Now that we know the Supreme Court is not going to be addressing non-signatories’ ability to compel arbitration this term (at least not in the Toyota case), we can take a moment to look at what lower courts are doing with that issue.   In short, the trend is for courts to clarify that it is very difficult for defendants who do not have an arbitration agreement with the plaintiff (non-signatories) to use equitable estoppel to compel arbitration of the plaintiff’s claims based on the plaintiff’s arbitration agreement with another party.

In Rajagopalan v. NoteWorld, LLC, 718 F.3d 844 (9th Cir. 2013), an engineer who could not repay his school loans signed up with a company offering debt solutions.  His contract with the debt solutions company contained an arbitration clause.  When the debt solutions did not materialize, the engineer sued a third party, NoteWorld, which had withdrawn money from his bank account as part of the debt solution program and refused to refund it.  NoteWorld had no agreement to arbitrate with the engineer, but sought to compel arbitration anyway, relying in part on equitable estoppel.  With respect to the equitable estoppel doctrine, the Ninth Circuit made clear that there is a nearly insurmountable burden for a non-signatory defendant to meet to compel arbitration.  “We have never previously allowed a non-signatory defendant to invoke equitable estoppel against a signatory plaintiff, and we decline to expand the doctrine here.”

Later this summer, the Ninth Circuit tackled the topic again in Murphy v. DirecTV, Inc., 724 F.3d 1218 (9th Cir. 2013).  In that case, customers alleged that Best Buy and DirecTV worked together to defraud and mislead DirecTV purchasers.  Only DirecTV had an arbitration agreement with the consumers and it precluded class actions.  Yet, Best Buy moved to compel arbitration and the district court granted the motion, finding that equitable estoppel compelled that result.  The Ninth Circuit reversed.  It found that neither of the two tests for equitable estoppel had been met.  First, the plaintiffs’ claims against Best Buy did not rely on the substance of their agreement with DirecTV, since the claims focused on the methods of selling the product.  And second, the alleged concerted action between the signatory (DirecTV) and nonsignatory (Best Buy) was not “intimately connected with the obligations of the underlying agreement.”

These two Ninth Circuit decisions are in addition to the four decisions from the Fifth and Eighth Circuits denying non-signatories the right to compel arbitration (discussed in previous posts) and the Ninth Circuit’s Toyota decision in February, finding Toyota could not rely on the arbitration clause in the agreement between the car buyers and the car dealerships.

The federal courts are not the only ones addressing this issue.  A Texas Court of Appeals recently rejected a defendant’s attempts to use equitable estoppel to compel arbitration in VSR Fin. Servs., Inc. v. McLendon, __ S.W.3d __, 2013 WL 4083853 (Tex. Ct. App. Aug. 14, 2013).  And in August, the New Jersey Supreme Court significantly increased the burden for a non-signatory seeking to compel arbitration by demanding a showing of detrimental reliance.  In Hirsch v. Amper Fin. Servs., 71 A.3d 849 (N.J. 2013), New Jersey’s highest court found it was not enough to show a plaintiff’s claims were intertwined with the contract containing an arbitration clause, “the doctrine of equitable estoppel does not apply absent proof that a party detrimentally rel[ied] on another party’s conduct.”  Because the non-signatories had no proof that they knew of the arbitration clause between plaintiffs and the signatory, let alone relied on benefiting from it, they could not compel arbitration.

The lesson here for potential plaintiffs is that it is possible to avoid an arbitration agreement (especially one precluding class actions) if you can make your claims against a non-signatory.  And the lesson for potential defendants is you should consider asking some of your business partners to include you as a third-party beneficiary in their contracts with consumers.

The U.S. Supreme Court has been knocking out blockbuster arbitration opinions annually in recent years.  2010?  Stolt-Nielsen and Rent-a-Center.  2011?  Concepcion.  2012? CompuCredit (Okay, that does not qualify as a blockbuster.) 2013? AmEx and Sutter.  At this point, SCOTUS has accepted roughly half of the cases it will hear this year, and only one arbitration case is on the docket, with two other petitions having been denied.

The case it will hear (on December 2) is BG Group v. Republic of Argentina.  (ScotusBlog’s case page here.)  That case, according to Petitioner, presents this question: “In disputes involving a multi-staged dispute resolution process, does a court or instead the arbitrator determine whether a precondition to arbitration has been satisfied?” 

