I began to write this issue on March 14, a/k/a as 3.14 or Pi Day. Having celebrated with a slice of berry pie (no ice cream, that’s sacrilege!), I am ready for the Ides of March. By the way, if you are curious about the origins of π, there is a great article in the New York Times archive from March 14, 2019. As for myself, I cannot figure if my interest in this number is “rational” or “irrational.”
Okay, time for cases. The lead today is a short, but divided, opinion from the Ninth Circuit on the meaning a “fair” arbitration hearing. Also, views from the Federal Circuit on litigation-conduct waiver and the Sixth Circuit on the arbitration of ERISA claims. At the District Court level, there is a discussion of judicial authority to compel mediation and the usual array of Quick Hits.
Costco Wholesale Corp. v. International Brotherhood of Teamsters, 2021 U.S. App. LEXIS 7305 (9th Cir. March 12, 2021) draws a stark distinction between two views of what constitutes a “fair hearing” in the arbitration context. The Union and Costco engaged in an arbitration over a Costco employee’s termination for allegedly selling drugs on company premises. The majority and dissent seem to agree on the facts surrounding the proceeding, which the majority calls a “bizarre turn.” According to Judge Rawlinson, writing for herself and District Judge Korman sitting by designation, the arbitrator engaged in “extensive post-hearing ex parte communications with Diaz and the Union,” including suggesting a settlement offer of which Costco was unaware. The award, sent as an email only to the Union read, “The above named grievant prevails in his grievance. The Union’s arguments as to double jeopardy were correct. Union remedy [which sought reinstatement to employment] is adopted. So that I can look at myself in the mirror, my resignation is effective today.” There was no further reasoning as to how the arbitrator reached his decision. However, the District Court confirmed the award and this appeal resulted.
The majority starts from the premise that parties to an arbitration are entitled to a hearing which meets “the rule of fundamental fairness.” Without lengthy discussion, the majority holds that this arbitration fell below that standard. First, according to the majority, by resigning and failing to provide any explanation of his award, the arbitrator made it impossible to determine whether the award drew its essence from the collective bargaining agreement, a requirement of an award under the Labor Management Relations Act. “For all we know, the arbitrator flipped a coin, consulted a Ouija board, or threw darts at a dartboard to determine the outcome.” Second, Judge Rawlinson opines that “the arbitrator’s ex parte communications and unauthorized settlement offer reflect consummate bias and lack of commitment to a transparent proceeding.” In short, “no party agreeing to arbitration bargained for a proceeding such as this. . . .“ The Court reverses and remands for vacatur of the award.
In dissent, Judge N.R. Smith hews directly to the premise that “a labor arbitration ‘hearing is fundamentally fair if it meets ‘the minimal requirements of fairness’ – adequate notice, a hearing on the evidence, and an impartial decision by the arbitrator.’” (citations omitted). He finds that there is no claim that Costco did not receive notice of the hearing or an opportunity to present evidence. Judge Smith opines that the award must be affirmed whenever the arbitrator “arguably construed [and] applied” the CBA. (Emphasis added). In a sentence that reaches the nub of the disagreement between the majority and the dissent, Judge Smith would hold that “the arbitrator did not . . . . ‘follow his own whims and biases’” – a conclusion which Judges Rawlinson and Korman argue cannot be reached based on the barebones award. Judge Smith would even hold that the ex parte communications provide no basis for vacatur, as “the FAA ‘does not prohibit ex parte contact[,]” unless it “constitutes misbehavior that prejudices the rights of a party.” (citations omitted). He would find no prejudice here, categorizing Costco’s objections as nothing more than a search for “relief from the bargain that it struck with Diaz [to arbitrate the dispute]’, because that bargain ‘ha[s] turned sour on [it].’” (brackets in original). He would affirm the District Court’s confirmation of the award.
Hard cases make bad law, to paraphrase Justice Holmes, National Securities Co. v. U.S., 193 U.S. 197 (1903)(dissenting). Whether you agree with the majority and risk a slippery slope away from the FAA to what Judge Smith characterizes as a “gut feeling” standard of confirmation or would join him in affirming an award reached through a perversion of arbitral conduct, Costco proves Justice Holmes’ insightfulness.
Arbitration of statutory claims; remedies
UAW International v. TRW Automotive U.S., LLC, 2021 U.S. App. LEXIS 7325 (6th Cir. Mar. 11, 2021) arose from the District Court’s granting of attorneys’ fees after an arbitration hearing in which the arbitrator did not make such an award. The factual background is complicated, involving multiple District Court proceedings. But, in summary, the case raises two issues. First, did the Union’s ERISA claims arise under the collective bargaining agreement, thus, requiring arbitration under the contract’s arbitration clause? Second, did the District Court err in awarding attorneys’ fees under ERISA after the arbitrator had resolved ERISA vesting questions?
The panel, Judge Rogers writing for himself and Judges Sutton and Stranch, holds that arbitration of the ERISA claim was proper. The arbitration clause encompassed “claims that the company has failed to carry out a provision of the Agreement and which involve a question concerning the interpretation or application of or compliance with this Agreement. . . .” Since the issue required interpretation of the CBA to determine what type of health care benefits TRW retirees were entitled to receive thereunder, the ERISA vesting questions involved therein were delegated to arbitration.
