“Sixth Circuit emphasizes the importance of challenging an arbitration agreement’s delegation clause to allow a court to resolve the arbitration agreement’s enforceability.”

Ellen Phillips of Squire Patton Boggs has authored this article, available at The National Law Review, discussing the Sixth Circuit’s recent 2-1 decision in In re: StockX Customer Data Security Breach Litigation. As Attorney Phillips emphasizes, the case serves as a reminder that “If one wants a court to determine whether an arbitration agreement is enforceable, they must check if there’s a delegation clause and, if so, specifically challenge it; otherwise, they’ll be left arbitrating whether they should be arbitrating.”

In this decision, as to arbitrability, the majority held that it was insufficient for attorneys representing minors with brokerage accounts to generally challenge the enforceability of the agreements based on infancy. Instead, they were required to specifically challenge the provision of the agreements delegating to arbitrators the issue of arbitrability. Finding that the minors had failed “to show that ‘the basis of [their] challenge [is] directed specifically’ to the ‘delegation provision,’” the court determined that the arbitrators–not the court–were required to address the arbitrability issue.

Federal Court Rejects Arbitration Provision As Being Contrary To Public Policy

In RTM Capital Partners, Inc. v. Barnes, a decision by my long ago law firm colleague, U.S. Magistrate Judge Dave Vatti, the court provides a detailed analysis of an arbitration provision that is worth reading in its entirety. Perhaps most interesting, however, is Judge Vatti’s view that the arbitration agreement, facially broad in that it purports to encompass “any dispute, claim, disagreement or other matter arising from or relating to this Agreement or the alleged breach of this Agreement,” is violative of public policy as to a party’s attempt to invoke it to address issues pertaining to a charging order against an asset of a judgment debtor. As the court explained, “[i]f this were a first party action … there is little dispute that this would fall within the purview of the Operating Agreement’s arbitration provision.”

However, insofar as the claims presented pertained to the enforcement of a court judgment, the court rejected arbitrability:

“In this Court’s view, there is an obvious and strong public interest in federal courts’
enforcement of their own judgments…. In this Court’s view, the ability of a party to enforce a judgment and the Court’s inherent ability recognized in Peacock to supervise such enforcement and conduct any proceedings to adjudicate issues relevant to and enforce a judgment are fundamental to inspiring the public’s confidence in the integrity of federal court judgments. It is a critical and important structural feature of the federal courts and the federal judiciary’s proper functioning.”

According to the court, judicial precedent and statutory authority governing judgments and their enforcement, create a framework which “embodies an explicit public policy by which federal courts have supervisory authority over their judgments and should not cede that authority to an arbitration forum, one of the major risks of which is the likelihood of delay… Severing [the issues pertaining to the charging order] to be litigated in arbitration would directly contravene a strong public policy interest in having this Court retain its ability to supervise a proceeding to enforce its judgment, to ensure against undue delay and to manage this process in a way that promotes efficient resolution of these proceedings.”

“Second Circuit Affirms Judgment Confirming Dismissal of Claims on Statute of Limitations Grounds and Order Enjoining Plaintiff From Refiling His Claims”

Brendan Gooley of Carlton Fields has this article, available in JD Supra, discussing the Second Circuit’s recent decision in Hermès of Paris, Inc. v. Swain. Summarizing the court’s holding regarding the scope of matters delegated to the arbitrator, the article explains that the court “affirmed the confirmation of an arbitrator’s decision dismissing claims on statute of limitations grounds against a claim that the arbitrator had no authority to consider such a defense.”

“Who’s in Charge Here? Federal Circuit Says An Arbitrator, not District Court, Should Decide Arbitrability”

Matthew Hurley of Mintz has this article in the National Law Review, discussing the Ninth Circuit’s recent decision in ROHM Semiconductor USA, LLC v. MaxPower Semiconductor, where, as the article notes, the court followed established precedent to hold that “an arbitrator, not a federal district court, should decide whether a dispute arising from a technology license is subject to mandatory arbitration.” As the court explained, “[v]irtually all courts to consider the question, including this court, have concluded that, in contracts between sophisticated parties, incorporation of rules with a provision on the subject is normally sufficient ‘clear and unmistakable’ evidence of the parties’ intent to delegate arbitrability to an arbitrator.”

Supreme Court Will Hear Case Regarding Arbitration Waiver

Under the Federal Arbitration Act, when does a party’s delay in seeking arbitration constitute a waiver of its contractual right? There is a split in the federal circuits, with a majority holding that prejudice must be demonstrated, while a minority holding that prejudice is only one factor to consider in determining whether a party has waived its right to arbitrate. The Supreme Court will address this split, having granted certiorari in Morgan v. Sundance, Inc.