The Argentina case arises out of the economic crisis in Argentina in the late 90s, and the measures the government took to address that crisis.  The Petitioner is a British company that invested in an Argentinian natural gas company.  It claimed that the Argentine measures “destroyed its investment and restricted it from both pursuing judicial relief and benefiting from the renegotiation process.”  The parties participated in UNCITRAL arbitration and Argentina lost.  Most important to the appeal, Argentina argued that the arbitrators lacked authority because the Bilateral Investment Treaty between the U.K and Argentina requires 18 months of litigation in an Argentine court before the arbitration could proceed, and no litigation had taken place in Argentine courts.  The arbitration panel determined it had jurisdiction to hear the case and ruled for the investor.

Argentina then moved to vacate the award, and the district court denied its motion.  The D.C. Circuit, however, reversed that decision and vacated the arbitration award.  It found the Panel had “rendered a decision wholly based on outside legal sources and without regard to the contracting parties’ agreement establishing a precondition to arbitration.”

It will be interesting to see if SCOTUS deals with this case based purely on its deferential standard of review, a la Sutter, or whether it takes the opportunity to clarify which issues are “gateway” issues for courts to decide.

SCOTUS denied cert in these two other arbitration cases on Monday:

Toyota Motor Corp. v. Choi, an appeal from this Ninth Circuit decision.  (Case page at ScotusBlog here.)  The Petitioner framed the question presented as:

“The parties to a contract agreed to arbitrate any claim or dispute arising out of the contract, including disputes over the arbitrability of the claim itself. Plaintiffs sued a non-signatory to the contract, and that non-signatory defendant sought to compel arbitration to determine whether the plaintiffs’ claims are arbitrable. The question presented in this case is whether the non-signatory defendant can compel arbitration of the arbitrability of the plaintiffs’ claims.”

In other words, can non-signatories use a delegation clause to get an arbitrator to decide whether equitable estoppel applies?  That issue will have to develop further in the district and circuit courts.

Bakoss v. Certain Underwriters at Lloyd’s of London, an appeal from this Second Circuit decision.  (Case page here.)  The Petitioner framed the question presented as two-fold:

“1. By electing not to define the term ‘arbitration,’ did Congress evince an intent to respect relevant state-law definitions of ‘arbitration,’ so long as applying them would not undermine the FAA’s policy goals?

2. If it is proper to disregard relevant state-law definitions of ‘arbitration’ in favor of one created by federal judges, should that definition exclude ADR that does not necessarily (a) resolve the plaintiff’s entire cause of action (b) through an adversarial process?”

I could hardly believe SCOTUS didn’t bite on the very definition of arbitration!  (Of course, I was biased, having authored an amicus brief in favor of cert.)

There is still time to get cases on the Court’s Spring calendar, but at this point, the Argentina case is the only arbitration law SCOTUS will be deciding.

On October 1, new Commercial Arbitration Rules became effective at the American Arbitration Association (AAA).  These rules are likely to apply to all commercial arbitrations filed on and after October 1 (unless an arbitration agreement specifically provides for old rules).  The AAA posted its own summary of the changes.  Four of the most notable include:

  • Greater specificity about allowable discovery, as well as clear authority for arbitrators to enforce discovery orders or sanction those who do not comply;
  • Specific authority for arbitrators to hear dispositive motions if “the moving party has shown that the motion is likely to succeed and dispose of or narrow the issues in the case”;
  • Authority for parties to seek emergency relief (even without having provided for it separately in the arbitration agreement) from an emergency arbitrator within specific timelines; and
  • The parties and their counsel now have a separate duty to disclose “any circumstance likely to give rise to justifiable doubt as to the arbitrator’s impartiality or independence” including past dealings with the parties and their representatives.

In my view, these are all very positive changes.

Speaking of rules, two recent courts compelled arbitration when the arbitration agreement provided for administration by the defunct NAF.  (Previous posts on that topic here and here.)  The definite trend now is to enforce arbitration agreements calling for administration by the NAF, albeit with some procedural “fixes” to the agreement.

