The Circuits chime in, again, this week.  The most interesting case involves a dissent from rehearing en banc.  We also get the rare vacatur for fraud.

Delegation of arbitrability of claim against non-signatory; Is this the next SCOTUS arbitration case?

In a model used in many industries, but particularly common in the energy industry, Plaintiff Newman was employed by Cypress, a labor staffing company, to perform work for a particular client, Plains. Newman’s contract with Cypress contained an arbitration clause.  Newman brought a class action against Plains under the Fair Labor Standards Act, alleging violation of mandates regarding overtime.  Plains sought to compel arbitration under Newman’s agreement with Cypress.

The District Court held that the right of a non-signatory to compel arbitration is a contract formation question – did that specific third party and the signing party against whom arbitration is asserted ever agree to arbitration. It rejected Plains’ argument that the right of a non-signatory to arbitrate is one of arbitrability, an issue which the Newman/Cypress agreement delegated to an arbitrator.  Since the court also held that the case did not satisfy the elements of applicable Texas state law for intertwined-claims estoppel, it declined to compel arbitration.  That decision was affirmed in Newman v. Plains All American Pipeline, L.P., 23 F. 4^th 393 (5th Cir. 2022)(Newman I).  Newman v. Plains All American Pipeline, L.P., 2022 U.S. App. LEXIS 21798 (5^th Cir. August 5, 2022)(Newman II) denies, by an 8-8 vote, a motion to rehear that decision by the full court.

Normally, the denial of a rehearing would end the matter.  However, in a lengthy dissent from that denial, Judge Jones (joined by Judges Smith and Duncan) lays out in detail why she believes Newman I “puts this court out of step with at least five (if not more) of our sister circuits.” In support of this proposition, she cites to cases from the First, Apollo Computer, Inc. v. Berg, 886 F. 2d 469 (1^st Cir.); Second, Contec Corp. v. Remote Solutions Co., 398 F. 2d 205 (2^nd Cir. 2005); Sixth, Becker v. Delek U.S. Energy, 39 F. 4 th 351 (6 th Cir. 2022); Eighth, Eckert/Wordell Architects, Inc. v. FJM Properties of Willmar, LLC., 756 F. 3d 1098 (8^th Cir. 2014); and Tenth Circuits, Casa Arena Blanca LLC v. Rainwater, 2022 U.S. App. LEXIS 7473 (10^th Cir. March 22, 2022)(unpublished), along with District Court decisions in the Seventh Circuit.

The most important disagreement between the Newman I panel and the dissenters in Newman II breaks down to a dispute as to the nature of the decision on whether a non-signatory may compel arbitration.  Is the question whether the non-signatory and the plaintiff themselves entered into an agreement to arbitrate disputes between them?  If that’s how one views the issue of non-signatory arbitration, the dispute is only the common question of  contract formation, one which the courts hold belongs only to them.  However, here, even though Plains was not a party to the arbitration agreement, Cypress and Newman unquestionably had an obligation to arbitrate.  If the question is viewed as whether that agreement encompasses disputes with third parties like Plains, the issue to be resolved pivots around the scope of the agreement – an issue of arbitrability which Newman and Cypress could and did delegate to the arbitrator.

On two occasions this year,  the Fifth Circuit has applied Newman I. See Kennedy v. Pioneer Natural Resources Co., 2022 U.S. App. LEXIS 18176 (5^th Cir. June 30, 2022)(Judges Jones, Higginson, and Duncan); Hinkle v. Phillips 66 Co., 35 F. 4^th 417 (5^th Cir. 2022)(Richman, Costa, and Ho).  Judges Ho and Duncan were among those voting for en banc reconsideration of the precedent, although, among them, only Judge Duncan in the dissenting opinion.

In light of the now-varying approaches among the Circuits, this issue seems ripe for SCOTUS resolution, particularly since the Supreme Court, as evidenced by its four decisions last Term, seems to be interested in arbitration questions. Presumably there will be a petition for certiorari. 

