Sorry for the long hiatus, but the day job of arbitration and teaching got particularly busy for a couple weeks. However, it’s good to be back, particularly with an interesting procedural case out of the Eleventh Circuit and a chance to catalog the pending petitions for certiorari before SCOTUS.
Early confirmation of an award
Does the Federal Arbitration Act require that a court wait three months before it may confirm an arbitration award? In McLaurin v. Terminix International Corp., 2021 U.S. App. LEXIS 28122 (11th Cir. September 17, 2021), the Eleventh Circuit says “No.” But, in what seems to be a solution in search of a problem, it lays out a procedure which it “recommend[s]” that District Courts follow when a party seeks speedy confirmation of an arbitral award.
The dispute arose out of defendant’s alleged failure to properly diagnose and repair a termite problem. Plaintiffs alleged that, as a result, they lost their house off the coast of Alabama. Based on their contract with Terminix, plaintiffs arbitrated their claim, with a resulting award in their favor for approximately $2.8 Million. Two days after the award, plaintiffs filed a complaint seeking to confirm. In its answer, Terminix did not address any of the merits of its challenge to the award; rather, it merely stated that it intended to file an application to vacate within the three months prescribed by Section 12 of the FAA. After plaintiffs filed a motion to confirm, the District Court ordered that “any opposition to the Motion [to confirm] shall be filed no later than September 25, 2019. . . .” Again, Terminix did not raise any substantive issues in its response and merely stated that the motion was “premature.” The District Court denied the defendant’s later-filed motion to vacate as untimely and confirmed the award. On appeal, Terminix argued that the trial court erred in denying vacatur and in confirming, as the statutory period for a motion to vacate had not expired as of its decision.
Adopting the Second Circuit’s reasoning in The Hartbridge, 57 F. 2d 672 (2nd Cir. 1932), Judge Brasher, writing for himself and Judges Jordan and Julie Carnes, holds that a party may move to confirm an award even though the three-month window available for an application to vacate has not expired. If plaintiff seeks to confirm and the court enters a briefing schedule on that motion, the respondent must present its substantive objections in its response to confirmation, rather than running out the skein until it could otherwise file a motion to vacate. Treating the court’s scheduling order as a de facto shortening of the time to object to the merits of the award, the Court of Appeals holds that the District Court did not abuse its discretion in confirming the award under FAA Section 9, since Terminix raised none of the defenses available under Sections 10 or 11 of the Act.
All of this seems pretty straight forward, and one would think the decision would give District Courts adequate direction as to how to deal with such issues in the future. However, Judge Brasher goes further and “recommends” to District Judges a very specific process to follow whenever applications to confirm are filed less than three months post-award. “We recommend that, when faced with a motion to confirm filed within three months of an arbitration award, district courts enter a briefing schedule that sets simultaneous deadlines for the losing party to file an opposition to the motion to confirm, if any, and file a motion to vacate, modify, or correct, if any.” Whether District Judges need such guidance in how to manage their dockets may be open to question, but, for practitioners in the Eleventh Circuit the rules are now clear, and, for those elsewhere, the case provides procedural guidance. For all of those opposing confirmation, meanwhile, the practical lesson is clear. If you want to object to an award, follow the advice attributed to James Van Buren about voting – do it early and often.
Two cases address when a party’s actions in connection with pending litigation constitute a waiver of their right to arbitrate over those issues.
In the lengthier opinion, Hahn v. Realreal, Inc. 2021 U.S. Dist. LEXIS 178547 (D.N.J. September 17, 2021), Judge McNulty holds that defendants’ failure to raise arbitrability until two years into the litigation constituted a litigation waiver of their right to arbitrate this age discrimination case. The court walks through the factors established by the Third Circuit in Hoxworth v. Blinder, Robinson & Co., 980 F. 2d 912 (3rd Cir. 1992) for evaluating claims of waiver – timeliness of the motion to arbitrate, the degree that the movant has contested the claim on the merits, whether the movant advised the nonmovant of its intention to claim the right to arbitrate, the extent of non-merits motion practice, movant’s assent to pretrial orders, and the extent of discovery. Judge McNulty relies heavily upon both (i) the two-year time frame between the filing of the case and the motion to compel arbitration and (ii) the parties’ extensive discovery – a motion to compel discovery responses, the exchange of interrogatories and document requests, and four depositions. “The entire foundation of the Hoxworth waiver procedure is that a party, at some reasonably early point, must choose. The Court’s resources are limited, and are properly directed to controversies that will ultimately be litigated here. Parties are not free to trifle with the Court’s processes in this manner.”
The Eighth Circuit’s decision in McCoy v. Walmart, Inc., 2021 U,S. App. LEXIS 27990 (8th Cir. September 17, 2021), (Stras, J., writing for himself, Judge Wollman, and Chief Judge Smith), looks at the usual elements of a litigation waiver claim. As to timeliness, Judge Stras finds that Walmart’s filing of motions to dismiss, participation in a joint scheduling order, and service of initial disclosures are “hardly the actions of a party trying to move promptly for arbitration.” (Citation omitted). He finds Walmart’s inclusion of arbitration as a defense in its amended answer to have been made too late. “[B]y that time, it had ‘substantially invoke[d] the litigation machinery. . . It had, in other words, already, acted inconsistently with its right to arbitrate.” (Citation omitted; emphasis in opinion). Turning to the issue of prejudice, the court opines that, in light of Walmart’s earlier motions to dismiss, requiring McCoy to arbitrate would make her litigate various defenses twice, while giving defendant a second bite at the apple on substantive questions which it previously lost.
