March 01, 2019

Case Law Update

Courts May Not Refuse to Compel ‘Wholly Groundless’ Motions to Compel Arbitration

In Henry Schein, Inc. v. Archer and White Sales, Inc., 139 S.Ct. 524 (2019), a disputant moved to compel arbitration in an antitrust action, citing the existence of an arbitration provision in the parties’ distribution agreement. The arbitration agreement in question specifically excluded “actions seeking injunctive relief and disputes related to trademarks, trade secrets, or other intellectual property.” Because the remedy sought in the antitrust action was an injunction and consistent with Fifth Circuit precedent, the District Court refused to compel arbitration, saying that the motion was “wholly groundless.”

In one of his first written opinions on the Supreme Court and writing for a unanimous Court, Justice Brett Kavanaugh found this “wholly groundless” exception inconsistent with the Federal Arbitration Act. Pointing to the text of the FAA, the Court held that “When the parties’ contract delegates the arbitrability question to an arbitrator, a court may not override the contract. In those circumstances, a court possesses no power to decide the arbitrability issue. That is true even if the court thinks that the argument that the arbitration agreement applies to a particular dispute is wholly groundless.”

Mutual Assent Lacking in Consumer Contract with Mislabeled Provision

In Kernahan v. Home Warranty Administrator of Florida, Inc., ___ A.3d ___ (N.J. 2019), a consumer entered into an agreement for repair of certain home appliances in exchange for $1,050. The consumer eventually became dissatisfied, canceled the contract, and filed a complaint alleging violation of various state consumer protection statutes. At issue here was a dispute resolution provision labeled “MEDIATION.” Within that provision, consumers would be bound not only to “mediate in good faith” but to have any disputes not resolved through mediation sent to binding arbitration.

The New Jersey Supreme Court refused to compel arbitration, finding the provision so flawed as to preclude the kind of mutual assent required to form an arbitration agreement. New Jersey precedent requires that any arbitration clause be “clear on its face” and “without ambiguity.” The party seeking to compel arbitration had argued in its petition for certiorari that this requirement conflicts with the US Supreme Court’s recent decision in Kindred Nursing. The New Jersey Supreme Court pointed to the fact that the provision in this case was in 6.5-point type and was mislabeled, finding that “Although we are not expecting a specific recitation of words to effect a meeting of the minds to create an agreement to arbitrate, the construct and wording of the instant provision are too confusing and misleading to meet simple plain wording standards demanded by the public policy of this state for consumer contracts.”

University’s Discipline against Tenured Faculty Member Not Akin to Arbitration

In McAdams v. Marquette University, 914 N.W.2d 708 (Wis. 2018), a tenured university professor, John McAdams, wrote a blog post criticizing the way a graduate student had conducted part of an ethics class. The graduate student, serving as an instructor,had shut down a classroom conversation about gay rights, indicating that homophobic comments would be offensive and inappropriate for the classroom. In his subsequent blog post, McAdams alleged that the instructor had employed “a tactic typical among liberals now … [urging] that opinions with which they disagree are … deemed ‘offensive’ and need to be shut up.” McAdams was subsequently suspended with pay, and the university began proceedings to dismiss him. Pursuant to university procedures, a panel of fellow faculty members heard several days of evidence and eventually made a recommendation to the president that McAdams be suspended without pay for some time. The president adopted that recommendation and suspended McAdams. Rather than accept the suspension, McAdams filed suit against Marquette, alleging breach of contract. The university pointed to its internal disciplinary proceeding and urged the court to treat that as akin to arbitration and, therefore, deserving of deference.

The Wisconsin Supreme Court rejected the notion that the university’s procedures should enjoy judicial deference, noting that nothing in the contract constituted a waiver of the right to file suit in court. The court further held that certain aspects of the internal procedure failed to provide the kinds of protections that would be required of any arbitration agreement, for example, the existence of partiality that would constitute disqualifying bias in the context of an arbitration. Additionally, the court noted that the panel’s decision was purely advisory. Proceeding to consider the merits of the cross-motions for summary judgment, the court held that McAdams’ blog post fell within the scope of “academic freedom” and ordered the university to reinstate McAdams with pay.

