This is a day of interestingly written and factually unusual opinions. Young and Al-Qarqani are worth reading just for the fun of it. All the cases, however, address both rare and common issues faced in arbitration and resulting confirmation and vacatur litigation.

Arbitration of student loan debt

You have to love an opinion that begins with “This appeal involves a poorly written federal regulation. (No sense in beating around the bush.)”  Young v. Grand Canyon University, Inc., 2020 U.S. App. LEXIS 35950 (11^th Cir.) (Nov. 16, 2020) revolves around the question of when a college or university may compel arbitration of an allegedly defaulted student debt. Federal regulations implementing the Federal Direct Student Loan Program provide that schools may not enter into or rely upon pre-dispute arbitration agreements or class action waivers with students as to any “borrower defense claim” which the debtor asserts, 34 C.F.R. §685.300(i)(1). The issue here is whether the District Court correctly held that Young’s claims of breach of contract and substantial misrepresentation constitute such arbitration barring defenses.  Circuit Judge Newsom and a panel which includes Circuit Judges Wilson and Anderson holds that mandatory arbitration of those defenses is impermissible under the regulations and reverses the lower court.   The opinion is a deep dive into the regulation’s syntax, even citing Justice Scalia and Bryan Garner, Reading Law; The Interpretation of Legal Texts. The upshot is that colleges and universities may not compel arbitration of many standard defenses which defaulting students may raise and will have to face class actions on a wide swath of claims. Young, for example, asserted that Grand Canyon misrepresented the speed with which he could get his PhD.   How many students, contrary to their expectations, take more than four years to get a degree and claim – to their parents, at least – that the delay resulted from the unavailability of necessary classes?  It is also worth reading the opinion just to enjoy Judge Newsom’s writing style, which combines contractions and phrases like “Let’s recap” with intensive legal analysis.

Arbitration by a non-signatory; violations of arbitration procedures

The facts in Al-Qarqani v. Arab American Oil Company, 2020 U.S. Dist. LEXIS 214237 (S.D. Tex.) (Nov. 17, 2020) hide interesting legal issues.  The plaintiffs, some of whom have the titles His (and Her) Royal Highness, claim that they own “rich oil land located in Ras Tourna, Saudi Arabia.” In an arbitration that the court described as “disturbing,” the plaintiffs obtained an award of $18 billion.  This is an action to confirm that award.

The arbitration clause upon which the dozens of royals and their family members rely goes back to a 1933 agreement between the Government of Saudi Arabia and Standard Oil of California, under the which Government gave SOCAL a concession to drill.  In 1949, the owners of the property transferred the concessioned land to Aramco.  Decades later, the Government began buying the land, consummating the purchase of all the interest in 1988. The nub of the agreement is that the plaintiffs claim that the 1949 agreement was merely a lease, not a sale, and that Saudi Aramco and Chevron owe them “rental value” for the property dating back 1949.  A Saudi Legal Committee and the President of the Council of Ministers rejected their claim, finding that the 1949 agreement was, in fact, a sale.

The plaintiffs were not signatories to the 1933 agreement, which contains the arbitration clause upon which they rely. Applying Texas law, the court holds that they cannot invoke any of the usual doctrines allowing enforcement of a contract by non-parties – incorporation by reference, equitable estoppel, third-party beneficiary or derivative claim. Therefore, the court holds that there was no arbitration agreement between the petitioners and Saudi Aramco, the respondent here. For added measure, the court holds that, even if the plaintiffs could enforce the 1933 arbitration agreement, their dispute falls outside its scope.

The fun in the opinion comes in the court’s discussion of whether the arbitration process complied with that set out in the 1933 agreement. That agreement created a specific procedure under which each party would appoint one of two arbitrators who, in turn, would pick an umpire.  If neither the two arbitrators nor the parties could agree on an umpire, the Permanent International Court of Justice would make the designation.  Arbitration would take place at a venue agreed upon by the parties or, as a default, in the Hague.  The arbitration here bore no resemblance to that orderly process. Plaintiffs commenced an ad hoc arbitration administered by a tribunal venued in Egypt, not at a place agreed upon by the parties or the Hague. From day one, Saudi Aramco refused to participate, stating that it had no arbitration agreement with the petitioners. Without ever filing a motion to compel arbitration, Petitioners pushed forward with a proceeding that, at least as laid out in the opinion, became increasingly bizarre.  Three arbitrators resigned, with two of them expressing a “lack of confidence in the ability of [the arbitral institution] to be entrusted with the administration of the required arbitration.”  In all, seven different arbitrators participated with three different combinations of them constituting various panels. Ultimately, a tribunal issued an initial award stating that it lacked jurisdiction over the dispute.  However, a new panel – with two new members – reopened the arbitration, despite the doctrine of functus officio. They not reversed the previous award and held that they had jurisdiction over the dispute, but rendered an $18 billion award in favor of the families.  “Most tellingly,” to quote Judge Hanks, this second panel also awarded the tribunal fees of about $23 Million. Thereafter, an Egyptian Court convicted two of the tribunal administrators and three arbitrators of fraud, forgery, and similar crimes, involving the reopening of the arbitration and the award.  Citing numerous deviations between the process leading to the award and the requirements of the arbitration agreement, the court invokes the New York Convention’s provision authorizing vacating an award upon “proof that… the composition of the arbitral authority or the arbitral procedure was not in accordance with the agreement of the parties. . .,” and refuses to confirm.  See also, Al-Qarqani v. Chevron Corp., 2019 U.S. Dist. LEXIS 172126 (N.D. Cal.) (Sept. 24, 2019) (refusing to confirm the arbitration as to Chevron entities and containing some additional factual tidbits).   Since the petitioners are incredibly wealthy and a lot of money is at stake, expect to see this modern Thousand and One Tales of the Arabian Nights continue into the Fifth Circuit.

