The last issue of “Highlights” was a little short on meat.  The courts have made up for it today, as they address the relation between arbitral rules and delegation in the employment context, the accrual of sexual harassment claims, and carve-outs for injunctive relief.  Good stuff!

The Invocation of AAA Rules Does Not Delegate Gateway Issues in Non-Commercial Cases; Arbitration of Victim Trafficking Claims

The rules of many, if not most, arbitral institutions provide that the arbitrator decides his or her own jurisdiction, see e.g., Commercial Arbitration Rules, American Arbitration Association, Rule 7 (September 2022). Courts have almost invariably held that, by invoking such rules, the contracting parties implicitly agree that the arbitrator will decide gateway questions, such as the scope of  and enforceability of the arbitration clause.

However, some judges have nibbled away at that concept, see e.g. Moreno v. T-Mobile USA, Inc, 2023 U.S. Dist. LEXIS 12911 (W.D. Wash. January 25, 2023)(dictum); Hanc & Brubaker Holdings v. NXT LVL Services, LLC, 2023 U.S. Dist. LEXIS 14410 (N.D. Ill. January 27, 2023). In Vidal v. Advanced Care Staffing, LLC, 2023 U.S. Dist. LEXIS 59411 (E.D.N.Y. April 4, 2023)(Morrison, J.), the dam potentially breaks as to contracts other than those among “sophisticated commercial parties.”[1]

The case raises the arbitrability of claims under the Trafficking Victims Protection Act (“TVPA”). Plaintiff was in the U.S. working as a nurse under a visa which the defendant sponsored. After he resigned, Defendant commenced arbitration under a broad provision in Vidal’s employment agreement, claiming that he breached his contract.  Vidal, then, brought this action seeking to enjoin the arbitration on the basis that the arbitration provision is unenforceable and void.

The court first addresses whether she or the arbitrator should decide this gateway question.  The parties’ agreement provided for arbitration under the AAA’s Commercial Rules.  The arbitrator held that she had the authority to decide “the validity of the arbitration agreement or the arbitrability of any claim.”  Judge Morrison disagrees. The court starts with the holding in First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944 (1995), that “courts should not assume the parties agreed to arbitrate arbitrability unless there is ‘clea[r] and unmistakabl[e]’ evidence that they said so.” (quoted citation omitted; brackets in original).  Judge Morrison, then, distinguishes the Second Circuit’s holding in DDK Hotels, LLC v. Williams-Sonoma, Inc, 6 F. 4^th 308 (2^nd Cir. 2021), that incorporation of the AAA’s Commercial Rules provides such “evidence” and demonstrates the “parties’ intent to delegate the question of arbitrability to the arbitrator.” 6 F. 4^th at 318-19. In DDK, she opines, the contracting parties were “two sophisticated commercial parties.”  Mr. Vidal, Judge Morrison writes, is probably less familiar with the law.  “It is highly unlikely that a foreign nurse unfamiliar with United States law, let alone caselaw surrounding the interpretation of arbitration agreements, would see a reference to the AAA Commercial Rules in the contract and reach that same conclusion, i.e. understand that such incorporation would in any way reflect an actual intent [to delegate].”  In a footnote, the court goes even further, writing that the jurisdictional rule is “tucked within [60] broad-spanning rules. . ,” and that “it is highly improbable that an unsophisticated party would even register this provision in a set of rules intended for an entirely separate purpose, let alone comprehend its implications.”

Judge Morrison further addresses the potential unenforceability of the arbitration clause based upon the “potentially ruinous financial toll of appearing before an arbitrator even to determine issues of arbitrability.”  Based upon those costs and its rejection of the AAA delegation theory, the court holds that Vidal is likely to succeed in demonstrating that the delegation clause is invalid; accordingly, she grants a preliminary injunction against the continuance of the arbitration pending her decision on the merits.

The opinion goes on to address the arbitrability of claims under the TVPA where the arbitration clause contains fee-shifting provisions, the procedural unconscionability of an agreement executed by a party who was allegedly in a “power disparity” due to his status as a foreign national working under a visa obtained by his employer, and the severability of allegedly improper provisions.

This seventy-four-page opinion reads like a law review article.  Whether one agrees with its conclusions or not, the case is an important read on a variety of issues.  It is one of the first full-scale considerations of the relation between AAA rules and delegation in a non-commercial context. It potentially affects the broad range of employers in the tech, health care, and hospitality industries who employ foreign nationals on work visas. And Judge Morrison’s discussion of the effect of a “loser-pays” provision will be important by anyone litigating the enforcement of arbitration clauses in employment, consumer, or investor agreements.  In other words, keep this case at hand, because you will either want to cite it or you will see thrown at you.

