Tag: Arbitration

Are they Worth Price of Paper They're Printed On? – Ubersization of Arbitration Clauses

Arbitration has long been treated as an inferior method of resolving disputes, despite pronouncements to the contrary from the U.S. Supreme Court. However, arbitration does serve a purpose. The process is less formalized, so it moves much faster than the court system. That means less disruption to business. It’s also less expensive than bringing a civil action, making it easier for individuals to assert their rights or air their grievances. For these reasons and more, many businesses have incorporated arbitration provisions into their contracts and handbooks. The Federal Arbitration Act was enacted in 1925, yet these types of contractual agreements to arbitrate still get shot down in certain courts and by certain administrative authorities.more

Drivers v. Uber – The Arbitration Dispute

In Uber’s California litigation, Judge Chen has examined various aspects of the arbitration provisions contained in the various versions of Uber’s agreements with its drivers.  The 2013 Agreement and the 2014 Agreement shared several key features:

(1) all disputes not exempted from the scope of arbitration were subject to resolution by final and binding arbitration;

(2) arbitration could proceed only on an individual basis, not by class;

(3) the delegation clause in the provision stated that “disputes arising out of or relating to the interpretation or application of this Arbitration Provision, including the enforceability, revocability or validity of the Arbitration Provision or any portion of the Arbitration Provision” shall be decided by the arbitrator; and,

(4) an opt-out clause allowed drivers to avoid the arbitration clause.

In separate litigation, the Court had Uber revise the opt-out provision to make it more conspicuous and less onerous on the drivers.  Because the 2013 Agreement contained the original opt-out provision, it did not stand a chance of being found enforceable.  In later 2014 and 2015 Agreements,  Uber included the provision in boldface and ALL CAPS with text larger than the provisions around it.  Language also was added to explain the significance of arbitration and the right to opt-out.  Additionally, to exercise that right now, a driver need only send an email to Uber stating his/her name and the desire to opt-out (although he/she could send a letter by regular mail, overnight delivery, or hand-delivery, too).  As a result, when the Court certified a class on September 1, 2015, those drivers who failed to opt-out of the provision were excluded from the class.  However, in December, the Court found the arbitration agreements were unenforceable on California public policy grounds, irrespective of the opt-out provision, thus dramatically increasing the size of the class.

Meanwhile, delegation clauses, like the one set forth under (3) above, seem to cause consternation in courts across the nation.  Even the U.S. Supreme Court has recognized that courts are the typical adjudicators of whether the parties have agreed to arbitrate in the first instance.  Because a delegation clause puts this determination in the hands of the arbitrator instead, it must be clear and unmistakable.  In Uber’s case, the clause was clear, but it was made ambiguous because it conflicted with other clauses contained in the Agreements.  For instance, a separate clause in Uber’s 2013 and 2014 driver agreements stated that the state and federal courts in San Francisco had exclusive jurisdiction over any disputes, actions, or claims arising out of the Agreement.  While Uber argued that the forum selection clause reserving jurisdiction in San Francisco courts was for any disputes found not subject to arbitration, Judge Chen did not buy into that argument.  He felt the clauses conflicted, and since the courts would have to apply rules of construction to resolve the ambiguity created by the competing clauses, that meant that the delegation clause was not clear and unmistakable, and therefore, was unenforceable.

The arbitration provision in Uber’s 2013 and 2014 Agreements also addressed responsibility for payment of the arbitrator’s fees.  It provided that if applicable law did not require Uber to pay for all of the costs and fees of arbitration, then the costs would be apportioned between the parties as required by law.  Judge Chen found that because the delegation clause would force drivers to pay exorbitant fees just to arbitrate whether or not their substantive disputes even belonged before the arbitrator in the first place, when drivers would not have to pay a court to make that determination, such a clause deprived drivers of any forum for their claims.

The arbitration provision contained three additional unfavorable terms which Judge Chen found were not sufficiently highlighted for the drivers’ attention.  For one, the confidentiality clause precluded the parties from disclosing the existence, contents, or results of any arbitration.  For another, the intellectual property carve-out clause excluded intellectual property disputes from arbitration – something the Court found favored Uber.  Finally, the unilateral modification clause permitted Uber to unilaterally modify the terms of the agreement without notice to the drivers.  As a result of all of the foregoing issues, the Court found the agreements to arbitrate were unconscionable.  Thus, Judge Chen refused to enforce them.

Can an enforceable arbitration agreement even be written? 

Arbitration agreements are evaluated on a case-by-case basis.  While many are still disfavored, as I mentioned earlier, they are more likely to be upheld if they are not unconscionable.  The procedural component of the unconscionability analysis usually deals with the formation of the agreement itself.  This includes the characteristics of the parties (e.g., age, literacy, sophistication), the manner and circumstances under which the contract was executed, and whether terms of the agreement are hidden or complex, among other things.  The substantive component looks at the unfairness of the agreement.  Judge Chen, acknowledging that the issue wasn’t fully settled, nevertheless evaluated the arbitration provision through the lens of an employer/employee relationship.  Let me provide some tips that make arbitration agreements more likely to be upheld by courts in the employment context.

  • Keep your agreement to arbitrate in a separate document requiring a separate acknowledgement.

  • While the agreement may cover all workplace disputes between the parties, do not preclude employees from filing charges with state or federal administrative agencies, like the EEOC.

  • If you reserve the right to modify or discontinue the arbitration clause, include a requirement that notice will be given to employees and that the modification or rescission will be applied prospectively.

  • Since cost is a big issue for courts reviewing these agreements, make sure the employee will only be required to pay what the arbitrator finds is reasonable should the employee lose, or make sure the costs to pursue arbitration are not more costly than those to bring a lawsuit.

  • The remedies available in arbitration should be similar to those available in court.

  • Avoid delegation clauses.

As always, there is no substitute for consulting with an attorney when attempting to draft one of these agreements.

ARTICLE BY Vanessa L. Goddard of Steptoe & Johnson PLLC
© Steptoe & Johnson PLLC. All Rights Reserved.

Are they Worth Price of Paper They’re Printed On? – Ubersization of Arbitration Clauses

Arbitration has long been treated as an inferior method of resolving disputes, despite pronouncements to the contrary from the U.S. Supreme Court. However, arbitration does serve a purpose. The process is less formalized, so it moves much faster than the court system. That means less disruption to business. It’s also less expensive than bringing a civil action, making it easier for individuals to assert their rights or air their grievances. For these reasons and more, many businesses have incorporated arbitration provisions into their contracts and handbooks. The Federal Arbitration Act was enacted in 1925, yet these types of contractual agreements to arbitrate still get shot down in certain courts and by certain administrative authorities.more

Drivers v. Uber – The Arbitration Dispute

In Uber’s California litigation, Judge Chen has examined various aspects of the arbitration provisions contained in the various versions of Uber’s agreements with its drivers.  The 2013 Agreement and the 2014 Agreement shared several key features:

(1) all disputes not exempted from the scope of arbitration were subject to resolution by final and binding arbitration;

(2) arbitration could proceed only on an individual basis, not by class;

(3) the delegation clause in the provision stated that “disputes arising out of or relating to the interpretation or application of this Arbitration Provision, including the enforceability, revocability or validity of the Arbitration Provision or any portion of the Arbitration Provision” shall be decided by the arbitrator; and,

(4) an opt-out clause allowed drivers to avoid the arbitration clause.

In separate litigation, the Court had Uber revise the opt-out provision to make it more conspicuous and less onerous on the drivers.  Because the 2013 Agreement contained the original opt-out provision, it did not stand a chance of being found enforceable.  In later 2014 and 2015 Agreements,  Uber included the provision in boldface and ALL CAPS with text larger than the provisions around it.  Language also was added to explain the significance of arbitration and the right to opt-out.  Additionally, to exercise that right now, a driver need only send an email to Uber stating his/her name and the desire to opt-out (although he/she could send a letter by regular mail, overnight delivery, or hand-delivery, too).  As a result, when the Court certified a class on September 1, 2015, those drivers who failed to opt-out of the provision were excluded from the class.  However, in December, the Court found the arbitration agreements were unenforceable on California public policy grounds, irrespective of the opt-out provision, thus dramatically increasing the size of the class.

