As we wrap up the year, the Ninth Circuit, which has been active on arbitration issues, weighs in on contract interpretation.  Also, the courts take a look at the expansive safe harbor under the AAA-ICDR immunity rule, the narrow gate for the review of grievance arbitrations, and mediation as a precursor to litigation.

Arbitration Institution Immunity

Schorr v. American Arbitration Association, Inc., 2022 U.S. Dist. LEXIS 231957 (S.D.N.Y. December 27, 2022)(Engelmayer, J.), represents an attempt by an arbitral party to recover fees paid in a proceeding that terminated early.  The respondent in the underlying proceeding, who appeared pro se, engaged in a series of threats and accusations against the arbitrator and AAA staff.  These first resulted in a warning from the institution to the parties that they must abide by the AAA-ICDR Standards of Conduct.  Ultimately, the AAA administratively terminated the arbitration due to “our employees and the arbitrator hav[ing] been subjected to continued violations of the Standards.”  Schorr, the Claimant, had advanced approximately $47,000 in fees and expenses, which AAA declined to repay. Schorr sued, alleging that, in bringing the claim before the AAA and advancing fees, “she had acted in reliance that the arbitration would reach completion and result in the issuance of a final award.”

The Association moved to dismiss on two bases.  First, it claimed that the common law doctrine of arbitral immunity, which extends to arbitrators and arbitral administrative institutions, barred the action in its entirety.  The court rejects the defense, except as to a single claim which was based upon the Association’s interpretation of the arbitration agreement. Those allegations, the court holds, “target[] conduct ‘associated with the adjudicative phase of the arbitration. . . .’”  (Citation omitted).   However, the court rejects the defense as to the remaining claims, which are based on breach of contract, promissory estoppel, negligence, false advertising, and similar claims,  The retention of advanced fees, the court opines, “sounds in commercial rather than administrative considerations.”  The court holds that the policies which underlie immunity – protecting the “finality of judgments” and sheltering administrative decisions taken to “further the progress of arbitral proceedings” – do not apply where the tribunal has terminated the proceedings before the entry of an award. Further, applying immunity here “would excuse – with impunity – arbitral institutions who shrink from carrying though [sic] on their contractual duties. . . .”

However, while not applying common law immunity, the court dismisses the action based on the AAA Commercial Rules.  Rule 52(d) “releases the AAA-ICDR and its arbitrators from liability ‘for damages or injunctive relief for any act or omission in connection with any arbitration under the Rules.’”  By accepting the Commercial Rules to govern the proceeding, Schorr agreed that any claim against the arbitrator or institution would be barred.  The opinion cites extensively to authorities in the Southern District and elsewhere related to the Rule-based claims bar and is a good starting point for research on the issue.

Review of Grievance Arbitrations

CSC Holdings, LLC v. International Brotherhood of Electricians, 2022 U.S. Dist. LEXIS 232121 (E.D.N.Y. December 27, 2022)(Lindsay, M.J.), is a reminder of the very limited scope of judicial review of awards in grievance arbitrations. The underlying dispute related to the employer’s right to implement changes in an overtime premium paid when an employee worked on a company holiday. The arbitrator found in favor of the union, holding that CSC had violated the CBA in making the modification unilaterally.  The union sought to confirm the award; CSC moved to vacate it.

The court lays out the generally accepted vacatur standard. “Vacatur is only warranted ‘when an arbitrator strays from interpretation and application of the agreement and effectively dispenses his own brand of industrial justice.’” (Citation omitted)  While finding the arbitration’s interpretation of the relevant language of the CBA to be “extremely narrow,” Magistrate Judge Lindsay recommends confirmation of the award. “As long as [the arbitrator] even arguably construed or applied the terms of the contract, which he did, the fact that ‘[the] court is convinced he committed . . . error does not suffice to overturn his decision.’” (Citation omitted, emphasis added).  In summary, so long as the arbitrator ties his or her decision to the CBA’s language, the award stands – even if the court believes it is wrong.