In one case, the Seventh Circuit compelled arbitration even though the parties’ loan agreement provided for “binding arbitration by one arbitrator by and under the Code of Procedure of the National Arbitration Forum [NAF]” and the NAF had not accepted consumer cases since July of 2009.  Green v. U.S. Cash Advance Illinois, LLC, __ F.3d ___, 2013 WL 3880219 (7th Cir. July 30, 2013).  (Curiously, the agreement was signed in 2012, so there was plenty of time to revise it after the NAF stopped taking cases.)  The district court had refused to compel arbitration, finding the NAF was an “integral part of the agreement” and without it the arbitration agreement was void.  Noting a circuit split in which the 3d and 11th Circuits have compelled arbitration, despite selection of the NAF, while the 5th Circuit has declared agreements calling for the NAF unenforceable, the 7th Circuit sided with those compelling arbitration.  The decision engaged in a lengthy analysis suggesting that the line of cases finding one aspect of an arbitration clause “integral” contradicts Section 5 of the FAA and does not come from a general state law principle allowable under Section 2.  The Green decision has a dissent from Judge Hamilton, largely relying on the fact that the NAF Code itself “provides for arbitration by the Forum or by nobody.  Since the Forum made itself unavailable, that should mean arbitration by nobody.”

In a less contentious case, the Sixth Circuit also enforced an arbitration clause that referenced the NAF.  In that arbitration clause, however, the drafters had inserted a Plan B: “The National Arbitration Forum will be the Administrator unless…” the lender chose the AAA under certain circumstances.  The court concluded that even though the NAF was the preferred forum, that language could be excised pursuant to the note’s severability clause, which left the language authorizing arbitration before the AAA.   Smith v. Computertraining.com, Inc., 2013 WL 4406999 (6th Cir. Aug. 16, 2013).

In recent weeks, both the Second and Sixth Circuits showed how difficult it is to vacate arbitration awards.

The Second Circuit decision has more drama, so I’ll start there.  In Kolel Beth Yechiel Mechil of Tartik-Ov, Inc. v. YLL Irrevocable Trust, __ F.3d __, 2013 WL 4609100 (2d Cir. Aug. 30, 2013), the losing party in an arbitration tried to vacate the award using both Section 10(a)(1) and 10(a)(2) of the Federal Arbitration Act — i.e., corruption and evident partiality.  The dispute was over ownership of life insurance policies, and when the dispute arose, the parties agreed to arbitrate before a panel of three rabbis.  Each party appointed a rabbi and the parties jointly selected the third rabbi (the only neutral arbitrator).  The arbitration agreement allowed the rabbinical panel to make its decision in any way the rabbis wished.  After seven unrecorded sessions, but after only one witness testified, two members of the panel issued an award in favor of the claimant.

In its effort to vacate the award, the losing party primarily alleged that the neutral arbitrator had actually been corrupt and partial.  It presented testimony that the neutral arbitrator had called the winning party almost two weeks before the award was issued, indicating a ruling was coming in its favor.  The district court refused to vacate the award, and the Second Circuit affirmed that decision.  In analyzing whether the panel was corrupt or sufficiently partial to vacate the award, the Second Circuit held that the standard it has used for evident partiality will be used in cases of corruption as well: “Evidence of corruption must be abundantly clear in order to vacate an award.”  Because there was no record of the arbitration proceedings, and the testimony about the phone call was not direct or definite evidence of bias, the law did not support vacatur.

In Teamsters Local Union No. 436 v. The J.M. Smucker Co., 2013 WL 4750782 (6th Cir. Sept. 5, 2013), two related arbitration proceedings were at issue.  An employer had eliminated the position of a union member (Graham), and the rules allowed Graham to then “bump” an employee with less seniority.  Graham chose to “bump” — take the position of — Rose, but the employer refused to allow the change.  So, Graham filed a grievance and ended up arbitrating the issue of whether she had the right to take Rose’s position.  The arbitrator ruled in favor of Graham.  After that ruling, the employer did not allow Rose to turn around and “bump” someone else.  Rose arbitrated his claim that he should get the same opportunity.  The second arbitrator made findings that were directly contrary to the first arbitrator’s (including about Graham’s job change) and then concluded Rose had no right to bump someone else.

The union sought to vacate the second arbitrator’s award, alleging the arbitrator had exceeded his powers by disregarding the issue preclusive effect of the first arbitrator’s findings.  The district court agreed and vacated the award.  But the Sixth Circuit reversed.  In language similar to SCOTUS’ decision in Sutter (but citing cases specific to labor arbitrations — do we really need a separate set of rules specific to labor arbitrations?), the court found that the arbitrator had done enough, even though he applied the collective bargaining agreement in a “cursory, meandering, and unclear” way.  “In summary, it does not matter that [second arbitrator] erred in failing to give the [first award] preclusive effect, as long as he was arguably construing or applying the CBA.  This is true even if [he], as he did here, committed ‘serious,’ ‘improvident,’ or ‘silly’ errors in resolving the merits of the dispute.”

