Category: Arbitration

WEBSITE LAYOUT PASSES MUSTER: Court Enforces Cruise Line’s TCPA and Arbitration Disclosures Over Objection

Those of you who attended Lead Generation World heard me discuss the big trend from back in 2020 in which Courts were refusing to enforce online disclosures owing to perceived problems with website layout.

Things like “below the button” disclosures and distracting visual elements were often described as defeating a manifestation of assent to disclosure terms in that unfortunate line of cases.

Well, 2022 has brought a couple of cases that have determined website disclosures to be just fine. Yesterday I reported on a big win by Efinancial, and today we have a nice victory by a cruise ship company.

In Barney v. Grand Caribbean Cruises, Inc., CASE NO. 21-CV-61560-RAR, 2022 U.S. Dist. LEXIS 8263 (S.D. Fl. January 17, 2022) the Defendant moved to enforce an arbitration provision on its website arguing that the Plaintiff had agreed to the terms and conditions by submitting a sweepstakes entry form.

Predictably, the Plaintiff argued that the disclosures were not enforceable because the website layout was insufficient–specifically that the font was too small and the terms excessively lengthy.

The Court was not impressed.

Noting that the disclosure was plainly readable and above the button–and it required a check box–the Court simply refused to heed the Plaintiff’s argument that he didn’t know he was agreeing to consent and arbitration. Here’s the analysis:

First, in terms of placement, the Website does not tuck away its statement regarding the Terms & Conditions in an obscure corner of the page where a user is unlikely to encounter it. Rather, the statement is located directly between the contact information fields and the “Submit Entry” button. The user is required to check the box indicating assent to the Terms & Conditions before any information is submitted. Id. ¶ 14. Thus, it is impossible that a user would miss seeing the statement regarding the Terms & Conditions or—at the very least—the checkbox indicating assent to them. Second, rather than merely informing the user that the Terms & Conditions exist, the statement directs the user to the precise location where the Terms & Conditions can be accessed—namely, at the “bottom of the page.” Finally, and most significantly, the user is required to check an acknowledgement box to accept the Terms & Conditions before any information is submitted through the Website—an affirmative act indicating [*14] assent. The checkbox accompanies the statement, which specifically includes language indicating that the user “agree[s] to the Privacy Policy and Terms & Conditions.” Thus, there is an explicit textual notice that checking the box will act as a manifestation of an intent to be bound. A reasonable user confronting a statement that “I consent to receive e-mail, SMS/Text messages, and calls about offers and deals from an automatic dialing system and/or pre-recorded voice technology” and “confirm that I am over age 25 [and] agree to the Privacy Policy and Terms & Conditions that are hyperlinked at the bottom of the page” would understand that he or she is assenting to the linked terms, including those pertaining to mandatory arbitration. And the record shows that Plaintiff indeed checked the box before clicking “Submit Entry.” Connolly Decl. ¶ 20. Plaintiff’s objections to the design of the Website hold no water. Plaintiff assails the statement regarding the Website’s Terms & Conditions as “lengthy” with “extremely small font that blends into the background.” Resp. at 9. But as seen in the screenshot of the Website on the day of Plaintiff’s visit, the statement’s text is clearly legible [*15] and not overly long. Indeed, it is roughly the same size and color as the text indicating the fields for “First Name,” “Last Name,” “Email,” and “Phone Number.” Plaintiff also objects to the placement of the link to the Terms & Conditions at the bottom of the page. Id. at 10. But, as discussed supra, that is precisely where the statement directed the user to view them.

As you can see the Court found the layout to be perfectly appropriate and was particularly moved by the presence of the opt in check box. Although many cases have recently enforced disclosures WITHOUT checkboxes, they do remain favored by the Courts.

I think Barney represents a case of a pretty clearly enforceable provision. The above-the-button text coupled with the radial button and the clear articulation of the terms being accepted made this an easy case for the court.

I will note that the TCPA consent is connected to the terms and conditions lingo–I don’t love that since the TCPA disclosure should be “separately signed”. But the agreement by the consumer that they are over 25 is a nice touch–helps to protect against claims that minors are supplying consent illegally.

© Copyright 2022 Squire Patton Boggs (US) LLP
For more articles about TCPA litigation, visit the NLR Litigation section.

Supreme Court to Address Role of “Prejudice” in Evaluating Waiver of Arbitrability

One of the best ways for companies facing media and privacy risk to protect themselves from expensive class action litigation is by including an arbitration provision in the applicable terms and conditions. While it’s not always clear at the outset of litigation whether the plaintiff agreed to the terms, companies often have to invoke arbitration quickly out of fear that they will be found to have waived arbitration. But in its coming term, the U.S. Supreme Court is now poised to address the critical point of whether prejudice to the plaintiff is a necessary element for a finding of waiver.

The Court agreed to decide whether prejudice is a required element in determining whether the right to arbitrate has been waived when it granted a Petition for Writ of Certiorari in Robyn Morgan v. Sundance, Inc. (No. 21-328). The case reached the Supreme Court after the Eighth Circuit found that Sundance, Inc., a company that owns over 150 Taco Bell franchises nationwide, did not waive its right to arbitrate the plaintiff’s claims, despite waiting almost eight months after the filing of her Complaint to move to compel arbitration.

