Future Challenges Nixed? Thomas Writes That Public Policy is Not FAA Illegality

By Russ Bleemer

There were two opinions in addition to the five-justice majority opinion this morning in Epic Systems Corp. v. Lewis, No. 16-285, covering three consolidated cases that declared that employers may require their employees to use mandatory individual arbitration to resolve workplace disputes, and waive their rights to class processes in either traditional litigation class actions, or in class arbitration processes.

[Our first blog post on the majority opinion here: https://bit.ly/2KEuXFN  Opinion here: https://www.supremecourt.gov/opinions/17pdf/16-285_q8l1.pdf.%5D

Justice Clarence Thomas, who joined the majority, wrote separately to explain why he believes that the Federal Arbitration Act Sec. 2 savings clause relied upon by the employees didn’t apply.

Thomas’s concurrence explains that the Sec. 2 ground for revocation of an arbitration agreement—“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)—concern the contract’s formation.

But the employees, Thomas writes, said the National Labor Relations Act makes the class waivers illegal, which is a public policy defense.

Because “‘[r]efusal to enforce a contract for public-policy reasons does not concern whether the contract was properly made,’ the saving clause does not apply here,” according to Thomas, quoting his concurrence in AT&T Mobility LLC v. Concepcion, 563 U. S. 333, 353, 357 (2011).

The position is a significant distinction and expands the majority opinion’s view that there was no Sec. 2 violation because the National Labor Relations Board interfered with a fundamental attribute of arbitration, also from AT&T Mobility.  Thomas’s position could be used by the Court to reject future challenges to arbitration contracts.

AT&T Mobility was the case in which the Court permitted mandatory individual arbitration with class waivers in consumer contracts.  Today’s Epic Systems decision mirrors AT&T Mobility in the workplace.

More on the Justice Ruth Bader Ginsburg-authored dissent soon.

 

Russ Bleemer is editor of CPR’s award-winning publication, Alternatives.

US Dist Ct Upholds Summary Disposition in Arbitration

Kantor Photo (8-2012)By Mark Kantor

Arbitrators and counsel often wonder whether summary disposition of an arbitral dispute is consistent with the requirements of applicable arbitration law and rules.  In Weirton Medical Center, Inc. v. Community Health Systems, Inc., N.D. West Virginia (Civ. Action No. 5:15CV132, Dec. 12, 2017) (available here – https://scholar.google.com/scholar_case?case=4968969295311804275&hl=en&lr=lang_en&as_sdt=20003&as_vis=1&oi=scholaralrt), Judge Frederick Stamp of the US District Court for the Northern District of West Virginia upheld last week an arbitration award on summary disposition issued under the 2009 AAA Commercial Arbitration Rules against an attack on grounds that summary disposition of the dispute without discovery and an evidentiary hearing was improper.  The District Court instead concluded that “that the arbitrator’s procedural determination that summary disposition was appropriate has a reasonable basis in the parties’ agreements. Accordingly, the arbitrator did not exceed his powers in disposing of the arbitration on summary disposition.”

Judge Stamp’s opinion involves a number of interesting issues, including collateral estoppel.  But for purposes of this post I focus only on the authority of the arbitrator to make a summary disposition.  The situation was complicated by the fact that there were two arbitration agreements.  Each contract referred to the then-current version of the AAA Commercial Arbitration Rules (i.e., the 2009 Rules).  But one also referred to the “substantive and procedural laws of the State of Tennessee applicable to contracts made and to be performed therein” and the other referred to the “substantive and procedural laws of the State of West Virginia applicable to contracts made and to be performed therein” (footnotes and many citations omitted below).

The Interim CFO agreement invokes the “substantive and procedural laws of the State of Tennessee applicable to contracts made and to be performed therein,” … the Turnaround Agreement invokes the “substantive and procedural laws of the State of West Virginia applicable to contracts made and to be performed therein,” … and both agreements invoke the “arbitration rules of the American Arbitration Association (“AAA”) in effect on the date of” the agreements.

The claimant in the arbitration, Weirton, found its claim summarily dismissed in arbitration on statute of limitation grounds.   Weirton argued both before the arbitrator and later in the District Court that the procedural laws of Tennessee and West Virginia prohibited summary dispositions in the circumstances.  By operation of the arbitration agreements, thus asserted Weirton, the arbitrator was bound to follow those laws and deny summary disposition.  The arbitrator concluded, however, that the arbitration agreements were subject for procedural issues to the AAA Commercial Arbitration Rules and that summary disposition was proper.  The arbitrator then dismissed Weirton’s claims “as a matter of law” as time-barred by the applicable statute of limitation.  Weirton thereafter sought to vacate that award on grounds that the arbitrator exceeded his powers and manifestly disregarded applicable law in so ruling.

