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Arbitration / Court Decisions

Arizona District Court Confirms Arbitration Award, Denies Cross-Motion to Vacate

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Relying on the Federal Arbitration Act (FAA) and noting that the FAA “enumerates limited grounds on which a federal court may vacate, modify, or correct an arbitral award,” the U.S. District Court for the District of Arizona granted defendants UBS Financial Services Inc. and UBS Credit Corp.’s motion to confirm an arbitration award and denied the plaintiff’s motion to vacate that award.

The plaintiff was employed as a financial adviser for UBS and obtained loans from UBS during his employment through a financial adviser loan program. As part of the loan process, the plaintiff signed promissory notes, which set forth the terms of repayment and included a choice-of-law provision and an arbitration clause or agreement. In addition to the notes, the plaintiff also signed “transition agreements,” which provided UBS would pay the plaintiff “‘on an annual basis in the amount totaling the loan principal and accumulated interest due under the associated note’” while the plaintiff was employed with UBS. All of the arbitration agreements also provided that arbitration of covered claims would be “conducted under the auspices and rules of FINRA in accordance with the FINRA Code of Arbitration for Industry Disputes.” Upon the termination of the plaintiff’s employment, the loans became due and payable and UBS initiated proceedings with FINRA alleging that the plaintiff failed to repay the loans and misappropriated UBS’ confidential customer information. The plaintiff filed various counterclaims against UBS regarding the notes and his employment, including breach of contract, fraud, constructive discharge, and violation of the Fair Labor Standards Act, among other claims. The FINRA arbitration panel issued a final award in part for UBS and in part for the plaintiff. The panel concluded that the plaintiff was liable for repayment of the notes but also found for the plaintiff on his negligent misrepresentation and constructive discharge claims. UBS filed a motion to confirm the award and the plaintiff filed a motion to vacate part of the award.

After rejecting UBS’ arguments that the plaintiff’s motion was procedurally deficient, the district court addressed the substantive issues raised by the parties, including whether the panel’s finding that the plaintiff was liable for the notes constituted “manifest disregard of the law,” whether the panel exceeded its powers in issuing an “irrational award,” and whether one of the arbitrators showed “evident partiality” against the plaintiff. First, the court noted the standard for manifest disregard of the law “affords an extremely limited review authority” and requires a showing that the arbitrators “knew of the relevant legal principle, appreciated that this principle controlled the outcome of the disputed issue, and nonetheless willfully flouted the governing law by refusing to apply it.” The court concluded that the panel’s findings were not in manifest disregard of the law. Second, the court rejected the plaintiff’s contention that the panel exceeded its powers in issuing an “irrational award,” noting the “completely irrational” standard for setting aside an award under the FAA is satisfied “only where the arbitration decision fails to draw its essence from the agreement.” Finally, the court rejected the plaintiff’s argument that one of the arbitrators showed “evident partiality” against the plaintiff, concluding that the plaintiff did not establish specific facts showing actual bias or partiality. The court also concluded that the plaintiff waived his evident partiality argument by not raising it in a timely manner.

Paynter v. UBS Financial Services Inc., No. 2:21-cv-02024 (D. Ariz. Mar. 2, 2023).

Arizona Permits Unilateral Modifications of Standard Consumer Contracts Upon Reasonable Notice and Opt-Out Opportunity

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In October 2018, Eva Cornell opened checking and savings accounts with Desert Financial Credit Union. In so doing, Cornell agreed to terms and conditions, including an agreement that Desert Financial could “change those terms and conditions from time to time.” In addition, Cornell also consented to the electronic delivery of all future communications from Desert Financial, including all disclosures, notices, and account statements. Notably, at the time Cornell opened the accounts, the parties’ contract did not include an arbitration clause.

In February 2021, Desert Financial updated its terms, adding a mandatory arbitration clause. The updated terms specified that agreement to the arbitration clause was not a mandatory condition of the customer maintaining an account with Desert Financial and that clients could opt out by providing notice by April 30, 2021, or 30 days after opening their account, whichever was later. Desert Financial did not directly contact its account holders regarding these updated terms. Rather, it posted on monthly account statements an orange-and-blue banner stating Desert Financial was making a “change-in-terms” and providing a link to the complete updated terms. Cornell received a notification from Desert Financial that her account statement was available for viewing but would only see the notice of the changed terms if and when she accessed the digital account statement.

