There are no blockbusters today, but the courts do consider several important issues. The most interesting cases address immunity and the recurring question of a defendant’s imposition of arbitration terms after a case is brought. There are also some interesting quick hits and a look at today’s SCOTUS conference docket, which might address some important arbitration questions.
Immunity may be one of an arbitrator’s favorite topics, and in Shamrock Fisheries, LLC v. Manning, 2021 U.S. Dist. LEXIS 233861 (D. Mass. December 7, 2021), Judge Burroughs reaffirms the principle.
The case arises out of a dispute regarding the sale of a fleet of fishing boats and licenses which, in turn, is rooted in an order from the National Oceanic and Atmospheric Administration requiring Carlos Rafael, the owner of the vessels and rights, to divest himself thereof. A trust was formed for the sale of the assets and the Trustee is a nominal party herein. While that sale was moving forward, non-parties thereto were arbitrating over a contingency agreement for Rafael to sell the same assets. The arbitrators in that proceeding issued an interim award that directed Rafael to advise the trustee not to sell the vessels or rights pendente lite. The parties in this case, who are not parties to the arbitration and whose purported right to the assets is related instead to the trusteeship, sued here for a declaration that they are not bound by the panel’s orders and that the panel has no authority to restrain the Trustee, in the exercise of his “fiduciary duties,” from allowing a sale to them. Since the relief would enjoin the panel’s actions, plaintiffs named the arbitrators as defendants.
The decision holds that arbitral immunity requires dismissal of the claims against the panel members. The immunity doctrine “covers all acts within the scope of the arbitral process” in order to “protect decision-makers from undue influence and protect the decision-making process from reprisals by dissatisfied litigants.” (Internal citation omitted). Thus, the key question in determining the scope of immunity is “whether the claim at issue arises out of a decisional act.” (Internal citation omitted). Here, the challenge essentially addressed the panel’s resolution of the scope of its jurisdiction, a “decisional” determination. Citing New England Cleaning Services, Inc. v. American Arbitration Association, 199 F. 3d 542 (1st Cir. 1999), the court holds that a “merely erroneous interpretation” of facts or law does not preclude the application of arbitral immunity. To the contrary, the court would exclude immunity only in extreme cases such as bribery of an arbitrator or an arbitrator’s refusal to return unearned pre-hearing deposits.
Nor does Judge Burroughs find it relevant that the plaintiffs here are not parties to the arbitration. She cites a long list of cases from across the country in which a court, while it may have reversed an arbitral award determining the rights of non-parties, did not enjoin the arbitrator’s conduct. The arbitrators, she holds, are not even proper parties in such a case as they have “no real interest in the outcome.”
As more states adopt and interpret the Uniform Arbitration Act, which specifically provides for arbitral immunity, the principles set forth in Shamrock will become ever more relevant. For arbitrators and arbitral institutions, this is a case to keep at hand.
Post-litigation adoption of arbitration provisions
It seems increasingly common for employers and other defendants in class actions to amend their contracts while litigation is pending in order to add arbitration provisions. Garcia-Alvarez v. Fogo de Chao Churrascaria (Pittsburgh) LLC, 2021 U.S. Dist. LEXIS 234194 (E.D. Tex. December 7, 2021), discusses when such amendments are effective.
Plaintiff purports to represent a nationwide class of “carvers” in the defendants’ forty restaurants and alleges that they were not paid minimum wages pursuant to the Fair Labor Standards Act. While the case was pending, defendant sent all its employees a “Mutual Arbitration Agreement,” which provided that all employment claims, including those asserted in this case, must resolved through binding arbitration. Further, the “Agreement” provided that continued employment would constitute acceptance of the provision. Plaintiff sought to invalidate the arbitration program, alleging that it constituted an “improper, coercive, and misleading communication” with members of the purported class. The court, Mazzant, J., rejects the claim as untimely, but without prejudice to its reassertion on a fuller record and after the filing of a motion to compel arbitration.
Regardless of the actual holding, dictum in the opinion is valuable to counsel seeking to institute arbitration of pending class or collective claims, as the court discusses criteria both as to the form of the agreement and the method of its presentation. The court cites to cases in which such arbitration mandates might be voided where they were rolled out in a “blitzkrieg fashion under a “false guise” and were addressed only to putative class members. Likewise, plans are suspect where “the setting was ripe with duress,” such as where potential plaintiffs met with upper-level management and corporate counsel, the agreements were presented “in a furtive manner,” and the company “painted a false picture of the lawsuit.” Here, on the contrary, the court finds that the proposed plan extended to all employees, not just the class of carvers covered by the litigation, and that the company may have already been considering the plan for several months before the lawsuit was brought. Thus, mandating arbitration may have been a neutral business decision, not related to the pending case. However, Judge Mazzant opines that several aspects of the arbitration “agreement” “cause the court concern.” The notice of the new arbitration program does not contain a description of the nature of the pending lawsuits so that it would be clear to employees what rights they may be waiving. Further, while there is “a small paragraph on the third page” which states that continued employment will constitute acceptance of the agreement regardless of whether the employee signs it, there is a large space for an employee’s signature. “Thus, the Agreement could reasonably be misleading to lay person because it does not require an employee to sign the agreement before it becomes effective, even though it contains a signature line.”
