Because Wednesday’s “Highlights” only focused on one issue, today’s is a little longer than usual. One case, Capua, is of particular importance in light of the extensive litigation arising from the pandemic’s impact on the travel industry and the decision’s contrary take on the arbitrability issue from at least one previously decided case.  

Uber arbitration denied

O’Hanlon v. Uber Technologies, Inc., 2021 U.S. App. LEXIS 7716 (3^rd Cir. Mar. 17, 2021), does not break any new ground, but is worth a look because of the ubiquitousness of the defendant.  The dispute arises from claims by motorized wheelchair users, asserting that Uber discriminated by not offering a “Wheelchair Accessible Vehicle” in the Pittsburgh area and that, by reason of that failure, defendant violated the Americans with Disabilities Act.  Uber moved to arbitrate based upon the mandatory terms of service allegedly triggered when a customer registers for an Uber account. The District Court denied the motion to compel arbitration; the Third Circuit, Krause, J., writing for herself and Judges Phipps and Beetlestone, sitting by designation, affirms.

Since the plaintiffs did not use the Uber service, they did not become parties to the terms of service, including the arbitration provision.  However, Uber argued, they were bound under the doctrine of equitable estoppel.  Under applicable Pennsylvania law, Judge Krause holds, a non-signatory to an arbitration agreement may be estopped from rejecting the arbitral process required thereby if he or she claims the benefits of the agreement.  However, the court  holds that plaintiffs’ statutory claims do not depend upon the terms of the Uber agreement. “Indeed, the crux of their claim is that Uber’s unlawful discrimination has prevented them from partaking in or benefiting from that service agreement in the first place.”  Therefore, “because there is no evidence that Plaintiffs’ ‘availed [themselves]’ of Uber’s service agreement prior to or in the course of litigation or ‘received any benefit under that agreement,’ they are not equitably estopped from rejecting its arbitration clause.”

Spousal COBRA clause not arbitrable

Along a similar line, the District Court in Torres v. Starbucks Corp., 2021 U.S. Dist. LEXIS 47821 (M.D. Fla. Mar. 15, 2021), holds that the COBRA claims of the spouse of a former Starbucks employee are not subject to arbitration. Plaintiff Lubin, during his wife’s employment at Starbucks, was covered by the defendant’s health plan. After the termination of his wife’s employment, both she and Lubin received a COBRA enrollment notice from the company’s COBRA administrator. Lubin brought this action for violation of 29 U.S.C. § 1166(a), claiming that the notice was deficient.  Starbucks moved to compel arbitration under the terms of the agreement to which his wife became subject as a condition of her employment. Since Lubin was not himself a Starbucks employee and, therefore, was not party to the arbitration agreement, defendant argued equitable estoppel. As did Judge Krause in O’Hanlon, Judge Honeywell here holds that Lubin’s claim is extra-contractual; it does not depend upon the employment contract which contains the arbitration clause, but, rather, upon his own statutory rights to be notified of options for continued health care coverage.  For the same reason, the court rejects Starbuck’s claim that Lubin is a third-party beneficiary of the employment agreement and, therefore, bound to arbitrate thereunder. Finally, Judge Honeywell rejects on procedural grounds a third, potentially interesting claim  – that Lubin’s rights are derivative of his wife’s and, therefore, subject to arbitration – since Starbucks first raised the argument in its reply brief.  While equitable estoppel and third-party beneficiary arguments are seen regularly, the derivative right claim is rarer and worth considering by counsel seeking to compel arbitration by one who is not a direct party to the agreement containing that mandate.