Request for Mediation as Condition Precedent Must be Satisfied         

In Primov v. Serco, Inc., 296 Va. 59 (2019), an employment dispute arose regarding pay associated with working in an “imminent danger zone.” The employment agreement included a mediation provision, which stated that “[i]f the dispute has not been resolved by mediation within 60 days of a written request to mediate made by one of the parties, then either party may bring suit in the state or federal court . . . .”  George Primov, the employee, filed suit against Serco, alleging breach of his employment contract. At the same time, Primov sent a letter to his employer indicating that he “would not be opposed to pursuing mediation concurrently with the court proceedings.” Serco sought dismissal on the grounds that Primov had failed to satisfy a condition precedent to filing suit. The trial court dismissed Primov’s case with prejudice.

The Virginia Supreme Court upheld the dismissal, stating that “[t]he contract clearly requires that a written request to mediate be made prior to bringing suit on the contract” and that Serco was denied “the benefit of its bargain.” Primov’s letter stating that he was willing to mediate did not satisfy “a written request to mediate.” The court held that the lower court’s decision and remedy did not constitute an abuse of discretion, and it sustained the dismissal with prejudice.

Supreme Court Views an Independent Contractor as Employee under FAA

In New Prime, Inc. v. Oliveira, 139 S.Ct. 532 (2019), Dominic Oliveira drove trucks for New Prime, an interstate trucking company, as an independent contractor. Oliveira filed a class-action lawsuit claiming that New Prime failed to pay drivers lawful wages. Citing their agreement, New Prime moved to compel arbitration. Oliveira claimed his agreement with New Prime was a “contract of employment of [a] worker[] engaged in . . . interstate commerce” and therefore because his claim fell into the exception of § 1 of the Federal Arbitration Act, he could not be compelled into arbitration. New Prime argued both that the exception does not apply in this case and that the question of whether the exception applied was a matter for the arbitrator to decide.

Justice Neil Gorsuch, writing for the Supreme Court, “stressed the significance of the [FAA’s] sequencing.” Citing Southland Corp. v. Keating, 465 U.S. 1 (1984), the Court noted ‘ “the enforceability of arbitration provisions’ under §§3 and 4 depends on whether those provisions are “part of a written maritime contract or a contract “evidencing a transaction involving commerce”’ under § 2—which, in turn, depends on the application of § 1’s exception for certain ‘contracts of employment.’ ” Parties to a contract can only use §§ 3 and 4 to enforce the arbitration clause, including a delegation clause, only if the contract does not fall into the exception of §1.

Justice Gorsuch then cited other recent case law: “ ‘[T]hat generally words should be ‘interpreted as taking their ordinary . . . meaning . . . at the time Congress enacted the statute.’ ” In this case, he found that sources from the 1920s, including law dictionaries, made no meaningful distinction between forms of employment in a way that would differentiate independent contractors from other employees. Therefore, because Oliveira was an employee within the meaning of § 1, the remainder of the FAA would be inapplicable to this dispute. The lower courts’ refusal to compel arbitration was upheld.

Web-Based Contract Did Not Provide Consumer with Sufficient Arbitration Notice 

In Starke v. SquareTrade, Inc., ___ 2019 U.S. App. Lexis 859, Adam Starke purchased an electronics protection plan from SquareTrade, and a disagreement followed about whether the protection plan covered Starke’s CD player. Starke filed a lawsuit, and SquareTrade moved to compel arbitration. Starke opposed arbitration on the grounds that he had no knowledge or reasonable notice of the provision in forming a contract with SquareTrade. The Second Circuit upheld the lower court’s refusal to compel arbitration. It examined the terms on SquareTrade’s website, as well as its buttons and advertisements, presence of distractors, clear and conspicuous hyperlink, and the language accompanying the link to the terms and conditions. The court concluded that SquareTrade’s communications never directed Starke’s attention to the “Terms & Conditions,” that there was no language on the website that directed Starke’s attention, and that the message was too cluttered to create a condition in which Starke could be deemed to have assented. Instead, the court found that “SquareTrade never gave Starke clear and conspicuous notice that the transaction would subject him to binding arbitration.” Starke saw SquareTrade’s terms and conditions only once, in a prior dealing, and there was no arbitration agreement within those terms or conditions. The court concluded that in looking at the totality of the circumstances, Starke was not provided sufficient notice of the terms and therefore did not show an assent to arbitrate.

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    Ben Pincus and Elise Williard

    Ben Pincus and Elise Williard are law students at the University of Oregon School of Law and serve as law student editors for Dispute Resolution Magazine.