In short, although the case leaves the issue unresolved between the litigants, it is important reading for defendants who believe they can limit their exposure in a pending class or collective action by adding an arbitration clause to existing relationships.
Timing of a notice of arbitration provisions
In Ballou v. Asset Marketing Services, LLC, 2021 U.S. Dist. LEXIS 234949 (D. Minn. December 8, 2021)(Nelson, J.), the court harks back to the earlier days when computer programs came on discs wrapped in cellophane and courts addressed the adequacy of “shrink-wrap” disclosures of arbitration requirements. Here, as in those cases, the gravamen of the dispute is whether the parties agreed to arbitration at the same time that they entered into their underlying transaction or the terms were only presented after a deal was formed.
The decision arises out of a class action in which plaintiffs allege that Asset Marketing violated consumer fraud statutes by misrepresenting the quality and value of “coins” which they sold through various streams of marketing. The program was subject to a 2016 Consent Order relating to allegations that the defendant took advantage of an “elderly woman to sell hundreds of thousands of dollars in coins.” (Judge Nelson reiterates on several occasions that the plaintiffs in this case are also “elderly,” one of whom paid $630,000 for 127 coins between 2015 and 2019). Defendant moved to compel arbitration based on a provision in its terms and conditions, which AMS included on the invoice which accompanied the coins at the time of their delivery. However, the court finds, the contract for the purchase of the coins was consummated, not when the invoice arrived, but when the customer placed a telephone order and AMS agreed to ship the product. Thus, the arbitration clause and other terms accompanying the coins were “mere proposals for additional terms.” Since arbitration may only be imposed where both parties agree, not where it is sought by only one party to the contract, the court denies the motion of AMS to compel.
Post-award attorneys’ fees – Toddle Inn Franchising, LLC v. KPJ Associates, LLC, 2021 U.S. Dist. LEXIS 234992 (D. Me. December 8, 2021), addresses the defendant’s liability for attorneys’ fees which Toddle incurred in seeking to enforce an arbitration award in its favor. KPJ argued that the arbitrator should decide the post-award fee issue under an agreement which provided that “[a]ll disputes between or among the parties. . . shall be settled by arbitration,” that “[t]he arbitrator may also award attorney fees,” and that the “arbitrator shall have continuing jurisdiction to implement his/her decision.” The court holds that, while “the contract here does let the arbitrator make an award of attorneys’’ fees and costs, it does not say only the arbitrator may make such an award.” (Emphasis in original). While Chief Judge Levy does not discuss why he chooses to retain consideration of the fee issue for himself, he refers to the post-award fees as “clearly judicial in nature.” Further, one senses that the court is anxious to bring the matter to a conclusion, since Chief Judge Levy’s order that the parties submit to arbitration was entered three years earlier, in December 2018; the arbitrator had issued his or her award in 2019; and the matter had already been to First Circuit, which affirmed the earlier judgment.
Container theory and challenges to arbitration clauses – Two cases are reminders that a party seeking judicial resolution of the conscionability of arbitration provisions must challenge the arbitration provision itself, not the agreement in which it is contained, Gerges v. Wells Fargo Bank, N.A., 2021 U.S. Dist. LEXIS 233765 (D.N.M. December 7, 2021)(Strickland, J.); Rock Hemp Corp. v. Dunn, 2021 U.S. Dist. LEXIS 233629 (W.D. Wisc. December 7, 2021)(Peterson, J.) Otherwise, the determination of unconscionability is one for the arbitrator.
The Court may resolve in today’s conference whether it will hear several important arbitration cases. The Justices have reset from last week the consideration of cert. petitions in Alix Partners, Dkt. No. 21-158, and ZF Automotive, Dkt. No 20-401, which address the Section 1782 discovery question left unanswered after the withdrawal of Servotronics. The Court will give a first consideration to Southwest Airlines, Dkt. No. 21-309, which could shape the limits of the FAA’s exemption from coverage of workers in interstate and foreign commerce, as it involves an airlines ramp supervisor who only occasionally actually handled baggage. Finally, for California lawyers, two of the PAGA cases, First Loans, Dkt. No 21-31, and Viking River Cruises, Inc., Dkt. No 20-1573, are up for consideration. Orders come out Monday, so there will be more details in “Highlights” next week.
Have a good weekend.
David A. Reif