Ultimately, Cornell never viewed or opted out of the updated terms. On May 5, 2021, Cornell filed a class action suit against Desert Financial alleging ambiguous and misleading language concerning overdraft fees. Desert Financial moved to compel arbitration. Cornell argued she never agreed to the updated terms and thus her agreement with Desert Financial did not include an arbitration clause. The District Court of Arizona certified a question to the Arizona Supreme Court as to whether Arizona law permits the unilateral modification of standard consumer contracts, and if so, what conditions must be satisfied to do so.

The Arizona Supreme Court answered the question in the affirmative, adopting Restatement Consumer Contracts § 3 in the process. The court found the Restatement “offers an effective modification procedure that fairly balances the public policies of economic efficiency and consumer protection.” The court summarized the requirements of Restatement § 3 as follows: “Consumers must (1) receive express and reasonable notice of the business’s right to unilaterally modify the agreement; (2) receive reasonable notice of new terms and the opportunity to opt out without penalty; and (3) upon receiving actual or constructive notice of new terms, continue the business relationship past a reasonable opt-out period.”

Per the court, adoption of the Restatement’s approach permits businesses to readily update their terms, facilitating economic efficiency in the context of standardized contracts, while simultaneously subjecting such changes to several safeguards designed to protect consumers from unfair exploitation.

Cornell v. Desert Financial Credit Union, No. CV-22-0071-CQ (Ariz. Mar. 2, 2023).

Ninth Circuit Reaffirms District Courts’ Discretion to Dismiss When All Claims Are Subject to Arbitration

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The Ninth Circuit Court of Appeals considered whether the Federal Arbitration Act (FAA) requires a district court to stay a lawsuit pending arbitration, or whether a district court has the discretion to dismiss when all claims are subject to arbitration.

The plaintiffs were current and former employees of Intelliserve, an on-demand delivery service. The plaintiffs sued Intelliserve in Arizona state court, arguing that they were improperly classified as contractors rather than employees. Intelliserve removed the lawsuit to federal court and then moved to compel arbitration. Both parties ultimately agreed that the lawsuit was subject to arbitration but disagreed as to whether the action should be dismissed or stayed by the federal trial court pending the completion of the underlying arbitration. The trial court dismissed the case without prejudice, rejecting the plaintiffs’ argument that the FAA itself mandated that the case be stayed rather than dismissed. The plaintiffs appealed the trial court’s dismissal.

On appeal, the Ninth Circuit acknowledged that section 3 of the FAA expressly provides that where all claims in a lawsuit are subject to arbitration, the trial court “shall” stay the action pending arbitration. However, the court noted that long-standing Ninth Circuit precedent provides that, notwithstanding section 3 of the FAA, “a district court may either stay the action or dismiss it outright when, as here, the court determines that all of the claims raised in the action are subject to arbitration.” The court rejected each of the plaintiffs’ attempts to distinguish such Ninth Circuit precedent, which the court found to be binding on the panel, and rejected the argument that the district court abused its discretion by relying on such precedent. The Ninth Circuit affirmed the district court’s dismissal of the action accordingly.

Forrest v. Spizzirri, No. 22-16051 (9th Cir. Mar. 16, 2023).

Fifth Circuit Refuses to Vacate Arbitration Award, Holds That Party’s Arguments Merely Ask for Merits Review

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The Fifth Circuit Court of Appeals recently rejected a claim that an arbitration award should be vacated by holding that the challenging party’s arguments improperly asked the court to review the merits of the arbitration panel’s decision and noting that proving fraudulent inducement to sign a contract is not enough to evade arbitration because the fraud must relate to the arbitration clause itself.

Brendan Church of Old South Trading Company LLC and Joseph Agresti of Dream Medical Group LLC entered into a business arrangement whereby Old South supplied Dream Medical with personal protective equipment that Dream Medical then distributed. Dream Medical subsequently sent Old South a resolution agreement that contained an arbitration clause. Church initially refused to sign the agreement but later did so after Agresti purportedly told him that Dream Medical would never enforce the agreement. Dream Medical later sought to enforce the agreement to obtain a refund on a transaction, which led to arbitration when Old South refused to provide the full refund. Old South argued that it had been fraudulently induced to enter the agreement, but the arbitration panel rejected that argument and concluded in relevant part that Old South breached the agreement. Dream Medical applied to confirm the award and Old South moved to vacate it.

