There were a number of opinions published since Friday’s Highlights that are worth considering. The Ninth Circuit weighed in with a decision that raises the controversial issue of non-precedential opinions, as well as an interesting question of contract formation. A pair of District Court opinions bring relevant slants to the discussion of whether to stay or dismiss a case when litigation moves to arbitration. Two cases, while not heavyweights in themselves, serve as good reminders of some basic principles.
Baten v. Michigan Logistics, Inc., 2020 U.S. App. LEXIS 32588 (9th Cir.) (Oct. 15, 2020) addresses two arbitration-related issues and raises philosophical one. The gravamen of the case is an unusually vague dispute resolution clause which bound the parties to “resolve any disputes. . . directly or with an agreed form of Alternative Dispute Resolution.” The issue before the court was whether that phrase created an obligation to arbitrate.
The court looks to California state law to determine whether the language of the clause constitutes an agreement to arbitrate. Citing cases from other Circuits, the judges recognize that the Ninth Circuit is in the minority in referring to state substantive law on the contract formation issue, as the First, Second, Sixth and Tenth Circuits apply federal common law to implement the FAA.
On the merits, Circuit Judges Siler and Berzon, the majority in a memorandum opinion, hold that the clause “does not contain any of the elements of a true arbitration agreement,” such as designation of a forum, provisions for the payment of the arbitrator’s fees, or the applicable rules. Since “alternative dispute resolution” can take forms other than arbitration, such as mediation, the court finds that there was no meeting of the minds and affirms the District Court’s denial of defendant’s motion to compel arbitration. In dissent, Circuit Judge Lee argues for a more encompassing view of the contract, not focusing solely on the quoted phrase, but rather recognizing that the parties attempted to “rule out litigation.” Since mediation, the other prevalent ADR mechanism, would leave the parties “in a no man’s land where there is no binding way to resolve any disputes,” he would hold that the parties agreed to arbitration, but “did not decide on the specifics (e.g. one or multiple arbitrators, specific rules that must apply, the ADR provider).” Interestingly Judge Lee points out that the plaintiff, who successfully opposed arbitration, initially submitted a demand pursuant to the very agreement which it now challenges.
An interesting sidebar is that the court designates the case as “not appropriate for publication and . . . not precedent except as provided by Ninth Circuit Rule 36-3.” The rule basically provides that such opinions may only be cited for claims preclusion, double jeopardy, sanctions or purposes of the underlying litigation. Why so restrict the use of this decision? The opinion is not a throwaway. It deals with an issue which the panel considers important enough to generate a dissent. It lays out a framework for deciding whether vague dispute clauses compel arbitration. It highlights a Circuit split on choice of laws. One potential answer – a member of the majority, Circuit Judge Siler, normally sits on the Sixth Circuit and was on the Ninth only by designation. Since there was not a unanimous panel, perhaps there was hesitancy to create Ninth Circuit precedent through a non-Ninth Circuit judge. In any event, the idea that, in the days of LEXIS and Westlaw, there are cases that are not “published” is archaic.
Stay v. dismissal
The issue of whether a court should stay or dismiss the underlying litigation when it compels arbitration is regularly addressed in numerous opinions. Two cases decided on Thursday give interesting spins to that issue.
The law of unanticipated consequences
Great American Insurance Company v. Johnson Controls, Inc., 2020 U.S. Dist. LEXIS 191599 (S.D. Ohio) (Oct. 15, 2020) demonstrates an unexpected result from a court’s dismissal of an action, rather than its retention of jurisdiction and staying of the litigation. In a series of previous orders discussed in the opinion, the court, Cole, J., had ordered that the threshold question of the arbitrability of the parties’ dispute over Great American’s liability on a performance bond should itself be arbitrated – a standard competence-competence decision. However, rather than staying the underlying action pending the arbitrator’s decision, Judge Cole dismissed the case without prejudice. Three weeks later, the arbitrator held that the dispute was not subject to arbitration. That is where the fun begins. Before Great American could return to Ohio and sue for a declaratory judgment as to the parties’ rights under the bond, Johnson Controls brought a breach of contract action in South Carolina. Judge Cole was not pleased. “The Court’s understanding at the time [of the dismissal] was that, if the arbitrator decided that the dispute was not arbitrable, the matter would be re-opened in this Court. That did not happen.” “By filing suit in South Carolina without first conferring with Great American, Johnson Controls sought to wrest jurisdiction from this Court, in what the Court agrees could be characterized as a ‘race to the courthouse.’” (Emphasis added). “This course of conduct has at least a flavor of inappropriate jurisdictional maneuvering – jumping the gun in an unanticipated fashion to obtain a preferred forum to the detriment of the plaintiff in the previous action.” Despite his displeasure, however, Judge Cole holds that the “first-to-file” doctrine dictates that the case should proceed in South Carolina and, therefore, denies Great America’s motion for relief from the prior dismissal.
Bottom line – In devising a dismissal v. stay strategy, be sure to consider what happens if the case has to return to court. Where would you ultimately want to try the case?
