Three significant Court of Appeals decisions – and I get to rant about another unprincipled “arbitration” award.

ERISA

Part of the two-step test for evaluating a request to grant a motion to compel arbitration is whether the issue between the parties falls within the scope of their agreement. (The other factor is whether they even formed an agreement).  Cooper v. Ruane Cunniff & Goldfarb, Inc., 2021 U.S. App. LEXIS 6357 (2^nd Cir. March 4, 2021) is a 2-1 decision addressing the scope of a typical employment arbitration agreement in the context of ERISA litigation.

The dispute arises from a decrease in the value of the 401(k) profit-sharing plan provided by Cooper’s employer, DST Systems, Inc., in which he was a participant.  Cooper sued Ruane Cunniff & Goldfarb (“Ruane”), the fund’s investment adviser, alleging that it failed to adequately diversify the fund’s assets.  When he started employment, Cooper received an employee Handbook, which contained an arbitration agreement covering “all legal claims arising out of or related to employment, or termination of employment. . . ,” except certain claims which the court does not consider applicable.  Ruane moved to compel arbitration. The District Court granted the motion and this appeal ensued.

The majority, with Circuit Judge Carney writing for herself and Circuit Judge Lohier, holds that a dispute relating to ERISA investments does not “aris[e] out of or relate[] to” Cooper’s employment.  The majority’s scope standard centers on whether the “facts relevant to the merits of Cooper’s claims” relate to elements of employment, such as work performance, evaluations, treatment by supervisors, or “any other fact particular to Cooper’s individual experience at DST.”  Applying that standard, the majority holds that, although Cooper was only able to enter the profit-sharing plan because of his status as a DST employee, his rights thereunder are separate from his work status.  In fact, the majority points out that those who were never employed by DST, such as designees of participants, other Plan fiduciaries, and the Secretary of Labor, may bring actions under ERISA related to mismanagement.  The majority, thus, analogizes Cooper’s ERISA claims to those asserted in out-of-Circuit cases which denied arbitration of non-employment causes of action under similar clauses, U.S. ex rel. Welch v. My Left Foot Children’s Therapy, LLC, 871 F. 3d 791 (9^th Cir. 2017)(False Claims Act); Doe v. Princess Cruise Lines, Ltd., 657 F. 3d 1204 (11^th Cir. 2011)(sexual assault); Jones v. Halliburton Co., 583 F. 3d 228 (5^th Cir. 2009)(sexual assault).  In each case, the court holds that employment was not the gravamen of the dispute; a non-employee might bring the same claim. The court specifically rejects a “but for” analysis, declining to expand the arbitration clause to include all claims that could arise only because the plaintiff had joined a defendant’s workforce.  To so hold, the majority opines, would essentially eliminate any “boundary” on the arbitration clause and “the term would stretch to the horizon and beyond,” quoting Doe, ibid.  Accordingly, they reverse the District Court and remand.

While not specifically adopting a “but for” standard, Circuit Judge Sullivan opines that it is one potential, reasonable application of the arbitration clause.  “Cooper’s claims here were necessarily dependent on his employment as he would not have been in a position to bring his breach of fiduciary duty claims had he not been employed by DST and had DST not made contributions to [the Plan] on his behalf.”  While he, thus, agrees with the majority that the applicability of the arbitration clause is unclear, unlike them he leans heavily on the presumption of arbitrability, citing seven supporting U.S. Supreme Court precedents. “Left with this equipoise the majority looks to ex-Circuit case law to resolve the meaning of the agreement, whereas I would apply the binding and well-settled presumption in favor of arbitrability. . . .”  Based on that presumption, absent “positive assurance that the arbitration clause is not susceptible to an interpretation” that would lead to arbitrability, Judge Sullivan would affirm the District Court.

Thus, the rule in the Second Circuit, at least pending any en banc from this split decision, seems to be that a typical arbitration clause encompassing claims “arising out of” or “related to” the employment relationship does not cover causes of action which could be asserted by a non-employee.  This removes a broad range of statutory and common law tort claims from arbitration.  Cautious drafters who want to assure that no disputes between the parties go to litigation need to use terms like “all disputes between the parties” that take the scope of arbitration well beyond just those matters which “relate to” the employment.  As the majority’s broad language gives no indication that its holding relates only to employment, not only commercial lawyers need to exercise such caution.

