Articles / Alternative Dispute Resolution
4th Circuit Refusal to Enforce Arbitration Agreement
This February 2016 case, Hayes v. Delbert Servs. Corp., just came to my knowledge as I was scanning a new (to me) resource – the law firm Baker & McKenie’s Global Arbitration News (http://globalarbitrationnews.com/). The case is of interest for several reasons, but in particular because it addresses the Federal Arbitration Act’s (“FAA”) limits on the breadth and content of an arbitration agreement.
Hayes, the plaintiff, received a “payday” loan from Western Sky Financial, LLC (“Western Sky”), a company owned by a Native American and purportedly operating on tribal lands. The defendant Delbert Servs. Co. (“Delbert”) is a loan servicing and debt collection company. The plaintiff, Hayes, claimed that Delbert’s debt collection practices (occurring on non-tribal land) violated Federal law and brought suit in Federal court notwithstanding the Western Sky payday loan agreement’s clear language that all disputes be arbitrated. Additionally, Hayes initiated a class action against Defendant.
While the arbitrability of class actions is a “hot” issue in the arbitration world, that subject is set aside for another day. Also set aside for another day is a discussion of Native American tribal sovereignty. Rather, the focus of this case is its discussion of the limits of an enforceable arbitration agreement.
The District Court found the loan agreement’s arbitration requirement enforceable and ordered arbitration. The 4th Circuit reversed under Section 2 of the Federal Arbitration Act, which provides:
“A written provision in any. . . contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” [bold added]
The Appellate Court held the Western Sky loan agreement invalid and unenforceable “for the fundamental reason that it purports to renounce wholesale the application of any federal law to the plaintiffs’ federal claims” and because it indisputably violated multiple provisions of Federal law.
Per the Court:
“No one appears to seriously dispute that Western Sky’s payday loans violated a host of state and federal lending laws. Indeed, a quick glance at Western Sky’s loan agreement suggests that Western Sky was keenly aware of the dubious nature of its trade. The agreement provides that it is “subject solely to the exclusive laws and jurisdiction of the Cheyenne River Sioux Tribe.” (citation and emphasis omitted). It later states that “no other state or federal law or regulation shall apply to this Loan Agreement.”
Regarding the enforceability of the loan agreement’s arbitration requirement, the Appellate Court determined that it would review the District Court’s order compelling arbitration de novo (anew, as though the District Court’s order did not exist). Next, it acknowledged, as it put it, “the strong federal policy in favor of enforcing arbitration agreements” and that the “FAA confers near plenary authority on an arbitrator to resolve a dispute given to him by an arbitration agreement.”
However, the Appellate Court found that it nonetheless possessed the power to review and declare unenforceable clear and unambiguous arbitration agreements under the FAA.
“The specific statutory basis for our review comes from the FAA’s second section, which says that an agreement ‘to settle by arbitration a controversy thereafter arising . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.’ [citation omitted] Importantly, any grounds given for revocation must concern the validity of the arbitration agreement in particular, not simply the validity of the underlying contract as a whole.” [emphasis added].
Applying the FAA’s Section 2 irrevocability provision, the 4th Circuit first made the bold and extremely broad statement noted above that the Western Sky agreement failed because it “purports to renounce wholesale the application of any federal law to the plaintiffs’ federal claims.” Continuing, the Court stated:
“The [arbitration] agreement [relied upon by Defendant] purportedly fashions a system of alternative dispute resolution while simultaneously rendering that system all but impotent through a categorical rejection of the requirements of state and federal law. The FAA does not protect the sort of arbitration agreement that unambiguously forbids an arbitrator from even applying the applicable law.”
The Court examined instances wherein waivers of Federal law and Federal rights were permitted and found that “while the [Supreme] Court has affirmed that the FAA gives parties the freedom to structure arbitration in the way they choose, it has repeatedly cautioned that this freedom does not extend to a ‘substantive waiver of federally protected civil rights’ in an arbitration agreement.” Referring to the US Supreme Court’s decision inAmerican Express v Italian Colors, it found that the Supreme Court had established a rule against substantive waivers of Federal rights, and that such rule covers “exactly what we have here.”
Additionally, and in this reviewer’s eyes more importantly, the Court found that the waiver of Federal Law rights in the Delbert case was “surreptitious” and thus by implication not a knowing waiver by the plaintiff.
The Court, while not expressly so stating, seems to believe that the purported waiver of Federal rights in the Delbert case was not a knowing waiver. In its discussion of those cases wherein the Supreme Court had permitted the right of parties to waive Federal rights, the Appellate Court noted:
“So long as [Federal Rights] waivers pass the applicable knowing and voluntary standard, they will typically be enforced.”
* * *
“[T]he arbitration agreement here almost surreptitiously waives a potential claimant’s federal rights through the guise of a choice of law clause.”
* * *
“With one hand, the arbitration agreement offers an alternative dispute resolution procedure in which aggrieved persons may bring their claims, and with the other, it proceeds to take those very claims away.”
* * *
“But a party may not underhandedly convert a choice of law clause into a choice of no law clause — it may not flatly and categorically renounce the authority of the federal statutes to which it is and must remain subject”
Whether the Court invalidated the agreement merely because it “renounce[d] wholesale the application of any federal law” or because it also apparently held that the plaintiff did not knowingly waive his rights is open to discussion. Personally, I believe the latter. Why? A US partie’s knowing agreement to adopt a foreign jurisdiction’s law would be a “wholesale renouncement” of US law yet (I believe) enforceable provided that the selection of the foreign law was knowing and clear.
