Vacation was terrific, and the temperature in Ireland was a lot friendlier than what we have had here. However, it’s good to be back. While I was gone, a lot of good authors addressed last month’s two SCOTUS decisions on arbitration, Coinbase v. Bielski and Yegiazaryan v. Smagin, and arbitration nerds have probably had their fill of those issues. So, today “Highlights” will keep its usual focus on recently published federal cases and literature.
Appellate Jurisdiction; Class Action Waivers in ERISA Claims
Henry v. Wilmington Trust NA, 2023 U.S. App. LEXIS 16592 (3rd Cir. June 30, 2023)(Chief Judge Chagares for himself and Judges Jordan and Scirica, J.), addresses two important questions.
Henry, a participant in an employee stock ownership plan (“ESOP”), alleged that the defendant breached ERISA duties which they owed the ESOP. The ERISA Plan contained an arbitration provision, including a class action waiver prohibiting a claimant from “’seek[ing] or receiv[ing] any remedy that has the purpose or effect of providing additional benefits or monetary or other relief’ to anyone other than the claimant.” (Brackets in opinion). Wilmington Trust sought to invoke the arbitration clause. However, rather than moving to compel arbitration, it moved to dismiss the action. The District Judge denied the motion; Wilmington Trust appealed.
The first issue before the Court of Appeals was whether it had subject matter jurisdiction, since there was no final judgment below. While the Federal Arbitration Act provides for an interlocutory appeal from the denial of a motion to compel arbitration, that was not what happened here. Wilmington Trust had moved to dismiss the entire case. The court, taking a practical view, finds that it has jurisdiction over the appeal. “In this case, the defendants’ motion to dismiss was substantively a motion to compel arbitration, and the District Court’s order denying the motion to dismiss was substantively an order denying a motion to compel arbitration.” The briefing below focused on whether Henry’s claims were subject to arbitration. Wilmington Trust explained that it was moving to dismiss, rather than to compel, because a Delaware-based court could not compel arbitration in Virginia, the venue in which the arbitration clause seated any such proceeding. Further, the District Court’s order stated that the motion to dismiss was “pursuant to a mandatory arbitration clause.” Thus, Chief Judge Chagares opines, the motion to dismiss “was effectively a motion to compel arbitration.”
On the merits, the Court affirms the District Court’s refusal to enforce the arbitration clause. Under ERISA, a fiduciary who breaches its responsibilities is liable to make “make good to such plan any losses to the plan resulting from such breach. . . ,” 29 U.S.C. § 1109(a). Such relief, the court holds, would not be available under the provisions of the arbitration clause’s limitation of remedies to those which benefit only the claimant. A statutory remedy, such as removal of the fiduciary, “has plan-wide effect; it is impossible for a court or arbitrator to order a pan’s fiduciary removed only for the litigation, while leaving the plan’s fiduciary in place for all other participants.” (Underlining in the original). Likewise, the fiduciary’s restitution of losses applies to damages to the Plan, not merely to those suffered by a single plan member. Accordingly, the court opines, since the class action waiver “purports to prohibit statutorily authorized remedies, the class action waiver and the statute cannot be reconciled.” The Court of Appeals joins the District Judge in holding that the class waiver is unenforceable.
Since the plan specifically provided that the class action waiver was non-severable, the entire arbitration “must fall with the class action waiver.”
For drafters, the case raises an interesting issue. Assuming that an arbitration clause can compel arbitration of any individual’s personal claim against the Plan (such as a failure to pay him or her benefits), how far can the agreement reach in barring class claims? And is it still wise to include a non-severability clause or is it better to risk class arbitration than it is to lose the effectiveness of the entire clause?
Effective Date of Ending Force Arbitration Act
The Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021 (“the EFA”) provides that, at the election of the person alleging sexual assault or harassment, no predispute arbitration clause is valid or enforceable. The act further provides that it “shall apply with respect to any dispute or claim that arises or accrues on or after the date” of the statute’s enacting, which was March 3, 2022. (Emphasis added). Barnes v. Festival Fun Parks, LLC, 2023 U.S. Dist. LEXIS 112915 (W.D. Pa. June 27, 2023)(Haines, J.), addresses that application provision.
