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Arbitration / Court Decisions

Sixth Circuit Holds That District Court Erred by Not Analyzing Whether Non-Signatory Consented to Arbitration

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The Sixth Circuit Court of Appeals recently vacated and remanded an order concluding that a party was not bound by an arbitration award after concluding that the district court failed to consider whether that party may have consented to arbitration through its actions even though it was not a signatory to the collective bargaining agreement that contained the arbitration clause.

Greenhouse Holdings LLC did business as Clearview Glass and Glazing in Kentucky. Greenhouse also owned 90% of Clearview Glass and Glazing Contractors of Tennessee LLC. The International Union of Painters and Allied Trades District Council 91 filed a grievance against “Clearview Glass” alleging that it violated a collective bargaining agreement the union had. It was unclear whether “Clearview Glass” meant Greenhouse (based on its trade name Clearview Kentucky), Clearview Tennessee, or both. The union argued that Greenhouse was bound by the collective bargaining agreement and an arbitration clause therein. Greenhouse disputed that. The arbitrator apparently sided with the union and issued an order that affected Clearview Kentucky (i.e., Greenhouse). Greenhouse challenged that award.

The district court vacated the arbitrator’s award “to the extent it applies to Greenhouse.” The district court “held that Greenhouse wasn’t a party to the [collective bargaining agreement] and thus the arbitrator acted outside his authority to the extent the award applied to Greenhouse.”

The Third Circuit vacated the district court’s decision. It held that the district court “didn’t address this threshold question” of whether Greenhouse had consented to arbitration even though it did not sign the collective bargaining agreement that contained the arbitration clause. The Third Circuit explained that “an agreement to arbitrate need not be in writing” and that courts “may infer agreement when a party willingly participates in [an] arbitration without objecting to the arbitrator’s jurisdiction.”

The Third Circuit further explained that whether a party has consented to arbitration it otherwise may not have agreed to is a fact-intensive inquiry, and it remanded the case to the district court to analyze that question under the facts of the case.

Greenhouse Holdings, LLC v. International Union of Painters & Allied Trades District Council 91, No. 21-6164 (6th Cir. Aug. 8, 2022).

New York Federal Court Finds Arbitration Award Is Subject to Confirmation Even Though It Doesn’t Dispose of All Claims Submitted to Arbitration

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In a recent decision, a New York federal district court considered whether two arbitration awards issued by a tribunal in an ongoing arbitration were “mutual, final, and definite” and thus subject to confirmation proceedings in the district court.

The underlying arbitration involved a long-running dispute between Gerling, a German insurance company, and Tosco Corp., a petroleum refining company, in which Tosco (through successor-in-interest Phillips 66 Co.) sought indemnity and defense costs arising out of its manufacture and sale of petroleum products containing methyl tertiary-butyl ether. On July 13, 2021, Gerling reimbursed Phillips 66 $725,412.94 pursuant to the Gerling policy’s “loss payable” provision in connection with defense costs incurred in certain ongoing lawsuits against Phillips 66. However, on November 26, 2021, the tribunal decided Gerling was not obligated to reimburse Phillips 66 under the “loss payable” provision until the underlying cases had been finally resolved. When Phillips 66 refused to repay the $725,412.94 amount to Gerling, the tribunal issued another order on December 21, 2021, directing Phillips 66 to repay that amount and reaffirming the tribunal’s prior interpretation of the “loss payable” provision. Gerling then sought to have the tribunal’s December 2021 award confirmed by the district court.

In confirming the portion of the tribunal’s December 2021 award directing repayment by Phillips 66, the court noted that that award “required specific action and did not serve as a preparation or basis for further decisions.” Rather, the court characterized it as a “separate and independent claim” that “can be confirmed even though it does not, in and of itself, dispose of all claims.” The court further noted that even though Phillips 66 had repaid the required amount six days before Gerling’s motion to confirm, “the fact that the arbitration award has been complied with is not a ground for refusing to confirm it.”

