Today’s “Highlights” differs a little from the usual format of several short summaries. Rather, because of the significance of a recent analysis of Section 1782(a), there is long discussion of one case. However, there are also some important decisions on mediation as a precondition to litigation, the question of whether the Department of Labor must arbitrate wage claims, and whether trial preparation triggers a website’s arbitration clause.
A different aspect of Section 1782(a)
Last Wednesday’s “Highlights” addressed the decision in In re: Application of Food Delivery Holding 12 S.A.R.L., 2021 U.S. Dist. LEXIS 93518 (C.D. Cal. May 17, 2021), holding that 28 U.S.C. § 1782(a) does not authorize discovery in connection with an arbitration before the Dubai International Finance Centre-London Court of International Arbitration (“DIFC-LCIA”). Since the District Judge merely accepted the Magistrate Judge’s recommendation, which was unpublished at that time, there was not much context for the holding. Since then, the opinion of Magistrate Judge Castillo has appeared on LEXIS, In re: Application of Food Delivery Holding 12 S.A.R.L., 2021 U.S. Dist. LEXIS 94481 (C.D. Cal. April 26, 2021), and it is an interesting one which requires deeper discussion than the usual “Highlights” treatment.
Recognizing that the Ninth Circuit has not determined whether a private, foreign arbitration is a “tribunal” for purposes of discovery under Section 1782(a), the Magistrate Judge adopts the position taken by the Second, Fifth and Seventh Circuits, holding that the act does not apply to such proceedings. He cites heavily to another decision from the same District, In re: Dubey, 949 F. Supp. 2d 990 (C.D. Cal. 2013)(Selna, J.), which, in turn, adopts the Second Circuit’s reasoning in National Broadcasting Co. v. Bear Stearns & Co., 165 F. 3d 184 (2nd Cir. 1999).
With the grant by SCOTUS of certiorari in Servotronics, Inc. v. Rolls-Royce PLC, 2021 WL 1072280 (S.Ct. Mar. 22, 2021), that part of the decision will probably be made less impactful by higher authority sometime next Term. (I say “probably” because resolution of the arbitration through award or settlement would moot Servotronics.) The more important part of the opinion is the court’s analysis of an issue which appears less frequently. What is a “private” v. a “state-sponsored” tribunal? Citing to the Second Circuit’s holding in In re: Guo, 965 F. 3d 96 (2nd Cir. 2020), the court adopts what it calls a “functional” test, looking to the degree of control which the private parties exercise over the process. The court finds that the following characteristics distinguish a DIFC-LCA arbitration from the traditional “state-sponsored” proceeding – the tribunal lacks jurisdiction absent agreement of the parties; the parties have a “high degree of input” over the proceedings, including the number of arbitrators, the identity thereof, the language of the proceedings and the location thereof, and the applicable lex arbitri; the parties must pay the costs of the arbitration; and there is only a limited scope of post-award challenges. The court emphasizes the confidentiality of the arbitral proceedings, relying upon Petitioner’s “almost heroic efforts, pursuant to the DIFC-LCIA’s confidentiality rules, to keep from public view even the most basic facts underlying the parties’ dispute, even though the facts are not trade secrets and are readily available in public filing ins U.S. Courts in other matters that do not directly arise from the DIFC-LCIA arbitration. . . .” The Magistrate Judge recommends denying the application for a subpoena – a recommendation which the District Court accepted in the case cited last week.
The opinion contains two interesting sidelights, both in footnotes.
In footnote 2, the court addresses the confidentiality issue raised above. He adopts the now-common rule that the District Court is not bound by the confidentiality rules of an arbitral institution and will not seal otherwise public matters because of those procedures. However, the court opines that “out of recognition for Petitioner’s obligations under the DIFC-LCIA’s confidentiality rules, and because resolution of the Application does not turn on the specific matters at issue in the arbitration, the Court will avoid referring to facts obtained solely from documents filed by Petitioner under seal, even when the facts would not be considered ‘confidential’ under any standard of confidentiality applicable in this Circuit.” The opinion, thus, provides a route – however, narrow and rocky – for those trying to convince a court to limit public access to arbitral information which the party might wish to keep from prying eyes.
Footnote 4 highlights the circuitous route which Section 1782(a) requires when one seeks information from multiple sources. The act only allows a District Court to issue a subpoena to those within its jurisdiction. Thus, Petitioner here also filed applications in the District of Columbia and the Northern District of California to get discovery from parties located in those venues. This is the same issue which put Servotronics in the position of creating its own Circuit split, as one court allowed it discovery while another said “no.”
While SCOTUS, by deciding Servotronics, may make this case moot on the question of whether private arbitrations are tribunals, it will remain relevant jurisprudence for those researching the underlying question of whether a proceeding is “private.”
