It is baking in New York City, and my family is on vacation in London, where it’s even hotter. The heat spell seems to have reached world-wide. So, grab a cold beverage. Here are some recent highlights from the federal ADR scene.
Handbooks and contracts
Mendez v. Securitas Security Services, USA, Inc., 2022 U.S. Dist. LEXIS 124755 (D. Kan. July 13, 2022)(Crabtree, J.), is a reminder of the importance of tying employment handbook provisions related to dispute resolution to a specific agreement to arbitrate.
Ms. Mendez brought this Title VII action against her former employer, alleging sexual and racial harassment. Securitas moved to compel arbitration pursuant to a provision in its employment handbook. In support of the motion, it introduced an acknowledgement that Plaintiff had previously signed, stating that she had received a copy of the handbook. The handbook discussed a “Mandatory Arbitration Program,” which Judge Crabtree specifically points out took up only “three paragraphs spread across two pages” of that seventy-two-page document. The Handbook explained that “the terms and conditions of the Arbitration Program are contained in the Company’s Dispute Resolution Agreement, which is provided to all employees.” However, per the Court, “neither plaintiff nor defendant signed the Dispute Resolution Agreement. . . . Indeed, the document contains no signature line for anyone to sign.”
Judge Crabtree denies the motion to compel, finding that there is no evidence that Ms. Mendez ever signed any “Dispute Resolution Agreement Acknowledgement” or otherwise accepted the agreement to arbitrate. In fact, he holds, “the record here is unclear whether defendant ever offered a mutual arbitration agreement to plaintiff. And, more importantly, the current record contains no evidence – none – that plaintiff ever agreed to such an offer.” Merely signing a document acknowledging receipt of a handbook which references arbitration is not enough to constitute an agreement to actually participate in arbitration.
The decision is driven by specific state law. The court opines that “under Missouri law [which applies in this case}, employee handbooks generally are not considered contracts.” Counsel seeking to enforce an arbitration provision contained in the defendant’s handbook should be sure to check applicable state substantive law on this issue. Further, as matter of employment law, there are sticky issues raised by turning a handbook into a contract that may outweigh the benefits of relying on a handbook to put forward the firm’s arbitration policy. The far easier approach is simply to present the arbitration clause as a separate document which is signed – or at least acknowledged – by the employee at the time of on-boarding or when the arbitration provision is created.
Adding arbitration after the relationship is established
Life changes and so do contractual relationships. Sifuentes v. Dropbox, Inc., 2022 U.S. Dist. LEXIS 125273 (N.D. Cal. June 29, 2022) deals with the effectiveness of arbitration obligations which one party imposes after a contractual relationship begins.
Plaintiff alleged that a data breach exposed his confidential information and that Dropbox failed to advise him thereof. He brought various common law and statutory claims for that breach. Defendant moved to compel arbitration, relying upon its terms of service. The case hinges on the applicability of an amendment to those terms. Plaintiff does not contest that, by virtue of a “clickwrap” provision on Dropbox’s site, he consented to terms of service in effect on July 6, 2011, when he created his Dropbox account. However, as the court finds, those terms did not include a mandatory arbitration provision. Rather, Dropbox added them later. The court holds that the amended terms do not apply to this dispute, as Sifuentes was unaware of the addition of that requirement. Crucially, the court opines that Plaintiff was not on “inquiry notice” of the change. That obligation, Judge Gilliam holds, arises only if the website provides “reasonably conspicuous notice of the terms to which the consumer will be bound,” and the consumer “takes some action, such as clicking a button or checking a box, that unambiguously manifests his or her assent to those terms.” (citation omitted; emphasis added). Continued use of the service, in and of itself, is not enough, absent a showing that the consumer was aware that, by doing so, he or she was accepting the new terms. Accordingly, the Court denies the motion to compel.
Stays of related litigation, issue preclusion, and FINRA arbitrations
Fidelity Brokerage Services, LLC v. Taylor, 2022 U.S. Dist. LEXIS 125588 (N.D. Ill. July 15, 2022), demonstrates the limitations on the preclusive effect of arbitrations, particularly those conducted under the FINRA rules, in subsequent litigation.
Fidelity brought this action alleging that Ms. Taylor violated restrictive covenants and misappropriated trade secrets. Taylor counterclaimed alleging age and sex discrimination. FINRA’s rules required Fidelity and Taylor to arbitrate the covenant and trade secrets claims. That arbitration has not yet taken place, and Fidelity seeks to stay litigation on the counterclaim pending resolution of the arbitration. That decision, Judge Tharp holds, hinges on the degree to which there will be an overlap of the issues in the arbitration and litigation and a preclusive effect from the FINRA proceeding.
A threshold issue is the legal standard which the court should apply on that question. While it is not dispositive here, Judge Tharp considers whether to use the parameters in Colorado River Conservation District v. U.S., 424 U.S. 800 (1976), under which the court considers whether the federal litigation and arbitration are “parallel proceedings,” or the Seventh Circuit’s holding in Volkswagen of America, Inc. v. Sud’s of Peoria, Inc., 474 F. 3d 966 (7th Cir. 2007), which looks more specifically at the existence of prejudice should both the arbitration and litigation move forward.