A primer on FAA Section 3 stays and dismissals
In Arabian Motors Group W.L.L. v. Ford Motor Company, 2020 U.S. Dist. LEXIS 191057 (E.D. Mich.) (Oct. 15, 2020), Judge Leitman holds that Arabian’s breach of contract claims are all subject to the parties’ arbitration agreement. The interesting portion of the opinion is the court’s consideration of whether to dismiss or stay the matter. Judge Cole holds that the mandate of Section 3 of the FAA, directing a “stay of the trial of the action,” applies only where less than all of the disputes presented in the case have been referred to an arbitrator. Since the court holds that all issues between Ford and Arabian Motors are arbitrable, it holds that it has discretion to dismiss the case and does so. The opinion is notable in that it provides a well thought out, twelve page analysis of Section 3, including “suggestions” from the Sixth Circuit as to dismissal of arbitrable cases (the Sixth Circuit having not directly addressed the issue); the existence of a circuit split on the issue, with citations; a textual consideration of the statutory language; and, even, the effect of dismissal and stay upon appealability of referral to arbitration. Whether you agree with the outcome of the case, the reasoning provides a roadmap for analyzing a request to dismiss or to stay a case after compelling arbitration.
The container returns
Patterson v. Lear Capital, Inc., 2020 U.S. Dist. LEXIS 191795 (D. Utah) (Oct. 15, 2020) is not remarkable in its own right. But, every once in a while, it is worth reading a case challenging an arbitration provision as unconscionable or fraudulently induced to remind ourselves that such an attack must be directed to the arbitration clause itself, not to the contract as a whole. Here, Patterson claimed that the parties’ overall contract was infected with fraud, duress, and unconscionability. However, per Judge Kimball, “a federal court cannot adjudicate a claim of fraud in the inducement unless the claim is that the arbitration clause itself was induced by fraud. Claims of fraud in the inducement of the contract as a whole go to the arbitrator.” (Emphasis added). Accordingly, he dismisses the litigation – which involved claims of investment fraud in the sale of precious metals – in favor of arbitration.
Health care proxy
As more health care facilities seek to protect themselves from the vagaries of a jury by adopting arbitration provisions, the issue arises as to the scope of the parties bound by those agreements. Denton v. Allenbrooke Nursing & Rehabilitation Center, 2020 U.S. Dist. LEXIS 192135 (W.D. Tenn.) (Oct. 16, 2020) addresses the question. Reginald Denton was admitted to the Defendant’s long-term care and rehabilitation facility. Upon his admission, Mabel Denton, his mother, executed the admission documents, including an arbitration agreement, on a line entitled “Signature of Family Member or other Representative.” Mr. Denton subsequently died and his mother brought a malpractice action both on behalf of his wrongful death beneficiaries and in her own right. Applying Tennessee law, the court holds that, because of the timing of her execution of the relevant documents, Ms. Denton did not have authority to bind the decedent or his estate to arbitration. Since this issue is fact intensive, the precedential value of this part of the case may be limited. The more encompassing issue, however, is whether Ms. Denton’s individual claims, as next of kin, are arbitrable. The court, Parker, J., holds that arbitration is not required, opining that when Plaintiff signed as a “Family Member or other Representative” of the decedent, she was making “a health care decision for Mr. Denton – not for herself.” Therefore, she did not sign the agreement in her personal capacity and is not bound to arbitrate. Moral of the case – in states where family members have their own post-mortem cause of action or where a spouse’s loss of consortium claim is not derivative of the patient’s action, health care providers may not have the broad arbitration protections which they expect.
Mediation privileges and expert opinions
Albert D. Seeno Construction Co. v. Aspen Insurance UK Ltd., 2020 U.S. Dist. LEXIS 192418 (N.D. Cal.) (Oct. 16, 2020) highlights the risks of violating the mediation confidentiality privilege. In preparing his opinion, Defendant’s expert reviewed the briefs which the parties submitted to a mediator in an attempt to resolve the case. California law provides that “no writing. . . that is prepared for the purpose of . . . a mediation. . . is admissible or subject to discovery.” The expert claimed that he had not used the information in those briefs in forming his opinion, but asked to review them simply to determine “what specific conduct by Aspen, [ADSCO, the Plaintiff] alleges constitutes bad faith.” However, finding that “’[T]here is no adequate way to assess the impact the mediation briefs had on’ [the expert’s] final report or how he may have shaped ‘his evaluations consciously or unconsciously in response’ to the statements contained in those briefs,” the court strikes the expert’s opinion. The court imposes this harsh remedy despite a specific finding that there is no evidence of bad faith on the part of defense counsel, who were merely unaware of the mediation privilege when they provided the briefs to their expert. The test for evaluating a disclosure, per the court’s footnote, is whether the communication was “accidental,” in which case disclosure might be excused. Here, however, while the cause may have been innocent, the briefs were turned over intentionally.
I just noticed that SCOTUS has scheduled oral argument on Schein for December 8th. Let’s hope we get some resolution on the Circuit split as to the effect of invoking a forum’s rules on the arbitration of gateway issues. Stay tuned.
See you Wednesday.