Today’s cases are reminders of basic arbitration principles – manifest disregard, contract formation through computer “wrap,” and illusory contracts.  However, they also throw in some curves and new insights.

Manifest disregard

Serna v. Northrop Grumman Corp., 2021 U.S. Dist. LEXIS 33770 (C.D. Cal. Feb. 22, 2021) demonstrates the limited scope of “manifest disregard” review. The issue arises out of plaintiff’s claim that Northrop discriminated against her because of disability in violation of California’s Fair Employment and Housing Act by refusing to allow her reasonable accommodations that would have permitted her to continue her employment.  That claim was arbitrated and the court, Olguin J., here addresses a motion to vacate an award in favor of the employer.

A few years before the arbitration hearing, the Social Security Administration had concluded that Serna qualified for payments under the Social Security Disability Act.  The arbitrator in the subject case denied plaintiff’s claims based on that administrative decision, because he found that “the arguments and the evidence Serna presented to the ALJ [administrative law judge] are directly in conflict with her claims that she was capable of performing her job with accommodations.”  Accordingly, he held that Serna’s arbitration claim was barred by “judicial estoppel.”  Plaintiff here argued that the arbitrator’s decision was in “manifest disregard” of U.S. and California Supreme Court authority holding that evidence of Social Security Disability benefits is irrelevant to claims of employment discrimination and should not be admitted.

Judge Oguin lays into the arbitrator’s decision. “[D]espite the arbitrator’s statement that ‘[c]ases have found that the receipt of SSDI benefits or workers’ compensation benefits can bar a plaintiff from claiming disability discrimination under the doctrine of judicial estoppel,’ the arbitrator did not cite a single state or federal case to support his assertion.  In any event, the court agrees with plaintiff that the arbitrator incorrectly applied the law relating to the judicial estoppel doctrine.”  (Citations to the record omitted)  The court cites eight disability discrimination cases for the proposition that “it is well-settled that, contrary to the arbitrator’s assertion, judicial estoppel generally does not apply in circumstances similar to those before the court.” Concluding, the court opines, “In short, the arbitrator clearly erred in his application of judicial estoppel in this case.”

So, the court vacates the award, right?  Wrong.  In one paragraph, the court holds that the manifest disregard standard saves the award from being overturned.  “However, the arbitrator’s error in applying the law of judicial estoppel is insufficient to constitute a ‘manifest disregard of the law.’”  Such vacatur, the court holds, requires that the plaintiff “present evidence that the arbitrator recognized and ignored ‘well defined, explicit, and clearly applicable’ law.” (Emphasis added)(Citation omitted).[1]  In light of what the court considers to be an arbitrator’s clearly wrong-headed application of the law, one must ask what “evidence” a party might introduce to obtain vacatur under the manifest disregard standard.   Does the arbitrator have to say, “I know what the law is, but, what the heck, I am going to ignore it?” When would that happen?

Monster Energy redux

Monster Energy v. City Beverages, 940 F.3d 1130 (9^th Cir. 2019) set the arbitration world on its ear by holding that an arbitrator’s failure to disclose his ownership interest in the arbitral tribunal which administered the matter, JAMS, required vacatur of an award because it could “create a reasonable impression of bias.”  Judge Klausner in Monster Energy Co. v. City Beverages, 2021 U.S. Dist. LEXIS 33269 (C.D. Cal. Feb. 17, 2021) decides a follow-up to that decision, as defendant moves for an order that the arbitration be held before a “neutral forum” rather than JAMS.   In support thereof, City Beverages argues that JAMS created “reasonable doubt” as to its impartiality when it filed an amicus brief supporting Monster Energy in the Ninth Circuit and the U.S. Supreme Court.  Rejecting the motion, the court opines that it would be “speculative” to disqualify every JAMS arbitrator, even those who have no ownership interest in the tribunal, particularly where the parties are free to select their own arbitrators before JAMS becomes involved.  The court denies defendant’s motion and orders the parties to arbitrate before JAMS, per their initial agreement.

Illusory contracts

Simpson v. Synergenx Health Kingwood, LLC., 2021 U.S. Dist. LEXIS 35736 (S.D. Tex. Feb. 25, 2021) addresses the effect upon the enforceability of an arbitration agreement when the employer retains a unilateral right to change the contract’s terms.  The case is a typical employment discrimination case where the employer included an arbitration clause in its employee handbook.  The plaintiff challenged both the provision of the arbitration agreement which delegated gateway questions to the arbitrator and the arbitration clause itself, arguing, in part, that the agreement was illusory.  Under Texas law, which the court, Bennett, J., applies, an agreement is unenforceable if one party has “the unrestrained unilateral authority to terminate its obligation to arbitrate,“ quoting Lizalde v. Vista Quality Markets, 746 F. 3d 222 (5^th Cir. 2014).  Here, the arbitration agreement provided, “This agreement may not be altered except by consent of the Company . . . Any change to this Agreement will only be effective upon notice to Applicant/Employee and shall only apply prospectively.”  In holding that the agreement is illusory and unenforceable, the court distinguishes between notice of an anticipated change to the arbitration agreement and notice of a change after its adoption by the employer.  Thus, Judge Bennett distinguishes Lizalde which upheld a provision providing that any change to the arbitration agreement did not become effective until ten days after notice thereof to the employee.  Since no prior notice is required in the Synergenx amendment provision, the court holds that the agreement to arbitrate is illusory and denies the motion to compel arbitration.

