Contract Interpretation

Two former Aon employees sued Aon, claiming restrictive covenants in agreements they entered into with the company were void, illegal, and unenforceable. Aon moved to compel arbitration per arbitration provisions in the relevant contracts. The plaintiffs argued that the arbitration provisions were both procedurally and substantively unconscionable, and thus unenforceable. In response, Aon pointed to “delegation clauses” in the provisions, pursuant to which disputes about gateway arbitrability issues are to be decided by an arbitrator. The plaintiffs claimed the delegation clauses were also unconscionable, but the U.S. District Court for the Northern District of California disagreed.

To successfully challenge a delegation clause, the court explained that a party cannot challenge the broader arbitration agreement in which the clause is contained; rather, it must be shown that the specific delegation language is itself invalid based on a general principle of contract law. Here, the court ruled initially that the delegation clauses at issue “clearly and unmistakably” delegated gateway questions to an arbitrator, rejecting the plaintiffs’ effort to argue otherwise. The plaintiffs also claimed the clauses were unconscionable, but the court disagreed. While finding the clauses “[were] — at most — minimally procedurally unconscionable” insofar as they were non-negotiable conditions of employment, the court found the clauses were in no way substantively unconscionable. Thus, applying the “sliding scale” approach, the court held that the clauses were valid, enforceable, and required granting Aon’s motion to compel arbitration.

Norris v. Aon PLC, No. 3:21-cv-00932 (N.D. Cal. Apr. 2, 2021)

The Fourth Circuit Court of Appeals upheld the enforceability of an employment agreement’s waiver of appellate review of an arbitration award. The waiver purported to waive both judicial and appellate review of the arbitrator’s decision. The district court held the waiver of all judicial review of the arbitration award was unenforceable under the Federal Arbitration Act, but nevertheless found the award was enforceable and dismissed the petition to vacate. On appeal, the Fourth Circuit appeared to agree, without deciding, that the complete waiver of all judicial review of an arbitration award was contrary to the FAA but found the waiver of appellate review to be consistent with the FAA’s policy objectives. In so doing, the court noted that arbitration awards are increasingly “reflexive[ly] appealed … leading to arbitration no longer being treated as an alternative to litigation, but as its precursor. The reflexive appeal of an arbitration award is all the more lamentable when the parties have expressly waived that right.” Finding no reason to reject the parties’ contractual agreement to waive appellate review, the court dismissed the appeal. 

Beckley Oncology Associates, Inc. v. Abumasmah, No. 19-1751 (4th Cir. Apr. 8, 2021).

The plaintiff alleged that she was a victim of an illegal predatory loan orchestrated by the defendant’s company. The loan allegedly charged excessive interest but was shielded from U.S. law by tribal sovereign immunity.

The plaintiff filed suit, alleging that the loan was illegal and that the defendant had committed RICO and other consumer protection violations. The loan contract, however, included an arbitration provision, providing that “any dispute … related to this agreement will be resolved through binding arbitration” under tribal law, subject to review in tribal court. The defendant moved to compel arbitration, contending that the plaintiff agreed to a delegation clause to arbitrate issues “concerning the validity, enforceability, or scope” of the arbitration agreement, but the district court denied the defendant’s motion. The court found that the enforceability of the arbitration agreement “has already been litigated, and decided against [the defendant], in a similar case commenced in Vermont.”

The Sixth Circuit reversed, finding that the district court exceeded its authority by resolving the issue of arbitrability and finding that the arbitration agreement was enforceable. The provision delegating the question of arbitrability to an arbitrator was invoked by the defendant but was never specifically challenged by the plaintiff or addressed by the district court. “Only a specific challenge to a delegation clause brings arbitrability issues back within the court’s province.” Accordingly, the “district court should have enforced [the delegation clause] and referred the case to arbitration.”

The Sixth Circuit was not persuaded by the plaintiff’s argument that the issue of arbitrability related to the defendant’s standing, and therefore could be adjudicated in court. In response, the Sixth Circuit noted that a “logical conundrum” exists because courts still must determine the existence of the contract even when a delegation clause exists in the underlying arbitration agreement. The court, however, relied on its prior decision in another case that “signaled” that a “nonsignatory’s ability to enforce an arbitration agreement concerned a question of arbitrability.” The court determined that it would “follow suit and find that whether [the defendant] can enforce the arbitration agreement against [the plaintiff] presents a question of arbitrability that [the] arbitration agreement delegated to an arbitrator.”

 Swiger v. Rosette, No. 19-2470 (6th Cir. Mar. 4, 2021).

In 2015, the plaintiff was in a car accident that required emergency room medical treatment at Andalusia Regional Hospital. The plaintiff had health insurance at the time through United HealthCare, which maintained a contract for medical services with Andalusia. The plaintiff alleged that in connection with her treatment, Andalusia failed to submit her bills to United HealthCare or follow other required procedures, in violation of the medical services contract. As a third-party beneficiary, the plaintiff filed a class action lawsuit to enforce the terms of the contract and to recover damages incurred as a result of Andalusia’s alleged contractual violations. Andalusia was not named as a defendant in the class action, though the court later joined Andalusia as the sole defendant and dismissed the plaintiffs’ claims against all other parties.

After being added to the lawsuit, Andalusia moved to compel arbitration pursuant to the arbitration clause within the medical services contract between Andalusia and United HealthCare. The plaintiff opposed, arguing: (1) the arbitration clause does not bind her as a third-party beneficiary; (2) Andalusia’s motion to compel arbitration was untimely; and (3) the arbitration agreement was unconscionable. The court dismissed these arguments and granted Andalusia’s motion to compel arbitration.

Finding first that a valid and enforceable arbitration agreement existed between Andalusia and United HealthCare, the court ruled that the arbitration agreement was binding on the plaintiff as a third-party beneficiary. The court found that because a third-party beneficiary stands in the shoes of the signatories to a contract, the beneficiary is bound by the entirety of the contract that he or she wishes to enforce. Put simply, a “third-party beneficiary cannot accept the benefit of a contract, while avoiding the burdens or limitations of that contract.”

With respect to the timeliness argument, the court did not agree with the plaintiffs’ argument that Andalusia failed to initiate arbitration within one year of written notice of the dispute, as provided in the contract. The court noted that the plaintiff, as master of her own complaint, decided not to name Andalusia as a defendant to the lawsuit originally filed in May 2016, and thus there was no actual dispute between the plaintiff and Andalusia that could be arbitrated until the court joined Andalusia in March 2020. Holding otherwise — which would have required Andalusia to preempt the plaintiff and interject itself into the litigation to secure its arbitration rights — would have “absurd results” that conflict with arbitration law and “erode core values of the American legal system.”

Finally, the court found that the arbitration agreement was not unconscionable. The court recognized that whenever parties operate at different levels of sophistication, there is a risk of disparate bargaining power — a requirement to finding the terms of an agreement unconscionable. However, the court reminded the plaintiff that as a third-party beneficiary, she stands in the shoes of United HealthCare, and there were no concerns of equal bargaining power as between United HealthCare and Andalusia.