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.”

In Person Or Online Mediation?

Initially viewed by many as simply a necessity during the pandemic, online mediation has revealed itself to be beneficial in its own right. It offers geographically distant parties an opportunity to more expeditiously convene a mediation; it enables parties to more productively spend their time during a mediator’s lengthy caucus with the other participants; in some cases, it can offer cost arbitrage by enabling parties to find capable mediators in parts of the country where mediation fees are meaningfully less.

On the other hand, there remains the question of the sterility of a process where the parties and mediator do not directly engage. One attorney shared with me during a recent mediation his strong belief that the interpersonal dynamic that can develop between a mediator and the parties often is the key to a successful resolution.

Additional perspective on the “in person” v. “online” debate comes from attorney/mediator Lucia Kanter St. Amour in this article, available on Mediate.com, in which she observes:

“For all the shortfalls of Zoom brings to the mediation and negotiation process (more difficult to build rapport, make eye contact, see and mirror body language, notice micro-expressions, and generally have ‘skin’ in the game the way people do in person), one of the pitfalls (‘Zoom fatigue’) has assisted my mediations by forcing us to break the process down into smaller pieces, incorporating meaningful breaks of hours or days, and thus avoiding the decision fatigue that is inevitable after a long day of mediation. This can, of course, lead to even more practical and durable agreements, and reduce morning-after regrets. Importantly, this benefits not just the parties but the mediator: deep listening, re-framing, thoughtful communication and ensuring fairness at all times is exhausting….The realities of online dispute resolution offer built-in ‘limitations’ that permit parties (and the mediator) to fend off decision fatigue and be better positioned for meaningful decisions that can truly allow them to find resolution and move forward.”

With in person mediation reemerging, my personal takeaway is that, for certain matters, online mediation remains a viable and valuable alternative.

Court Erred When It Held Pending Divorce Overrode Parties’ Arbitration Agreement Regarding Their Collective Business Arrangement

As described by a Texas appellate court in In re Bowers, “the question presented in this case is whether a party to a pending divorce proceeding can compel the other party to arbitrate a business dispute concerning the sale of one party’s interest in a limited liability company when that interest is subject to the trial court’s standing order prohibiting the transfer or encumbrance of community assets.”

Reversing the trial court, which denied a motion to compel arbitration for the reason that it would violate a Texas statute imposing a temporary restraining order on the transfer of assets subject to a pending divorce, the appellate court held that the divorcing couple’s agreement to arbitrate disputes regarding their commercial relationship was enforceable.

“Calif. App. Court (2nd Dist) Holds Court Should Decide Whether Parties Agreed to Arbitrate”

Daniel Miller of Maurice Wutscher has this article, found in Lexology, discussing the recent California appellate decision in Banc of California, N.A. v. N977CB Holdings, LLC. The case arises from multiple agreements designed to facilitate loans for the purchase of commercial aircraft, and a separate, subsequent agreement providing for the lender’s charter of the aircraft. Only the latter agreement contained an arbitration provision.

Following alleged default, the lender filed suit, and, pursuant to the defendant’s motion, the lower court compelled arbitration on the basis of the arbitration agreement contained in the charter agreement, holding it was for the arbitrator, not the court, to determine the scope of the arbitration.

The appellate court reversed, finding that the lender was not asserting claims under the charter agreement, and that, since the loan agreements contained no arbitration provisions, there was no basis to compel arbitration of the dispute.

Eighth Circuit Provides Guidance Regarding The Enforceability Of Browsewrap Arbitration Agreements

In Foster v. Walmart, Inc., the Eighth Circuit was confronted with claims brought by Walmart gift-card purchasers who did not receive a refund after third parties allegedly tampered with, and stole the funds that were loaded onto, the cards. Walmart sought to compel arbitration of the claims, invoking a notation on the back of the cards that directed purchasers to “[s]ee Walmart.com for complete terms.” According to Walmart, a visit to the referenced website would lead the gift card purchaser to “an arbitration provision covering ‘ALL DISPUTES ARISING OUT OF OR RELATED TO THESE TERMS OF USE OR ANY ASPECT OF THE RELATIONSHIP BETWEEN YOU AND WALMART.’” The website further provided that customers “accep[ed]” arbitration by “[u]sing or accessing the Walmart sites.”

As the Eighth Circuit explained, the district court erred when it denied Walmart’s motion to compel without holding an evidentiary hearing to determine whether the plaintiffs had notice of the arbitration provision. As the Eighth Circuit explained, the Walmart cards constituted an example of a “browsewrap” arrangement, whereby assent to the contract terms is imputed “through the user’s performance of some specific act–here, ‘using or accessing’ Walmart’s website.”

Once a user clicks on the url, “notice can come in one of two forms”–actual notice (“which occurs “most commonly after clicking on a hyperlink and reviewing [the terms of use]”) or inquiry notice (which “depends on ‘whether the website puts a reasonably prudent user on inquiry notice of the terms'”). Here, according to the Eighth Circuit, “the district court got ahead of itself when it concluded, on this ‘meager record[],’ that inquiry notice was absent.” Instead, the district court was required to conduct a hearing to obtain the necessary facts to render a conclusion as to whether the plaintiffs were on inquiry notice of the existence of an arbitration agreement.

The Eighth Circuit provided guidance that is useful to all companies that use browsewrap arrangements to refer customers to arbitration provisions. In particular, “the exact
location and prominence of the terms-of-use hyperlink, how many clicks it would
have taken for the user to discover the arbitration provision, and whether the website
changed during the relevant period” are key to determining whether a “case belongs in arbitration or litigation.” Moreover, the court also noted that specifics about the size and placement of the gift card directive that customers should go to “Walmart.com for complete terms” might be significant in whether customers were provided adequate “notice to inquire further by telling them where to go for more information.”