Only one case for discussion today, so we have space to take a look at the cert. petitions pending before SCOTUS.

Incorporation of Arbitration Clauses

Both commercial transactions and employment on-boarding processes often involve the parties signing a number of agreements.  Korea Advanced Institute of Science and Technology v. KIP Co., LTD, 2022 U.S. Dist. LEXIS 183869 (E.D. Wisc. October 7, 2022), is a reminder of the importance of cross-referencing arbitration clauses from one document to another.

In connection with the licensing of intellectual property rights, the parties entered into three agreements – a “Business Agreement,” a “Management Agreement,” and a “Revenue Sharing Agreement.”  The Business Agreement and Management Agreement each contained an arbitration clause; the Revenue Sharing Agreement did not. After a dispute arose, KAIST brought this action, alleging breaches of all three agreements. KIP moved to dismiss the claims under the Revenue Sharing Agreement based upon the arbitration provisions in the Management Agreement.  Magistrate Judge Duffin denies the motion.  Quoting the Seventh Circuit’s holding in Rosenblum v. Travelbyus.com Ltd., 299 F. 3d 657, 664 (7^th Cir. 2002), he opines that, in order to apply the arbitration clause contained in one agreement to a dispute under another, the contract containing the arbitration clause “must show an intent to incorporate the other document and make it a part of the contract itself.”  It is not enough that the Management Agreement expressly referenced an expectation that the parties would enter into a revenue sharing contract, which became the Revenue Sharing Agreement.  “[W]here an agreement with an arbitration clause merely references a second agreement without one, the reference is not enough to incorporate its terms into the second agreement. . . .”  As indicia of incorporation, the court suggests situations where the contracts are sections of the same agreement, each contract contains similar provisions, the contracts borrow missing terms from each other, or “one contract relates to an ongoing relationship while the other was for a more specific purpose.” Those factors, the court holds, are not present here.  According, it refuses to dismiss the claims for breach of the Revenue Sharing Agreement for improper venue.  (For those interested in federal procedure more generally, the case also contains a good discussion of the concepts of forum non conveniens, as KAIST moved to dismiss in favor of the Korean courts).

Arbitration of Attorney-Client Disputes

Normally, “ADR Highlights” covers the federal courts.  However, in light of current discussions in the arbitration and legal ethics fields surrounding the circumstances under which an attorney may include an arbitration clause in his or her engagement letter, it is worth noting the Michigan Supreme Court’s recent adoption of a rule providing that such agreements are not enforceable, unless the client is “reasonably informed in writing regarding the scope, advantages, and disadvantages of the provision” or is independently represented in making the agreement, Michigan Rules of Professional Conduct, Rule 1.19.  The Official Comment sets out provisions which create a presumption that the client has given “informed consent.”  For anyone litigating the enforceability of such a provision, those guidelines are worth a look.  Also, there is a lengthy dissent by Justice Viviano, joined by Justice Zahra, in which he characterizes the rule change as “a classic solution in search of a problem; no evidence has been produced that arbitration agreements between lawyers and clients in Michigan are currently a problem.” In fact, the dissenters believe the rule is “needless, ineffective, and potentially deleterious.”   The dissent’s citation to law journal articles provides a good starting point for opponents of similar rule changes in other jurisdictions.  The rule change, Official Comment, and dissent are available at 101 MI Bar Jnl. 63, which you can find on Lexis Advance.

 

SCOTUS

There are three pending cert. petitions related to arbitration.

“Transportation Worker” Exception to the FAA

Section 1 of the FAA excludes “contracts of employment of . . . any . . . class of worker engaged in foreign or interstate commerce.”  In its last Term, the Court held that a supervisory ramp employee who sometimes loaded and unloaded baggage from planes fell within the exclusion.  Therefore, the Court held that the District Court erred in enforcing the mandatory arbitration clause in her employment contract.  Some lower courts, see e.g. Bissonnette v. LePage Bakeries Park St., LLC,  2022 U.S. App. LEXIS 27628 (2^nd Cir. September 26, 2022)(discussed in last Friday’s edition of this blog), have limited Saxon to those in the transportation industry, still leaving open the question of whether employees such as truck drivers who drive in only one state, but deliver goods that have moved through interstate commerce, fall within the exclusion. In this day of Grubhub, Uber, and last-mile Amazon delivery service, this is obviously an important question. Domino’s Pizza LLC. v. Carmona, Dkt. No. 21-1572, gives the Supreme Court a chance to resolve the issue, as Respondents delivered pizza products, at least some of which came from outside California, to franchisees in the Southern California area, but did not cross state lines themselves.  The case is set for conference this coming Friday, October 14.

California Private Attorney General Act (“PAGA”)

Last Spring, SCOTUS held that the FAA pre-empts California case law exempting PAGA claims from mandatory employment arbitration, Viking River Cruises, Inc. v. Moriana, 142 S. Ct. 1906 (2022).  Based on that holding, ForwardLine Financial, LLC v. Ahlmann, Dkt. No. 22-75, asks the Court to reverse a California Court of Appeals decision which was based on pre-Viking California law.  The Court’s rulings on similar petitions, see Uber Technologies, Inc. v. Gregg, Dkt. No. 21-452; Uber Technologies v. Rosales, Dkt. 21-526; Lyft, Inc. v. Seifu, Dkt. 21-742; Shipt, Inc. v. Green, Dkt. 21-1079; Handy Technologies, Inc. v. Pote, Dkt. No. 21-1121,  indicate that it will probably accept cert. and remand for consideration in light of Viking.

Judicially-Created Exceptions to the FAA’s Enumerated Bases for Vacatur

Section 10 of the FAA sets forth the grounds for vacating arbitration awards that are subject to the Act, specifying those cases in which the “arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final and definite award upon the subject matter submitted was not made.” Courts, following SCOTUS’s holding in W.R. Grace & Co. v. Local 759, 461 U.S. 757 (1983), have created additional bases for vacatur, including circumstances where the award violates public policy and, in some Circuits, where the award is in “manifest disregard” of the law.  Caputo v. Wells Fargo Advisors, LLC., Dkt. No. 22-265, raises the issue of whether the public policy exception – and, by implication, other judicially created grounds for vacatur – survive the Supreme Court’s holding in Hall Street Associates v. Mattel, 552 U.S. 576 (2008).  There, the Court held that the parties may not expand the bases for vacatur beyond those set forth in the Act.  The Petitioners do not cite any Circuit split; however, they reference lower federal court and state Supreme Court decisions which invoke the public policy exception.  In addition, there have been several federal courts which have asked in dictum the same question Caputo raises here.  Perhaps, even absent a Circuit split, this Supreme Court, which last Term showed its interest in arbitration, might resolve this important question.   Wells Fargo has waived its right to file an opposition to the petition, and the Court has scheduled the matter for conference on October 28^th.

For a discussion of other cert. petitions decided by the Court over the summer and at its first conference, see George Friedman’s great note in Securities Arbitration Alert, First Monday in October: Some Arbitration-Centric Cases Worth Following – SAA Blog (secarbalert.com).  And, as always, full copies of the cert. petitions and all other filings are available at the terrific Scotus Blog, Scotusblog.com.

Have a good week.

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