Happy New Year.  Hopefully, this year brings us back to the face-to-face practice of arbitration, litigation and mediation.  Far more importantly, vaccines and new knowledge about treating COVID-19 may signal the end of a pandemic that has resulted in the death of hundreds of thousands of people throughout the world and an economic downturn that has crushed many people’s hopes of economic stability.  

While there are the usual District Court cases, the end-of-year opinions also give a rare view of appellate jurisdiction.

Appellate Jurisdiction – You lost in District Court on your motion to dismiss in favor of arbitration or in your opposition to a motion to compel. Where do you go now?  Two cases address the issue and give litigators specific instruction.

Be careful what relief you look for in District Court

In a 2-1 decision, U.S. ex rel. Dorsa v. Miraca Life Sciences, Inc., 2020 U.S. App. LEXIS 40754 (6^th Cir. Dec. 30, 2020), the Sixth Circuit emphasizes the need to accompany any motion to dismiss an action in favor of arbitration with some reference to compelling that alternative method of resolution.  The plaintiff here was a former employee of Miraca who alleged that the company fired him because he disclosed alleged fraud against the U.S. and commenced a qui tam action. Miraca moved to dismiss the case based upon an arbitration clause in Dorsa’s employment contract.  The District Court denied the motion.  Miraca appealed the denial of its motion to dismiss.

In this opinion, the court dismisses the appeal for lack of subject matter jurisdiction. Because the District Court denied defendant’s motion to dismiss, the case was still pending below.   Therefore, there is no jurisdiction under 28 U.S.C. §1291, which allows appeals only from final judgments.  Recognizing this, Miraca argued that jurisdiction exists under Section 16 of the Federal Arbitration Act, 9 U.S.C. §16, which provides an appeal may arise from an order “refusing a stay of any action under Section 3 [of the FAA],” i.e., a stay in favor of arbitration, or one “denying a petition under Section 4 of this title to order arbitration to proceed.”  The majority in Miraca, with Circuit Judge Rogers writing for himself and Circuit Judge Moore, holds that, since Section 16 does not specifically mention the denial of a motion to dismiss as an appealable order under the Section 16, the Court of Appeals has no subject matter jurisdiction.  It dismisses the appeal.  The opinion hinges on the fact that Miraca only moved to dismiss the action below, rather than seeking a stay of the case as an alternative to dismissal or requesting that the dismissal order should also compel arbitration.   The court distinguishes its precedent In Turi v. Main Street Adoption Services, LLP, 633 F. 3d 496 (6^th Cir. 2011) and Simon v. Pfizer, Inc. 398 F. 3d 765 (6^th Cir. 2005), where the court found appellate jurisdiction over the granting of a dismissal, holding that the movants in those cases included such language in their requests to the District Court.  Here, the court holds, there was no such reference to arbitration.  The majority cites to Third, Ninth and Tenth Circuit precedent in support of its holding.   In dissent, Circuit Judge Batchelder challenges the majority’s distinguishing of Turi.  She likens the two cases in that neither actually sought “referral” to an arbitrator in the motion to dismiss and holds that Turi is a binding precedent. In a strange footnote, the majority in response, says that it holds to its opinion, even if it “may in fact misstate the record in Turi, as the dissent suggests. . . . “

It will be interesting to see if the Circuit en bancs the case in light of a strong dissent from one of its most senior judges and the importance of the issue.  In the meantime, practitioners moving to dismiss an action because the parties agreed to arbitration should be sure to add the five magic words “and refer it to arbitration” to their motion in order to preserve the right to appeal if the motion is denied.

You can not withdraw your way into the Court of Appeals

In Olmstead v. Dell, Inc., 594 F. 3d 1081 (9^th Cir. 2010), the Court of Appeals created an end run around the FAA’s prohibition on appealing the granting of a motion to compel arbitration by allowing a party who was ordered to arbitrate to withdraw its entire action with prejudice.  Since doing so creates a final judgment, the Court there held that appellate jurisdiction exists under the final judgment rule of 28 U.S.C. §1291.  Langere v. Verizon Wireless Services, LLC, 2020 U.S. App. LEXIS 40566 (9^th Cir. Dec. 29, 2020) specifically reverses that precedent. Rejecting plaintiff’s attempt to invoke the Olmstead rule, the court dismisses his appeal for lack of subject matter jurisdiction.

