NY Federal Judge Rejects Trumps’ Motion to Compel Arbitration

By Anne Muenchinger

A New York  Southern District matter accusing President Donald Trump, his company and his family of endorsing an allegedly fraudulent sales scheme is moving forward as litigation after the defendants tried to move the case to arbitration.

U.S. District Judge Lorna G. Scholfield refused the Trump Corp.’s motion to compel arbitration of the claims. Jane Doe, et al. v. Trump Corp., et al., 18 Civ. 9936 (LGS) (S.D.N.Y. April 8) (available at https://bit.ly/2wXWZLh).

The order is the latest development in a claim originally filed in October 2018, against Trump Corp., the president, and his three older children for racketeering and conspiracy to racketeer in violation of federal law, and six state law claims relating to unfair or untrue business practices.

The amended complaint alleged that the Trumps promoted Concord, N.C.’s ACN Opportunity LLC, a non-party to the action.  ACN is a multi-level marketing company which contracts with independent business owners, or “IBOs,” who then sell ACN’s products and services to the wider public. The ACN videophone tanked, and the plaintiffs allege they lost hundreds of thousands of dollars.

The company was endorsed and promoted by Trump Corp. through multiple media advertising channels, including during episodes of the television program Celebrity Apprentice, hosted by Donald Trump and featuring his children Ivanka Trump and Donald Trump Jr.

The anonymous plaintiff, along with other similarly placed complainants, signed up to become IBOs, citing the defendants’ endorsement as a crucial in deciding to contract with ACN.

Their action, brought individually and on behalf of a putative class, alleges that the defendants made false statements in the promotional material that concealed that the Trumps were paid for their promotion, rather than because they believed that ACN “offered a reasonable probability of commercial success.”

The defendants filed a motion to dismiss following a February 2019 amended complaint, which was granted on the racketeering and conspiracy to racketeer claims.  But state law claims of dissemination of untrue and misleading public statements, unfair competition, unfair and deceptive trade practices, deceptive practices, as well as fraud and negligent misrepresentations were permitted to proceed, with the court retaining jurisdiction under the Class Action Fairness Act, 28 U.S.C. § 1332(d).

The Trumps notified the court on July 19, 2019, of their intention to compel arbitration, eight months into litigation. Their motion is based on the contract signed between ACN and each IBO, which includes a clause mandating the resolution of all disputes via binding arbitration under the American Arbitration Association commercial arbitration rules.

In her denial order earlier this month, Judge Scholfield not only firmly rejects the motion, but issued a scathing rebuke of the Trumps’ behavior which she denounces as “substantively prejudicial towards Plaintiffs and seeks to use the [Federal Arbitration Act] as a vehicle to manipulate the rules of procedure to the Defendants’ benefit and Plaintiffs’ harm.” Jane Doe, et al. v. Trump Corp., et al., 18 Civ. 9936 (LGS) at 15.

Scholfield added, “Such tactics undermine a fundamental purpose of the FAA to support the economical resolution of claims.” Id.

The defendants argued that the contractual obligations arising out of ACN’s contract with each IBO equally apply to them under a theory of equitable estoppel, or agency, so the claims must be submitted to arbitration.

The central question for the court to resolve was whether the plaintiffs had in fact agreed to arbitrate any disputes with the defendants under either of the two cited doctrines, since the Trumps were not a party to the plaintiffs-ACN contracts. Additionally, in the event that an agreement was established, the court examined whether the defendants had waived their right to mandatory arbitration of the claims.

On the theory of equitable estoppel, Judge Scholfield wrote that a signatory to an arbitration clause may be compelled to arbitrate a dispute against a non-signatory “where (1) ‘the issues the nonsignatory is seeking to resolve in arbitration are intertwined with the agreement that the estopped party has signed,’ and (2) there is ‘a relationship among the parties of a nature that justifies a conclusion that the party which agreed to arbitrate with another entity should be estopped from denying an obligation to arbitrate a similar dispute’ with the non-signatory.” Id. at 6 (citations omitted).