Meanwhile, delegation clauses, like the one set forth under (3) above, seem to cause consternation in courts across the nation.  Even the U.S. Supreme Court has recognized that courts are the typical adjudicators of whether the parties have agreed to arbitrate in the first instance.  Because a delegation clause puts this determination in the hands of the arbitrator instead, it must be clear and unmistakable.  In Uber’s case, the clause was clear, but it was made ambiguous because it conflicted with other clauses contained in the Agreements.  For instance, a separate clause in Uber’s 2013 and 2014 driver agreements stated that the state and federal courts in San Francisco had exclusive jurisdiction over any disputes, actions, or claims arising out of the Agreement.  While Uber argued that the forum selection clause reserving jurisdiction in San Francisco courts was for any disputes found not subject to arbitration, Judge Chen did not buy into that argument.  He felt the clauses conflicted, and since the courts would have to apply rules of construction to resolve the ambiguity created by the competing clauses, that meant that the delegation clause was not clear and unmistakable, and therefore, was unenforceable.

The arbitration provision in Uber’s 2013 and 2014 Agreements also addressed responsibility for payment of the arbitrator’s fees.  It provided that if applicable law did not require Uber to pay for all of the costs and fees of arbitration, then the costs would be apportioned between the parties as required by law.  Judge Chen found that because the delegation clause would force drivers to pay exorbitant fees just to arbitrate whether or not their substantive disputes even belonged before the arbitrator in the first place, when drivers would not have to pay a court to make that determination, such a clause deprived drivers of any forum for their claims.

The arbitration provision contained three additional unfavorable terms which Judge Chen found were not sufficiently highlighted for the drivers’ attention.  For one, the confidentiality clause precluded the parties from disclosing the existence, contents, or results of any arbitration.  For another, the intellectual property carve-out clause excluded intellectual property disputes from arbitration – something the Court found favored Uber.  Finally, the unilateral modification clause permitted Uber to unilaterally modify the terms of the agreement without notice to the drivers.  As a result of all of the foregoing issues, the Court found the agreements to arbitrate were unconscionable.  Thus, Judge Chen refused to enforce them.

Can an enforceable arbitration agreement even be written? 

Arbitration agreements are evaluated on a case-by-case basis.  While many are still disfavored, as I mentioned earlier, they are more likely to be upheld if they are not unconscionable.  The procedural component of the unconscionability analysis usually deals with the formation of the agreement itself.  This includes the characteristics of the parties (e.g., age, literacy, sophistication), the manner and circumstances under which the contract was executed, and whether terms of the agreement are hidden or complex, among other things.  The substantive component looks at the unfairness of the agreement.  Judge Chen, acknowledging that the issue wasn’t fully settled, nevertheless evaluated the arbitration provision through the lens of an employer/employee relationship.  Let me provide some tips that make arbitration agreements more likely to be upheld by courts in the employment context.

  • Keep your agreement to arbitrate in a separate document requiring a separate acknowledgement.

  • While the agreement may cover all workplace disputes between the parties, do not preclude employees from filing charges with state or federal administrative agencies, like the EEOC.

  • If you reserve the right to modify or discontinue the arbitration clause, include a requirement that notice will be given to employees and that the modification or rescission will be applied prospectively.

  • Since cost is a big issue for courts reviewing these agreements, make sure the employee will only be required to pay what the arbitrator finds is reasonable should the employee lose, or make sure the costs to pursue arbitration are not more costly than those to bring a lawsuit.

  • The remedies available in arbitration should be similar to those available in court.

  • Avoid delegation clauses.

As always, there is no substitute for consulting with an attorney when attempting to draft one of these agreements.

ARTICLE BY Vanessa L. Goddard of Steptoe & Johnson PLLC
© Steptoe & Johnson PLLC. All Rights Reserved.

Deflategate: A Critique of Judge Berman's Decision

By now, almost everyone is familiar with Judge Berman‘s decision vacating Commissioner Roger Goodell’s award upholding a four-game suspension of New England quarterback Tom Brady in connection with the tampering of air levels in footballs during the 2015 AFC Championship game. Judge Berman found that Commissioner Goodell’s award was deficient in the following respects:

(1) that Brady had no notice that the conduct for which he was suspended — being generally aware of the misconduct of an equipment assistant and locker room attendant who deflated the balls and then refusing to cooperate with the subsequent investigation — was prohibited conduct for which he could be disciplined;

(2) that Brady was denied the opportunity to examine one of the two lead investigators who authored the investigative report upon which Commissioner Goodell relied, namely NFL Executive Vice President and General Counsel Jeff Pash; and

(3) that Brady was denied equal access to investigative files, including witness interview notes.

Judge Berman did not remand to correct these errors, but simply vacated the award.

Did Judge Berman Properly Follow the Standard for Review? How sound was Judge Berman’s decision? 

From an analysis of his opinion and well-established Supreme Court authority he was supposed to follow, it may have been the Judge himself who overstepped his bounds. It is important to remember that Commissioner Goodell’s role was that of arbitrator; the collective bargaining agreement permitted him to assume that role if he so chose and he did so choose. The level of deference that courts must give an arbitrator is extreme: in essence, as long as the arbitrator is arguably construing or applying the contract, and acting within the scope of his authority, a court cannot overturn his decision. While Judge Berman superficially acknowledged this standard, it does not appear that he actually followed it. Instead, he appeared to apply some type of “common law of the workplace” to find that Brady’s treatment was fundamentally unfair.

The first sign that Judge Berman was straying from his role was his failure to cite or acknowledge any of the leading U.S. Supreme Court cases establishing the basic principles regarding judicial review of labor arbitration awards in the collective bargaining context. The Supreme Court repeatedly has emphasized that a court is not authorized to reconsider the merits of a labor arbitration award even though the parties may allege the award was decided on errors of fact or on a misinterpretation of the contract. The Supreme Court has explained this extreme deference as emanating from the federal policy inherent in Section 301 of the Labor Management Relations Act (LMRA) favoring the settlement of labor disputes by arbitration. In essence, the parties contracted for the settlement of their dispute by an arbitrator of their choice; if dissatisfied with his decision, they are free to select a different arbitrator in the future.

The Supreme Court’s Garvey Decision

In particular, Judge Berman did not cite or deal with the Supreme Court’s decision in Major League Baseball Players Ass’n v. Garvey. This was striking, as that case, like Brady’s, arose in the context of the review of an arbitrator’s award under the collective bargaining agreement of a professional players association. The facts and decision the Garvey case are worth reviewing, as they demonstrate just how deferential the Supreme Court expects courts to be:

Steve Garvey, an All-Star first baseman, alleged that his contract with the San Diego Padres had not been extended in the 1988 and 1989 baseball seasons as part of the owners’ collusion in the market for free agents that an arbitrator had found to have taken place. He sought damages under a framework that had been set up to determine and evaluate individual player’s claims for damages due to that finding of collusion. Garvey’s main piece of evidence was a letter from the Padres’ President, Ballard Smith, admitted to the non-extension of the contract due to the collusion. However, the arbitrator rejected Garvey’s grievance by discrediting the letter because it contradicted the President’s testimony in the earlier arbitration in which the collusion had been found to exist. Bizarrely, however, in that earlier proceeding the same arbitrator specifically had found that testimony to be non-truthful in concluding there had been collusion.

Finding the arbitrator’s decision “completely inexplicable and border[ing] on the irrational,” the Court of Appeals for the Ninth Circuit vacated the award, finding the only justification for the arbitrator’s decision was “his desire to dispense his own brand of industrial justice.” Reversing, however, the Supreme Court claimed to be “baffled” by what the Court of Appeals did in light of the clearly expressed deferential standard for reviewing labor arbitration awards under Section 301. The Supreme Court acknowledged that the arbitrator’s ruling may have appeared to the Court of Appeals as “improvident or even silly,” but even so that did “not provide a basis for a court to refuse to enforce the award.” According to the Supreme Court, even when a federal judge considering the arbitration award is “convinced that the arbitrator committed serious error, it does not suffice to overturn [the arbitrator’s] decision.” This is also true when an arbitrator’s “procedural aberrations rise to the level of affirmative misconduct,” for a federal court may not “interfere with an arbitrator’s decision that the parties [players and owners] bargained for.”