You hear more about Lena Dunham than you expect, given the audience for “Girls”, right?  (Read this article for more.)  The same is true, or should be true, for the contract defense of illusoriness.  After decades of disuse, it is popping up more and more often as a defense to the enforcement of arbitration clauses (like in New Mexico and the Fifth Circuit), and therefore qualifies as the “it girl” of arbitration law.  Just last week, the Sixth Circuit issued a new decision, affirming the district court’s denial of a motion to compel arbitration based on its conclusion that the arbitration agreement was illusory.

In Day v. Fortune Hi-Tech Marketing, Inc., 2013 WL 4859781 (6th Cir. Sept. 12, 2013), a number of independent sales representatives sued Fortune, alleging it was running an illegal pyramid scheme.  The parties’ agreement had an arbitration clause.  It also had a separate clause saying that Fortune could modify the agreement at any time, effective upon notice. Fortune moved to compel arbitration, and the district court denied the motion.  The district court concluded the arbitration clause was unenforceable because Fortune had the ability to modify the contract at any time, making its promises illusory and meaning the agreement lacked consideration under Kentucky law.  On appeal, the Sixth Circuit affirmed that ruling.

Relying on Kentucky state court cases from 1912, 1938, and 1949, the Sixth Circuit held that “because the contract lacked consideration, the entire contract, including the arbitration clause, is void and unenforceable.”  The problem, as the district court found, is that “in this case, in effect, [Fortune] promised to do certain things unless it decided not to, and that is by definition illusory.”   The court noted that Fortune could have made its contract enforceable by ensuring that unilateral changes were not effective until a notice period (30 days?) had passed.

The problem that I see with the reasoning in this case is it does not confront the severability doctrine (that began with Prima Paint and extends to Rent-a-Center).  That line of Supreme Court case law holds that in deciding the validity of an arbitration agreement, courts may not consider arguments that attack the validity of the contract as a whole, and instead courts are limited to arguments that identify something invalid in the arbitration agreement itself.  In this case, the invalidity came from the unilateral modification clause, which was outside the arbitration agreement.  The Sixth Circuit did not discuss that argument, so maybe no one argued it.  Alternatively, the Sixth Circuit may have concluded the illusoriness sufficiently affected the arbitration clause (it did say “Defendant could modify the arbitration clause to suit its purposes at any time”) to satisfy the severability doctrine, but that analysis is not set forth.  (To be fair, this case is not set for publication.)

Is illusoriness an up and coming argument for invalidating arbitration agreements?  Yes.  Should drafting parties reduce their risk by ensuring that unilateral modifications are not effective for a certain period of time?  Yes.  Does the party hoping to avoid arbitration need to construct an argument that the illusoriness is specific to the arbitration agreement itself?  That answer should also be yes.

In January of this year, the Eighth Circuit was the first federal appellate court to refuse to adopt the National Labor Relations Board’s ruling on class action waivers in employment contracts.  (The previous year, in D.R. Horton, the NLRB declared it a violation of federal labor law for employers to require employees to waive their rights to class actions.)  Last month, the Second and Ninth Circuits joined the Eighth Circuit in that stance.

In Sutherland v. Ernst & Young, __ F.3d__, 2013 WL 4033844 (2d. Cir. Aug. 9, 2013), an employee brought a putative class action for violations of the Fair Labor Standards Act.  The employer, E&Y, moved to compel arbitration.  Because the lead plaintiff had a potential recovery of only $1,900, but her attorneys fees and expert costs would likely reach $200,000, the district court relied on the Second Circuit’s Amex III decision and denied the motion to compel arbitration.  Now that SCOTUS has reversed the Second Circuit in Amex III, however, the Second Circuit ruled that this case against E&Y must proceed in individual arbitrations.

While the Second Circuit did not address the NLRB ruling directly, it expressed its disagreement sub silentio.  It found that Congress did not preclude the waiver of collective action claims in the FLSA, and cited the Eighth Circuit’s decision in Owen v. Bristol Care repeatedly.  It also hinted that recent Supreme Court rulings make clear that the NLRB ruling is unsupported.

