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Arbitration / Court Decisions

Fifth Circuit Affirms Order Dismissing Tesla Lawsuit in Favor of Arbitration

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In Lynch v. Tesla Inc., the Fifth Circuit Court of Appeals affirmed a district court order adopting a magistrate judge’s recommendation that the plaintiffs’ lawsuit should be dismissed in favor of arbitration. The plaintiffs were former Tesla employees who brought an action in district court alleging that Tesla violated the Worker Adjustment and Retraining Notification Act and a similar California statute by failing to provide employees with 60 days’ notice prior to termination and by requiring the employees to sign separation and release agreements. Tesla also had arbitration agreements with its employees. The employees moved for a protective order seeking, in part, an order requiring Tesla to notify all terminated employees that a lawsuit had been filed challenging the terminations. Tesla also moved to compel arbitration. The magistrate judge ordered Tesla to notify terminated employees about the lawsuit and then recommended that the district court grant Tesla’s motion dismissing the lawsuit in favor of arbitration. The district court adopted the magistrate judge’s recommendation and dismissed the action in favor of arbitration. After an unsuccessful motion for reconsideration, the plaintiffs appealed, arguing that the district court should have required Tesla to first notify terminated employees about the lawsuit before dismissing the action and compelling arbitration.

The Fifth Circuit rejected the plaintiffs’ argument that the district court should have considered that the magistrate judge intended to have Tesla issue notice of the lawsuit before dismissing the lawsuit. The court noted that the district court “was under no obligation to accept the magistrate judge’s proposed timeline for reviewing the motions” since the judge’s recommendation of dismissal was not an order but a recommendation related to a dispositive motion. The court also rejected the plaintiffs’ argument that the district court should not have compelled arbitration because there was a pending emergency motion by Tesla to stay the magistrate judge’s order when the case was dismissed in favor of arbitration. The court found that since the entire case was subject to arbitration, there was “no error in adopting the magistrate judge’s recommendation prior to ruling on Tesla’s objection and emergency motion.”

Lynch v. Tesla, Inc., No. 22-51018 (5th Cir. July 5, 2023).

Fifth Circuit Affirms Denial of Arbitration, Rejects Arbitration Provisions in “Battle of the Forms” Between Buyer and Seller in UCC Transaction

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The case involved the sale of mist eliminators (demisters) from MECS Inc. to Axiall Canada Inc., an owner of a Canadian manufacturing facility. A key issue involved the terms of the parties’ contractual relationship as formed through the sale and delivery process of the demisters: MECS typically would issue a proposal to Axiall; Axiall then sent a purchase order; MECS then sent an order acknowledgment; and Axiall would last accept the demisters. MECS’ proposals and order acknowledgments contained an arbitration clause. Axiall’s purchase order forms, however, did not contain an arbitration clause and contained language that acceptance of its purchase orders indicated an “irrevocable agreement” to Axiall’s general terms and conditions, which contained a no-modification provision and a forum-selection clause permitting Axiall to select a forum within either Louisiana or Kentucky.

When Axiall experienced problems with the demisters, Axiall sued MECS in Louisiana state court. MECS removed the case to federal court and then moved to dismiss, or alternatively stay, and compel arbitration under MECS’ proposal and order acknowledgment forms. The district court, however, denied MECS’ motion, holding that under Louisiana law, the parties had not agreed to the arbitration clauses.

On appeal to the Fifth Circuit, the court held that the case presented a “battle of the forms,” which is governed by two provisions of Louisiana’s version of the UCC adopted in its Civil Code: Article 2601 concerning additional terms in an acceptance of an offer to sell movables (such as demisters); and Article 2602 concerning contracts formed by the conduct of the parties. Applying these provisions, the court found that neither Axiall’s purchase orders nor MECS’ order acknowledgments “were communications that, when read in succession, were sufficient to form contracts under Article 2601.” However, the conduct of MECS’ shipping of the demisters following its sending of the order acknowledgment and Axiall’s accepting delivery, created a contract for “an agreed-upon quantity of demisters delivered at the agreed upon price.” This conduct-based contract, as construed by the court, did not include the arbitration clause as a term. The court rejected MECS’ argument that its order acknowledgments were counteroffers whose terms Axiall accepted by performance. There was no arbitration agreement because the parties never mutually agreed to MECS’ proposed arbitration clauses. The court thus affirmed the district court’s denial of MECS’ motion to compel arbitration.