Mediation as a Prerequisite to Litigation

Travelers Casualty and Surety Co. v. Silo City Phase I, LLC., 2022 U.S. Dist. LEXIS 232107 (W.D.N.Y. December 27, 2022)(McCarthy, M.J.), addresses stepped dispute resolution. The parties’ construction contract provided that claims arising out of the Contract “shall be subject to mediation as a condition precedent to bringing dispute resolution.” Travelers here seeks exoneration on the surety bond which it issued in connection with that contract. Silo moved to dismiss, arguing that Travelers had an obligation under the quoted language to mediate before starting suit and that it had failed to do so.   The  court rejects the argument.  Opining that “resolution” means “to make a formal decision,” quoting Black’s Law Dictionary, the court holds that “the mere commencement of litigation does not formally decide anything.”  It distinguishes authorities under which ADR is required “as a condition of commencing any action. . . “ (Emphasis added).  Accordingly, the Magistrate Judge recommends that the motion to dismiss be denied. The court defers deciding whether to stay the case pending mediation, as “the relief has not been formally requested.” Presumably, were such a motion to be made, it would be granted.

Separate Arbitration Agreement

Meeks v. Experian Information Services, Inc., 2022 U.S. App. LEXIS 35650 (9^th Cir. December 27, 2022), shows the challenges raised when the arbitration provision defines terms differently than does the contract which contains it.  When Plaintiffs signed up for credit-monitoring, they executed an agreement with Experian Consumer Services (ECS) which contained an arbitration provision. While the arbitration provision defined ECS to encompass its “affiliates,” the larger agreement did not do so.  In this action against Experian Information Services (Experian), a sister company of ECS, Experian moved to compel arbitration.  The District Court denied the motion, holding that the arbitration agreement did not stand alone, and, therefore, that the controlling definition should be that in the larger agreement – the one which did not include “affiliates.”  In a 2-1 decision, the Court of Appeals reverses.  The majority, consisting of Circuit Judge Bennett and District Judge Dorsey, sitting by designation, holds that “arbitration provisions [are] separately enforceable from those larger agreements.”  Therefore, the relevant definition is that contained in the arbitration provision, i.e., the one which includes “affiliates” like EIS.

In dissent, Circuit Judge S.R. Thomas opines that California law, which applies to contract formation, does not authorize arbitration by non-signatories, even if they are referenced in the agreement.  Such non-signatories can only compel arbitration through “an alternative theory like the third-party beneficiary rule,” citing to Revitch v. DIRECTTV, LLC., 977 F. 3d 713 (9^th Cir. 2020).  “In short, the arbitration provision did not create a separate, broader set of contractual parties than the Terms of Use Agreement and Experian is not a party to that overarching contract.” Since Experian did not claim that any of the doctrines allowing arbitration by a non-signatories applies, he would reverse.

While the case is driven by the language of the agreement, the lesson to drafters is clear; unless you intentionally want to limit those who can enforce an arbitration provision, make sure that all the definitions within the agreement track each other.

The case also raises a pet peeve of mine.  It is a “memorandum” decision, which the court states is “not precedent except as provided by 9^th Cir. R. 36-3.”  Why? I recognize the optics issues raised where a visiting judge or one sitting by designation completes the majority in a 2-1 decision.  However, both Rule 32.1 of the Federal Rules of Appellate Procedure and the Ninth Circuit rule itself allow the citing of the opinion. If the Circuit has enough confidence in its decision to allow it to determine the rights of Ms. Meeks and Experian, it should be willing to stand by it as precedent in later cases.  That is one of the underpinnings of a common law system.

Today’s “Highlights” finishes another trip around the sun.  Thank you for following me this year.  It’s been an interesting one, as SCOTUS has been particularly active in resolving major issues of jurisdiction and discovery related to arbitration.  With the lower court’s further development of the exceptions under Section 1 of the FAA and the Supreme Court’s upcoming look at stays during appeal, 2023 promises to hold new surprises.  I’ve enjoyed following the idiosyncrasies of arbitration law in 2022; I hope the result has been interesting and useful.  As always, if you have any suggestions for improvements, please email me.

All the best for a safe; prosperous; and, above all, fulfilling 2023.

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