Plaintiff alleged that she was subjected to demeaning slurs based on her sexuality and was terminated from her employment with Festival. As part of her on-boarding, she executed a broad arbitration agreement, which the court finds was neither procedurally nor substantively unconscionable. This part of the opinion is a fairly routine analysis of Pennsylvania law. The more interesting issue is the court’s consideration of whether the clause is unenforceable under the provisions of the EFA.
Plaintiff alleged that the harassment began in July 2019, and that she was fired on July 5, 2021. On September 30, 2021, she filed a complaint with the EEOC, who responded with a Right to Sue letter on June 29, 2022. She sued on September 23, 2022. In summary, the events of harassment and the filing with the EEOC occurred before the effective date of the EFA, but the issuance of the Right to Sue letter and the filing of the instant action happened after that date.
Judge Haines holds that the EFA, in using the disjunctive “or,” intended to distinguish between a “claim” and a “dispute.” Applying dictionary definitions and precedent, the court holds that a “claim” is ”[a] conflict or controversy. . , “ while a claim is “the assertion of an existing right.” (Internal citations omitted). Thus, the court opines “a dispute is an underlying conflict which will later give rise to the lawsuit while a claim refers to an existing right which may be the object of a lawsuit.” The court also looks at the Act’s definition of a “predispute agreement,” 9 USCA § 401(1), which “require[s] the arbitration to be entered into prior to the dispute – the discriminatory conduct.” In summary, the court opines, “a claim necessitates an underlying dispute. In this way, a dispute sparks the potential for a later claim and is, in a sense, the inception of a cause of action. Likewise, a claim is mature, or present and complete, capable of being asserted as an existing right once the conflict or controversy has ceased to develop.” The court, then, draws a distinction between a single violation and a continuing course of conduct. As to the former, Judge Haines, holds that “the claim accrues when the plaintiff knows of her injuries. This is often concurrent with the discriminatory act in the cases of sexual assault and sexual harassment” – in this case in July 2019. However, when the plaintiff “is alleging a continuing violation of civil rights laws the lates date for accrual is either the adverse employment action, such as the termination of employment, or the plaintiff’s injury” – here on July 14, 2022. In either case, the court holds the matter arose before the effective date of the EFA.
The opinion gives a very full discussion of the issue, including citation to legislative history and contrary holdings. However, the opinion does not seem to grapple with an issue distinct to claims which are first brought to the EEOC, as was this one. A plaintiff may file an action subject to the EEO only after he or she receives a right to sue letter. If, as the court opines, “a claim accrues when the plaintiff has a complete and present cause of action,” is such a claim only “complete” when the claimant receives that letter? Ms. Barnes received her Right to Sue letter on June 19, 2022 – after the effective date of the EFA. So, did the “claim” only “accrue” on that date? In light of the conflicting District Court decisions on the issue, we can expect guidance down the road from higher authorities.
Venue Selection Clauses and Arbitration Provisions
Happy Puppy LA, Inc. v. Bank of America, N.A., 2023 U.S. Dist. LEXIS 113722 (C.D. Cal. June 30, 2023)(Staton, J.), reiterates the generally accepted position that the existence of a venue-selection clause for judicial proceedings does not override a provision compelling arbitration. The class action arises out of a claim that the Bank misrepresented that PPP loan proceeds could be used to pay 1099 contractors, as well as employees. Happy Puppy alleged that, had it known that the PPP program’s loan forgiveness provisions only applied to payments made to employees, it would have borrowed less. Before getting the loan, plaintiff opened a deposit account at B of A, at which time it signed an agreement with a broad arbitration clause covering “any claim, dispute or controversy” related to the “deposit relationship between us. . . .” When it received the loan proceeds, plaintiff also signed a promissory note in which it consented to “the personal jurisdiction of any state or federal court located in [the state of Borrower’s principal place of business] so that a trial shall only be conducted by a court in that state.” (Brackets in opinion). Plaintiff argued that the forum selection clause in the note overrode the arbitration provision in the earlier deposit agreement. The court holds otherwise. Looking at the language of the note, Judge Staton holds that the “venue-selection clause at issue here specifies the venue of any trial in which the parties may litigate their disputes and secures their consent to personal jurisdiction in that venue, but it does not require them to litigate in court and go to trial.” (Emphasis in original) Thus, the court distinguishes Goldman, Sachs & Co. v. City of Reno, 747 F. 3d 733 (9th Cir. 2014), in which the forum provision stated that a claimant had to bring “all actions and proceedings” in U.S. District Court. (Emphasis in opinion). For the same reason, Judge Staton distinguishes Applied Energetics, Inc. v. NewOak Capital Markets, LLC, 645 F. 3d 522 (2nd Cir. 2011)(the arbitration provision stated that “’any dispute’ between the parties ‘shall be adjudicated’ in specified courts”). The court compels arbitration.
