Today, the Sixth Circuit looks at the effect of arbitration clauses on different types of ERISA claims, while the Seventh deals with a vague arbitration award. Two District Courts impose sanctions for alleged misconduct by arbitrating parties.
ERISA Claims and Arbitration
Hawkins v. Cintas Corp., 2022 U.S. App. LEXIS 11377 (6th Cir. April 27, 2022), addresses whether a provision in an employment agreement requiring that employees arbitrate their disputes and “only submit their own, individual claims [in that proceeding] . . . and not seek to represent the interests of any other person” prohibits class litigation seeking recovery for losses to the entire fund.
Plaintiffs brought this action on behalf of all participants and beneficiaries in Cintas’s retirement plan. They allege that the plan only allowed them to invest in actively managed funds, rather than what they considered to be less expensive passively managed funds, and charged “imprudently expensive” record keeping fees. Cintas moved to compel arbitration on an individual basis based on the plaintiffs’ employment contracts. The District Court denied the motion, and the Sixth Circuit affirms.
Judge Boggs, writing for himself and Judges Gibbons and Nalbandian, holds that the plaintiffs are acting in a representative capacity. Invoking “common-law trust principles,” the court opines that the actions are derivative. Thus, the claims which Plaintiffs assert belong to Plan, not the individuals, and the arbitration clause which covers “the Employee’s rights or claims” is inapplicable. (Emphasis added). “It is the plan that takes legal claim to the recovery, suggesting that the claim really ‘belongs’ to the Plan. And because § 502(a)(2) claims ‘belong’ to the Plan, an arbitration agreement that binds only individual participants cannot bring such claims into arbitration.” In dictum¸ the court opines that “a different sort of claim might change the analysis.” In nuances that are more relevant to ERISA practitioners than to the more general arbitration audience of “Highlights,” the court draws a distinction between claims, such as this one, under § 502(a)(2), which seek recovery for the breach of fiduciary duty, and those under § 503(a)(1)(B) for benefits due to the participant or beneficiary under the plan. “Had Plaintiffs brought a claim under § 503(a)(1)(B), or a claim that should have been brought under that section, then it might be the kind of individual claim subject to arbitration under an individual participant’s employment agreement.” The court leaves that issue for another day.
The Seventh Circuit addresses the remedies available on review of an unusually vague award. In an award that “all agree. . . was not a picture of clarity,” the arbitrator ordered that Roe pay approximately $500,000 to Nano “in such manner as Roe chooses.” Nano sought an order requiring defendant to turn over certain shares representing ownership in Nano to satisfy the award. The District Court denied the request; the Court of Appeals reverses, Nano Gas Technologies, Inc. v. Roe, 2022 U.S. App. LEXIS 11127 (7th Cir. April 25, 2022)(St. Eve, J., writing for herself and Judges Rovner and Jackson-Akiwumi).
The court opines that it must exercise caution in considering the meaning of the arbitrator’s language, as “the wrong interpretation may inadvertently alter the award.” Therefore, “we must enforce the award as written and ‘if possible, resolve the apparent ambiguities by examining the arbitrator’s opinion and the record.’” (Internal citation omitted). In that context, the court holds that “in such manner as Roe chooses” means only that he may decide how to make payment, not when, to do so. “The ‘manner’ Roe chooses does not mean the ‘time’ Roe chooses. . . . Roe cannot refuse to turn over his only identifiable asset, choose hypothetical forms of payment that may never come to fruition, or require Nano Gas to wait until he dies. Both the language of the arbitrator’s opinion and common sense easily resolve this issue.”
The court adopts an interesting remedy. It recognizes that courts may remand to the arbitrator to clarify an award. However, here, the arbitrator entered his or her award over five years before the decision, and “at oral argument, Roe’s counsel could not confirm the arbitrator’s whereabouts.” Therefore, finding that “the award’s language compels only one conclusion, the parties need not track down the arbitrator to confirm the obvious. . . . Nano Gas has waited long enough.” The court reverses the District Court’s decision regarding Roe’s discretion to satisfy the $500,000 and remands for further proceedings, presumably the entry of an order compelling the turnover. For practitioners, this case is worth keeping as potential fodder for those occasions when they want to avoid a case being remanded to an unfriendly arbitrator.
Refusal of Forum to Accept Arbitration
Arbitration agreements often provide that a particular arbitration provider will manage the proceeding. What if the institution refuses to accept the case? Bedgood v. Wyndham Vacation Resorts, Inc., 2022 U.S. Dist. LEXIS 75694 (M.D. Fla. March 30, 2022), addresses the issue. (For some reason, although decided a month ago, the case was just posted to LEXIS this week).
