Federal Arbitration Case Update | Bound and Determined

Richard Birke

Richard Birke

By Richard Birke

Owner Not Bound by Arbitration Clause in Engagement Agreement between Contractor and Law Firm
Auto Parts Manufacturing Mississippi v. King Construction
2015 WL 1379980
United States Court of Appeals, Fifth Circuit

APMM contracted with Noatex to build a building and Noatex subcontracted with King. When Noatex deemed King’s work inadequate, King filed a stop work notice and informed APMM that Noatex owed King $260,000. This matter resulted in APMM’s interpleading the money while the federal court in Mississippi figured out who was entitled to what.

Meanwhile, Noatex’ lawyer, Kohn, filed suit in California against APMM alleging that an engagement agreement between Kohn and King conferred a lien over the money APMM owed to Noatex. The suit was stayed pending the resolution of the Mississippi suit.

Noatex and Kohn (but not King) moved the Mississippi court to compel arbitration against APMM pursuant to the arbitration clause found in the fee agreement between King and Kohn.  They argued that equitable estoppel prevented APMM from opposing the motion to arbitrate. The district court denied the motion and Noatex and Kohn appealed.

The United States Court of Appeals for the Fifth Circuit affirmed.  The Court wrote “this case does not fit the rationale of the equitable estoppel exception. APMM is not trying to ‘hav[e] it both ways’ by seeking to hold Noatex and Kohn liable pursuant to a contract that contains an arbitration provision and, at the same time, deny arbitration’s applicability.  We see no unfairness in refusing to compel a non-signatory party to arbitrate a dispute based on an arbitration clause contained in an attorney engagement agreement signed by two other parties. Because APMM has not agreed to arbitrate disputes with Noatex and Kohn, and is not required by equitable estoppel to arbitrate, we affirm the district court’s denial of appellants’ motion to compel arbitration and to stay the proceedings.”

District Court Affirmed on Finding Validity of Arbitration Clause, Reversed on Finding of Waiver
Shy v. Navistar International Corp.
2015 WL 1383106
United States Court of Appeals, Sixth Circuit

As part of the settlement of a class action, Navistar entered into a consent decree that required it to participate in a program overseen by a Supplemental Benefits Committee (SBC).  When the SBC disputed some of Navistar’s financial records relating to Medicare payments, Navistar rejected requests for clarification.  The parties wrangled in court over Navistar’s obligations under the consent decree, until Navistar invoked an arbitration clause found in the consent decree specifically designating arbitration by accountants in disputes about financial information.  The district court found the dispute subject to arbitration, but also noted “Navistar’s reluctance to enter into arbitration over the Medicare subsidy payments prior to litigation, and the fact that Navistar did not seek to arbitrate the SBC’s first claim requesting information until after the court granted the SBC’s motion to intervene and found that these decisions were ‘completely inconsistent with any reliance on the [consent decree’s] dispute resolution procedures,’ and also caused a delay that prejudiced the SBC by delaying the resolution of the dispute and any payments that the SBC might be entitled to.”

The United States Court of Appeals affirmed the lower court’s finding that the dispute was subject to arbitration but reversed the finding that Navistar had waived its right to arbitrate.  As to the first point, the Court wrote “the contract disputes involved in the SBC’s classification-based arguments are relatively simple and closely related to accounting; it is reasonable to suppose that the parties to the agreement intended such disputes to be arbitrated.”  As to the second, it wrote “Navistar’s pre-litigation conduct and failure to raise arbitration in its response to the SBC’s motion to intervene at the start of litigation did not constitute a waiver of its right to arbitrate the claims raised by the SBC.”  The Court detailed Navistar’s actions and found them to be “completely consistent with a willingness to arbitrate.”

ADR is on the Rise in Employment Cases

Jeffrey Grubman, Esq.

Jeffrey Grubman, Esq.

By Jeffrey Grubman, Esq.

