In addition to the Supreme Court’s grant of cert. in Servotronics, today’s cases include an interesting take on sovereign state v. private arbitrations under Section 1782; a small, but important, case on who serves an application to confirm an award; another nursing home case involving the execution of an arbitration agreement by a patient’s family member; the conscionability of an arbitration clause which the court deems to be “infinite;” and arbitration of an FLSA claim under an “arising under” clause.
SCOTUS grants cert. in Servotronics
In an order issued on Monday, the U.S. Supreme Court granted certiorari in Servotronics v. Rolls-Royce, Dkt. No 20-794. The ultimate decision should resolve the Circuit split on whether 28 U.S.C. § 1782 provides a basis for U.S. based discovery in connection with a foreign arbitration. The statute permits the issuance of a subpoena to gather information for “use” in a “proceeding in a foreign or international tribunal.” The Circuits are split over whether a foreign arbitration panel constitutes such a “tribunal.” The Fourth and Sixth Circuits say yes; the Second, Fifth and Seventh Circuits, no. Although the matter will not be heard until the next Term, international arbitration practitioners and corporate practitioners in the U.S. whose clients are subpoenaed to provide discovery under Section 1782 will at last know where the law stands. For more on Section 1782, see the last case in today’s “Highlights.”
Service of an application to confirm
Red Spark, LP v. Saut Media, Inc., 2021 U.S. Dist. LEXIS 51942 (E.D. Pa., Mar. 19, 2021), addresses an anomaly in the FAA – how to serve an application to confirm on a nonresident of the District in which confirmation is sought. Section 9 of the FAA provides that, when an adverse party is a nonresident of the District in which confirmation is sought, service of the application to confirm is to be “served by the marshal of any district within which the adverse party may be found in like manner as other process of the court.” The realistic problem is that U.S. Marshal’s offices are no longer geared to service of process. As the court says, since the Federal Rules of Civil Procedure were amended in 1983 to provide for service by an indifferent person, the “USMS has been out of the summons-serving business, aside from a few unique circumstances.” In fact, it appears that the Marshal’s office in this case was unwilling to serve process without a specific order, which lead to this decision.
Judge Wolson recognizes that service of an application to confirm by the marshal is a residue of the past. However, he opines, while service as provided by Fed. R. Civ. P. 4 might be a more appropriate procedure, he is bound by the language of the statute. “The [FAA] predates changes to the Federal Rules of Civil Procedure, which shift the burden of service of process from USMS to private parties. The approach in the Rules might make more sense than the approach in the FAA. But the Court does not get to choose which statutes to enforce.” He recognizes, but rejects, authorities from other jurisdictions, including the First and Second Circuits, see Reed & Martin, Inc. v. Westinghouse Electric Corp., 439 F. 2d 1268 (2nd Cir. 1971); Puerto Rico Telephone Co. v. U.S. Phone Manufacturing Corp., 427 F. 3d 21 (1st Cir. 2005), which hold that Section 9’s reference to service “in like manner as other process of the court” triggers service under Rule 4. Since Rule 4 and Section 9 of the FAA can be harmonized by holding that the “like manner” language refers to how the Marshal serves the process, rather than revoking the mandate for the Marshal to make the service, the court holds that the abolition of the broad mandate for service by the Marshal under the Federal Rules did not implicitly revoke the requirement for such service in Section 9.
Therefore, the court orders the Marshal to serve the petition to confirm. Who knows how long that service will take, as the USMS no longer views service as a central part of its duties. This underlying issue, which probably arose simply through inattention to the requirements of the FAA at the time of the amendment of the Federal Rules, calls for a simple, legislative fix. The problem is finding someone to take ownership of repairing a narrow defect in the U.S. Code.
Execution of an arbitration clause under a power of attorney
Casa Arena Bianca, LLC v. Rainwater, 2021 U.S. Dist. LEXIS 51783 (D. N.M. Mar. 19, 2021) discusses when a nursing facility may compel arbitration based upon an agreement signed a patient’s family member. Ms. Rainwater became a patient at the Claimant’s facility after hospitalization for heart surgery. Her estate alleges in a state court wrongful death action that Casa Arena failed to follow her physician’s orders regarding the monitoring of her incision and that, as a result, she became septic, underwent a change in mental status, and died. Petitioner brought this action seeking to compel arbitration of the claim based upon the arbitration clause contained in an “Admission Agreement” that her daughter, Ms. Burris, executed two weeks after Ms. Rainwater’s admission. Respondent, Ms. Rainwater’s estate, maintained that the daughter, Ms. Burris, did not have authority to enter into the arbitration agreement.