Defendants are in the time-share industry; plaintiffs are a group of purchasers who claim that they were unable to book accommodations at their desired resorts. Their time-share agreement with Wyndham provided for arbitration before the AAA. However, when Plaintiffs Bedgood, Brandon and Heil-Brandon filed for arbitration, the institution refused to administer the claim because Wyndham had previously “failed to comply with AAA’s policies regarding consumer claims.” Those plaintiffs, together with five others, brought this action under various consumer fraud statutes. Wyndham moved to compel arbitration.
The court, Byron, J., denies the motion, pursuant to the Federal Arbitration Act. Section 3 thereof requires that the court “shall on application of the parties stay the trial of action 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.” (Emphasis in opinion). Adopting a definition from Black’s Law Dictionary, the court opines that “[d]efault is defined as when a party is deemed to be neglectful in the arbitration proceedings. It is logical that a party is in default when it has failed to comply with the arbitrator’s policies.” (Emphasis in opinion).” Since defendants, as the party moving to compel, are “in default in proceeding with [the] arbitration,” the court holds that Section 3 precludes them from compelling arbitration
The court, then, turns to Section 4 of the FAA, which provides “[a] party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement, may petition for an order to compel.” (Emphasis in opinion). Since Bedgood, Brandon, and Heil-Brandon filed with the AAA, the court opines that they have not refused to participate in arbitration. The Court distinguishes Kaspers v. Comcast Corp., 631 F. App’x 779 (11th Cir. 2015), upon which Wyndham relied. There, Judge Byron opines, the parties’ agreement provided that, if the contractually designated arbitrator would not enforce the arbitration agreement, “the parties shall agree upon a substitute arbitration organization.” Here, the agreement does not include an option for the appointment of any entity other than the AAA to act as the arbitral tribunal. In a footnote, the court opines that an “unavailable forum,” under the provisions of Section 5 of the FAA, which permits the court to appoint an arbitrator, is one which “no longer exists or does not even handle private arbitrations.” Here, while it declined to handle the case, the FAA is very much around. In another footnote, the court takes the practical approach that, even though, the five additional plaintiffs have not actually filed for arbitration, it allow them to move forward with the litigation, without first filing for arbitration. “The court values substance over formality and it does not find it necessary for these select Plaintiffs to go through the same procedures of applying to arbitrate their claims and then being sent back to this court.” In summary, “while the claims may have originally been arbitrable under the Agreement, Defendants’ actions have foreclosed the arbitration of these claims under the plain language of the FAA.”
Drafting lesson – In drafting form arbitration contracts, consider including a provision for a backup arbitral forum in case the entity designated in the agreement refuses to accept the matter. Better yet, abide by the forum’s rules and avoid the problem in the first place.
While we all recognize that a motion to vacate an award under the “manifest destiny” standard or one similar thereto is a long-shot, those cases keep appearing. The publication of QAD Inc. v. Block & Company, Inc., 2022 U.S. Dist. LEXIS 75409 (D. Del. April 25, 2022), may slow that trend. QAD sought to confirm an award in its favor in the amount of approximately $750,000; Block moved to vacate. In support of its motion, Block alleged that the arbitrator exceeded his authority by ruling that a limitation of liability provision in the parties’ agreement was unconscionable. Magistrate Judge Fallon denies the motion to vacate, invoking the common rubric that, “[e]ven if the arbitrator made a mistake in following [a particular authority], that ‘mistake’ is not enough to vacate the award under § 10(a)(4) of the FAA.” “The arbitrator’s decision,” she opines, “arises from the essence of the contract, i.e., his interpretation of an unambiguous limited liability provision and unenforceability as unconscionable under Delaware law. This court cannot relitigate the merits of unconscionability, regardless of whether the arbitrator reached the correct decision.”
So far, so good. This is an expected judicial response to a motion to vacate. However, Magistrate Judge Fallon goes a step further and imposes attorneys’ fees on Block. Rejecting Defendant’s claim that attorneys’ fees are not appropriate because “it supported its position with authority,” the court finds that “Block did not have a reasonable chance to prevail on its motion to vacate because district courts have extremely limited authority to vacate arbitration awards.” She goes so far as to remind any reviewing court that “the award of attorney’s fees is committed to the discretion of this court and may only be reversed on appeal if it is determined to be an abuse of discretion.”
There may be history here that is not clear in the opinion. However, if not, this case is troublesome. While it makes sense to give an arbitrator a long leash in order to keep the process from becoming as complex and hidebound as litigation, parties should not be afraid of challenging an award that they believe goes too far. The risk of paying your opponent’s attorneys’ fees generates that fear.
Spring is finally coming to the Northeast. Wherever you are, enjoy your weekend.
David A. Reif, FCIArb
 Plaintiffs brought their action under this section of ERISA.
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