The lead case today is a fifty-four-page split decision from the Ninth Circuit that raises important issues as to the focus of determining whether performance under an arbitration agreement should be excused because of economic duress and the relevance of the circumstances under which it was executed.  I suspect that it will be both widely cited and distinguished.  Two other cases address whether something specifically designated not be an arbitration is one at heart and the application of arbitration to an ERISA claim.

Unconscionability; farmworker contracts

Martinez-Gonzalez v. Elkhorn Packaging Co., LLC, 2021 U.S. App. LEXIS 32724 (9^th Cir. Nov. 3, 2021), can be read on many levels.  As a civil procedure question, it addresses the degree to which a Court of Appeals really gives deference to a District Court Judge’s findings of fact and what “clearly erroneous” means in fact-finding review. As a sociology case, it gives insight into the circumstances facing migrant field workers. On a judicial relationship basis, it demonstrates dissention on an appellate panel so severe that one judge accuses others of “gaslighting.”  For those interested in arbitration law, Martinez-Gonzalez demonstrates the high bar which one faces in setting aside an arbitration agreement based on a party’s economic duress.

Plaintiff was a Mexican agricultural worker whom defendant employed under an H-2 visa.  He brought this class action alleging that Elkhorn violated state and federal labor and wage laws.  Defendant moved to compel arbitration pursuant to an employment agreement which plaintiff signed.  The District Court, Chen, J., held an evidentiary hearing, made factual findings, and concluded that the agreements resulted from Gonzalez’s economic duress.  Accordingly, Judge Chen denied the motion to compel arbitration; this appeal ensued.

The majority, Bumatay, C.J., writing for himself and Circuit Judge Siler of the Sixth Circuit sitting by designation, parses the factual findings and holds that they either do not support the District Court’s legal conclusions or are clearly erroneous.  Those findings of fact centered on the circumstances surrounding the signing of the agreement, which Judge Chen described as follows.  Elkhorn arranged for plaintiff’s transportation from Mexico, where he was supporting a family of seven or eight people on approximately $150 per week, and obtained his H-2 visa. When he was already in the U.S. and at the end of a full day picking crops, plaintiff, together with a group of co-workers, was lined up in a parking lot.  After a wait of approximately forty minutes and with others still behind him, plaintiff was “directed” to sign employment documents that included the arbitration agreement. The documents were in Spanish, his native language.  The supervisor “flipped through the pages of the documents and directed [plaintiff] where to sign.”  The supervisor “urged the migrant workers to hurry.”  The supervisor did not provide Plaintiff with a copy of the documents to take with him for later review.  The District Court specifically found that plaintiff “reasonably believed that he had no option but to sign the documents presented to him to continue working for Elkhorn.  He also believed that the H-2A visa limited him to working for Elkhorn.”

The majority holds and the dissent seems to agree that California law requires two elements before an agreement may be set aside an agreement based on economic duress.  One party must commit a “wrongful act,” and that act must be sufficient to “cause a reasonably prudent person faced with no reasonable alternative” to agree to the contract.  The majority finds that the record below does not support such a finding.  Judge Bumatay focuses on the agreement itself, rather than the circumstances of its signing.  He finds that Elkhorn committed no “wrongful act,” which, he opines, includes the assertion of false claims, bad faith threats to breach a contract, and threats to withhold payment of an acknowledged debt.  Such acts share the common thread that they “do not include arrangements that ‘served a practical business function.’” (internal citation omitted).  Here, the majority holds, Elkhorn  “simply asked [plaintiff] to sign a commonplace agreement to bring disputes to the arbitrator.”

In addition to holding that the factual findings do not support a legal conclusion that there was a “wrongful act,” the majority overrules as clearly erroneous the District Court’s factual determinations that plaintiff had “no reasonable alternative” to signing the agreement.  Judge Bumatay characterizes Martinez-Gonzalez’s fear of losing his job as “speculation about unfavorable outcomes,” which “cannot show economic duress.” “We do not think a ‘reasonably prudent person’ would just assume an agreement is mandatory – at least not without someone saying so or even asking.”

In dissent, Circuit Judge Rawlinson opines that the majority fails to give adequate deference to the District Court’s findings of fact. Accordingly, she finds that “my colleagues in the majority pay lip service to the deference we owe to the district court’s factual findings, while simultaneously making their own factual findings based on their own weighing of the evidence.”  Taking the facts found by Judge Chen as true, Judge Rawlinson focuses on the circumstances surrounding the signing of the agreements in a parking lot, with others lined up behind the plaintiff waiting to sign, after a full day of work, and with the risk of a return to Mexico if employment was lost.  Based on those considerations and the high deference given to a District Judge’s findings, she would affirm the District Court’s refusal to compel arbitration.