The full opinion: Hayes v. Delbert Servs. Corp., No. 15-1170 (4th Cir. Feb. 2, 2016)
Eugenie Rogers, Global Arbitration News, USA: Fourth Circuit Rejects Arbitration Clause Waiving Federal Statutory Rights
Email Notice Creates Binding Arbitration Agreement
It is axiomatic that arbitration is a creature of contract, and that the foundation principle is that the parties to the arbitration agreed to resolve their dispute using arbitration. Thus, a June decision in the US District Court of the Northern District of California which held that an eMail notice with an opt-out clause was sufficient to create a binding arbitration agreement is worth noting.
The case, Aquino v Toyota Motor Sales USA, concerns an age and discrimination claim brought by Aquino, a 44 veteran of Toyota’s San Ramon CA operations. Briefly, in 2014 Toyota informed Ms. Aquino that it intended to relocate its headquarters from Southern California to Plano, TX, and offered her two options: a relocation package that would assist her with the cost of moving to Texas, or a retention package under which she would remain employed in California until Toyota decided to dismiss her from work. Ms. Aquino accepted the latter offer, which she claimed a Toyota on-line calculator determined to be approx. $132,000. Ms. Aquino claims that Toyota then unilaterally decided not to pay her the relocation package and instead assigned her to a warehouse position that she was unable to perform due to medical issues. She subsequently filed a discrimination complaint with the appropriate state and Federal agencies, received a “right to sue” letter, and commenced the US District Court action.
Approximately one year prior to Toyota giving notice of its intent to relocate to Texas and giving Aquino the two options described above, Toyota “distributed a Mutual Agreement to Arbitrate Claims . . . to all of its employees via their company email accounts and by sending a duplicate hard copy directly to each employee’s home address.” The Agreement provided for binding arbitration before a stated tribunal. The email announcement and mailed document contained an “opt-out” provision requiring employees to complete a specified form and fax the completed form to a stated person by a stated date. It further provided:
“If you do not fax a completed Opt-Out Form to the [described person by the stated date] you and the Company will have agreed to resolve disputes through final and binding arbitration, in the manner that is described in the attached Agreement.”
Importantly: “Toyota claims, and Ms. Aquino does not dispute, that Ms. Aquino did not take any action to opt out of the Agreement.”
The Court began its analysis by reviewing the general principles of arbitration and the Federal Arbitration Act’s (“FAA”) Section 2 which provides that arbitration agreements “shall be valid, irrevocable, and enforceable, save upon such grounds that exist at law or in equity for the revocation of any contract.” It then held:
“When deciding whether a valid arbitration agreement exists, federal courts ‘apply ordinary state-law principles that govern the formation of contracts.’ [citation omitted] ‘[T]he party resisting arbitration bears the burden of proving that the claims at issue are unsuitable for arbitration.’ [citation omitted]
Applying that standard, the Court looked to California law, and determined:
“In California, “acceptance of an agreement to arbitrate may be express . . . or implied-in-fact where . . . the employee’s continued employment constitutes her acceptance of an agreement proposed by her employer.’ [citation omitted] ‘California’s intermediate appellate courts have recognized that employees’ consent may be implied from their continued employment after the unilateral imposition of an arbitration agreement by the employer.’ [citation omitted] ‘Where an employee continues in his or her employment after being given notice of the changed terms or conditions, he or she has accepted those new terms or conditions.’ [citation omitted]”
Having reviewed California’s law, the Court held:
“Here, it is undisputed that Ms. Aquino received the Agreement (at least via email), that she failed to opt out of it, and that she continued to work at Toyota after the Agreement went into effect. [citation omitted] Moreover, Ms. Aquino does not argue that she ever attempted to communicate her lack of consent to the Agreement to Toyota in any way. Under California law, these facts establish an enforceable agreement between Ms. Aquino and Toyota. [citation omitted] (‘By not opting out within the 30–day period, [employee] became bound by the terms of the arbitration agreement.’ [citation omitted]).”
The full opinion: Angelita Aquino v. Toyota Motor Sales USA, Inc., United States District Court Northern District Of California, Case No. 15-cv-05281-JST
Recoverability of In-house Counsel Fees in Arbitration
As noted in my introduction, I recently discovered the Baker & McKenzie Global Arbitration News newsletter and become a fan. A March article discusses the allocation of costs in international arbitration awards, and prior articles have addressed the recovery of costs (including attorney’s fees) in domestic arbitral tribunals.
Most arbitration forum rules provide for the allocation of costs between the parties. Thus, arbitrators must determine not only how costs shall be allocated between the parties, but what expenses are to be included in the cost calculation. One question that is being raised more frequently is whether in-house counsel fees may be included and assessed in the calculation. Historically, the answer has generally been no: “costs for in-house counsel are part of the normal costs for running a business enterprise and that they would have arisen anyway.”
Valid arguments exist for including such costs however, and the presented article highlights those arguments and presents data from the ICC Commission Report “Decisions on Costs in International Arbitration” (“ICC Report”). The article is not a deep study of the issue, but a good starting place for those thinking about the issue. It is a worthy read for litigants and neutrals, as is the ICC Report itself.
The author’s prior articles on cost allocation are also worthy reads, and referenced in the article linked below.
Dr. Markus Altenkirch, Jan Frohloff, Recoverability of In-house Counsel Fees in International Arbitration, Global Arbitration News, March 15, 2016