Judge Berman Relied More on the Federal Arbitration Act Than Cases Under Section 301

Had Judge Berman paid closer heed to decisions such as Garvey, he might have been less inclined to wade into the weeds of assessing Commissioner Goodell’s claimed procedural aberrations. Judge Berman instead appeared to rely more heavily on cases applying the Federal Arbitration Act (FAA), which establishes four limited statutory grounds for vacating an arbitration award. Judge Berman zeroed in on the FAA’s exceptions allowing vacatur where the arbitrator is “guilty of misconduct . . . in refusing to hear evidence pertinent and material to the controversy” or in “exceeding his powers.”

The problem with relying on the FAA, however, is that the FAA has been held not to apply to labor disputes, although to be sure federal courts have often looked to the FAA for guidance in labor arbitration cases. Section 301, which does apply, does not provide statutory grounds for vacating a labor arbitration award, although, as seen, the Supreme Court has made clear what a court may not do. As the body of case law applying Section 301 has developed, the main reasons a court may vacate a labor arbitration award appear to be if (i) the award does not “draw its essence” from the labor agreement, meaning it conflicts with the express terms of the agreement, imposes additional requirements not expressly provided for in the agreement, or is based on “general considerations of fairness and equity” instead of the exact terms of the agreement; or (ii) it violates a well-settled and prevailing public policy.

The Problems With Judge Berman’s Findings

Judge Berman first found fault in Commissioner Goodell’s award because the Judge found that Brady did not have notice that he could receive a four game suspension for general awareness of a scheme to deflate footballs, or for non-cooperation with the NFL’s investigation. He also attacked Commissioner Goodell’s reasoning in looking to penalties for violations of the league’s steroid policy as a justification for upholding a four game suspension. He further found that Brady had no notice he could be suspended rather than fined. Citing decisions by other arbitrators involving NFL players, Judge Berman concluded that Commissioner Goodell violated the “law of the shop” by failing to find there was inadequately notice of prohibited conduct and potential discipline.

In all of this, however, Judge Berman was doing what the Supreme Court has stated a judge should not do: second-guessing the arbitrator. For example, the so-called “law of the shop” is not something akin to the common law that a court must follow. Rather, it is up to the labor arbitrator alone to interpret precedent by other arbitrators or, as the Supreme Court has put it, to simply to conclude “that he was not bound by” a prior arbitrator’s decision. Judge Berman relied heavily on decisions by other arbitrators in other high-profile NFL cases — such as “Bounty-Gate” and the Ray Rice and Reggie Langhorne cases — to find that Brady was entitled to the type of notice that Judge Berman thought he was entitled to. But that simply was not Judge Berman’s role to say.

Moreover, Brady’s notice contentions were acknowledged and rejected by Commissioner Goodell in his post-hearing detailed award that was also based on his assessment of the evidence — including Brady’s credibility and the exhaustive Wells investigative report upon which he relied. There can be no question that in so doing the Commissioner was “arguably construing or applying the contract,” which is all it took to require enforcement of his award. In short, the Commissioner was entitled to disbelieve that two equipment employees would take it on their own to deflate the footballs without the knowledge or involvement of the quarterback of the team, and to conclude that Brady’s awareness was conduct detrimental to public confidence in the integrity of the game. He also was entitled to believe that Brady deserved to be penalized for refusing to cooperate with the investigation and then destroying his cell phone rather than turn it over to the investigators, even if there was no specific rule that said he could not do this.

Judge Berman was on similarly weak footing in attacking the punishment meted out (suspension versus fine) because he thought it was error for Commissioner Goodell to uphold the penalty by borrowing from the schedule of penalties for violations of the league’s steroid policy. Again, such judgment calls are quintessentially for the arbitrator, and the suspension penalty echoed the penalty that the Patriots themselves had issued to its equipment employees for their roles.

Relying on the FAA, Judge Berman further justified his decision to vacate Commissioner Goodell’s award based on the latter’s refusal to allow Jeff Pash to testify at the arbitration hearing. Judge Berman found this to be “fundamentally unfair,” because Pash was the co-lead investigator of the investigation, known as the Wells Report. Commissioner Goodell had excluded Pash because Pash had not in fact played substantive role in the investigation, his role having been limited to comments on the draft of the report. Commissioner Goodell moreover regarded any testimony by Pash  as cumulative, as Wells, the report’s architect, was allowed to testify. But Judge Berman determined that Pash would have had valuable insight into the course and outcome of the investigation and into the drafting and content of the Wells Report. Therefore, he found that Brady was prejudiced because he could not explore how truly independent the report was.

Again, Judge Berman appeared to have simply second-guessed Commissioner Goodell, given that Commissioner Goodell had substantial discretion to admit or exclude evidence without having to “follow all the niceties observed by the federal courts.”  Commissioner Goodell had at least a colorable basis for excluding Pash’s testimony. Indeed, his rationale for excluding that testimony was that which a court might have applied. Further, Judge Berman’s conclusion as to how Brady was prejudiced appeared speculative as to whatever additional value Pash’s testimony would have supplied.

Judge Berman came closest to presenting a valid basis for vacating the award in his determination that Commissioner Goodell had improperly denied Brady equal access to Wells’ investigative files and interview notes. Commissioner Goodell had justified his denial of access to those files, including interview notes, because they had played no role in the disciplinary decisions, which were based on the Wells Report itself. But as Judge Berman observed, the Wells Report was based on those notes. Furthermore, compounding the prejudice to Brady was that Wells’ law firm, Paul, Weiss, acted as both independent counsel and as retained counsel to the NFL during the arbitration hearing. NFL counsel therefore had access to the investigate file for direct and cross examination while Brady had no such access.

These observations have some merit. After all, it does not seem fair that Brady had no access to the notes and interviews upon which the report was based, especially when the same law firm that produced the report also represented the NFL at the arbitration hearing. But Article 46 of the collective bargaining agreement expressly limited discovery to the exchange of exhibits upon which the parties intended to rely at the hearing. The Commissioner’s decision to deny additional discovery was based on his interpretation of that provision, such that it at least arguably “drew its essence” from the collective bargaining agreement. Furthermore, as stated, Commissioner Goodell asserted that the investigation notes played no role in his decision on appeal, and other notes had been provided, such as the interview notes from the NFL’s own investigators.

Judge Berman Should Have Remanded

The final error in Judge Berman’s decision is that he did not remand the case. The procedural and due process errors appeared to be correctable. For example, Judge Berman could have instructed Commissioner Goodell to reconvene the hearing to allow Brady to access the Wells investigative files and to call Pash as a witness. In the Garvey case, the Supreme Court expressly criticized the Ninth Circuit for not remanding, because by not remanding the court in essence was deciding the case. Here, too, Judge Berman in essence was resolving the dispute, and without even making any judgment as to whether Brady did or did not have a role in the tampering that took place.

Immediately after Judge Berman issued his decision, the NFL announced it was appealing. Based on Judge Berman’s apparent failure to properly follow the applicable highly deferential standard, the NFL’s chances for success on appeal appear to be good.

Article By Irving M. Geslewitz of Much Shelist, P.C.
© 2015 Much Shelist, P.C.

Deflategate: A Critique of Judge Berman’s Decision

By now, almost everyone is familiar with Judge Berman‘s decision vacating Commissioner Roger Goodell’s award upholding a four-game suspension of New England quarterback Tom Brady in connection with the tampering of air levels in footballs during the 2015 AFC Championship game. Judge Berman found that Commissioner Goodell’s award was deficient in the following respects:

(1) that Brady had no notice that the conduct for which he was suspended — being generally aware of the misconduct of an equipment assistant and locker room attendant who deflated the balls and then refusing to cooperate with the subsequent investigation — was prohibited conduct for which he could be disciplined;

(2) that Brady was denied the opportunity to examine one of the two lead investigators who authored the investigative report upon which Commissioner Goodell relied, namely NFL Executive Vice President and General Counsel Jeff Pash; and

(3) that Brady was denied equal access to investigative files, including witness interview notes.

Judge Berman did not remand to correct these errors, but simply vacated the award.

Did Judge Berman Properly Follow the Standard for Review? How sound was Judge Berman’s decision? 

