Today’s post covers three new developments from this past week. The Fifth Circuit found a defendant waived its right to arbitrate a class action; the Second Circuit found arbitrators retain power to clarify ambiguous awards; and Jay-Z found his list of potential arbitrators sorely lacking in diversity.

In Forby v. One Technologies, 2018 WL 6191349 (5th Cir. Nov. 28, 2018), a class of plaintiffs filed an action for consumer fraud. The defendant waited two years before compelling arbitration. In the meantime, it removed the case to federal court, transferred venue, and filed a Rule 12 motion to dismiss, which was only partially successful.

In response to the motion to compel, the plaintiffs argued the defendant had waived its right to arbitrate. The district court disagreed, finding that “delay alone is insufficient” to establish the prejudice required to prove waiver. On appeal, however, the Fifth Circuit found prejudice because the plaintiff would “have to re-litigate in the arbitration forum an issue already decided by the district court in its favor”, i.e. the Rule 12 issue. Even if defendant did not make another motion to dismiss in arbitration, the court disapproved of the tactic of “check[ing] the district court’s temperature” on the dispositive issue, before moving the case to another forum.

In General Re Life Corp. v. Lincoln Nat’l Life Ins Co., 2018 WL 6186078 (Nov. 28, 2018), the Second Circuit examined whether a panel of arbitrators can clarify their own award. In the underlying reinsurance arbitration, the arbitrators had ordered the parties to unwind their agreement, and work together to figure out how much money had to be repaid. In the award, the arbitrators retained jurisdiction to resolve any dispute over the payments. The parties did not agree on the amount of repayment, or even how to calculate it. So, more than three months after the final award, one party wrote the arbitrators, seeking resolution of the payment dispute. The other side objected, characterizing the request as one to reconsider the final award. The panel clarified its award, after finding the award had ambiguities.

The Second Circuit confirmed the clarified award. Although usually an arbitration panel loses authority after issuing the final award, five circuits have recognized an exception to that “functus officio” doctrine where the final award is “susceptible to more than one interpretation”. The Second Circuit adopted the same exception, but limited it to when three conditions are present: the award is ambiguous; the clarification only clarifies the award, and does not substantively modify the award; and the clarification comports with the parties’ arbitration agreement.

Finally, making headlines across the country, Jay-Z has asked a New York state court to stay his arbitration, due to a lack of available African-American arbitrators. I will let you know when I hear of a decision. But, the underlying premise is one I have wondered about – are large arbitration providers a place of “public accommodation”? In the meantime, maybe Jay-Z will write a rap about arbitration… then it could be my theme song!

What could be a better subject for a Black Friday weekend post than the Cabbage Patch Kids??!  Especially if you are old enough to remember the 1980s…  Whether you loved or hated the smushed-face dolls, the point of this post is that the 11th Circuit confirmed an arbitration award in their favor, showing significant deference to the arbitrator.  Original Appalachian Artworks, Inc. v. Jakks Pacific, Inc., 2017 WL 5508498 (11th Cir. Nov. 17, 2017).

The dispute was between the company that owns the Cabbage Patch Kids (CPK) brand and a company to which it licensed the intellectual property during 2012-2014 (the licensee).  As the end of the license agreement was approaching, CPK selected a new company to receive the license in 2015, and let them get started creating the new line of toys, so that the new line could launch right away in 2015.  The licensee claimed that was a breach of the agreement and started an arbitration.

The arbitrator concluded that CPK had not breached the agreement and ordered that the licensee had to repay CPK over a million dollars in unpaid royalties.  The licensee moved to vacate the award.  Curiously, it made arguments under both the Georgia Arbitration Code and the FAA, and the 11th Circuit considered them all.  [Maybe showing that New Hampshire was onto something in declaring the FAA does not preempt state law on vacatur?]

Under the Georgia Code, the licensee argued the arbitrator had manifestly disregarded the law by ignoring the parol evidence rule (and accepting extrinsic evidence regarding the agreement).  [Manifest disregard is a statutory basis for vacatur under the Georgia act, unlike the federal act.]  The court found there was no concrete evidence that the arbitrator purposely disregarded the law, which is the standard.  Instead, the transcript and award showed the arbitrator had understood Georgia law as instructing that the purpose of contract interpretation is to effectuate the parties’ intent, and that’s what he tried to do in reviewing the extrinsic evidence.  So, even “assuming the arbitrator incorrectly applied the parol evidence rule,” the court found he “simply made a mistake.”  That does not rise to the level of manifest disregard.

