It is a very quiet day today with only a few published decisions. Of greatest interest is the Third Circuit’s discussion of arbitration agreements between attorneys and their clients.
Conscionability of attorney/client arbitration agreements
In Sanford v. Bracewell, LLP, 2021 U.S. App. LEXIS 589 (3rd Cir. Jan. 11, 2021), the Third Circuit reviews the District Court’s confirming of an arbitration award arising from a dispute between a law firm and its former clients. Sanfords sued the firm for breach of contract and malpractice. Based on a provision in the parties’ retainer letter, which provided for the arbitration of “any controversy, dispute or claim arising out of or related to the engagement,” the District Court had previously ordered arbitration. The panel found in favor of Bracewell on the legal malpractice claims, but against it on Sanfords’ breach of contract claim. As the District Court has sealed the award, the terms of the award are not public; however, it appears from the opinion of the Court of Appeals that the arbitrator found that “Bracewell’s alleged breach did not cause [Sanfords] harm.” The District Court granted Defendant’s motion to confirm and the Court of Appeals, Restrepo, C.J., writing for a panel which includes Circuit Judges Jordan and Krause, affirms.
The decision’s holdings on the standard of appellate review and the deference given an arbitral panel’s findings track other holdings. The interesting issue for practitioners who might wish to include arbitration provisions in their engagement letters is the court’s rejection of Sanfords’ claim that their agreement is unconscionable. The opinion walks through the indicia which make the agreement enforceable and should guide drafting counsel.
- Both parties were “relatively sophisticated.”
- Bracewell did not employ “untoward tactics.”
- The arbitration clause was prominent and the agreement was otherwise uncomplicated.
- Bracewell encouraged Sanfords to consult other counsel for “independent advice concerning [the arbitration clause].”
- Both parties bore their own costs and fees in the arbitration.
- The agreement made it clear that the parties waived the right to a “trial de novo  in a court of law.”
- Nothing compelled Sanfords to continue their relationship with Bracewell if they found the concept of arbitration unacceptable.
The opinion acknowledges that “some courts and scholars have questioned whether arbitration clauses in client engagement letters should be enforceable,” but does not cite to any of those authorities. It appears that the parties’ appendix, which does not seem to be available on-line, contains those references. However, Judge Restrepo holds no “applicable law,” presumably state contract law in Pennsylvania or New York which he applies under choice of law doctrines, invalidates such agreements.
Arbitration of discrimination claims in New York
Bedoy v. NBCUniversal Media, LLC, 2021 U.S. Dist. LEXIS 4555 (D. Colo. Jan. 11, 2021) will interest New York employment lawyers, but probably no one else. Effective July 11, 2018, N.Y.C.P.L.R §7515 prohibits contract clauses that require parties to submit certain allegations of discrimination to mandatory arbitration. Finding that the parties’ contract predates that effective date, the court, Moore, J., holds that the provision is inapplicable to this ADA and Title VII action. He also holds that the section conflicts with the FAA’s general presumption of parties’ freedom to contract for arbitration, making §7515 “unenforceable.” Although the case might be less weighty as precedent since it is decided by a Colorado judge interpreting New York law, Judge Moore relies upon more local authority, citing Latif v. Morgan Stanley & Co., LLC, 2019 WL 2610985 (S.D.N.Y. June 26, 2019).
Arbitration of coverage
Educational Service Centers Risk Funding Trust v. Certain Underwriters at Lloyds, 2021 U.S. Dist. LEXIS 2801 (S.D. Ind. Jan. 6, 2021) addresses the arbitrability of an insurer’s liability under an excess liability policy. Shakamak School District, one of the plaintiffs, received a notice of claim regarding damages allegedly suffered by a minor student due to “sexual misconduct” by another student; ultimately, the allegedly injured student brought suit on those claims. The District put Defendant, which had issued an excess liability policy, on notice. The timeliness of that notice appears to be one of the issues between the District and the insurers. The Underwriters declined both indemnity and defense. Plaintiff brought this declaratory judgment action seeking a holding that the policy provided coverage and that Shakamak had given timely notice of the claim. Defendant moved to compel arbitration under a policy provision which required that “in the event that the ASSURED and Underwriters are unable to agree as to the amount recoverable by the ASSURED . . . ,” (Capitals and bold face in original) the matter must be arbitrated. Viewing the arbitration clause “in its context,” the court, Hanlon, J., focuses on the inclusion of the arbitration mandate under “General Policy Conditions,” rather than as a “Specific Excess Limit.” The court must assume that the parties understand the significance of the placement of the arbitration provision, as he does not elaborate. At its bottom line, the opinion defaults to the general principle that “any doubt about the scope of the arbitration clause is resolved in favor of arbitration as a matter of federal law,” quoting Gore v. Alltell Communications, Inc., 663 F. 3d 1027, 1032 (7th Cir. 2012) and referencing Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1 (1983). In short, the court compels arbitration because “it cannot ‘be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute.’ [citing Gore]. Plaintiffs’ claim therefore must be arbitrated.” (Emphasis added).
For those interested in civil procedure issues beyond arbitration, the court holds that, even though the school district’s liability, if any, in the underlying tort case has not yet been established, the case is ripe under the Case and Controversy clause. In doing so, the court applies the “probabilistic injury” doctrine, which holds that a court may examine coverage before liability is established if there is a “substantial probability that the insured would be liable for an amount that it cannot afford.” Here, although the court does not discuss the evidence upon which it bases its conclusion, Judge Hanlon finds that the damages in the underlying lawsuit, if awarded, “would have a devastating effect on Shakamak and likely render it unable to continue as a viable public school.”
The International Institute for Conflict Prevention and Resolution, better known as CPR, has filed an amicus brief in support of the pending petition for certiorari in Servotronics v. Rolls-Royce, Dkt. No. 20-794. Not only does CPR argue for the granting of cert., which would be expected, it also asks SCOTUS to set oral argument during the pending term. Per CPR’s brief, the arbitration as to which the subject discovery subpoenas were issued is set for a final hearing on May 10, 2021. Accordingly, “there is a high likelihood that this case will become moot before this Court issues its decision if argument is held over until the October 2021 term.” If you want a good summary of the Circuits’ various Section 1782 cases and the resulting split in authorities, along with an extensive list of law review articles and other scholarship on the issue, you will find it in this twenty-page filing. You can download it at Scotusblog.com.
Hopefully, the next two days bring us more cases with which to work. SCOTUS may announce decisions on Thursday morning, so perhaps “Highlights” can discuss an opinion in Henry Schein. In any event, see you Friday.
David A. Reif