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Arbitration / Court Decisions

Ninth Circuit Affirms Ruling That Successor Is Bound to Collective Bargaining Agreement

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“Although a predecessor collective bargaining agreement does not automatically bind a ‘perfectly clear’ successor, it may if the employer expresses an intent to be bound.” Here, Vectrus Systems Corp. entered into an agreement with Teamsters Local 631, wherein it promised to accept the terms and conditions of the preexisting collective bargaining agreement before staffing its operations. Thus, the fact that the staffing determination that gave rise to the dispute took place before the effective date of the collective bargaining agreement did not divest the arbitrator of the authority to arbitrate the dispute. The District of Nevada’s denial of Vectrus’ petition to vacate the arbitration award was affirmed.

Vectrus Systems Corp. v. Teamsters Local 631, No. 19-16640 (9th Cir. June 11, 2020).

First Circuit Rejects Argument That Arbitration Clause Was Unenforceable Because Contract Containing the Clause Was Allegedly Terminated and Superseded

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The First Circuit Court of Appeals recently rejected a party’s argument that an arbitration agreement was unenforceable because the contract containing the arbitration clause had been allegedly terminated and superseded. The court explained that arbitration clauses are generally freestanding and survive the termination of a contract, and concluded that the narrow circumstances in which a later agreement might terminate an arbitration clause were not satisfied in this case.

Kara Biller and her mother Joan McKenna sued Brookdale Greenwich Bay, an assisted living facility, for a variety of tort claims related to allegedly inadequate medical treatment McKenna received while she was a resident at Brookdale.

Brookdale moved to compel arbitration under the terms of a “residency agreement” that Biller signed on McKenna’s behalf when McKenna moved into Brookdale.

In response, Biller and McKenna argued, among other things, that the residency agreement and its arbitration clause expired when McKenna was subsequently moved to a new unit within Brookdale and a new implied-in-fact contract was created that superseded the residency agreement.

The district court declined to compel arbitration. The First Circuit reversed.

As an initial matter, the court rejected Brookdale’s argument that the arbitrator should decide gateway issues of arbitrability rather than the court. The residency agreement’s arbitration clause did not establish that such issues were for the arbitrator in clear and unmistakable language.

The court therefore considered Biller and McKenna’s arguments, including their contention that the residency agreement and its arbitration clause were void because the agreement contained a clause allowing either party to terminate the agreement if McKenna had to “be relocated due to [her] health.” The court noted that it was up to the arbitrator, not the court, to interpret that clause to determine what “relocate” meant and whether McKenna’s move within Brookdale qualified as a relocation that triggered that clause.

That did not end the matter, however, because Biller and McKenna argued that no agreement to arbitrate existed because the agreement had terminated when McKenna “relocated.” The court rejected that agreement. It explained that unless an agreement provides otherwise, arbitration clauses are freestanding and severable and that an argument that an arbitration clause is invalid on a ground that affects the entire agreement is generally for the arbitrator to decide. The court also explained that there is a presumption that arbitration clauses survive the underlying contract. There was no evidence that the arbitration clause was not severable in this case.

The court then rejected Biller and McKenna’s other arguments that the relocation had created an entirely new agreement that superseded the residency agreement and its arbitration clause and that the arbitration clause was unconscionable. Although the court noted that parties could extinguish arbitration clauses, there was no evidence that the parties did so in this case by, for example, entering into a new contract that completely covered the same subject matter as the original contract and that was inconsistent with that agreement. Nor was the agreement unconscionable under Rhode Island law, which sets a “daunting” standard for unconscionability.

Biller v. S-H Opco Greenwich Bay Manor, LLC, No. 19-1865 (1st Cir. June 5, 2020).

Fourth Circuit Finds Arbitration Clauses Are Valid and Enforceable, Confirms Chinese Arbitral Award

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The Fourth Circuit confirmed a foreign arbitration award issued in favor of third-party defendant Chongqing Rato Power Co. Ltd., a Chinese equipment manufacturer, against defendant Roger Leon. The parties negotiated and executed several contracts in China, each containing an arbitration clause requiring any disputes be resolved before a Chinese arbitral commission. Rato commenced arbitration when the relationship soured and the panel issued an award in Rato’s favor, which it sought to confirm in this action. Leon opposed the effort, claiming the contracts, and their arbitration clauses, were invalid because he was not represented by Chinese counsel when the contracts were signed. The district court disagreed and the Fourth Circuit affirmed, agreeing that there was no evidence of fraud, coercion, material misunderstanding, obvious unfairness, or any other situation that would invalidate the agreements.

