There is really no theme today, as the cases released cover a broad range of issues.

Severance of unconscionable provisions

If part of an arbitration agreement is unenforceable, does the court have to void the entire obligation?  In Crespo v Kapnisis, 2022 U.S. Dist. LEXIS 131579 (E.D.N.Y. July 25, 2022), Judge Cogan says “no.”

The case arises out of Defendants’ alleged violations of various labor laws, including the Fair Labor Standards Act.   As part of his employment, Plaintiff signed an arbitration agreement, which contained provisions which Crespo maintains are substantively unconscionable.  The agreement required the losing party on any appeal of the award to pay the winner’s attorneys’ fees, provided that the costs of the arbitration would be shared equally, and shortened the limitation on any statutory claims from the legislatively mandated time frame to one year.

After dismissing Plaintiff’s claims of procedural unconscionability, the court addresses the above issues set under the “effective vindication” test.  Under that exception to the FAA’s general policy of enforcing arbitration agreements, the court may invalidate provisions which “operat[e]. . . as a prospective waiver of a party’s right to pursue [federal] statutory remedies,” quoting American Express Company v. Italian Colors Restaurant, 570 U.S. 228, 235 (2013)(Deletions and brackets in Crespo).  Since the FLSA requires that defendants pay a prevailing plaintiffs’ attorneys’ fees, but contains no requirement that a losing plaintiff pick up any such burden, the court strikes all the requirements which might shift fees to the employee. Next, although the Second Circuit has not yet weighed in on whether an arbitration agreement may shorten the FLSA’s three-year limit for asserting a claim, Judge Cogan joins other federal courts which he opines have “routinely disallowed” such provisions. Finally, since the agreement required that the arbitrator be a retired judge with at least ten years of legal experience, “the fees of such an arbitrator are likely to be substantial.” Since the ”plaintiff has asserted financial hardship, which defendants have not challenged,” the court finds that those costs would make it impossible for the employee to pursue his statutory rights.

The remedy, the court holds, is to sever the offending provisions, as they “subvert the FLSA’s statutory scheme,” and proceed with arbitration without those mandates. “Once severed, a plaintiff is unable to show substantive unconscionability based on arguments concerning the severed provisions.”

Arbitrator Discretion

Two cases reiterate an arbitrator’s broad discretion in managing the proceeding.

In Utility Systems, Inc. v. International Union of Operating Engineers, 2022 U.S. App. LEXIS 20553 (3^rd Cir. July 26, 2022), Petitioner argued that the arbitrator was guilty of “misconduct” by refusing to reopen the arbitration to admit additional evidence.  Therefore, Utility maintained, the award should be set aside under Section 10(a)(3) of the Federal Arbitration Act. The court, with Judge Restrepo writing for himself and Judges Roth and Fuentes, opines that such vacatur is appropriate only where the conduct “so affects the rights of a party that it may be said that [the party] was deprived of a fair hearing.” (Citation omitted; brackets in original).  Here, the evidence which Plaintiff proffered was merely designed to rebut its own witnesses, so the arbitrator was free to reject it.  “[T]he arbitrator gave Utility ample opportunity to present witnesses and arguments. . . . Utility’s request to reopen the record was not based on newly discovered – or even overlooked evidence.”

245 Park Member LLC v. HNA Group (International) Company Limited, 2022 U.S. Dist. LEXIS 131849 (S.D.N.Y. July 25, 2022), addresses the propriety of a documents-only arbitration.    The arbitration agreement at issue provided for an accelerated resolution; each party had to submit “its position on each matter in dispute and any applicable materials that it desires that such arbitrator consider” within seven business days of the arbitrator’s appointment.  In addition, the arbitrator had to issue his or her award within thirty days after “submission” of the dispute.  HNA sought discovery and a full evidentiary hearing under the rules of JAMS, the administering institution. The arbitrator denied the request, opining, “It is clear from the express language of the Guaranty that the parties agreed to an expedited arbitration process that included waiving discovery and an evidentiary hearing” and that “there is no time allocated for a hearing and no language providing for one.”  She ultimately entered an award  in favor of Petitioner, which brought this action to confirm the award, in the amount of $185,412,763.80.

HNA argued that denying it discovery and an evidentiary hearing rendered the award “fundamentally unfair and contrary to the terms of the parties’ arbitration agreement.”  The court, Koeltl, J., rejects that contention and confirms the award.  Quoting from Tempo Shain Corp. v. Bertek, Inc., 120 F. 3d 16 (2^nd Cir. 1997), he holds  that “an award is fundamentally unfair if the arbitrator did not ‘give each of the parties to the dispute an adequate opportunity to present its evidence and argument.’” Here, the arbitrator “considered extensive submissions from the parties in connection with both the scheduling decision and the final merits hearing” and “considered the parties’ competing interpretations of the Guaranty” before rendering her decision on merits.

A footnote in the opinion serves as a reminder that good practice in award writing can reduce the risk of vacatur. Respondents complained that the arbitrator “neglected to consider” certain witness statements; the court notes that the arbitrator “explicitly stated” that she reviewed all the material “provided by counsel,” although the court is not clear if she expressly laid out each such item in the award. Further, the court rejects HNA’s claim that the arbitrator did not explain the “specific reasons” as to why she was not persuaded by certain witness statements. “[T]he arbitrator was not required to provide such an explanation, and the arbitrator thoroughly explained the reasons for her decision.”  In short, the appropriate degree of specificity in a reasoned award is an art.  The arbitrator should give sufficient detail to show a reviewing court that he or she seriously considered the case – but, not so much as to open up potential challenges over irrelevancies.

Choice of laws; Non-existent forums

What happens if the arbitration agreement designates an arbitral institution that either closes or never existed?  The arbitration agreement at issue in Canobinoti, LLC v. Woods, 2022 U.S. Dist. LEXIS 133518 (S.D. Fla. July 26, 2022), called for arbitration before “the international arbitration centre (I.A.C.).”   The court, Damian, M.J., opines that the centre “is simply an arbitration facility, or a space for rent, that has neither arbitration rules nor the ability or authority to appoint an arbitrator.”  Thus, petitioner argues, the court should appoint an arbitrator, pursuant to the provisions of Section 5 of the FAA, but still require arbitration of the parties’ dispute.

The court begins its analysis with a choice of laws question. The parties’ agreement provides that British law governs its interpretation.  The issue, however, is whether that law also applies to the enforceability of the arbitration provision.  Citing prior law in the District,  Olsher Metals Corp. v. Olsher, 2003 WL 25600635 (S.D. Fla. Mar. 25, 2003), the Court applies federal common law, not English law, to that question. “[E]ven where the underlying agreement has a choice-of-law provision, federal law still governs the threshold question of arbitrability.” (Citation omitted).

Applying that body of law, the Magistrate Judge Damian defines the issue to be whether the forum selection clause is “integral to the agreement.”  If, not the arbitration may proceed with an appropriate arbitrator; if so, “the failure of the chosen forum will preclude arbitration.” (Citation omitted). Here, the court finds, the choice of forum does not “pervade the Agreement.”  Only the arbitration clause refers to the I.A.C.; the term does not appear elsewhere in the agreement.  Therefore, the court holds, the parties did not intend their choice of arbitral forum to be anything more than “an ancillary logistical concern.”  The court severs the selection clause and recommends that the Court appoint an arbitrator under FAA Section 5 and stay the litigation pending completion of the arbitration.

Enjoy your weekend. See you on Tuesday.      

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