While there is a long history of utilizing arbitration in the labor union context, the majority of employment disputes have historically been litigated in federal court. Federal courts tend to be more formal than state courts, requiring full legal briefing on all motions and involving judges appointed by the President of the United States with tenure for life and extraordinarily bright law clerks to assist them. As a general rule, it is more expensive to litigate cases in federal court than state court, and the most expensive cases to litigate are class actions. The employment law area has long been fertile ground for class actions. Also, in recent years, collective Fair Labor Standards Act overtime cases have been quite active in federal courts throughout the country.

Large employers apparently have tired of the expense and perhaps the dissatisfying results arising from court actions. Accordingly, many have started including binding arbitration clauses as well as class action waivers in their employment agreements. In fact, the percentage of companies using arbitration clauses to preclude class action claims soared to 43 percent in 2014 from 16 percent in 2012, according to a survey of nearly 350 companies conducted by management-side law firm Carlton Fields Jorden Burt LLP. That same survey found that the percentage of class action lawsuits that address employment issues slipped to 23 percent in 2014 from 28 percent in 2011 and that class action suits from workers cost employers $462.8 million in 2014, down from $598.9 million in 2011.

Courts historically have been supportive of binding arbitration clauses. Legal claims in certain industries, such as securities claims by investors against broker dealers, have been resolved through binding arbitration for decades. It now appears that employment disputes are moving in that direction. In 2011, in the case of AT&T Mobility LLC v. Concepcion, the U.S. Supreme Court upheld class action waivers entered by customers of AT&T. The U.S. Supreme Court has not yet agreed to hear cases applying the logic of the Concepcion case to class action waivers in the employment context. Nevertheless, while the National Labor Relations Board has ruled that class action waivers violate the National Labor Relations Act, the trend among the lower courts is to uphold class-action waivers and to uphold traditional arbitration clauses. (See, e.g., Jasso v. Money Mart Express Inc. (N.D. Cal. 2012) and Morvant v. P.F. Chang’s China Bistro, Inc. (N.D. Cal. 2012).)

For more on Mr. Grubman’s discussion, please read the full article, “ADR is on the Rise in Employment Cases,” from Law.com.

Federal Employment Case Update | Pizza and Beer

Richard Birke

Richard Birke

By Richard Birke

Members of Certified Class Lack Standing to Challenge Class Arbitration Ban
Conners v. Gusano’s Chicago Style Pizzeria
United States Court of Appeals, Eighth Circuit

When Jacqueline Conners brought a class action lawsuit against her employer Gusano’s (alleging unlawful tip pooling practices), Gusano’s instituted an arbitration policy that required individual arbitration of any disputes.  Conners filed a motion seeking to have the court declare the new policy invalid because it interfered with the right of class members to communicate with other potential class members.  The trial court found this persuasive and granted the motion.  Gusano’s appealed.

The United States Court of Appeals for the Eighth Circuit vacated the lower court’s order, finding that Conners and the other members of the class lacked standing to contest a work requirement that did not apply to them. The Court wrote that “the former employees cannot gain standing here by defending the rights of current employees, not yet joined in the action.”

District Court Unjustified in Vacating Award
Raymond James Financial v. Fenyk
United States Court of Appeals, First Circuit

Robert Fenyk worked as a broker for Raymond James Financial (RJF) until he was terminated for alleged problems with alcohol. Fenyk filed a complaint in Vermont state court alleging he was fired because of his sexual orientation and his status as a recovering alcoholic. The complaint sought $665,000 in back pay, $588,000 in front pay, and $250,000 in punitive damages, with attorney’s fees and costs.  RJF argued that Fenyk was not an employee (but rather, an independent contractor) and therefore the Vermont employment laws didn’t apply to the case. They also moved to compel arbitration of all the remaining claims.

On the first day of arbitration, Fenyk moved to add a complaint under Florida law. The panel denied the motion as untimely. The panel issued an award of $600,000 for back pay based on discrimination and about $55,000 in fees.