Under the FAA, the licensee separately argued that the arbitrator had exceeded his powers.  After quoting the standard from Sutter, the court quickly concluded that because the arbitrator did interpret the parties’ contract, it does not matter “whether he got its meaning right or wrong,” the award must be confirmed.

Class action arbitration continues to be a hot topic among the federal appellate courts this summer.

The 8th Circuit followed the lead of other circuit courts, finding that courts, not arbitrators, presumptively decide whether the parties’ arbitration agreement allows for class arbitration. Catamaran Corporation v. Towncrest Pharmacy, 2017 WL 3197622 (July 28, 2017).   In support of its decision, the court raised concerns about class arbitration, including loss of confidentiality, due process concerns for absent parties, and a concern about the lack of appellate review.  [Interesting that it didn’t cite any of CFPB’s report on this, but just cited other case law… ] Therefore, unless the parties have “clearly and unmistakably delegated” the class arbitration issue to the arbitrator, a court will decide the issue.  Furthermore, the court said that incorporating the AAA rules is not a clear and unmistakable delegation of the class arbitration decision, even though citing the AAA rules is sufficiently clear in analogous issues in regular “bilateral arbitration.”  The court remanded to the district court to determine whether there was a contractual basis for class arbitration.

Halfway across the country, the 9th Circuit held that employees could bring their claims related to a data breach as a class action in arbitration.  Varela v. Lamps Plus, Inc., 2017 WL 3309944 (Aug. 3, 2017).  The employees had first brought their class claims to federal court, and the employer moved to compel individual arbitration.  The district court found the arbitration agreement was valid, but ambiguous about whether class actions were waived.  Construing that ambiguity against the employer who drafted the agreement, the district court ordered class arbitration.  On appeal, the 9th Circuit affirmed the finding of ambiguity, sending the class to arbitration as a group.  One judge issued a two sentence dissent, noting “we should not allow Varela to enlist us in this palpable evasion of Stolt-Nielsen

On Monday of this week, after stringing the parties along for five months, SCOTUS denied cert  in a case involving the intersection between arbitration and franchise regulation.  The petition was filed in November of 2015, and after the respondent initially declined to respond, the Court specifically requested a response, and conferenced the case twice, before denying the petition.   This could be an indication that, without Scalia, the Court is less interested in arbitration issues, or at least less interested in those that will not garner five of the current eight votes.

The case is Chorley Enterprises Inc. v. Dickey’s Barbecue Restaurants, Inc., 807 F.3d 553 (4th Cir. 2015).  [I admit that I did not blog about it when it initially came out last summer because it was complicated and messy and I was feeling lazy.  But, today, I came up with a few Prince tie-ins, so I am taking it on.]  Franchisees of the barbecue chain alleged the franchisor misrepresented costs and profits, and the franchisor alleged the franchisees were in breach for poor operation of the restaurants.  The franchisor also demanded that the claims be arbitrated.

The problem is that the franchise agreement called for both arbitration and litigation in court.  First there was an “Arbitration Clause” requiring arbitration of all claims related to the franchise agreement.  Then, in a “Maryland Clause” required by the state of Maryland, the agreement said the franchisees retained their right to file a lawsuit under the Maryland Franchise Law in court.  (Maryland franchise regulations make it illegal for a franchisor to require a franchisee to waive the franchisee’s right to file a court lawsuit under the franchise statutes.)  The Fourth Circuit essentially enforced both provisions, by allowing the franchisees’ claims under the franchise statutes to proceed in court, while directing the franchisor’s contractual claims to proceed in arbitration.

In reaching its Solomonic decision, the court rejected arguments from both sides.  It rejected the franchisees’ argument that the Maryland Clause completed trumped the Arbitration Clause, reasoning that the Maryland Clause only applies to claims under the franchise statutes, and finding that the franchisees could still raise affirmative defenses based on the franchise statutes in the arbitration.  It reminded the parties that SCOTUS is just fine with piecemeal litigation, when it conforms with the parties’ contracts.

