Today’s most interesting cases ask whether some common contract provisions are unconscionable in the context of an arbitration and give an early look at the impact of a significant Ninth Circuit employment agreement case. Also, for those interested in civil procedure, the ZF Automotive case, regardless of the merits of the Section 1782 claims, demonstrates creative thinking.
Limitations on damages as unconscionable
Ward v. Crow Vote, LLC, 2021 U.S. Dist. LEXIS 199369 (October 6, 2021)(Selna, J.), arises from a charity fund-raising “contest” called “Favorite Chef.” The unusual format – which did not involve any taste-testing or skills judgment – provided that the winner was the person who collected the most “votes,” which could be purchased by making a donation to charity. While the opinion does not set forth the nature of plaintiffs’ factual claims, they sought damages under the federal RICO statute and the California Unfair Competition law.
Defendants moved to compel arbitration under a provision on the contest’s website. The relevant terms and conditions contained a limitation on damages (“[t]o the extent damages are awarded, the arbitration award shall be limited to actual out-of-pocket expenses incurred)” and a confidentiality provision (“[e]xcept as may be required by law, neither a party nor an arbitrator may disclose the existence, content or results of any arbitration hereunder without the prior written consent of both parties).” Judge Selna holds that those provisions render the agreement substantively unconscionable.
Since RICO allows a trebling of the claimants’ damages, Judge Selna finds that the agreement’s limitation of any recovery to “actual out-of-pocket expenses” would result in a potential reduction in plaintiffs’ recovery by two-thirds. Citing to authorities in the District of Arizona, Cristales v. Scion Group, LLC, 478 F. Supp. 3d 845 (D. Ariz.), appeal dismissed 2020 U.S. App. LEXIS 30430 (9th Cir. Sept. 23, 2020), and Wernett v. Service Phoenix, LLC. 2009 U.S. Dist. LEXIS 62593 (D. Ariz. July 6, 2009), the court holds that such “limitations on remedies [are] substantively unconscionable where they deny a litigant the opportunity to vindicate their rights.” The court further holds that the confidentiality clause renders the arbitration provision unenforceable, since its application to the parties “unfairly limits a prospective plaintiff’s ability ‘because it prevents Plaintiffs from discussing their claims with other potential plaintiffs and from discovering relevant precedent to support their claims.’” (quoting Pokorny v. Quixtar, Inc., 601 F. 3d 987 (9th Cir. 2010).
The case raises interesting questions. Does Judge Selna really mean to hold that an arbitration clause may never include limitations on damages, even though such provisions regularly appear in both consumer and commercial agreements? Would it be different if the limitation had appeared somewhere in the agreement other than in the arbitration clause itself? Since confidentiality is one of the drivers behind many parties’ invocation of arbitration, what limitations on disclosure might the court find acceptable? Is this case really just an outlier?
An interpretation of Chamber v. Bonte
In a widely reported split decision, Chamber of Commerce v. Bonta, 2021 U.S. App. LEXIS 27659 (9th Cir. September 15, 2021), the Ninth Circuit reversed and remanded a District Court’s holding that Section 432.6 of the California Labor Code, which prohibited an employer from threatening to terminate an employee for refusing to consent to the waiver of “any right, forum, or procedure” available for violation of California labor laws, conflicted with the Federal Arbitration Act and was unenforceable. Harper v. Charter Communications, Inc., 2021 U.S. Dist. LEXIS 197768 (E.D. Cal. October 13, 2021), addresses the implications of that decision.
Plaintiffs, former Charter employees, brought this class action alleging various violations of the California Labor Code. Charter moved to compel arbitration under a provision of its employment dispute resolution program, known as the Solution Channel Agreement. Relying on Chamber of Commerce, plaintiffs contended that, since consent to the agreement was a mandatory condition of employment, the provision conflicted with the FAA and was unenforceable. Judge Shubb reads Chamber of Commerce more narrowly, holding that it merely subjects employment arbitration agreements to the same “generally applicable contract defenses[s]” as non-employment agreements. “The most that Chamber of Commerce does to aid employees who seek to challenge arbitration agreements is simply to affirm the applicability of the FAA’s saving cause to arbitration agreements under Section 432.6.” Since the court elsewhere in the opinion finds such defenses to be inapplicable, it grants the motion to compel arbitration.
