Contract Interpretation

West Virginia Supreme Court Reverses, Finds “Delegation Clause” in Employment Arbitration Agreement Neither Ambiguous nor Unconscionable

June 17, 2019 by Alex Silverman

Petitioners, two Rent-A-Center entities, moved to compel arbitration of a lawsuit by Anita Ellis alleging that Rent-A-Center unlawfully terminated her employment for seeking workers’ compensation benefits. At the time she was hired, Ellis signed an arbitration agreement stating that she agreed to arbitrate any claims arising out of her employment and/or termination. In seeking to compel arbitration, Rent-A-Center specifically relied on a “delegation clause” in the arbitration agreement stating that the arbitrator — not any court — shall have exclusive authority to resolve any challenge to the applicability, enforceability, or formation of the arbitration agreement, including on the grounds that it was void, voidable, ambiguous, unconscionable, or in violation of state law. Ellis argued that the delegation clause was: (1) ambiguous and failed to reflect an unmistakable intent to delegate arbitrability issues to the arbitrator; (2) unconscionable under state common law; and (3) invalid for violating a West Virginia statute. The lower court held that the delegation clause was both procedurally and substantively unconscionable and that there was no mutual agreement to arbitrate. It therefore denied Rent-A-Center’s motion to compel arbitration, but the Supreme Court of West Virginia reversed.

With respect to Ellis’ first argument, the court noted that it had previously considered the exact delegation clause at issue here and held that it clearly and unmistakably expressed an intent to delegate arbitrability issues to the arbitrator. It thus rejected Ellis’ contrary argument. The court next rejected Ellis’ argument that the delegation clause was unconscionable or otherwise invalid under common law contract principles and West Virginia statute. Ellis claimed the provision suffered from various “contract of adhesion” characteristics often associated with procedural unconscionability (e.g., unequal bargaining power, “take-it-or-leave-it” terms, and others). The court disagreed, however, finding the failure to read a contract does not relieve a party of its binding effect. And while an arbitration clause generally will not be deemed “unconscionable” absent proof of both procedural and substantive unconscionability, the court found Ellis failed to prove substantive unconscionability nonetheless. The court noted that in order for it to consider Ellis’ delegation clause challenge, 9 U.S.C. § 2 and the “severability doctrine” required her to specifically object to the delegation clause, rather than the arbitration agreement as a whole. Because Ellis’ “statutory violation” argument was directed to the arbitration agreement as a whole, it could not serve as a basis for invalidating the delegation clause on unconscionability grounds.

Rent-A-Center, Inc. v. Ellis, 827 S.E.2d 605 (W.Va. 2019)

Fifth Circuit Affirms Ruling That Policy’s Conformity Provision Does Not Negate the Agreement to Arbitrate Despite Statute Prohibiting Arbitration Agreements in Insurance Contracts Covering Property in Louisiana

May 31, 2019 by Nora Valenza-Frost

McDonnel Group LLC obtained a builder’s risk policy for a construction project on a property located in New Orleans, Louisiana. When the insured was denied coverage, it filed suit seeking damages for breach of contract and breach of the duty of good faith and fair dealing. The insurers responded by filing a motion to dismiss for lack of subject-matter jurisdiction and improper venue, invoking the contract’s arbitration provision under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

The policy also contained a “conformity to statute” provision stating, “In the event any terms of this Policy are in conflict with the statutes of the jurisdiction where the Insured Property is located, such terms are amended to conform to such statutes.” The insured “responded that any obligation to arbitrate under the Convention did not apply to the instant dispute because the policy’s arbitration agreement was, as a matter of law, invalid” as it was contrary to title 22, section 868(A)(2) of the Louisiana Revised Statutes, “which prohibits arbitration agreements in insurance contracts covering property located in the state.” The insured argued the conformity provision “amended” the arbitration provision out of the contract in order to “conform” with Louisiana law.

Relying on Safety National Casualty Corp. v. Certain Underwriters at Lloyd’s, London, 587 F.3d 714 (5th Cir. 2009), which held that the Convention superseded the Louisiana statute, the district court found that, because the “state statute was preempted by federal law … no conflict existed between the policy and state law so as to trigger the conformity provision of the policy.”

Although Safety National determined the Louisiana statute was preempted by the Convention, the Fifth Circuit now had to determine the impact of the conformity provision. The court held that because the statue does not and cannot apply to the policy, “there is no conflict between the policy and the state statute. With that premise established, the conformity provision is not triggered; its inapplicability leads only to the conclusion that the arbitration provision survives, undiminished by state law.”

McDonnel Grp., LLC v. Great Lakes Ins. SE, UK Branch, 923 F.3d 427 (5th Cir. May 13, 2019)

Third Circuit Interprets Unique Arbitrability Language in Arbitration Clause

May 30, 2019 by Nora Valenza-Frost

The Third Circuit determined that a former employee’s claim for retaliation against her employer was subject to arbitration per the arbitration clause in her employment agreement, which stated:

Except for actions for specific performance or injunctive relief, if a dispute or claim should arise that does not get resolved through negotiation of the parties, the parties will attempt in good faith to resolve the dispute or claim by mediation administered by the American Arbitration Association (AAA) under its Employment Mediation Rules, before resorting to arbitration.

