On Wednesday, the Tenth Circuit addressed the difference between the issues of whether the parties ever formed an agreement to arbitrate and whether such an agreement, once reached, is applicable, flawed or unenforceable – the same issue that the Third Circuit considered in a case highlighted earlier this week. With the exception of that case, the decisions in the last two days considered more narrow issues, including post-award cases that, for once, do not focus on the scope of the arbitration clause.
Delegation of the decision on arbitrability
The Tenth Circuit, in Fedor v. United Healthcare, Inc., 2020 U.S. LEXIS 29444 (10th Cir.) (Sept. 16, 2020), considered the question of contract formation versus contract interpretation raised in MXM Const. Co v. N.J. Bldg. Laborers Statewide Benefit Funds, 2020 U.S. App. LEXIS 29039 (3rd Cir.) (Sept. 14, 2020), covered here on Wednesday.
In Fedor, the District Court compelled the plaintiff to arbitrate her Fair Labor Standards Act (“FLSA”) claim without first determining whether she had contracted to do so, holding that her failure to address her challenge specifically to the delegation clause, rather than to the formation of the overall agreement, was fatal. The opinion hinges on a 2016 UHC policy, which United argued mandated arbitration of Plaintiff’s claim. The Policy broadly provided that the arbitrator would resolve issues regarding “interpretation, enforceability, applicability, unconscionability, arbitrability or formation, or whether the Policy or any portion of the Policy is void or voidable.” In short, virtually anything related to the Policy would go to the arbitrator, rather than to the court as a gateway issue. Based on that delegation, the District Court compelled arbitration, but without considering the merits of Plaintiff’s claim. Rather, the lower court resolved the issue on a purely procedural ground, holding that Fedor had only challenged “the validity of the contract as a whole,” rather than specifically challenging the delegation clause itself. In reaching that conclusion, the lower court relied on Rent-a-Center, West, Inc. v. Jackson, 561 U.S. 63 (2010), which established the severability doctrine, i.e. that an attack on an arbitration clause or any component thereof contained within a contract entered into by the parties must sever the challenged clause from the agreement as a whole and focus any objections on the clause itself, not on the overall contract. In Wednesday’s decision, the Court of Appeals reversed the lower court’s judgment compelling arbitration, holding that the District Court skipped a crucial step – it did not determine whether the Plaintiff ever agreed to the Policy itself. In other words, was there even an agreement from which to sever the arbitration clause? Rather than joining the District Court in relying upon Rent-a-Center, Judge Eid and the panel looked to Granite Rock Co. v. International Brotherhood of Teamsters, 561 U.S. 287 (2010), decided three days after Rent-a-Center. There SCOTUS distinguished between the question of whether the parties “agreed to arbitrate” a dispute, which must be decided by the court as a gateway issue, and the “scope” and “enforceability” of the clause, which the parties may commit to the arbitrator. Here, since Fedor claimed that neither she nor other class members had read or agreed to the 2016 arbitration agreement, she raised the threshold issue of whether there was ever any agreement to submit disputes to arbitration – i.e. the issue of contract formation. Opining that “[d]enying her relief because of her failure to specifically challenge the delegation clause [within the Policy] would thus contradict the Supreme Court’s repeated statement that courts may order arbitration only when ‘satisfied that the parties agreed to arbitrate,’” the Court of Appeals reversed the judgment below compelling arbitration and remanded for the “district court to determine if Fedor and UHC formed the 2016 arbitration agreement.”
The lesson – if the “container contract” theory is used to attack a delegation clause, be sure to first determine whether there is a container.
Federal question jurisdiction and the FAA
The Fifth Circuit addressed federal subject matter jurisdiction in the context of the removal of a state court action to vacate an arbitration award, Badgerow v. Walters, 2020 U.S. App. LEXIS 29339 (Sept. 15, 2020). The matter began routinely, with a panel of arbitrators dismissing plaintiff’s employment-based claims against Ameriprise Financial Services and three of its advisors. Plaintiff filed a motion to vacate the award in Louisiana state court; the defendants removed the action to federal court. Plaintiff moved to remand, arguing that there was no subject matter jurisdiction over the petition to vacate. The District Court denied the motion, holding that it had federal question jurisdiction, and rejected the Plaintiff’s claims on the merits. Plaintiff appealed only the jurisdictional grounds, not attacking the merits portion of the District Court’s decision. The Circuit panel, Jolly, J., applied the “look-through” analysis developed by SCOTUS in Vaden v. Discover Bank, 556 U.S. 49 (2009), which the Fifth Circuit had extended to petitions to vacate. Under that approach, the court determines whether the dispute underlying the arbitration is a matter over which the court would have had federal question jurisdiction if that claim had been brought as litigation; if so, there is jurisdiction to consider an application to confirm or vacate under the FAA. Holding that the gravamen of Ms. Badgerow’s claims arose out of principles underlying Title VII, a federal discrimination act, the court found federal question subject matter jurisdiction and affirmed the denial of Badgerow’s motion to remand. A tangential issue, probably of interest only to those actually litigating this issue, is whether the “look-through” relates only to claims against parties to the federal litigation or to the entire arbitrated controversy, including claims against those arbitral parties who are not parties to the ensuing proceeding seeking to confirm or vacate.
There were two cases that, while interesting, are narrow in their application to most practices. I will highlight them, though, in case the issues raised happen to be on your desk.
In McKinney v. Apple Food Serv. of Suffolk, LLC, 2020 U.S. Dist. LEXIS 168794 (E.D. N.Y.) (Sept. 15, 2020), Judge Chen held that the parties’ stipulated dismissal of a Fair Labor Standards action with prejudice requires approval by either the court or the Department of Labor, even if the plaintiff retains the right to assert his or her claims in arbitration. Applying Cheeks v. Freeport Pancake House, Inc., 796 F. 3d 199 (2nd Cir. 2015), the court held that the policy behind judicial review of stipulations to the dismissal of FLSA litigation – assuring that the employee is not being bludgeoned into settlement – applies equally to the amicable resolution of arbitrations. Accordingly, rather than dismissing McKinney’s action in favor of arbitration, the court merely stayed the case, so it could review any settlement that might be reached during the arbitral proceeding.
Dahiya v. Talmidge Int’l, 2020 U.S. Dist. LEXIS 169393 (E. D. La) (Sept. 16 2020), raises the timeliness of the removal from state court of an action seeking confirmation under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “Convention”) of a foreign arbitration. The parties’ dispute has a long, tortured history going back to litigation commenced in 2002, which wended its way through Louisiana state trial and appellate courts; to arbitration in India; back to state court; and, again, to District Court eighteen years later. The Convention’s enabling legislation has a very expansive timetable for removal to federal court, allowing removal at any time “before the trial thereof,” 9 U.S.C. 205. The issue involved in Dahiya is the meaning of “the trial” in the context of this multi-phased litigation.
Have a good weekend. To those of you in the Western states, may the weekend bring rain and some relief from the fires. And to all of you, be safe.