The last couple of days’ reports included some new decisions on procedure, as the courts wrote about the “how” of case management and drafting, as well as the “what” of contract interpretation. Also, there is a really good law journal article on the delegation of gateway issues.
Amending around broad arbitration clauses
BioOrigyn, LLC. v. Fairhaven Health, Inc., 2021 U.S. Dist. LEXIS 104803 (W.D. Wash. June 3, 2021), addresses plaintiffs’ attempt to plead around an arbitration clause. The facts of the dispute provide an interesting insight into the Internet sale of medical products. Plaintiff Ellington, BioOrigyn’s founder, developed a line of “fertility-friendly” products for women and a fertility aid for men. In May 2015, Ellington and Fairhaven entered into an agreement which granted defendant the right to use Ellington’s likeness “in relation with certain products” (the “Likeness Agreement”). Just months later, the parties terminated the agreement. Plaintiffs brought this action, alleging that Fairhaven breached the Likeness Agreement and committed various Lanham Act violations and business torts. Fairhaven sought to compel arbitration
The Likeness Agreement contained an arbitration provision. The exact language of that clause is unclear as the court, pursuant to the parties’ agreement to file the Likeness Agreement under seal, redacts the provision. However, it appears that the clause was a broad one, as Judge Jones relies upon authorities interpreting clauses which provide for arbitration of claims “arising in connection with [this Agreement]” (brackets in opinion). The court gives the provision a wide-ranging scope, holding that, to require arbitration, a plaintiff’s ‘”factual allegations need only ‘touch matters’ covered by the contract containing the arbitration clause and all doubts are to be resolved in favor of arbitrability,” citing Simula, Inc. v. Autoliv, Inc., 175 F.3d 716 (9th Cir. 1999).
The parties agreed that plaintiffs’ breach of contract claim was subject to the arbitration clause. However, BioOrigyn sought to avoid arbitration by “dropping” certain of those contract claims. The court rejects the attempt, holding that it must base its decision upon the complaint as filed. “The Court will not ignore the express language of the complaint simply because Plaintiffs request to drop the claim here. Whether Plaintiffs continue to pursue this claim or not, the claim is subject to the 2015 Likeness Agreement’s arbitration provision and must be sent to arbitration.”
In the balance of the opinion, Judge Jones holds that the Lanham Act, infringement of personality rights, and false advertising claims have a “significant relationship to the agreement.” Accordingly, he dismisses the complaint in favor of arbitration.
Tying arbitration to a class action claim
In Donelson v. Ameriprise Financial Services, Inc., 2021 U.S. App LEXIS 16527 (8th Cir. June 3, 2021), Circuit Judge Gruender, writing for himself and Circuit Judges Benton and Stras, addresses the interplay between class action allegations and an arbitration provision.
The case arises out of alleged violations of the securities laws. Plaintiff asserts that his investment advisor at Ameriprise improperly traded on margin, despite having been directed not to do so; misrepresented the plaintiff’s account balance; and, generally, badly mishandled the account. Donelson brought this action on behalf of himself and other customers of the broker. Ameriprise sought to compel arbitration, based upon a provision of the account application which provided for arbitration of “all controversies that may arise between us. . . . whether arising before, on or after the date this account is opened,” except “putative or certified class actions.” The District Court denied both the motion to compel and an accompanying motion to deny class certification. Reviewing the lower court’s judgment de novo, the Court of Appeals reverses.
The case centers on whether Donelson ever agreed to arbitrate, since it is undisputed that the Ameriprise broker never gave him a copy of the Client Agreement in which the arbitration agreement appeared. The Court holds that by signing an account application which referenced the arbitration clause, Plaintiff agreed to abide by the Client Agreement. Thus, this case falls into those cases, like employee handbook decisions, in which one agreement incorporates an arbitration clause contained elsewhere; those cases split on enforcement of the incorporated arbitration provision. Some hold that, unless the plaintiff has actually seen the arbitration clause itself and, therefore, understands the scope of the arbitration obligation, a mere reference to it elsewhere in the parties’ documentation is inadequate to demonstrate a meeting of the minds. Others agree with Judge Gruender, particularly where, as here, the account application itself informs the customer that there is an arbitration obligation and imposes an obligation to inquire further if the customer cares about the details thereof.
The court also rejects Donelson’s claim that, since the defendant can freely amend the agreement, Ameriprise’s obligation to arbitrate is illusory and without consideration. Because the provision requires Ameriprise to give thirty days notice of any such change and allows Donelson to withdraw his account during that hiatus, the Court upholds the provision. When you read the opinion, ask yourself whether the court gives adequate weight to the Missouri Supreme Court’s decision in Baker v. Bristol Care, Inc., 450 S.W. 3d 770 (Mo. 2014), which held that an employee’s continued employment did not salvage an arbitration provision which the employer could change at will.
The panel overrules the District Court’s decision to allow the matter to proceed as a class action. By doing so, it removes the case from the arbitration clause’s exclusion of “putative or certified class actions” from its coverage. Combining its holdings on the parties’ agreement to arbitrate with its denial of class status, the court reverses the District Court and remands “for the entry of an order . . . compelling arbitration.”