Because the claim is based upon misleading and unfair statements which allegedly induced the plaintiffs to enter the agreement, Scholfield ruled that the claims are sufficiently intertwined with the agreement.

But the opinion holds that the relationship prong needed to find equitable estoppel is not fulfilled in this case, rejecting the defendants’ proposition that the plaintiffs were aware of the defendants’ paid relationship with ACN.

Rather, the opinion states that the “business relationship was expressly hidden,” and applies Second Circuit precedent denying estoppel to “a defendant aligned with the signatories to allegedly accomplish wrongful business practices”. Id. at 9.

Similarly, the Trump’s failure to disclose their relationship with ACN was central in the court’s reasoning with regard to the agency claim. That basis of the claim was also denied, as arbitration agreements may only apply to non-signatory agents where such agents are disclosed. Id. at 12.

On the waiver, the court examined the time elapsed from the commencement of litigation to the request for arbitration, the amount of litigation to date, and the proof of prejudice. All of these elements, the court explains, lean in favor of the plaintiffs in this case.

The opinion found probative that Trump Corp. notified the court of its intention to arbitrate eight months after the outset of litigation, and after full adjudication of a motion to dismiss; a motion to proceed pseudo-anonymously; multiple motions to seal, and several discovery disputes.

Prejudice is established, the Scholfield explained, where “the defendant seeks to benefit from information obtained through judicial proceedings that would be unavailable in arbitration,” and where the defendants want to “use arbitration as a means of aborting a suit that did not proceed as planned in the District Court.” Id. at 15 (internal citations omitted).

So the case will continue before the Southern District of New York.

Only a day after the order, Bloomberg reported that in a teleconference hearing, Judge Schofield ordered Hollywood studio Metro-Goldwyn-Mayer, current owner of the Celebrity Apprentice, to release hundreds of hours of unaired footage from the two episodes in which ACN principals were featured. See Erik Larson, “MGM Told to Hand Over Trump’s ‘Apprentice’ Tapes in Scam Suit,” Bloomberg (April 9) (available at https://bloom.bg/3cFNz6q).

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Muenchinger is a CPR Institute Spring 2020 intern, and an LLM student at the Benjamin N. Cardozo School of Law at Yeshiva University in New York City.


DOJ to NLRB: You’re On Your Own in the Supreme Court


By Nicholas Denny

In the clearest illustration so far of the Trump Administration’s evolving hands-off policy toward mandatory arbitration clauses and class action waivers, the U.S. Solicitor General authorized the National Labor Relations Board (NLRB) last week to represent itself in one of three consolidated arbitration cases to be heard by the U.S. Supreme Court this fall.

At the same time, the U.S. Department of Justice, which had been representing the board in NLRB v. Murphy Oil USA Inc., No. 16-307 (U.S. Supreme Court docket page at http://bit.ly/2kOPxal) until last week, switched sides in the case, filing an amicus brief backing the employer in the matter.

Justice, via the friend-of-the-court briefs, is now advocating against the NLRB, and against its previous position.

The case—along with its companions, Ernst & Young v. Morris, No. 16-300 (Docket page at http://bit.ly/2kLxCEg) and Epic Systems Corp. v. Lewis, No. 16-285 (Docket page at http://bit.ly/2kFVxm6)—asks whether mandatory arbitration clauses as a condition of employment bar individual employees from pursuing work-related claims on a collective or class basis under the National Labor Relations Act (NLRA). Mandatory arbitration clauses are used throughout employment settings and apply to employees regardless of titles or union affiliation; two of the three cases involve white-collar office workers.

The Supreme Court will hear the consolidated cases in the term beginning in October.

The issue in the consolidated cases is whether employers can continue to unilaterally require that employees agree to a mandatory arbitration clause in employment contracts. Often, these clauses are non-negotiable: either employees accept the employer’s terms or the employer finds someone else to hire.

The Supreme Court must decide which of two laws controls: the National Labor Relations Act, 29 U.S.C. § 151, et seq., or the Federal Arbitration Act, at 9 U.S.C. § 1 et seq. Under the NLRA, an employee’s rights to collective bargaining and action are protected. Under the FAA, however, an employment contract that includes a mandatory arbitration clause binds the worker to arbitrate with the employer instead of litigating in court, and is accompanied by a waiver barring the employee from bringing a class-action suit in favor of an individualized process.

