Happy Monday, as we begin what will probably be a crazy week. There are some interesting cases today. The Sixth Circuit weighs in on whether a prelitigation letter constitutes a waiver of arbitration, there is a rare discussion of the “irreparable harm” leg of a preliminary injunction in an opposition to arbitration, and a court explores the exhaustion of mediation as a precondition to litigation.
Prelitigation letters and waiver
“That’s just a lawyer letter” is almost a term of art. Booror Property Management, LLC v. Oro Karric North, LLC, 2020 U.S. App. 34199 (6th Cir.) (Oct. 29, 2020) discusses whether presuit epistles can have a larger effect.
Boorer arises out of a dispute between the owner of residential properties and its property manager. The management contract provided that “if either party shall notify the other that a matter is to be determined by arbitration,” they would follow that process unless they resolved the dispute on their own. Because of a disagreement between the parties, Boorer stopped providing management services. Oro responded in writing (the opinion is not clear whether the letter came from Oro itself or its attorneys), alleging a breach of contract and stating that it planned “to proceed directly to litigation in either state or federal court,” as the agreements “do not limit litigation exclusively to arbitration.” It advised Boorer to respond in six days if it preferred arbitration; otherwise, it would assume Boorer wanted to go to court. Boorer brought the subject litigation in federal court for breach of contract. Oro moved to compel arbitration, but the District Court denied the application, finding that the presuit letter constituted a waiver of that provision. This case is the appeal of that denial.
In reversing the District Court, Circuit Judge Readler, joined by Daughtrey, C.J. and Donald, C.J., first lays out the two findings needed for a waiver of arbitration – “acts [which] are ‘completely inconsistent’ with [a party’s] arbitration right and . . . conduct [which] is prejudicial to an opposing party – for example, when the party significantly delays its arbitration right.”
The Court of Appeals finds neither condition exists. First, the court holds that the letter did not constitute an action inconsistent with the right to arbitrate. The court distinguishes pre-litigation letters from the “strict rigors” of pleadings or other litigation tools. In a frank, real world analysis, Judge Read recognizes that “a threat of litigation, for example, might in fact be pure puffery, a boastful way to articulate one’s grievances – legal, equitable, or otherwise – with a goal to compelling a favorable resolution. . . In that respect, these letters are often more rhetorical art than legal science.” In fact, the court opines that giving weight to such “pre-filing communications” would “leave parties with little room to maneuver” and “the inevitable result would be to make pre-filing settlement elusive. . . .”
The court, likewise, finds that there was no prejudice to Boorer as a result of the letter, as “prejudice tends to arise only after the wheels of justice have begun to turn.” Here, since Oro’s motion to compel arbitration was filed immediately, before it even filed an answer or motion in response to the complaint, “Oro’s actions cost Borror nothing – neither time nor money, advantage nor disadvantage.” Judge Reader, thus, distinguishes this case from those in which a party waits until opposing parties have gone through the expense of motion practice or discovery or one party has uncovered some favorable evidence in discovery that would have been unavailable in arbitration. In an interesting piece of dictum, the court raises, but does not resolve, the question of whether prejudice must be present in cases of implied, but not express, waiver. That issue will await another day.
In summary – send off those shots across the bow, but throw an anchor for the right to arbitrate.
Prejudice as a prerequisite of a preliminary injunction
Cases ruling on motions to compel arbitration usually do not include discussion of a preliminary injunction against proceeding with ADR; rather, they focus on the referral itself. E.R.J. Insurance Group, Inc. v. McEachern, 2020 U.S. Dist. LEXIS 202469 (Sept. 1, 2020) is an interesting discussion of the need for irreparable harm when the party opposing arbitration requests injunctive relief. Plaintiff sought a declaration that it was not subject to an arbitration agreement contained in its Agent Agreement with McEachern. Together with the request for declaratory relief, Plaintiff sought a preliminary injunction against the arbitration proceeding before resolution of its claim. The court, Davis, J., holds that, despite the various processes of an arbitration proceeding while arbitrability is still in dispute, there is no irreparable harm justifying injunctive relief. He distinguishes authorities from both the Second and Third Circuits which Plaintiff argued hold that the expenditure of time and money in a potentially wasteful arbitration constitute harm per se. Concluding that “in breaking down different scenarios, the Court could not create one where the parties faced a threat of injury beyond repair,” Judge Davis holds that vacating a wrongfully entered award, together with an award of costs and attorneys’ fees, results in an “absence of irreparable harm.” The court does not indicate whether the parties’ agreement authorized attorneys’ fees or whether he is relying upon forum rules in concluding that the party opposing arbitration can recover those costs; see the Peebles case below for a case where the forum rules did not prevail. Whether you agree with the court’s conclusion or not, the case is worth putting in a file of arbitration cases, as it contains a raft of citations on both sides of the issue.