Triggering an arbitration clause during case preparation
Callahan v. PeopleConnect, inc., 2021 U.S. Dist. LEXIS 94467 (N.D. Cal. May 18, 2021) raises the question of whether a lawyer, by accessing a website in the process of legal research, ends up compelling his client to arbitrate the underlying dispute. The complaint underlying the decision is a class action in which plaintiffs allege misappropriation of their names, photographs, and likenesses by Classmates.com, which they assert curates and reproduces information from yearbooks. While preparing the case, plaintiffs’ counsel accessed the website, whose terms and conditions included an arbitration provision providing that “use of the websites/and or services require you to arbitrate all disputes on an individual basis. . . .” Defendant claimed that, since counsel acts as an agent for his or her client, by “using” the website he or she bound those clients to arbitrate and to do so individually. Applying general principles of agency law, the court, Chen, J., holds that the scope of the attorney’s authority did not extend to waiving his client’s right to litigate the underlying issues. “In short, absent client consent or ratification, a lawyer cannot bind a client to an arbitration agreement by virtue of the attorney-client relationship alone.” The court further holds that the actions of Plaintiffs’ counsel in accessing the site to fulfill his or her Rule 11 presuit obligations “do not serve as the basis for Plaintiff’s claims – i.e., counsel’s use of the Classmates.com website is not the factual predicate of the Plaintiffs’ claims.” Taking a very practical approach, the court opines that requiring an attorney to choose between doing adequate investigation of his or her client’s claim or potentially triggering an arbitration clause would create a situation placing the attorney on “the horns of a dilemma, [with] Hobson’s choice, stuck between a rock and a hard place, or caught between Scylla and Charybdis. . . .” The court denies the motion to compel arbitration.
Arbitration of FLSA enforcement actions
In Walsh v. Arizona Logistics, Inc., 2021 U.S. App. LEXIS 14727 (9th Cir. May 18, 2021), the Department of Labor brought an enforcement action under the Fair Labor Standards Act, alleging that defendant improperly treated delivery drivers as independent contractors, rather than employees, thus violating minimum wage, overtime, and other requirements. Among other relief, the Department sought payments which would benefit the employees. Defendant moved to compel arbitration under the provisions contained in its agreements with the drivers. Affirming the District Court, Judge Hunsaker, writing on behalf of herself and Judges Fletcher and Miller, holds that, since the Labor Department is not a party to the arbitration clause, it is not bound thereby, even through some benefit might accrue to drivers who would be required to arbitrate if they brought the action themselves. The court analogizes to EEOC v. Waffle House, Inc., 534 U.S. 579 (2002), in which the Supreme Court held that, because the EEOC, rather than the individual employee, maintained full control over any enforcement action which it brought, the employees’ arbitration mandate did not bind the agency. Since the agency here may bring an action without the employee’s consent, the employee may not bring a separate action, and he or she may not intervene in the Department’s case, the court holds that the Labor Department, not the employee, “is in command of the process.” Therefore, the Ninth Circuit affirms the District Court’s denial of arbitration.
Parenthetically, it would have been interesting to see what the panel did if they were deciding the case without the Waffle House precedent. The court twice seems to express some regret as to the direction in which Waffle House guides it. “We conclude that despite the Federal Arbitration Act’s (FAA) policy favoring arbitration agreements, [Waffle House] requires us to answer this question [should the matter be arbitrated] in the negative.” (Emphasis added) “Under these circumstances, we see no meaningful way to distinguish Waffle House.” (Emphasis added).
Mediation as a mandatory precondition to litigation
Physician & Tactical Healthcare Services, LLC. v. Inova Health Care Services, 2021 U.S. Dist. LEXIS 94920 (D.N.J. May 19, 2021) gives us a chance to look at the other side of ADR – mediation. Plaintiff and defendant entered into a Services Agreement pursuant to which Plaintiff would assist Defendant in qualifying patients for coverage under Medicaid. Disputes arose regarding Defendant’s termination of the agreement. The agreement contained a “Dispute Escalation” provision, which established a stepped procedure beginning with negotiations and, if the parties did not resolve their issue, mediation. Thereafter, “[i]f the dispute, claim, question, or disagreement is not resolved pursuant to such mediation procedures, each party will be entitled to seek whatever legal or equitable remedies that may be available to such party under this Agreement.” Although no mediation took place, Plaintiff brought this action. The court, Hillman, J., in a fact-intensive opinion based on an analysis of the relevant contract language, holds that Inova did not waive the mediation clause by an early termination of the agreement. Accordingly, he dismisses the action without prejudice to refiling if mediation fails.
See you Wednesday.
David A. Reif