The Fourth Circuit also affirmed the district court order confirming the award. Leon argued that the award was invalid because the Chinese arbitration proceedings were initiated while Rato’s motion to compel arbitration was still pending in a North Carolina state court. But the Fourth Circuit ruled that a party need not await a ruling on a motion to compel in order to initiate arbitration, whether pursuant to section 4 of the Federal Arbitration Act or otherwise. Leon asserted other defenses under article V of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, each of which was rejected. As such, the district court order was affirmed.

Denver Global Products, Inc. v. Leon, No. 18-1853 (4th Cir. Jun. 8, 2020).

Washington Supreme Court Finds Hospital Waived Its Right to Arbitration When It Chose to Litigate for Nine Months

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The Supreme Court of Washington recently affirmed the denial of Evergreen Hospital Medical Center’s motion to compel arbitration on the grounds that Evergreen waived its right to compel arbitration of claims arising under a collective bargaining agreement between Evergreen and the Washington State Nurses Association governing nurse employment.

A member employee brought this putative class action against her employer, Evergreen, alleging that Evergreen failed to give required rest and meal breaks. After nine months of litigation and the addition of a second named plaintiff, Evergreen moved to compel arbitration. The trial court denied the motion, and the court of appeals affirmed. Evergreen petitioned to the Supreme Court of Washington, which granted review.

The court analyzed three factors to determine whether Evergreen waived its right to arbitration: (1) knowledge of an existing right to compel arbitration; (2) acts inconsistent with that right; and (3) prejudice.

As to the first factor, the court found there was no dispute that Evergreen believed it had an existing right to arbitrate. As to the second factor, the court found that through its conduct, Evergreen chose to litigate for approximately nine months rather than arbitrate, and thus behaved inconsistently with a party seeking to arbitrate. The court noted that the parties engaged in discovery and litigation for approximately nine months without seeking mediation or awaiting a decision from the court in another case and that Evergreen did not move to compel until the third iteration of the complaint even though the complaint had almost identical claims throughout.

As to the third factor, the court found that granting the motion to compel arbitration this late in litigation would cause severe prejudice to the plaintiffs, who had already incurred more than $140,000 in legal fees (from discovery, sending the notice of the class action to all the nurses, and securing expert witnesses), and would improperly allow Evergreen to relitigate class certification on which it lost.

Thus, the Supreme Court affirmed the court of appeals on the ground that Evergreen waived the right to compel arbitration, and remanded to the superior court for further proceedings consistent with the Supreme Court’s opinion.

Lee v. Evergreen Hospital Medical Center, No. 97201-0 (Wash. June 4, 2020).

Oklahoma Supreme Court Finds Arbitrator, Not Court, to Determine Fraudulent Inducement Attack on Contract Containing Arbitration Clause

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The plaintiff-appellant filed suit in Oklahoma state court seeking to rescind a contract it entered into with the defendants, claiming the contract was procured by fraud. Citing an arbitration clause in the contract, the defendants moved to dismiss the suit and to compel arbitration. The question thus became whether the court or an arbitrator should determine a challenge of fraudulent inducement to the entirety of a contract containing an otherwise valid arbitration clause. The Supreme Court of Oklahoma held that state and federal law were aligned on the issue and required that the question be decided by the arbitrator. Specifically, the court concluded that Oklahoma law and the Federal Arbitration Act both adhere to the “separability doctrine.” The doctrine states that when parties agree to arbitrate, attacks on the validity of the contract – as distinct from the validity of the arbitration clause itself – are to be resolved by the arbitrator in the first instance. Because the allegations of fraud here were directed to the contract as a whole, not specifically to the arbitration clause, the court agreed with the lower court that the fraud issue must be referred to arbitration. As such, the court vacated an appellate court order and affirmed the lower court order granting the defendants’ motions to dismiss and to compel.

Signature Leasing LLC v. Buyer’s Group LLC, No. 115100 (Okla. June 9, 2020).