Weirton argues that the arbitrator exceeded his powers by granting summary disposition rather than permitting discovery and holding a hearing. It argues that the arbitration agreements, the AAA Rules, and West Virginia and Tennessee’s Rules of Civil Procedure did not permit summary disposition. Further, Weirton argues that summary disposition was premature because no discovery had been conducted and factual disputes were evident.

Weirton made these same arguments before the arbitrator, and he rejected them. The arbitrator expressly concluded that the 2009 AAA rules provided him “discretion to hear and grant motions for summary disposition.” …. He concluded that summary disposition was not premature and that Weirton was not entitled to discovery because “the asserted claims fail as a matter of law.” …. The arbitrator also implicitly determined that this matter was governed by the AAA rules and not the Rules of Civil Procedure of Tennessee or West Virginia.

The District Court began its analysis of this issue by observing that US courts will not question an arbitrator’s decision on procedural issues “so long as it has some reasonable basis in the parties’ agreement.”

It is well settled that an arbitrator has jurisdiction to “adopt such procedures as are necessary to give effect to the parties’ agreement” and that “`procedural’ questions which grow out of the dispute and bear on its final disposition are presumptively. . . for an arbitrator[] to decide.” . Thus, an arbitrator is empowered to make a determination on procedural issues, and courts will not question that determination so long as it has some reasonable basis in the parties’ agreement.

The arbitration agreements provided for a situs in those jurisdictions, thereby (said Weirton) importing the procedural rules of those locales in any event.  According to the petitioner, the procedural laws of the two States “require full discovery and a full evidentiary hearing.”  Weirton also contended that the references in the contracts to the procedural law of Tennessee and West Virginia, respectively, imported the civil procedure rules of those States.  However, according to the Court, “[t]he arbitrator implicitly concluded that the AAA rules rather than West Virginia or Tennessee’s Rules of Civil Procedure applied to determine whether summary disposition was proper.”  That conclusion, said the Judge, had “a reasonable basis in the parties’ agreements.”  Therefore, the arbitrator’s conclusion was proper.

To that end, Weirton argues that the arbitration agreements do not provide authority to dispose of the case on summary disposition. Both arbitration agreements contain substantially identical language. Each provides for binding arbitration of any dispute arising out of or relating to the Interim CFO Agreement or the Turnaround Agreement, both invoke the 2009 AAA rules, both require a written and reasoned award, and both contain choice of law provisions. The Interim CFO Agreement provides for arbitration in Brentwood, Tennessee and for the application of Tennessee law. The Turnaround Agreement provides for arbitration in Pittsburgh, Pennsylvania and for the application of West Virginia law.

First, Weirton argues that, because the arbitration agreements provide for binding arbitration at particular locations, the parties intended to require full discovery and a full evidentiary hearing. It also argues that the arbitration agreements invoke the AAA rules and the procedural laws of Tennessee and West Virginia, none of which allow for summary disposition without an opportunity for discovery.

Second, Weirton argues that the arbitrator was obligated to apply West Virginia and Tennessee’s Rules of Civil Procedure, which, Weirton argues, would not have permitted summary disposition without adequate discovery. The arbitrator implicitly concluded that the AAA rules rather than West Virginia or Tennessee’s Rules of Civil Procedure applied to determine whether summary disposition was proper. This Court finds the arbitrator’s conclusion to have a reasonable basis in the parties’ agreements.

Reasoning in a manner that gave effect to the arbitrator’s authority to resolve ambiguities and to to respect the function of arbitration, rather than a textual analysis of the contracts, the Court held that these agreements made clear that “the AAA rules governed procedural matters in the arbitration … [and] application of those States’ Rules of Civil Procedure in an arbitration proceeding would be wrong….”