Waiver of right to compel arbitration

McKenzie Law Firm, P.A. v. Ruby Receptionists, Inc., 2020 U.S. Dist. LEXIS 215848 (D. Ore.) (Nov. 18, 2020) is a class action against the virtual reception service, alleging that Ruby’s billing practices breached the parties’ contract. After dealing with a number of contract and evidentiary issues, Judge Simon addresses Ruby’s motion to compel arbitration. That demand arises out of Ruby’s September 2019 addition of mandatory arbitration to its agreement, an amendment made ten months after the filing of the complaint in this action. Noting Defendant never sought arbitration until August 21, 2020, eleven months after the amendment, and that, during that interim period, Ruby moved to preclude class certification, filed two motions for summary judgment, engaged in discovery, litigated the format of the class notice, and requested a notice reminding class members of their right to opt out, the court holds that “Ruby’s litigation activities are precisely the sort of conduct that the Ninth Circuit has held conflicts with the right to arbitrate.”  What makes the opinion interesting is Ruby’s creative argument that the waiver question is one for the arbitrator, not a gateway issue for the court.  The arbitration provision broadly provides that “the arbitrator shall have the power to rule on . . . the arbitrability of any claim or counterclaim.” Therefore, Ruby argues, the arbitrator, not the court, should decide the waiver issue. Citing Martin v. Yasuda, 829 F. 3d 1118 (9^th Cir. 2016), the court holds that, despite the extensive scope of the arbitrator’s authority, the issue of waiver remains a threshold question for the court’s resolution.   Since the judge relies on Ninth Circuit precedent, it would be interesting to see how Ruby’s argument would fare elsewhere.

Hisert v. Haschen, 2020 U.S. App. LEXIS 36023 (1^st Cir.) (Nov. 17, 2020) is a case in which the Court of Appeals needs only one paragraph to deal with Haschen’s claim that Hisert must arbitrate his claim. Since Haschen did not raise the arbitration issue in the court below either through a motion to compel arbitration or one to stay the litigation, the court holds he waived any right to arbitrate the Plaintiff’s fraud claim.

Quick Hits

Illusory Arbitration Obligations

Two cases, Wheeler v Plano Arbor Hills, LLC, 2020 U.S. Dist. LEXIS 215385 (E.D. Tex.) (Nov. 18, 2020) and Coady v. Nationwide Motor Sales Corp., 2020 U.S. Dist. LEXIS 215248 (D. Md.) (Nov. 18, 2020) refuse to enforce arbitration clauses against employees where the provision gives the employer an unfettered right to amend the agreement retroactively without prior notice to the employee. Thus, the employer effectively retains sole and complete authority over whether any given claim must be arbitrated and can force the employee to litigate some or all issues.  Coady is particularly informative as Judge Gallagher discusses the distinction between employment contracts and employee policies and when the latter is incorporated into the former.

Binding sureties

BRC Uluslararasi Taahut Ve Ticaret A.S. v. Lexon Insurance Co., 2020 U.S. Dist. LEXIS 216925 (D. Md.) (Nov. 19, 2020) arises out of a contract for security upgrades at the U.S. Embassy in Prague.  An arbitration panel held that the prime contractor, Montague, liable to BRC, its subcontractor, for $2,362,628.23.  The court, in confirming the award, addresses a number of issues.  The case is most interesting in its holding that Lexon, the surety on Montague’s payment bond, although not a signatory to the agreement, must arbitrate based on its consent to a stay of litigation and the doctrine of res judicata.

LMRA arbitration appeals

The Eleventh Circuit’s rule is that an action to compel an employer to arbitrate a grievance must be filed within six months of the denial of a demand for arbitration.  Communications Workers of American v. BellSouth Telecommunications, LLC, 2020 U.S. Dist. LEXIS 216045 (N.D. Ga.) (Oct. 27, 2020) holds that the statute begins running from the date when the employer “unequivocally refuse[s] to arbitrate the dispute,” even if the parties continue to talk informally in an attempt to resolve the underlying dispute.

Arbitration as irreparable harm

Brandsafway Services, LLC v. Laborers International Union, 2020 U.S. Dist. LEXIS 216472 (D. Nev.) (Nov. 19, 2020) joins those cases holding that an order to arbitrate a case, even if it might later be held that the matter was non-arbitrable, does not constitute irreparable harm for purposes of a preliminary injunction. Although recognizing that the process of arbitration will cost the respondent time and money, the court holds that such harms are not “irreparable.”  Although the court is correct that an action to vacate an invalid award provides a remedy against enforcement thereof, it provides no explanation as to how the considerable expense of an unjustified arbitration is ever recouped.  The opinion provides citations to numerous contrary District Court cases holding that there is a presumption that the process of arbitration in and of itself is irreparably harmful.

Sealing of arbitration documents – In Coscarelli v. Esquared Hospitality, LLC., 2020 U.S. Dist. LEXIS 216959 (S.D.N.Y.) (Nov. 19, 2020), Defendant sought to seal the very awards that it moved to vacate. Holding that it is “’plain as day’ that the Awards are judicial documents to which the presumption of public access applies” and that the Awards constitute “the heart of what the Court is asked to act upon,” Judge Furman orders that the documents be unsealed.  He does, however, seal the billing rates of Plaintiff’s counsel because of “the competitive sensitivity” of those rates.

Have a great weekend.  Be safe.

Dave

Dave Reif
Reif ADR
Dreif@reifadr.com
Reifadr.com