Federal Arbitration Case Update | The Powers that Be

Following are two interesting and recent federal court rulings related to arbitration.

Arbitrator Has Authority to Rule on Whether He Can Change His Mind
United Brotherhood of Carpenters and Joiners v. Tappan Zee Constructors

Richard Birke

Richard Birke

When the general contractor for the rebuilding of the Tappan Zee Bridge gave a portion of the job to the carpenters (at $70/hr.) rather than the dock builders (at $94/hr.), a jurisdictional dispute arose between two unions. The two unions agreed that the dock builders would get the work, but the GC disagreed and brought the case to arbitration pursuant to the plan agreement covering the project.

In his interim award, the arbitrator stated that he planned to apply the “local standards” test in the plan agreement and that the outcome would favor the dock builders. However, in his final award, nine days later, the arbitrator stated that there were no local standards and that the GC was free to employ the lower-wage carpenters. The district court confirmed the award and the carpenters appealed.

The United States Court of Appeals for the Second Circuit affirmed. The contract governing the arbitration required an interim award and a later final award. By definition, the interim award was not a final award and the arbitrator was free to change his mind based on newly heard evidence or reconsideration of the matter. Moreover, the contract’s language was sufficiently ambiguous to allow the arbitrator to determine the circumstances that would give rise to a permissible re-visitation of his interim award. “It was because he concluded that he had initially failed to consider certain evidence under the Section 8 criteria that he rendered a written decision different from his short-form decision.”

The Court concluded, “Because we must defer to the arbitrator’s interpretation of the rules by which the parties agreed the arbitration would be conducted, and because the arbitrator interpreted the rules as allowing him to fashion the second decision as he saw fit, the order of the District Court confirming the May 13th Award and vacating the May 4th Award is affirmed.”

Arbitrator Who Held He Had Exceeded His Powers in Prior Award Exceeded Them Again in Issuing Second Award
IBEW Local 824 v. Verizon Florida

The CBA between Verizon Florida and its union had a provision that allowed members with one-year seniority to bump existing workers with certain exceptions. When bumps were denied to certain workers, the union sought arbitration.

The theory presented by the union was based on a clause that required a bump be given if the worker needed only “minimal additional training.” The company maintained that was in controversy.

The arbitrator interpreted the “minimal additional training” requirement to mean four weeks or less. As many of the would-be bumpers in the case in arbitration required more, the award was in favor of the company.

The union then sent a letter to the arbitrator asking for a “clarification.” The union argued that two additional would-be bumpers whose bumps were denied fell into the exact categories as the two workers whose bumps were allowed. The company argued that the award be rewritten to exclude consideration of the “previously held” aspects of the case.

The arbitrator then issued a substitute award in which he stated that he had exceeded his powers in the original award and he struck out the portions of the award dealing with the “previously held” clause. The union moved to vacate and when that motion was denied, it appealed.

The company argued that the arbitrator was free to change the opinion, functus officio didn’t apply in a labor context and that the union invited the substitute opinion. However, the U.S. Court of Appeals for the Eleventh Circuit found that the union asked a narrow question that assumed that the award was valid, e.g., if the first two got it, why not the second two? The Court found that the company responded with a full frontal attack on the award itself.

The Court determined that the award was proper in the first instance, and that the arbitrator exceeded his powers by issuing the substitute award.

The company argued that the award be rewritten to exclude consideration of the “previously held” aspects of the case.

The arbitrator then issued a substitute award in which he stated that he had exceeded his powers in the original award and he struck out the portions of the award dealing with the “previously held” clause. The union moved to vacate and when that motion was denied, it appealed.

The company argued that the arbitrator was free to change the opinion, functus officio didn’t apply in a labor context and that the union invited the substitute opinion. However, the U.S. Court of Appeals for the Eleventh Circuit found that the union asked a narrow question that assumed that the award was valid, e.g., if the first two got it, why not the second two? The Court found that the company responded with a full frontal attack on the award itself.

The Court determined that the award was proper in the first instance, and that the arbitrator exceeded his powers by issuing the substitute award.

 

The Deflategate Drama: A Win for the Patriots scores a Touchdown for Arbitration

Lorraine M. Brennan, Esq.

Lorraine M. Brennan, Esq.

The “Deflategate scandal,” in which the New England Patriots, and in particular their star quarterback, Tom Brady, were accused of deflating footballs beneath the required PSI (12.5-13.5 psi) to somehow gain an advantage over competing teams was a very hot topic among American football enthusiasts. However, it has also become a case study on how the arbitration process for vacating and confirming arbitration awards under the Federal Arbitration Act (FAA) worked properly, thus ensuring the integrity and fairness of the process.

