An abundance of cases today makes up for the paucity early in the week. This has allowed me to continue my efforts to steer away from run-of-the-mill matters dealing with more routine questions of contract formation and agreement scope. Of particular and general interest today are Sanh, which should make counsel think about whether they really want to enforce their arbitration clause, and Karchner because of its sense of justice at least partially done.
Should you waive arbitration?
Your client has been sued based on a claim that arguably falls within the scope of an arbitration clause. The immediate reaction, understandably, is to move to compel arbitration. After all, you drafted the clause for a reason. But wait. Might it be better to waive arbitration and let a court resolve the issue? Sanh v. Opportunity Financial, LLC, 2021 U.S. Dist. LEXIS 5893 (W.D. Wash. Jan. 12, 2021) highlights why that strategic discussion is important.
Sanh arises out a series of what seem to be payday loans. Sanh alleged that she signed loan documents, each of which paid the outstanding balance on the previous loan and provided “a few hundred dollars directly to plaintiff.” Claiming that the interest rates were “outrageous and usurious,” she alleged various tort and statutory claims. The loan documentation for the first two transactions included arbitration clauses, but the third loan did not. Based on the first two agreements, Opportunity moved to compel. Holding that the third loan constituted a new transaction which superseded the prior arbitration clauses, the court, Lasnik, J., denies arbitration. If the case ended there, this would be a routine contract formation case not worth discussing. However, in the balance of the opinion, the court finds in favor of Opportunity under Rule 12(b)(6), in part on a matter of federal preemption, and dismisses the complaint, albeit with the right to plead over. If the case had been arbitrated and the tribunal, contrary to what Judge Lasnik holds is controlling law, had rejected the preemption claim, Opportunity would have effectively been left remediless, since, as Justice Kagan reminds us, “an arbitrator’s error — even his grave error— is not enough. So long as the arbitrator was ‘arguably construing’ the contract . . . a court may not correct his mistakes.” Oxford Health Plans LLC v. Sutter, 569 U.S. 564, 572 (2013).
So, as a matter of strategy, if you believe you have a strong legal defense, think about whether you really want to arbitrate, with the attendant risk of a run-away arbitrator. Particularly if you may be able to resolve the litigation on an early motion to dismiss, waiving arbitration might be the better choice.
Proving receipt of an arbitration clause
One of the issues defendants face in seeking to enforce an arbitration clause in the consumer context is proving that the plaintiff received and agreed to the contract. Proctor v. First Premier Corp., 2021 U.S. Dist. LEXIS 6502 (D.D.C. Jan. 13, 2021) addresses the issue and shows a pathway to proof. Plaintiff claimed that defendants, including First Premier, filed inaccurate information with a credit bureau and failed to correct the plaintiff’s credit record, all in violation of the Fair Credit Reporting Act and Fair Debt Collection Practices Act. First Premier moved to compel arbitration under the terms of its credit card agreement, which it alleged was contained in material provided to the consumer along with the card. There was no question that Proctor used her credit card; the issue was whether the brochure had accompanied her receipt thereof.
First Premier provided a declaration from one of its employees setting forth the procedure under which the agreement, as a matter of routine business practice, is included with the card. However, Chief Judge Howell finds a break in that chain of proof. First Premier used a third-party vendor to mail the credit cards and the accompanying agreement. Since First Premier, at best, can aver that it instructs that vendor to include the agreement with the credit, but not that the vendor, as a matter of business practice, does so, Chief Judge Howell holds that “a key link is missing from the logical chain that would permit the inference that plaintiff was mailed the credit card agreement.” Interestingly, if you think this reads like the chain of custody analysis in a criminal case, you are probably right. Before going on the bench, Chief Judge Howell spent six years of her career as an AUSA, rising to become Deputy Chief of the Narcotics Section in the Eastern District of New York. However, whatever you may think of the reasonableness of the narrow inferences which the court is willing to draw, Proctor is a reminder that counsel need to be sure that every box is checked in proving the contractual elements of an agreement to arbitrate.
