Arbitration Law Memo
February 25, 2006 by Ross Runkel at LawMemo
Arbitration Law Memo is a freebie. On the web. By email. RSS feed. Get it here.
The February edition has some interesting stuff.
- From the US Supreme Court, the holding that it still is the arbitrator, not the court, that decides whether a contract that contains an imbedded arbitration agreement is legal - void, or voidable.
- From California, a holding that class action waiver clauses are lawful if properly agreed to.
- From the 9th Circuit, a holding that an ERISA subscriber is not bound by an arbitration clause in the contract between the ERISA Plan and its investment advisor.
- A 6th Circuit opinion that urges the whole (en banc) 6th Circuit court to rehear a case and to re-examine that Circuit's standards for overturning a grievance arbitration award.
- And, amazingly, an arbitration award overturned because the arbitrator used Arbitrator Carroll Daugherty's seven elements of "just cause" instead of the Black's Law Dictionary definition.
Buckeye v. Cardegna: Contract validity is for arbitrator to decide
February 21, 2006 by Ross Runkel at LawMemo
The US Supreme Court says it is for an arbitrator - not a state court - to decide whether or not a contract containing an arbitration clause is illegal.
This is a strong re-statement (extension?) of the rule laid down in Prima Paint Corp v. Flood & Conklin, 388 US 395 (1967), in which the US Supreme Court said that it was up to the arbitrator - not the court - to decide whether the underlying contract was subject to a defense of fraud in the inducement.
The latest case, Buckeye Check Cashing, Inc. v. Cardegna (US Supreme Court 02/21/2006) involved a claim that the entire contract was illegal and therefore void under Florida's usury laws. The Court concluded (7-1) that it did not matter whether the issue was stated in terms of "void" or "voidable," or whether the matter arose in federal court or state court. It's for the arbitrator to decide.
- Cardegna claimed that Buckeye made illegal usurious loans disguised as check cashing transactions in violation of Florida law. The agreement Cardegna signed contained an arbitration clause, so Buckeye filed a motion to compel arbitration.
- Buckeye relied on Prima Paint Corp v. Flood & Conklin, 388 US 395 (1967).
- The Florida Supreme Court distinguished Prima Paint, saying that case dealt with whether the contract was voidable. In Cardegna's case the issue was whether the contract was void under Florida law. Therefore, said the Florida court, since a void contract would mean the arbitration clause could not be enforced, the issue was to be decided by a court.
The US Supreme Court's reasoning:
- Regardless of whether it is brought in federal or state court, a challenge to the validity of a contract as a whole, and not specifically to the arbitration clause within it, must go to the arbitrator, not the court.
- Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U. S. 395, and Southland Corp. v. Keating, 465 U. S. 1, answer the question presented here by establishing three propositions.
- First, as a matter of substantive federal arbitration law, an arbitration provision is severable from the remainder of the contract. Prima Paint.
- Second, unless the challenge is to the arbitration clause itself, the issue of the contract's validity is considered by the arbitrator in the first instance. Prima Paint.
- Third, this arbitration law applies in state as well as federal courts. Southland.
- The crux of Cardegna's claim is that the Agreement as a whole (including its arbitration provision) is rendered invalid by the usurious finance charge. Because this challenges the Agreement, and not specifically its arbitration provisions, the latter are enforceable apart from the remainder of the contract, and the challenge should be considered by an arbitrator, not a court. The Florida Supreme Court erred in declining to apply Prima Paint's severability rule, and Cardegna's assertion that that rule does not apply in state court runs contrary to Prima Paint and Southland.
Justice Thomas DISSENTED, arguing that the Federal Arbitration Act does not apply in state courts.
Parties picked FAA over state law
February 21, 2006 by Ross Runkel at LawMemo
Parties to an arbitration agreement can select whether to use state law or federal law to govern the arbitration. And it can make a huge difference.
In Rodriguez v. American Technologies (California Ct App 02/16/2006) they expressly picked the Federal Arbitration Act (FAA).
American sought a court order compelling arbitration. Rodriguez pointed out that there was a third party involved who was not subject to arbitration, and that splitting the case between arbitration and litigation could result in conflicting rulings on common issues of law and fact.
- A California statute says that a court has several options. It may refuse to compel arbitration, or it may stay either the arbitration or the court proceeding pending completion of the arbitration proceedings. (California Code of Civil Procedure § 1281.2(c).
- The Federal Arbitration Act requires that a federal court must stay the court proceeding and compel the arbitration.
So when the California trial court applied California law and denied the motion to compel arbitration, that was wrong. So says the California Court of Appeal.