Axiall Canada, Inc. v. MECS, Inc., No. 21-30105 (5th Cir. June 14, 2023).

New Hampshire Supreme Court Vacates Arbitration Award Based on “Plain Mistake” of Law

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The city of Portsmouth terminated a police officer in the wake of a bequest made to the officer by a 92-year-old woman he had met while on duty. The officer had assisted the woman in finding an attorney to draft a new will leaving the majority of her estate to him, which she executed months before her death. Afterward, the city convened a task force to conduct an independent inquiry into the officer’s relationship with the decedent. The task force concluded that the officer’s actions violated the Portsmouth Code of Ethics and the Portsmouth Police Department Duty Manual, and the city terminated him based on the task force’s recommendation.

The beneficiaries of the decedent’s prior will had also initiated an action to contest the new will. That action resulted in a probate decision that concluded the new will must be invalidated due to undue influence by the officer. The probate decision was issued approximately one month after the city had already terminated the officer.

Meanwhile, the police union had filed a grievance under the collective bargaining agreement, which had been referred to arbitration. The city notified the union that it intended to introduce the probate decision at the arbitration hearing to justify the termination and as mitigating evidence relative to any remedy. After litigation of the issue, the probate decision was admitted as “after-acquired evidence” for purposes of determining the appropriate remedy but was not admitted to supply the “just cause” for the termination itself.

The arbitrator found that the officer’s misconduct was “severe” but nevertheless determined the city wrongfully terminated the officer due to its failure to correctly enforce its own rules and to properly supervise him. The arbitrator awarded the officer back pay from the date of his termination to the date the arbitrator held the firing to be unsupported by just cause. The city challenged the award in the New Hampshire Superior Court, arguing the arbitrator had made a “plain mistake” of law in determining the period of back pay, based in part on her rulings related to the introduction of the after-acquired evidence. The superior court confirmed the award.

On appeal, however, the New Hampshire Supreme Court reversed. The court noted that the “after-acquired evidence” doctrine applies to evidence of an employee’s misconduct — discovered by the employer after it has terminated the employee for an unlawful reason — which is so severe that the employer would have terminated the employee on those grounds alone had it known of the misconduct at the time of the discharge. After-acquired evidence may be introduced to bar or limit an employee’s recovery, but it may not be introduced to provide a basis for the termination itself.

Here, the arbitrator held that the city had not complied with due process requirements (imposed by Cleveland Board of Education v. Loudermill) to provide notice to an employee of the grounds for termination and an opportunity to be heard. However, the Loudermill requirements do not apply to after-acquired evidence, which concerns the calculation of damages resulting from a wrongful termination as opposed to the basis for the termination itself. As such, the city was not required to comply with the Loudermill notice requirements when it sought to introduce and rely on the after-acquired evidence in support of its argument to limit the officer’s recovery. The Supreme Court held that the arbitrator had committed a plain mistake of law, and vacated the lower court’s confirmation and directed it to remand the case to the arbitrator to reconsider the back pay award.

City of Portsmouth v. Portsmouth Ranking Officers Association, NEPBA, Local 220, No. 2021-0511 (N.H. June 7, 2023).

South Carolina Supreme Court Finds Contract Didn’t Involve Interstate Commerce, Reverses Order Compelling Arbitration

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In Hicks Unlimited Inc. v. UniFirst Corp., the South Carolina Supreme Court agreed with a trial court ruling that the underlying contract between the parties, which included mandatory arbitration to be governed by the Federal Arbitration Act, did not implicate interstate commerce. The court found that the FAA did not preempt South Carolina’s Arbitration Act (SCAA) and reinstated the trial court’s order denying UniFirst’s motion to compel arbitration.