While the opinion and the issues it addresses are fairly vanilla, there are two points which make it worth keeping in an arbitration file. First, the panel recognizes that litigation waiver issues are for the court, not the arbitrator, to decide. While not discussing the issue at length, the decision references precedent to which one may turn to examine various types of arbitration waivers and the question of who resolves each. Second, while the court considers Walmart’s two motions to dismiss to be inconsistent with an argument for arbitration, it implies that the effect of those motions might be different if defendant merely sought “early dismissal of the case on jurisdiction and quasi-jurisdiction grounds.” (Citation omitted).
The lesson from McCoy and Hahn is the same as that discussed above in relation to McLaurin. If you have a defense in some way related to arbitration, don’t delay asserting it. Get the claim in front of the court as aggressively and early as you can.
State law arbitration in place of the FAA
In the fervor over the scope of the FAA’s exclusion of those “engaged” in interstate or foreign commerce, parties sometimes forget to look to alternative governing law – state arbitration acts. Nelson v. Gobrands, Inc., 2021 U.S. Dist. LEXIS 178277 (E.D. Pa. September 20, 2021), is a reminder that analysis does not stop with the Federal Arbitration Act. Nelson was a delivery driver who used his personal vehicle to transport products from the defendants’ warehouse in Illinois to customers within the state. He raised the issue of whether he was an employee or independent contractor and Gobrands sought to compel arbitration under the “Technology Services Agreement” which he signed. The Agreement contained an arbitration clause which provided that the provision was “governed” by the FAA. As is usual in such “last mile” cases, the issue was whether the exemption in Section 1 of the FAA for “contracts of employment of seamen, railroad employees or any other class of workers engaged in foreign or interstate commerce” precluded arbitration.
Judge Younge avoids that issue, holding that both Pennsylvania and Illinois arbitration statutes would mandate arbitration of the dispute, even if federal law did not. The particular relevance of the case is its reliance upon the Agreement’s severability clause to hold that the unenforceability of the arbitration provision under the FAA does not mean that the clause remains unenforceable under state law. In reaching this conclusion, the court cites to authorities from Illinois and New Jersey. The opinion quotes extensively from the Agreement’s arbitration, choice of laws, and severability provisions. For those drafting contract clauses which may be subject to the provisions of FAA §1, a review of these terms may help them tailor provisions which either foreclose or allow (depending on the drafter’s goal) reliance upon state, rather than federal, law.
The court also discusses the substantive unconscionability of a class action waiver in light of the costs of individual arbitration. Judge Younge addresses both the adequacy of the record which plaintiff presented in support of his cost claim and whether the “potential damage recovery could easily justify resolution by individual arbitration.”
Sham arbitration awards
Bozek v. PNC Bank¸ 2021 U.S. App. LEXIS 28040 (3rd Cir. September 17, 2021), affirms the District Court’s dismissal of motion to enforce an approximately $13 Million arbitration award issued by “Dalwickman Arbitration Services.” The case centers on another of the unilateral “contracts” under which complainants claim that silence constitutes an agreement to arbitrate. While the decision breaks no new ground, it is worth being reminded periodically that these “arbitration” cases follow a pattern of which institutional parties who might be targets need to be aware.
The big arbitration news out of the U.S. Supreme Court lately has been the withdrawal of the Servotronics appeal and, as a result, the on-going controversy over the applicability of Section 1782 discovery to foreign, private commercial arbitrations. However, there is still a significant case teed up for oral argument. Badgerow v. Walters, Dkt. No 20-1143, raises the issue of whether subject matter jurisdiction over a petition to confirm or vacate may be based solely upon a “look through” to a federal question in the underlying arbitration itself. Oral argument is set for November 2, 2021. A full set of documents, including briefs, is available through the Scotus blog, Scotusblog.com.
There are several other pending petitions that raise important issues.
Eni USA Gas Marketing LLC v. Gulf LNG Energy LLC, Dkt. No. 20-1462 – whether a court may refuse to enforce an arbitration agreement which provides for competence-competence when the arbitration may conflict with an earlier proceeding;
Branch Banking Trust Co. v. Servier County School Federal Credit Union, Dkt. No. 21-365 – whether the FAA overrides state law that forbids modification of an existing consumer contract to add an arbitration provision;
Morgan v. Sundance, Dkt. 21-325 – the validity of an arbitration-specific requirement that one claiming waiver must demonstrate prejudice;
Southwest Airlines Co. v. Saxon, Dkt. No. 21-309 – the applicability of the FAA’s Section 1 exemption to those unloading a vehicle containing interstate commerce, but who do not themselves operate the vehicle;
SNH SE Ashley River Tenant LLC v. Arredondo Dkt. No, 21-196 – the enforceability of a state’s arbitration-specific prohibition on a power of attorney’s authority to agree to arbitration of future claims; and
Fast Auto Loans v. Maldonado, Dkt. No. 21-31 – whether the FAA supersedes California’s McGill rule related to arbitration of public injunctive relief.
Again, see the ever-useful Scotus blog for the petitions for cert., the filings related to the cases, and anything else you might want to know about these cases.
I’ll be traveling this weekend, so it may be mid-week before I can weigh in, again. In the meantime, be safe.
David A. Reif