The court, Herrara, J., first addresses whether the court or the arbitrator makes the decision as to the enforceability of the arbitration clause. The court holds that this is a question of contract formation reserved to the court, although this part of the ruling seems to conflict with the judge’s opinion elsewhere that the incorporation of JAMS rules demonstrates that “formation” of the contract is delegated. Since, at the time of execution of the agreement, Ms. Burris had no power of attorney from the decedent, the case hinges on whether she was either her mother’s agent or had apparent authority. The opinion relies heavily upon the two-week time frame between Ms. Rainwater’s admission to the facility and the execution of the arbitration agreement, during which time, her mental capacity declined. Since, while competent, she did not indicate that her daughter was to act as an agent, the court finds that the facility did not establish that an agency relationship. Nor, the court holds, was there any indication that Ms. Rainwater intended to be a third-party beneficiary of the agreement. The court distinguishes cases in which the patient, at the time of admission, was already incapable of decision making; here, the court opines, “the record indicates that at the time of her admission to the facility Ms. Rainwater may have been able and willing to sign documents related to her own care.” During that period, the decedent could have signed an arbitration agreement; Judge Herrara is unwilling to impute an intent that Ms. Rainwater did not express while able to do so. In addition, the court may be implicitly questioning the facility’s motive in presenting admissions paperwork, including the arbitration agreement, only “after many of the events that form the basis of liability in the state-court complaint” occurred.
New Mexico law drives the court’s rejection of equitable estoppel as a basis for enforcing the arbitration agreement. Unlike those jurisdictions which center the doctrine around any ties between the claim and the contract in which the arbitration agreement resides, without regard to the parties’ motives, New Mexico requires that (1) the party to be estopped made a misrepresentation by conduct; (2) the party claiming estoppel had a reasonable belief, based upon the estopped party’s conduct, that the estopped party would not assert the estopped right; and (3) the party claiming estoppel acted in reliance on that conduct to its detriment. Based upon the willingness of the facility to treat Ms. Rainwater without any signed arbitration agreement, the court finds that Casa Arena did not rely upon the arbitration clause in providing services and rejects the Petitioner’s equitable estoppel argument. The court denies the motion to compel arbitration.
The case is worth reading not only for its holding, but as a reminder of the importance of choice of laws issues to the resolution of arbitrability. Under the law of many jurisdictions other than New Mexico, the equitable estoppel claim could have come out differently, since the decedent’s claims relate directly to the services provided under the contract which contains the arbitration provision. There are, in fact, cases so holding in earlier “Highlights.” Attorneys involved in arbitration litigation need to think about all the venues whose laws might apply to the substantive questions raised and weigh which law is more favorable, particularly where the contract contains no choice of law clause. Drafters need to do the same analysis in creating choice of law and forum provisions.
Infinite Arbitration Clauses
Mey v. DIRECTTV, LLC, 2021 U.S. Dist. LEXIS 51437 (N.D. W. Va. Feb. 12, 2021) is another in the string of cases addressing arbitration clauses which purport to encompass all disputes between not only the contracting parties, but also all current or future affiliates thereof. In 2012, Plaintiff entered into an agreement with AT & T Mobility for the purchase of cellphone service in which she agreed to arbitrate “all disputes and claims” with AT & T Mobility and its “subsidiaries, affiliates, agents, employees, predecessors in interest, successors, and assigns.” Three years later, Mobility acquired DIRECTTV, which, the court notes, sells satellite television, not cellphone, service. “Some years after that,” plaintiff sued DIRECTTV over unwanted advertising calls. DIRECTTV moved to arbitrate, alleging that it was an “affiliate” of AT & T Mobility and, therefore, any dispute which Mey had covered by the 2012 arbitration clause. Judge Bailey has no time for that argument and declines to compel arbitration under an agreement that he deems “unconscionably broad.”