Hicks and UniFirst entered into a contract wherein Hicks agreed to rent uniforms for its employees. The agreement mandated all disputes would be decided by binding arbitration per the expedited procedures of the commercial arbitration rules of the American Arbitration Association and governed by the FAA. UniFirst moved to compel arbitration of a dispute that arose between the parties, and Hicks opposed the motion on the grounds that the arbitration provision did not comply with the notice requirements of the SCAA and was unenforceable. UniFirst further contended that the arbitration provision was governed by the FAA, which preempts the notice provision set forth in the SCAA. The lower court denied UniFirst’s motion, finding that the FAA did not apply because the agreement did not involve interstate commerce, and the arbitration provision was unenforceable because it did not meet the notice requirements of the SCAA. On appeal by UniFirst, the court reversed the trial court’s ruling, concluding that arbitration should have been compelled because the contract involved interstate commerce and, therefore, the FAA preempted the SCAA. Hicks appealed to the South Carolina Supreme Court.

In reversing the court of appeals’ decision, the court first noted that the determination of whether a contract involves interstate commerce, and whether it preempts applicable state law, is a question of law to be reviewed on a de novo basis. The court then rejected UniFirst’s argument that, because the parties agreed in the contract that the FAA would apply, it was unnecessary to address whether the contract involved interstate commerce. The court ruled that a provision in an arbitration agreement declaring that the FAA applies “is not a fait accompli.” The court refused to apply the FAA to the dispute without first determining whether interstate commerce was involved. The court noted that when deciding whether a contract involves interstate commerce, a court must examine the agreement, the complaint, and the surrounding facts, including any affidavits. The court then found the evidence UniFirst relied upon to support its contention that the agreement involved interstate commerce was untimely, and the court of appeals should not have used those facts in ruling for UniFirst. The court concluded that the contract did not involve interstate commerce, affirmed the trial court’s determination denying UniFirst’s motion to compel arbitration, and reversed the court of appeals’ ruling.

Hicks Unlimited, Inc. v. UniFirst Corp., No. 28158 (S.C. June 14, 2023).

New York Appellate Court Reverses Order Compelling Arbitration, Holds Collective Bargaining Agreement Arbitration Provisions Unenforceable

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New York statutes classify certain civil service positions as exempt where such positions are confidential in nature and require personal qualities that cannot practicably be tested by an examination. These positions are typically appointed positions, such as deputies and secretaries to political officers. As such, the nature of the positions requires that the officer exercising the appointment and removal power possess largely unrestricted authority and unlimited responsibility for appointments to positions in that class. As a result, exempt civil service positions are terminable at will, unlike most other New York civil service positions. At-will employment status allows elected officials and political appointees to hire their preferred officers, deputies, and secretaries in place of incumbent exempt class employees.

In 2015, the town of Monroe entered into a collective bargaining agreement with labor union Teamsters Local 445 that provided certain grievance procedures for covered employees, including binding arbitration regarding terminations. The agreement defined the employees covered by its provisions to include the secretary to the town planning board. In 2017, the town fired the employee. The union filed a grievance with the town alleging violations of the collective bargaining agreement’s “just cause” termination provisions and subsequently sought to compel arbitration of the dispute. The New York Supreme Court compelled arbitration of the dispute, and the Appellate Division affirmed. The New York Court of Appeals reversed, holding that for-cause termination protections, including requiring binding arbitration of related disputes, cannot be made applicable to an exempt class employee: “The statutory framework, the criteria for exempting positions, and the policy concerns underlying the exempt class’s historical terminable-at-will status together compel this conclusion.”

The court found that excluding exempt civil service employees from such protections was consistent with the legislature’s omission of such employees from the statutory tenure protections provided to other classes of employees. The exclusion was also consistent with the legislature’s intent to closely guard exempt class positions, which demonstrates an intent that positions properly classified as exempt remain so unless the applicable statutory procedure for reclassification is followed. Lastly, the court stated that public policy weighed against enforcement of the collective bargaining agreement’s termination protections, as “appointing officers must be free to choose their employees as they please. A contrary result would require officers to continue to employ in the most sensitive positions employees who do not meet the officers’ preferred qualifications.”

As a result, the court held the arbitration provisions of the collective bargaining agreement unenforceable as applied to exempt class employees, and reversed the decision to compel arbitration.

In re Teamsters Local 445 v. Town of Monroe, No. 40 (N.Y. Ct. App. May 23, 2023).