TGIF (at least on this side of the International Date Line). Today’s highlights deal with a couple of familiar issues from a different vantage point.
Delegation of gateway issues of arbitrability and waiver
While SCOTUS has decided not to deal with the issue, the Circuits generally agree that the parties’ designation of a tribunal whose rules provide that the arbitrator shall decide arbitrability delegates to him or her those gateway questions. In re: Intuniv Antitrust Litigation, 2021 U.S. Dist. LEXIS 26102 (D. Mass. Feb. 11, 2021) addresses whether that doctrine applies when a non-signatory to the arbitration clause is compelled to arbitrate. The case arises from a settlement agreement resolving a prior patent suit. Meijer, Inc. and Meijer Distribution, Inc. (collectively “Meijer”) are among the class members who allege they were forced to pay inflated prices for products due to that agreement. Meijer moved for appointment as class representative. Shire moved to compel arbitration of Meijer’s own claims. Shire’s argument to compel arbitration centered on a claim that, under the doctrine of equitable estoppel, Meijer’s arbitration agreements with a third-party, Activis (“Activis arbitration clause”), require arbitration of the Shire claims. The interest in the case arises, not from the equitable estoppel argument, but from the court’s consideration of whether this threshold issue is for the arbitrator or the court to resolve. Meijer sought resolution by the court; Shire by the arbitrator.
The Activis arbitration agreement incorporated the AAA Commercial Rules, which delegate gateway issues to the arbitrator. However, there was no such direct agreement between Shire and Meijer; any obligation for Meijer to arbitrate arose because of equitable estoppel, not because of a contractual relationship. Thus, the doctrinal underpinning for the concept that the parties’ contractual incorporation of the AAA’s rules brings along the rules’ application of competence-competence is absent. Despite the lack of such a direct contractual relationship, Judge Burroughs holds that, since the agreements which allegedly form the basis for binding Meijer to arbitration through equitable estoppel contain arbitration clauses, the provisions of those contracts, including the delegation of gateway issues, are invoked. Although the court cites to First Circuit Court of Appeals authority on related issues, see Apollo Computer, Inc. v. Berg, 886 F. 2d 469 (1st Cir. 1989) (applying competence-competence from the ICC rules to the assignee of a contract), it recognizes that there is nothing directly on point. The court acknowledges and cites to contrary District Court holdings within the First Circuit, so the case is worth reading whichever side of the issue is sitting on your desk. Considering the stakes involved in the case, it will be interesting to see whether there is certification of an interlocutory appeal.
The court also addresses the issue of whether Shire waived arbitration by participation in this litigation. Applying the usual tests of the scope of participation, delay in seeking to compel arbitration, and prejudice, the court holds that arbitration was not waived. The more interesting discussion is whether the court or the arbitrator makes that determination. Relying upon Marie v. Allied Home Mortgage Corp., 402 F. 3d 1 (1st Cir. 2005), the court retains that determination for itself. In so holding, Judge Burroughs rejects Shire’s argument that SCOTUS’s decision in Henry Schein “undercuts” Marie. “The Supreme Court’s concern in that case was affording proper respect to the contractual delegation of arbitrability. Here, whether Shire has forfeited its right to arbitrate claims against it in this lawsuit is a different issue that does not depend on the underlying arbitrability of the dispute.”
Coincidentally, Liou v. Organifi, LLC, 2021 U.S. Dist. LEXIS 24681 (S.D. Cal. Feb. 8, 2021) was published the same day. There, Judge Bencivengo reaches the contrary result, holding that delegation arises only among actual parties to the contract. However, her comments in footnote 6 indicate that there may be some wiggle room where equitable estoppel provides the basis for compelling arbitration.
Sunbelt Residential Acquisitions, Inc. v. Crowne Lake Associates, LP, 2021 U.S. Dist. LEXIS 25968 (M.D. N.C. Feb. 11, 2021) raises an interesting strategic dilemma for counsel – in what court do you seek an order to compel arbitration. Sunbelt brought a declaratory judgment action in which it sought a determination as to whether it was entitled to the return of a deposit after its cancellation of an agreement to purchase an apartment complex in Jamestown, North Carolina from Crowne Lake. The parties’ purchase agreement provided for arbitration at “the regional office of the [AAA] located in Birmingham, Alabama.” The problem is that there is no such office. However, Crowne Lake initiated arbitration proceedings in Alabama, apparently through the AAA. In this case, Sunbelt seeks a stay of those proceedings, while Crowne Lakes seeks an order compelling arbitration and either staying or dismissing this action. Magistrate Judge Auld first resolves the easier question of who determines arbitrability. Since the parties’ arbitration agreement incorporated the AAA Commercial Rules, he holds that arbitrability is for the arbitrator, not the court. Therefore, he declines to consider arbitrability questions and denies Sunbelt’s request for a stay. The harder question is whether he can compel Sunbelt to arbitrate in Alabama. Section 4 of the FAA provides that “the hearing and proceedings under the parties’ agreement shall be in the district in which the petition for an order directing such arbitration is filed.” However, the court opines, Section 4 also holds that “when the Court determines that an arbitration should occur, the Court must ‘make an order directing the parties to proceed to arbitration in accordance with the terms of the agreement.’ 9 U.S.C. § 4 (emphasis added).” The dilemma which the court sees is that the agreement provides for arbitration in Alabama, but the “district in which the petition . . . is filed” is in North Carolina. After evaluating District Court authorities from the Fourth, Fifth, Seventh, Ninth and Tenth Circuits, including a discussion of whether jurisdictional limits vary depending on whether the proponent of arbitration is a plaintiff or defendant, the Magistrate Judge opines that, regardless of the party posture of the movant, a court outside the District in which the parties have venued the arbitration may not grant a motion to compel. Accordingly, he recommends that the District Court stay the pending action so that the parties can move forward with arbitration, but not compel such a proceeding.
