The last post focused on three recent state appellate court decisions that refused to compel arbitration or vacated an award, and this follow-up post focuses on seven recent cases that are friendly to arbitration.

My favorite is from Montana.  Although none of its arbitration decisions have been addressed by SCOTUS, Montana decided to preempt any federal preemption issues by adjusting its stance on unconscionability.  (It waited five years after the 9th Circuit put it on notice, though.)  Lenz v. FSC Sec. Corp., 2018 WL 1603927 (Mont. April 3, 2018), involves claims by investors against investment advisors over “substantial losses.”  The defendants moved to compel arbitration and the district court granted the motion.  On appeal, the Montana Supreme Court affirmed.  In its decision, it took the opportunity to clarify that the previous test it had used to determine unconscionability was improper, because it mixed unconscionability analysis with the reasonable expectations doctrine from the insurance context.  (Read this mea culpa: “We have continued to perpetuate confusion by inaccurately referencing [bad tests for unconscionability] …Even more problematic in particular regard to arbitration agreements, we have failed to recognize the manifest incompatibility of the insurance-specific reasonable expectations doctrine as a generally applicable contract principle.”)  I read that as “we do not want to be reversed by the U.S. Supreme Court.”

The others can be reviewed more quickly:

  • Substantive unconscionability cannot be established by showing only that the arbitration agreement is broad in scope.  SCI Alabama Funeral Servs. v. Hinton, 2018 WL 1559795 (Ala. March 30, 2018) [I’m a bit surprised that needed clarifying];
  • The Federal Arbitration Act applies to arbitration agreements within a common interest community’s covenants (and preempts conflicting state law).  In U.S. Home Corp. v. The Michael Ballesteros Trust, 2018 WL 1755536 (Nev. April 12, 2018), 12 homeowners argued that the FAA did not apply to the arbitration agreement in their covenants because land is traditionally a local concern.  The court found that the covenants’ larger purpose was to facilitate the creation of a community of multiple homes, and multiple out-of-state business contributed to construction of the homes.  Therefore, the FAA controlled and preempted Nevada rules requiring the same procedures as in court and requiring arbitration agreements to be more conspicuous than other text in a contract;
  • Non-signatories may compel arbitration if the plaintiff’s claims are based on facts that are “intertwined” with arbitrable claims.  Melendez v. Horning, 2018 WL 1191150 (N.D. March 8, 2018) (reversing district court order denying motion to compel arbitration);
  • Scope of arbitration agreement broad enough to encompass claims against related entity.  Bridgestone Americas Tire Operations v. Adams, 2018 WL 1355966 (Ala. March 16, 2018), concluded that where the employee’s arbitration agreement was with the “Company,” which was defined to include affiliate and related companies, the employee’s suit against a related company was arbitrable;
  • Arbitrator did not manifestly disregard contractual language in construction contract.  In ABC Building Corp. v. Ropolo Family, 2018 WL 1309761 (R.I. Mar. 14, 2018), the owner tried to vacate an arbitration award in favor of the general contractor.  It relied on contract language requiring submission of payroll records with payment applications in order to argue that the contractor could not receive additional compensation for labor without having provided that contemporaneous documentation.  However, the arbitrator considered that provision of the contract in his decision-making (and the owner had never complained), so vacatur was inappropriate (one judge dissented);
  • Delegation clause must be enforced if not specifically challenged.  Family Dollar Stores of W. Va. v. Tolliver, 2018 WL 1074947 (Feb. 27, 2018).  I know, it’s a stretch to call this one a spring decision.  But, it’s snowing in Minnesota on April 14th, so my seasons are totally confused.  That’s why we call it “Minnesnowta.”

 

In a decision that is very skinny on the facts, a unanimous Nevada Supreme Court recently un-vacated a significant arbitration award in a dispute over dental franchises.  In Half Dental Franchise, LLC v. Houchin, 2017 WL 3326425 (Nev. Aug. 3, 2017), the court found the arbitrators did not exceed their power in exercising authority over non-signatories.

The dispute began when Half Dental Franchise filed an arbitration demand against Precision Dental Professionals and Robert Houchin (among others).  They asserted breaches of contract and tort claims (including tortious interference with contract and usurping corporate opportunities).  A three-arbitrator panel found that both those respondents were proper parties, and granted Half Dental about $6.7M in damage.  Houchin filed a motion to vacate the arbitration award  The district court granted the motion, finding that the arbitrators exceeded their power in finding authority over Houchin, and vacated the award.

On appeal, the Nevada Supreme Court found that the district court improperly conducted a de novo review of the arbitrator’s decision finding Houchin bound to the arbitration agreement by estoppel.  (Precision Dental was also a non-signatory to the franchise agreement that the arbitrator found was bound to arbitrate based on estoppel.)  The court noted that under Nevada’s state arbitration statutes, the district court should have asked simply whether there was “colorable justification for the outcome.”  Finding that the arbitrator’s citation to contemporaneous documents provided at least colorable justification for estoppel, the appellate court found no basis for vacatur.  The “colorable justification” standard was especially appropriate because the parties’ arbitration agreement contained a delegation clause, authorizing the arbitrator to “decide any questions relating in any way to the parties’ agreement or claimed agreement to arbitrate.”  (Otherwise, the question of whether non-signatories are bound is presumptively for a court to determine.)  For those reasons, the supreme court reversed the district court’s decision.

What’s the lesson here?  It might be that dentistry is a very competitive field, but it is also that if an award is vacated at the trial court, it’s usually worth bringing an appeal.