Attempted withdrawal from arbitration

Bartlit Beck LLP v. Okada, 2021 U.S. Dist. LEXIS 47324 (N.D. Ill. Mar. 12, 2021), seeks confirmation of an arbitration award arising from the failure of the respondent to pay attorneys’ fees established under the parties’ engagement letter.  Okada retained Bartlit Beck to represent him in litigation with Wynn Resorts, pursuant to an engagement agreement which included a substantial success bonus and an arbitration clause. After the case settled with a recovery in Okada’s favor in the amount of $700 Million, he refused to pay the success bonus.  Bartlit Beck commenced arbitration. After eight months of “participation” in the arbitration – which the court noted was marked by respondent’s failure to produce a witness, multiple reschedulings of his own deposition, and failure  to comply with the panel’s discovery orders – Okada, on the Friday night before the hearing’s Monday, October 28th start, advised the panel that he would not be participating in the proceeding.  He cited bad health, which allegedly made it impossible for him to travel, and a general dissatisfaction with the agreement with Petitioner.  “If Bartlit Beck does not agree that the alleged agreement is invalid, there is no need for me to attend the proposed arbitration.” (Emphasis added in the opinion).  The arbitral panel proceeded to hear Bartlit Beck’s evidence on written submissions.  It refused to accept any new papers from Okada, ruling that he had forfeited his right to present evidence.  Bartlit Beck submitted its final brief on Friday, November 1^st. On Monday, October 3^rd counsel for Okada sent an email to the panel asking whether they would reschedule “if I could convince [Respondent] to commit to a date certain to attend the arbitration hearing. . . .” The panel did not grant that request and, on December 20^th,  issued an award in favor of Petitioner.  This action addresses Petitioner’s application to confirm and Respondent’s motion to vacate that award.

Respondent invoked Section 10(a)(3) of the FAA, which authorizes the court to vacate an award “where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy.”   Okada essentially raises two issues challenging the fairness of proceeding held in his absence.  Judge Kness rejects both.  The court first opines that, although a legitimate health issue might require an arbitrator to reschedule a hearing, Okada failed to adequately substantiate any medical reasons for “abandoning” the hearing.  The judge relies largely on Respondent’s failure to provide the panel with medical evidence supporting his alleged condition and, also, notes social media showing Okada in the gym and lifting weights while he allegedly was incapacitated from traveling to the hearing. Second, the court holds that the arbitration panel did not err in refusing to accept further filings from Respondent after his refusal to appear. The parties invoked the CPR rules to govern their proceeding. CPR Rule 16 provides that the arbitrator has authority to render an “award on default,” so long as the non-defaulting party meets its burden of proof.  The court finds that the panel reviewed the Respondent’s deposition and all his exhibits before rendering its decision, thus satisfying Rule 16 and minimizing any prejudice to Okada.  In dictum, the court opines that CPR Rule 16, by requiring that a non-defaulting party provide sufficient evidence to establish its claim, gives a defaulting party more consideration than it would receive under Federal Rule of Civil Procedure 37(b)(2).

The court concludes, “In the end, Respondent took a chance when he chose not to participate in an arbitral process to which he had agreed.  That gambit failed; and the court believes that Respondent should be held to live with the consequences of his choice.”  The court confirms the award.

In an interesting sidebar, Judge Kness raises the question of whether a party may bring an action under the FAA to vacate an award which is issued by “an arbitrator in a U.S. jurisdiction, but governed by the [New York] Convention.”  Because the court finds that Respondent had not met his burden to establish vacatur under either the Convention or the FAA, it does not resolve the question.  However, it is worth sticking this case into an arbitration notebook to pull out in an appropriate case, as it recites numerous citations on the issue.

Emergency arbitrator award as res judicata

It is not unusual in distributorship or franchise cases for the arbitral tribunal to appoint an emergency arbitrator who addresses requests for an injunction against termination of the parties’ relationship pending a final award. Vital Pharmaceuticals v. PepsiCo, Inc., 2021 U.S. Dist. LEXIS 48931 (S.D. Fla. Mar. 16, 2021), Ruiz, J, addresses the preclusive effect of such a ruling.