Read as a whole, these agreements make clear that the AAA rules governed procedural matters in the arbitration, while Tennessee and West Virginia law governed the substantive legal issues. Although the choice of law provisions provide that the states’ procedural law applicable to contracts was to be applied, application of those States’ Rules of Civil Procedure in an arbitration proceeding would be wrong, especially in light of the express invocations of the AAA rules.  At best, these choice of law and procedural rules provisions create ambiguity as to what procedural law applied, a determination well within the arbitrator’s jurisdiction. The arbitrator’s decision to apply the AAA rules rather than the States’ Rules of Civil Procedure has a reasonable basis in the parties’ agreements. Thus, the arbitrator’s determination that summary disposition was procedurally proper is entitled to deference.

Judge Stamp also rejected the notion that designating a location for the arbitration had the effect of importing that locales’ judicial procedure rules.

Weirton argues that the arbitration agreements required discovery and full evidentiary hearings because they specified the locations for such hearings. However, these designations of sites for arbitration hearings are not equivalent to express requirements that the parties conduct discovery and participate in a full evidentiary hearing on claims that fail as a matter of law.

Interestingly, the Court found authority for arbitral summary judgment in Rule L-4 of the Large, Complex Commercial Case Procedures of the AAA Commercial Arbitration Rules.  Rule L-4 only states generally that arbitrators may “take such steps as they may deem necessary or desirable to avoid delay and to achieve a just, speedy and cost-effective resolution of Large, Complex Commercial Cases.”  Notably, the 2009 AAA Commercial Arbitration Rules did not include a provision expressly referring to summary dispositions, unlike Rule R-33 of the current 2013 version of those Rules which does conditionally authorize dispositive motions (“R-33.  Dispositive Motions.  The arbitrator may allow the filing of and make rulings upon a dispositive motion only if the arbitrator determines that the moving party has shown that the motion is likely to succeed and dispose of or narrow the issues in the case.”).

While the arbitration agreements do not expressly permit summary disposition, they do not expressly prohibit it either. The agreements invoke the 2009 AAA rules, which provide a set of procedural rules including requiring arbitrators to “take such steps as they may deem necessary or desirable to avoid delay and to achieve a just, speedy and cost-effective resolution of Large, Complex Commercial Cases.” Rule L-4, AAA Commercial Arbitration Rules and Mediation Procedures (2009 ed.).

Perhaps sensing that he was relying only general authority under the Rules, Judge Stamp also buttressed his conclusion by asserting that result was consistent in any event with the civil procedure rules of the two states (“Further, the Rules of Civil Procedure of Tennessee and West Virginia allow for the dismissal of or summary judgment on legally insufficient claims.”).  At bottom, though, the District Court applied a deferential standard of review to the arbitrator’s decision that he had authority under the 2009 AAA Commercial Arbitration Rules to grant summary disposition.

As discussed above, the arbitrator implicitly concluded that the AAA rules rather than the States’ Rules of Civil Procedure applied to the arbitration. This was a procedural matter to be determined by the arbitrator, and this Court will defer to that ruling because it has some reasonable basis in the parties’ agreements. …. Thus, because Tennessee and West Virginia’s Rules of Civil Procedure did not apply to the issue of whether summary disposition was proper, the arbitrator did not manifestly disregard those laws.

The Weirton case therefore stands for the propositions that (1) an arbitrator’s decision to apply arbitration rules rather than a local civil procedure code will prevail even if the underlying agreements refer to local procedural law, so long as the arbitrator reasonably found ambiguity in that contractual language, and (2) authority for dispositive motions in arbitration can be found in general language of the AAA Commercial Arbitration Rules, even in the absence of specific reference to summary dispositions in the applicable Rules (“While the arbitration agreements do not expressly permit summary disposition, they do not expressly prohibit it either.”).

We will have to see if this ruling is appealed to the US Circuit Court of Appeals in due course.

Mark Kantor is a CPR Distinguished Neutral and a regular contributor to CPR Speaks. Until he retired from Milbank, Tweed, Hadley & McCloy, Mark was a partner in the Corporate and Project Finance Groups of the Firm. He currently serves as an arbitrator and mediator. He teaches as an Adjunct Professor at the Georgetown University Law Center (Recipient, Fahy Award for Outstanding Adjunct Professor). Additionally, Mr. Kantor is Editor-in-Chief of the online journal Transnational Dispute Management.