 

Two opinions came out recently in disputes over the arbitrability of putative class actions alleging that employees were not paid for overtime (and other labor violations). In one, the Nevada Supreme Court acknowledged that its 2011 ruling, finding class action waivers in arbitration were unconscionable, is preempted. In the second, the Ninth Circuit found that the California Supreme Court’s recent ruling in Iskanian, invalidating PAGA waivers in arbitration agreements, is not preempted.

The Nevada opinion relates to security guards who did not want to arbitrate their claims for unpaid work. Tallman v. Eighth Judicial Dist. Ct. of Nev., 2015 WL 5656981 (Nev. Sept. 24, 2015). One by one, the court disposed with each of the employee’s arguments for not enforcing their arbitration agreements with the employer. Importantly, the court acknowledged that its pre-Concepcion decision in Picardi, 251 P.3d 723 (2011), which found class action waivers in arbitration violated Nevada public policy and therefore were unconscionable, was abrogated by Concecpion. The court reasoned that Concepcion’s application could not be limited to consumer or federal cases. The court also concluded that the National Labor Relations Act did not invalidate the parties’ class action waiver. Siding with the many courts that have ganged up against the NLRB on that issue, it found the NLRB ruling “cannot be reconciled with the FAA as authoritatively interpreted by the Supreme Court.” In the course of its analysis, Nevada cited repeatedly to California’s recent opinion in Iskanian.

Iskanian itself was the subject of a recent 9th Circuit opinion in Sakkab v. Luxottica Retail N. Am., 2015 WL 5667912 (9th Cir. Sept. 28, 2015).   It was the first federal court to consider whether Iskanian’s rule — that California law will not enforce pre-dispute agreements to waive claims under California’s Private Attorneys General Act (PAGA) – is preempted by federal law. In that case, employees of Lenscrafters brought a putative class action alleging failures to pay overtime and other compensation. The only real issue on appeal was whether the waiver of class or collective claims in the arbitration clause was enforceable with respect to the employees’ PAGA claims. The court found the Iskanian rule is not preempted. In support of its conclusion it noted that the Iskanian rule applies to arbitration and non-arbitration contracts, that the rule is not “hostile” to arbitration, and that it “does not diminish parties’ freedom to select informal arbitration procedures.” The court also emphasized “PAGA’s central role in enforcing California’s labor laws” noting that states, and not the federal government, have authority to regulate employment. I am guessing SCOTUS’s refusal to accept cert in Iskanian emboldened the 9th Circuit to find the rule was not preempted.

It is generally accepted that courts may only engage in the very front and very back end of an arbitration. At the outset, courts may determine whether the parties agreed to arbitrate the dispute, and at the end, courts may determine if the arbitration met the basic fairness requirements of the Federal Arbitration Act.  However, in a 1973 case the Ninth Circuit had indicated there may be some “extreme” circumstances where mid-arbitration intervention was appropriate.  This week, the Ninth Circuit reversed a district court’s attempt to characterize an arbitration as one of those “extreme” cases and nearly disavowed its 1973 ruling creating the loophole.

In Sussex v. U.S. Dist. Ct. for D. Nevada, __ F.3d __, 2015 WL 327558 (9th Cir. Jan. 27, 2015), the underlying issue was whether the arbitrator had a disqualifying conflict of interest.  A single arbitrator was hearing three similar actions by condominium owners against the developer.  During the course of his service, the arbitrator founded a company to invest in “high-value, high-probability legal claims.”  The arbitrator did not disclose that investment activity, but the developer discovered it and moved the AAA to disqualify the arbitrator.  The AAA denied the developer’s request after the arbitrator said his investment company was “dormant”.

Undeterred, the developer moved the federal district court to disqualify the arbitrator and stay the arbitration.  The district court granted the motion.  It relied on Aerojet-General Corp. v. Am. Arbitration Ass’n, 478 F.2d 248 (9th Cir. 1973), which allowed for the possibility that court intervention in ongoing arbitrations may be appropriate in “extreme cases.”  The district court reasoned that the arbitrations were in their early stages, and that the developer would likely be able to vacate any resulting arbitration award based on evident partiality.  The partiality came from the potential that a large financial award for the condominium owners could help the arbitrator promote his company.

On appeal, the Ninth Circuit issued a writ of mandamus, instructing the district court to vacate its disqualification of the arbitrator.  It noted that no court after Aerojet had approved of a mid-arbitration intervention and that a majority of circuit courts “expressly preclude” such intervention.  It found that the district court had clearly erred in its arbitration analysis.  In particular, the district court erred in predicting any award from the arbitrator would be vacated due to evident partiality.  Because there was no “direct financial connection” between the arbitrator and any party or law firm involved, and instead only an attenuated and potential relationship, the Ninth Circuit found insufficient grounds for vacatur.

More interesting, the court found that even if the connection was sufficient to establish evident partiality, that would not be the type of “extreme case” envisioned in Aerojet.  The increased cost and delay associated with a vacated arbitration award are “manifestly inadequate to justify a mid-arbitration intervention.”

This is a hard arbitration pill to swallow.  If a party is convinced that it has a solid basis under the narrow provisions of FAA Section 10 to vacate the arbitration award in its proceeding, and the arbitral venue does not eradicate that basis, this case stands for the proposition that the party has to simply continue through the end of the arbitration, go through the process of vacating the award (and the likely appeal), and then decide whether it wants to re-arbitrate the dispute.  The result drives home the point that the point of the FAA is not efficient resolution of disputes, but enforcing arbitration agreements.