A number of Court of Appeals cases came down over the last couple of days. So, today’s Highlights will focus on them, as Circuit court cases have a broader precedential value and generally carry more weight than those from the District Courts.

Fee Agreements; Depuy Orthopedics litigation

Today’s main case, In re: Depuy Orthopaedics, Inc. ASR Hip Implant Products Liability Litigation, 2020 U.S. App. LEXIS 39224 (6^th Cir. Dec. 15, 2020) carries specific interest to any attorneys involved in the Depuy Hip litigation or who are generally on the plaintiff side of mass tort cases. However, it has a far broader message in its focus on the contractual nature of arbitration.

The case arises out of a fee dispute between Attorney Steven Johnson and his former client William Drake.  Johnson and Drake entered into a retainer agreement under which Johnson undertook representation of Drake in connection with injuries Drake allegedly suffered as a result of purported defects in the Depuy hip implant. The retainer agreement provided for a contingency fee of 40% and that any fee dispute would be resolved by arbitration in Fort Worth, Texas with “any other arbitrator The Firm [Johnson’s office] might choose.”  Drake subsequently discharged Johnson and got new counsel.  Thereafter, Depuy entered into a global settlement of the hip implant cases.  That settlement was incorporated into a Master Settlement Agreement (“MSA”) which, like Drake’s retainer with Johnson, contained a provision for resolving fee disputes along with other matters to be considered by a panel of special masters who would “make final and binding determinations under [the MSA] with the authority of an Arbitrator under the Federal Arbitration Act.”  Drake and Johnson disagreed on the fee to which Johnson was entitled.  Under the dispute resolution provision of Johnson-Drake retainer agreement, Johnson selected JAMS to arbitrate the matter in Texas.  The arbitrator, over Drake’s objection, entered an award in favor of Johnson in the amount of approximately $350,000.  Drake applied to the District Court to vacate the award and the District Court granted his application, holding that the provisions of the MSA trumped the retainer agreement and, therefore, that the arbitration in Texas was unauthorized.  This appeal ensued.

As framed by the Court, Guy, C.J., writing for a 2-1 majority with Judge Kethledge, the resolution of the question falls back on the basic underpinning of arbitration; it is a contract between parties and the only contract to which Johnson and Drake are both parties is the fee agreement.   Although Johnson participated in the MSA on behalf of other clients, Judge Guy opines that being subject to the MSA in those other circumstances “is not the same as an agreement between them [Johnson and Drake] to arbitrate their contingent fee disputes before a Special Master pursuant to the MSA – rather than before an arbitrator of the Firm’s choosing in Texas.” (Emphasis added).  The court quickly dismisses arguments seeking to bind Johnson to the MSA under the doctrines of agency and estoppel.  In short, Depuy holds that, since arbitration is a contract, i.e., an agreement specifically between the parties to be bound, an outside authority, even a court, may not impose arbitration upon them. The Court of Appeals reverses the District Court’s decision vacating the award and denying confirmation thereof.

In dissent, Judge Clay recognizes that arbitration is a matter of contract, but disagrees with the majority as to the relevant contract.  He would hold that, by representing clients who enrolled in the MSA, Johnson contracted to have the special masters resolve all of his Depuy-related fee disputes. The MSA required that plaintiffs “enroll” in the program to participate in the settlement, stating “that by submitting an Enrollment Form and Release, each Enrolling U.S. Program Claimant and Enrolling Counsel, agrees that authority over the process. . . resides with [the Special Masters]. . . .” (Emphasis added).  Since Johnson was an “Enrolling Counsel,” albeit for plaintiffs other than Drake, Judge Clay holds that he “agreed” to resolve disputes before the Special Masters in all his Depuy cases.  Thus, Judge Clay opines, there are two agreements binding Johnson and the question becomes which agreement is applicable. Since Johnson agreed that a 5% fee hold-back applicable to cases under the MSA should also apply in his Texas arbitration, Judge Clay would find that the MSA is the more relevant contract and would hold that the special masters, not the Texas arbitrator, must resolve all disputes. (Does no good deed – like agreeing to a fee reduction – go unpunished?)

Bottom line – Arbitration is a matter of contract. While there might occasionally be a dispute as to the relevant contract, contract law still predominates.  There is also a lesson for attorneys drafting arbitration agreements.  Anticipate that there might later be some conflicting agreement and insert language giving the contract you are drafting priority over the late comer.

Jurisdictional amount on an application to vacate

It is black letter law that the FAA does not establish federal jurisdiction; there must be some other hook.  Hale v. Morgan Stanley Smith Barney, LLC. 2020 U.S. App. 39248 (6^th Cir. Dec. 15, 2020) is a lesson for counsel drafting applications to vacate arbitrations which resolved in favor of respondent. Hale addresses how to determine the amount in controversy where jurisdiction of based on diversity of citizenship, 28 U.S.C. §1332.  Since Hale lost the arbitration, the effective amount awarded her in the proceeding was $0, which Morgan Stanley argued was the amount to consider for diversity purposes.  The District Court agreed and dismissed the application to vacate for lack of subject matter jurisdiction.  The Court of Appeals reverses.  Judge Donald, writing for herself and Chief Judge Cole and Judge Readler, applies Horton v. Liberty Mutual Insurance Co., 367 U.S. 346 (1961) and looks to the face of the complaint to determine the amount in controversy. Since the plaintiff, in his complaint, alleged that the arbitrator should have awarded him $15 million, the minimum jurisdictional requirement was met, even though the subject award, $0, was obviously less than the $75,000 required by Section 1332.

