I’m back from vacation and recovered from the resulting COVID, so it’s time to get back to work. The overall reaction to the format change in the last “Highlights” was positive; so here are more cases and shorter analyses.
Law of Arbitration
Most contracts contain a choice of laws provision, which governs substantive issues. However, what law governs questions related to the conduct of the arbitration itself? In Vernile v. Pacifica Foundation, Inc., 2022 U.S. Dist. LEXIS 167942 (C.D. Cal. September 13, 2022)(Wilson, J.), the court opts for the California, rather than the Federal, Arbitration Act as controlling law. The court begins from the premise that “the parties must explicitly state their intention to incorporate California law as it relates to arbitration.” (Emphasis of “as it relates to arbitration” in the original, other emphasis added), quoting ValueSelling Associates, LLC v. Temple, 2011 WL 2532560 , at *2 (S.D. Cal, June 23, 2011). It, then, looks to language in the parties’ agreement to the effect that “the parties also ‘shall have the right to seek judicial relief in the form of injunctive and/or other equitable relief under the California Arbitration Act.’” Finally, it relies upon this limited choice of laws provision to encompass a petition to confirm or vacate an award. So, why is this language an “explicit” choice of California law over the federal law of arbitration in a case in no one seeks an injunction? Does the court view the confirmation and vacating of awards as “equitable” proceedings? See Jordan, below, for a discussion of the applicability of federal common law as the law of arbitration.
What happens if a party violates its obligation to keep mediation proceedings confidential? In Seabourn Cruise Line, Ltd. v. Goldring, 2022 U.S. Dist. LEXIS 166389 (W.D. Wash. August 29, 2022), one of the parties to a mediation communicated with a third party regarding an email produced during the session. Magistrate Judge Tsuchida enjoins the defendant from any further disclosure of information that fell within the mediation-related confidentiality agreement. In analyzing the necessary elements for a preliminary injunction, the most quote-worthy relates to the public interest consideration. “It does not serve the public interest for a party to engage in pre-suit mediation subject to confidentiality requirements imposed by a mutually agreed upon NDA [non-disclosure agreement], and then to allow the party to violate the NDA.”
Special Master v. Arbitration
The role of the special master is in our daily headlines. McCarthy Improvement Co. v. Blythe Development Co., 2022 U.S. Dist. LEXIS 167221 (W.D.N.C. September 16, 2022) (Metcalf, M.J.), addresses the interplay between an arbitration clause and a special master. The parties to this construction claim jointly requested that the court appoint a specific individual as a special master, based on his “experience in construction law disputes.” Although the parties’ contract contained an arbitration clause, they “desire to have a Special Master appointed in light of the difficulties with conducting certain discovery for the production of documents and deposition testimony (from both in state and out-of-state witnesses.” The court rejects the request, opining that, even if out-of-state witnesses refuse to participate voluntarily in discovery, “a mechanism exists for compelling the non-parties’ response, provided a sufficient showing is made.”
Section 1782 Discovery
We have not seen many arbitration cases involving 28 U.S.C. § 1782 since SCOTUS decided that the statute did not apply to private, international arbitrations see ZF Auto, US, Inc. v. Luxshare, Ltd., 142 S. Ct. 2078 (2022). In re: Petition of the Federal Republic of Nigeria, 2022 U.S. Dist. LEXIS 166224 (S.D.N.Y. September 14, 2022)(Figueredo, M.J.), is a good refresher as to the law related to applications thereunder. The case arises out of a proceeding in England to set aside a $10 billion arbitration award against Nigeria. In granting the application, the opinion analyses both the statutory requirements of Section 1782 and the discretionary factors set forth in Intel Corp. v. Advanced Micro Devices, Inc., 542 U.S. 241 (2004).