From an analysis of his opinion and well-established Supreme Court authority he was supposed to follow, it may have been the Judge himself who overstepped his bounds. It is important to remember that Commissioner Goodell’s role was that of arbitrator; the collective bargaining agreement permitted him to assume that role if he so chose and he did so choose. The level of deference that courts must give an arbitrator is extreme: in essence, as long as the arbitrator is arguably construing or applying the contract, and acting within the scope of his authority, a court cannot overturn his decision. While Judge Berman superficially acknowledged this standard, it does not appear that he actually followed it. Instead, he appeared to apply some type of “common law of the workplace” to find that Brady’s treatment was fundamentally unfair.

The first sign that Judge Berman was straying from his role was his failure to cite or acknowledge any of the leading U.S. Supreme Court cases establishing the basic principles regarding judicial review of labor arbitration awards in the collective bargaining context. The Supreme Court repeatedly has emphasized that a court is not authorized to reconsider the merits of a labor arbitration award even though the parties may allege the award was decided on errors of fact or on a misinterpretation of the contract. The Supreme Court has explained this extreme deference as emanating from the federal policy inherent in Section 301 of the Labor Management Relations Act (LMRA) favoring the settlement of labor disputes by arbitration. In essence, the parties contracted for the settlement of their dispute by an arbitrator of their choice; if dissatisfied with his decision, they are free to select a different arbitrator in the future.

The Supreme Court’s Garvey Decision

In particular, Judge Berman did not cite or deal with the Supreme Court’s decision in Major League Baseball Players Ass’n v. Garvey. This was striking, as that case, like Brady’s, arose in the context of the review of an arbitrator’s award under the collective bargaining agreement of a professional players association. The facts and decision the Garvey case are worth reviewing, as they demonstrate just how deferential the Supreme Court expects courts to be:

Steve Garvey, an All-Star first baseman, alleged that his contract with the San Diego Padres had not been extended in the 1988 and 1989 baseball seasons as part of the owners’ collusion in the market for free agents that an arbitrator had found to have taken place. He sought damages under a framework that had been set up to determine and evaluate individual player’s claims for damages due to that finding of collusion. Garvey’s main piece of evidence was a letter from the Padres’ President, Ballard Smith, admitted to the non-extension of the contract due to the collusion. However, the arbitrator rejected Garvey’s grievance by discrediting the letter because it contradicted the President’s testimony in the earlier arbitration in which the collusion had been found to exist. Bizarrely, however, in that earlier proceeding the same arbitrator specifically had found that testimony to be non-truthful in concluding there had been collusion.

Finding the arbitrator’s decision “completely inexplicable and border[ing] on the irrational,” the Court of Appeals for the Ninth Circuit vacated the award, finding the only justification for the arbitrator’s decision was “his desire to dispense his own brand of industrial justice.” Reversing, however, the Supreme Court claimed to be “baffled” by what the Court of Appeals did in light of the clearly expressed deferential standard for reviewing labor arbitration awards under Section 301. The Supreme Court acknowledged that the arbitrator’s ruling may have appeared to the Court of Appeals as “improvident or even silly,” but even so that did “not provide a basis for a court to refuse to enforce the award.” According to the Supreme Court, even when a federal judge considering the arbitration award is “convinced that the arbitrator committed serious error, it does not suffice to overturn [the arbitrator’s] decision.” This is also true when an arbitrator’s “procedural aberrations rise to the level of affirmative misconduct,” for a federal court may not “interfere with an arbitrator’s decision that the parties [players and owners] bargained for.”

Judge Berman Relied More on the Federal Arbitration Act Than Cases Under Section 301

Had Judge Berman paid closer heed to decisions such as Garvey, he might have been less inclined to wade into the weeds of assessing Commissioner Goodell’s claimed procedural aberrations. Judge Berman instead appeared to rely more heavily on cases applying the Federal Arbitration Act (FAA), which establishes four limited statutory grounds for vacating an arbitration award. Judge Berman zeroed in on the FAA’s exceptions allowing vacatur where the arbitrator is “guilty of misconduct . . . in refusing to hear evidence pertinent and material to the controversy” or in “exceeding his powers.”

The problem with relying on the FAA, however, is that the FAA has been held not to apply to labor disputes, although to be sure federal courts have often looked to the FAA for guidance in labor arbitration cases. Section 301, which does apply, does not provide statutory grounds for vacating a labor arbitration award, although, as seen, the Supreme Court has made clear what a court may not do. As the body of case law applying Section 301 has developed, the main reasons a court may vacate a labor arbitration award appear to be if (i) the award does not “draw its essence” from the labor agreement, meaning it conflicts with the express terms of the agreement, imposes additional requirements not expressly provided for in the agreement, or is based on “general considerations of fairness and equity” instead of the exact terms of the agreement; or (ii) it violates a well-settled and prevailing public policy.

The Problems With Judge Berman’s Findings

Judge Berman first found fault in Commissioner Goodell’s award because the Judge found that Brady did not have notice that he could receive a four game suspension for general awareness of a scheme to deflate footballs, or for non-cooperation with the NFL’s investigation. He also attacked Commissioner Goodell’s reasoning in looking to penalties for violations of the league’s steroid policy as a justification for upholding a four game suspension. He further found that Brady had no notice he could be suspended rather than fined. Citing decisions by other arbitrators involving NFL players, Judge Berman concluded that Commissioner Goodell violated the “law of the shop” by failing to find there was inadequately notice of prohibited conduct and potential discipline.

In all of this, however, Judge Berman was doing what the Supreme Court has stated a judge should not do: second-guessing the arbitrator. For example, the so-called “law of the shop” is not something akin to the common law that a court must follow. Rather, it is up to the labor arbitrator alone to interpret precedent by other arbitrators or, as the Supreme Court has put it, to simply to conclude “that he was not bound by” a prior arbitrator’s decision. Judge Berman relied heavily on decisions by other arbitrators in other high-profile NFL cases — such as “Bounty-Gate” and the Ray Rice and Reggie Langhorne cases — to find that Brady was entitled to the type of notice that Judge Berman thought he was entitled to. But that simply was not Judge Berman’s role to say.

Moreover, Brady’s notice contentions were acknowledged and rejected by Commissioner Goodell in his post-hearing detailed award that was also based on his assessment of the evidence — including Brady’s credibility and the exhaustive Wells investigative report upon which he relied. There can be no question that in so doing the Commissioner was “arguably construing or applying the contract,” which is all it took to require enforcement of his award. In short, the Commissioner was entitled to disbelieve that two equipment employees would take it on their own to deflate the footballs without the knowledge or involvement of the quarterback of the team, and to conclude that Brady’s awareness was conduct detrimental to public confidence in the integrity of the game. He also was entitled to believe that Brady deserved to be penalized for refusing to cooperate with the investigation and then destroying his cell phone rather than turn it over to the investigators, even if there was no specific rule that said he could not do this.

Judge Berman was on similarly weak footing in attacking the punishment meted out (suspension versus fine) because he thought it was error for Commissioner Goodell to uphold the penalty by borrowing from the schedule of penalties for violations of the league’s steroid policy. Again, such judgment calls are quintessentially for the arbitrator, and the suspension penalty echoed the penalty that the Patriots themselves had issued to its equipment employees for their roles.

Relying on the FAA, Judge Berman further justified his decision to vacate Commissioner Goodell’s award based on the latter’s refusal to allow Jeff Pash to testify at the arbitration hearing. Judge Berman found this to be “fundamentally unfair,” because Pash was the co-lead investigator of the investigation, known as the Wells Report. Commissioner Goodell had excluded Pash because Pash had not in fact played substantive role in the investigation, his role having been limited to comments on the draft of the report. Commissioner Goodell moreover regarded any testimony by Pash  as cumulative, as Wells, the report’s architect, was allowed to testify. But Judge Berman determined that Pash would have had valuable insight into the course and outcome of the investigation and into the drafting and content of the Wells Report. Therefore, he found that Brady was prejudiced because he could not explore how truly independent the report was.

Again, Judge Berman appeared to have simply second-guessed Commissioner Goodell, given that Commissioner Goodell had substantial discretion to admit or exclude evidence without having to “follow all the niceties observed by the federal courts.”  Commissioner Goodell had at least a colorable basis for excluding Pash’s testimony. Indeed, his rationale for excluding that testimony was that which a court might have applied. Further, Judge Berman’s conclusion as to how Brady was prejudiced appeared speculative as to whatever additional value Pash’s testimony would have supplied.