Provisions allowing a change to contract terms

The Sixth Circuit weighed in last week with a split decision on a significant contract interpretation issue.  Sevier County Schools Federal Credit Union v. Branch Banking & Trust Co., 2021 U.S. App. LEXIS 6464 (6^th Cir. March 5, 2021) addresses the scope of a change-of-terms provision in a consumer agreement.  In 1989, plaintiffs opened Money Market Investment Accounts with First National Bank (“FNB”).  At that time, FNB promised that the annual interest rate on the accounts “was guaranteed to ‘never fall below 6.5%.’”   FNB merged twice and, in 2017, the Defendant, which succeeded to FNB’s contract with plaintiffs, made what the majority characterizes as “massive changes to the BSA [its post-2001 deposit agreement with plaintiffs], including an amendment to the arbitration provision.”   The next year, BB&T, apparently considering the reality of declining interest rates, reduced the rate on the plaintiffs’ accounts from the initial 6.5% to 1.05%.  Plaintiffs brought this action for breach of contract. BB&T moved to compel arbitration.

Before the 2017 amendment, the BSA’s arbitration clause established a flexible process. “You and [BB&T] each have the option of requiring that any dispute or controversy concerning your account be decided by binding arbitration.“(Emphasis added)   The amended provision required that “any dispute, claim, controversy or cause of action, that is filed in any court and that arises out of or relates to this Agreement . . . . including the determination of the scope thereof, shall be determined by one arbitrator . . . .” (Emphasis added)

BB&T justified the additional of the stricter arbitration clause by a change-of-terms clause in the parties’ 1989 agreement which provided that “[c]hanges in the terms of this agreement may be made by the financial  institution from time to time.”  The decision of the majority, Gilman, J. writing for himself and Circuit Judge Moore, centers on the scope of that provision. The court starts with the proposition that any such change must be both “reasonable” and not violate the implied covenant of good faith and fair dealing.  BB&T’s change, the majority holds, transgresses both those requirements. The court cites to the reasoning of Badie v. Bank of America, 67 Cal. App. 4^th 779 (1998), which also addressed the issue of whether a change-of-terms clause allowed the creation of a new arbitral scheme. A change under such a clause, both Badie and the majority hold, must be “a modification whose general subject matter was anticipated with the contract was entered into.”  The court finds no rationale to believe that depositors expected such a shakeup in dispute resolution.  Further, the majority holds, BB&T’s new arbitration clause left plaintiffs with no practical option but to accept the new terms, since the only alternative was to close their account, thus losing the incredibly high interest rate to which they argued they were entitled.  Considering both the unanticipated nature of the change and the effect thereof on plaintiffs, the court holds, “BB&T did not act reasonably when it added the arbitration provision years after the Plaintiff’s accounts were established by FNB.”  The Court reverses the District Court’s grant of the bank’s motion to dismiss in favor of arbitration and remands.

Circuit Judge Griffin dissents. He opines that the contract was not one of adhesion, since “each time that plaintiffs were faced with notice of an arbitration agreement, they could have gone to a nearby bank and – according to their expert – received an account that would have preserved their ready access to the courts.”  Thus, discounting the difference in interest rates which the majority found to be so important, the dissent opines that “plaintiffs cannot now contend that Branch Banking offered the arbitration agreements to them under ‘such conditions that [they could not have] obtain[ed] the desired product or service except by acquiescing to the [arbitration agreement].’” (internal citation omitted)(brackets in original). Having gotten over the adhesion hurdle, Judge Griffin finds that the change was not unconscionable under Tennessee law and, therefore, that the court “should not second-guess the precise balance struck by the parties.”

In summary, it seems that the majority and dissent part ways on the reasonableness of expecting the plaintiffs to walk away from an alleged right to a 6.5% interest rate to preserve their right to sue on the chance that some yet unforeseen claim might arise.  With all respect to Judge Griffin, is that a reasonable demand?

An interesting sidelight is that Tennessee law, which the court applies under the choice of law doctrine, has never addressed this issue, a fact which the majority recognizes.  Thus, both majority and dissent are merely predicting what the Tennessee Supreme Court would do.