When he bought a phone and phone plan, Langere purchased Verizon’s extended warranty program.  Thereafter, he alleges, he discovered that Verizon’s warranty overlapped with that offered by the cell phone manufacturer. He brought a putative class action seeking damages for violation of consumer protection statutes.  The District Court, based on Verizon’s terms of service, granted a motion to compel arbitration of the claim.  Because he believed arbitration was not “economically feasible,” Plaintiff opted to go all in on getting a reversal on appeal.  Accordingly, he voluntarily dismissed his case with prejudice, thus creating a final judgment, and filed a notice of appeal.

However, Circuit Judge Bumatay, for himself and Circuit Judges Parker (sitting by designation from the Second Circuit) and Watford here overrules Olmstead based on the Supreme Court’s subsequent holding in Microsoft Corp. v. Baker, 137 S.Ct. 132 (2017).  SCOTUS there held that a plaintiff may not create appellate jurisdiction over the denial of class certification by voluntarily dismissing the class claims.  Finding that Olmstead’s rationale – that
“the voluntary-dismissal tactic ‘invites protracted litigation and piecemeal appeals’” and that such a final judgment would “permit ‘plaintiffs only’ and ‘never defendants’ to force an immediate appeal” – applies equally to arbitration claims, the court holds that appeal from a voluntary dismissal would render the final decision rule “a pretty puny one.” (quoting Digital Equipment Corp. v. Desktop Direct, Inc., 511 U.S. 863, 872 (1994).  Accordingly, it dismisses the appeal for lack of subject matter jurisdiction.  For practitioners in the Ninth Circuit and probably elsewhere, the lesson is clear: if the other side wins a motion to compel arbitration, you have to ride out the case before the arbitral tribunal unless you can convince the court to allow an interim appeal under 28 U.S.C. §1292(b) – and good luck with that.

Fraud as a defense

Petrozzino v. Vivint, Inc., 202 U.S. Dist. LEXIS 245134 (D.N.J. Dec. 31, 2020) reminds us of the alternative types of fraud which an opponent of arbitration may allege and the different methods of resolving those issues.

Plaintiffs in this purported class action claimed that Defendant misrepresented the quality of its alarm system.  Vivint moved to arbitrate under the terms of its purported contract with Plaintiff; Defendant moved to arbitrate.  The parties disagreed on whether there was an enforceable arbitration agreement as there were two sets of documents exchanged between the parties, only one of which contained an arbitration provision.   On August 25, 2017, a door-to-door salesman had visited the Plaintiffs and, after making his pitch, provided them with a one-page document entitled “Purchase and Services Agreement.”   Plaintiffs signed the agreement, but defendant did not.  After the system was installed on August 27, 2017, Defendant provided plaintiff with a “Schedule of Equipment and Services,” “E-sign Consent form,” and another “Purchase and Services Agreement.”  This second agreement, unlike the first, included a second page of terms and conditions, including an arbitration agreement.  Both parties signed the August 27, 2017 agreement, but in opposition to the Verizon’s motion to compel, Plaintiffs claimed that they were led to believe that the second document was merely an “Order Confirmation,” not a contract.  Thus, they claimed that the second contract, with its arbitration provision, was the result of fraud and invalid.

The court, applying New Jersey law, distinguishes between two types of fraud – fraud in the inducement and fraud in the execution.  The first and more common type arises where a party concedes that it entered into an agreement, but argues that, but for misrepresentations by its counterparty, it would not have done so.   Such disputes, the court holds, are resolved by the arbitrator.  Fraud in the execution arises where a party claims that it entered into an agreement different in nature from the one which the counterparty proffers.  In other words, fraud in the execution questions whether there was ever the meeting of minds necessary to form an agreement.  Since the formation of an agreement is a gateway issue, the court, not the arbitrator, resolves the issue.  Judge Hillman holds that, since plaintiffs’ claim that second contract did not reflect the agreement which they reached with the salesman, they claim fraud in the execution.  Therefore, it is for the court to decide whether fraud exists.  Finding none, the court compels arbitration.