In a separate case, the Ninth Circuit explores delegation of threshold questions in Caremark, LLC v. Chickasaw Nation, 2022 U.S. App. LEXIS 21962 (9^th Cir. August 9, 2022). The case arose out of the Nation’s claim that Caremark failed to reimburse tribal pharmacies for medications, in violation of the Indian Health Care Improvement Act, 25 U.S.C. § 1621e, also known as the Recovery Act.  The provider manual describing the relationship between Caremark and the pharmacies contained a broad arbitration clause, which included a “delegation provision” assigning the arbitrator, not the court, the responsibility for resolving threshold issues.  The Nation argued that, because consenting to arbitration might waive its sovereign immunity, the arbitration provision should be excised from its agreement with Caremark. The Court, with Judge Friedland writing for herself and Judges Boogs and Wallace, holds that the issue of sovereign immunity, together with the impact, if any, of the Recovery Act, relate to the effect and enforceability of the arbitration clause, not to the formation of the agreement to arbitrate.  Therefore, resolution of both falls within questions which are delegated to the arbitrator.  The Court affirms the District Court’s judgment compelling arbitration.

Setting aside an award for fraud

The moral of France v. Bernstein, 2022 U.S. App. LEXIS 21945 (3^rd Cir. August 9, 2022), is pretty simple – don’t lie to the arbitrator.  The case arises out of a dispute between two NFLPA-certified football agents and involves the representation of Kenny Golladay, who is currently a wide receiver for the New York Giants.  At the time of the issues under dispute, Bernstein’s roster of clients included Golladay.  In January 2019, Golladay terminated the representation and signed with France. Three days earlier, Golladay had participated in an autograph signing event, in which Bernstein apparently played no part.  Pursuant to NFLPA regulations, Bernstein filed a “poaching” arbitration against France, seeking $2.1 million in damages. His case centered, in part, on the question of France’s participation in the signing event. After a hearing, the arbitrator found in favor of France, opining, in part, that “France had nothing to do with arranging, organizing[,] or influencing in any way the operation of the Signing Event.” (Brackets in opinion).  The problem, Circuit Judge Jordan, writing for himself and Circuit Judges Krause and Porter, opines is that France “hid that evidence [of his participation in the event] and then falsely testified that he had no knowledge of or involvement in the signing event.”  The parties had taken discovery, including a deposition of France and a request by Bernstein to produce documents.  At that deposition and, again, at the hearing, “France repeating and consistently denied that he had anything to do with the autograph-signing event.” In response to four variously phrased requests for documents related to the signing, France responded that he had “none.”  Through testimony in separate federal court litigation, Bernstein learned that both the testimony and the document responses were false.

The court applies a three-part test in determining whether the District Court erred in confirming the award. First, is there clear and convincing evidence of the fraud? Second, could the fraud have been discovered through reasonable diligence before or during the arbitration? Third, was the fraud materially related to an issue in the arbitration? The appellate panel finds for Bernstein on all three steps.  Beyond providing a good example of a case which accomplishes the “steep climb to vacate an arbitration award,” the decision is a valuable read on the issue of “reasonable diligence.”  The arbitrator authorized seven subpoenas, including one requesting production of documents from CAA Sports for whom France worked, but Bernstein did not seek enforcement of any of them.  France argued that failure to do so demonstrated a lack of necessary diligence.  The panel rejects this argument, opining that Bernstein had a right to assume that France was answering discovery truthfully.  “Reasonable diligence does not require parties to assume the other side is lying.  It piles one unfairness on another to say that Bernstein had to seek enforcement of the subpoenas shortly before the arbitration, just to double check whether France was being truthful. . . .”  To put this part of the Court’s holding in context, remember that the arbitrator does not have the power to enforce third-party subpoenas; to do so, the subpoenaing party needs to go to court in a separate proceeding, with all the attendant costs and delay.

Holding that the District Court erred as a matter of law, the Court of Appeals reverses, with an instruction to vacate the award.

Because my granddaughter was in town last week, I got the great pleasure of playing grandpa.  Since there was no Highlights on Friday, I’ll publish on Monday and Thursday this week. 

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