There are some particularly interesting decisions today, so today’s “Highlights” gives a little deeper analysis on four cases, rather than the usual 30,000-foot view of a greater number.  I hope that you find it useful. 

Delegation of gateway issues; stay v. dismissal

There is a little something for everyone in Anderson v. Charter Communications, Inc., 2021 U.S. App. LEXIS 17534 (6^th Cir. June 11, 2021). The case arises from plaintiff’s allegedly wrongful discharge.  Charter moved to compel arbitration under its “Solution Channel” dispute resolution program, which compelled arbitration of “any dispute arising out of or relating to” the termination of employment.

Both on appeal and in the District Court, plaintiff raised several gateway objections to arbitrability.  He argued, first, that the present dispute does not fall within the scope of the arbitration clause. Second, he raised unconscionability claims. Third, he alleged that the arbitration agreement lacked consideration.  The District Court compelled arbitration, holding that the broad arbitration clause demonstrated a “clear intent” to delegate those determinations to the arbitrator.  Circuit Judge Murphy, writing for himself and Circuit Judges Kethledge and Gibbons, undertakes a breezy discussion of the types of gateway issues which the parties might choose to delegate to an arbitrator.  The panel holds that the parties, through their broad arbitration clause, delegated scope issues to the tribunal.  Relying upon Rent-a-Center, W., Inc. v. Jackson, 561 U.S. 63 (2010), it rejects the challenge as to unconscionability under the “container” theory; since Anderson challenged the entire agreement, not just the arbitration clause, questions of unconscionability are sent to the arbitrator. On the third issue, the court casts the question as a choice between whether a lack of consideration is a question of contract formation and, therefore, not delegable or is an issue of whether, the agreement having been formed, it is enforceable – a decision that may be delegated. However, the panel ultimately determines that it need not resolve the question, as, even if the issue is one for the court, there was adequate consideration. (This dictum could set up an interesting issue on confirmation if the arbitrator ultimately finds no consideration, while the court here has held that consideration exists.  We may find out much deference a court really gives an arbitrator’s award which the reviewing judge believes is wrong.)

Perhaps the more interesting part of the opinion is the court’s reversal of the District Court’s dismissal of the action in favor of arbitration. The panel recognizes that there is a Circuit split over the effect of Section 3 of the Federal Arbitration Act on the remedy to be imposed when a court deems a dispute arbitrable. That section provides that the court “shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement. . . .” (Emphasis added). The Second, Third, Tenth and Eleventh Circuits, the court opines, hold that a court may only issue a stay; it may not dismiss. The Eighth, First, and Ninth Circuits, on the other hand, allow dismissal if all claims are subject to arbitration. Circuit Judge Murphy cites to three unpublished Sixth Circuit decisions which he opines show that the Circuit allows dismissal.  However, the court avoids the issue by holding that, even if the court has the authority to dismiss the case, it abused its discretion in this case by doing so, since dismissal raises potential statute of limitations issues if the arbitrator dismisses the case and Anderson must sue again. In doing so, the Court of Appeals sloughs off as a “matter of Charter’s good graces” Defendant’s disavowal of any statute of limitations defense.  Accordingly, the Sixth Circuit affirms the District Court’s judgment compelling arbitration, but reverses its order of dismissal.

The case raises an interesting issue unrelated to its merits.  This is an “unpublished” opinion, like the other Sixth Circuit cases holding that an action may be dismissed when arbitration is ordered.  One has to ask why not establish clear, published Circuit authority.  The other Courts of Appeals to which Circuit Judge Murphy cites have made their rulings on the stay v. dismissal order fully citable.  What is the rationale for the Sixth not doing so?

Appellate Jurisdiction

Hansen v. LMB Mortgage Services, Inc., 2021 U.S. App. LEXIS 17472 (9^th Cir. June 11, 2021), addresses another Circuit split. Plaintiff sued under the Telephone Consumer Protection Act (TCPA) alleging that LMB sent him unsolicited text messages. The defendant moved to compel arbitration under the terms of a clickwrap acceptance of terms and conditions. Plaintiff denied that he had ever visiting the website; defendant submitted evidence to the effect that either Hansen or his mother had clicked on the site’s “submit” button.  In response to a motion to compel arbitration, the District Court entered conflicting orders.  While it held a jury trial was required to determine whether Hansen agreed to arbitrate, it denied defendant’s motion to compel and stay.  LMB appealed, arguing that the District Court erred in holding that there were any material facts to be tried.

The court sua sponte raises the issue of appellate jurisdiction, since the District Court’s order was clearly nonfinal and did not reach the merits of the arbitrability dispute. The issue, therefore, was whether the appellate court still had jurisdiction under Section 16 of the FAA, which allows an appeal from “an order. . . . (B) denying a petition . . . to order arbitration to proceed.”  Holding that Section 16 draws no distinction between final and non-final orders – requiring merely that the order be one denying arbitration – the panel, Circuit Judge Ikuta, writing for herself, and Circuit Judge Nguyen and Judge Eaton of the Court of International Trade sitting by designation, holds that it has jurisdiction.  It joins the Fourth, Eighth, Federal, and D.C. Circuits in so holding; the Sixth Circuit takes the contrary view.  Addressing the merits of the dispute, the court vacates the order of dismissal and remands, holding that, once the District Court concludes there are issues of fact to be resolved regarding the petition to compel, it must “proceed without delay to a trial on arbitrability and hold any motion compel in abeyance,” citing authority from the Fourth, Eighth and Tenth Circuits.