The court declines to stay the litigation. First, it recognizes that there is no obligation under the FINRA rules to arbitrate the Title VII claims; while the parties may choose to do so, Taylor opted for litigation. Although there might be some overlap in questions presented in the two tribunals, the assorted claims asserted by Taylor and a co-counterclaim plaintiff Fairhaven arise out of different contracts than those at issue in the FINRA dispute between Fidelity and Taylor. Further, based on the absence of privity, Fairhaven would not be bound by the arbitrators’ award, even if that panel were to consider some of the issues which Fairhaven would raise in litigation. Second, the court focuses on the nature of FINRA awards. Those decisions are generally “standard” awards, which do not discuss the panel’s reasoning, but merely state who wins and the amount of any award. Thus, “this is likely to be a case in which the arbitrators’ findings are not announced and thus are entitled to no preclusive effect.” The court here throws in some interesting dictum about the whole FINRA arbitration scheme. “This point is not meant to cast aspersions on the FINRA process – what Fairhaven and Taylor describe as its ‘rough justice’ approach is no doubt part of FINRA’s appeal to businesses seeking speedy resolutions of disputes.” Finally, the court finds that a stay would prejudice the counter-plaintiffs as it would unduly delay discovery in the litigation. The court finds that Fairhaven would risk the loss of testimony from a “key witness” who lives in a memory home. Further, if the court stayed the litigation while the arbitration proceeded, Fidelity would gain an edge over Fairhaven, since the Plaintiff could conduct third-party discovery in that proceeding, while Fairhaven would be unable to do so in the litigation.
Off-spring of Badgerow
Last Term, SCOTUS held that there is no “look through” in determining whether a District Court has federal question jurisdiction over an application to confirm or vacate an arbitration award under the Federal Arbitration Act, Badgerow v. Walters, 142 S. Ct. 1310 (2022). Two recent cases address some results thereof.
In re: IBM Arbitration Agreement Litigation, 2022 U.S. Dist. LEXIS 124991 (July 14, 2022), is part of on-going litigation regarding claims under the ADEA against IBM and the validity of arbitration agreements signed in connection with the related employment terminations. (Last Friday’s ADR Highlights discussed another piece of that litigation). The case focuses largely on EEOC issues related to “piggy backing.” Judge Furman mainly addresses the Badgerow issue in a footnote. Twenty-four of the plaintiffs had filed for arbitration; the arbitrator dismissed those claims on the basis that they were not timely under the settlement agreement. Here, the Plaintiffs seek a declaratory judgment that that “timeliness” provision is unenforceable. Approximately two years elapsed between the arbitration and the filing of this action, while the FAA only allows three months for an application to vacate an award. Accordingly, Judge Furman declines to exercise subject matter jurisdiction because “the arbitration proceedings definitely resolved the ADEA claims, and the window to challenge those rules, or the enforceability of the provisions that governed them, has long since closed.” He further opines, probably in dictum¸ that under Badgerow, there may be no federal subject matter jurisdiction at all. The Declaratory Judgment Act, under which the case is brought, does not create federal jurisdiction on its own; rather, unless there is diversity jurisdiction, the courts “look through” to the underlying dispute to see if there is a federal question. However, here the underlying dispute is over the propriety of the arbitration, not the ADEA claim itself. Therefore, the federal question may not appear on the ”face” of the complaint, as required by Badgerow. While the court does not resolve “this thorny jurisdictional question” because it concludes that jurisdiction is lacking for other reasons, the opinion points out the kinds of issues that courts will be facing as they wrestle with the limits on FAA vacatur and confirmation.
Matios v. City of Loveland, 2022 U.S. App. LEXIS 19416 (10th Cir. July 14, 2022)(Judge McHugh for herself and Judges Baldock and Hartz), also highlights the limits imposed on federal courts by Badgerow. The court considers another of the Sittcom arbitrations. The arbitration “award” for $300,000,000 arose out of a traffic stop which Plaintiff alleged violated federal and state law. The District Court denied the Plaintiff’s petition to confirm the award, finding that there was no contract between the parties. The Tenth Circuit finds that there is no subject matter jurisdiction, vacates that judgment, and remands with instructions to dismiss the complaint without prejudice. Looking only at the face of the complaint, the court holds, as did SCOTUS in Badgerow, which it quotes, that an arbitration is “no more than a contractual resolution of the parties’ dispute.” Therefore, it is irrelevant that the underlying dispute raised federal law claim. As one reads the case, particularly in light of the rejection of a claim for declaratory judgment in In re: IBM, it becomes even clearer than ever that, absent diversity, there is no way that a federal court can ever decide an application to confirm or vacate an arbitration award. Those battles will shift to the state courts, with the attendant risk of inconsistent case law related to a federal statute that was intended to bring about uniformity. We really need a legislative fix.
Enjoy your week. Please think of those who are facing this heat without the benefit of air conditioning. If you know of anyone who is affected in that way, please check on their safety.
David A. Reif, FCIArb
 There is a useful footnote for those confronted with these “awards,” in which the court assembles a number of cases which “consistently questioned the validity of the underlying contracts and the subsequent arbitration awards.”