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Arbitration / Court Decisions

New Jersey Supreme Court Reinstates Arbitrator’s Decision Demoting School Official

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Under New Jersey’s Tenure Employees Hearing Law, when a school district files tenure charges against an employee, the state commissioner of education must refer the case to arbitration if he or she determines that the charges are “sufficient to warrant dismissal or reduction in salary of the person charged.” Amada Sanjuan, an assistant principal, was charged with “conduct unbecoming” after lying about the cause of a fall she had taken down a flight of stairs, which was caught on a security camera. The commissioner referred the case to arbitration, and, after a hearing, the arbitrator determined that Sanjuan should be demoted and reinstated without back pay.

Sanjuan filed a complaint seeking to vacate the arbitration award against her and to be reinstated as a tenured administrator with back pay. She argued that New Jersey law limited the possible penalties an arbitrator could impose to termination or a reduction of salary. Sanjuan argued that demotion was not an available penalty, and because the arbitrator had already heard and decided against termination, the arbitrator was collaterally estopped from firing her upon rehearing. The trial court ruled against Sanjuan, but the Appellate Division reversed.

On appeal, the New Jersey Supreme Court determined that the law limited the matters that could be referred to an arbitrator to those that could merit termination or a reduction in salary, but the law did not limit the arbitrator’s power to only those two possible remedies. Rather, the court found that arbitrators traditionally had wide-ranging discretion to fashion an appropriate remedy, and nothing in the law changed or limited that discretion. Nor did any contractual agreement relevant to the matter impose any additional limits on the penalties that the arbitrator could impose. As a result, the arbitrator had the authority to order Sanjuan’s demotion. The Supreme Court reversed and ordered that the arbitrator’s decision be reinstated.

Sanjuan v. School District of West New York, No. 087515 (N.J. Feb. 12, 2024).

Ninth Circuit Upholds Decision Compelling Arbitration Based on Terms of Use in Hyperlinks

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The Ninth Circuit Court of Appeals recently upheld a decision compelling arbitration based on an arbitration provision in website “terms of use,” even though those terms were in a hyperlink.

In Patrick v. Running Warehouse LLC, a group of consumers brought six putative class actions against online sporting goods retailers after their personal information was exposed in a data breach. When purchasing goods from the defendants’ websites, they had to click a button that said “place order” or “submit order.” Next to that button was a statement that read: “By submitting your order you … agree to our privacy policy and terms of use.” The phrase “terms of use” was a hyperlink that led to the defendants’ terms of use, which contained an arbitration provision.

The defendants move to compel arbitration based on the arbitration provision in the terms of use. The district court granted that motion and the plaintiffs appealed to the Ninth Circuit, which affirmed.

The plaintiffs primarily argued that the websites provided insufficient notice of the arbitration provisions. The Ninth Circuit rejected that argument. It noted that inquiry notice was sufficient as long as “the website provides reasonably conspicuous notice of the terms to which the consumer will be bound; and (2) the consumer takes some action, such as clicking a button or checking a box, that unambiguously manifests his or her assent to those terms.” The court noted that hyperlinks can satisfy that standard as long as they are “displayed in a font size and format such that the court can fairly assume that a reasonably prudent Internet user would have seen it.” The defendants’ hyperlinks satisfied that standard because, for example, the notice was prominently displayed on an uncluttered page, clear and legible, and the “terms of use” hyperlink, colored bright green, was easily distinguishable and clearly clickable, resembling other links on the page.

The Ninth Circuit distinguished those facts from a case in which it recently held that there was insufficient inquiry notice because the “terms and conditions” in that case were printed in a tiny gray font much smaller than surrounding website elements, it was “barely legible to the naked eye.”

The Ninth Circuit also rejected the plaintiffs’ arguments that the arbitration provisions were invalid under California law and that they were unconscionable. The court further held that the parties delegated the question of arbitrability by invoking JAMS’ rules, which provide that arbitrability disputes are for the arbitrator, not the court.

Second Circuit Holds That Refusal to Enjoin Arbitration Is Immediately Appealable, Clarifies Standard for Obtaining Preliminary Injunction Enjoining Arbitration

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The Second Circuit Court of Appeals recently held that a district court’s refusal to enjoin arbitration was immediately appealable because the arbitration agreement was governed by state law rather than the Federal Arbitration Act. The Second Circuit went on to clarify the standard for obtaining a preliminary injunction enjoining arbitration and remanded the case for a determination of whether that standard was met.

