ADR Cases

vol. 19 No. 2

By

FAA Requires Arbitrator to Decide Validity of a Contract in the Presence of a Valid Arbitration Agreement

In Nitro-Lift Tech LLC v. Howard, 133 S. Ct. 500 (Nov. 26, 2012) Nitro-Lift issued a demand for arbitration to two former employees claiming breach of noncompetition agreements that had been signed as a condition of employment. The employees brought suit seeking to have the noncompetition agreements rendered void under Oklahoma state law. The trial court dismissed the complaint, holding that a valid arbitration agreement exists and that an arbitrator, not the courts, must decide the validity of the contract. The plaintiffs appealed. The Oklahoma Supreme Court reversed, holding that noncompetition agreements were null and void as against public policy in Oklahoma.

The United States Supreme Court reversed, holding that it is well established under the Federal Arbitration Act that arbitration agreements are severable and are subject to judicial review, but the validity of the underlying contract is for the arbitrator to decide. To read more, go to http://www.supremecourt.gov/opinions/12pdf/11-1377_3e04.pdf.

Purpose of FAA Would be Frustrated by Compelling Arbitration After Trial

In Gutierrez v. Wells Fargo Bank, No. 10-16959, __ F.3d __ (9th Cir. Dec. 26, 2012) the plaintiff filed a class action suit against the defendant alleging unfair business practices. The contract between the parties contained a permissive arbitration clause that allowed the parties to choose litigation over arbitration. After a full trial on the merits in which neither party requested arbitration, Wells Fargo Bank appealed an adverse judgment, sought to compel arbitration and claimed its right to arbitration did not mature until after AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011).

The Ninth Circuit, noting the effect of Concepcion on a judgment after appeal as an issue of first impression, held that Wells Fargo Bank waived its right to seek arbitration after five years of litigation. Acknowledging the ambiguity in the defendant’s pre-trial right to compel arbitration, the Ninth Circuit nonetheless found the extreme prejudice to the plaintiff to be determinative. Furthermore, it held, sending this case to arbitration post-appeal would frustrate the purpose of the Federal Arbitration Act by causing further delay and expense.

To read more, go to http://cdn.ca9.uscourts.gov/datastore/opinions/2012/12/26/10-16959.pdf.

Implied-in-Fact Contract is Not Created by Continued Employment When Employee is Urged to Sign Arbitration Agreement as a Condition of Employment

In Gorlach v. Sports Club Co., 148 Cal. Rptr. 3d 71 (Cal. Ct. App., Oct. 16, 2012) the plaintiff brought suit against the defendants alleging multiple causes of action. The defendants sought to compel arbitration, acknowledging that the plaintiff never signed an arbitration agreement but asserting that she consented to it by continuing her employment after becoming aware of the change in company policy. The trial court denied the motion to compel arbitration, noting that the plaintiff did not sign the arbitration agreement.

The California Court of Appeal affirmed, rejecting the defendant’s assertion that an implied-in-fact contract was created by the plaintiff’s continued employment. The court stated that California law allows for employers to unilaterally implement policies that become implied-in-fact contracts by continued employment. However, when employees are urged to sign an arbitration agreement as a condition of employment, it is not valid unless signed by the employee. 

To read more, go to http://www.courts.ca.gov/opinions/documents/B233672.pdf.

Arbitration Award Subject to Greater Judicial Review Because Unwaivable Statutory Rights Are at Stake

In Richey v. Autonation, Inc.,149 Cal. Rptr. 3d 280 (Nov. 13, 2012) the plaintiff filed suit against an employer alleging violations of the Family and Medical Leave Act (FMLA) and California Family Rights Act (CFRA). The defendant moved to compel arbitration under the employment agreement. The arbitrator issued an award for the defendant, citing the “honest belief” defense accepted by the Seventh Circuit. The trial court denied the plaintiff’s motion to vacate the arbitration award, and the plaintiff appealed.

The court acknowledged that arbitration awards are generally subject to limited judicial review but noted that the California Supreme Court has consistently recognized public policy exceptions that require greater judicial scrutiny, most notably when unwaivable statutory rights are at stake. The court determined that the arbitrator’s clear legal error in accepting a defense not recognized under California law effectively denied the plaintiff his statutory right to reinstatement because it impermissibly shifted the burden of proof to the employee.

To read more, go to http://www.courts.ca.gov/opinions/documents/B234711.pdf.

Class Arbitration Permitted Where Plaintiff Otherwise Lacked Means to Vindicate Unwaivable Statutory Rights

In Franco v. Arakelian Enterprises, Inc.,149 Cal. Rptr. 3d 530 (Nov. 26, 2012) the plaintiff brought a class action suit against his employer alleging multiple violations of the California Labor Code, including failure to pay overtime and provide rest and meal periods. The defendant moved to compel arbitration, and the trial court granted the motion. On appeal, the California Court of Appeals reversed, holding that the California Labor Code conferred unwaivable statutory rights and the plaintiff had satisfied the factors set forth in Gentry v. Superior Court, 165 P.3d 556 (Cal. 2007). On remand, the defendant again moved to compel arbitration, claiming the United States Supreme Court decisions Stolt-Nielsen S.A. v. AnimalFeeds International Corp., 130 S. Ct. 1758 (2010) and Concepcion overruled Gentry. The trial court denied the motion.

The California Court of Appeals affirmed, reasoning that Gentry was not overruled by Concepcion because it does not establish a categorical rule against class action waivers but “sets forth factors to be considered on a case-by-case basis to determine whether a class action waiver precludes employees from vindicating their statutory rights.” The court further reasoned that Gentry is consistent with Stolt-Nielsen because a class arbitration waiver that is unenforceable under Gentry must be heard in court as required by Stolt-Nielsen

To read more, go to http://www.courts.ca.gov/opinions/documents/B232583.pdf.

Admission of Confidential Mediation Communications Harmless Error When Other Evidence Led to Same Conclusion of Fact and Law

The Montana Supreme Court held that the lower court erred in admitting evidence protected under Montana’s mediation confidentiality statute, but that the error was harmless because the court would have reached the same conclusion if the evidence had been excluded.

In Kluver v. PPL Montana, LLC, ___ P.3d ___, 2012 WL 6740152 (Mont., Dec. 31, 2012) the plaintiffs brought suit alleging local power companies contaminated the groundwater under their property. In mediation, the parties created a Memorandum of Understanding (MOU) that settled their dispute. After consulting with a tax attorney, one of the plaintiffs told the other the settlement would not be as much as they anticipated after paying taxes and they intended to back out of the settlement. Defendants filed a motion to enforce the agreement and at the hearing details of the mediation were admitted into evidence. The trial court entered an order enforcing the agreement and the plaintiffs appealed.

The Montana Supreme Court affirmed. Although the Montana mediation confidentiality statute prevented all communication disclosures, including non-verbal actions intended to be an assertion, the statute did not extend to discussions about the mediation after the mediation had concluded. Because there was enough evidence for the court to make the same conclusion without the improperly admitted evidence, the error was harmless.

J.D. Hoyle is a law clerk with the Section of Dispute Resolution.

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