PepsiCo and Vital, d/b/a VPX, entered into a distribution agreement under which Pepsi became the exclusive distributor of Vital’s Bang-branded energy beverages.  Vital, unhappy with the efforts that defendant expended on product placement and marketing, terminated the relationship without cause on October 23, 2020. While a “without cause” termination was permitted under the distribution agreement, the contract provided that such termination “shall be effective in three (3) years after the date the written notice is received by the other Party.”  The parties disputed whether Vital regained the right to distribute its products during that three-year period or whether Pepsi retained exclusive distribution.  Pepsi commenced an arbitration over the issue.  Two days later, Vital brought this action seeking an injunction against Pepsi’s deterring customers from purchasing products from VPX or its new distribution network during the pendency of that proceeding.  In response, Pepsi asked the AAA to appoint an Emergency Arbitrator, presumably pursuant to AAA Rule 38, which establishes a procedure for interim relief before the appointment of an arbitration panel.  The emergency arbitrator held that Pepsi is “likely entitled to the relief that it seeks in this Arbitration, namely, a declaration that [Pepsi] remains [VPX’s] exclusive distributor pursuant to the [Agreement] through October 24, 2023” and that Pepsi would “suffer immediate and irreparable loss or damage in the absence of emergency relief.”  The court confirmed that interim order. In this opinion, Judge Ruiz grants Pepsi’s motion to dismiss this action, as the injunctive relief which Vital sought here had already been resolved by the emergency arbitrator. He rejects Vital’s argument that the doctrine of collateral estoppel is inapplicable where the Emergency arbitrator did not reach a resolution on the ultimate merits of the full dispute. “[A] preliminary injunction ruling is conclusive on the limited issue presented by the preliminary injunction – i.e.,  whether a party can slow likelihood of success on the merits, irreparable harm, and the other necessary factors.”

Arbitration of airline refund claims

The February 17, 2021 issue of “ADR Highlights” discussed a case holding that Expedia’s arbitration clause did not require arbitration of a claim against an airline whose ticket was purchased through that on-line service, Rudolph v United Airlines Holdings, Inc., 2021 U.S. Dist. LEXIS 27795 (N.D. Ill. Feb. 12, 2021).  Capua v. Air Europa Lineas Aereas, S.A., 2021 U.S. Dist. LEXIS 47759 (S.D. Fla. Mar. 15, 2021), Ruiz, J., reaches the opposite result. As in Rudolph, plaintiff purchased a ticket on the defendant carrier through Expedia, whose terms and conditions provided for arbitration of “any Claims you assert against us, our subsidiaries, travel suppliers or any companies offering products or services through us (which are beneficiaries of this arbitration agreement).” (Emphasis added). Plaintiff’s flight was cancelled due to COVID-19; Air Europa refused to refund his fare.  He brought this class action, alleging a violation of Air Europa’s Conditions of Carriage.

Defendant moved to compel arbitration, alleging that the Expedia arbitration clause inures to its benefit.  Judge Ruiz agrees. While Air Europa is not a signatory to the plaintiff’s contract with Expedia, the court holds that defendant is a third-party beneficiary of the arbitration clause contained therein. “The parties’ intent to make Air Europa a third-party beneficiary of Expedia’s TOU [Terms of Use] is clearly evidenced by the express language of the arbitration clause and more broadly throughout the TOU.  The court specifically addresses the italicized language quoted above. “Therefore, the Court concludes that Expedia’s TOU, read as a whole, establishes a clear intent by the parties to make Air Europa, as a travel supplier, a third-party beneficiary of the agreement.”  Judge Ruiz makes short shrift of the argument which drove the Rudolph decision – the existence of a federal regulation prohibiting airlines from including arbitration clauses in their contracts of carriage.   Nothing in that language, he holds, prohibits an airline from relying upon an arbitration that is created other than in that specific contract. Further, he holds, in an issue not addressed in Rudolph, the regulation applies only to domestic flights and, therefore, is irrelevant to Capua’s trip from Miami to Porto, Portugal.  Specifically rejecting the holding in Rudolph, Judge Ruiz opines that the is “troubled by the suggestion that a little-known DOT regulation could take precedence over the ‘emphatic federal policy in favor of arbitral dispute resolution,’” quoting Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc. 473 U.S. 614, 631 (1985).  The FAA, he states, is a “super-statute,” which “can at times swallow Chevron deference.”  Accordingly, the court grants Air Europa’s motion to compel arbitration.

So, between Rudolph and Capua, we have both sides of the Expedia/carrier arbitration question.  It is more likely we will first get Court of Appeals guidance from the Seventh Circuit in Rudolph, because the denial of United’s motion to stay pending appeal is immediately appealable under the FAA, while the order in Capua is not.   

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