The district court declined to confirm the portion of the tribunal’s December 2021 award addressing the “loss payable” provision on the grounds that that portion of the award “merely decides issues that bear on future determinations as to claims that still must be made … in order to establish liability.” As a result, the district court granted in part and denied in part Gerling’s motion to confirm the December 2021 arbitration award.

HDI Global SE v. Phillips 66 Co., No. 1:22-cv-00807 (S.D.N.Y. Aug. 26, 2022).

Third Circuit Compels Arbitration Despite Dispute About Whether Assignment of Loan Containing Arbitration Clause Was Lawful

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The Third Circuit Court of Appeals recently held that a district court should have granted a motion to compel arbitration even though there was a dispute about the legality of an assignment of a loan agreement that contained the arbitration clause at issue. The Third Circuit explained that there was a valid agreement to arbitrate, which was sufficient to send the case to arbitration.

OneMain Financial Group, a nonbank finance company that issues consumer loans, issued a loan to Benjamin Zirpoli pursuant to the Consumer Discount Company Act (CDCA), which creates exceptions to state usury laws. That loan contained an arbitration clause that provided that “You or We have an absolute right to demand that any Claim be submitted to an arbitrator in accordance with this Arbitration Agreement.” “We” was defined to include OneMain’s “assignees.” “Claim” was meanwhile defined to include “anything related to … the arbitrability of any Claim pursuant to this Agreement” and “anything related to … any alleged violation [of a state statute], including without limitation … usury … laws.”

OneMain sold Zirpoli’s account, which was then delinquent, to Midland Funding LLC, a company that purchases consumer debt. The “CDCA prohibits CDCA licensees from ‘selling contracts to a … corporation not holding a license … without the prior written approval of the Secretary of Banking,’” but Midland apparently “did not possess a CDCA license or request approval from the Department of Banking” to acquire Zirpoli’s account.

Midland sued Zirpoli to collect the debt but later dismissed the suit and then allegedly reported Zirpoli’s delinquent debt to various consumer agencies, which purportedly negatively affected Zirpoli’s credit. Zirpoli then filed a putative class action alleging that because Midland did not have a CDCA license and did not obtain approval from the Department of Banking, it was not lawfully permitted to purchase his loan or the other CDCA-governed loans it acquired.

Midland moved to compel arbitration. The district court ultimately denied Midland’s motion based on the purported illegality of the transfer from OneMain to Midland.

The Third Circuit (with one judge dissenting) vacated the district court’s decision and remanded the case with instructions to grant Midland’s motion to compel arbitration.

After holding that “party” under section 4 of the Federal Arbitration Act “refers to a party to a litigation” and that it therefore had jurisdiction to consider Midland’s motion on appeal, the Third Circuit held that arbitration was appropriate because Zirpoli had signed a valid arbitration agreement and that agreement applied to OneMain’s assigns, which included Midland. The Third Circuit acknowledged that there was a dispute about the legality of OneMain’s assignment to Midland but explained that its analysis was limited to the threshold question of whether there was a valid agreement to arbitrate in light of the delegation clause delegating issues of arbitrability to the arbitrator and that it was therefore prohibited from analyzing the merits of the dispute regarding whether that agreement should be invalidated because it violated the CDCA.

The Third Circuit alternatively held that even if it considered the merits of Zirpoli’s claim, it would reject his contention that the assignment was invalid. OneMain had “charged-off” Zirpoli’s loan, which meant that the “assignment falls outside of the CDCA’s purview.”

Zirpoli v. Midland Funding, LLC, No. 21-2438 (3d Cir. Sept. 1, 2022).