During the arbitration, the arbitrator was not asked to determine whether the Union was entitled to attorneys’ fees on the ERISA claim; therefore, he did not make such an award. The Circuit Court holds that the District Court erred in taking that authority to itself. “Once the arbitrator finds a merits violation, the parties are responsible for raising any remedy issues in their remedy demands during arbitration.” If those requests are made, the court may, so long as it applies the correct deference standard, vacate an award which denies such fees. However, “when the judiciary undertakes to determine the merits of a grievance under the guise of interpreting the grievance procedure of collective bargaining agreements, it usurps a function which under that regime is entrusted to the arbitration tribunal,” quoting United Steelworkers v. American Manufacturing Co., 363 U.S. 564, 569 (1960).
Accordingly, the panel reverses the District Court’s judgment.
What if the District Court judge thinks mediation might move a case, but one of the parties objects? United States v. Ridley’s Family Markets, Inc. 2021 U.S. Dist. LEXIS 46919 (D. Utah Mar. 11, 2021) addresses both the court’s authority and the considerations for exercising the same. This is a civil action brought under the Controlled Substances Act, alleging that defendant improperly filled prescriptions for opioids. Ridley’s moved to compel the U.S. to mediate the dispute; the U.S. responded that “mediation would not be productive at this point in the litigation” and “strongly” opposed the motion.
The court, Bennett, Magistrate Judge, first determines that he has two bases upon which to enter such an order. The court’s local rule was inapplicable as it required that the parties first participate in an initial scheduling conference, which had not yet occurred in this case. However, although without citation, he holds that the court has “inherent authority to order mediation as a way of managing the litigation before it. . . .” In this case, he denies the motion. First, “the current resistance of the United States to mediate strongly militates against ordering mediation because doing so is unlikely to be fruitful. . . .” Second, the court distinguishes this case, which it views as quasi-criminal, from matters in which the United States is “a mere proprietor of its own proprietary interests.” To order mediation in a matter like the subject one would border on an “intrusion of the Article III branch of government into the exclusive prerogative of the Article II branch of government to enforce the law.” Therefore, “despite the salutary effects that might be realized by [mediation],” the court denies the motion.
The Federal Circuit’s holding in Cajun Services Unlimited, LLC. v. Benton Energy Service Co., 2021 U.S. App. LEXIS 7320 (Fed. Cir. Mar. 12, 2021) reviews the denial of a motion to compel arbitration by the U.S. District Court for the Eastern District of Louisiana. The court, Louries, Hughes, and Stoll, J., opines that BESCO, the defendant, filed two answers and participated in discovery on the merits of its claims “before it first hinted” that it would seek to arbitrate those claims. However, it undertook two more years of litigation before it, again, put Cajun on notice that it might seek arbitration; in the interim, some of the issues involved went to a jury verdict. Based on the District Court’s finding of waiver, the Federal Circuit affirms. The case is of special interest to those practicing in the Fifth Circuit, as the panel distinguishes aspects of Guaranty Insurance Co. v. New Orleans General Agency, Inc., 427 F. 2d 924 (5th Cir. 1970), a leading Circuit case on waiver.
Statutory violation as voiding obligation to arbitrate
Nordeman v. Dish Network, LLC, 2021 U.S. Dist. LEXIS 46971 (N.D. Cal. Mar. 12, 2021), Hixson, M. J., holds that the defendant’s violation of the requirements of California’s Home Solicitation Act voids the parties’ contract, including its arbitration provisions. The interesting issue for consideration here is what the result would have been if California law merely made the contract voidable, rather than void, by reason of that violation. Would the impact of the compliance failure be an issue for determination by the arbitrator under the arbitration clause, which provided that the arbitrator would decide, “without limitation” “the validity, enforceability and/or scope [of the arbitration clause]?”
Proving acceptance of electronic acceptance of an employment arbitration clause
In Sinclair v. Wireless Advocates, LLC, 2021 U.S. Dist. LEXIS 45528 (S.D. Fla. Mar. 1, 2021), the court, Ruiz, J., grants the defendant’s motion to compel arbitration over Sinclair’s claim that he never executed the preemployment arbitration clause. The legal ruling in the case is unremarkable. However, the opinion serves as a primer for those seeking to prove such an agreement at an evidentiary hearing. The court evaluates in detail testimony from an expert witness who reviewed both “multiple data sources” and reports generated by the onboarding system, as well as that of a content developer who testified as to the operation of the system. The case shows the advantages of utilizing a deep dive description of relevant systems, their uses, and their outputs.
Electronic service of summons
One of the challenges of an arbitration involving parties located around the world is making service. CKR Law, LLP v. Anderson Investments International, LLC, 2021 U.S. Dist. LEXIS 46890 (S.D.N.Y. Mar. 12, 2021) explores the question of whether electronic service is permitted where the use of registered mail and the provisions of the Hague Convention are impractical. (Plaintiff’s expert testified that service in Hong Kong might take six months or more to complete and that service in Nevis or Dubai would cost at least $13,624, would require fourteen to twenty-four months, and might be “ignored . . . by foreign authorities). Judge Rakoff authorizes service of the summons in this action to compel arbitration through specified email addresses and WhatsApp phone numbers. Like Sinclair above, the case provides a good roadmap for trial lawyers facing the issue, with detailed methods of proof.
Beware of Brutus today. See “tu” Wednesday.
David A. Reif