Failure to invoke mediation as a precondition to litigation
A common dispute resolution scheme is a series of escalating attempts at resolution, often starting with formal meetings between designated personnel and moving through mediation. U.S. ex rel Contrack Watts, Inc. v. Relyant Global, LLC, 2020 U.S. Dist. LEXIS 203174 (D. Guam) (Oct. 29, 2020) addresses the effect of one party’s failure to follow those steps. Contrack agreed with Relyant to act as a subcontractor on a federal project at Anderson Air Force Base. The agreement provided that, in the event of a dispute, the parties would “first attempt to resolve it by designated executives of the Parties. . . . If that is unsuccessful, either Party may request in writing that an informal dispute resolution procedure should be utilized, stating in general terms the nature of the proposed procedure and provide the other Party with sufficient descriptions and information regarding its position to permit informed assessments and decisions.” The agreement, then, provided that if the other Party did not respond in two weeks, “the requesting party shall be free to pursue any legal remedy that may be available to it.” The court found that Contrack skipped these pre-suit steps and moved straight to litigation.
Relying upon language within the agreement saying that “the aforementioned (informal dispute resolution) procedures will be utilized prior to proceeding to a judicial forum” (Emphasis in original), Chief Judge Tydingco-Gatewood dismisses the action for Plaintiff’s failure to fulfill the required, informal preconditions to suit.
For a case holding that the requirement of presuit mediation has been waived, see Mr. Sandless Franchise, LLC v. Karen Cesaroni, LLC, 2020 U.S. Dist. LEXIS 201552 (E.D. Pa.) (Oct. 29, 2020).
Setting aside an award for fraud
France v. Bernstein, 2020 U.S. Dist. LEXIS 202838 (M.D. Pa.) (Oct. 30, 2020) reminds us of the high bar for setting aside an arbitration award due to fraud. Bernstein, a sports agent, alleged that France, another agent, poached Kenny Golladay, a Bernstein client. (For pro football fans, Golladay is the Pro Bowler who leads the Lions in receptions). Such poaching violates National Football League Player Association regulations. An arbitrator ruled that Golladay, not France, began the contacts that ultimately lead to the player’s change in agents. In challenging the award, which France sought to confirm, Bernstein claimed that the arbitrator should have required the attendance of Golladay, who, although subpoenaed, did not testify, and that France had perjured himself in the arbitration. The court, Kane, J., disposes of both claims swiftly. As to the fraud claim, she first repeats the three step test for setting aside an award based on fraud – the movant must establish (1) the existence of fraud by “clear and convincing evidence,” (2) that the fraud was not discoverable before or during the arbitration hearing, and (3) that the fraud materially related to an arbitrated issue. Finding both that the emails upon which Bernstein hinged his fraud claim could have been discovered if Defendant had enforced some of his eight subpoenas and that the purported emails merely went to credibility, she opines that the Bernstein failed to meet any of those conditions. She likewise finds that a lapse in diligence by Bernstein undercuts the alleged misconduct of the arbitrator in failing to require the attendance of Golladay at the arbitration. While an arbitrator may issue a subpoena, he or she has no power to enforce the same; rather, Section 7 of the FAA puts the burden on the party issuing process to compel the witness to testify. Since Bernstein never sought enforcement, the arbitrator did not commit error. The court confirms the award.
Forum selection clauses
Powers v. Northrup Grumman Corp., 2020 U.S. Dist. LEXIS 202828 (S.D. Cal.) (Oct. 29, 2020) discusses whether a contract’s designation of an inconvenient location for arbitration constitutes substantive unconscionability. Plaintiffs are former Grumman employees who reside in San Diego, while the venue for the arbitration is Virginia. The court rejects the alleged expense of travel as a basis for invalidating the arbitration clause, opining that, since the employees were stationed in the Mideast during their employment, the choice of Virginia was “not unreasonable,” as Defendant is headquartered there and controlled work from that location.
Contractual conflicts re: attorneys’ fees
What happens when a contract prohibits the arbitrator from awarding attorneys’ fees, but the rules of the arbitral forum selected by the parties in that agreement provide for such an award? According to Peebles v. Terminix International Co., L.P., 2020 U.S. Dist. LEXIS 202237 (S.D. Ala.) (Sept. 14, 2020), the contractual limitation prevails. In a holding which he reaffirms in Peebles v. Terminix International Co., L.P., 2020 U.S. Dist. LEXIS 199832 (S.D. Ala.) (Oct. 26, 2020), Judge Beaverstock vacates an award of attorneys’ fees as exceeding the arbitrator’s authority. However, he confirms the remainder of the $1.6 million award, including $838,000 of punitive damages.
Have a good week. And, here in the U.S., whomever you may favor, get to the polls tomorrow, unless you’ve already voted. The right to cast a ballot is at the heart of our democracy.