As a result, arbitration clauses can deliver a one-two punch: (1) workers arbitrating individually may have less power, because they are not operating as part of a collective whole as contemplated by the NLRA, and (2) a worker may be less likely to find counsel because arbitration awards are perceived to be much smaller than court and class-action outcomes—meaning a lawyer working for a portion of the settlement would be less likely to take the case.

On the other hand, employers contend that mandatory arbitration clauses protect the company and benefit the employee. They argue that arbitration clauses ensure a speedier and more cost-effective conclusion to conflicts: class actions are harder and more costly to fight than arbitrations.

The disagreement over the use of mandatory arbitration clauses has arisen in the political arena, too. While the Obama Administration focused on pro-employee, anti-mandatory arbitration policies that prohibited employers from unilaterally waiving workers’ rights to concerted action under the NLRA, the Trump Administration is leaning toward an employer-centric policy by permitting mandatory arbitration clauses in employment contracts and as a condition of hiring.

This drastic shift in policy culminated with Friday’s news that the NLRB will represent itself, and that the Department of Justice would switch sides. The NLRB, as an autonomous government entity, is tasked with protecting “the right of employees to engage in protected concerted activities—group action to improve wages, benefits, and working conditions and to engage in union activities and support a union,” according to its website, as well as protecting the right of workers to refrain from engaging in protected concerted or union activities.

While the Justice Department prosecutes on behalf of the nation as well as defends government agencies, it is exceedingly rare for it to withdraw its representation of an agency it had been representing and subsequently file a brief in opposition to the position had it previously taken.

The Justice Department amicus brief switching sides in Murphy Oil is available at http://bit.ly/2sUnFbL.  The NLRB’s June 16 announcement that it would represent itself without Justice Department support can be found on the board’s website at http://bit.ly/2traH2s.

The move, however, is consistent with another recent Trump Administration policy shift on arbitration. In early June, the Centers for Medicare and Medicaid Services, an arm of the U.S. Department of Health and Human Services, withdrew a 2016 Obama Administration position prohibiting mandatory arbitration clauses in long-term care nursing home contracts.

CMS’s new position allows arbitration agreements provided that the provisions are written in plain language, and explained to and accepted by the applying resident.  Among other conditions, the CMS requires that the nursing home retain a copy of the signed agreement and post a notice that details the nursing home’s arbitration policy.

In addition, House Republicans introduced the “Financial CHOICE Act” earlier this month, a proposed law that aims to dismantle the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. Dodd-Frank is an extensive law that was passed to ensure higher accountability in the U.S. financial sector after the economic recession of 2008 and it was endorsed by former President Obama.

Among its many goals, Dodd-Frank pointed its then-new Consumer Financial Protection Bureau at pre-dispute mandatory arbitration clauses in consumer finance contracts. A lengthy study concluded last year by the CFPB resulted in a promise to finalize regulations that would ban the use of predispute mandatory arbitration in consumer financial contracts, such as cellphone agreements.

But should the “Financial CHOICE Act” become law, it likely would allow financial institutions to include mandatory arbitration clauses in their consumer contracts and agreements, and negate the CFPB efforts.

President Trump’s stance on mandatory arbitration clauses is becoming clear. Whether the clauses are legal in the employment context, and whether they will withstand Supreme Court scrutiny, are developing issues that are expected to be answered within the year. Watch CPR Speaks for updates.

The author is a CPR Institute Summer 2017 intern.

The U.S. Paris Climate Accord Pull-Out: From a Negotiation Standpoint, A Bit of an Artless Deal?

By John Bickerman

President Donald Trump’s decision to have the U.S. withdraw from the Paris Climate Accord will undoubtedly have many repercussions in many different areas and industries, ranging from energy to environmental and well beyond. But, at its core, Thursday’s action can be boiled down to a deal negotiation. Below are a few basic alternative dispute resolution (ADR) principles, and how they apply to the U.S. Paris Accord pull-out:

Any analysis of negotiation strategy starts with identifying the ‘interests,’ not the positions of parties. One also must assume that parties behave rationally.  

