There was only one case published over the last few days which is worth a lengthy discussion, so this is a chance to run some “Quick Hits,” which either reaffirm or put different spin on basic principles.
Incorporation of AAA Rules Does Not Delegate Unconscionability; Arbitration Clause and Forum Clause
I think it is fair to say that Hanc & Brubaker Holdings v. NXT LVL Services, LLC, 2023 U.S. Dist. LEXIS 14410 (N.D. Ill. January 27, 2023), is an outlier on the delegation of threshold questions from court to arbitrator.
Plaintiffs claim that defendants tried to induce prospective customers, including the Plaintiffs, to pay “large consulting fees” to manage ecommerce retail stores on the Amazon and Walmart internet platforms. Plaintiffs allege that, although the “stores” were removed from the platforms, Defendants kept the fees. The agreement between Plaintiffs and certain defendants included a provision requiring arbitration of any dispute “in accordance with the American Arbitration Association (“AAA”) rules. . . .” Defendants moved to compel arbitration; in response, plaintiffs claimed that the relevant agreements were unconscionable. The issue arose as to who should decide the unconscionability question, the arbitrator or the court.
Questions which go to the enforceability of an arbitration provision, such as its unconscionability, are normally gateway questions which the court resolves. However, where there is “clear and unmistakable” evidence that the parties intended to delegate such issues to the arbitrator, the panel, not the court, resolves those questions, see First Options of Chicago, Inc. v. Kaplan,514 U.S. 938, 944 (1995). Most courts hold that the incorporation of an institution’s rules, where those rules provide that the arbitrator decides his or her jurisdiction, constitutes such evidence. The AAA Rules, which these parties’ agreement invoked, provide that the arbitrator “shall have the power to rule on his or her own jurisdiction, including any objections to the existence, scope, or validity of the arbitration agreement. . . without any need to refer such matters first to a court.” AAA Commercial Rules, 2022 edition, Rule 7. (A similar provision exists in the pre-amendment rules, although it excludes the last phrase). However, Judge Kennelly, quoting from his earlier decision in Taylor v. Samsung Electronics America, Inc., 2020 WL 1248655 (N.D. Ill. March 16, 2020), rejects that reasoning. “It is hard to see how an agreement’s bare incorporation by reference of a completely separate set of rules that includes a statement that an arbitrator has authority to decide validity and arbitrability amounts to ‘clear and unmistakable’ evidence. . . .” Therefore, the court decides the unconscionability claims of those plaintiffs who signed the agreement, ultimately rejecting the defense.
Judge Kennelly also resolves an arguable inconsistency between the inclusion of both an arbitration clause and a forum selection clause. The parties’ agreement provided that “the sole venue for any dispute arising in connection with this Agreement shall be the courts of competent jurisdiction (State and federal) located within Miami-Date County, Florida. Client [Plaintiff] agrees not to commence or prosecute any such action, claim or proceeding other than in such aforementioned courts.” (Emphasis added). The court reconciles the two provisions, reading the forum selection clause as merely “providing the location for any action necessary to compel arbitration or enforce an arbitration award.”
Although Judge Kennelly’s holding on delegation is out of the mainstream, it should be in every litigator’s notebook for those occasions when he or she needs such an authority. Also, in light of Judge Chun’s dictum in Moreno, below, are we beginning to see a trend in which the courts are becoming more protective of laymen who may not understand the impact of a reference to AAA or JAMS rules in their agreements?
Quick Hits –
Retention of Jurisdiction
Nicosia v. Amazon.Com, Inc., 2023 U.S. App. LEXIS 1259 (2nd Cir. January 19, 2023), arises out of Amazon’s decision to remove an arbitration provision from certain of its consumer agreements. Based on that change, Nicosia, invoking Fed. R. Civ. P. 60(b)(5), sought to reopen an earlier judgment which had compelled arbitration of his putative class action related to the sale of weight-loss products. The District Court denied the motion; the Court of Appeals affirms. In a summary order, the panel of Circuit Judges Chin, Bianco and Merriam, holds that a District Court’s final judgment compelling arbitration and dismissing the case is not “prospective,” as it must be for Rule 65(b)(5) to apply. The only prospective effect of such a judgment, the panel opines, “was to bar future relitigation of the arbitrability award. . . . That the district court’s judgment has preclusive effect on Nicosia’s ability to litigate his claims in federal court is not sufficient to render that judgment prospective.” The lesson – counsel needs to think carefully about what portion of Rule 60 he or she invokes to seek a reopening and whether a different subparagraph could be on the table.
Parties sometimes need to decide whether the significantly increased cost of a reasoned award over a simple standard award is justified. FCA US, LLC v. Wubbolts, 2023 U.S. Dist. LEXIS 12732 (E.D. Mich. January 25, 2023)(Roberts, J.), demonstrates one reason for falling on the side of the more detailed award. FCA petitioned to set aside the an award in favor of Wubbolts, its former employee, related to Family Leave Act payments. Judge Roberts rejects FCA’s manifest disregard claims. The court’s decision hinges on its inability to determine why the arbitrator reached her conclusion. “[T]he arbitrator failed to explain the basis of her award – making it difficult to meaningfully review.” “The arbitrator’s failure to explain her decision makes it ‘all but impossible to determine whether [she] acted with manifest disregard for the law.’” (Citation omitted; brackets in original). In summary, if you believe you may want to vacate an adverse arbitral decision, err on the side of a reasoned award.