The case is a good analysis of the issue. But, on a practical basis, the approach of Moody v. PNE Media Holdings, LLC, 2002 WL 824637 (W.D.N.C. April 25, 2002), which distinguishes between applications to compel brought by plaintiffs, who can choose the court in which they file, and defendants, who are dragged into a venue of plaintiff’s choosing, seems more practical. As recognized in language from Moody that Magistrate Judge Auld quotes, “[T]o extend such requirement to motions to compel filed by defendants, who have been brought into court in contravention of the arbitration agreement, would create a quagmire for the courts, penalize the parties attempting to enforce arbitration, and unnecessarily frustrate the purpose of the [FAA],” 2002 WL 824637 at *6. It will be interesting to follow this case and see if the District Court Judge who reviews the recommendation is more flexible.
District Court authority to review interim arbitral awards
Under the rules of most arbitral tribunals, arbitrators are authorized to enter interim orders preserving assets and to bifurcate their decision-making by entering interim awards. Berland v. The Conclave, LLC, 2021 U.S. Dist. LEXIS 24782 (S.D. Cal. Feb. 9, 2021) deals with the availability of review of such orders. The court, Huff, J., begins with the general proposition that “for an arbitration award to be subject to judicial review, it must be final and binding as to all issues presented to the arbitrator.” (Emphasis added). However, she opines, under Ninth Circuit authority, Pacific Reinsurance Management Corp. v. Ohio Reinsurance Corp., 935 F. 2d 1019 (9th Cir. 1991) “temporary equitable orders calculated to preserve assets or performance needed to make a potential final award meaningful. . . are final orders that can be reviewed for confirmation by district courts under the FAA.” Applying this definition of a “final order,” she reviews and confirms, as falling within the scope of the arbitrator’s authority, the preliminary injunction award preventing transfer of certain assets. However, the court denies confirmation of an Interim Award directing the allocation of certain disputed ownership, but leaving blanks in the award for the parties to further divide the shares. The Interim Award, Judge Huff holds, does not merely preserve assets and, by its very terms, references a “Final Award” yet to be rendered. As such, the court holds, it is not a Final Award and not subject to confirmation under Section 9 of the FAA.
The opinion has two significant footnotes which, in and of themselves, make it worth reading. In footnote 4, the court addresses whether the one-year time frame for confirming an award under the FAA is mandatory. Judge Huff cites to the divergent views among the Fourth, Sixth, and Eighth Circuits, which hold that the one-year time horizon was meant to be “a permissive provision,” and the Second Circuit, which considers the provision to be a one-year statute of limitations. In dictum, she states that she would adopt the Second Circuit rule. In footnote 5, she discusses the authority of a Court to “remand the matter back to the Arbitrator with instructions to enter a Final Award by a specific date.” The court holds that, under Section 10 of the FAA, courts “may only vacate awards when arbitrators improperly execute their powers; they may not fashion any remedy they might like.” (Emphasis in original). Based on references in the opinion to the court’s unhappiness that this arbitration, which under the terms of the parties’ agreement was to be concluded in ninety days from the date the arbitration proceedings were initiated, has been pending since 2016, one suspects Judge Huff wishes she had more power.
Application of the summary judgment standard to a motion to compel
The Fifth Circuit applies a summary judgment standard in deciding a motion to compel arbitration. In Johnson v. The CMI Group, 2020 U.S. Dist. LEXIS 249681 (N.D. Tex. Dec. 29, 2020), the court, Ramirez, M.J., discusses the burdens of proof and of going forward involved in this standard approach.
Stay v. dismissal
The question of whether to stay or dismiss a pending action when the court compels arbitration is a common one. Alliance Health & Life Insurance Co. v. Symetra Life Insurance Co, 2021 U.S. Dist. LEXIS 25102 (W.D. Mich. Feb. 10, 2021), Maloney, J., is worth reading as a reminder that the issue generally hinges on whether there are any claims left for the court to resolve. “[D]ismissal, as opposed to a stay, is proper where all claims are referred to arbitration. This Court need not retain jurisdiction to decide hypothetical discovery disputes. Moreover, any discovery disputes must be resolved by the Court in the district where the arbitrators are sitting, and the arbitrators are sitting in Bellevue, Washington. See 9 U.S.C. § 7.”
Have a good weekend. If you are off on Monday, enjoy the holiday.
David A. Reif