In this case, in which a previous judgment decision was reversed and remanded for further proceedings related to unconscionability of the agreement, Mey v. DIRECTTV, LLC, 971 F. 3d 284 (4th Cir. 2020), Judge Bailey holds that the arbitration agreement, as applied to the dispute before him, is both procedurally and substantively unconscionable. On the procedural front, he emphasizes not only the adhesion contract issues present in many consumer agreements, but also the method of execution thereof. The court emphasizes that the contract was presented “with a small electronic pinpad device which displayed a few lines of AT&T’s Wireless Customer Agreement at a time.” After clicking “a box marked ‘I Accept,’” the court opines, “Ms. Mey was now irrevocably locked in to face demands that she arbitrate any dispute arising out of any relationship with virtually any of AT&T Mobility’s corporate cousins; a list that could, over time, comprise AT&T’s current competitors or not-yet created subsidiaries.” Such scope, the court holds, is substantively unconscionable. In fact, the court is so offended that he uses the term “absurd” twelve times. Applying both the contract’s language and a wide range of precedents, Judge Bailey (who, perhaps a little peevishly, cites the dissent in the Circuit Court’s remand of his earlier decision at least three times) refuses to compel arbitration.
The case is useful to anyone addressing an arbitration clause which purports to cover all disputes or all entities affiliated with a corporate party. The range of precedents cited by Judge Bailey is wide and covers several jurisdictions. For drafters, it is a useful resource in determining how far the borders of an arbitration clause can be pressed before the cross the edge into uselessness.
Arbitrability of FLSA claims
Whereas Mey shows the risks of overly broad arbitration clause, Joseph v. Communicare Health Services, Inc. 2021 U.S. Dist. LEXIS 52500 (S.D. Fla. Mar. 18, 2021) demonstrates that a narrower clause may not encompass the full range of claims that might be raised by a party thereto. Plaintiff, a home health aide, alleged violation of the Fair Labor Standards Act, claiming a failure to pay required overtime, with one question being whether Mey was an employee or independent contractor. Communicare moved to compel arbitration under a clause which covered “a dispute which arises under” the agreement covering Mey’s services. Magistrate Judge Strauss holds that the failure to “pay Plaintiff the minimum wages and overtime wages owed under the FLSA do not stem from a breach of any of the Agreement’s provisions nor arise under any of those provisions.” Rather, Mey raises a question of the application of the Fair Labor Standards Act and whether she falls within the definition of an employee thereunder. He recommends that the District Judge deny the motion to compel.
The scope of this holding as precedent is limited – and, if fact, it can become a defendant-friendly opinion – since the agreement here was “silent on the compensation to be paid to Plaintiff and the hours she was expected to work.” In a footnote, the court states that “had the Agreement addressed the compensation to be paid to the Plaintiff, and had the arbitration provisions contained ‘related to’ language, the outcome would very likely be different.” Magistrate Judge Strauss does not indicate how he would have come out if only one of those two conditions existed.
While, as discussed above, SCOTUS will be resolving issues under Section 1782 later this year or in 2022, we are going to have to live with ambiguity in the meantime. In re: Eni S. p. A., 2021 U.S. Dist. LEXIS 53204 (D. Del. Mar. 19, 2021), raises an interesting issue to fill the gap. Eni sought discovery from several U.S. parties in connection with an International Centre for Settlement of Investment Disputes (“ICSID”) arbitration related to sale by the Federal Republic of Nigeria of an oil prospecting license to Eni and Royal Dutch Shell, PLC. Criminal charges had been brought against Eni in Madrid, alleging a corrupt scheme involving Eni and Nigerian officials. As of the time of the decision, the criminal charges had been dismissed, but the verdict remained “appealable.” Eni filed a request to arbitrate through the ICSID under a treaty between the Netherlands and Nigeria. Judge Noreika, in a very thorough opinion, examines the scope of the “for use in” language of Section 1782, holding that the ultimate admissibility of the evidence into the foreign proceeding is not relevant to the court’s consideration. On the issue of whether the arbitral forum is a “tribunal,” the court draws an interesting distinction. While acknowledging decisions holding that a private arbitration panel does not constitute a “tribunal,” she distinguishes this ICSID arbitration from such contractual proceedings, because this arbitration arose out of national treaty obligations.
Having found that Section 1782 applies, the court goes through the discretionary factors established under Intel Corp. v. Advanced Micro Devices, Inc., 542 U.S. 241 (2004). Since the resolution of those factors is very fact-intensive, those interested in the issue will need to go to the case to get an adequate grasp thereof. Ultimately, the court grants the subpoena, but modifies the breadth thereof.
Spring has come to Connecticut. I hope it is reaching you, as well. See you later in the week.
David A. Reif