In contrast, the Ninth Circuit did directly address the NLRB ruling in Richards v. Ernst & Young, LLP, __ F.3d__, 2013 WL 4437601 (9th Cir. Aug. 21, 2013).  In Richards, three employees brought wage and hour claims against the employer (E&Y again).  After the Concepcion decision in 2011, the employer moved to compel arbitration, and the district court denied the motion, finding E&Y had waived its right to arbitrate.  Although there was “years of litigation” before E&Y moved to compel, the Ninth Circuit found that the employee had not proven any prejudice and therefore E&Y had not waived its right to arbitrate.  In particular, dismissal of some claims (without prejudice) was not prejudicial, nor was the expense of discovery.

Although the court did not need to address the NLRB ruling (because it found the employee had not proven prejudice and had not raised the NLRB argument at the district court level), it went out of its way to say that “the only court of appeals, and the overwhelming majority of the district courts, to have considered the issue have determined tha they should not defer to the NLRB’s decision in D.R. Horton because it conflicts with the explicit pronouncements of the Supreme Court concerning the policies undergirding the Federal Arbitration Act.”  Therefore, the employee claims in Richards also had to proceed on an individual basis in arbitration.

What’s the opposite of a circuit split?  A circuit pile-on?  In any case, that’s what we’ve got so far on this issue.  The federal appellate courts are ganging up on the NLRB on the issue of contractually precluding class and collective waivers.

After reading more than 40 decisions about arbitration from state high courts, issued just in the past eight months, I have two bits of wisdom to share.  First, that is not the best way to spend your summer vacation, even for a devoted arbitration nerd.  And second, there are arbitration issues percolating in state courts that counsel practicing in this area should be aware of.  In particular, state courts are: 1) working hard to avoid having the FAA preempt their developed defenses to arbitration clauses; and 2) confronting a lot of issues relating to whether there is an agreement to arbitrate at all (especially authority issues in nursing home settings).

PREEMPTION

A big category of cases relate to preemption.  Most of these cases involve state courts trying to explain how application of state law is not preempted by federal law under Concepcion.  (One case that falls under this heading, Feeney, has already been reversed.)

The Supreme Court of Washington, in particular, spilled a lot of ink explaining why Concepcion did not bar it from reaching various results.  For example, it held that an arbitration clause requiring that the demand be made within 30 days, the hearing take place in California, and the prevailing party recover attorneys fees was unconscionable.  Gandee v. LDL Freedom Enterprises, Inc., 293 P.3d 1197 (Wash. 2013).  It found Concepcion did not preclude that result.  Washington also concluded that Concepcion did not preclude it from enforcing a state statute prohibiting insurance contracts from calling for arbitration (it held FAA preemption was essentially preempted by the McCarran-Ferguson Act).  State v. James River Ins. Co., 292 P.3d 118 (Wash. 2013).  Finally, Washington refused to vacate an arbitration award in favor of Subway franchisees based on the franchisor’s argument that its arbitration agreement called for arbitration in Connecticut, but the Washington court compelled arbitration in Washington.  Saleemi v. Doctor’s Assocs., Inc., 292 P.3d 108 (Wash. 2013).  While rejecting the franchisor’s preemption arguments, the court said (pre Amex) “[w]hether Concepcion reaches beyond class arbitraiton procedures is subject to debate.”  Id.

Montana found that Concepcion did not prevent it from declaring the arbitration agreement in a payday loan unconscionable.  Kelker v. Geneva-Roth Ventures, Inc., 303 P.3d 777 (Mont. 2013).  The Supreme Court of Montana applied a Montana rule invalidating adhesion contracts if they are not within the weaker party’s “reasonable expectations” or are otherwise oppressive.  In applying the rule, it focused on the facts that the arbitration clause was not conspicuous, the plaintiff did not understand it, the plaintiff was less sophisticated than the lender, and the clause was vague.  Two justices dissented, noting that Montana has only applied the rule to evaluate arbitration clauses and therefore it is preempted under the Concepcion reasoning.  Those two justices got the last laugh — the Ninth Circuit in July found that Montana’s rule is preempted under Concepcion.

In another case involving a payday lender, the Supreme Court of Florida concluded the lower court’s ruling was preempted.  McKenzie Check Advance of Florida, LLC v. Betts, 112 So. 3d 1176  (Fla. 2013).  In that case, the trial court found the arbitration clause was void as against public policy because it would prevent consumers from vindicating their state statutory rights.  The high court, however, found that Concepcion prevented Florida from adopting its own state-law version of the Green Tree rule at issue in Amex (which only applies to federal statutes, and has now been decimated in any case). 