Accrual of Claims under the Sexual Assault and Sexual Harassment Act

In 2021, Congress passed an act prohibiting pre-dispute agreements which require employees to arbitrate claims of sexual harassment or sexual assault.  The act applies “with respect to any dispute or claim that arises or accrues on or after the date of enactment of this Act [March 3, 2022].”   Hodgin v. Intensive Care Consortium, Inc., 2023 U.S. Dist. LEXIS 59251 (S.D. Fla. March 31, 2023)(Middlebrooks, J.) addresses when a claim “arises” or “accrues.”  Plaintiff claimed that she was injured in 2021; in 2022, she filed charges with the EEOC. Both of those events pre-date the Act.  However, the EEOC issued a notice of right to sue letter in August 2022, i.e., after the prohibition’s effective date.  Hodgin argued that her claim accrued only upon the issuance of that letter, and, therefore, that the prohibition against mandatory arbitration applied. Judge Middlebrooks disagrees, holding that a dispute “arises” as soon as there is a “disagreement.”  Here, he finds, the dispute arose when the plaintiff filed her Charges of Discrimination with the EEOC, not when the agency authorized her suit. While the Charge of Discrimination with the EEOC “initiates an administrative process whereby the EEOC attempts to mediate an early resolution. . ,”  the dispute had already arisen before the agency gave permission to sue “because the Plaintiff was now in an adversarial position with her employer in a forum with the potential to resolve the claim”

With the passage of time, this timing issue will arise less frequently; however, for employment lawyers, this is a case worth keeping in your notebook.

Carve-outs from Arbitration

Continental Materials and Veer Plastics entered into a distribution agreement which provided that “any dispute, controversy or claim between the parties (whether or not to this Agreement or any transaction pursuant to this Agreement. . .)”  would be arbitrated under the ICC Rules, but that “a Party may seek specific performance of this Agreement or any other equitable relief in a court of competent jurisdiction.”  The terms of the agreement provided that Veer could not solicit CMI’s employees.  One such employee, however, resigned from working with CMII and began work with Veer shortly thereafter.  CMI brought this suit against Veer on September 15, 2022, seeking, inter alia, injunctive relief arising from alleged breaches of contract, misappropriation of trade secrets, and other business torts. Five days later, Veer commenced arbitration in London, pursuant to the arbitration clause; it, then, moved to compel arbitration and dismiss the complaint.  In Continental Materials, Inc. v. Veer Plastics Private Limited, 2023 U.S. Dist. LEXIS 59703 (E.D. Pa. April 4, 2023), Judge Perez grants that motion.

The opinion is interesting for two reasons.  First, the court rejects the claim that the invocation of the ICC rules delegates the issue to the arbitrator.  The ICC rules, like those of the AAA discussed above, provide that the arbitral tribunal should decide its jurisdiction.  However, citing to decisions by two Courts of Appeals,  Archer & White Sales, Inc. v. Henry Schein, Inc., 935 F. 3d 274 (5^th Cir. 2019); NASDAQOMX Group, Inc. v. UBS Securities, LLC, 770 F. 3d 1010 (2^nd Cir. 2014), the court opines that, “where a dispute arguably falls within a narrow carve-out provision, circuit courts have found that questions of arbitrability should remain with the court.” Accordingly, he retains the arbitrability issue for himself.  Second, Judge Perez holds that the carve-out does not cover all requests for injunctive relief addressed to the merits of the claim; “rather [it] permits parties to seek equitable relief in aid of arbitration.” (Emphasis added).  To read the equitable relief provision to “carv[e] out any request for equitable relief [] would create a carveout so broad that it would render the rest of the arbitration agreement void, as it would permit parties to bring any and all claims before a court so long as they include a request for equitable relief.” (Emphasis in original).  Therefore, he grants the motion to compel arbitration and sends all issues to the arbitral tribunal.

For litigators, the opinion raises a very practical concern. Assume that you represent the plaintiff in a trade secrets case who believes a former employee is actively soliciting its customers. The parties have entered into an agreement which covers the topic. Even if you seek emergency relief in the arbitration in order to stop the solicitation while you arbitrate the merits, time is going to pass until an emergency arbitrator is appointed, holds a hearing, and issues an interim award.  In addition, in order to enforce any injunctive relief from the arbitrator, your client may still need judicial help.  On the other hand, federal and most state courts can enter a temporary injunction immediately, perhaps even without prior notice to the alleged miscreant, thus minimizing any damage.  The general perception is that this need for quick action is the reason for equitable relief carveouts. Does Continental Materials undercut this concept?  The answer is a lawyerly “maybe.”  The opinion is not clear as to whether the relief which CMI sought was a temporary injunction to maintain the status quo pending arbitration or whether it was seeking a permanent injunction.  If the relief which it sought was permanent, the case may be distinguishable from requests for merely interim relief. Alternatively, a preliminary injunction might be considered to be “in aid of” the arbitration, a situation which Judge Perez seems to hold would fall within the scope of the carve-out.  Bottom line, the case is a reminder for those drafting arbitration agreements, who want to preserve the option of seeking emergency injunctions or other pendente relief from courts.  They need to be very precise in their drafting as to the types of relief which may be sought; otherwise, they risk having no protection outside the arbitration itself.

Enjoy the weekend.  If Easter, Passover, or Ramadan is a part of your faith tradition, I hope you are able to honor your religious practices in a meaningful way.  See you next week.  

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

[1] In the interest of full disclosure, I should note that, when I was practicing law, one of the counsel for defendant was an associate of a firm in which I was a partner.