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Arbitration / Court Decisions

Fourth Circuit Declines to Vacate Arbitration Award Where Challenge to the Award Was Nothing More Than an Ordinary Disagreement With Its Outcome

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Tecnocap LLC appealed a decision by the U.S. District Court for the Northern District of West Virginia, where it declined to vacate an arbitration award in favor of an employee and labor union in a grievance proceeding related to Tecnocap’s termination of an employee covered by the parties’ collective bargaining agreement.

The parties’ collective bargaining agreement prohibited Tecnocap from “summarily discharging” covered employees and required that termination of employment be “for just cause.” The agreement also subjected grievances involving the interpretation of express provisions of the arbitration agreement. Separate from the agreement, Tecnocap instituted an attendance program wherein employees accrued points for certain absences from work and were then subject to different disciplinary procedures based on the number of accrued points.

After a Tecnocap employee accrued nine points in the attendance program and failed to timely submit paperwork that would allocate one of his absences to FMLA leave, Tecnocap terminated his employment. The union then filed a grievance protesting the employee’s termination, which proceeded through arbitration.

The arbitrator determined that the grievance was arbitrable, rejecting Tecnocap’s argument that the grievance was untimely and should be denied or dismissed on procedural grounds, pointing to the parties’ past conduct of inattentiveness to grievance deadlines as evidence of a waiver of such deadlines. The arbitrator also ruled that Tecnocap did not have “just cause” to terminate the employee because it improperly assessed him with a ninth point.

Tecnocap filed an action in the U.S. District Court for the Northern District of West Virginia under section 301 of the Labor Management Relations Act, 29 U.S.C. § 185, to vacate the arbitrator’s award, and the union filed an action under the same provision to enforce the arbitrator’s decision, which it alleged Tecnocap had refused to follow.

The district court found Tecnocap failed to present evidence that would warrant overturning the arbitrator’s award, including any evidence that the award: (i) was the product of the arbitrator’s bias; (ii) ignored the evidence in favor of the arbitrator’s own brand of “industrial justice”; or (iii) altered the language of the collective bargaining agreement.

Tecnocap then appealed, arguing that the district court should have concluded that the arbitrator’s award did not draw its essence from the collective bargaining agreement and therefore should have been vacated. Affirming the district court’s decision, the panel rejected Tecnocap’s challenge, finding that Tecnocap presented nothing more than an ordinary disagreement with the outcome of the arbitration award based on Tecnocap’s preferred application of the collective bargaining agreement to the underlying facts.

The panel determined that the collective bargaining agreement plainly delegated authority to the arbitrator to adjudicate grievances involving the interpretation or application of the express provisions of the agreement and that upon being delegated with that authority, the arbitrator had the authority to review whether Tecnocap fulfilled its obligations under the agreement and whether the termination comported with the agreement’s “just cause” limitation. The panel held that the arbitrator’s decision was a clear exercise in applying the agreement’s provisions and that Tecnocap failed to point to any limitation in the agreement that prevented the arbitrator from making her decision.

Tecnocap, LLC v. United Steel, Paper & Forestry, Rubber, Mfg., Energy, Allied Industrial & Serv. Workers Int’l Union AFL-CIO/CLC, Local Union No. 152M, No. 19-1263 (4th Cir. Jan. 19, 2021).

Tenth Circuit Agrees Arbitration Award Issued Absent an Arbitration Agreement Was a “Farce,” Orders Sanctions Against Pro Se Petitioner

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Petitioner James Wicker appealed an order dismissing his application to confirm a $2 million arbitration award issued in his favor against respondents Bayview Loan Services LLC and U.S. Bank, N.A. Wicker obtained the award after the respondents failed to respond to his “binding self-executing irrevocable” counteroffer containing certain “scattered and incoherent” references to arbitration. The district court dismissed Wicker’s effort to confirm the award, finding the arbitration was “bogus” and the award was a “farce” absent an agreement to arbitrate. On appeal, Wicker claimed the district court usurped the arbitrator’s authority to interpret the agreement between the parties. The Tenth Circuit disagreed, finding that Wicker ignored case law establishing that it is for the court, in the first instance, to decide whether the parties agreed to arbitrate. The court also emphasized Wicker’s failure to cite authority that failure to respond to a counteroffer created a contract. As such, the district court’s order was affirmed. Moreover, although Wicker was pro se, finding his appeal was frivolous, the Tenth Circuit granted the respondents’ motion for sanctions and ordered Wicker to pay double appellate costs.

Wicker v. Bayview Loan Services, LLC, No. 19-4169 (10th Cir. Jan. 27, 2021).

Ninth Circuit Denies Non-Signatory’s Bid to Compel Arbitration of Trademark Infringement Claims

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On remand from the U.S. Supreme Court, the Ninth Circuit Court of Appeals considered in Setty v. Shrinivas Sugandhalaya LLP the question whether non-signatories to an agreement may use state law doctrines, such as equitable estoppel, to compel arbitration. Although the Ninth Circuit recognized that non-signatories may have the power to compel arbitration using equitable estoppel under certain circumstances, it ultimately found that the defendant in this particular case was unable to do so.

The underlying case arose from a failed business relationship between two brothers, Balkrishna and Nagraj Setty. While they were in business together, the brothers had personally entered into a partnership agreement that required them to arbitrate disputes related to partnership rights. Eventually, the brothers parted ways, and each brother formed his own company. After Balkrishna Setty and his company (SS Bangalore) brought suit against Nagraj Setty’s company (SS Mumbai) for trademark infringement, SS Mumbai sought to compel arbitration based on the arbitration provision in the brothers’ partnership agreement.