Stay of Discovery
Usually Smith v. Experian Information Solutions, Inc., 2023 U.S. Dist. LEXIS 112052 (S.D.N.Y. June 6, 2023)(Broderick J.), would not merit discussion beyond a “Quick Hit.” But, in light of SCOTUS’s decision in Coinbase. Inc. v. Bielski, 2023 U.S. LEXIS 2636 (June 23, 2023), Smith addresses a situation which will occur more frequently than in the past.
The case addresses discovery during the pendency of a motion to compel arbitration. EIS moved to compel arbitration, and Plaintiff “did not oppose [the] motion.” However, Smith refused to consent to delay discovery, so EIS moved for a stay. After snarking that “Plaintiff’s refusal to consent to a stay runs contrary to the practice of this Court. . . ,” Judge Broderick finds that there is good cause for granting the stay. He applies a three-fold test – the breadth of the discovery sought, the prejudice to each party based on any such delay, and the “strength of the motion.” Here, the court holds that denying the stay would prejudice EIS by requiring it to undergo potentially extensive coverage “in contravention of the parties’ written agreement.” Plaintiff, on the other hand, “will have the opportunity to conduct discovery” under the applicable arbitration rules.
In Coinbase, SCOTUS held that, when the District Court denies an application to compel arbitration and the movant takes an appeal under the provisions of the FAA, all pretrial actions come to a halt under the appeal is resolved. Since plaintiffs may not want to delay discovery for what will certainly be months while the Court of Appeals acts, we can expect more attempts to press for discovery before the District Court decides the motion to compel. This case should be in counsel’s notebook for quick reference when those cases arise.
Attorneys’ Fees under the Revised Uniform Arbitration Act
Since most commercial arbitrations seems to be subject to the FAA, it is easy to forget that state arbitration statutes also apply. RTI Connectivity PTE, Ltd. v. Gateway Network Connections, LLC, 2023 U.S. Dist. LEXIS 112193 (D. Haw. June 29, 2023), is such a case. Since applicable Hawaii law applies the widely adopted Revised Uniform Arbitration Act, the case is broadly relevant.
Under the RUAA as adopted in Hawaii, a court may award attorneys’ fees to a prevailing party in an action to confirm vacate, modify, or correct an award, URAA § 25(c). The District Court holds that, despite language in In re: Arbitration Between Hawai’i State Teachers Association and Hawai’i, Department of Education, 140 Hawai’i 381, 400 P. 3d 582 (2017), the award of fees is at the judge’s discretion. In exercising that discretion, the court considers whether opposition to the motion to confirm, although unsuccessful, had “some merit;” whether that opposition “resulted in ‘drawn-out confirmation proceedings;’” whether the plaintiff was pro se; and whether there had been a prior award of attorney’s fees. Applying these tests, the court denies the motion for fees.
The case is useful for those considering fees under the Uniform Revised Arbitration Act. However, be careful; Section 25(c) of the RUAA, which provides for recovery of attorneys’ fees, has not been adopted in all jurisdictions which have adopted the rest of the Act. Be sure to check applicable local law.
One of the procedural problems in arbitration is the failure of a party to pay its share of the costs, either because it cannot afford to do so or as a strategy to scuttle the whole proceeding. An article in the Spring edition of the ABA Forum on Franchising’s publication, The Franchise Lawyer, highlights the problem and proposes some remedies, Halasz and Turiano, Franchise Arbitration: Dealing with a Party’s Refusal to Share Costs, The Franchise Lawyer, Spring 2023, 3, available on-line at https://www.americanbar.org/content/dam/aba/publications/franchise_lawyer/spring23/fl262.pdf. It is a short read and well worth the time.
I hope you had a good Fourth of July. Whatever peoples’ political or other differences, the holiday reminds us of the privileges of living in a democracy and of our personal and collective obligation to be sure that no one loses those rights.
Be safe and enjoy the rest of your week.
David A. Reif, FCIArb
 For example, see Justice Brown’s example in her dissent of taking the testimony of a witness who is on her deathbed, 2023 U.S. LEXIS 2636, *31.