There is, at a present, a circuit split on the question of whether prejudice plays a role in the waiver analysis. Nine out of the twelve federal circuit courts—the First, Second, Third, Fourth, Fifth, Sixth, Eighth, Ninth, and Eleventh Circuits—have explicitly found that prejudice is a required element to establish a waiver of the right to arbitrate. But the remaining three circuit courts—the Seventh, Tenth, and D.C. Circuits—have held that prejudice is not a required element.

In this case, the plaintiff, on behalf of herself and a proposed putative class, filed suit against Sundance on September 25, 2018 in the U.S. Southern District of Iowa, alleging that it had failed to pay employees for overtime hours worked in violation of the Fair Labor Standards Act. Because an action containing nearly identical allegations had been pending in the Eastern District of Michigan for nearly two years, Sundance first filed a motion to dismiss or stay the claims under Fed. R. Civ. P. 12(b)(3), which the District Court ultimately denied.

Thereafter, Sundance, plaintiff, and the plaintiffs in the Eastern District of Michigan action voluntarily attended mediation in an attempt to achieve a global resolution of the claims asserted against Sundance. Plaintiff’s claims were not resolved at the mediation, and three weeks later (nearly eight months after the case had been filed), Sundance moved to compel arbitration.

The motion to compel arbitration was filed before the parties attended an initial scheduling conference with the District Court and before the parties had engaged in any discovery. Nonetheless, the District Court denied the motion, finding that Sundance had waived its right to arbitration because it acted inconsistently with its right by invoking the “litigation machinery,” which prejudiced plaintiff.

The U.S. Court of Appeals for the Eighth Circuit reversed on appeal, finding that—in light of the totality of the circumstances—plaintiff had not been prejudiced by Sundance’s eight-month delay because, during that time, the parties were briefing the quasi-jurisdictional issue raised in the motion to dismiss or stay and then waiting on the District Court’s ruling on same, rather than litigating the merits of the claim.

Plaintiff sought review by the Supreme Court, asking it to answer the following question: “Does the arbitration specific requirement that the proponent of a contractual waiver defense prove prejudice violate this Court’s instruction [in , 563 U.S. 333, 339 (2011)] that lower courts must ‘place arbitration agreements on an equal footing with other contracts?’”

In response, Sundance argued that despite the apparent split, the Seventh, Tenth, and D.C. Circuits nonetheless consider prejudice in determining if the right to arbitrate has been waived. Per Sundance, “[a]t bottom, all of the Circuits are looking at the totality of the circumstances, as they should, in assessing waiver, and all are considering the existence of prejudice, whether as a mandatory or non-mandatory factor, as part of the assessment, based upon highly overlapping facts.”

Only time will tell whether the Supreme Court agrees, but we will continue to track and report on this case.

© 2022 Vedder Price

Article By Bryan Clark and Julia L. Koechley of  Vedder Price

For more articles on the Supreme Court, visit the NLR Litigation / Trial Practice section.

Supreme Court to Consider Whether the FAA Mandates Arbitration of PAGA Actions

On Dec. 15, 2021, the United States Supreme Court granted certiorari in Viking River Cruises, Inc. v. Moriana, and likely will decide by summer 2022 whether the Federal Arbitration Act (FAA) preempts California public policy and requires enforcement of arbitration agreements that purport to waive an employee’s ability to pursue representative actions under the California Private Attorneys General Act (PAGA). Employers have been waiting for the Supreme Court to take up this issue and are watching the case with interest.

Currently, per the California Supreme Court’s decision in Iskanian v. CLS Transportation Los Angeles, LLC, arbitration agreements that waive an employee’s right to pursue PAGA representative actions are considered void and unenforceable. In Iskanian, the California Supreme Court held the FAA does not preempt California state law prohibiting prospective PAGA waivers because PAGA actions are between the employer and the state, not the employee. Thus, the state of California is the real party in interest, not the employee bringing suit, and although the employee may have executed a binding arbitration agreement, the state of California did not. Thus, arbitration agreements that purport to waive the right, expressly or otherwise, to bring a PAGA representative action are not enforceable.

In Viking River, the employee filed a PAGA representative action seeking civil penalties for various alleged violations of the California Labor Code, despite signing an arbitration agreement with her employer agreeing to resolve all future employment-related disputes with the employer via individual arbitration. Relying on the agreement, the employer moved to compel the action to arbitration. The trial court denied the motion, and the Court of Appeal affirmed the denial citing California state law as articulated in Iskanian. The California Supreme Court subsequently denied the employer’s petition for review.

Viking River then petitioned the U.S. Supreme Court for certiorari, relying on the Supreme Court’s decisions in AT&T Mobility LLC v. Concepcion and Epic Systems Corp. v. Lewis. These decisions held that courts may not disregard bilateral arbitration agreements or reshape traditional individualized arbitration by mandating class-wide arbitration procedures without all parties’ consent. Viking River argued the Supreme Court needed to review the case to reaffirm the FAA and national policy in favor of arbitration. Viking River further argued review was necessary to ensure that Concepcion and Epic promote bilateral arbitration, rather than simply result in “representational litigation” under PAGA by those who agreed to arbitrate individually. In granting review, the Supreme Court will decide “[w]hether the Federal Arbitration Act requires enforcement of a bilateral arbitration agreement providing that an employee cannot raise representative claims, including under PAGA.”