Judge Berman came closest to presenting a valid basis for vacating the award in his determination that Commissioner Goodell had improperly denied Brady equal access to Wells’ investigative files and interview notes. Commissioner Goodell had justified his denial of access to those files, including interview notes, because they had played no role in the disciplinary decisions, which were based on the Wells Report itself. But as Judge Berman observed, the Wells Report was based on those notes. Furthermore, compounding the prejudice to Brady was that Wells’ law firm, Paul, Weiss, acted as both independent counsel and as retained counsel to the NFL during the arbitration hearing. NFL counsel therefore had access to the investigate file for direct and cross examination while Brady had no such access.

These observations have some merit. After all, it does not seem fair that Brady had no access to the notes and interviews upon which the report was based, especially when the same law firm that produced the report also represented the NFL at the arbitration hearing. But Article 46 of the collective bargaining agreement expressly limited discovery to the exchange of exhibits upon which the parties intended to rely at the hearing. The Commissioner’s decision to deny additional discovery was based on his interpretation of that provision, such that it at least arguably “drew its essence” from the collective bargaining agreement. Furthermore, as stated, Commissioner Goodell asserted that the investigation notes played no role in his decision on appeal, and other notes had been provided, such as the interview notes from the NFL’s own investigators.

Judge Berman Should Have Remanded

The final error in Judge Berman’s decision is that he did not remand the case. The procedural and due process errors appeared to be correctable. For example, Judge Berman could have instructed Commissioner Goodell to reconvene the hearing to allow Brady to access the Wells investigative files and to call Pash as a witness. In the Garvey case, the Supreme Court expressly criticized the Ninth Circuit for not remanding, because by not remanding the court in essence was deciding the case. Here, too, Judge Berman in essence was resolving the dispute, and without even making any judgment as to whether Brady did or did not have a role in the tampering that took place.

Immediately after Judge Berman issued his decision, the NFL announced it was appealing. Based on Judge Berman’s apparent failure to properly follow the applicable highly deferential standard, the NFL’s chances for success on appeal appear to be good.

Article By Irving M. Geslewitz of Much Shelist, P.C.
© 2015 Much Shelist, P.C.

How Deflategate May Affect Your Business

In a closely watched case, federal judge Richard M. Berman of the Southern District of New York vacated the four-game suspension handed down to New England Patriots quarterback Tom Brady by NFL Commissioner Roger Goodell. Relying on Section 10 of the Federal Arbitration Act, Judge Berman’s decision focuses in large part on the discovery aspects of the arbitration proceeding which originally confirmed Brady’s suspension. In vacating the suspension, Judge Berman strikes a blow to those who view arbitration as a low-cost alternative to the traditional expense and burden of discovery, and provides an arrow in the quiver of parties looking to employ discovery costs as leverage in their disputes.

The suspension was originally imposed after the NFL commissioned an independent investigation into whether the New England Patriots, and Brady, tampered with game-used footballs during last season’s AFC Championship Game. Brady’s appeal was initially heard through the arbitration proceedings provided for under the NFL’s Collective Bargaining Agreement, and Commissioner Goodell served as the sole arbitrator. During the proceeding, Commissioner Goodell denied Brady’s request for the files gathered and created during the independent investigation, and also denied Brady’s request to compel testimony from Jeff Pash, general counsel for the NFL. Commissioner Goodell ultimately issued an award upholding the suspension and the NFL sought confirmation of that award from Judge Berman.

In a 40- page written opinion vacating the suspension, Judge Berman not only focused on what he deemed “fundamentally unfair” discovery rulings made by Commissioner Goodell, he also relied in part on the contention that Commissioner Goodell did not provide adequate justification for those rulings, particularly with respect to his decision to preclude the testimony of Pash. By digging into the nuts and bolts of the discovery process, Judge Berman deviated from what is often viewed as the “rubber stamp” process of confirming an arbitration award. Further, by pointing to the reasoning (or lack thereof) behind the arbitrator’s individual discovery rulings, Judge Berman arguably expands the burden on arbitrators to incorporate more formality into their decisions and, in essence, second-guessed the judgment of the Commissioner in his role as Arbitrator. Parties looking to protect future arbitration awards may also now feel the need to demand more formality in the discovery process, and from their arbitrators.

At one time, arbitration was seen as a more informal, yet sophisticated, way for businesses to settle disputes and conserve resources. With the increase in filing fees, the self-expansion of powers (and processes) by the organizations who conduct arbitrations, and now rulings like Judge Berman’s, it may be time to re-evaluate that view.

The NFL already has announced its intention to appeal. This case may go into overtime.

Article By Thomas Haskins of Barnes & Thornburg LLP

© 2015 BARNES & THORNBURG LLP

Let the NFL Season Begin: Judge Overturns Arbitration Award Suspending Tom Brady

Tom Brady will begin the 2015 NFL season as the starting quarterback of the New England Patriots for the 14th consecutive season following U.S. District Court Judge Richard Berman’s grant of the National Football League Players Association’s motion to vacate NFL Commissioner Roger Goodell’s July 28, 2015, arbitration award imposing a four-game suspension on Brady. This forestalled the suspension before it was scheduled to take effect on September 5.

Judge Berman found the NFL failed to show it applied Article 46 of its collective bargaining agreement with the NFLPA fairly and consistently.

This decision is the fourth time a legal authority has challenged the NFL’s application of Article 46, following U.S. District Judge David Doty in the Adrian Peterson case, former Federal Judge Barbara Jones in the Ray Rice arbitration, and former NFL commissioner Paul Tagliabue in his opinion regarding the Saints players in Bountygate.

While judges rarely vacate arbitration awards, Judge Berman identified specific problems with the Brady arbitration hearing held by Goodell, including denial of access to key witnesses, which can be grounds to vacate an arbitration award. He found problematic the denial of NFLPA attorneys’ request to question NFL general counsel Jeffrey Pash, who edited the Wells Report before its release.

In addition, Judge Berman criticized Goodell for using the League’s collectively bargained steroid punishment policy to justify the suspension. Recognizing that the policy’s procedures are irrelevant to the allegations made against Brady, Judge Berman wrote that the steroid policy “cannot reasonably be used as a comparator for Brady’s four-game suspension for alleged ball deflation by others.”

Judge Berman also found decisions cited by the NFL to support confirming the arbitration award to be distinguishable. While Article 46 authorizes the League to use Goodell as the arbitrator for player appeals, Judge Berman concluded the “law of the shop,” requiring fairness and consistency, prohibits Goodell from rendering a decision that may have been compromised by bias.

The next phase of this litigation has already begun. The NFL recognizes that a motion seeking a stay of Judge Berman’s decision would require a showing of “irreparable harm,” and its argument would fall short on this score.

The NFL filed a Notice of Appeal with the U.S. Court of Appeals for the Second Circuit within hours of Judge Berman’s decision.

Therefore, the immediate impact of Judge Berman’s decision is that Tom Brady can play in the first four games of the upcoming NFL season. Indeed, because of the Notice of Appeal, Judge Berman’s decision does not yet have precedential authority. However, the long-term effect of Judge Berman’s decision is far-reaching and considerable for the NFL, the NFLPA, and any private arbitral process governed by a collective bargaining agreement.

The NFL’s appeal faces the burden of convincing two appellate judges that Judge Berman misapplied the law.

Each case presents unique issues and facts, appellate courts typically do not reverse district court judges on their orders to vacate or confirm arbitration awards. The NFL likely will rely on strong legal precedent discouraging federal judges from interfering with a private arbitrator’s decision. In his 40-page decision, Judge Berman reasoned that the NFL failed to provide notice to Brady that being aware of deflated footballs and obstructing an investigation were misconduct justifying a four-game suspension. The NFL will undoubtedly argue that the “lack of notice” argument is irrelevant where the collective bargaining agreement gives the Commissioner complete authority to evaluate the definition of “conduct detrimental” to the League and to issue punishments based upon that determination. This is the authority provided by the NFLPA to the Commissioner under the current collective bargaining agreement and the NFL will argue it was not required to provide such “notice.” The NFL likely will also stress that Judge Berman’s decision to vacate Brady’s suspension reflects a complete disregard of judicial precedents confirming arbitration awards.

Clearly, this matter is not about Tom Brady, deflated footballs, or even NFL’s investigation. Rather, the appeal is about the NFL seeking to protect its internal arbitral process. Indeed, 38-year-old Tom Brady may even be retired by the time the appeals are ultimately resolved and a final determination is made.