The lower court denied SS Mumbai’s motion to compel, finding that only the brothers (and not their companies) were signatories to the partnership agreement, and Nagraj Setty was not a named defendant in the lawsuit. The Ninth Circuit upheld the lower court’s decision, holding that SS Mumbai could not equitably estop SS Bangalore from avoiding arbitration. SS Mumbai appealed to the Supreme Court.

The Supreme Court remanded the case for further consideration following its recent decision in GE Energy Power Conversion France SAS, Corp. v. Outokumpu Stainless USA, LLC, which ruled that the Convention on the Recognition and Enforcement of Foreign Arbitral Awards does not conflict with domestic equitable estoppel doctrines permitting enforcement of arbitration agreements by non-signatories.

On remand, the Ninth Circuit reaffirmed its earlier decision denying the motion to compel. The court stated that for equitable estoppel to apply in the arbitration context, “it is essential … that the subject matter of the dispute [is] intertwined with the contract providing for arbitration.” The court found that SS Bangalore’s claims against SS Mumbai for trademark infringement were not clearly “intertwined” with the brothers’ partnership agreement providing for arbitration, and thus SS Mumbai, a non-signatory defendant, lacked the power to compel arbitration in this matter.

New Jersey Supreme Court Affirms $56M Refund to Johnson & Johnson for Overpayment of Insurance Premium Tax

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The New Jersey Supreme Court recently ruled that Johnson & Johnson is required to pay an insurance premium tax (IPT) based only on its premiums for risks located within the state of New Jersey rather than nationwide, entitling the company to a $56 million tax refund.

Prior to 2011, New Jersey insurance laws required J&J, as a holder of self-procured insurance, to pay its IPT based only on risks located in New Jersey. However, in a 2011 amendment to the state’s insurance laws, the Legislature authorized additional taxation on surplus lines insurance policies by adding the following sentence to N.J.S.A. 17:22-6.64: “If a surplus lines policy covers risks or exposures in this State and other states, where this State is the home state, … the tax payable pursuant to this section shall be based on the total United States premium for the applicable policy.” J&J, despite not being a holder of surplus lines coverage, thereafter voluntarily increased its IPT payments to reflect the amount due on its nationwide insurance premiums. In November 2015, J&J filed a claim with the New Jersey Department of Banking and Insurance (DOBI) and the director of the Division of Taxation, seeking a refund of nearly $56 million in excess IPT that it had paid since 2011.

After the division denied its refund claim, J&J filed a complaint in the Tax Court. The Tax Court found in favor of the DOBI and the division, concluding that the 2011 amendments that authorized the collection of IPT for surplus lines insurance coverage based on total nationwide premiums applied equally to self-procured coverage. The Appellate Division reversed, finding that J&J’s IPT obligations should have continued to be based solely on the risks it insured that were located within New Jersey. Stressing that the original plain language of the statute “clearly limited J&J’s tax liability to the risks it insured in New Jersey [and] was not changed in any way, shape, or form in the 2011 amendment,” the Appellate Division explained that it was “bound to follow and apply” that language. The Appellate Division ultimately declared itself unable to conclude that the New Jersey Legislature, by specifically stating that the amendment applied only to surplus lines insurance coverage, likewise intended to extend it to self-procured coverage.

In a one-paragraph majority decision, the New Jersey Supreme Court affirmed the ruling “substantially for the reasons expressed” by the Appellate Division.

Court Compels Arbitration Because Non-Signatory “Knowingly Exploited” and Obtained Benefits of Agreement

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The Eastern District of Pennsylvania recently compelled arbitration involving a claim by a plaintiff who had not signed a Comcast subscriber agreement on the ground that the plaintiff had used benefits under the agreement and exercised control over the Comcast account. The court held that the plaintiff was therefore equitably estopped from avoiding arbitration.

James Shelton’s father signed up for Comcast and agreed to Comcast’s subscriber agreement, which provided, among other things, that Mr. Shelton’s father was accepting the agreement “on behalf of all persons who use [Comcast’s] Equipment and/or Service(s) at the Premises” (i.e., the Shelton household) and that Mr. Shelton’s father had “sole responsibility for ensuring that all other users understand and comply with the terms and conditions of this Agreement and any applicable policies.” The agreement also contained an arbitration clause.

Mr. Shelton, who lived in the Shelton household, subsequently placed a service call to Comcast in which he acknowledged using Comcast’s services and setting up his account online. Mr. Shelton also “associated his own personal cell phone with the Shelton Household Account.”

Mr. Shelton later filed suit alleging that Comcast and other defendants violated the Fair Credit Reporting Act by “check[ing] his credit report without a permissible purpose.”

Comcast moved to compel arbitration pursuant to the subscriber agreement.

The U.S. District Court for the Eastern District of Pennsylvania granted Comcast’s motion. Applying Pennsylvania law, the court held that Mr. Shelton was “equitably estopped from avoiding the Arbitration Provision” in the subscriber agreement because, even though “other members of [Mr. Shelton’s] household … originally contracted for Comcast’s services,” Mr. Shelton had “sought and obtained benefits under the agreement by … not only using the Comcast services provided under the agreement at the Shelton Household, but also by exercising control over the account.” Mr. Shelton “‘did more than just passively benefit from the services.’”

Shelton v. Comcast Corp., No. 2:20-cv-01763 (E.D. Pa. Jan. 21, 2021).