The Language Used In An Arbitration Provision Matters

Although I have long since forgotten the genesis, I learned many years ago that the safest way to ensure an arbitration provision would capture the full scope of contractual matters between the parties was to use the incantation “all disputes arising out of or relating to the agreement.” Dave Reif’s most recent discussion of arbitration and mediation decisions confirms the importance of a belt and suspenders approach. He discusses Aryze, LLC v. Sweig, in which the U.S. District Court in Massachusetts was presented with a contractual arbitration provision that only went halfway, as it provided that “[a]ny disputes between the parties arising from this Agreement will be settled through binding arbitration…” (emphasis added). Dave’s post describes how the court “parses in detail each count of the parties’ arbitration claim,” mandating arbitration of claims that, in the court’s words, “undoubtedly involve construction of the Agreements’ provisions,” however rejecting those that do not since the arbitration “provision does not mean that any claim brought by Defendants … related to their business relationship must be arbitrated.” 

The takeaway for contract drafters seeking to provide for arbitration of the widest universe of contractual matters: don’t be stingy with the contract language; belt and suspenders works where one alone may not.

“The Supreme Court Argument Only Underscored the Complexities of Federal Court Jurisdiction Over Arbitration Awards”

This Lexology article, by John Lewis at Baker Hostetler, nicely encapsulates the issues before the U.S. Supreme Court in the recently argued Badgerow v. Walters case. As the Court grapples with the language and intent of the Federal Arbitration Act, in particular regarding the subject matter jurisdiction of the federal courts to confirm or vacate arbitration awards, the practical ramifications involve the deference paid under the FAA to the sanctity of an arbitrator’s award, as compared to a more activist review of the merits that certain state statutes allow their courts to exercise.

Ninth Circuit Applies High Bar To Establishing Economic Duress Regarding Execution Of Arbitration Agreement

Adam L. Sorensen and Lena H. Hughes of Morrison Foerster have this article, available in Lexology, discussing the Ninth Circuit’s recent decision in Dario Martinez-Gonzales v. Elkhorn Packing Co. LLC. Summarizing the court’s decision–which reversed the lower court for the asserted reason that “we are firmly convinced the district court overlooked key facts”–the author’s explain that the Ninth Circuit held “that a farm laborer who was directed to sign an arbitration agreement in a hotel parking lot, after traveling to the U.S., without an opportunity to read the agreement or consult an attorney, was not subjected to economic duress or undue influence under California law.” The panel’s 2-1 vote may receive additional review.

“Ninth Circuit Rejects Ex-Tinder Employee’s Attempt to Avoid Arbitration”

Scott Jang and Tyler Brown of Jackson Lewis have this article, available at Lexology, discussing the Ninth Circuit’s recent decision in Sanfilippo v. Match Group LLC, in which the authors explain the court held “that an ex-Tinder employee must arbitrate her claims against her former employer and cannot pursue her claims in court, even though her claims arose before she executed an arbitration agreement…[and] that a unilateral modification clause (granting the employer the right to make changes to the agreement) does not, in and of itself, render an arbitration agreement unenforceable.”

Litigation Of Complaint Continues, While Court Orders Counterclaim Be Arbitrated

A federal case arising in Pennsylvania presents an interesting and unusual circumstance. Notwithstanding an arbitration agreement sufficiently broad to capture the dispute, a plaintiff employer brought suit against departing employees, alleging wrongdoing in connection with their establishment of a competing endeavor. The defendants, apparently comfortable with the judicial enforcement, did not seek to compel arbitration of the dispute.

However, when the defendants filed a counterclaim, alleging violation of the Fair Labor Standards Act regarding non-payment of overtime, the employer promptly invoked the arbitration provision that it ignored when it commenced the lawsuit. The former employees cried “foul” and the court was presented with the question of whether the counterclaim, under the circumstances, was arbitrable.

The court answered the question with a resounding “yes”. In Keystone Automotive Industries, Inc. v. Gorgone, held that the plaintiff had not waived arbitration of the counterclaim by initiating and pursuing its claims in a judicial forum. Noting also that “[t]he wage claim brought by Defendants is separate from and unrelated to the claims brought by Plaintiff,” the court explained that “Plaintiff cannot be faulted for failing seek arbitration of a distinct claim that Defendants had not yet asserted.” Finally, observing that the “strong policy in favor or arbitration compels this result,’ the court concluded that “[i]ronically, Defendants could have invoked the arbitration provision at the inception of this action. Their election not to do so does not limit the rights of the other party to the agreement where the newly raised claim is legally and factually distinct and has not yet been the focus of litigation in this court.”