Earlier “Highlights” discussed the difficulty of obtaining review of an adverse decision compelling arbitration. Section 16 of the Federal Arbitration Act allows appeals from the denial of motions to stay pending arbitration and of motions to compel arbitration – orders which might be categorized as “antiarbitration.” It specifically prohibits appeals from an order compelling arbitration or granting a stay. The only means for obtaining such review is through the certification of an interim appeal under 28 U.S.C. 1292(b). Hickerson v. Pool Corp., 2021 U.S. Dist. LEXIS 6348 (D. Colo. Jan. 13, 2021) is the rare case that grants such certification. Judge Arguello goes through each of the steps involved in that decision. As to two preconditions to certification – that the order as to which certification is sought contains a controlling question of law and that resolution will “materially advance the ultimate determination of the litigation” – she holds that review of her order regarding class arbitration will determine whether the matter can move forward as a collective action or will require individual arbitrations. An interesting issue is that she treats her own reversal of a Magistrate Judge’s interpretation of the contract as satisfying the test’s third requirement – “substantial ground for difference of opinion.” For parties ordered to go forward with an arbitration, Hickerson gives you support for getting through the needle’s eye of Section 1292(b) certification and possible appellate review.
Failure to advance arbitration fees
Aquino v. BT’s on the River, LLC, 2021 U.S. Dist. LEXIS 5204 (S.D. Fla. Jan. 12, 2021) addresses the issues raised by a party’s refusal to pay arbitration fees. In an earlier opinion, the court, Scola, J., severed a provision in the parties’ employment contract which required the Plaintiff dancer and the club to bear the costs of arbitration equally, “unless the arbitrator concludes that a different allocation is required by law.” He, thus, saved the agreement from running afoul of the plaintiff’s right under the FLSA to attorneys’ fees and costs if successful in her claim. The issue addressed in this opinion arises from the plaintiff’s claim that the arbitration service which the parties selected required a deposit against the arbitrator’s fee of $500 per hour. Claiming she was unable to afford either the retainer or the hourly fee, Plaintiff alleged that the arbitration order should be set aside since arbitration would not provide “an adequate and accessible substitute forum in which to resolve her statutory claims.” In essence, she asserts that allegedly prohibitive costs of arbitration, coupled with a bar on federal court litigation, would leave her without a forum. The court makes short work of the argument. First, Judge Scola holds that, since plaintiff agreed to use this specific arbitration service, she cannot now complain about its charges. “In sum, after being compelled to arbitrate, the Plaintiffs, who are represented by counsel, appear to now be complaining that they picked an arbitration service that they cannot afford.” Further, the court opines that plaintiffs showed no effort to seek reduced fees from the service. In summary, the court finds that “to adopt the Plaintiffs‘ position, [the court] must first find that the FLSA entitled Plaintiffs to arbitrate for free.” Rejecting that position, the court holds that, since the Plaintiffs retain the right to recover any costs if they prevail, they may be required to advance their share of those costs upfront. There is no requirement, he holds, that “defendants completely subsidize the costs of the arbitration at the outset.”
Rooker-Feldman doctrine and arbitration
Rooker v. Fidelity Trust Co., 263 U.S. 413 (1923) and District of Columbia Court of Appeals v. Feldman, 460 U.S. 462 (1983) established the so-called Rooker-Feldman doctrine, holding that federal courts lack subject matter jurisdiction over cases which effectively seek direct review and reversal of state court judgments predating the federal litigation. Parker Law Firm v. Travelers Indemnity Co., 2021 U. S. App. LEXIS 702 (8th Cir. Jan. 12, 2021) addresses the doctrine in the context of arbitration. In December 2017, a New York trial court ordered arbitration of a dispute between Plaintiff and PS Finance, one of the defendants in this action, over the law firm’s obligation to reimburse PS out of certain proceeds received by the firm’s client. The firm appealed that New York decision and the appeal is still pending. Two years later, the Plaintiff brought this action seeking a declaratory judgment that they owe no money to PS. The District Court dismissed the claims under Rooker-Feldman, holding that the Plaintiff effectively sought a review of New York’s order to arbitrate. The Court of Appeals, Circuit Judge Colloton writing for himself and Judges Gruender and Grasz, affirms. Plaintiffs argued that, since an appeal was still pending from the New York order compelling arbitration, that decision was not final and, therefore, did not trigger Rooker-Feldman. Rejecting that argument, the Court holds that consideration of the same issues here would effectively give Parker a “parallel appeal.” Further, the court holds that Rooker-Feldman deference is applicable to an order directing arbitration, even though, by its very nature, such a decision is not one on the merits of the claim. “While the more common application of Rooker-Feldman involves a state court adjudication on the merits, the logic underlying the rule applies equally to a state court order directing arbitration.”