Should the Second Circuit affirms Judge Berman’s decision, it will create a stronger precedent for the NFLPA to challenge future discipline issued through the NFL’s arbitral process. The Second Circuit’s precedent also will have potential far-reaching implications on all employers who utilize a private arbitration governed by a collective bargaining agreement, especially in light of the broad authority afforded to the Commissioner in the NFL’s collective bargaining agreement.

Article By Gregg E. Clifton & Benjamin A. Tulis of Jackson Lewis P.C.

Jackson Lewis P.C. © 2015

Half-Billion Dollar Arbitration Award in Trade Secrets Case Affirmed by Minnesota Supreme Court in Trade Secrets Dispute

Jackson Lewis Law firm

The Minnesota Supreme Court has affirmed an arbitrator’s eye-popping award of $525 million plus prejudgment interest totaling $96 million and post-award interest in a trade secrets dust up between Seagate Technology, LLC and Western Digital Corporation, et al. Seagate Technology, LLC v. Western Digital Corporation, et al and Sining Mao, No. A12-1994 (Minn. October 8, 2014).  The Court’s decision is replete with lessons about the legal boundaries, risks, and protections for litigants in arbitration. It is notable also for the magnitude of the award which was, in part, the consequence of falsified evidence.

Seagate designs and manufactures hard disk drives for computers. Sining Mao was a senior director for advanced head concepts at Seagate working on technology that involves incorporating tunneling magnetoresistance (“TMR”) in to read heads to improve storage capacity. When he was hired by Seagate, he signed an employment agreement which included a requirement to preserve the confidentiality of trade secrets and to return company documents. The employment agreement contained an arbitration clause which stated, in part, that the “arbitrator may grant injunctions or other relief in such controversy” arising out of the agreement.  Arbitration was subject to the rules of the American Arbitration Association (“AAA”).

Mao left Seagate in September 2006 to join Western Digital, a competitor. Seagate then commenced a district court action seeking injunctive relief and alleging misappropriation of trade secrets related to TMR technology.  Western Digital invoked the arbitration clause of Mao’s employment agreement with Seagate, and the district court stayed the lawsuit pending arbitration.

Things started to go south for Western Digital and Mao argued that three of the alleged trade secrets had been publicly disclosed before Mao left Seagate because they were included in a PowerPoint presentation he gave at a conference.  Seagate argued that Mao had fabricated and inserted additional PowerPoint slides containing the information after the fact to make it appear as if this information had been made public.  The arbitrator found that “[t]he fabrications were obvious. There is no question that Western Digital had to know of the fabrications and yet continued to represent to the Arbitrator that Dr. Mao did in fact insert the disputed slides at the time of the conferences.” The arbitrator found that the fabrication and Western Digital’s complicity was an egregious form of litigation misconduct that warranted severe sanctions.

Specifically, the arbitrator precluded any evidence or defense by Western Digital and Mao disputing the validity of the three trade secrets or any defense to the allegation of misappropriation or use of the three trade secrets, which resulted entry of judgment on liability and monetary damages in the amount of $525 million, calculated based on an unjust enrichment method. Western Digital brought a motion to vacate the award in district court. The district court granted the motion in part, finding that the arbitrator exceeded the scope of his authority under the arbitration agreement.  The Minnesota Court of Appeals reversed the district court on the ground that Western Digital had waived its right to challenge the arbitrator’s ability to issue punitive sanctions by not raising the issue with the arbitrator himself (and because Western Digital had earlier sought sanctions against Seagate in the same matter).

The Minnesota Supreme Court affirmed the Court of Appeals although based on a different analysis. The Supreme Court held that Western Digital did not waive its right to challenge the Arbitrator’s authority under Minnesota statutes regarding arbitrations and requests for vacatur, specifically Minn. Stat. Section 572.19.   The high Court then went on to conclude that the arbitrator did have the authority to impose the disputed sanctions, looking at the employment agreement, AAA arbitration rules, and case law.

The Court noted that:

Some believe that arbitration has benefits, potentially including faster resolution and less expense than the judicial system as well as a higher degree of confidentiality. But the benefits come with costs, including significantly less oversight of decisions, evidentiary and otherwise, and very limited review of the final award. Here, despite the best efforts of experienced appellate counsel to argue otherwise, Mao and Western Digital’s decision to demand arbitration necessarily limited the availability of the protections and advantages of the judicial system.

It is unclear if a district court could have reached the same result as the arbitrator in the Seagate case, but the Minnesota Supreme Court’s decision suggests that arbitrators can have greater discretion than judges.  The case certainly highlights the fact that arbitration may not always be the best forum, depending on which side of the dispute you are on.

Jackson Lewis P.C. © 2014
ARTICLE BY

V. John Ella
OF
Jackson Lewis P.C.

Barnes & Thornburg Labor Relations’ Top Ten Traditional Labor Stories of 2011 (Part 1)

‘Tis the season for year-end recaps, and we here at BT Labor Relations couldn’t resist taking our own look back at the year in traditional labor. As we move into 2012, here’s our countdown of the top ten traditional labor issues that made the news this year. Numbers 10 through 6 are below; check back tomorrow for our top five.

10. The Board sues Arizona over secret ballot constitutional amendment

2011 started off with a bang in January when the Board’s Acting General Counsel Lafe Solomon threatened to sue four states (Arizona, South Carolina, South Dakota, and Utah) over their secret ballot union election constitutional amendments. All four states added provisions to their state constitutions mandating that union elections be held by secret ballot only, after constitutional amendments passed by public referendum at the November 2010 election. These constitutional amendments were in response to the Employee Free Choice Act (EFCA) proposed in Congress in 2009, which would have required an employer to recognize a union if a majority of employees signed cards stating their desire for representation. This “card check” method of recognition is currently allowed by the NLRA, but employers have the option of demanding that election of the union be confirmed by a secret ballot. EFCA would have taken this option away from employers (as well as enacting other pro-union changes to the NLRA).

EFCA never became law, but the constitutional amendments in these states passed anyway, purportedly preserving the right of a secret ballot election for employers in those states. The amendments as they currently stand do not conflict with the NLRA, but the NLRB nevertheless took exception to them, claiming that such state provisions are preempted by federal law. After a back and forth discussion with the states’ Attorneys General during the early part of 2011, the NLRB filed suit against Arizona in May, asking the court to declare that Arizona’s constitutional amendment was preempted by federal law and therefore unenforceable.

Although EFCA never became law, the NLRB has made attempts to individually implement many of the pro-union changes proposed in the bill, and Arizona has become the battleground for card checks. So far, the NLRB’s lawsuit appears to have some traction. The Arizona federal court hearing the case has deniedArizona’s motion to dismiss and litigation continues. Stay tuned in 2012 as this issue continues to develop …

See B&T’s previous coverage of this issue here.

9. The NLRB strikes a blow to mandatory arbitration policies in Supply Technologies

Companies love mandatory arbitration policies in contracts and in May, the U.S. Supreme Court issued a landmark decision in AT&T v. Concepcion upholding such policies in consumer contracts. Employers also see the appeal of mandatory arbitration clauses and many union contracts include such provisions. However, an NLRB Administrative Law Judge reminded employers of the limits of such policies in a decision in June, finding in Supply Technologies LLC that an employer’s arbitration policy violated the NLRA by unlawfully restricting employees’ rights by suggesting that an employee had to bring any unfair labor practice charge through the arbitration procedure, and thus could not make that charge with the Board. This decision served as a warning for employers hopeful after theConcepcion decision that arbitration provisions should be carefully reviewed before being included in collective bargaining agreements. Employers should know that just because SCOTUS approves, doesn’t mean the Board will.

See B&T’s previous coverage of this issue here.

8. Congress sits up and takes notice (although no new legislation is actually passed)

With a new majority in the House of Representatives after the 2010 elections, certain Republican members of Congress have made the NLRB their new target this year. Several hearings were held by Congressional Committees to discuss what many characterize as the pro-union, “activist agenda of the National Labor Relations Board.” The Board’s complaint against Boeing was a frequent target, as well as its decisions regarding posting requirements, “quickie” elections, and “micro” bargaining units.