The Resource Group International Ltd. (TRGI) and related entities and TRGI’s chairman and director, Muhammad Ziaullah Khan Chishti, entered into a preferred stock purchase agreement with several other entities. The agreement contained an arbitration clause that provided for arbitration in accordance with “the Uniform Arbitration Act as in effect in the State of New York.” Chishti subsequently resigned from TRGI and executed a release agreement with the entities who had signed the stock purchase agreement. The release agreement contained (1) a forum-selection clause designating the state and federal courts in New York as the “exclusive jurisdiction” for any litigation between the parties and (2) a merger clause stating that the release agreement constituted the “entire agreement” between the parties and that it “supersede[d] all prior arrangements or understandings.” The release agreement required Chishti to refrain from commencing litigation or other proceedings against TRGI and others.

Chishti subsequently initiated arbitration against TRGI claiming that TRGI had breached the stock purchase agreement. TRGI then filed suit in the Southern District of New York claiming that Chishti had breached the release agreement. TRGI sought a declaratory judgment that the release agreement superseded the stock purchase agreement’s arbitration provisions and a temporary restraining order and a preliminary injunction staying the arbitration proceedings. The district court denied the preliminary injunction, concluding that TRGI had not shown irreparable harm or a likelihood of success. TRGI appealed.

The Second Circuit first concluded that it had jurisdiction to consider TRGI’s interlocutory appeal. Although Section 16 of the FAA precludes appeals from interlocutory orders refusing to enjoin arbitration subject to the FAA, the Second Circuit explained that the parties to the stock purchase agreement “opted out of the FAA and expressly elected New York state law to govern any arbitration.” New York law allowed for interlocutory appeals from orders refusing to enjoin arbitration.

Turning to the merits, the Second Circuit held that the release agreement did in fact supersede the stock purchase agreement and that TRGI was likely to succeed on its claim on that point. The release agreement also made clear, however, that at least some claims could be arbitrable. The Second Circuit therefore remanded the case to determine whether the instant claims were arbitrable under the release agreement. The Second Circuit also explained that “forced arbitration of inarbitrable claims may constitute irreparable harm when the arbitration is one for which any award would not be enforceable and for which the time and resources expended in arbitration is not compensable by any monetary award of attorneys’ fees or damages.” The Second Circuit instructed the district court to consider that standard on remand.

Resource Group International Ltd. v. Chishti, No. 23-286 (2d Cir. Jan. 22, 2024).

Eleventh Circuit Dismisses Appeal From Order Compelling Arbitration and Staying Case for Lack of Jurisdiction

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The Eleventh Circuit Court of Appeals dismissed, sua sponte, a district court order that granted defendant Trina Solar (U.S.) Inc.’s motion to compel arbitration and stay the underlying case. The court did not address the facts of the case in its per curiam opinion, other than to note the dismissal and closure of the case would not impact the merits of the litigants’ claims. Without discussion, the court based its dismissal on 9 U.S.C. § 16(b)(1)–(3), and the precedent cited in its opinion confirming “[a]n appeal may not be taken from an interlocutory order that compels arbitration and stays, rather than dismisses, the action.” The court noted the district court order that the plaintiff sought to appeal “stayed, rather than dismissed, the case and expressly contemplated further proceedings.” The court dismissed the appeal, concluding it lacked jurisdiction to consider the underlying order compelling arbitration and staying the case.

Allco Finance Limited Inc. v. Trina Solar (U.S.) Inc., No. 23-13968 (11th Cir. Jan. 11, 2024).

Court Holds Federal Law Governs FAA Arbitration Dispute Related to Surplus Lines Insurance Contract, Compels Arbitration Under Fifth Circuit Preemption of State Law

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Harbor Homeowner’s Association Inc. sued its insurers in Louisiana state court seeking to recover damages allegedly caused by the insurers’ failure to pay claims related to Hurricane Ida. The insurers removed to federal court, arguing that the action related to an arbitration agreement falling under the Federal Arbitration Act (FAA) and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention), and filed a motion to compel arbitration.

The plaintiff argued in response that arbitration provisions in surplus lines insurance contracts are not enforceable under Louisiana law. The plaintiff also argued that, because the policy included a choice-of-law provision selecting New York law, the court should follow Second Circuit precedent holding that, pursuant to the McCarran-Ferguson Act, the New York Convention did not preempt contrary state law.

The court disagreed, noting that arbitrability under the FAA is a question of federal law, not state law, whereas a choice-of-law clause in an insurance policy provides the substantive insurance law applicable to the contract. As such, the choice-of-law clause did not bear on the arbitrability of the dispute.  Moreover, the court noted that “application of New York state law does not entail application of Second Circuit federal law simply because New York sits within the Second Circuit; a Second Circuit case construing federal law is not New York state law.”

Based on the above, the court found that it was constrained to follow Fifth Circuit precedent holding that the New York Convention preempts contradictory state law, including Louisiana law prohibiting the enforcement of arbitration provisions in insurance contracts, and ordered the parties to arbitrate their dispute.

Harbor Homeowner’s Association, Inc. v. Certain Underwriters at Lloyd’s London, No. 2:23-cv-05043 (E.D. La. Jan. 12, 2024).