Third Circuit Affirms Dismissal of Complaint With Prejudice After Plaintiff Failed to Initiate Arbitration Proceedings

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Plaintiff R&C Oilfield Services appealed from an order of the U.S. District Court for the Western District of Pennsylvania. The district court granted defendant American Wind Transport Group’s motion to compel R&C to arbitrate the parties’ commercial dispute, having determined that the arbitration clause was not a contract of employment between the parties as R&C contended and was thus enforceable. The district court stayed the case pending arbitration and denied R&C’s motion for reconsideration. More than a year later, the district court ordered the parties to submit a joint status report. The report included confirmation that “Plaintiff had not commenced an arbitration, and did not plan to do so.” American Wind then moved to dismiss R&C’s complaint with prejudice pursuant to Federal Rule of Civil Procedure 41(b) based on R&C’s refusal to initiate arbitration proceedings. The district court weighed the factors for dismissal with prejudice set forth in Poulis v. State Farm Fire & Casualty Co. and granted the motion to dismiss R&C’s complaint with prejudice.

The Third Circuit Court of Appeals affirmed the district court’s dismissal order, noting that “[c]ourts possess inherent power to manage their own affairs so as to achieve the orderly and expeditious disposition of cases.” The court observed that R&C had “multiple avenues to seek appeal of the District Court’s order to stay the proceedings and compel arbitration” and did not seek interlocutory review under the Federal Arbitration Act. The court further noted that R&C failed to initiate arbitration proceedings and instead “sat on its rights for a year and a half and told the District Court that it did not intend to comply with the order, leaving the Court no choice but to involuntarily dismiss the complaint.” The Third Circuit concluded that the district court did not abuse its discretion in dismissing the case with prejudice pursuant to Rule 41(b) under these circumstances, and the district court “soundly exercised its discretion in dismissing this case.”

R&C Oilfield Services, LLC v. American Wind Transport Group, LLC, No. 21-2742 (3d Cir. Aug. 15, 2022).

SDNY Compels Arbitration Pursuant to ADR Provision in Contract Governing Disputed Commercial Transaction

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Applying the Federal Arbitration Act and recognizing that it “reflects a liberal federal policy favoring arbitration agreements,” the U.S. District Court for the Southern District of New York granted the defendant’s motion to compel arbitration, finding that the arbitration provision at issue was as expansive as similar clauses that the Second Circuit has previously described as the “paradigm of a broad clause establishing a presumption of arbitrability.”

Plaintiff Kuehne + Nagel Inc., a logistics service provider that arranges the transportation of freight, and defendant Baker Hughes were parties to a global air freight transportation contract, which included an alternative dispute resolution provision that applied “[i]n the event of any dispute between the Parties hereto arising from or relating to this contract.” After a shipment of cargo was seized by customs authorities at its destination in Brazil, Baker sent a demand letter to Kuehne to commence the claim process so Baker could be compensated for its losses. Efforts to mediate the dispute were unsuccessful and Kuehne filed an action in federal court seeking, among other relief, a declaratory judgment that the agreement did not apply to the claims at issue with Baker. Baker then moved to compel arbitration, contending that the ADR provision requires the submission of all disputes concerning the agreement to arbitration. Kuehne raised several arguments in opposition to the motion, including: (i) the issue of arbitrability should be decided by the court; (ii) the language “either party may refer the dispute to arbitration” means that the ADR provision is not mandatory; and (iii) the agreement did not apply to the transportation services at issue in the case.

The court rejected Kuehne’s arguments, finding that the ADR provision was expansive and that because the claims at issue “touch matters covered by” the agreement, the underlying dispute fell within the scope of the agreement’s ADR provision. The court also found that the agreement incorporated procedural rules that expressly empowered the arbitrator to determine the issue of arbitrability and concluded that although the agreement did not expressly address the matter, the parties intended to delegate the question of arbitrability to the arbitrator. Finally, the court noted the “overwhelming balance of authority in this Circuit and elsewhere” confirms that, absent language that an arbitration provision is intended to trigger “permissive” arbitration, provisions that state either party “may” refer the dispute to arbitration trigger mandatory arbitration. The court then concluded that the arbitration clause of the ADR provision of the agreement was mandatory and that the merits of Kuehne’s claims must be decided by the arbitrator. The court granted Baker’s motion to compel arbitration but denied its motion to dismiss, deciding instead to stay the case.

Kuehne + Nagel Inc. v. Baker Hughes, No. 1:21-cv-08470 (S.D.N.Y. June 23, 2022).