Waiver of arbitrator conflict

When does an arbitrator have a conflict? How deep must a party probe to make that determination? Shaffer v. Priorityone Bank, 2021 U.S. Dist. LEXIS 108850 (S.D. Miss. June 10, 2021) provides cautions to both arbitrators and parties.

The action is brought by the bankruptcy trustee for the Estates of Danny and July Hall. It centers on whether the foreclosure on property securing a series of notes executed by the Halls resulted in a surplus or deficiency. The matter was referred to arbitration; the sole arbitrator found in favor of plaintiff and ordered the bank to pay the trustee approximately $2.7 Million. After the arbitration, the bank moved to vacate the award on the basis that the arbitrator, who had been the guarantor of a note to the bank at the time of his appointment, had not disclosed this conflict on the standard AAA questionnaire – apparently through an oversight.  The bank alleged that it only learned of the conflict after the issuance of the award.

The court, Wingate, J., addresses two issues.  Relying upon Commonwealth Coatings Corp. v. Continental Casualty Co., 393 U.S. 145 (1968), the Court holds that the non-disclosure of the guaranty constituted “evident partiality” under the FAA’s tests for vacatur. Applying the Fifth Circuit’s test, the court finds that the non-disclosure “involves a ‘reasonable impression of bias’ stemming from ‘a significant compromising connection to the parties’ . . . .”  As such, vacatur would be appropriate.

However, while the bank may have felt elation over the vacatur, its attitude probably changed when the court held that the failure to raise the issue until after the issuance of the award constituted a waiver of the defense.  Acknowledging that there is a Circuit split over whether a party must have actual or merely constructive notice of a conflict in order for the failure to assert it to create a waiver, Judge Wingate holds that the Fifth Circuit falls in the “constructive notice” camp. (By declining cert. in Seldin v. Estate of Silverman, 2021 U.S. LEXIS 2400 (May 17, 2021),  SCOTUS rejected an opportunity to clarify the Circuits’ disagreement over whether only a reasonable appearance of bias or actual bias is required in order disqualify an arbitrator). The court holds that the bank’s own records showed that the arbitrator was the guarantor of an obligation to it. Even a cursory examination thereof, Judge Wingate finds, would have disclosed internal emails referencing the arbitrator’s loan and, on eleven occasions, his specific name.  Therefore, by not seeking to disqualify the arbitrator at the time of his appointment, the defendant waived the objection. While the court declined to vacate on the basis of an arbitrator conflict, it postponed decision on other alleged bases to vacate.

This decision will, I suspect, change the procedure most parties use in reviewing arbitrator appointments. While it is common practice to vet the list of proposed arbitrators to determine their experience and predispositions, most parties do not review their records to  “cross-examine” the arbitrator’s oath in which he or she states that there are no conflicts.  To the extent that other courts adopt the reasoning in Shaffer, such skepticism will need to become a regular practice.

Jurisdiction under the New York Convention

Zhang v. Dentons U.S. LLP, 2021 U.S. Dist. LEXIS 110148 (C.D. Cal. June 11, 2021), addresses the jurisdictional scope of the New York Convention.  Procedurally, the case resolves a motion to remand a partnership dispute to state court.  Dentons terminated Zhang, a partner in its Los Angeles office.  While the parties disagree on the facts, the dispute originated out of Dentons’ representation of a client based in the People’s Republic of China in a foreign arbitration.  Dentons claimed it terminated Zhang because he tried to cut a backdoor deal which would have given him a larger share of the fee in that case; Zhang claimed that his discharge was racially motived and involved fraud on the part of the firm. The parties commenced arbitration, but, during the course thereof, Zhang sued in state court.  Dentons removed the action; Zhang sought to remand, claiming that the federal court lacked subject matter jurisdiction.

Since there was no diversity of citizenship and the FAA is not jurisdictional, the case revolved around the applicability of the New York Convention, which, by statute, creates federal question jurisdiction.  The Convention specifically allows removal of an action where “the subject. . . relates to an arbitration agreement or award falling under the Convention.”  The opinion centers on what constitutes such a relationship.  The Court, Klausner, J., rejects  Dentons’ claim that an international hook exists because the underlying dispute relates to a foreign arbitration, holding that the dispute arises out of the Dentons partnership agreement, not the arbitration.

Dentons also argued that its own international structure made the dispute one that “involves property located abroad, envisages performance or enforcement abroad or has some other reasonable relations with one or more foreign states.”  Here, too, Judge Klausner holds for plaintiff. Again, he focuses exclusively on the parties’ own dispute.  The Dentons arbitration agreement required arbitration in Chicago or New York, with enforcement in Delaware or a state in which the party resides. While Dentons may be part of a Swiss verein, have a “foreign corporate parentage,” and Zhang “engaged in international activity as a Dentons partner,” none of those elements are “akin to ‘involving property locate abroad’ or ‘envisaging performance abroad.’”  In short, “all aspects of the Agreement are domestic. . . .”

The court grants the motion to remand.

News

FINRA reopens

FINRA announced that it will reopen all of its in-person hearing sites on August 2nd.  It had previously stated that sixty-two of sixty-nine venues (excluding Augusta, Maine; Boca Raton; Buffalo; Detroit; Philadelphia; Providence; and Wilmington) will open on July 5th.

I never thought I would say this, but I am actually looking forward to a plane flight in a couple of months.  Who would have thought the ritual of “Please raise your tray and put your seat in an upright position” and the scramble for an overhead rack would ever be appealing?  Let’s hope that the return to some normality continues. 

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