This will be a closely watched decision for both sides of the bar and will likely have a groundbreaking effect on California employment litigation. Should the Supreme Court decide in Viking River’s favor, PAGA-only actions, which have become the preference of California plaintiffs’ attorneys in the face of arbitration agreements containing class action waiver provisions, will largely become a thing of the past for those employers who mandate individual arbitration for employees. Although it is by no means certain how the Supreme Court will decide this issue, employers should certainly be ready to revisit any arbitration agreements with California employees and consider what if any changes the ultimate ruling may warrant.

Article By Ashley M. Farrell Pickett and Radha D.S. Kulkarni of Greenberg Traurig, LLP

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©2021 Greenberg Traurig, LLP. All rights reserved.

Ninth Circuit Rejects Ex-Tinder Employee’s Attempt to Avoid Arbitration

The Ninth Circuit Court of Appeals has ruled that an ex-Tinder employee must arbitrate her claims against her former employer and cannot pursue her claims in court, even though her claims arose before she executed an arbitration agreement. In reaching this decision, the Ninth Circuit not only enforced the broad language of the parties’ arbitration agreement, but also held that a unilateral modification clause (granting the employer the right to make changes to the agreement) does not, in and of itself, render an arbitration agreement unenforceable. Elizabeth Sanfilippo v. Match Group LLC et al., Case No. 20-55819, 2021 U.S. App. Lexis 29263 (9th Cir. Sept. 28, 2021).

In this case, the chronology of events is important to understanding how this lawsuit arose.  In September 2016, Tinder hired the plaintiff as a brand manager.  According to the plaintiff, in mid-2017 and January 2018, she complained to human resources about sexual harassment by her coworkers and supervisors. During that same time period, in July 2017, Tinder was acquired by Match Group, Inc. After acquiring Tinder, Match Group sent its employees a mandatory arbitration agreement. The plaintiff signed the agreement and continued to work for Match Group until Match Group discharged her in March 2018. The plaintiff sued in California state court for sexual harassment and retaliation.  The case was removed to federal court at which point Match Group successfully moved to compel arbitration. The plaintiff appealed, arguing that the arbitration agreement (1) is unenforceable, and (2) does not cover her claims, which predated the agreement.

On appeal, the Ninth Circuit held the arbitration agreement was enforceable and applicable to the plaintiff’s sexual harassment allegations, even though the plaintiff did not sign the agreement until after her claims arose. In ruling for Match Group, the court highlighted the broad nature of the arbitration agreement’s language that required arbitration for “all claims and controversies arising from or in connection with [the plaintiff’s] application with, employment with, or termination from the Company.” In enforcing the agreement, the court noted that the agreement’s reference to “all claims and controversies” arising out of the plaintiff’s employment necessarily included her claims that predated the arbitration agreement.

Moreover, the Ninth Circuit was not swayed by the fact that the arbitration agreement included a provision that allowed Match Group to modify the terms of the agreement unilaterally. While the court recognized that such a provision could be substantively unconscionable, it explicitly discussed how Match Group had not actually modified the agreement but was rather seeking to enforce the agreement as written. But the court went even further in enforcing the agreement. In addition to upholding the agreement, the Ninth Circuit determined that even if it assumed that a provision permitting unilateral modifications by the employer is substantively unconscionable, such a provision alone does not render the entire agreement unenforceable. Therefore, even taking the plaintiff’s argument as true, the agreement, as a whole, was still enforceable.

The Ninth Circuit’s decision is encouraging for employers seeking to enforce their arbitration agreements for a few reasons. First, the court made clear that a unilateral modification clause will not, in of itself, render the agreement unenforceable. Second, the court  enforced the broad language in the employer’s arbitration agreement and compelled arbitration of claims that pre-date the execution of the agreement.

Co-authored by Spencer Ladd.

Jackson Lewis P.C. © 2021

Lessons From Above: SCOTUS Declines to Review a Class Arbitrability Case (the Issue Had Been Delegated to an Arbitrator)

In its restraint, SCOTUS has shown us the mischief that arbitrators may do if parties are lax in setting boundaries in their agreement to arbitrate.  By declining to grant certiorari regarding the Second Circuit’s most recent decision in Jock v. Sterling Jewelers, Inc., 2019 U.S. App. LEXIS 34205 (2d Cir. Nov. 18, 2019), cert. den., No. 19-1382, 2020 U.S. LEXIS 4133 (Oct. 5, 2020), SCOTUS reminds us of the significance of the doctrine of judicial deference to the authorized decisions of an arbitrator.

In Jock, the ultimate issue was formidable — class arbitrability.  And the subsidiary issues were and are daunting. For example,

(1) parties to an arbitration agreement can delegate the class arbitrability issue (is class arbitration permitted?) to an arbitrator in the first instance, but would that delegation bind non-appearing putative class members, who are of course not parties to the operative arbitration agreement?

(2) who decides that delegation issue?

(3) would an arbitrator’s determination that class arbitration is permitted bind (a) non-appearing putative class members or (b) an unwilling respondent vis-à-vis those non-appearing putative class members?