The effect of failing to advance fees
Cota v. Art Brand Studios, LLC, 2021 U.S. Dist. LEXIS 199325 (S.D.N.Y. October 15, 2021), is the epitome of Hobson’s Choice, as it raises the question of whether a party must advance its opponent’s share of arbitration fees or lose the right to arbitrate the dispute.
Plaintiffs are artists who entered into agreements with Art Brand under which the latter agreed to market their works, in return for which the artists’ rights of distribution were limited. The agreement contained an arbitration clause, invoking the rules of the American Arbitration Association. A dispute arose. The artists claimed that Art Brand failed to sufficiently market their works, while Art Brand claimed that the artists failed to produce the requisite number of “acceptable works” and violated non-complete provisions. Art Brand invoked the arbitration provision, and the parties submitted their demands, answers, and counterclaims in arbitration. Each party initially advanced AAA’s administrative fees and the arbitrators’ deposits, until the artists received bills totaling approximately $230,000. The artists claimed that Art Brand’s failure to market the paintings and the effects of the COVID-19 pandemic made it impossible for them to pay those amounts. Art Brand, in turn, refused to “’front’ the Artists’ portion of the AAA dues” and asked the arbitration panel to suspend the arbitration. In response, the arbitral panel invoked AAA’s Commercial Rule 57(f) and issued a Case Management Order suspending the arbitration and providing that the proceedings would be terminated if payment was not made in approximately ninety days. The order specifically provided that Art Brand could advance the payment on behalf of the artists and include that amount in its claim. Art Brand declined the invitation, and the AAA terminated the proceeding. The artists, then, brought this litigation, asserting the same claims as they raised before the AAA; Art Brands moved to compel arbitration.
Relying on Section 3 of the FAA, Judge Liman denies the motion. The statutory provision requires the court to stay an action which would be referable to arbitration “until such arbitration has been had in accordance with the terms of the agreement, providing the applicant for the stay is not in default in proceeding with such arbitration.” Interpreting the italicized language, the court holds that the parties’ arbitration ”has been had.” Applying both Circuit and District Court decisions, the court first holds that an arbitration “has been had” when “an arbitral panel has terminated the proceeding for failure to pay without conducting further proceedings or granting an award.” Since the court cannot force the AAA to ignore its own rules and reopen a closed case, allowing a stay in such circumstances would “place the parties in a perpetual state of uncertainty – unable to proceed with the arbitration pursuant to the tribunal’s rules but also unable to proceed with a litigation because the arbitration has not reached its conclusion.” Further, Judge Liman rules that Art Brands was in “default in proceeding with such arbitration” when it rejected the panel’s proposal that it consider advancing the artists’ share of the fees. The court opines that “one way that an applicant can ‘default in proceeding with such arbitration’ is by waiving the right to arbitrate.” (citation omitted). “Art Brand had a choice – it could pay both fees if it wanted to prosecute the claims and take the risk that it might never be able to recover the share of fees owned by the Artists or it could elect not to pay either set of fees and allow the arbitration (including its claims) to terminate. It elected the latter. . . Defendant acted inconsistently with its arbitration right.”
In large arbitrations, the impact of the court’s position is significant. Here, for example, Art Brands was in the position where it would have to risk almost a quarter of million dollars in order to arbitrate. The interesting issue the case raises is the allocation of that risk. Is a “perpetual state of uncertainty” inherently worse than shifting all of the financial risk to one party? Does it matter whether the fees arise from the claims of the party to be burdened or result from a counterclaim against which it is defending? What are the elements that need to go into such a consideration?
Section 1782 and SCOTUS
Last Wednesday’s Highlights discussed a move by ZF Automotive US to seek prejudgment certiorari to the Sixth Circuit on the issue which would have been raised in the Servotronics appeal, ZF Automotive, Inc. v. Luxshare, Ltd., Dkt. No 21-401. As would be expected, Luxshare opposed the application, arguing, in part, that SCOTUS should follow the traditional route of awaiting a decision from the Circuit Court before undertaking review. Reuters reported on Friday evening that, in order to expedite its request, ZF asked the Sixth Circuit for summary affirmance of the District Court order and that it was dropping any case-specific objections to the District Court’s decision. According to PACER, as of this writing the Sixth Circuit has not acted on that motion, Luxshare, Ltd. v. ZF Automotive, Inc., Dkt. No. 21-2736 (6th Cir.).
As a Pittsburgh native, who bleeds black and gold, Sunday night’s game was worth staying up late. But, since I now live in the New York ambit, the pain of watching the Giants can be overwhelming. Have a good week, anyway.
David A. Reif