Finally, addressing both nursing home arbitration and preemption, New Mexico held that the party alleging an arbitration agreement is unconscionable bears the burden of proving that unconscionablility, even when the other party is a nursing home accused of negligent care.  Strausberg v. Laurel Healthcare Providers, LLC, __ P.3d __, 2013 WL 3226753 (N.M. 2013).  The court noted that to adopt the opposite rule would be preempted by the FAA.

AUTHORITY

Really, the heading for this could be “Nursing Home Arbitration Litigation,” because in 2013 there have already been five separate opinions from state high courts relating to when wrongful death or negligence claims against nursing homes have to be arbitrated.  In general, the issue is: did the relative who signed documents for the nursing home resident have the resident’s authority to sign on his or her behalf?  Without proof of authority, state courts have concluded that there is no valid arbitration agreement in the nursing home admission documents.  E.g., SSC Montgomery Cedar Crest Ooperating Co. v. Bolding, __ So. 3d__, 2013 WL 1173975 (Ala. 2013); Courtyard Gardens Health & Rehab., LLC v. Quarles, __ S.W.3d __, 2013 WL 2361051 (Ark. 2013); GGNSC Batesville, LLC v. Johnson,  109 So. 3d 562 (Miss. 2013); State v. King, 740 S.E.2d 66 (W. Va. 2013).  However, if the resident dies, his or her estate and heirs are bound by an arbitration agreement the resident actually signed.  Laizure v. Avante at Leesburg, Inc., 109 So. 3d 752 (Fla. 2013).

NON-SIGNATORIES

Another issue that comes up regularly in both state and federal courts is when arbitration can be enforced by or against non-signatories.  On that topic, the Supreme Court of New Jersey found that the lower courts had erred by allowing a non-signatory to compel arbitration.  Hirsch v. Amper Fin. Servs., LLC, __ A.3d __, 2013 WL 4005282 (N.J. 2013).  The court disliked the way the lower courts had applied the equitable estoppel doctrine.  “Equitable estoppel is more properly viewed as a shield to prevent injustice rather than a sword to compel arbitration.”  Id. at *1.   Even when the parties and claims are intertwined, New Jersey will not compel arbitration without proof of detrimental reliance.

DID THE PARTIES INTEND ARBITRATION TO BE PART OF THE AGREEMENT?

The Supreme Court of Iowa recently concluded that an agreement to arbitrate existed, even though all negotiations of the contract were oral and did not mention arbitration.  Bartlett Grain Co. v. Sheeder, 829 N.W.2d 18 (Iowa 2013).  Over the course of several phone calls, Sheeder agreed to sell corn to Bartlett at particular prices on certain dates.  Bartlett then sent Sheeder confirmation forms to sign, which provided for arbitration under the National Grain Feed Association arbitration rules.  The court relied largely on the UCC to reject Sheeder’s argument that he was not bound by the arbitration term in the confirmations.

THE ARBITRATION CLAUSE IS UNENFORCEABLE

An interesting New Mexico case found an arbitration agreement was illusory.  Much like a 2012 Fifth Circuit case applying Texas law, the New Mexico Supreme Court found the employer’s promise to arbitrate was illusory because the employer could amend or terminate its Dispute Resolution Program at any time, even after the employee’s claim accrued.  Flemma v. Halliburton Energy Servs., Inc., 303 P.3d 814 (N.M. 2013).

In addition, the Gandee decision from Washington and Kelker decision from Montana (discussed in the preemption section above) both found arbitration agreements unconscionable in consumer settings.

APPEALS

One area where state courts seem to be completely in line with the federal courts is in enforcing the limited bases for appealing arbitration awards.  So far this year, for example, Mississippi declared that “manifest disregard of the law” is not a valid basis for vacating arbitration awards under Mississippi’s arbitration act.  Robinson v. Henne, 115 So. 3d. 797 (Miss. 2013); but see C-Sculptures, LLC v. Brown, __ S.E.2d __, 2013 WL 1898379 (S.C. 2013) (applying the state uniform arbitration act, not the FAA, and vacating an award based on the arbitrator’s “manifest disregard” of state law).

