By Alice Albl
The First U.S. Circuit Court of Appeals has vacated a judgement to enforce an arbitration agreement, ruling that the contract between a professional boxer and sanctioning organization was unconscionable because it allowed the organization to select arbitrators from its own staff.
In Trout v. Organización Mundial de Boxeo Inc., 965 F.3d 71 (1st Cir. 2020) (available at https://bit.ly/2FNdUEF), the First Circuit Court remanded a case against the World Boxing Organization to the U.S. District Court of Puerto Rico. The court called the arbitrator-selection provision in the WBO’s Appeal Regulations “unconscionable.”
After declaring this selection process invalid, Circuit Judge David Barron, writing for a unanimous panel, left it to the federal district court to determine whether a severability clause from the separate but applicable WBO Championship Regulations would allow arbitration under the Appeal Regulations to continue.
In a concurring opinion, Circuit Judge Timothy Dyk wrote that, though the panel had declared the WBO arbitration setup unconscionable, it had omitted saying whether that determination would have to fall under state or federal law. Dyk noted that the court had avoided contribution to the thorny debate over how the Federal Arbitration Act may preempt state arbitration laws.
For now, according to the WBO’s attorney, Edward Ricco, a director at the Rodey Law firm in Albuquerque, N.M., the case can either proceed in the district court or transition into litigation. Ricco did not mention any plans to seek certiorari or a rehearing.
Professional boxer and World Boxing Organization member Austin Trout filed suit in a New Mexico state court in November 2015 alleging that “the WBO’s decision to remove him from its rankings for a certain weight class cost him a chance to pursue the world championship in that class,” as described in the opinion. Trout called the act a violation of the Muhammed Ali Boxing Reform Act (“MABRA”), and added claims under Puerto Rico law for breach of contract, fraud and negligence.
The WBO claimed that Trout had caused his own removal by committing to another fight while scheduled for a ranking match. The WBO invoked its Championship Regulations, which bound Trout as an organization member, and transferred venue to the U.S. District Court of Puerto Rico.
There, the WBO filed a motion to compel arbitration. It cited a provision of the Championship Regulations that required disputes to be arbitrated under its separate Appeal Regulations.
The motion was granted despite Trout’s insistence that a MABRA complaint was entitled to federal court adjudication. Trout included this contention along with three others in an appeal to the First Circuit.
While the First Circuit was quick to disarm Trout’s claim about MABRA requirements, along with two other claims, it focused on his assertion that a provision in the Appeal Regulations was unfair.
This provision notes that arbitrators are gathered into a Grievance Committee of “[t]hree persons designated by the President” of the WBO. Those chosen served for “indeterminate terms” and were “subject to replacement by the nomination of the President of the WBO.”
Trout contested the WBO’s President’s power to freely choose and replace arbitrators as unconscionable.
The WBO countered by indicating additional language stating: “the Grievance Committee shall act as a fair and independent arbitrator of any grievance arising out of WBO Participation and it shall conduct all of its proceedings as Amiable Compositeur, Ex Aequo et Bono.”
It drew parallels between the regulations’ phrasing, and clauses deemed acceptable by other courts. Those clauses required the selection of arbitrators who were “qualified and independent.’”
That, held the First Circuit, was the problem. While cited precedent called for individuals who were “independent,” the WBO only required that an arbitrator’s performance be independent. Its selection provision called for “[t]hree persons designated by the President” of the WBO, none of whom may be members of the WBO Executive Committee.”
But the contract permitted the president to select biased individuals, even from within the WBO itself. “In fact,” the First Circuit opinion notes, “at oral argument the WBO conceded that the Appeal Regulations give the WBO’s president the power to nominate his or her own assistant to serve on the Grievance Committee.”
Allowing arbitrators to be biased toward one side of a dispute, even if expected to perform in an “independent” manner, was unconscionable, according to the First Circuit opinion.
With the selection provision struck as unconscionable, the First Circuit sent the case back to the district court to determine whether a severability clause that would allow the arbitration to continue applied. The severability clause was written not among the terms of the Appeal Regulations it was intended to preserve, but in the Championship Regulations which compelled WBO members to arbitrate.
In his concurring opinion, Circuit Judge Dyk, sitting by designation from the Federal Circuit Court of Appeals, commented on an issue unaddressed by the court. Although the WBO’s selection provision was soundly unconscionable, he wrote: “whether arbitration-clause-specific issues of unconscionability (and certain related defenses) are governed by individual state law or federal common was up for debate.”
Dyk’s comment referred to a fiery debate ignited by the U.S. Supreme Court’s ruling in AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011) (available at https://bit.ly/363u7jW) centered around whether the FAA preempts conflicting state law defense arbitration or rather acts a guideline for it. This topic, he concluded, “we appropriately leave to another day the question[…].”
While Trout awaits further action in the San Juan federal court, WBO counsel Edward Ricco says that he believes that the case’s impact on ADR practice will go back to contract construction. “I imagine the case will warn drafters away from the sort of arbitrator-selection provision at issue,” he said, “certainly in the First Circuit and presumably in other jurisdictions where the Trout decision may have persuasive value.”
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The author, a CPR Institute Fall 2020 intern, is a second-year student at Brooklyn Law School in New York.