- Yes, parties can - by agreement - select either federal law or California law to govern the arbitration proceedings.
- I'm troubled by the fact that the relevant part of the FAA (Section 3) specifically refers to federal courts when it says a court must issue a stay of court proceedings.
- There is a missing link in the logic.
- Incorporating the FAA into an agreement is not the same thing as agreeing that the express words of the FAA (that is, the reference to federal courts) will have a new meaning (that is, a reference to state courts).
Arbitrator's non-disclosure was OK
February 11, 2006 by Ross Runkel at LawMemo
Must an arbitrator disclose that he is on a permanent panel?
The City of North Las Vegas and the North Las Vegas Police Officers Association selected an arbitrator under FMCS rules. The arbitrator did not disclose that he was on a permanent panel under the collective bargaining agreement between the Las Vegas Metropolitan Police Department and the Las Vegas Metropolitan Police Department.
The losing parties in the arbitrations sued to vacate the awards, the trial court did vacate the awards, but the Nevada Supreme Court reversed. Thomas v. City of North Las Vegas (Nevada 02/09/2006).
FMCS rules govern. The parties agreed to arbitrate under FMCS Rules. Therefore, the court used the FMCS disclosure rules and did not apply the state statute on arbitrators' disclosure obligations. The FMCS uses the Code of Professional Responsibility for Arbitrators of Labor-Management Disputes (originally a joint effort of the National Academy of Arbitrators (NAA), American Arbitration Association (AAA), and FMCS).
National Academy of Arbitrators Opinion. The court relied on a 1991 Advisory Opinion promulgated by the NAA. In that case an arbitrator was hearing a case between an employer and Union A, and the arbitrator did not disclose that the arbitrator regularly served as an expedited arbitrator in cases between the same employer and Union B. The NAA opinion held that disclosure was not required. Quoting NAA Opinion 22:
Previous or current service as a neutral arbitrator for a particular employer and/or union is not a relationship requiring disclosure under the Code. Absent some personal relationship or other special circumstance mandating disclosure, such service is not a "circumstance ... which might reasonably raise a question as to the arbitrator's impartiality.
- Certainly the correct outcome.
- Extremely interesting that the court cited Chevron U.S.A. v. Natural Resources Defense Council, 467 US 837 (1984) (courts give deference to administrative agencies' interpretations of statutes), and said that the NAA's "Opinion 22 is the equivalent of an agency interpretation of the FMCS guidelines." Wow, they gave Chevron deference to the opinion of a non-profit private organization.
Non-signers not bound to arbitrate
February 05, 2006 by Ross Runkel at LawMemo
Two recent cases, same results, different reasons, both saying that a person who did not sign an arbitration agreement is not bound to arbitrate.
Perhaps the outcomes are obvious to you. They were not obvious to me.
Peters v. Columbus Steel (Ohio Ct App 01/31/2006): An employee leasing company hired William Peters to work at Columbus Steel. William signed an arbitration agreement. After William died from on-the-job injuries, Alice Peters (his widow and administrator of his estate) sued Columbus claiming wrongful death.
The court held that Alice was not required to arbitrate her claim. The court's focus was on the nature of Alice's claim. Her claim is not one that is on behalf of William's estate. Her claim is an independent claim on behalf of William's next of kin. Therefore, the fact that William agreed to arbitrate his claims does not mean that Alice is required to arbitrate her claims.
Comer v. Micor, Inc (9th Cir 02/01/2006): Comer was a participant in two ERISA plans operated by Micor. The plan trustees retained Smith Barney to provide investment advice, and the agreement between the trustees and Smith Barney contained an arbitration clause.
Comer sued Smith Barney under ERISA claiming breach of fiduciary duty. Although such a suit is brought by an individual plan beneficiary, the suit is for the benefit of the plan and any recovery is on behalf of the plan as a whole.
It's important to understand that the 9th Circuit made it clear that Comer was not suing in a derivative capacity. Although any recovery from his suit will go to the plan, Comer has his own cause of action. (Similar to the Peters case discussed above.)
Once we make it clear that Comer had his own cause of action, it's equally clear that he is not bound by the arbitration agreement signed by the trustees. The 9th Circuit used what it considers to be ordinary contract principles to decide that Smith Barney cannot impose the arbitration clause on Comer.
A word of caution: These two cases are not based merely on the fact that the plaintiffs did not sign an arbitration agreement. Arbitration agreements can be enforceable without an actual signature, provided it can be shown that an individual agreed to arbitrate. These two cases are both based on the principle that the plaintiffs' claims were not derived from the claims owned by the party that did agree to arbitrate. The plaintiffs each had their own claims.
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