The lesson is simple.  If you are a Complainant seeking to vacate an award that went in favor of Respondent and awarded you no damages, be sure to allege the amount which you sought in front of the panel in your application.

Public policy exception

Two cases deal with the public policy exception to affirming an otherwise proper arbitration award.

International arbitration

Guarino v. Productos Roches, S.A., 2020 U. S. App. LEXIS 39280 (11^th Cir. Dec. 15, 2020), arose under the Inter-American Convention on International Commercial Arbitration.  Like the New York Convention, whose caselaw is applicable to the Inter-American Convention, a court may refuse to enforce an award which violates the public policy of the jurisdiction in which recognition of the award is requested.  The arbitration in Guarino was held in Venezuela under the auspices of the Arbitration Center of the Caracas Chamber. The arbitrators applied Venezuelan law under the choice of laws provision of the parties’ contract.  Under Venezuelan law, a party signing an agreement on behalf of a corporate entity is personally liable if the entity is established abroad and not registered in Venezuela. The panel found that Guarino signed the subject purchase contract on behalf of such a non-registered entity, Iutum, which became defunct.  It entered an award against Iutum and Guarino jointly and severally. Guarino sought to invoke the public policy exception, arguing that there were no grounds for piercing the corporate veil that, under applicable U.S. law, insulates corporate officers from personal liability for their company’s debts. Both the District Court and the Court of Appeals, per curiam for a panel of Circuit Judges Lagoa, Brasher and Black, held the exception inapplicable. The public policy defense “applies only when confirmation or enforcement of a foreign arbitration award would violate the form state’s most basic notions of morality and justice.” [Citation omitted](Emphasis added).  In the court’s view, the doctrine of no personal liability does not rise to that level.

Railway Labor Act

Union Pacific Railroad Company v. American Railway & Airway Supervisors’ Association, 2020 U.S. App. LEXIS 39550 (5^th Cir. Dec. 16, 2020) gets into a deep analysis of the effect of a Medical Review Officer’s opinion regarding the rehiring of a discharged employee who tested positive for methamphetamines.  For those involved in labor relations and grievance disputes, this part of the opinion is important as it draws a limit on the purposes of MRO findings.  As a more general arbitration matter, the case is worth reading as it discusses when a conflict arises between an arbitrator’s award and public policy as expressed in regulations. The per curiam opinion, with Judges King and Stewart in the majority, views such conflicts narrowly, as it holds that a conflict between an award and public policy, as represented by a regulation, only exists if the regulation is aimed at addressing the specific issue under consideration by the arbitrator. Accordingly, it reverses the District Court’s judgment holding that the arbitrator erred in ordering the rehiring of the employee in the face of the MRO’s opinion that the test administered the employee demonstrated the presence of the drug. In a three-paragraph dissent, Owens, C.J. opines that she would remand for a determination of whether the employee could have been placed into a position that was not “safety-sensitive.”

Quick Hits –

Scope of issues presented to the arbitrator

A & A Maintenance Enterprise, Inc. v. Ramnarain, 2020 U. S. App. LEXIS 39556 (2^nd Cir. Dec. 16, 2020) is an LMRA case in which the arbitrator considered whether non-union employees qualified as “substitutes” under the Collective Bargaining Agreement, even though the employer had a practice of discharging and rehiring them to do union work.  The Court, Calabresi, J., writing for himself and Judges Katzmann and Sullivan, recognizes the standard deferral to the arbitrator to interpret and apply the terms of a CBA.  “A federal court’s review of labor arbitration awards is narrowly circumscribed and highly deferential – indeed, among the most deferential in the law.” [Citation omitted].  Finding that the parties submitted the general issue of whether the non-union workers were authorized under the CBA, the court holds that the arbitrator was not constrained by whether the grievance characterized them as “temporary” or “substitute” workers.  The panel affirms the District Court’s confirming of the award. As an aside, in evaluating the application of the opinion to other cases, it may be relevant to consider Judge Calabresi’s characterization of A & A’s hiring of non-union workers as “an underhanded plan.”

Conflicts

In determining whether an arbitrator has a conflict of interest, I suggest you read Fleischer v. Barnard College, 2020 U.S. Dist. LEXIS 235387 (S.D.N.Y. Dec. 15, 2020) (no conflict where the arbitrator had participated on three prior panels in which the law firm representing the respondent in this case was the employer’s counsel) and Miniex v. Law Office of E. Sharon Thornton, 2020 U. S. Dist. LEXIS 236518 (S.D. Tex. Dec. 16, 2020)(no disqualifying conflict where Thornton made no timely objection to the arbitrator’s appointment, even though she had previously contacted him about serving as her expert in the case).

Participation in arbitration as creating personal jurisdiction

In Connie E. Lee Living Trust v. Lebenthal, 2020 U.S. Dist. LEXIS 235029 (D.N.D. Dec. 15, 2020) defendant Alexandra Lebenthal moved to dismiss the action for lack of personal jurisdiction. In reviewing the nature and quality of her contacts with North Dakota, the court holds that her presence at an unrelated arbitration was insufficient to justify personal jurisdiction.

Have a good weekend. We are still shoveling.

Dave Reif
Reif ADR
Dreif@reifadr.com
Reifadr.com