Only two cases on the board today.  Interestingly, they take contrary positions on the ability of a District Court to compel arbitration at a venue outside its District.

Avoiding a Finding of Unconscionability

Two recurring claims of unconscionability which plaintiffs raise in opposition to a motion to compel arbitration are the location of the proceeding and the allocation of costs and fees.  In Holandez v. Entertainment, LLC., 2022 U.S. Dist. LEXIS 24977 (C.D. Cal. January 18, 2022), Judge Bernal resolves these issues by simply severing the allegedly objectionable provisions.

In this collective action, plaintiff alleged that defendants violated the Fair Labor Standards Act and various parts of the California Labor Code.  Defendants moved to compel arbitration under a provision in Ms. Hernandez’s terms of employment; plaintiff responded that the arbitration provision is unconscionable.

Judge Bernal grants the motion to compel.  However, he specifically addresses two of plaintiff’s claims and purports to cure the alleged deficiencies.  The agreement required that the arbitration take place in Florida.  The court “agrees [with Plaintiff] that this provision would impose too great a burden on Ms. Hernandez,” who resides in California.   In addition to accepting the plaintiff’s concerns as to the difficulties of her travel across the country, the court claims that it has authority to move the place of arbitration to California under Section 4 of the Federal Arbitration Act.  That section provides that “the hearing and proceedings, under such agreement, shall be within the district in which the petition for an order directing such arbitration is filed.” 9 U.S.C. § 4.  However, Judge Bernal does not discuss how he reaches his conclusion beyond citing the statute, and there is a split of authority as to how the provisions of Section 4 interact with a contract requiring arbitration in specific venue.  Specifically, does Section 4 mean that the court may move the arbitration into its own district from the contractual seat or does it prohibit the court from compelling any arbitration which would be set outside its borders, thus requiring the proponent of the arbitration clause to seek an order in the District Court which encompasses the  location designated for the arbitration? See Deardorff v. Cellular Sales of Knoxville, Inc., 2022 U.S. Dist. LEXIS 23870, *16 (E.D. Pa. February 9, 2022), discussed below, for a court taking the latter position.

Judge Bernal also resolves plaintiff’s claim that a provision of the agreement which awards all costs and fees to the prevailing party is unconscionable.  He implicitly holds that the issue is one of state law and relies upon the five-fold test in Armendariz v. Foundation Health Psychcare Servies, Inc., 24 Cal. 4^th 83 (2000), for determining substantive conscionability of arbitration provisions in employment agreements.  The fifth Armendariz test holds that, to be enforceable, such an agreement  must not “require the employee to bear costs unique to arbitration.”  The Court opines that a loser-pays provision violates this fifth prong, presumably because it clashes with the American rule where each party bears its own attorneys’ fees in litigation.  However, rather than finding the agreement unconscionable, Judge Bernal simply declines to enforce this provision.

Judge Bernal’s opinion is highly practical.  It finds a way to enforce an arbitration agreement by simply expunging those clauses which might make it unconscionable.  However, the court never addresses, either through citation or otherwise, the key question in that striking process.  Where does the court get the authority to “blue line” the parties’ agreement?

Delegation of Threshold Questions

As mentioned above, Deardorff v. Cellular Stores of Knoxville, Inc., 2022 U.S. Dist. LEXIS 23870 (E.D. Pa. February 9, 2022), holds that a District Court does not have the authority under Section 4 of the FAA to compel arbitration outside of the District in which it sits. Since the parties’ arbitration clause required that the proceeding take place in North Carolina, Judge Marston holds that she, as a judge sitting in Pennsylvania, may not compel arbitration.  However, that part of the opinion applies only to one plaintiff and is not the decision’s main thrust.

Rather, the case is an important summary of the circumstances under which the parties have delegated to the arbitral tribunal gateway questions, such as arbitrability, which the court normally resolves.  Over the course of twenty pages, the court addresses virtually any issue related to that question.

As a threshold issue, the court applies the standard set forth in Federal Rule of Civil Procedure 12(b)(6) to the resolution of the motion to compel.  Since “there would be no reading of the complaint, no matter how friendly to [the plaintiff], that could rightly relieve her of the arbitration provision in the Account Agreement,” (internal citation omitted)(brackets in original), the court moves on to consideration of the issues on the merits, without any evidentiary hearing

The court first discusses the “clear and unmistakable evidence” standard for proving the parties’ intent to delegate laid out in Henry Schein, Inc. v. Archer & White Sales, Inc., 139 S. Ct. 524 (2019).  Judge Marston finds that the language of the arbitration agreement, which provided for the arbitrator to resolve “the interpretation, validity or enforcement” of the agreement, and the incorporation of the JAMS rules both demonstrate that the parties intended to leave arbitrability issues to the arbitral tribunal.

Judge Marston further holds that plaintiff has “conflate[d] the questions of whether the parties clearly and unmistakably delegated gateway issues of arbitrability to the arbitrator and whether the party opposing arbitration challenged the delegation clause specifically. . . .”  Addressing in depth the “container” theory and the “nesting” analogy, she opines that a challenge to the overall contract is insufficient to challenge the arbitration mandate contained therein; likewise, a challenge to the arbitration provision does not constitute a challenge to any delegation clause which it may include.   “[T]he arbitration provision is distinct from the delegation clause (the antecedent agreement, nested within the arbitration provision), so that it is of no import that Plaintiffs challenged the arbitration provision more generally.”  Here, the court holds, plaintiffs challenged only the arbitration clause in its entirety, not the delegation clause “nested” therein.  As an analogy, consider the classic Russian doll, which contains ever smaller items, set within each other.  Judge Marston holds that the plaintiffs only challenged the larger doll, while it had to address their objections to the doll contained therein.

Having walked through the analysis in depth, the court grants the motion to compel arbitration as to the named plaintiff.

If I were teaching arbitration to a law school class, Deardorff would be my case for a couple of days when teaching delegation.  It reads like a treatise and contains the relevant SCOTUS cases, as well as citations from lower courts.  You should definitely put this opinion in your arbitration notebook and use it as both a starting point for research and as a refresher on the issue.

Literature

If you are member of the ABA’s Dispute Resolution Section, be sure to check out the January issue of Dispute Resolution Magazine. It is the magazine’s 100^th issue and has interviews with  practitioners about their experiences in the ADR field.  On substantive issues, there is a great article by James Coben of Mitchell Hamline School of Law on litigation arising out of mediation.  If you are not a member of the Section, you should join; you are losing terrific education content (both formal and informal) and networking opportunities.

To those of you in Cincinnati, congratulations on a great run. With the tools you have, this year will not be a fluke.  See you all next issue.

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