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Arbitration / Court Decisions

Second Circuit Rejects Enforcement of Class Waiver and Arbitration Agreement Under FAA, Finds That Provisions Impermissibly Limited “Plan-Wide” Remedies Under ERISA

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The plaintiff sued the trustee of his retirement plan, his former employer, and others for breach of fiduciary duties in connection with the plan’s purchase of shares of the employer’s parent company for more than fair market value. The plan was a defined contribution plan, with a separate individual account for each participant. The complaint sought relief under section 502(a)(2) of ERISA, including restoration of plan-wide losses, surcharge, accounting, constructive trust, disgorgement of profits, and other equitable relief.

The defendants moved to compel arbitration under the FAA on an individual basis, relying on plan provisions that required participants to resolve any legal claims solely in their “individual capacity and not in a representative capacity” and that prohibited participants from seeking or receiving “any remedy that has the purpose or effect of providing additional benefits or monetary or other relief to” other participants or beneficiaries. The defendants argued that compelling individual arbitration would not limit any substantive rights or remedies that the plaintiff “could personally achieve under ERISA section 502(a)(2),” as the plaintiff could only ever have recovered losses within his individual plan account.

The district court disagreed with the defendants and denied the motion, and a divided panel of the Second Circuit affirmed. The Second Circuit found, over a dissenting judge, that the above provisions were unenforceable because, as the Third, Seventh, and Tenth Circuits found in analogous cases, the provisions would prevent the plaintiff from pursuing remedies under section 502(a)(2) that were, by their nature, plan-wide. Analyzing U.S. Supreme Court precedent, the court explained that “the Section 502(a)(2) vehicle for enforcing Section 409(a) provides for only plan-wide remedies.” If the arbitration provisions prevented the plaintiff from pursuing the statutory plan-wide remedies, then it effectively prevented him from vindicating his substantive statutory rights under ERISA. Consequently, the above plan provisions (and the arbitration agreement as a whole) were unenforceable.

In reaching its decision, the court distinguished Supreme Court rulings, including Epic Systems, Italian Colors, Concepcion, and Gilmer, which enforced arbitration agreements containing a waiver of aggregated actions involving statutory rights. This case was different, the court explained, as precluding a representative action would deprive the plaintiff of the “full range” of statutory substantive rights and remedies. Drawing from another recent Supreme Court case, Viking River Cruises, the court highlighted a “qualitative difference” between waivers of collective action procedures, and waivers that purport to preclude a party from arbitrating in a representational capacity on behalf of a single absent principal (the plan). The court also observed that there would be “no legal way to provide many of the equitable remedies allowed by statute and sought by [the plaintiff] without impacting the accounts of other plan participants and beneficiaries or binding the Plan Administrator and Trustee vis-à-vis other participants.” The court affirmed the denial of the motion to compel arbitration.

Cedeno v. Sasson, No. 21-2891 (2d Cir. May 1, 2024).

Oregon District Court Denies Motion to Compel Arbitration, Finds It Involves Procedural Questions Best Left to Arbitrators

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In Sacramento Drilling Inc. v National Casualty Co., the U.S. District Court for the District of Oregon addressed an amended motion to compel arbitration brought by defendant National Casualty Co. seeking to limit arbitration to only certain claims.

The underlying matter involved claims related to alleged losses incurred by plaintiff Sacramento Drilling (a subcontractor) for furnishing labor and materials for defendant White Construction (the general contractor) associated with the construction of two projects. The agreement between Sacramento and White included a mandatory arbitration clause that “mediation and binding arbitration shall be the sole methods of dispute resolution for any dispute arising out of this Subcontract or Subcontractor’s performance of the Subcontract Work.” Sacramento’s equipment accidentally severed an overhead electrical line, and a dispute arose regarding the amount that Sacramento was due for its work after deductions were taken by White for the damages caused by Sacramento. National Casualty had issued insurance policies for the projects naming Sacramento and White as additional insureds, and Sacramento tendered the claim for the loss to National Casualty, which denied a portion of the alleged loss. The insurance policies also contained a mandatory arbitration provision covering all differences arising out of the insurance policies. Sacramento’s state court lawsuit against White, National Casualty, and others was removed by National Casualty to federal court and the parties then filed a joint motion for a stay, which included an agreement that the case should be stayed pending the arbitration between Sacramento, White, and National Casualty. The district court granted the joint motion.