The Second Circuit held that an arbitrator had acted within her authority in “purporting to bind the absent class members to class procedures,” 2019 U.S. App. LEXIS 34205 at *14, and that that determination therefore would stand “regardless of whether [it] is, as the District Court believes, ‘wrong as a matter of law.’”  Id.  Indeed, the Second Circuit had framed its inquiry as “whether the arbitrator had the power, based on the parties’ submissions or the arbitration agreement, to reach a certain issue” and “not whether the arbitrator correctly decided that issue.”  Id. at *8-*9, citing Oxford Health Plans LLC v. Sutter, 569 U.S. 564, 569 (2013).

Thus, the Court of Appeals did not review the merits of the arbitrator’s Class Determination Award (“CDA”), but rather defended it from scrutiny on the merits.  Instead, the Second Circuit focused on the delegation question — did the parties clearly and unmistakably delegate the class arbitrability issue to the arbitrator for determination in the first instance?

The first lesson:  if the issue of class arbitrability is delegated to an arbitrator for determination in the first instance, the resulting award becomes a hardened target with respect to its legal merits.  It may be challenged on the narrow grounds for vacatur set out in Section 10(a) of the Federal Arbitration Act (“FAA”), 9 U.S.C. § 10(a), and it then benefits from the deference accorded to all arbitral awards.  Consequently, a decision concerning class arbitrability that might be reversed on de novo review if issued by a court will likely be left undisturbed if issued by an arbitrator.

That lesson alone is important to any company that uses a form arbitration clause in many substantially similar contracts – e.g, employment, consumer, financial, or insurance agreements.  It highlights the urgency of getting one’s form(s) of arbitration agreement in order, including the advisability (i) to state clearly whether arbitrability issues – and class and/or collective arbitrability issues in particular – are to be determined by a court or an arbitrator in the first instance, and (ii) to expressly prohibit class and collective arbitration if bilateral arbitration is the sole desired structure for dispute resolution.

To illustrate the point, consider that SCOTUS decided in Lamps Plus, Inc. v. Varela, 139 S.Ct. 1407, 2019 U.S. LEXIS 2943 (U.S. Apr. 24, 2019), that when a court is deciding the matter under the FAA in the first instance, neither silence nor ambiguity in an arbitration agreement regarding the permissibility of class arbitration is a sufficient basis to find that the parties agreed to permit class arbitration.  And SCOTUS implied that incorporation by reference of institutional rules such as those of the American Arbitration Association (“AAA”), including its Supplementary Rules for Class Arbitration, is not a sufficient basis to infer an agreement to permit class arbitration.  (The AAA’s Supplementary Rules are expressly consistent with that. See R-3.)

But, as the Second Circuit pointed out, the parties in Lamps Plus had agreed that a court, not an arbitrator, should resolve the class arbitrability question, and so the District Court’s decision in Lamps Plus was subject to de novo review on appeal, rather than the deferential review that applies concerning a motion to vacate an arbitrator’s award.  See, 2019 U.S. App. LEXIS 34205 at *18.

In the Jock case, on the other hand, the class arbitrability issue had been delegated to an arbitrator for determination in the first instance:  (1) the appearing arbitrating parties had “squarely presented to the arbitrator” the issue of whether the controlling arbitration agreement permitted class arbitration, id. at *6, in effect resolving the delegation issue via an ad hoc agreement; (2) the operative arbitration agreement provided that the arbitrator shall decide questions of arbitrability and procedural questions, see id. at *12-*13; and (3) the operative arbitration agreement incorporated the AAA’s arbitration rules, including the delegation provision (see R-3) of its Supplementary Rules for Class Arbitration, which “evinces agreement to have the arbitrator decide the question of class arbitrability,” id. at *12, citing Wells Fargo Advisors, LLC v. Sappington, 884 F.3d 392, 396 (2d Cir. 2018).  The Second Circuit justifiably took these manifestations to be “clear and unmistakable evidence” of an intent by the appearing parties to delegate the class arbitrability issue to an arbitrator.

The wild card question, however, was whether the non-appearing putative class members should be deemed bound by that delegation.

It is worth recalling that the Jock case has a lengthy history in the Southern District of New York and the Second Circuit, having bounced back and forth between those courts several times already.  In an earlier go-round, after an arbitrator had “certified” a class of 44,000 employee claimants (including 250 active claimants),1 the District Court denied respondent Sterling’s motion to vacate that CDA, but the Second Circuit reversed and remanded, noting that it had not previously squarely determined “whether the arbitrator had the power to bind absent class members to class arbitration given that they…never consented to the arbitrator determining whether class arbitration was permissible under the agreement in the first place.”  2019 U.S. App. LEXIS 34205 at *6.  On remand, the District Court then vacated the arbitrator’s CDA.  But the Second Circuit reversed again, this time based principally on the appellate court’s determination that the arbitrator had been authorized to adjudicate class arbitrability in the first instance, and so the District Court’s review of that award was therefore limited by (a) the narrow grounds for vacatur set out in FAA § 10(a)(4) and (b) the requisite deferential standard of review of such awards.

In that decision, which SCOTUS eventually let stand, the Second Circuit arguably could have addressed a number of issues:

(1) did the parties to the operative arbitration agreement delegate the class arbitrability issue to an arbitrator?

(2) did the non-appearing members of a putative class too delegate the class arbitrability issue to the particular arbitrator in the pending arbitral proceeding?

(3) are the non-appearing putative class members, who were not parties to the operative arbitration agreement, bound by that arbitrator’s decision regarding class arbitrability?

(4) should the District Court have vacated the arbitrator’s CDA?