During the January 18, 2015 AFC Championship game between the New England Patriots and the Indianapolis Colts, a ball thrown by Brady was intercepted by the Colts linebacker, who turned it over to the Colts equipment staff as he believed the football felt underinflated. The Colts equipment manager, in violation of the rules, used a pressure gauge to measure the football and found that the inflation level was approximately 11 psi, which was below the required standard. At halftime, NFL officials collected and tested 11 of the balls supplied by the Patriots and four balls that the Colts had prepared. All 11 of the Patriots balls were under-inflated below the required 12.5 psi. The balls were re-inflated to 13 psi for the second half of the game, in which the Patriots were victorious.

Not long after the game the NFL commissioned an investigation of the event. Leading the investigation was Ted Wells, Esq., an attorney with the law firm of Paul Weiss, and Jeff Pash, the NFL Executive President and General Counsel. The investigation was undertaken pursuant to the NFL “Policy on Integrity of the Game & Enforcement of Competitive Rules,” which was sent from Roger Goodell, the Commissioner of the NFL to Chief Executives, Club Presidents, General Managers and Head Coaches. Notably, this policy was not distributed to the players.

The Wells Report concluded that “it is more probable than not” that Brady was at least generally aware of the inappropriate activities of McNally and Jastremski (the Officials Locker Room attendant and Patriots equipment assistant in charge of footballs, respectively) involving the release of air from Patriots game balls.” The Wells report also concluded that “it is unlikely that an equipment assistant and a locker room attendant would deflate game balls without Brady’s knowledge and approval.”

Following the issuance of the report, a disciplinary decision letter was sent to Patriots owner. A separate letter was to Brady informing him of the disciplinary action to be taken against him – a four game suspension. Brady appealed the disciplinary action through the Player’s Association. Commissioner Goodell appointed himself as the arbitrator to hear Brady’s appeal, which he had the authority to do under the Collective Bargaining Agreement (CBA) with the Players. The Player’s Union filed a motion seeking Goodell’s recusal from serving as the Arbitrator, but the motion was denied by Goodell, who claimed under the CBA he had the discretion to serve as a hearing officer in any appeal involving conduct detrimental to the integrity of the game.

Brady, through the Players Association, made several discovery motions. First, he requested “[a]ll Documents created, obtained, or reviewed by NFL investigators in connection with the investigation; Second, he moved to compel the testimony of NFL Executive Jeff Pash, a senior executive of the NFL who had been designated co-lead investigator for the Wells Report, as well as a number of other document requests upon which the Players Association intended to question Pash. These requests were denied by Goodell, citing the CBA wherein documents to be used at the hearing were required to be turned over “no later than three calendar days prior to the hearing,” and that the CBA provides for “tightly circumscribed discovery.”

In July 2015, Goodell published a 20 page Award on Brady’s appeal, which upheld the four game suspension. The Goodell award went far beyond what the Well’s report had concluded, in that Goodell stated that “Mr. Brady knew about, approved of, consented to, and provided inducements and rewards in support of a scheme by which, with Mr. Jastremski’s support, Mr. McNally tampered with game balls.”

The NFL then moved to confirm the Arbitral Award in the Federal Court in New York, while at the same time the Players Association moved to vacate the award in the Federal Court in Minnesota. As the NFL was first to file, the motion to confirm and the motion to vacate were consolidated in the Federal Court in New York. Judge Richard Berman presided over the proceedings.

Judge Berman recognized that the standard for review of arbitral awards under the FAA 9 U.S.C. Section 10 is a deferential one, yet nonetheless he noted that “the deference due an arbitrator does not extend so far as to require a district court to countenance, much less confirm, an award obtained without the requisites of fairness or due process.” Judge Berman focused on numerous instances in the arbitration where Brady was not given a fair hearing, including the fact that Brady was never provided with the “Policy on Integrity of the Game & Enforcement of Competitive Rules,” nor was he ever advised that he would be subject to suspension from the game for “general awareness” of ball deflation by others.

Judge Berman focused on the fact that Goodell had likened Brady’s conduct to the use of anabolic steroids, a practice that had in the past subjected NFL players to suspensions from games, a comparison he soundly rejected. He also found that Brady had been denied the opportunity to examine the co-lead investigator in the case, Jeff Pash, which was not in line with NFL precedent wherein players must be afforded the right to confront their investigators. Judge Berman ruled that the denial of that opportunity was “fundamentally unfair” and in violation of FAA Section 10(a)(3), which resulted in prejudice to Brady. The Judge also found that Brady was improperly denied the opportunity to have equal access to investigative files, and that this fact was especially noteworthy as Paul Weiss, who participated in preparing the “independent” Wells report, represented the NFL before the Judge and actually cross-examined Brady. The Court ordered the award to be immediately vacated. The NFL is appealing Judge Berman’s decision.