RJF moved to vacate the award, arguing that the panel awarded damages under Florida law even though Fenyk brought no claims under Florida law, and even if he would have brought claims under Florida law, those claims would be time-barred. The district court granted the motion to vacate.

On appeal, Fenyk argued “that the district court erred in construing the Florida statute of limitations to bar his claim and improperly failed to defer to the arbitrators’ good faith effort to resolve the dispute.”  The United States Court of Appeals for the First Circuit held that the Florida statute of limitations should apply, but the Florida law did not apply the civil statute to arbitration until several weeks after the award and there was an open question about whether the statute applied to this kind of case. The Court concluded “any error by the panel in refusing to dismiss Fenyk’s claims as untimely does not rise to the level necessary to justify vacatur.”

The Court dealt with the claim that it was a mistake to apply Florida law in a similar way. They wrote “In the final analysis, the panel apparently decided that Fenyk’s mistake in labeling his claims did not justify denying him relief. Where the arbitrators applied the substantive law that RJFS agreed would govern its conduct, that choice to apply Florida law falls within the category of judgments—even if erroneous—that we may not disturb.”

The Court found that the award drew its essence from the contract and was therefore valid.  The Court concluded by writing “Accordingly, we reverse the decision of the district court and remand the case for entry of an order confirming the arbitration award.”

 

Mediation: Confidentiality and Enforceability

Kim Taylor, Esq.

Kim Taylor, Esq.

By: Kimberly Taylor, Esq.

An essential element of a successful mediation is confidentiality.  Participants to a mediation must be able to rely on the confidentiality of the process if they are going to be candid with the mediator about their settlement positions, pressure points, litigation strategy and other sensitive issues.  This principle is reflected in the Uniform Mediation Act, finalized in 2003 and adopted by 11 states to date, including Washington, Idaho, Utah, South Dakota, Nebraska, Iowa, Illinois, Ohio, New Jersey, Vermont and Hawaii.  According to the Act, “[t]his frank exchange can be achieved only if the participants know that what is said in the mediation will not be used to their detriment through later court proceedings and adjudicatory processes.”

Most ethics guidelines for mediators and some state statutes require that anything said, any writing or any admission made during a mediation is to be kept confidential, and that would include the terms of the settlement.  Standard V of the ABA Model Standards of Conduct for Mediators (Model Standards), adopted in 2005, directs that a mediator must “maintain the confidentiality of all information obtained by the mediator in mediation, unless otherwise agreed to by the parties or required by applicable law.”  JAMS Mediators Ethics Guidelines recognize that “[i]t is crucial that the mediator and all parties have a clear understanding as to confidentiality before the mediation begins…A mediator should not disclose confidential information without permission of all parties or unless required by law, court rule or other legal authority.”

What happens, however, if one party reneges on a settlement agreement and the other party wants to go to court to enforce it?  Or if the parties agree on basic terms of the deal, with details to be worked out later, and discussions break down?  “Settler’s remorse” can set in the day after a particularly emotional or contentious mediation session, leading to claims of coercion or fraud.  Can the parties or their lawyers introduce evidence to support the fact that an agreement was in fact reached?  Can a mediator be compelled to testify about the terms of a settlement agreement?

There is a clear tension between preservation of confidentiality on the one hand and the need on the other hand to introduce some facts about the mediation to enforce the agreement.  The Uniform Mediation Act attempts to reconcile this by not only providing for confidentiality, but also permitting a written agreement signed by all parties to be admitted in a later court proceeding.  Some states, like California, have statutes that provide that if a settlement agreement is signed by the parties during the mediation, it can be admitted in a later court proceeding if the agreement itself provides that it is admissible and that it is enforceable and binding and all parties agree to its disclosure.  The agreement might also be introduced if it is needed to show fraud, duress or illegality.  The Model Standards permit a mediator to “report, if required, whether parties appeared at a scheduled mediation and whether the parties reached resolution.”

For more on Ms. Taylor’s discussion on confidentiality and enforceability in mediation, please read the full article from Law.com.