The Second Circuit first determined that the class arbitrability issue had been delegated to an arbitrator.  It also decided that the District Court should not have vacated the CDA because the arbitrator had the authority, based on the delegation, to resolve the class arbitrability issue in the first instance, and the merits of that determination therefore were not up for review even if the District Court believed that it had been wrongly decided as a matter of law.

Finally, the Second Circuit decided– and this was novel– that the arbitrator had the authority to reach the class arbitrability issue even with respect to the non-appearing putative class members.  2019 U.S. App. LEXIS 34205 at *15.  Thus, the appellate court decided that, in the circumstances, the non-signatory “absent class members” (a) were deemed to have delegated the class arbitrability issue to the particular arbitrator in the proceeding in question, and (b) were bound by her determination that class arbitration was permitted.

The court’s rationale was:  (1) each of the non-appearing putative class members respectively had made an arbitration agreement with respondent Sterling Jewelers that was substantially identical to the agreement upon which the appearing arbitration participants relied; (2) they thereby consented to, and indeed “bargained for,” an arbitrator’s authority to decide the class arbitrability issue, see id. at *11, *14; (3) that constituted an express contractual consent to delegation by the non-appearing putative class members, see id. at *17; and (4) even if the non-appearing class members had not expressly agreed to “this particular arbitrator’s authority,” id. at *15, that did not matter because judicial class actions routinely bind absent members of mandatory or opt-out classes, id. at *15-*16.  (But of course, arbitration is not litigation, and Fed. R. Civ. P. 23 does not apply in arbitrations.)

Notably, this rationale appears to be inconsistent with the skepticism in this regard expressed by Justice Alito in his concurring opinion in the Oxford Health case.  Justice Alito had opined that an arbitrator’s interpretation of an arbitration agreement generally “cannot bind someone who has not authorized the arbitrator to make that determination,” and that “it is difficult to see how an arbitrator’s decision to conduct class proceedings could bind absent class members who have not authorized the arbitrator to decide on a class-wide basis when arbitration procedures are to be used.”  Oxford Health Plans, LLC v. Sutter, 133 S.Ct. at 2072 (Alito, J., concurring).  Thus too, “an arbitrator’s ‘erroneous interpretation’ of a contract that does not authorize class procedures cannot bind absent class members who have ‘not authorized the arbitrator to make that determination.’”  2019 U.S. App. LEXIS 34205 at *10-*11, citing Oxford Health Plans LLC v. Sutter, 569 U.S. 564, 574 (2013) (Alito, J., concurring).

Nevertheless, SCOTUS let the Jock decision, with all it entails, stand.  And we are left to puzzle out what further lessons SCOTUS intended to convey in this regard.

1 The arbitrator “certified” an arbitration class solely for purposes of injunctive and declaratory relief, and it was an opt-out class (which is usually certified for class action litigations seeking money damages) rather than an opt-in class (which might have lent more justification to the CDA) or a mandatory class.

©1994-2020 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. All Rights Reserved.
ARTICLE BY Gilbert A. Samberg  of Mintz
For more articles on litigation, visit the National Law Review ADR / Arbitration / Mediation section.

Feuding Business Partners in Private Companies: Considering Arbitration to Resolve Partnership Disputes

It is common for private company co-owners to have disagreements while they operate their business, but they typically work through these disputes themselves.  In those rare instances where conflicts escalate and legal action is required, business partners have two options—filing a lawsuit or participating in an arbitration proceeding.  Arbitration is available, however, only if the parties agreed in advance to arbitrate their disputes.  Therefore, before business partners enter into a buy-sell contact or join other agreements with their co-owners, they will want to consider both the pros and the cons of arbitration.  This post offers input for private company owners and investors to help them decide whether litigation or arbitration provides them with the best forum in which to resolve future disputes with their business partners.

Arbitration is often touted as a faster and less expensive alternative to litigation with the additional benefit of resulting in a final award that is not subject to appeal.  These attributes may not be realized in arbitration, however, and there are other important factors involved, which also merit consideration.  At the outset, it is important to emphasize that arbitrations are created by contract, and parties can therefore custom design the arbitration to be conducted in a manner that meets their specific needs.  The critical factors to be considered are: (i) speed—how important is a quick resolution to the dispute, (ii) confidentiality—how desirable is privacy in resolving the claims, (iii) scope—how broad are the claims to be resolved, (iv) expense—how important is it to limit costs, and (v) finality—is securing a final result more desirable than preserving the right to appeal an adverse decision.

Speed—Prompt Resolution of Dispute

Arbitrations generally resolve claims more promptly than litigation, but that is not always the case as arbitration proceedings can drag on if the arbitration is not subject to any restriction on when the final hearing must take place.  One way to ensure that an arbitration will promptly resolve the dispute, however, is to require an end date in the arbitration agreement.  Specifically, the parties can state in their arbitration provision that the final arbitration hearing must take place within a set period of time, perhaps 60 or 90 days of the date the arbitration panel holds its first scheduling conference.  The arbitrators will then set a date for the final hearing that meets this contractual requirement.  Similarly, in the arbitration provision, the parties can also specify the length for the hearing (no more than 2-3 days), and they can also impose limits on the extent of discovery, including by restricting the number of depositions than can be taken.

If securing a prompt resolution of a dispute with a business partner is important, this result can be assured by requiring that all claims are arbitrated, particularly if the parties specify in the arbitration provision that the final hearing must take place on a fast track basis.

