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Contract Interpretation

Fifth Circuit Suggests Question of Class Arbitrability Was for Arbitrator Not Court

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The Fifth Circuit has suggested that the question of class arbitrability was for the arbitrator, not the court, based on the language of the arbitration clause at issue. The court ultimately concluded, however, that it did not need to reach that issue because the appellant challenging the arbitrator’s conclusion that class arbitration was available forfeited the argument.

Roy Conrad initiated arbitration against his employer Sun Coast Resources Inc. regarding purported violations of the Fair Labor Standards Act. The arbitrator concluded that the parties’ agreement “clearly provide[d] for collective actions.” Sun Coast moved to vacate that determination, but the district court rejected Sun Coast’s arguments. The Fifth Circuit affirmed.

The court explained that although there was a presumption that class arbitrability is a question for the court, “the arbitration agreement … appear[ed] to assign the question of class arbitrability to the arbitrator rather than to the court.” The arbitration clause covered “any dispute concerning the arbitrability of any such controversy or claim” and incorporated the American Arbitration Association rules for arbitration. Those provisions “strongly indicate[d] that the parties bargained for the arbitrator to decide class arbitrability.”

The Fifth Circuit nevertheless found it unnecessary to decide that issue. Sun Coast had forfeited its argument that the arbitrator invaded the province of the court by failing to raise that argument before the arbitrator and then failing to properly raise it before the district court.

In fact, Sun Coast had “affirmatively agreed that the arbitrator should decide whether collective proceedings were appropriate.”

The court also refused to vacate the arbitrator’s award on the merits. It concluded that the arbitrator interpreted the agreement and focused on the arbitration clause’s text, which was sufficient regardless of whether the arbitrator’s decision was in fact correct.

Sun Coast Resources, Inc. v. Conrad, No. 19-20058 (5th Cir. Apr. 16, 2020).

SDNY Concludes Arbitrators Did Not Exceed Authority in Interpreting Product Pollution Liability Exception to Policy’s Pollution Exclusion

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Petitioner sought to vacate an arbitration award, arguing that the arbitration panel exceeded its authority in interpreting the terms of an insurance policy when it determined that certain claims fell within the policy’s product pollution liability exception to the pollution exclusion. The court found that the petitioner did not demonstrate that the panel manifestly disregarded the terms of the policy: first, the arbitration agreement specifically instructed the panel to interpret the terms of the policy and to determine whether and to what extent the respondent’s losses were excluded by the pollution exclusion or restored by the production pollution liability exception; second, the text of the policy served as the basis for the award, reflecting that the panel did not disregard its terms; and third, the panel explained that the product pollution liability exception only granted coverage for pollution that satisfies the exception’s three requirements, and the court could not review the merits of the panel’s contract interpretation. Accordingly, the award was confirmed.

HDI Global SE v. Phillips 66 Co., No. 1:20-cv-00631 (S.D.N.Y. May 12, 2020).

Court Compels FMLA Employment Dispute to Arbitration, Finding That Arbitration Agreement Delegated Arbitrability to Arbitrator and Agreement Appeared Not to Be Void or Unconscionable

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A former executive and in-house lawyer for the Miami Heat basketball franchise sued the team for allegedly violating her rights under the Family and Medical Leave Act when she was terminated from her employment. The Heat filed a motion to compel arbitration, which the plaintiff opposed. First, the plaintiff contended that the arbitrability of the dispute was for the court, not the arbitrator. The court disagreed, holding that, while the agreement did not contain an express delegation clause, the agreement’s incorporation of the American Arbitration Association rules served to delegate the issues regarding the validity of the arbitration agreement to the arbitrator.

The plaintiff also argued that the agreement was void as against public policy, contending that the agreement’s provisions for the arbitrator to award reasonable fees to the prevailing party and for each party to be responsible for one-half of any administrative costs imposed by the AAA precluded her from vindicating her complete rights under the FMLA. Although the court did not need to decide this issue – having already found that arbitrability was delegated to the arbitrator – the court found that even if the fees and costs provision was unenforceable due to a failure to provide the plaintiff with remedies fully consistent with the FMLA, the provision was not the essence of the parties’ agreement and was therefore severable.

The plaintiff also contended that the agreement was unconscionable because the Heat allegedly did not permit her time to review the agreement, seek legal counsel, or negotiate the terms. The court rejected this argument finding that the plaintiff failed to provide any evidence to “explain any specific reason she felt rushed to sign the agreement, had no ability to negotiate it, or lacked employment alternatives.” The court further rejected the plaintiff’s argument that the agreement was substantively unconscionable because it required her to arbitrate all her claims, “while only requiring the Defendant to arbitrate counterclaims that it ‘is or should be aware [of] at the time a demand for arbitration is made.'” The court explained that the plaintiff overlooked the provision in the agreement that required “that any claims ‘arising in the workplace environment’ be subject to arbitration.” “Certainly,” the court concluded, the agreement was not “outrageously unfair” and did not “otherwise shock the judicial conscience.” The court compelled arbitration and dismissed the case.