Additionally, Republicans in both the House and the Senate have introduced bills to amend the NLRA to reverse these controversial actions taken by the NLRB in 2011. The Democrats weren’t able to get EFCA passed when they had a majority of both houses, so it is unlikely that any of this legislation will actually be passed by a divided Congress, but the NLRB’s continued perceived pro-union actions have made traditional labor a key issue as we move into the 2012 election season.

See B&T’s previous coverage of this issue here.

7. General Counsel memo regarding mandatory language in settlement agreements puts additional pressure on employers

This year, the Board has placed additional pressure on employers looking to settle NLRB proceedings with the issuance of a memo by General Counsel Solomon in January which requires mandatory language in settlement agreements whereby an employer in effect agrees in advance that if it is even accused of violating the agreement, all of the prior charges against it have merit. Although the Board characterized this language as necessary for effective enforcement of such agreements, this requirement likely has the effect of simply making employers less willing to settle a case. And it was another example of the Board’s aggressive efforts to secure rights for unions in 2011.

See B&T’s previous coverage of this issue here.

6. Specialty Healthcare decision opens the door for “micro” bargaining units

One of the Board’s more controversial decisions of 2011 was issued in August regarding appropriate bargaining units. In Specialty Healthcare (357 NLRB No. 83), the Board overturned 20 years of precedent regarding determination of an appropriate bargaining unit in non-acute health care facilities. The Board increased the burden on employers who wish to challenge a bargaining unit petitioned for by a union to include more employees. Under the new standard, employers have the burden to prove that the employees the employer believes also should be part of the unit share an “overwhelming community interest” with the petitioned for employees. The previous rule (as articulated by the Board inPark Manor Care Center, 305 NLRB 872 (1991)), applied a lower standard: whether the community of interest of the employees the employer sought to include was “sufficiently distinct from those of other employees” in order to justify their exclusion from the bargaining unit.

The upshot is that this decision allows unions to pursue so-called “micro” bargaining units, and it will be easier for unions to certify bargaining unit(s) piecemeal, even when a majority of employees in a facility do not desire union representation. This decision helps unions trying to “get a foot in the door” by allowing them to target vulnerable employer sub-groups.

This decision was targeted by legislation introduced in Congress to reverse it, but for now, it remains current Board law and sets up new challenges for employers seeking to avoid unionization.

See B&T’s previous coverage of this issue here.

Disagree with our picks? Let us know in the comments what traditional labor issues you think were most important in 2011. And don’t forget to check back tomorrow for our top five!

© 2011 BARNES & THORNBURG LLP

Create Your Own Arbitration Provision: Two Recent Supreme Court Decisions Emphasize That Parties Have the Freedom to Define the Nature and Scope of Their Agreement to Arbitrate

Posted recently on the National Law Review by Damian V. Santomauro and Jennifer Marino Thibodaux of Gibbon PC – great analysis of the US Supreme Court’s recent interpretation of arbitration agreements: 

Arbitration provisions are a common component of a wide array of contracts, including many commercial and consumer agreements.  Recently, the Supreme Court of the United States issued two opinions addressing the enforceability of arbitration clauses that require businesses incorporating such clauses into their consumer agreements to re-evaluate how they are drafted and for those businesses that do not utilize such clauses in their agreements to reconsider whether to do so.  First, in Stolt-Nielsen S.A. v. AnimalFeeds International Corp.(“Stolt-Nielsen”), 130 S. Ct. 1758 (2010), the Court held that consent to class arbitration cannot be assumed based upon the parties’ general agreement to arbitrate and that a court cannot compel class arbitration where the arbitration clause is silent as to class arbitration.  Second, in Rent-A-Center, West, Inc. v. Jackson (“Rent-A-Center”), 130 S.Ct. 1758 (2010), the Court held that a party’s challenge to the validity of an arbitration agreement must be resolved by an arbitrator, not the District Court, where the agreement contains a provision delegating such issues to an arbitrator.  Taken together, these opinions (in both of which Justices Alito, Kennedy, Roberts, Scalia, and Thomas were in the majority) demonstrate that the direction of the current Court is to respect the language the parties used in their arbitration clauses, with a corollary emphasis on the underlying principle of parties’ freedom to contract.

The Stolt-Nielsen Decision

In Stolt-Nielsen, the Court considered a relatively straight-forward dispute among commercial parties regarding the propriety of ordering class arbitration where the parties’ arbitration provision was silent on the issue.  Specifically, the plaintiff, a supplier of raw ingredients utilized in animal fees, filed a demand for class arbitration seeking to represent a class of customers that had purchased transportation services from the defendant shipping companies.  130 S.Ct. at 1764-65.  The parties agreed that their dispute was subject to arbitration, but disagreed as to whether it could be arbitrated on a class-wide basis.  Ultimately, the parties agreed that an arbitration panel would decide whether class arbitration was appropriate in light of their arbitration agreement, which the parties stipulated was “silent” regarding class arbitration.  Id. at 1765.  When the arbitration panel determined that class arbitration could proceed under the arbitration clause because the parties’ evidence did not show an intent to preclude class arbitration, the shipping companies filed an application to vacate the arbitrators’ award.  Id. at 1766.  The District Court for the Southern District of New York vacated the award on the grounds that federal maritime law (and its emphasis on custom and usage) should have governed the issue, but the Court of Appeals for the Second Circuit reversed.  Id. at 1766-67.

On appeal, the Supreme Court, in a five to three decision (with Justice Sotomayor abstaining), reversed and held that the decision of the arbitration panel must be vacated pursuant to Section 10(a)(4) of the Federal Arbitration Act (“FAA”), 9 U.S.C. § 1, et seq., because the panel exceeded its powers by imposing its own views with respect to the policy of class arbitration in lieu of what the parties actually agreed to.  Id. at 1767-68.  Specifically, the Court concluded that the panel had failed to identify any rule of decision from the FAA, maritime law, or New York law that addressed the question of class arbitration where the parties’ contract was silent on the issue and, instead, simply based its decision on its own policy choice.  Id. at 1770.

In ascertaining the appropriate law to apply to the dispute, the Court held that “a party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so.”  Id. at 1775 (emphasis in original).  The Court emphasized that, although interpretation of arbitration provisions is generally an issue of state law, the FAA imposes certain rules that must be considered, including that arbitration is principally an issue of consent.  Id. at 1773.  Noting that parties have the freedom to draft their arbitration provisions in accordance with their own preferences, including (1) the issues they want to arbitrate; (2) the rules under which an arbitration will occur; and (3) who will arbitrate the dispute, the Court said that in analyzing the nature and scope of an arbitration provision, courts and arbitrators must “give effect to the intent of the parties.”  Id. at 1774-75.

Although the Court could have remanded to the Court of Appeals for a rehearing in accordance with these principles, it elected to resolve the issue of class arbitration itself because, in light of the parties’ stipulation that the arbitration provision was silent, the Court determined that there was only one permissible outcome.  Id. Specifically, because the parties had stipulated that they had not reached an agreement on class arbitration, there was no basis to conclude that the parties had consented to arbitration on a class wide basis.  Id. at 1775.  Moreover, because of the significant differences between bilateral arbitration and class arbitration, the Court ruled that “[a]n implicit agreement to authorize class-action arbitration . . . is not a term that the arbitrator may infer solely from the fact of the parties’ agreement to arbitrate.”  Thus, the parties’ silence on the issue could not be presumed to confer consent to class arbitration.  Id. As a result, the Court held that because the parties had not expressly agreed on class arbitration, the parties could not be compelled to submit their dispute to class arbitration.

The Rent-A-Center Decision

The Rent-A-Centerdecision involved a dispute as to whether the court or the arbitrator decides the issue of whether the arbitration agreement is unconscionable.  In this case, the plaintiff employee sued his employer, Rent-A-Center, in the United States District Court for the District of Nevada, alleging employment discrimination.  130 S.Ct. at 2775.  The plaintiff had signed an arbitration agreement that expressly provided for arbitration of claims of discrimination and contained a provision that expressly delegated to the “[a]rbitrator, and not any federal, state, or local court or agency, [] the exclusive authority to resolve any dispute relating to the interpretation, applicability enforceability, or formation of the” arbitration agreement.  Based on the arbitration agreement, Rent-A-Center moved to dismiss or stay the proceedings under the FAA and to compel arbitration.  In opposition, the plaintiff employee argued that the arbitration agreement was unenforceable on the grounds of unconscionability.  Id.

