Contract Interpretation

Court Compels Arbitration of Balance Billing Dispute Under a California Health Plan, Severs Certain Unconscionable Provisions, and Rejects Class Arbitration Proceedings

February 18, 2020 by Michael Wolgin

A patient sued her health plan and the plan’s debt collector under various California and federal laws in connection with alleged attempts by the plan to unlawfully collect the balances of the plaintiff’s medical statements that were in excess of the insurance allowed amounts. The defendants moved to compel arbitration based on arbitration agreements that the plaintiff executed when she enrolled in the health plan from year to year beginning in 2012. The plaintiff, however, opposed arbitration, arguing that (1) the arbitration agreements did not comply with section 1363.1 of the California Health and Safety Code, which requires that an arbitration provision be “prominently displayed” and meet certain other conditions, and (2) the agreements were unconscionable.

The court rejected the plaintiff’s arguments. With respect to section 1363.1, the court found that it was preempted by the Affordable Care Act for the time period in which that law was applicable and that the plan’s arbitration disclosures complied with the law. And as to unconscionability, the court found that the agreements’ attorney fees and cost-splitting provisions were unconscionable, but these provisions could be severed from the arbitration agreements and would not preclude arbitration.

The plaintiff also argued that, if the court were to compel arbitration, it should be on a class basis because the arbitration agreements included references to “parties” asserting a claim (in plural form). The court, however, was not convinced. Relying on the U.S. Supreme Court’s Stolt-Nielsen decision and Ninth Circuit authority, the court held that even an ambiguous arbitration agreement did “not provide a sufficient basis to conclude that parties to an arbitration agreement agreed to” resolve their dispute in a class proceeding. The court therefore compelled individual arbitration.

Hunter v. Kaiser Foundation Health Plan, No. 3:19-cv-01053 (N.D. Cal. Jan. 17, 2020).

Eighth Circuit Reinstates Arbitration Award Stemming From Federal Crop Insurance Policy

January 28, 2020 by Benjamin Stearns

The Eighth Circuit reversed a district court decision vacating an arbitration award relating to a federal crop insurance policy issued through a standard reinsurance agreement with the Federal Crop Insurance Corp. (FCIC). The district court had ruled that the arbitrator exceeded his powers under the arbitration agreement by interpreting the crop insurance policy. Pursuant to FCIC regulations, the policy included a provision prohibiting the arbitrator from interpreting either the policy or FCIC procedures, and instead requiring the parties to obtain such an interpretation from the FCIC itself.

The Eighth Circuit found that the question whether the arbitrator was required to interpret the policy was not raised by either party until after the award had already been issued. Emphasizing that the courts are to “accord an extraordinary level of deference” to the arbitrator’s decision, the Eighth Circuit stated that an “arbitrator has not exceeded his powers where neither party suggested that a term of the policy was subject to interpretation, but the interpretation dispute instead arose after the arbitration proceedings.” The Eighth Circuit reversed and remanded, directing the district court to enter an order confirming the arbitration award.

Balvin v. Rain & Hail, LLC, No. 18-3018 (8th Cir. Dec. 2, 2019).

Court Finds No Manifest Disregard of the Law or Exceeding of Powers in Upholding Arbitration Award Related to Dispute Over Earn-Out Payment

December 18, 2019 by Benjamin Stearns

Markmidco S.àr.l., a Luxembourg company, sold to Zeta Interactive Corp. its interest in a customer relationship management business consisting of several companies that provided to retailers email and text message marketing, database management, and related services. The parties’ agreement called for several earn-out payments to be made upon the determination that the CRM business had surpassed certain revenue thresholds laid out in the contract. Zeta refused to make the first earn-out payment of $4 million, claiming the revenue threshold had not been reached as of the deadline. Markmidco disagreed and referred the parties’ dispute to an arbitrator. The arbitrator agreed with Markmidco and awarded it the earn-out payment.

The parties’ dispute then moved to federal court where Markmidco’s award was confirmed over several arguments from Zeta seeking its vacatur. Zeta argued that the parties’ contract called for a “manifest error” standard of review. However, the court held that the parties “cannot contract for more judicial review than the FAA and Convention grant them.” Zeta next argued that the award should be vacated due to the arbitrator’s manifest disregard of the law, but failed to identify any instance of the arbitrator ignoring the applicable law.

The court also denied Zeta’s claim that the arbitrator exceeded his powers, stating that his findings were reasonable interpretations based on analysis of specific provisions of the purchase agreement. When presented with an argument that an arbitrator has exceeded his powers, the “sole question” for the court is “whether the arbitrator (even arguably) interpreted the parties’ contract, not whether he got its meaning right or wrong.” As such, Zeta’s argument failed.

Zeta also argued that the grounds for vacatur stated in the Delaware Uniform Arbitration Act should apply rather than those provided by the Federal Arbitration Act because the parties’ contract included a choice-of-law provision selecting Delaware law. The court held that, under Third Circuit law, state law vacatur standards apply only when the parties express a clear intent to supplant the FAA standards with state law standards. A choice-of-law provision that applied broadly to the parties’ contract was not a sufficiently clear expression of the parties’ intent to opt out of the FAA scheme.