Burnett v. Prudent Fiduciary Services, LLC, 2023 U.S. Dist. LEXIS 13151 (D. Del. January 25, 2023), joins those cases which refuse to compel arbitration under a provision in a group retirement plan which prohibits parties from asserting claims on behalf of the plan itself. The plan documents at issue in Burnett provided that Covered Claims “must be brought solely in the Claimant’s individual capacity and not in a representative capacity.” Under ERISA, a claimant may seek removal of the fiduciary and may claim monetary relief designed to reverse damage to the Plan itself. Opining (1) that “the FAA does not require a court to enforce a provision in an arbitration agreement that effects an elimination of a statutory right to pursue a remedy,” and (2) that the offending provision is not severable, Magistrate Judge Hall recommends denying the Defendants’ motion to compel arbitration.
Reference to the AAA Rules Demonstrates Delegation
Taking a more traditional path than Judge Kennelly does in Hanc & Brubaker, Judge Chun delegates issues of arbitrability in a case in which the parties invoked the AAA rules, Moreno v. T-Mobile USA, Inc., 2023 U.S. Dist. LEXIS 12911 (W.D. Wash. January 25, 2023). However, that decision comes with two interesting caveats. First, Judge Chun raises, in a single sentence dictum, the Ninth Circuit’s statement in Brennan v. Opus Bank, 796 F. 3d 1125 (9th Cir. 2015)(basing delegation on a reference to the AAA rules), that it “limit[ed] [its] holding to the facts of the present case, which do involve an arbitration agreement between sophisticated parties.” Might Judge Chun be inviting such a challenge in future cases? Second, in a footnote, the court addresses its own doubts, like those of Judge Kennelly, about “whether the mere incorporation of certain arbitration rules will always provide ‘clear and unmistakable’ evidence of an intent to delegate, at least as to unsophisticated parties.” However, “given the overwhelming body of existing case law. . . and the Plaintiff’s silence on the issue,” he compels arbitration.
Contract Formation is for the Court to Decide
In light of all the cases addressing the delegation of threshold issues, McDaniel v. HBO, Inc., 2023 U.S. Dist. LEXIS 14428 (S.D.N.Y. January 27, 2023)(Caproni, J.), serves as a reminder that the initial issue of whether the parties entered into a contract at all, i.e. whether the parties “manifested assent,” as opposed to whether that assent was somehow tainted, is still one which is reserved for the court. “The Court will address only Plaintiffs’ arguments that they never assented to the [agreement]; it will leave to the arbitrator Plaintiffs’ arguments regarding the unconscionability of the arbitration agreement.”
Scope of the “Commercial Provision” Requirement of the NY Convention
The parties’ dispute in Zhongshan Fucheng Industrial Investment Co., Ltd. v. Federal Republic of Nigeria, 2023 U.S. Dist. LEXIS 13603 (D.D.C. January 26, 2023)(Howell, J.), relates to the enforcement of an arbitration award in favor Zhongshan for approximately $70 million. The arbitration arose under a bilateral treaty between Nigeria and China. Plaintiff sought enforcement under the NY Convention and the FAA. Under elements the U.S. adopted at ratification, in order for an award to fall under the Convention, it must “arise out of a legal relationship, whether contractual or not, which is considered as commercial.” Nigeria argued that the treaty between China and Nigeria is not “commercial.” Rather, Defendant argues, the agreement is “quintessentially sovereign.” Judge Howell rejects the argument. She cites to at least five cases in which the D.C. Circuit has confirmed awards “in which sovereign nations have been found to breach treaty – rather than contract obligations.” She distinguishes between disputes arising out of “investment agreements,” and those controversies “of a public international law character, which concerns only arbitrations between states.” (Internal citation omitted, emphasis in original). Since “this arbitration took place between Nigeria and Zhongshan a private actor – not two states,” the agreement is a commercial one and falls within the Convention. The Court denies the Republic’s motion to dismiss for lack of subject matter jurisdiction.
Randall v. Volvo Car USA, 2023 U.S. Dist. LEXIS 14075 (S.D. Miss. January 27, 2023)(Reeves, J.), is a reminder that a party undertaking discovery in pending litigation risks waiving any right to arbitrate the dispute. The case is a great reference for anyone asserting a litigation waiver where its opponent’s litigation efforts have been minimal. While recognizing that a party may not “stall its pursuit of arbitration to gain access to discovery through the litigation process,” the only discovery to which the court cites is defense counsel’s statement that, before deciding whether to move forward with mediation, “they ‘want to inspect the car and see what . . . can be determined from it. . . .’” Since Performance moved to compel arbitration only three months after the action was commenced, it seems that the evidence of waiver is thin.
Worth Group, Inc. v. Morales, 2023 U.S. Dist. LEXIS 14369 (S.D. Fla. January 27, 2023)(Cannon, M.J.), addresses the extent to which personal jurisdiction exists over an application to compel arbitration. Applying Florida law, the court holds that a contractual provision requiring arbitration in Palm Beach County, Florida, is insufficient to support personal jurisdiction over a party who filed an application to arbitrate elsewhere in the country. In a footnote, the court draws a distinction between parties who agree to be bound by the courts of a state and those who merely agree to arbitrate there.
Have a good week. Winter has not yet really hit New England, as we reached 50 degrees yesterday. Let’s keep it that way.
David A. Reif, FCIArb