Delegation of arbitrability

Last week was busy for Judge Griffin around arbitration, as he was also on the panel in Swiger v. Rosette, 2021 U.S. App. LEXIS 6317 (6^th Cir. Mar. 4, 2021).  The case raises the interplay between choice of laws provisions calling for the application of Tribal law and the FAA.  Swiger arises out of an issue discussed in earlier “ADR Highlights,” which the plaintiff characterizes as a “scheme” under which an on-line lender organized under the laws of the Chippewa Cree Tribe and operating on Tribal lands made small loans at effective interest rates exceeding 350%.  The loan agreement contained a provision providing for arbitration under tribal law, with any award being subject to review only in tribal court.  The District Court denied Defendant’s motion to compel under this clause, based upon the collateral estoppel effect and reasoning of an earlier, Second Circuit case against defendant Rees, Gingras v. Think Finance, Inc. 922 F. 3d 112 (2^nd Cir. 2019).

After first dealing briefly with an unsuccessful challenge to its jurisdiction, the Court of Appeals, Cook, J. writing for herself and Circuit Judges Griffin and Larsen,  focuses on that the portion of the arbitration clause requiring arbitration of “any issue concerning the validity, enforceability or scope of this Agreement or this Agreement to Arbitrate.”  Thus, the court holds an arbitrator must resolve the issue of whether the arbitration agreement, because it purports to remove the ability of U.S. courts to review even the most egregious arbitration award is invalid.

While the court acknowledges that the competence-competence provision might be unconscionable, it rejects Plaintiff’s challenge thereto, since she addressed her attack to the entire arbitration clause, not just the delegation provision.  The court does, however, telegraph its view on the transaction, citing four Circuit Court cases which “found similar arbitration agreements unenforceable.”  The lesson of Swiger and the other “container” cases is simple –  limit your unconscionability claim to only that portion of the contract which you want to set aside.  If you are attacking arbitration generally, do not attack the whole contract as unconscionable.  If you are attacking the delegation of gateway issues, so limit your argument.  Otherwise, you will end up with the arbitrator deciding unconscionability – with all the attendant risks.

Quick Hits

N.Y.’s prohibition on mandatory arbitration of employment claims is preempted by the FAA

On October 11, 2019, New York amended its Civil Practice Law and Rules, known as the CPLR, by adopting a section which purports to prohibit the contractual arbitration of discrimination claims. In Rollag v. Cowen, Inc., 2021 U.S. Dist. LEXIS 39942 (S.D.N.Y. Mar. 3, 2021), the Court, Abrams, J., holds that the provision, Sec. 7515, is displaced by the FAA, citing AT & T Mobility, LLC v. Conception, 563 U.S. 333 (2011) for the proposition that federal law trumps state acts which bar arbitration for only a specific type of claim.  Accordingly, the defendant’s motion to compel arbitration is granted.

Sanctions for a fake arbitration

Courts are getting very tired of awards issued by “arbitration tribunals” which do not require that the parties first agree to arbitration. In Williams v. County of Cook, 2021 U.S. Dist. LEXIS 41201 (N.D. Ill. Mar. 5, 2021), the court, Kendall, J., was asked to confirm an $5.5 Million award from “Non-Public Arbitrator” Matthew Zander in Comal County, Texas, arising out of a dispute between plaintiff and the county over delinquent property taxes in Illinois.  The pattern seems to have been a now familiar one. The claimant advises respondent that, if a payment in some unilaterally selected amount, is not made, the claimant will commence arbitration. Claimants further indicate that they will treat a failure to pay as an agreement to arbitrate.  Receiving no response, the claimant pays a fee to a “tribunal” which, after review of documents, issues an award without requiring proof of a signed arbitration agreement.  In this case, for example, the arbitrator opined that the existence of an arbitration agreement was based on “tacit procuration” and finds that “Respondent has submitted a fraudulent claim offending the private and property rights of the Claimant.”  Judge Kendall denies confirmation and vacates the award.  However, she also orders that plaintiff produce within twenty-one days a “legitimate arbitration agreement that he formed with the Cook County Assessor to resolve this tax dispute.”  Upon receipt of that filing, she states that she will decide whether “he should be sanctioned, whether he should be referred to the Executive Committee of this Court to prevent him from filing fraudulent lawsuits in the future, and whether the Court should refer the matter to the United States Attorney for review of whether he should be investigated for obstruction of justice.”   The court references two other cases involving the same arbitrator and “similarly fraudulent documents.”  She also is influenced by her finding that Plaintiff had previously been sanctioned $15,000 for what she calls a similar “scheme” and that he “then attempted to try his hand again in a different” jurisdiction.”

Have a good week.  See you Wednesday.

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