FINRA arbitrations

Two cases address motions to compel arbitration under FINRA’s rules. In Citizens Bank, N.A. v Margolis, 2020 U.S. Dist. LEXIS 243221 (E.D. Mich. Dec. 23, 2020), plaintiff claimed that defendant, a former wealth manager, had violated a non-competition agreement after the bank terminated his employment.  At the beginning of his employment, Margolis had worked for both Citizen’s Bank and its affiliate Citizen’s Securities, Inc., a FINRA-member firm. At the time of his termination, however, he had been promoted to new position at Citizen’s Bank, at which time he signed a new employment agreement; that agreement did not include Citizen’s Securities as a co-employer.  Citizen’s Bank, unlike Citizen’s Securities, was not a FINRA member firm.  Nevertheless, Defendant argued FINRA’s arbitration rules applied to his dispute because the bank benefited from his FINRA membership, required him to maintain his FINRA license, and incorporated form U-4 as a condition of employment.  Judge Drain finds that, despite these ties, Citizen’s Bank never specifically agreed be bound by FINRA rules and, since it was not a FINRA member, that requirement was not automatically imposed upon it.   He denies the application to compel arbitration.  (For some reason, the case also appears in LEXIS as 2020 U.S. Dist. LEXIS 243220.  I have not found any difference between the two opinions.)

First Allied Securities, Inc. v. Carrier, 2020 U.S. Dist. LEXIS 243758 (S.D. Tex. Nov. 19, 2020) addresses whether FINRA arbitration applies to conduct by a broker which is outside the activities authorized by his statutory employer.  Beginning in 2015, Azad, an attorney and, at that time, a registered representative with First Allied, convinced defendants, at least some of whom were his legal clients, to invest between $100,000 and $840,000 in his son-in-law’s company.  The investors sought to recoup their losses from First Allied through a FINRA arbitration.  The investors had never held any other investment accounts or investment with First Allied.  First Allied brought this action seeking a declaratory judgment that the defendants may not commence a FINRA arbitration and enjoining them from continuing with proceedings before the panel.  The case is presented on cross-motions for summary judgment.

FINRA Rule 1220 provides that parties must arbitrate a dispute “between a customer and a member or associated person of a member” if the dispute arises in “connection with the business activities of the member or the associated person. . . “(Emphasis added).   The court applies a bright line test, holding that “because Defendants purchased securities from a registered representative of Plaintiff, they are ‘customers’ under FINRA Rule 12200.”  Accordingly, the court holds, the investors may invoke FINRA arbitration even if the actual investment was not one which the member firm offers its clients. The court grants summary judgment for the Defendants.  I recommend that anyone faced with this issue also take close look at authority elsewhere, as other courts may disagree when dealing with unauthorized sales.

Washington Football Team and ripeness for arbitration

In a case primarily of interest to those following the football team formerly known as or the battle over its ownership, Rothman v. Snyder, 2020 U.S. Dist. LEXIS 244787 (D. Md. Dec. 30, 2020) holds that arbitration of issues related to the sale of minority interests in the team must wait until the Plaintiffs provide Snyder with a “complete package proposal from [the] bidder. . . .”  Until that offer is presented, the court holds, “[i]t can hardly be maintained that the holder of the [Right of First Refusal, Snyder] (or an arbitrator) is authorized to participate in and oversee the owner/seller’s search for and negotiation with a third-party bidder . . . .” (Emphasis added).  Accordingly, the court, Messitte, J. holds that, while there are issues that may ultimately be arbitrable, any such proceeding is premature.  Even for those outside the Beltway, the case is worth reading as the court discusses at some length when a matter is ripe for arbitration.

It is law school exam grading time, so the fate of Wednesday’s and Friday’s “ADR Highlights” depends on how well that effort goes over the next couple days.  I will see you as soon as that job gets wrapped up.  Be safe.

David A. Reif
Reif ADR
Dreif@reifadr.com
Reifadr.com