The District Court granted Rent-A-Center’s motion to dismiss and to compel arbitration, finding that the “delegation clause” in the arbitration agreement, which provided that the arbitrator had the exclusive authority to resolve all disputes regarding the agreement, governed because the plaintiff was challenging the arbitration as a whole.  Id. at 2775-76.  On appeal, the Court of Appeals for the Ninth Circuit reversed on the question of whether the court or the arbitrator had the authority to determine whether the agreement was enforceable, concluding that where a party asserts that an arbitration agreement is unconscionable that threshold inquiry is for the court to decide regardless of what the agreement provides.  Id. at 2776.

On appeal, the Supreme Court, in a five to three decision (with the same five Justices in the majority as were in the majority in Stolt-Nielsen) reversed, holding that the question of the validity of the subject arbitration agreement was reserved for the arbitrator by the delegation clause.  Id. at 2779.  The Court’s opinion focused on the FAA’s recognition of “the fundamental principle that arbitration is a matter of contract” and noted that “the FAA [] places arbitration agreements on an equal footing with other contracts.”  Id. at 2776.  As a result, the Court stated that the delegation provision governed the dispute unless it was otherwise unenforceable pursuant to Section 2 of the FAA, which provides that arbitration provisions “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.

In analyzing the enforceability of the delegation provision, the Court noted that there are two ways to challenge the validity of an arbitration provision under Section 2 of the FAA: (1) to challenge the validity of the specific arbitration provision at issue, or (2) to challenge the entire contract as a whole.  130 S.Ct. at 2778.  As the Court explained, only the former challenge implicates a court’s involvement because Section 2 of the FAA provides that a “written provision” to arbitrate is valid — without regard to the validity of the entire contract in which the provision is contained.  Thus, a party’s challenge to the entire contract does not preclude a court from enforcing a specific agreement to arbitrate, which is severable from the contract.  Id. In other words, only if a party challenges the validity of the specific arbitration provision, rather than the validity of the entire contract, is the inquiry one for the court.  Id.

Although the subject contract in this case was an arbitration agreement, the Court concluded, in the face of a strongly worded dissent, that was not a distinction with any significance, stating “[a]pplication of the severability rule does not depend on the substance of the remainder of the contract.”  Id. In this case, the plaintiffs unconscionability challenges (i.e. that the arbitration agreement was one-sided in that it only applied to claims of an employee and that the arbitration procedures called for by the arbitration agreement, including fee-splitting and limitations on discovery, were unconscionable) were all directed at the arbitration agreement as a whole.  Thus, because the plaintiff only challenged the validity of the contract as a whole (i.e. the arbitration agreement) and the not the specific arbitration provision at issue (i.e. the delegation provision in the arbitration agreement), the majority held that the delegation provision was enforceable under the FAA and the issue of the enforceability of the arbitration agreement was one that was within the exclusive authority of the arbitrator.  Id.

Analysis

Arbitration can, under certain circumstances, be a less expensive and more efficient forum in which to resolve disputes than traditional litigation.  The Stolt-Nielsen and Rent-A-Center decisions provide parties with the ability to craft arbitration provisions with clearly defined parameters, and potentially allow parties to more readily ensure that their disputes are addressed in arbitration.

As an initial matter, the Rent-A-Center decision enables parties to exert greater control over the forum in which issues relating to their arbitration agreement are resolved.  Specifically, parties can draft arbitration agreements limiting a court’s involvement in any subsequent dispute regarding the arbitration agreement by including a delegation clause in the agreement that expressly requires that all disputes regarding the arbitration agreement, including those that challenge the enforceability of the arbitration agreement, will be decided by the arbitrator rather than a court (conversely, parties may draft a delegation provision that requires the court to resolve such disputes, although the use of such provisions is unlikely given that the parties have agreed to arbitrate the underlying dispute).  In such an agreement, only challenges specifically directed to the validity of the delegation clause could be heard by a court, while challenges to the arbitration agreement as a whole would be addressed by the arbitrator.  Thus, the practical effect of theRent-A-Center decision is that disputes between parties with arbitration agreements containing such delegation clauses are more likely to be arbitrated than in the past.  That is, because a delegation clause referring disputes regarding the arbitration agreement to arbitration is generally more difficult to invalidate in court than an arbitration agreement as a whole, 130 S.Ct. at 2778 andRent-A-Center provides that the court can only consider the former, arbitration should now be easier to successfully invoke in that (1) opposing parties will be less likely to resist referral to arbitration and/or (2) courts will be more likely to refer the dispute to arbitration because of the limitations imposed by Rent-A-Center on their authority to invalidate arbitration agreements.

While the Rent-A-Center decision related to a delegation provision in a stand-alone arbitration agreement, the Court’s holding should be equally applicable where the delegation clause is contained in an arbitration provision that is part of a larger contract.  Indeed, as the dissent noted in Rent-A-Center, “the written arbitration agreement [was] but one part of a broader employment agreement between the parties.”  Id. at 2782.  Until further clarification is provided by District Courts or Circuit Courts of Appeal, however, it may be prudent for businesses to utilize arbitration agreements (containing the appropriate delegation clause) that are separate from, but still applicable to, the underlying contract.

The Stolt-Nielsen decision enables parties to more readily control the forum in which class claims will be resolved.  That is, unless the parties specifically agree to arbitrate class claims, an agreement to arbitrate does not compel arbitration of class claims.  This decision, thus, provides significant protection for parties that want to arbitrate individual claims, but ensure that any class claims are litigated in the courts.  Although the decision in Stolt-Nielsen provides that silence on the issue of class arbitration does not equal consent, the preferred practice is for business to expressly include provisions in their arbitration agreements that the parties do not consent to class arbitration.

In addition, Stolt-Nielsen calls into question those decisions in which courts have held that class arbitration waivers are unconscionable and unenforceable, severed such waivers from the arbitration provision, and compelled arbitration of all claims, including class claims.  If silence cannot be construed as consent to class arbitration, then arbitration provision containing a class arbitration waiver, even if that waiver is determined to be unenforceable, should not be construed as consent to class arbitration.  Nevertheless, business can avoid any ambiguity on the issue by expressly stating that (1) the class arbitration waiver is not severable from the arbitration agreement and (2) if a court or other authority determines that the class action waiver is unenforceable, then the parties do not consent to arbitration of any class claims.

Finally, it is important to note that the Supreme Court’s grant of certiori in AT&T Mobility LLC v. Concepcion, 130 S.Ct. 3322 (May 24, 2010) has the potential to drastically alter the nature and scope of enforceable arbitration provisions and significantly increase the use of such provisions, particularly in consumer contracts.  In this case, the Court of Appeals for the Ninth Circuit held that the FAA did not expressly or impliedly preempt California state law regarding the unconscionability of class arbitration waivers in the arbitration agreements.  Laster v. AT&T Mobility LLC, 584 F.3d 849 (9th Cir. 2009).  That the Supreme Court granted certiori suggests, particularly in light of the Stolt-Nielsen and Rent-A-Center cases, the potential that the Court may conclude that the FAA — and not state law — governs the issue of the enforceability of class action waivers and that such waivers are enforceable.  If that were to occur, then such a decision could, depending upon the nature and scope of the Court’s decision, enable businesses to potentially insulate themselves from class actions in either the courts or arbitration proceedings through the utilization of arbitration agreements contain class arbitration waivers (i.e. an enforceable agreement that refers the parties to arbitration to resolve any dispute relating to the agreement, but expressly provides that such disputes may not be arbitrated on a class-wide basis).

Conclusion

The Supreme Court’s decisions in Stolt-Nielsen and Rent-A-Center evidence the significance of the FAA and signal that the Court, as currently constituted, is likely to enforce the terms of arbitration provisions in parties’ agreements as written.  Thus, even in circumstances that may be susceptible to concern as to whether the parties really had a “freedom to contract,” parties will more likely be bound by the terms of their written arbitration agreements, and there is a significant likelihood that these decisions will result in the federal courts referring more litigation to arbitration where the parties’ agreements so provide.  The Court’s pending decision in Concepcion promises to provide further direction from the Court regarding the scope of the FAA and, when the Court issues this decision, businesses and parties to contracts should further assess their use of arbitration provisions and the validity and enforceability of the language they include in such provisions.

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