Quick Hits –
Conditional Certification in FLSA collective actions
In In re: JPMorgan Chase & Co., 916 F. 3d 494 (5th Cir. 2019), the Fifth Circuit held that a District Court, as part of the certification process of a collective action, may not send notice to potential class members who have signed arbitration agreements which cover the alleged employment dispute. In Swales v. KLLM Transportation Services, LLC, 2021 U.S. App. LEXIS 827 (5th Cir. Jan. 12, 2021) the Court of Appeals, Circuit Judge Willett, writing for himself and Judges Jolly and Jones, extends that doctrine and seems to dispose of a common two-part certification procedure. While any such change in the management of FLSA collective actions is beyond the scope of this blog, it is worth tracking Swales, as it seems to create a Circuit split and may lead to SCOTUS review of some of the underpinnings of JPMorgan.
AAA Arbitrator selection v. AAA rule incorporation
Demopoulos v. Curcio, 2021 U.S. Dist. LEXIS 6270 (E.D.N.Y. Jan. 10, 2021) involves the common issue of whether the parties have delegated gateway issues to the arbitrator. Defendant argued that the parties’ arbitration agreement incorporated the AAA rules, which authorize the arbitrator to make decisions as to his or her own jurisdiction. However, Magistrate Judge Kuo holds that the contract merely provides that, if the parties cannot agree upon an arbitrator, they will petition the American Arbitration Association for a list of neutrals. This, she holds, “falls short of explicitly incorporating AAA rules into the Arbitration Clause, including any rule empowering an arbitrator to decide issues of arbitrability.” After resolving issues related to the scope of the arbitration clause, she recommends compelling arbitration.
Gunasekera v. War Memorial Hospital, Inc., 2021 U.S. App. LEXIS 733 (6th Cir. Jan. 12, 2021) serves as a reminder of the steep slope parties face in vacating an arbitration award. In addition to the bases for vacatur specifically set forth in the FAA, the 6th Circuit has recognized a “separate judicially created basis” for setting aside awards where the award “was made in manifest disregard of the law.” Merrill, Lynch, Pierce, Fenner & Smith, Inc. v. Jaros, 70 F. 3d 418, 421 (6th Cir. 1995). The panel, Judges Cook, Griffin and Larsen, per curiam, in addition to questioning the continuing viability of the manifest disregard doctrine, holds that its invocation requires a showing both that the applicable legal principle is “clearly defined and not subject to reasonable debate” and that the arbitrator knew of the principle and “refused to heed” it. Finding that the Plaintiff failed to meet that standard, the Court affirms the District Court’s refusal to set aside the award based upon the panel’s failure to award Dr. Gunasekera attorneys’ fees claimed under the Family and Medical Leave Act.
Arbitration under the Foreign Sovereign Immunities Act
Arbitration requirements arise in unexpected contexts. Under the Foreign Sovereignty Immunity Act, a foreign state may be held liable for state sponsored terrorism. However, to create subject matter jurisdiction “in a case in which the act occurred in the foreign state against which the claim has been brought, the claimant [must afford] the foreign state a reasonable opportunity to arbitrate the claim in connection with the accepted rules of international arbitration,” 28 U.S.C. §1605A9a)(2)(A)(iii). In Karchner v. Islamic Republic of Iran, 2021 U.S. Dist. LEXIS 7170 (D.D.C. Jan 14, 2021), plaintiffs alleged that Iran provided weapons to terrorists in Iraq, as a result of which American servicepeople and civilians were killed. Since the “acts” of terrorism, the killings, occurred in Iraq and the defendant is Iran, a separate state, the act does not mandate arbitration, according to Judge Kollar-Kotelly. Far more important than this nuance, however, is the court’s ultimate finding that Iran, a designated state sponsor of terrorism, is liable for the deaths of seventy-three Americans and will face damages in an amount still to be determined.
See you Monday. Have a good weekend.
David A. Reif