had actually indicated that it was uncertain as to whether waiver had occurred.

The Ninth Circuit concluded that the plaintiffs failed to meet their burden of proving a defense to the enforceability of the delegation clause. However, the Ninth Circuit ruled, because the district court did not address the issue, it would vacate the order and remand the case to allow the district court to provide “a full analysis,” which the Ninth Circuit held might assist the court in its review.

Cipolla v. Team Enterprises, LLC, No. 19-15964 (9th Cir. June 24, 2020).

Sixth Circuit Affirms Ruling That Arbitrator Is to Determine Arbitrability of Employment Dispute Between Franchise Employees and Domino’s

July 9, 2020 by Nora Valenza-Frost

The plaintiffs filed a class action against Domino’s, alleging that the company’s franchise agreement violated federal antitrust law as well as state law. Domino’s moved to compel arbitration, and the plaintiffs opposed on the basis that Domino’s couldn’t enforce the arbitration agreements because Domino’s hadn’t signed the agreements; only their franchises had. However, incorporation of the AAA rules in the plaintiffs’ agreements provided “clear and unmistakable” evidence that the parties agreed to arbitrate “arbitrability.”

The plaintiff offered several arguments against such conclusion: (1) the arbitration agreement incorporates the AAA rules only as to claims that fall within the scope of the agreement; (2) the relevant AAA rule addresses only the “existence, scope, or validity” of his agreement, not whether non-signatories may enforce arbitration agreements under the FAA; (3) even if the relevant AAA rule gives arbitrators the power to decide the question of “arbitrability,” it does not give them the exclusive power to do so; (4) Sixth Circuit precedent has held, in certain instances, that incorporation of the AAA rules does not provide “clear and unmistakable” evidence that the parties agreed to arbitrate “arbitrability”; (5) the incorporation of the AAA rules is not “clear and unmistakable” evidence that the parties agreed to arbitrate “arbitrability”; and (6) a ruling for Domino’s would mean that anyone could force him to arbitrate “arbitrability” no matter how frivolous the argument for arbitration. The circuit court did not find these arguments availing and affirmed the Eastern District of Michigan’s ruling referring the matter to arbitration.

Blanton v. Domino’s Pizza Franchising LLC, No. 19-2388 (6th Cir. June 17, 2020).

Fourth Circuit Declines to Compel Arbitration Due to Missing Arbitration Agreements

July 8, 2020 by Brendan Gooley

The Fourth Circuit Court of Appeals recently declined to compel arbitration in a Fair Labor Standards Act (FLSA) class action with respect to more than 70 employees for whom the defendant employer could not produce signed arbitration agreements due to apparent poor record-keeping.

April Hill worked for Employee Resource Group LLC (collectively with other defendants “ERG”), which operated Applebee’s restaurants in several states. Hill filed a putative FLSA class action. In response, ERG moved to enforce arbitration agreements it purportedly had with all its employees. In support of that motion, ERG submitted agreements containing arbitration clauses for a number of employees. It also admitted, however, that it could not locate signed arbitration agreements for a number of plaintiffs, including Hill. It therefore submitted an affidavit from its director of human resources, David Bates. Bates averred that all ERG employees are required to sign agreements containing arbitration clauses when they are hired, described the training that managers received requiring them to have new employees sign such agreements, and explained that the fact that some agreements could not be found was the result of record-keeping errors.

The district court granted ERG’s motion to compel arbitration with respect to the employees for whom ERG had produced signed arbitration agreements, but denied it with respect to the more than 70 other employees for whom ERG could not produce such agreements.

The Fourth Circuit affirmed. Applying state law that required a heightened standard for establishing the existence and terms of a contract through parol evidence and the summary judgment standard, the court concluded that no reasonable trier could conclude that ERG had presented sufficient evidence with respect to the individuals for whom it could not produce signed arbitration agreements. Bates’ affidavit described ERG’s general human resources policies. It did not describe the actual hiring process experienced by the class members in question. Nor was there any other evidence describing the processes for those employees. The arbitration agreements ERG produced for some 780 other employees did not cure this deficiency. ERG argued that the large number of agreements confirmed Bates’ sworn statement that all employees signed arbitration agreements. There was no evidence, however, of how many employees ERG had during the relevant time period. It could have been 900 or 9,000, which doomed ERG’s argument.

Hill v. Employee Resource Group, LLC, No. 18-2009 (4th Cir. June 9, 2020).

Ninth Circuit Affirms Ruling That Successor Is Bound to Collective Bargaining Agreement

July 7, 2020 by Nora Valenza-Frost

“Although a predecessor collective bargaining agreement does not automatically bind a ‘perfectly clear’ successor, it may if the employer expresses an intent to be bound.” Here, Vectrus Systems Corp. entered into an agreement with Teamsters Local 631, wherein it promised to accept the terms and conditions of the preexisting collective bargaining agreement before staffing its operations. Thus, the fact that the staffing determination that gave rise to the dispute took place before the effective date of the collective bargaining agreement did not divest the arbitrator of the authority to arbitrate the dispute. The District of Nevada’s denial of Vectrus’ petition to vacate the arbitration award was affirmed.

Vectrus Systems Corp. v. Teamsters Local 631, No. 19-16640 (9th Cir. June 11, 2020).