The district court confirmed the award and Old South appealed. It argued that the arbitrators violated section 10(a)(3) of the FAA “by not fully considering its fraudulent inducement claim” and violated section 10(a)(4) of the FAA “by failing to fully review Old South’s evidence of, and the applicable law regarding, fraudulent inducement.” The Fifth Circuit concluded that neither of these arguments warranted reversal. It explained that both arguments “functionally invite[d] [it] to reassess the merits of [the arbitration panel’s] fraudulent inducement claim and reach a different conclusion than the” panel, which was “not something [the court could] do.” Old South also argued “that it didn’t voluntarily consent to arbitration because it was fraudulently induced to sign the … Agreement,” but the Fifth Circuit rejected that claim, noting that “even if a contract had been induced by fraud, the arbitration clause is enforceable unless the plaintiffs were fraudulently induced into agreeing to the arbitration clause itself.”

Dream Medical Group, LLC v. Old South Trading Co., No. 22-20286 (5th Cir. Mar. 6, 2023).

Third Circuit Affirms Finding That Defendant Waived Its Arbitration Rights

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In White v. Samsung Electronics America Inc., the Third Circuit Court of Appeals, in a precedential opinion, affirmed a district court order denying defendant Samsung’s motion to compel arbitration, concluding that, “[t]hrough its actions expressing an intent to litigate, Samsung waived its right to arbitration.”

The plaintiffs in this putative class action filed in 2017 brought claims alleging that Samsung, and others, illegally monitored their use of certain internet-based services on their smart TVs and collected personally identifying information, which they transmitted to third-party advertisers and data brokers. The “terms and conditions” the plaintiffs had to accept when setting up their smart TVs included an arbitration provision. Samsung initially moved to dismiss the complaint; however, the parties agreed to a stay and administrative dismissal of the case. In early 2018, the case was reinstated when the plaintiffs filed an amended complaint, which Samsung again sought to dismiss. Samsung also submitted a proposed discovery plan, which did not raise the arbitration provision or a possible motion to compel arbitration. The district court granted the motion to dismiss, after which the plaintiffs filed a second amended complaint in November 2018, which Samsung again moved to dismiss. The district court granted the motion in part, dismissing all but the Wiretap Act claims.

In May 2020, Samsung filed a motion to compel arbitration, which was denied without prejudice. Samsung then refiled its motion to compel in May 2021, arguing that “it did not waive its right to arbitrate because ‘the prerequisites of waiver — extensive discovery and prejudice — are lacking, and the [relevant] factors do not support a finding of waiver.’” The district court denied the motion, concluding that Samsung had waived its right to arbitrate, and the plaintiffs would suffer “significant prejudice” if compelled to arbitrate. Samsung appealed the district court’s decision to the Third Circuit, and while the appeal was pending, the U.S. Supreme Court issued its decision in Morgan v. Sundance Inc. Through supplemental briefing, Samsung brought the decision in Morgan to the court’s attention, arguing that the decision rejected a “prejudice-based waiver analysis” in connection with motions to compel arbitration.

Relying on the Federal Arbitration Act and the recent decision in Morgan, the Third Circuit concluded that “Samsung’s litigation actions here evince a preference for litigation over arbitration.” The court noted that Samsung agreed to stays in discovery so it could instead pursue its motions to dismiss the plaintiffs’ claims on the merits, which, to Samsung’s advantage, resulted in the dismissal of all but one claim. The court also found that Samsung “engaged in multiple instances of non-merits motion practice and acquiesced to the District Court’s pre-trial orders” and noted that Samsung submitted pro hac vice applications in the case and participated in several court conferences. The court also noted that the discovery plan asked whether the case was subject to court-annexed arbitration and, while the case was not subject to that particular type of arbitration, “Samsung should have disclosed that another type of arbitration may be applicable.” Relying on Morgan, the court affirmed the district court’s decision refusing to refer the matter to arbitration, concluding that Samsung waived its right to arbitrate.

White v. Samsung Electronics America Inc., No. 22-1162 (3d Cir. Mar. 7, 2023).