The Fourth Circuit also rejected the franchisor’s argument that the Maryland Clause was forced on it by state law in Maryland, and therefore the clause is preempted by the FAA.  Its harsh assessment of the franchisor’s options follows:

Dickey’s was not forced to do anything…It could have simply declined to do business in Maryland.  Or…it could have filed a declaratory action challenging the [state’s] position before including the Maryland Clause in its agreements.

This is a fascinating issue.  Can state agencies that regulate franchisors preclude arbitration of franchise claims?  Wouldn’t that be exactly the kind of state law that stands as an obstacle to the goals of the FAA and is therefore preempted under ConcepcionI look forward to another franchisor setting up a stronger record of state insistence on the arbitration waiver and taking another run at a preemption argument.

______________

I’m sure Dickey’s serves ribs, unlike Prince (“ I don’t serve ribs / You better be happy that dress is still on/
I heard the rip when you sat down”).  And before I was known for being an arbitration geek, I was known for being a Prince geek.  As we are all mourning today in Minneapolis, I used some “purple” in today’s title and image.  If you want a recommendation for a great song that is outside the usual Prince play list, try “How Come U Don’t Call Me Anymore?”

Hawaii issued a bold arbitration decision this month. It applied its state contract law to conclude that the parties did not form a clear arbitration agreement, but even if they did, it was unconscionable because it prohibited both discovery and punitive damages.  Narayan v. The Ritz-Carlton Dev. Co., Inc., __ P.3d __, 2015 WL 3539805 (Haw. June 3, 2015).

The plaintiffs purchased the first condos in a development in Kapalua Bay.  The developer defaulted on loans, however, and it or its agent withdrew over a million dollars from the association’s operating fund.  The plaintiffs sued for breach of fiduciary duty and other claims.

In response, the developer moved to compel arbitration.  It argued that the plaintiffs’ purchase agreements incorporated the condominium declaration, which had an arbitration clause.  The trial court denied the motion to compel, but the intermediate court of appeals reversed.  The Hawaii Supreme Court found the intermediate court gravely erred and the plaintiffs did not have to arbitrate their claims.

Under Section 2 of the FAA, the Hawaii Supreme Court applied state law to decide whether an arbitration agreement existed and whether it was valid.

On the first question, the Hawaii Supreme Court found the parties did not form an agreement to arbitrate, because the purchase agreement was ambiguous regarding the parties’ intent to arbitrate.  Notably the purchase agreements themselves did not mention arbitration and instead stated that the venue for any action shall be in Hawaii state court.  The arbitration clause was only included in the separate condominium declaration.  The court found “it is facially ambiguous whether those disputes would be consigned to arbitration in Honolulu pursuant to the condominium declaration or the [state court] pursuant to the purchase agreement.”  The court’s analysis applied Hawaii case law that appears to create different (and higher) standards for proving the existence of an arbitration agreement than the standards required to prove other contracts.  But, Hawaii avoided any FAA preemption problem by offering up a second, independent basis for its refusal to enforce the arbitration clause: unconscionability.

The court also found the arbitration agreement unconscionable under Hawaii law.  It found it was procedurally unconscionable because the plaintiffs could not negotiate it, it was “buried in an auxiliary document,” and it was ambiguous.  With respect to substantive unconscionability, the court focused on three provisions of the arbitration agreement.  The arbitration agreement provided that the arbitrator could order the parties to exchange copies of “nonrebuttable exhibits” and witness lists, but “the arbitrator shall have no other power to order discovery or depositions unless and then only to the extent that all parties otherwise agree in writing.”  The arbitration agreement  also precluded parties from “disclos[ing] the facts of the underlying dispute…without prior written consent of all parties.” The Hawaii Supreme Court concluded that “if the arbitration clause were enforced as written, the [plaintiffs] would have virtually no ability to investigate their claims, and thus, would be deprived of an adequate alternative forum.”  Furthermore, the arbitration agreement precluded punitive damages, which the court found “substantively unconscionable” in a contract of adhesion.

If there is a continuum of state arbitration decisions, varying from hostile to arbitration on one end to rubber-stamping of arbitration on the other end, I think Hawaii just situated itself on the very hostile end, even further than California and Missouri.  But, this case offers a reminder of two important rules for drafters of arbitration clauses: make the agreement to arbitrate very clear and easy to find; and do not overreach when inserting arbitration provisions that favor your client.