Prior to the arbitration, National Casualty filed an amended motion seeking to limit the arbitration to the contract claims under the insurance policy only. The district court denied the motion, finding that National Casualty’s effort to limit the claims did not present questions of arbitrability that are reserved for judicial determination. The court noted that none of the parties disputed the validity of the arbitration clauses at issue and that the arbitrability of the dispute had already been established in connection with the initial joint motion. Rather, the amended motion involved procedural questions including “how the parties have agreed to arbitrate, not whether the parties agreed to arbitrate.” The court ruled that these types of issues are for the arbitrator to decide and denied National Casualty’s motion.

Sacramento Drilling Inc. v National Casualty Co., No. 3:23-cv-00889 (D. Or. June 20, 2024)

Vacation of Arbitration Award for Manifest Disregard of the Law Is “Exceedingly Rare,” Requires “Egregious Impropriety”

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The U.S. District Court for the Southern District of New York denied a petition to vacate a $65 million arbitration award based on the petitioner’s argument that the arbitrator’s decision was in “manifest disregard of the law.” The court explained that a “litigant seeking to vacate an arbitration award based on alleged manifest disregard of the law bears a heavy burden, as awards are vacated on grounds of manifest disregard only in those exceedingly rare instances where some egregious impropriety on the part of the arbitrator is apparent.”

A court may vacate an award for manifest disregard of the law only if the court finds both that:

  1. The arbitrators knew of a governing legal principle yet refused to apply it or ignored it altogether; and
  2. The law ignored by the arbitrators was well defined, explicit, and clearly applicable to the case.

In contrast, a court must uphold an arbitration award so long as “the arbitrator has provided even a barely colorable justification for his or her interpretation of the contract.”

Here, the court found that the arbitrator’s award was “extensively reasoned” and “correctly applied New York law.” As such, the court granted the respondent’s cross-motion to confirm the arbitration award.

The court denied the respondent’s motion for attorneys’ fees, despite noting that it retained “inherent equitable powers to award attorney’s fees when the opposing counsel acts in bad faith, vexatiously, wantonly, or for oppressive reasons,” and despite the fact that it dispatched the petitioner’s motion to vacate with relative ease. Although the petitioner’s arguments failed, the court did not find that counsel had acted “in bad faith … or for oppressive reasons.” The respondent argued that the petitioner’s motion breached clear provisions of the arbitration agreement prohibiting such filings, and it should therefore be awarded the fees it had been forced to expend. But the court noted that the agreement “effectively incorporated FAA review into [the] contract” and, further, that “courts have held provisions that prevent or discourage petitioners from challenging arbitral awards are unenforceable.”

Risen Energy Co. v. Focus Futura Holding Participações S.A., No. 1:23-cv-10993 (S.D.N.Y. June 11, 2024).

District Courts May Not “Look Through” Applications to Modify, Confirm, or Vacate Arbitral Awards

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Ascension Data & Analytics LLC terminated its contract with Pairprep Inc. for data extraction services after an alleged data breach involving Pairprep’s servers and Pairprep’s alleged “failure to extract reliable data.” Ascension subsequently initiated arbitration proceedings against Pairprep pursuant to the parties’ contract in an attempt to recover the remediation costs incurred as a result of Pairprep’s data breach. Pairprep asserted counterclaims against Ascension, and the arbitration panel ultimately rendered a monetary award in Pairprep’s favor.