For drafters, the case raises the question of whether the ability to implement a change immediately is important enough that you are willing to run the risk of invalidating the entire arbitration procedure. While there may be occasions when you want to terminate or amend arbitration procedures in a race to head off a particular claim, how often does that really happen? Is the risk that you will end up litigating a vast array of claims that you thought would stay out of the courthouse worth a short delay in implementation?

Abstention

The doctrine in Colorado River Water Conservation District v. United States, 424 U.S. 800 (1976) which provides for federal court abstention where federal and state suits are parallel, with the same parties and issues, is one of those Civ. Pro. I subtleties that normally do not arise in arbitration.  However, it raises its head in Regions Bank v. Antoine, 2021 U.S. Dist. LEXIS 34727 (S.D. Miss. Feb. 22, 2021). Plaintiffs sued Regions in Mississippi state court, alleging the theft by a Regions’ employee of $132,000 from their retirement account.  Rather than moving in state court for arbitration, Regions commenced this FAA action to compel.  The court, Jordan, J. discusses the issue of whether Colorado River can ever apply to an action brought under the Federal Arbitration Act, citing Moses H. Cone Memorial Hospital v. Mercury Construction Co., 460 U.S. 1 (1983) and Safety National Casualty Corp. v. Bristol-Myers Squibb Co., 214 F. 3d 562 (5^th Cir. 2000).  Assuming such authority, the court opines that it would still decline to abstain. Weighing the Colorado River factors – jurisdiction over a res, inconvenience of forums, concern regarding piecemeal litigation, first-filed litigation, the extent to which federal law governs, and the adequacy of state proceedings – Judge Jordan holds that none favor abstention.  Accordingly, he denies the motion to abstain and orders the parties to arbitrate their dispute.

Arbitration of TCPA claims

The parties in Regan v. Pinger, Inc., 2021 U.S. Dist. LEXIS 33839 (N.D. Cal. Feb. 23, 2021) had entered into an arbitration clause which provided that “any dispute between you [the customer] and [Defendant]” were subject to arbitration. The case raises the applicability of that provision to a statutory claim.  Plaintiff alleged that, even after he terminated his relationship with Pinger, which provides apps allowing subscribers to create an alternative number for their mobile phone, defendant continued to send him text messages without consent. The issue was whether Plaintiff’s claims of a violation of the Telephone Consumer Protection Act fell within that clause’s broad scope.

The court, Koh, J., recognizes that there is a split both within and outside the Ninth Circuit as to whether TCPA claims are sufficiently related to the parties’ initial relationship to fall within the scope of a general arbitration provision, however broad.  Thus, the case is a great resource for anyone beginning research into the issue regardless of their litigation’s venue. After analyzing both the parties’ contract and their course of dealing, the court opines that this is a “close question,” but orders arbitration, relying, in part, on the admonition from SCOTUS to resolve “any doubts concerning the scope of arbitrable issues . . . in favor of arbitration.” Quoting Moses H. Cone, supra at 24-25.

The case is also a reminder or primer, depending on your experience, on the issues raised by “wrap” arbitration clauses, which are accessed when a customer makes a purchase or begins a service on-line.  In an exhaustive discussion, which includes a helpful set of screen shots, Judge Koh distinguishes between “clickwraps” and “browsewraps” and opines as to why pushing a “Create Account” button bound Plaintiff to an arbitration clause contained in the site’s hyperlinked Terms and Conditions.  Since the “wrap” saga has been discussed several times in earlier “Highlights,” I will just refer you to the opinion for an education on the disclosure and contract issues involved in such sites.  Judge Koh lays out the questions and analysis in detail.

Interstate transportation worker exception to the FAA

Sheppard v. Staffmark Investment, LLC., 2021 U.S. Dist. LEXIS 34726 (N.D. Cal. Feb. 23, 2021) addresses the scope of the exemption of transportation workers from the FAA’s provisions for the enforcement of arbitration agreements.  The crux of the case, however, is not the usual question of whether “last mile” workers fall within the exception.  The plaintiff here is one step further removed from commerce since she did not physically transport packages.  Rather, she was a sorter, who processed packages which were, then, picked up by third-party drivers who took them to another facility where they were resorted for ultimate delivery.  The court, Freeman, J., holds that “without a strong connection to employees who are actually transporting products,” employment in the transportation industry “is not sufficient to qualify an individual as a transportation worker.”  Since plaintiff did not have “any contact with the employees who delivered packages, or . . . was even responsible for loading the packages onto the delivery truck,” she was essentially a warehouse employee and not a transportation worker.

Literature

Those looking for a discussion of a broad range of issues related to mediation should go to the ABA’s Solo, Small Firm, and General Practice Section’s  January/February issue of their publication GPSolo. The issue contains extensive articles on mediation techniques and the development of a mediation practice. Plus, if you are an ABA member, membership in the section may be free.

Upcoming programs

Two good training programs are on the horizon.  The ABA’s Dispute Resolution Section will hold their Spring Conference virtually from April 14 to April 17, 2021.  This is an excellent opportunity to get quality CLE in all areas of ADR from leading practitioners – all while still wearing your sweatpants.   The Chartered Institute of Arbitrators is holding its “Introduction to International Arbitration Associates Course” virtually on April 9 and 10, 2021.  Check the Chartered Institute’s North American branch website for information.

Have a good start to the week.  See you Wednesday.  Be safe.

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

[1] Or to use the in-vogue citation form, “(cleaned up.)”