The case raises two interesting issues for those challenging arbitration agreements.  First, although it may be dictum, the majority “question[s] whether extracting an arbitration could constitute a ‘wrongful threat’ under California law.” (Emphasis added).  Does the Court of Appeals mean to set a per se standard, holding that arbitration agreements are immune from “wrongful threat” challenge?   Second, to what extent is the setting in which an arbitration agreement is signed any longer relevant in the Ninth Circuit to the agreement’s enforceability?  Does the court mean that a judge addressing an alleged economic distress claim must focus solely on whether arbitration is “commonplace” in a given commercial or consumer setting?  Future litigation will undoubtedly address these questions.

What is an “arbitration?”

The October 22, 2021, Highlights discussed Martinique Properties, LLC. v. Certain Underwriters at Lloyd’s London, 2021 U.S. Dist. LEXIS 199497, which held that a property damage appraisal is an arbitration for purposes of review under the Federal Arbitration Act. Schwab v. Missionside, LLC, 2021 U.S. Dist. LEXIS 213122 (D.D.C. Nov. 4, 2021)(Boasberg, J.), raises a similar question regarding an accountant’s determination of amounts owed under a purchase agreement.

The parties entered into a Membership Interest Purchase Agreement under which Missionside bought a media company from Schwab.  The agreement provided that any amounts in dispute regarding adjustments to the price “shall be submitted for resolution to Aronson, LLC (the “Independent Accountants”) who, acting as experts and not arbitrators, shall resolve the Disputed Amounts. . . .” That determination “shall be conclusive and binding upon the parties hereto.”  Missionside claimed that Schwab failed to disclose a $500,000 obligation to its landlord and that the price should be adjusted to reflect that debt.  When Schwab refused, Missionside invoked the referenced provision.  Schwab declined to submit the issue the accountants and brought this action, including a claim for breach of the Purchase Agreement; defendants moved to dismiss those claims in favor of the accounting remedy.  Treating that motion as an application to compel arbitration, the court directs that the breach of contract claim must be referred to the accountants for resolution.  Citing authorities from several jurisdictions, including one which helpfully “collect[s] cases under federal and state law,” Judge Boasberg opines that arbitration is a process which “commits the parties to resolve any disputes before a neutral third party.”  Here, despite the label which the agreement attaches to the process, the court holds that the submission of the dispute to the accountants meets that definition.  The agreement’s language reciting that the accountants “act[] as experts and not arbitrators,” the court holds, deals only with the process by which they reach their decision. Citing Omni Tech Corp. v. MPC Solutions Sales, LLC, 432 F. 3d 797 (7^th Cir. 2005), the court opines that this provision “means that [they] will resolve the dispute as accountants do – by examining the corporate books and applying normal accounting principles plus any special definitions the parties have adopted – rather than by entertaining arguments from lawyers and listening to testimony.”  (Brackets in original).  The interesting issues for arbitration practitioners in this case will come up later if either party is unhappy with the accountants’ findings.  Will the court, as did Judge Buescher in Martinique, apply the Federal Arbitration Act to determine the timing of any challenge and the scope of review?

Limitations of ERISA arbitrations

Section 409(a) of the Employee Retirement Income Security Act (“ERISA”) provides that a fiduciary who breaches its duties is liable to the Plan for resulting losses. Section 502(a)(2) permits a “participant, beneficiary, or fiduciary” to bring an action to recover “appropriate relief.”  Cedeno v. Argent Trust Co., 2021 U.S. Dist. LEXIS 212926 (S.D.N.Y. Nov. 2, 2021)(Koeltl, J.), addresses whether an arbitration clause is enforceable if it only permits the claimant to seek relief based on his or her personal losses.

The case arises out of defendants’ alleged purchase assets for the Plan at more than fair market value. Cedeno brought suit to require the defendants to “make good to the Plan the losses resulting from the breaches of ERISA and to restore to the Plan any profits that the defendants made through use of the assets of the Plan.”  (Emphasis added).  Defendants sought to enforce an arbitration provision contained in the Plan documents requiring that any arbitration recovery be “limited to (i) the alleged losses to the Claimant’s Accounts . . . so long as such remedial or equitable relief does not include in benefits . . . to any Employee, Participant or Beneficiary other than the Claimant.” (Emphasis added).  Relying on Supreme Court precedent that “prospective waivers of statutory rights are impermissible,” Judge Koeltl holds that this limitation on recovery conflicts with the “ERISA-conferred right to a plan-wide remedy.”   As the parties stipulated that the limitation on recovery was not severable so as to preserve the balance of the arbitration obligation, the court denies the motion to compel arbitration.

Enjoy your weekend.  Here in the New York environs, the leaves are passing their peak colors and fall has definitely set in.

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