Confidentiality—Arbitration Conducted Privately

Litigation takes place in a public forum and, as a result, all pleadings the parties file, and with only rare exceptions, all testimony and other evidence presented at any hearings and at trial will be available to the public.  Therefore if a business partner wants to avoid having future partnership disputes subject to public scrutiny, arbitration provides this protection. But looking at this from another perspective, a minority investor may want to decline to arbitrate future claims against the majority owner if the owner is sensitive to adverse publicity.  The threat of claims being litigated in a public lawsuit may provide the investor with leverage in the negotiation and settlement of any future claims the investor has against the majority owner.

Scope of Dispute—How Much Discovery Required

Determining the scope of a future dispute with a business partner is difficult to do at the time that business partners enter into their contract when any future claims are unknown.  The downside arises in the arbitration context, because one of the parties may desire broad discovery of the type that is permitted in litigation, which may be necessary to defend against certain types of contentions, such as claims for fraud, personal injury and other types of business torts.  In an arbitration proceeding, discovery is typically more restricted, and it may further be limited by the arbitration provision, which caps the number of depositions and narrows the scope of document discovery.  Under these circumstances, the defending party (the respondent) may be hamstrung by these discovery limitations in defending against the claimant’s allegations in arbitration.

To avoid prejudice to the respondent from restrictions on discovery in arbitration, the parties may decide to agree that not all claims between them would be subject to arbitration.  For example, the parties could agree that all claims related in any way to the value and purchase of a departing partner’s interest in the business would be subject to arbitration, but that other claims of a personal nature (e.g., claims for discrimination, wrongful termination) would be litigated in court rather than arbitrated.  This splitting of claims in this manner may not be practical, but is something to be discussed by the parties when they enter into their agreement at the outset.

Expense of Dispute Resolution

As discussed above, business partners can limit the expense of resolving future claims between them by requiring a fast track arbitration hearing and also by limiting the scope and the extent of allowed discovery.  For example, if the parties require a final arbitration hearing to take place in 90 days after the initial scheduling conference, limit the hearing to two days and permit no more than three fact witness depositions per side.  They will have likely achieved a significant reduction of the cost of resolving their dispute.

The issue of cost requires additional analysis, however, because if the parties are not of equal bargaining power, the partner with more capital may not agree that arbitration is the best forum to resolve disputes with a less solvent partner.  The wealthier partner may believe that he or she would prevail over the less well-capitalized partner in a “war of attrition.” This factor may be so significant that it causes the wealthier partner to reject the arbitration of future disputes in favor of resolving of all future claims by or against the other partner through litigation.

Finality of Arbitration Awards

There is no right of an appeal in arbitration and the grounds for attacking an arbitration award in a court proceeding after the arbitration concludes are narrow and rarely successful.  This finality element may thus be an important factor in selecting arbitration as the forum for resolving partnership disputes with the goal of ending the dispute without having it linger on.

There is another concern here, however, that also bears considering.   The conventional wisdom among trial lawyers is that arbitrators are prone to “split the baby” by not providing a strict construction of the written contract or the controlling statute at issue.  Instead, the belief is that arbitrators are inclined to include something for both sides in the final award in an attempt to be as fair as possible, which results in mixed bag outcome.   That has not been my personal experience, but it is true that if the arbitration award is not fully consistent with the contract or a governing statute, there is no right to appeal the decision.  The bottom line is that, at the end of the arbitration, the parties will have to live with the result, and there is no available path to challenge an unfavorable/undesired outcome.

Conclusion

The takeaway is that arbitration is not a panacea.  It can be structured to take place faster and more cost-effectively than a lawsuit, and it will also be held in private and not be subject to public scrutiny.  But, business partners also need to consider other factors in arbitration, such as specific limits on discovery that may be problematic and the finality of the arbitrators’ decision, which may not be viewed as fully consistent with the partners’ contract or in strict accordance with the applicable law.   To the extent that business partners do opt for arbitration, they should craft the arbitration provision to make sure its terms closely align with their business goals.

© 2020 Winstead PC.

ARTICLE BY Ladd Hirsch at Winstead.
For more on business conflict resolution, see the National Law Review Corporate & Business Organizations law section.

Federal Court Preliminary Enjoins Enforcement of New California Arbitration Law AB 51

On Friday, January 31, 2020, Chief District Judge Kimberly J. Mueller of the federal District Court for the Eastern District of California issued a Preliminary Injunction (PI) against the State of California, enjoining the State from enforcing Assembly Bill 51 (AB 51) with respect to mandatory arbitration agreements in employment to the extent governed by the Federal Arbitration Act (FAA).1

As discussed in the Vedder Price employment law alert, TRO Halts New Arbitration Law AB 51, the District Court had previously issued a Temporary Restraining Order (TRO) on December 30, 2019 temporarily enjoining enforcement of AB 51 pending a preliminary injunction hearing scheduled for January 10, 2020. The Court subsequently continued the January 10 hearing and extended the TRO until January 31 to allow the parties time to submit supplemental briefing. AB 51, the new California law previously slated to take effect on January 1, 2020, purportedly prohibited employers from requiring applicants or employees in California to agree, as a condition of employment, continued employment, or the receipt of any employment-related benefit, to arbitrate claims involving violations of the California Fair Employment and Housing Act (FEHA) or the California Labor Code. AB 51 did not specifically mention “arbitration” but instead broadly applied to the waiver of “any right, forum, or procedure for a violation of [the FEHA or Labor Code], including the right to file and pursue a civil action.”