New Mexico held that an employee who did not raise any objection about the scope of his arbitration proceedings with the arbitrator had waived any right to later argue that he reserved some claims for litigation.  Horne v. Los Alamos Nat’l Security, LLC, 296 P.3d 478 (N.M. 2013).  That decision is in accord with the recent decisions of the Minnesota Court of Appeals finding that parties must raise objections with arbitrators or else they are waived.

**Why this doozy of a blog post?  Because ArbitrationNation just celebrated its second birthday!  Nothing else quite says “thanks for sticking with me” like 1250 dense words… **

Put this post in the “I called it” category.

On June 12, the Massachusetts Supreme Judicial Court declared in Feeney that class arbitration waivers are invalid under Massachusetts law if plaintiffs cannot effectively pursue their claims in individual arbitration.  On June 20, the U.S. Supreme Court decided American Express, holding that arbitration agreements must be enforced according to their terms under the Federal Arbitration Act, even if it means that low-dollar claims will not be prosecuted.  That same day, this blog predicted that Feeney would be overturned based on Amex.  On August 1, as anticipated, Massachusetts’ highest court concluded “that following Amex, [its] analysis in Feeney II no longer comports with the Supreme Court’s interpretation of the FAA.”  Feeney v. Dell, Inc., __ N.E.2d __, 2013 WL 3929051 (Aug. 1, 2013).

The justices of Massachusetts make clear that they disagree with the Amex majority, though:  “Although we regard as untenable the Supreme Court’s view that ‘the FAA’s command to enforce arbitration agreements trumps any interest in ensuring the prosecution of low-value claims,’ [] we are bound to accept that view as a controlling statement of Federal law.”

More predictions about state court decisions in next week’s anniversary post. . . that’s right ArbitrationNation is almost two years old!

*If you like having your own personal arbitration crystal ball, or if you otherwise find this blawg useful or interesting, please consider nominating it for the ABA Journal’s list of the top 100 Blawgs!  The deadline is August 9 and ArbitrationNation would be honored to be listed for a second year.  http://www.abajournal.com/blawgs/blawg100_submit/

 

In two decisions this week, courts consider whether arbitration awards can be vacated based on arbitrators’ decisions to exclude evidence.  In both cases, the courts affirm an arbitrator’s authority to make reasonable evidentiary decisions — excluding hearsay and denying tardy subpoena requests — as long as those decisions do not deny a party a fair hearing.

In LJL 33rd Street Assocs. LLC v Pitcairn Props. Inc., __ F.3d __, 2013 WL 3927615 (2d Cir. July 31, 2013), a dispute over the valuation of a luxury high-rise in NYC, the arbitrator excluded four exhibits.  All four contained valuations by entities or individuals who were not called as witnesses in the hearing.  The federal district court then vacated the arbitrator’s determination of value under Section 10(a)(3) of the FAA.  It reasoned that, while the exhibits were hearsay, they should have been admitted and the objections should have gone to their evidentiary weight.

The Second Circuit reversed the vacatur with instructions to confirm the award.  It noted that Section 10(a)(3) of the Federal Arbitration Act only allows vacatur of an award if arbitrators are “guilty of misconduct” in “refusing to hear evidence pertinent and material to the controversy.”  To violate that standard, excluded evidence must impair the “fundamental fairness” of the proceeding.  The court found this arbitration proceeding was fundamentally fair for two reasons.  First, there was nothing preventing the complaining party from bringing live witnesses to authenticate the documents.  And second, if the exhibits had been allowed, the other side would have been prejudiced by its inability to cross-examine the authors of those valuations.

In Doral Financial Corp. v. Garcia-Velez, __ F.3d __, 2013 WL 3927685 (1st Cir. July 31, 2013), the issue was the arbitrators’ decision not to issue subpoenas to a third party.  In that employment dispute, the employer did not seek any subpoenas (or document requests) before the deadline in the scheduling order.  Then, after the arbitration hearing had begun (but was on a recess), the employer requested the arbitrators issue subpoenas for documents and hearing testimony from a third party.  The arbitrators denied the request as untimely, and later awarded the employee almost $2.5 million.

The employer moved to vacate the award under Section 10(a)(3), arguing that the denial of its subpoena request deprived it of a fair hearing.  Both the district court and appellate court refused to vacate the award.  With colorful language reminiscent of earlier arbitration decisions, the First Circuit described the employer as “cling[ing] like a limpet in the heaviest sea to the ‘fair hearing’ requirement subsumed in [Section] 10(a)(3).”  The limpet’s ride was cut short by the fact that the employer had received both adequate notice of the schedule for requesting discovery and the opportunity to present relevant evidence and arguments (as well as continuances when requested).  The court also noted that the employer had nothing but a hunch that the documents and testimony it sought woudl have yielded relevant information, declaring “[w]e cannot vacate an arbitral award based on sheer speculation alone.”  [In confirming the arbitrator’s grant of pre-award interest, the court closed its discussion with “To say more on this front would be to carry coals to Newcastle.”  What does that even mean??!]