U.S. Court of Appeals Upholds Trial Court’s Sanctions Against Attorney for Frivolous Arguments Seeking to Avoid Arbitration Agreement

By Mark Kantor

The US Court of Appeals for the Seventh Circuit, in Appeal of Jana Yocum Rine in Hunt v. Moore Brothers, No. 16-2055 (June 27, 2017), recently upheld sanctions imposed by the trial court against an attorney personally for her frivolous arguments seeking to avoid an arbitration agreement in a contract between an independent trucker and a trucking company.  The appellate opinion is available at http://cases.justia.com/federal/appellate-courts/ca7/16-2055/16-2055-2017-06-29.pdf?ts=1498759242.

Very briefly, the trial court had required Ms. Rine, counsel for Mr. Hunt, to pay $7,500 in legal fees and expenses incurred by Moore Brothers defending against frivolous claims in a complaint filed by Ms. Rine in District Court and frivolous arguments that the arbitration agreement in the contract between Hunt and Moore Brothers was unenforceable, including a claim that the trucking company was holding Hunt “in peonage.”

James Hunt worked as a truck driver in Nebraska. On July 1, 2010, he signed an Independent Contractor Operating Agreement with Moore Brothers, a small company located in Norfolk, Nebraska.  Three years later, Hunt and Moore renewed the Agreement.  Before the second term expired, however, relations between the parties soured.  Hunt hired Attorney Jana Yocum Rine to sue Moore on his behalf.  She did so in federal court, raising a wide variety of claims, but paying little heed to the fact that the Agreements contained arbitration clauses.  Rine resisted arbitration, primarily on the theory that the clause was unenforceable as a matter of Nebraska law.  Tired of what it regarded as a flood of frivolous arguments and motions, the district court granted Moore’s motion for sanctions under 28 U.S.C. § 1927 and ordered Rine to pay Moore about $7,500.  The court later dismissed the entire action without prejudice.

****

The relevant part of the arbitration clauses in the Agreements reads as follows:

This Agreement and any properly adopted Addendum shall constitute the entire Agreement and understanding between us and it shall be interpreted under the laws of the State of Nebraska. … To the extent any disputes arise under this Agreement or its interpretation, we both agree to submit such disputes to final and binding arbitration before any arbitrator mutually agreed upon by both parties.

When Rine decided to take formal action on Hunt’s part, she ignored that language and filed a multi‐count complaint in federal court.  The complaint was notable only for its breadth: it accused Moore of holding Hunt in peonage in violation of 18 U.S.C. § 1581 (a criminal statute), and of violating the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. § 1962; the federal antitrust laws, 15 U.S.C. §§ 1, 4, 14; the Illinois Employee Classification Act, 820 ILCS 185/1 et seq.; and for good measure, the Illinois tort of false representation.

The Court of Appeals, and the District Court before then, concluded that Rine had blown up a simple commercial dispute beyond all rational proportion; “This was a simple commercial dispute between Hunt and Moore, but one would never know that from reading Rine’s complaint.  She blew it up beyond all rational proportion.”

Writing for a unanimous appellate panel, Chief Justice Wood upheld the trial court’s imposition of sanctions against Rine personally as “within the district court’s broad discretion, in light of all the circumstances of this case….”

We have no need to consider whether the sanctions imposed by the district court were also justified under the court’s inherent power.  See Chambers v. NASCO, Inc., 501 U.S. 32, 45–46 (1991).  Nor are we saying that the district court would have erred if it had denied Moore’s sanctions motion.  We hold only that it lay within the district court’s broad discretion, in light of all the circumstances of this case, to impose a calibrated sanction on Rine for her conduct of the litigation, culminating in the objectively baseless motion she filed in opposition to arbitration.  We therefore AFFIRM the district court’s order imposing sanctions.

The judicial decisions in Hunt v. Moore Brothers are yet another illustration of the increasing peril to counsel personally in US Federal courts if the attorney pursues a frivolous “take no prisoners” approach seeking to avoid arbitration.

 

Mark Kantor is a CPR Distinguished Neutral. Until he retired from Milbank, Tweed, Hadley & McCloy, Mark was a partner in the Corporate and Project Finance Groups of the Firm. He currently serves as an arbitrator and mediator. He teaches as an Adjunct Professor at the Georgetown University Law Center (Recipient, Fahy Award for Outstanding Adjunct Professor). Additionally, Mr. Kantor is Editor-in-Chief of the online journal Transnational Dispute Management.

This material was first published on OGEMID, the Oil Gas Energy Mining Infrastructure and Investment Disputes discussion group sponsored by the on-line journal Transnational Dispute Management (TDM, at https://www.transnational-dispute-management.com/), and is republished with consent.