The court noted that “[i]t does not appear that any federal court has addressed an arbitration agreement with language similar to this one. But in light of the presumption in favor of arbitrability, we think the phrase ‘if a dispute or claim should arise’ is best understood as functionally equivalent to more standard language that would expressly sweep in any claim relating to Dr. Monfared’s employment.”

The Eastern District of Pennsylvania’s decision confirming the arbitration award was affirmed.

Monfared v. St. Luke’s Univ. Health Network, No. 18-2850 (3d Cir. May 10, 2019)

Court Finds Arbitration Panel Did Not Exceed Powers or Manifestly Disregard the Law in Confirming Award in Dispute Over Leasing of Oil Lands

May 22, 2019 by Michael Wolgin

The case relates to an arbitration award entered in a dispute between affiliated oil exploration and marketing companies, on the one hand, and owners of land leased to the oil companies, on the other hand. The leases at issue authorized the exploration company to produce and sell any oil and natural gas found there. In exchange, the owners of the land would receive royalties calculated as a percentage of the proceeds attributable to the production from each well. The owners objected to the amount of the royalties paid by the exploration company, which were calculated based on the exploration company’s sales of the oil and gas to its affiliated marketing company, instead of based on the higher amounts for which the marketing company would sell the oil and gas downstream to third parties. The dispute went to an arbitration, which found that the owners failed to provide evidence that the oil sales between the affiliated companies were less than what would occur in an arms-length transaction. The panel found that the exploration company had legitimately transferred title to the oil and gas, and received sufficient consideration from the affiliated marketing company.

The owners petitioned the court to vacate the award, arguing that the arbitrators “exceeded their powers” and “effectively dispensed their own brand of industrial justice,” and that they “manifestly disregarded the law.” The court rejected both arguments, disagreeing that the arbitrators “ignored the central question” in dispute. According to the court, the panel found that (1) title was transferred to the marketing company; (2) the exploration company marketed the oil and gas as required; (3) the exploration company made “legally sufficient accounting entries on their books and records to evidence transfer of title and consideration paid for the oil and gas”; (4) the leases permitted the exploration company to sell to an affiliate; and (5) the owners failed to provide evidence of any defects with the sales transactions. The court found, without expressing any opinion about whether the panel was correct, that the panel “stayed well within its powers to adjudicate the dispute and executed those powers appropriately.” The court further found that the panel did not manifestly disregard the law. The court explained that the panel “was asked to interpret contracts that were arguably inconsistent both internally and with one another, and it made an informed, careful judgment about how to do so.” The court therefore granted summary judgment in favor of the oil companies and confirmed the award in its entirety.

Hale v. Chesapeake Expl., LLC, No. 4:18-cv-02217 (N.D. Ohio Apr. 25, 2019).

Supreme Court’s Lamp Plus Brings Ambiguity in Classwide Arbitration to Light

May 9, 2019 by Carlton Fields

In 2016, a hacker tricked an employee of petitioner Lamps Plus Inc. into disclosing tax information of about 1,300 company employees. After a fraudulent federal income tax return was filed in the name of respondent Frank Varela, a Lamps Plus employee, Varela filed a putative class action against Lamps Plus in federal district court on behalf of employees whose information had been compromised. Relying on the arbitration agreement in Varela’s employment contract, Lamps Plus sought to compel arbitration — on an individual rather than a classwide basis — and to dismiss the suit. The district court rejected the individual arbitration request, but authorized class arbitration and dismissed Varela’s claims. Lamps Plus appealed, arguing that the district court erred by compelling class arbitration, but the Ninth Circuit affirmed.

The U.S. Supreme Court granted cert on the issue of whether the Federal Arbitration Act (FAA) bars an order requiring class arbitration when an agreement is not silent, but rather “ambiguous,” about the availability of such arbitration. First, the Court held that it had jurisdiction because an order that both compels arbitration and dismisses the underlying claims qualifies as “a final decision with respect to an arbitration” within the meaning of 9 U.S.C. §16(a)(3). Next, the Court held that under the FAA, an ambiguous agreement cannot provide a contractual basis for concluding that the parties agreed to submit to arbitration. The Court explained that pursuant to the FAA, arbitration is a matter of consent. Previously, the Supreme Court held that “courts may not infer consent to participate in class arbitration absent an affirmative contractual basis for concluding that the party agreed to do so,” and that silence is not enough. The Court explained that this reasoning controlled here and, like silence, ambiguity does not provide a sufficient basis to conclude that parties consented to arbitration.

Lamps Plus, Inc. v. Varela, No. 17-988, 2019 WL 1780275 (2019)