*If you find this blawg useful or interesting–and definitely if the posts have helped you brief an arbitration issue or draft an arbitration agreement–please consider nominating it for the ABA Journal’s list of the top 100 Blawgs!  ArbitrationNation would be honored to be listed for a second year.  http://www.abajournal.com/blawgs/blawg100_submit/

In a decision that confirms arbitrators’ broad discretion to not only fashion remedies, but also fashion sanctions, the Minnesota Court of Appeals held that an arbitrator did not exceed his power by issuing a severe sanction: denying one party the right to defend against certain claims after finding that party had fabricated evidence relating to those claims.  Seagate Technology, LLC v. Western Digital Corp., __N.W.2d __, 2013 WL 3779231 (Minn. Ct. App. July 22, 2013).

The case involved Seagate’s claims that one of its former employees had taken multiple trade secrets to a competitor, Western Digital Corporation.  The arbitrator found that after the employee went to Western Digital, he had added slides to old PowerPoint files he had created at Seagate in order to falsely suggest that three of the trade secrets at issue had been publicly disclosed during his time at Seagate.  Because the arbitrator concluded that Western Digital was complicit in the fabrication of evidence, the arbitrator determined that “severe sanctions” were in order.  The arbitrator precluded Western Digital and the employee from presenting any defense to Seagate’s claims about those three trade secrets and entered judgment against them for misappropriation and use of the trade secrets.  As a result of that judgment on the three trade secrets, and his conclusion that the employee breached his employment contract, the arbitrator awarded Seagate $634 million (including $109 million in interest).

Not surprisingly, given the size of the award, Western Digital moved to vacate it.  The district court granted the motion and vacated critical aspects of the arbitration award based on its finding that the arbitrator did not have authority to impose such a severe sanction, and ordered a rehearing by a different arbitrator.  In a rare move, the Court of Appeals accepted an interlocutory appeal from the district court order and reversed.

The Court of Appeals found three separate reasons to reverse the district court on the critical issue of whether the arbitrator had “exceeded his powers” sufficient to vacate the award under the FAA and the Uniform Arbitration Act.  First, the court found that Western Digital had waived its right to argue that the arbitrator had exceeded his power by not raising that issue with the arbitrator.  Second, the court found Western Digital had doubly waived the issue by asking the arbitrator to issue discovery sanctions against Seagate, thereby implicitly acknowledging the arbitrator’s power to issue any sanctions.  Third and most importantly, the court addressed the merits and held that a broadly worded arbitration agreement grants arbitrators inherent authority to sanction a party that participates in arbitration in bad faith, even absent specific AAA employment rules regarding sanctions.

The court did not stop after it had analyzed the main issue of the arbitrator’s power to severely sanction Western Digital, which was enough to reverse the district court.  Instead, the court also confirmed that district courts may not vacate awards just because they think the arbitrator got the result wrong.  Echoing the U.S. Supreme Court’s recent decision in Sutter, the court held that the “district court’s excursion in the merits of sanction law violated [] bedrock principles” that awards will not be set aside for mistake of law and courts may not overturn awards just because they disagree with the merits of the decision.

Why did the Minnesota Court of Appeals take this interlocutory appeal and go out of its way to issue a lengthy, published opinion?  I would hazard that it wants to drive home to litigators (and district court judges) in my fair state that there are very limited bases to overturn an arbitration award.  The case also offers a message to parties considering arbitration agreements: arbitration is not always speedy (this one took more than four years), nor cheap (six separate law firms are listed as counsel for these parties, cha ching!), nor confidential (once the award is challenged, it becomes public), and a losing party will have a much more difficult time appealing the award than if it lost in district court.

*If you find this blawg useful or interesting–and definitely if the posts have helped you brief an arbitration issue or draft an arbitration agreement–please consider nominating it for the ABA Journal’s list of the top 100 Blawgs!  ArbitrationNation would be honored to be listed for a second year.  http://www.abajournal.com/blawgs/blawg100_submit/