Yakovee v. Miami Heat L.P., No. 1:20-cv-20540 (S.D. Fla. Apr. 30, 2020).

Court Compels Arbitration Based on Merger Clause Incorporating Separate Agreement Into Contract Containing Arbitration Clause and Rejects Argument That Delay Precluded Arbitration

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The U.S. District Court for the Middle District of North Carolina has compelled arbitration over a party’s objection that the dispute at issue was not within the scope of the arbitration clause and that arbitration was precluded by the opposing party’s failure to seek it sooner. The court concluded that a merger clause in the contract amendment containing the arbitration clause and the broad language of the arbitration clause rendered the dispute about a separate agreement incorporated into the amendment and subject to the arbitration clause and ruled that there was no actual prejudice to preclude the invocation of the arbitration clause.

In concluding that delay did not preclude arbitration, the court found significant the fact that the party opposing arbitration had agreed in a Rule 26(f) report to allow the opposing party to file a motion to compel, which greatly undermined the party’s prejudice argument.

North Carolina Mutual Life Insurance Co. entered into a coinsurance agreement with Max Re Ltd. pursuant to which Max Re and later a successor agreed to reinsure certain liabilities in North Carolina Mutual policies. North Carolina Mutual and Max Re’s successor subsequently entered into a novation agreement with Port Royal Reassurance Company SPC Ltd. pursuant to which Port Royal replaced Max Re’s successor as reinsurer. The parties also entered into an amendment to the coinsurance agreement that contained an arbitration clause and a merger clause related to the coinsurance agreement. The amendment also incorporated a trust agreement related to the reinsurance obligations of the various parties to the amendment.

In September 2016, North Carolina Mutual filed suit claiming mismanagement and misappropriation of trust assets in violation of the trust agreement. The parties engaged in settlement negotiations, and several parties reached an agreement in March 2017. The court then stayed the remaining portion of the action until September 2018. The settlement agreement, however, fell apart and the court lifted its stay in April 2018. North Carolina Mutual subsequently filed an amended complaint, which Port Royal answered, that invoked the arbitration clause as an affirmative defense. More than a year later, the parties filed their Rule 26(f) report. The parties agreed in that report that Port Royal could file a motion to compel arbitration by a certain date. Port Royal thereafter filed its motion to compel.

North Carolina Mutual opposed Port Royal’s motion, arguing that (1) its claims against Port Royal were not within the scope of the arbitration clause and (2) Port Royal was in “statutory default” and could not invoke the arbitration clause because years had elapsed since the action was filed.

The Middle District of North Carolina rejected both arguments.

First, the court concluded that North Carolina Mutual’s claims, which related to the trust agreement, were within the scope of the amendment’s arbitration clause. That clause was broad and encompassed “any dispute or claim arising out of or relating to” the parties agreement, which included the trust agreement because of the amendment’s merger clause, which evidenced an “intent … to ‘roll up’ several separate agreements [including the trust agreement] into one integrated contract.”

Second, the court explained that in order to preclude arbitration based on “statutory default,” the party objecting to arbitration had to establish “actual prejudice.” The court analyzed two factors to determine whether such prejudice existed: (1) the degree of Port Royal’s delay in seeking arbitration; and (2) the nature and extent of Port Royal’s litigation activities. Although the court recognized that this action had been pending for years, it noted that the case’s history included a settlement agreement and a stay. The court also emphasized that North Carolina Mutual agreed in the Rule 26(f) report that Port Royal could file a motion to compel arbitration, which “greatly undermine[d] [North Carolina Mutual’s] claim of prejudicial delay.” Port Royal’s litigation activity, meanwhile, was limited to filing answers, participating in a pretrial conference, and moving to compel.

The court also rejected North Carolina Mutual’s argument that the court should deny arbitration because North Carolina Mutual would have to prosecute litigation and arbitration simultaneously if the court compelled arbitration. The court noted that North Carolina Mutual “took on that risk when it brought its claims in federal court while being party to a contractual agreement with a mandatory arbitration provision.”

North Carolina Mutual Life Insurance Co. v. Stamford Brook Capital, LLC, No. 1:16-cv-01174 (M.D.N.C. Apr. 10, 2020).

Utah Court Stays Claims in Litigation Pending Completion of Arbitration

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After the plaintiffs filed a fourth amended complaint, certain defendants sought to compel arbitration and stay further federal court proceedings. The plaintiffs did not oppose the motions, which argued that the subject agreements contained broad arbitration clauses, which required arbitration based on the plaintiffs’ claims in the lawsuit. The court concurred, granting all three motions to compel and staying the claims against the defendant-movants pending the completion of arbitration.

J. White, L.C. v. Wiseman, No. 2:16-cv-01179 (D. Utah Apr. 9, 2020).