Ascension petitioned the Northern District of Texas to vacate the arbitration award. Shortly thereafter, Pairprep filed an application to confirm the arbitration award in Texas state court. The state court confirmed the award and entered a final judgment in favor of Pairprep. In the federal proceeding, Ascension filed a motion for a preliminary injunction against the state court proceeding, while Pairprep argued that the district court lacked subject matter jurisdiction. The district court agreed and dismissed the matter due to a lack of subject matter jurisdiction.

The Fifth Circuit Court of Appeals affirmed the dismissal, relying on the U.S. Supreme Court’s recent decision in Badgerow v. Walters. There, the Supreme Court concluded that district courts may not “look through” the application for confirmation or vacation of an arbitration award to determine whether the court has jurisdiction over the matter. Rather, “a court may look only to the application actually submitted to it in assessing its jurisdiction.”

The fact that a petition seeks enforcement or vacation of an arbitration award rendered under the Federal Arbitration Act is not sufficient. Rather, the court must identify some additional “independent basis for its jurisdiction,” such as satisfaction of the requirements for diversity jurisdiction or federal question jurisdiction. The court noted that an arbitration award “is no more than a contractual resolution of the parties’ dispute … [a]nd quarrels about legal settlements — even settlements of federal claims — typically involve only state law, like disagreements about other contracts.” As such, if there is no other additional basis for federal jurisdiction that is shown on the petition to modify, confirm, or vacate an arbitration award, then the matter is one for state courts, not federal courts.

Ascension Data & Analytics, LLC v. Pairprep, Inc., No. 23-11026 (5th Cir. June 25, 2024)

Alabama Federal Court Seals and Approves FLSA Settlement Agreement, Addresses Confidentiality Provision

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The plaintiff was employed by defendant Pilot Catastrophe Services Inc. as an insurance claims adjuster, where she was responsible for inspecting property damage claims and providing damage estimates to insurance companies. The plaintiff brought a collective action under the Fair Labor Standards Act (FLSA) alleging that she and other claims adjusters were misclassified as salaried employees exempt from overtime requirements, and Pilot violated the FLSA by failing to pay overtime wages. Pilot filed a motion to compel arbitration pursuant to the arbitration provisions set forth in the plaintiff’s employment agreements and moved to dismiss the class and consolidated action claims. While the motions were pending, the parties filed a joint status report confirming that the plaintiff did not oppose Pilot’s motion to dismiss the class action and collective action claims. The parties also reported that after agreeing to arbitrate, they reached a settlement of the plaintiff’s FLSA claims and requested 60 days to finalize the settlement. After further revising the settlement agreement, the parties filed an amended joint motion to approve the settlement. Pilot filed a motion to seal the amended joint motion and settlement agreement.

First, addressing the motion to seal, the court cited prior district court decisions confirming that “when, as here, a settlement must be approved by a court, the settlement becomes part of the judicial record.” However, the court further noted that “confidentiality provisions have been approved in FLSA settlement where the provision is bargained for and the plaintiff receives separate consideration.” The court then found that the plaintiff in this matter “separately bargained for and received separate consideration for the confidentiality provision” reflected in her employment agreements and had jointly moved to approve the amended settlement agreement with Pilot. With this finding, the court concluded that “the public interest in assuring that employee wages are fair” was adequately protected in this case since the monetary terms of the plaintiff’s FLSA settlement were disclosed in the court’s order and contained in the record, and granted Pilot’s motion to seal. Second, the court addressed the amended joint motion to approve the settlement, noting that the Eleventh Circuit recognizes two methods for settlement of FLSA claims, including, as the court utilized in this case, a court determination that the settlement “is a fair and reasonable resolution of a bona fide dispute over FLSA provisions.” Applying this standard of review, the court approved the amended settlement agreement, noting that the plaintiff had a “significant risk of little to no recovery should this action proceed to trial or arbitration” and concluding that the settlement is a “fair and reasonable resolution of her FLSA claims.”

Pleasants v. Pilot Catastrophe Services, Inc., No. 1:23-cv-00132 (S.D. Ala. Apr. 30, 2024).