In issuing the PI, the District Court specifically: (a) enjoined the State from enforcing sections 432.6(a), (b), and (c) of the California Labor Code where the alleged “waiver of any right, forum, or procedure” is the entry into an arbitration agreement covered by the FAA2; and (b) enjoined the State from enforcing Section 12953 of the California Government Code [FEHA] where the alleged violation of “Section 432.6 of the Labor Code” is entering into an arbitration agreement covered by the FAA.

The PI will remain in place pending a final judgment, which would likely occur following a motion for summary judgment rather than a full trial on the merits since there are no material facts in dispute to be tried. However, pursuant to 28 U.S.C. § 1292(a)(1), an order granting a preliminary injunction is immediately appealable. Accordingly, it is likely that the State of California will file an immediate appeal directly with the 9th Circuit Court of Appeals.

In the interim, based on this PI, employers should feel comfortable in continuing to require employees in California to sign mandatory arbitration agreements as a condition of employment without being subjected to criminal prosecution under AB 51, provided that the arbitration agreement is clearly governed by the FAA. Employers are encouraged to consult with legal counsel to ensure compliance in this regard.

1 See Chamber of Commerce of U.S., et al. v. Xavier Becerra, et al., Case No. 2:19-cv-02456-KJM-DB, Dkt. No. 44 (E.D. Cal. Jan. 31, 2020).

2 Federal Arbitration Act, 9 U.S.C. §§ 1-16

© 2020 Vedder Price

For more on recent employment law litigation in California and elsewhere, see the National Law Review Labor & Employment law section.

Court to Consider Whether California Ride Share Drivers Who Make Airport Runs Are Exempt from the Federal Arbitration Act

On November 26, 2019, San Francisco Superior Court Judge Richard B. Ulmer ruled that the Federal Arbitration Act (“FAA”) might not apply to Uber drivers who are engaged in interstate commerce while driving passengers to or from international airports.

In his claims before the Division of Labor Standards and Enforcement (“DLSE”), driver Sangam Patel (“Patel”) seeks recovery of unpaid wages, overtime pay, vacation pay, meal and rest break premiums, and unpaid business expenses allegedly owed by Uber. Uber petitioned to compel arbitration of Patel’s (“Patel”) claims under the FAA.

The Labor Code provides a right to bring an action to collect wages notwithstanding the existence of an arbitration agreement. Cal. Lab. Code § 229. If the FAA applies, a written arbitration agreement “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2. The FAA applies to any “contract evidencing a transaction involving commerce” that contains an arbitration provision. Id. The FAA does not apply, however, to “contracts of…workers engaged in foreign or interstate commerce.” Id., at § 1.

Notably, there is a distinction between the term “involving” for purposes of section 2 and the term “engaged in” for purposes of section 1.

As the California Court of Appeal explained earlier this year in Muller v. Roy Miller Freight Lines, LLC (2019) 34 Cal.App.5th 1056, 1062, “the [United States] Supreme Court reasoned the plain meaning of ‘engaged in’ interstate commerce in section 1 is narrower in scope than the open-ended phrase ‘involving’ commerce in section 2. Unlike section 2’s reference to ‘involving commerce,’ which ‘indicates Congress’ intent to regulate to the outer limits of its authority under the Commerce Clause’ and thus is afforded an ‘expansive reading,’ section 1’s reference to ‘engaged in commerce’ is ‘narrower,’ and therefore ‘understood to have a more limited reach,’ requiring ‘a narrow construction’ and a ‘precise reading.’” (Internal citations omitted.)

Uber argued that the FAA applies to its arbitration provision because it involves commerce as the Uber app is available to riders and transportation providers in over 175 cities across the United States. Relying on precedent that stands for the proposition that workers need only engage in activities that affect interstate commerce to be considered “engaged in interstate commerce,” the Labor Commissioner argued that Uber drivers such as Patel engage in interstate commerce when they transport passengers to and from international airports, thus rendering the FAA inapplicable.

The argument is similar to that raised Singh v. Uber Techs. Inc. earlier this year, where the U.S. Court of Appeals for the Third Circuit rejected Uber’s argument that a group of New Jersey drivers suing for unpaid overtime wages were required to arbitrate their claims. The Singh Court found that transportation workers who transport passengers may be exempt from the FAA if they are engaged in interstate commerce. Singh claimed that he frequently transported passengers on the highway across state lines, between New York and New Jersey. In light of the factual dispute as to whether Uber drivers engaged in interstate commerce, the Third Circuit sent the case back to the district court to decide, after discovery on the issue, whether Singh and the proposed class of Uber drivers engaged in interstate commerce. If they did, the FAA would not apply.

Consistent with the Third Circuit in Singh, Judge Ulmer granted the Commissioner’s request for limited discovery on the issue of whether Uber drivers engage in interstate commerce. Following that discovery, Uber may then re-calendar its petition for hearing.