The President has two plausible interests that he was trying to vindicate.  First, he could be trying to do what he said, which was protect American jobs; the second plausible interest is that he was trying to affirm and solidify his political base. The second appears to be the more rational explanation for his behavior. When the President returned from his European trip after failing to endorse fully NATO, his popularity ticked up, almost exclusively with his hard core Republican base. It wouldn’t be surprising if withdrawal from the Paris Accord further solidifies his base and marginally increases his popularity and affirms his promise to the voters he believes elected him.

A corollary would be that it gets the Russia investigation off the front pages, although based on the subsequent news cycles that seems highly unlikely. With respect to protecting American jobs, the better data suggests that this interest will not be achieved and employment in the U.S. could actually be harmed if foreign countries retaliate against the United States by enacting carbon taxes as some analysts have suggested they might. Moreover, there is a seemingly strong case that jobs are being created in the renewable energy sector that would surpass the jobs lost in the fossil fuel industry.  The Washington Post reported that there was a fierce battle in the White House over the decision.  The “withdrawal” side, led by Senior Advisor Steve Bannon, appear to have deluged the President with data that rejected the consensus view. Much of the data presented by the Bannon team was highly suspect, according to the Post.

Remember that only three countries are now not part of the Paris Accord — Syria, Nicaragua and the United States.  It’s extremely rare, perhaps unprecedented, to have such worldwide unanimity on an issue.

 A good negotiator also tries to understand how his counter-parties will react to his negotiating position.  

The Administration, either misjudged or doesn’t care about International repercussions.  Other countries, especially China, Germany and France will step into the vacuum created by the withdrawal of the U.S. As reported by the news media, China intends to ramp up its production of renewable energy products, potentially usurping a role that the United States could have.

The threat of an action often carries much greater leverage than the action itself.  

There is no opportunity under the Paris Accord to withdraw from its terms until 2019.  The President would have had much greater leverage if he had continued to threaten withdrawal between now and 2019 instead of playing his hand now. This line of thinking was apparently presented to the President by Secretary of State Tillerson and other according to news reports.  Clearly, the federal government has lost its leverage in influencing further changes in the pact.  Interestingly, 30 cities, 3 states, including California and 100 companies have formed an alliance that supports the Accord and will affirm their support to the U.N.  This development further undermines the influence President Trump will have on this issue.  It’s rare for a negotiator to dissipate his bargaining power in this manner.

The best negotiators are able to reach strategic and creative compromise with equal negotiation partners, and not only with weaker parties who are more easily pressured into action.

The President has not shown himself to be an especially good negotiator when there are other equal partners with which to negotiate. The strategy he employed in his business, when he was often negotiating with weaker counter-parties and could afford to stake out extreme positions, doesn’t work in International negotiations (or with the other branches of government) where parties are less likely to be “bullied” into agreement.

Time and again, since he took office, the President has staked out extreme positions or made ultimatums.  When his bluff has been called, he has lost all ability to negotiate and has been ignored. That’s what seems to be happening with the Paris Accord. The rest of the world will continue to adhere to the agreement. The United States has squandered its leadership position and has no “fallback” position that would allow it to exert any influence in the future, unless it rejoined the Accord.

There is no art to “re-negotiating” completely voluntary, or multi-party, deals.

Despite the President’s avowed intent to re-negotiate the Paris Accord, that will not be possible.  First, the Paris Accord has only voluntary commitments.  There are no binding obligations, other than the promise of the first world countries to pay for environmental efforts in developing countries.  (So far, the United States has paid $1 billion of the $3 billion it has promised to pay under the agreement.). Second, it’s not possible to renegotiate a multi-lateral agreement.  There simply is no “one” party with which to negotiate.

John Bickerman is the Chair of the International Institute for Conflict Prevention & Resolution’s Environmental Committee, a lawyer and the founder of Bickerman Dispute Resolution, PLLC