This case is noteworthy as the arbitration process worked as intended. The Court made it clear that while deference is clearly given to arbitral awards, it will not be so when a party is not given basic procedural fairness. So while there will still be those who continue to obsess about deflated footballs, the real win in this process was for the fundamental integrity of arbitration. And that is a touchdown not only for those who work in the arbitration field, but the users of the process as well.

Lorraine M. Brennan is a full time arbitrator and mediator at JAMS, specializing in international dispute resolution, employment, complex commercial and intellectual property among other specialties.  The views expressed in this piece are her own, and not those of JAMS.  She is a native of New England, but admittedly not a football fan.  She was assisted with the underlying technical aspects of the Deflate-Gate saga by Lisa Duggan Brown, M.S. in Engineering Management, Northeastern University. She can be reached at lbrennan@jamsadr.com.

 

Federal Case Update| Mail and Carrier

Richard Birke

Richard Birke

By Richard Birke

Court Dashes Postmaster General’s Hopes That New Argument to Avoid Administrative Arbitration, Not Raised Below, Is Unwaivable Because It Goes to Subject-Matter Jurisdiction
Ruiz v. Donahoe
2015 WL 1811810
United States Court of Appeals, Fifth Circuit

Blanca Ruiz worked for the post office. She sued Postmaster General Donahoe in a putative class action. The district court dismissed the case for lack of subject matter jurisdiction, but the United States Court of Appeals for the Fifth Circuit reversed and remanded the case for a determination regarding an administrative class action.

Donahue petitioned for rehearing, arguing that the CBA covering Ruiz’ employment bars litigation of her claims. He argued that despite the fact that he is raising this matter for the first time on the petition, he did not waive the argument because the matter goes to subject-matter jurisdiction.

The Court disagreed. It wrote “[M]andatory grievance and arbitration procedures in contracts, such as the CBA [in prior cases] are waivable and do not affect this court’s subject-matter jurisdiction. If a dispute is subject to mandatory grievance and arbitration procedures, then the proper course of action is usually to stay the proceedings pending arbitration. However, a dismissal may be appropriate ‘when all of the issues raised in the district court must be submitted to arbitration.’ In any event, agreements to arbitrate implicate forum selection and claims-processing rules not subject-matter jurisdiction….Donahoe has waived his argument regarding the CBA’s mandatory grievance and arbitration procedures by failing to raise it before the district court or this court prior to the present petition for rehearing.”

Public Policy Defense Fails to Overturn Foreign Arbitral Award
Asignacion v. Rickmers Genoa Schiffahrtsgesellschaft MBH
2015 WL 1840880
United States Court of Appeals, Fifth Circuit

Lito Asignacion sustained injuries while working aboard a vessel operated by Rickmers Genoa Schiffahrtsgesellschaft MBH (Rickmers). The injury occurred in Louisiana and he filed suit in court there. Rickmers moved to compel arbitration.

Asignacion’s employment was governed by terms and conditions, which included the following:

“In cases of claims and disputes arising from this employment, the parties covered by a collective bargaining agreement shall submit the claim or dispute to the original and exclusive jurisdiction of the voluntary arbitrator or panel of arbitrators. If the parties are not covered by a collective bargaining agreement, the parties may at their option submit the claim or dispute to either the original and exclusive jurisdiction of the National Labor Relations Commission (NLRC), pursuant to Republic Act of 1995 or to the original and exclusive jurisdiction of the voluntary arbitrator or panel of arbitrators….Any unresolved dispute, claim or grievance arising out of or in connection with this Contract, including the annexes thereof, shall be governed by the laws of the Republic of the Philippines, international conventions, treaties and covenants where the Philippines is a signatory.”

The state court stayed the matter and ordered arbitration in the Phillipines. The panel determined that it could use only Phillipine law to determine the dispute, and it awarded the lowest grade of compensable disability, entitling Asignacion to $1,870.

Asignacion filed a motion to set the award aside as a violation of United States public policy.  Asignacion pointed to Article V(2)(b) of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, which “allows a signatory country to refuse enforcement if recognition or enforcement of the award would be contrary to the public policy of that country.” The district court refused to enforce the award and Rickmers appealed.

The United States Court of Appeals for the Fifth Circuit noted that the burden of proof was on Asignacion. The Court rehearsed his main argument. “Asignacion’s counsel also urged that United States public policy requires that foreign arbitral panels give seamen an adequate choice-of-law determination; he argued that the arbitrators’ exclusive reliance on the choice-of-law provision in Asignacion’s contract did not constitute a choice-of-law determination, let alone a fair one.”

The Court was unpersuaded, and it reversed. Noting that the law does not require that U.S. courts apply U.S. standards to all foreign awards, it found that the court below had gone a step too far. “[T]he district court only determined that the arbitration and award ‘effective[ly] deni[ed]’ Asignacion the right to pursue his general maritime remedies. But that finding is insufficient to support the conclusion that the public policy of the United States requires refusing to enforce the award.”

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.