The case bears watching as it may provide employees in some industries with arguments to try to circumvent the otherwise enforceable arbitration agreements that they signed with their employers. Ultimately, if Uber drivers are found to be engaged in interstate commerce such that the FAA is inapplicable, the FAA would not preempt their right to file suit under Labor Code section 229 notwithstanding any private agreement to arbitrate. But section 229 only applies to actions to collect due and unpaid wages. Any other claims – such as claims for missed meal or rest periods, failure to reimburse business expenses, or failure to provide accurate wage statements – would not be covered and, thus, should still be subject to a valid and enforceable arbitration agreement. It will be interesting to see if and how that issue is addressed.

©2019 Epstein Becker & Green, P.C. All rights reserved.

More on the Federal Arbitration Act can be found on the National Law Review ADR, Arbitration and Mediation law page.

Court Finds Medical Bill Reimbursement Claim Subject to “Biblically-Based Mediation and Arbitration”

A Mississippi federal court granted a motion to compel arbitration of a claim for reimbursement of medical expenses from the defendant, a company that provides health care sharing plan alternatives to those of Christian faith. The plaintiff had signed a membership agreement stating that he would abide by the defendant’s guidelines, under which members, such as the plaintiff, were required to exhaust an “appeals” process for challenging bill-sharing decisions before resorting to any sort of legal procedures against the defendant. If the appeals process did not resolve the dispute, a “biblically-based mediation and arbitration” clause in the guidelines stated that any and all disputes arising out of the membership agreement shall be settled by “biblically-based mediation.” If that mediation fails, the member may submit the dispute to an independent and objective arbitrator for binding arbitration but otherwise waives his or her right to file a lawsuit.

Addressing the defendant’s motion, the court first held that the provision above constituted a valid arbitration agreement and that the subject dispute fell within the scope thereof. The court noted that the plaintiff had indeed agreed that he “will bring no suit, legal claim or demand of any sort … in the civil court system, with the sole exception of enforcing any favorable arbitration award or mediated agreement.” As such, the court explained that arbitration was required unless a federal statute or policy rendered the plaintiff’s claim non-arbitrable. Because the plaintiff failed to identify any such statute or policy, the court granted the defendant’s motion to compel arbitration.

Pettey v. Medi Share, No. 2:19-cv-00059 (S.D. Miss. Oct. 1, 2019).

©2011-2019 Carlton Fields, P.A.

ARTICLE BY Alex B. Silverman of Carlton Fields.

Second Circuit Confirms Arbitration Awards That Are (Literally) Out of This World

Arbitration over whether a South Korean company or a Bermuda company headquartered in Hong Kong owns a geostationary satellite in light of an order from a South Korean regulatory agency can be complicated. The Second Circuit recently affirmed a decision confirming an arbitration award adjudicating ownership of the satellite in question and awarding damages related to a party’s failure to obtain regulatory approvals necessary to complete the sale over claims that the arbitration panel exceeded its power, disregarded the law, and violated public policy.

KT Corp., a Korean company, agreed to sell a satellite to ABS Holdings Ltd., a Bermuda company headquartered in Hong Kong. The companies signed a purchase agreement to convey the title to the satellite and an operations agreement under which KT agreed to operate the satellite on behalf of ABS. Both agreements contained New York choice-of-law provisions and mandatory arbitration clauses. The purchase agreement required KT to obtain and maintain all necessary licenses and authorizations for the sale and the continued operation of the satellite.

The sale was completed and title to the satellite was transferred.

Nearly two years later, a South Korean regulatory agency issued an order declaring the purchase agreement null and void because KT had failed to obtain a required export permit. The agency canceled KT’s permission to use certain frequencies to operate the satellite.

KT and ABS arbitrated who held title to the satellite and whether KT had violated the purchase agreement before a panel of the International Chamber of Commerce. In two awards, the panel concluded that ABS held title to the satellite because title had lawfully passed when the conditions precedent to the purchase agreement were completed when there was no requirement that KT obtain an export permit. And even if that was not the case, the panel concluded, the regulatory order had no effect because it was issued retroactively without notice to the parties in violation of New York law, and KT breached its obligations by failing to obtain all the approvals necessary for the continued operation of the satellite (even though an export permit may not have been required for the sale of the satellite, one was necessary to maintain the satellite’s operations).

KT petitioned the Southern District of New York to vacate the award, and ABS petitioned the court to confirm it. The district court granted ABS’ petition and confirmed the panel’s award.

The Second Circuit affirmed. KT argued that the panel had exceeded its authority and that the award disregarded the law and violated public policy. KT claimed that the panel’s conclusion that the regulatory order was without effect violated due process principles. The court disagreed, noting that KT had not challenged the order, its counsel had questioned its validity, and the panel did not rest on the validity of the order; the panel referenced the propriety of the order as an alternate basis for its primary conclusion that title to the satellite properly changed hands. The court also rejected KT’s argument that the panel had disregarded New York contract law. Regarding public policy, although the court recognized that it is the public policy of the United States to enforce foreign judgments that are not repugnant to U.S. policy, it was unclear whether that public policy extended to foreign regulatory orders, and it was not even clear that the regulatory order in this case was enforceable under South Korean law according to KT’s expert.

KT Corp. v. ABS Holdings, Ltd., No. 18-2300 (2d Cir. Sept. 12, 2019).

©2011-2019 Carlton Fields, P.A.

ARTICLE BY Brendan N. Gooley of Carlton Fields.
For more arbitration decisions, see the National Law Review ADR / Arbitration / Mediation page.