Specificity in award drafting
Miner v. Mines, 2021 Bankr. LEXIS 1505 (Bankr. E.D.N.Y. June 3, 2021), is a reminder that arbitrators need to be specific in their findings when drafting awards, as one never knows the purpose for which the award might be used in the future. The case addresses the issue of whether a debt should be denied dischargability under Section 523(a)(2)(A) as the underlying obligation was “obtained by false pretenses, a false representation, or actual fraud.” The debtor had previously arbitrated issues related to the claim, after which the tribunal found that he had violated the Virginia Consumer Protection Act and awarded treble damages. However, the arbitrator made no specific factual or legal findings. Since the VCPA contains sixty-six subsections, some of which might merely constitute a willful breach of contract – a violation which would not contain the fraud elements needed to deny dischargability under Section 230 – Bankruptcy Judge Grossman holds that the arbitration award is insufficiently detailed to have a preclusive effect on the issues before him. He denies non-dischargability. The lesson to arbitrators is one of precision – if you are writing a reasoned award state exactly why you are making your decision and cite to chapter and verse of anything on which you rely.
Signature by a dishonest agent
Berkeley County School District v. HUB International, Ltd., 2021 U.S. Dist. LEXIS 104432 (D.S.C. June 3, 2021), fortunately arises from an unusual set of facts. The complaint alleges that employees of the district were accepting bribes from an insurance broker, as a result of which the district placed unnecessarily expensive insurance packages through HUB. The District sought recovery of some of those premiums. HUB moved to compel arbitration pursuant to the terms of several Brokerage Service Agreements (“BSAs”) under which the insurance was placed. The opinion contains 160 numbered findings of fact and conclusions of law, so anyone interested in applying its holding on agency needs to read the case in detail, but the upshot is that the court, Norton, J., holds that none of the BSAs’ arbitration mandates are enforceable. The case is most widely applicable as to the agreements which were executed by the dishonest employee, as to which the court holds that he had no apparent authority, despite his position as the district’s representative to negotiate insurance on its behalf. “No reasonable person would believe that an agent has the actual authority to act against his principal’s best interest.”
Stay of discovery pending determination of arbitrability
Nguyen v. BMW of North America, LLC, 2021 U.S. Dist. LEXIS 105585 (S.D. Cal. June 4, 2021), addresses the question of whether discovery should be stayed while the court considers a motion to compel arbitration. Balancing the plaintiff’s need for discovery against the waste of resources which would occur if the parties undertook the discovery process only to have the case sent to the arbitration, Magistrate Judge Major grants defendant’s motion to stay discovery.
Limited review of grievance arbitration awards
JNESO District Council 1 v. Prime Healthcare, 2021 U.S. Dist. LEXIS 104173 (D.N.J. June 3, 2021), reaffirms the limited scope of review of a labor grievance award. The arbitrator found that the defendant had violated the collective bargaining agreement by failing to offer a laid-off employee a radiation therapy position for which he could have been trained and, instead, hiring a new technician. The hospital argued that the arbitrator misapplied the CBA by relying upon the wrong section thereof. The court, McNulty, J., confirms the award, holding that “the Hospital’s argument is not unreasonable, but it cannot outweigh the ‘heavy degree of deference’ I give the arbitrator.” “An alleged ‘misinterpretation of the contract’ does not ordinarily provide a basis to vacate an arbitration award.” Vacatur is only appropriate, the court holds, when “an arbitrator so departs from the plain language of the agreement that the arbitrator essentially ‘dispense[s] his own brand of industrial justice.” (citation omitted).
The Second Circuit is one of the courts which recognize “manifest disregard” as a basis for vacating an award under the Federal Arbitration Act. In Jeffries, LLC v. Gegenheimer, 2021 U.S. App. LEXIS 16532 (2nd Cir. June 3, 2021), Judges Sack, Lynch and Park, in an “unpublished” summary order, reaffirm the tightly constrained scope of that exception. Plaintiff claimed that the panel disregarded controlling New York substantive law regarding liquidated damages. Holding that the District Court correctly held that the arbitration panel had “at least a ‘colorable justification’ for finding the liquidated damages provision enforceable,” the Court of Appeals affirms. The opinion reaffirms the Second Circuit’s two-part test for manifest disregard – (1) the arbitrator’s knowledge of a governing legal principle and (2) his or her ignoring of that well-defined, explicit, and clearly applicable doctrine.
The analysis of whether gateway issues of arbitrability have been delegated to the arbitral tribunal can be a thicket. In an extremely well-researched (there are 192 footnotes of citations) article, the Franchise Law Journal explores the development of delegation law from before Rent-a-Center through the present, Sapp, Goodarzi and Hoover, “Rent-a-Center Ten Years Later; Surveying How Courts Analyze Franchise Agreement Provisions that Delegate Gateway Arbitrability Issues to the Arbitrator”, 40 Franchise L.J. 589 (Spring 2021). Despite its title, the scope of the article is not limited to franchise disputes. Anyone considering – or thinks they may ever consider – the delegation of issues related to arbitrability, scope of an arbitration provision, or any other gateway question needs to keep this excellent piece of scholarship somewhere close at hand.
As you may have noticed, the appearance of “ADR Highlights” has become a little more sporadic than its thrice-weekly winter, COVID shut-down schedule. The pace of arbitration and mediation proceedings has picked up as parties again meet face-to-face and, frankly, summer weather has arrived, so publication will be a little more ad hoc. But fear not, “Highlights” will continue to keep you up to date on the latest in the ADR legal landscape. So, stay tuned.
David A. Reif