Lastly, Zeta argued that enforcement of the award was premature because other proceedings between the two parties were ongoing. The court held that Zeta’s claims in the collateral proceeding did not overlap with the issues submitted by the parties to the arbitrator. The court also held that issuing a stay or denying enforcement of the award at this time “would transform a summary proceeding into a protracted dispute,” contrary to the “basic purpose” of arbitration. The court ordered enforcement of the arbitration award.

Markdutcho 1 B.V. v. Zeta Interactive Corp., No. 1:17-cv-01420 (D. Del. Nov. 12, 2019).

Second Circuit Finds Arbitrator Within Authority to Bind Absent Class Members to Arbitration

December 11, 2019 by Nora Valenza-Frost

In reversing a New York federal court, the Second Circuit found the arbitration was within the arbitrator’s authority in binding absent class members to class proceedings because, by signing the operative arbitration agreement, the absent class members — employees of the defendant — bargained for the arbitrator’s construction of their agreement with respect to class arbitrability. The issue whether the arbitrator exceeded her authority in certifying an opt-out, as opposed to a mandatory, class was not before the Second Circuit, and thus the matter was remanded to the district court.

The court found that the arbitrator’s decision was supported, in part, by the American Arbitration Association’s Supplementary Rules for Class Arbitrations, which provide that “the arbitrator shall determine as a threshold matter … whether the applicable arbitration clause permits the arbitration to proceed on behalf of … a class.” Furthermore, the arbitration agreement provided that questions of arbitrability and procedural questions were to be decided by the arbitrator.

The Second Circuit noted that it was not for the court to “decide whether the arbitrator’s class certification decision was correct on the merits of issues such as commonality and typicality. We merely decide that the arbitrator had the authority to reach such issues even with respect to the absent class members.”

Jock v. Sterling Jewelers Inc., No. 18-153 (2d Cir. Nov. 18, 2019).

Eighth Circuit Rejects Claim That Arbitration Clause in Retainer Was Unconscionable

December 10, 2019 by Brendan Gooley

The Eight Circuit has rejected a plaintiff’s claim that an arbitration clause in a retainer agreement she signed with a law firm after receiving a call from a purported agent of the firm informing her of a purported life-threatening medical condition was unconscionable.

Allegedly, someone acting on behalf of McSweeney Langevin LLC, a law firm, called Jerri Plummer and told her that there was a life-threatening issue with the transvaginal mesh that had previously been implanted in her. The caller also told Plummer that the caller could arrange for Plummer to have the mesh surgically removed and could set Plummer up with an attorney to seek compensation for her surgery. As a result, Plummer signed a retainer agreement with McSweeney Langevin and underwent the surgery. According to Plummer, the surgery was less than successful. She sued an array of defendants, including McSweeney Langevin.

McSweeney Langevin sought to compel arbitration pursuant to the retainer agreement Plummer signed. The district court, applying the law of Washington, D.C., concluded that the arbitration agreement was unconscionable and refused to compel arbitration.

On appeal, the Eighth Circuit reversed and remanded.

The court noted that under D.C. law, an agreement must generally be both substantively and procedurally unconscionable to be unenforceable, but that in an egregious situation, it is sufficient for an agreement to be procedurally unconscionable alone.

With respect to substantive unconscionability, the Eighth Circuit allowed McSweeney Langevin to cure the district court’s finding that the agreement was unconscionable because Plummer could not afford to pay the costs of arbitration by volunteering to pay her costs. The court relied on several federal court decisions applying D.C. law that had similarly allowed litigants seeking to compel arbitration to cure substantive unconscionability by covering costs.

The court therefore turned to procedural unconscionability, noting that Plummer faced an uphill battle to establish that the retainer agreement was unconscionable in light of the fact that it was not substantively unconscionable. On the whole, the Eight Circuit concluded that the retainer was not procedurally unconscionable. The retainer agreement was sent to Plummer more than a month after the initial call she received regarding her mesh. The agreement informed Plummer that she had the “freedom to contract” by bargaining for certain terms in the agreement. The retainer was six pages long (including a nearly full-page signature page) and was easy to read. The fact that it was marked urgent and was sent shortly before Plummer’s surgery was not sufficient, considering all the facts, to render the agreement procedurally unconscionable.

Despite acknowledging that the circumstances that gave rise to this lawsuit were “troubling,” the Eighth Circuit determined that the retainer agreement was not procedurally unconscionable. It therefore reversed the district court’s decision.

Finally, the Eighth Circuit also rejected Plummer’s contention that the retainer agreement was unenforceable because McSweeney Langevin violated ethical obligations by failing to explain the ramifications of the arbitration provision to Plummer. The court assumed that the retainer agreement would be unenforceable if the attorneys have violated ethical obligations, but concluded that no such violations occurred. The agreement informed Plummer of the basic consequences of the arbitration clause. It conspicuously noted, among other things, that Plummer was waiving her right to a jury and a judicial appeal and that arbitration was her only recourse.

Plummer v. McSweeney, No. 18-3059 (8th Cir. Oct 23, 2019).