Jordan v. Petco Health and Wellness Co., Inc., 2022 U.S. Dist. LEXIS 166205 (W.D. Pa. September 14, 2022)(Stickman, J.), holds that an arbitration agreement contained on Respondent’s website is not a contract of adhesion, because a user who did not want to agree to the terms could simply “walk away” from the transaction. “Jordan was not required to join – even make purchases at Petco [sic]. But by doing so, he realized personal benefits. . . . The arbitration agreement was not part of a contract of adhesion.” The interesting issue is how far the court would extend this walk away. What constitutes a “compulsion, economic or otherwise, to participate. . . ” so as to create a contract of adhesion?
Subject Matter Jurisdiction over FAA Confirmations and Vacaturs
Wynston Hill Capital, LLC v. Crane, 2022 U.S. Dist. LEXIS 167856 (S.D.N.Y. September 16, 2022)(Cave, M.J.), is a reminder that the FAA does not establish subject matter jurisdiction over an action to confirm or vacate an arbitration award. Wynston Hill seeks to vacate an arbitration award in favor of the Respondent. The court denies the petition, without prejudice, for lack of subject matter jurisdiction. While the award of approximately $477,000 meets the jurisdictional requirement of 28 U.S.C. § 1332, the Petitioner, a limited liability company, failed to allege the citizenship of each of its members and the domicile, as opposed to “residence,” of Crane. Therefore, “the Court is unable to determine whether it has subject matter jurisdiction.” The lesson, when seeking to vacate or confirm an award under the FAA, is to think back to your 1L Civil Procedure class and be sure that you have met the requirements for pleading subject matter jurisdiction. (And remember SCOTUS’s holding in Badgerow v. Walters, 142 S.Ct. 1310 (2022) – there is no “look through” federal question jurisdiction in an action to confirm or vacate an arbitration award).
Another Section 1332 issue is raised in Clements v. Alto Trust Co., 2022 U.S. Dist. LEXIS 166659 (D.N.M. September 15, 2022)(Brack, J.). Here, the question is the statute’s requirement of damages in excess of $75,000. While the decision only directly addresses what damages may be included, the interesting question for an arbitration/civil procedure nerd relates to the nature of the action itself. This case is a declaratory judgment action in which Clements seeks avoid arbitration by having the court declare the contract containing the arbitration clause to be unenforceable. In determining the jurisdictional amount, however, the court relies upon the potential recovery “were she to proceed with arbitration and succeed on her claims.” (Emphasis added). Since the presence of the requisite jurisdictional amount is decided based on the allegations of the complaint, why isn’t the appropriate assumption that there would be no arbitration (essentially a $0 award), with only attorneys’ fees and punitive damages being considered in determining the $75,000 threshold?
Arbitration of Fair Labor Standards Act Case; Severance
Under the Fair Labor Standards Act, a plaintiff may bring an action within two years for non-willful violations and three years for willful ones. Dimidik v. Hallrich, Inc., 2022 U.S. Dist. LEXIS 167322 (S.D. Ohio September 14, 2022)(Rice, J.), addresses the enforceability of an arbitration clause which requires that any claim be brought within six months of the date of the act giving rise to the claim. Plaintiff, as a threshold matter, argued that any arbitration of FLSA claims would “evade the judicial scrutiny that [the Act] requires.” In essence, she maintained that arbitration of such claims created a Hobson’s choice. To allow private resolution of a FLSA dispute without the court approval attendant to litigation would render the award “unenforceable” as violative of the policy contained in the Act. On the other hand, requiring such approval would also make the agreement unenforceable, as it “would negate the final, binding nature of the arbitration and defeat the purpose of the contract. . . .” The court rejects the argument, relying upon the Sixth Circuit’s holding in Floss v. Ryan’s Family Steakhouses, Inc., 211 F. 3d 306 (6th Cir. 2000). However, the court severs the six-month time limit on the filing of claims, despite its opining that “it is problematic that Defendants know that this provision is unenforceable and they have done nothing about it.” Lesson – when drafting an arbitration clause, be sure to include a severability provision.
This week feels like “back to school” – but without the joy of a new pencil box. See you Thursday.
David A. Reif, FCIArb