June 04, 2021 Dispute Resolution Magazine

Case Law Update - Spring 2021

Lindsey Anderson and Andrew Jordan

Company that Bought Credit Card Debt Can Compel Arbitration, Court Finds

In Barbosa v. Midland Credit Management, Inc., 981 F.3d 82 (2020), the First Circuit Court of Appeals addressed whether a third-party company that purchased credit card debt from a different company can compel arbitration based on the original contract. Barbosa, the prior cardholder, owed debt that was sold to Midland Credit Management. When the company was trying to collect the debt, Barbosa appeared in court to contest the claim. In response, Midland tried to enforce the arbitration clause from the contract between Barbosa and the original credit card company.

The court held that Midland could compel arbitration even though it was not originally a signatory to the original contract. In the cardmember agreement, the arbitration clause stated that it would be enforced for claims against “us, the employees, agents, or assigns of the other…” The First Circuit determined that Midland was assigned the rights when it purchased Barbosa’s debt and thus able to compel arbitration.

Arbitration Clause in Employee Handbook Ruled Unconscionable and Unenforceable

The Supreme Court of Washington struck as unconscionable an arbitration provision in an employment context in Burnett v. Pagliacci Pizza, Inc., 196 Wash.2d 38 (2020). The plaintiff, Burnett, brought a class action claim against Pagliacci Pizza for unpaid wages. Pagliacci Pizza then asked the court to force arbitration based on the clause in the employee handbook. In response, the court held the arbitration clause unconscionable and unenforceable.

The employee handbook provided to Burnett upon initial training contained a mandatory arbitration clause under a section labeled “Mutual Fairness Benefits.” The handbook also stated that claims must first go through the company’s internal process for claims evaluation prior to arbitration. These policies were not explained to incoming employees; instead, employees were given a handbook and instructed to read and refer to it when signing the agreement. The court determined this to be unconscionable, holding that employees are not consenting to these practices when signing the agreement because they had no reasonable notice of the provisions before signing. Finding the terms also to be one-sided and substantively unconscionable, the court upheld the denial of Pagliacci Pizza’s motion to compel.

An Earlier Arbitration Clause Not Enforceable, Illinois Court Says

The US District Court for the Northern District of Illinois addressed the enforceability of an arbitration clause from a previous contract in Varma v. TCC Wireless, LLC, 19-CV-7153, 2020 WL 4677118 (N.D. Ill. Aug. 12, 2020). The plaintiff, Varma, was hired, quit, and then rehired by TCC Wireless before bringing a claim against his employer. TCC Wireless tried to enforce the arbitration clause from Varma’s original employee contract when the claim was brought. Varma, however, argued that arbitration was unenforceable because he never signed a new contract at the time the claim was brought.

The court determined the arbitration clause effectively ended when Varma quit from the first time. Upon being rehired, Varma signed only an offer letter and never signed a contract of employment. Since nothing signed indicated an arbitration agreement was back in effect or showed agreement to a new arbitration agreement, TCC Wireless cannot use a previously signed contract to force arbitration of the claims brought against them. A previous agreement that has ended does not constitute as consent by a party.

Sixth Circuit Finds Negotiation Class Is Outside the Bounds of Rule 23

The United States Court of Appeals for the Sixth Circuit held that the certification of a “negotiation class” in response to ongoing multi-district litigation surrounding the opiate crisis was beyond the permissible scope of FRCP 23, the rule governing class certifications, in In re Nat'l Prescription Opiate Litig., 976 F.3d 664 (6th Cir. 2020). More than 1,300 public entity-led lawsuits have been initiated in response to the opiate crisis in the United States. These entities argue that an excessive amount of public health funds is being diverted to help with the fallout from a rash of opiate addiction pushed by drug manufacturers and pharmacies. In order to encourage and facilitate settlement, the late Francis E. McGovern, a Duke law professor and special master in the case, proposed a negotiation class. This new form of class certification would allow individual cases to continue along with litigation while simultaneously trying to reach a settlement for members of the proposed class.

The Sixth Circuit noted the creative novelty of the idea but was ultimately unpersuaded, due to the existing permissible scope of Rule 23 and potential issues of coercion and fairness. The court noted that participants would “likely not” be given a second chance to enter the negotiation class if they initially refused and would be bound by the results if they did. Further, the Sixth Circuit suggested that defendants would be plainly aggrieved by the certification of a negotiation class, as it would affect the state of play for ongoing litigation.

The Sixth Circuit disagreed with the plaintiff’s broad view of what is possible under the open-ended wording of Rule 23. Specifically, the court identified that Rule 23 contains no discussion of negotiation as a separate class for certification. As a result, this new form of class action is wholly untethered from the rule and may not be employed by a court. In the view of the court the potential success of a negotiation class resolving a broad swath of cases in the multi-district litigation was not enough to bring it within the narrow textual confines of Rule 23 as a settlement class. Citing Amchem Prod., v. Windsor, the Sixth Circuit concluded that Rule 23 limits judicial inventiveness  and courts are not free to amend it outside the process Congress ordered. 521 U.S. 591, 117 S. Ct. 2231, 138 L. Ed. 2d 689 (1997).

AR Court Says Striking Right to Jury Trial For Failure to Mediate is Unconstitutional

The Supreme Court of Arkansas held that striking a defendant’s request for a jury trial based on failure to comply with a mediation requirement was unconstitutional in Bandy v. Vick, 2020 Ark. 334, 608 S.W.3d 903 (2020). In Pulaski County, Arkansas, parties are required to attempt mediation prior to a pre-trial hearing when requesting a jury trial. The defendant and subsequent appellant in this case, Lawrence Bandy, did not attempt mediation. At the pre-trial hearing, Bandy put forth a motion to dispense with mediation or at least receive an extension. Bandy reasoned that his refusal to consent to settlement rendered potential mediation a waste of time and resources. The lower court disagreed, noting that the requirement is well-known in the central Arkansas legal community and that the court is legislatively obligated to encourage alternative dispute resolution. For failing to comply, the lower court struck down Bandy’s motion and ordered a bench trial.

On appeal, the Supreme Court of Arkansas agreed that the action of the lower court was an unconstitutional prevention of the right to a trial by jury. The court explained that Arkansas Code 16-7-202 (e) gives courts the discretionary authority to “make at the request of a party appropriate orders to confirm and enforce the results produced by the dispute resolution process.” However, this authority had no particular application in this case. The court acknowledged that trial courts in the state have considerable discretion but held that such discretion is not unlimited. The code does not mention sanctions for failing to mediate, and refusing to do so cannot be viewed as a waiver to the jury trial right under the Arkansas constitution.

Colorado Court Finds Mediator’s Email Outlining Agreement Inadmissible

The Colorado Court of Appeals clarified the scope and application for protected mediation communications in Tuscany Custom Homes, LLC v. Westover (2020 COA 178). The appellant, Westover LLC, challenged a lower court order allowing admission of an email and deposition transcript. The email was authored by the mediator who conducted the mediation between Tuscany and Westover, and the deposition contained the mediator’s recollection of outcomes in the mediation. Based on the state’s Dispute Resolution Act and the prior case of Yaekle v. Andrews, 195 P.3d 1101 (Colo. 2008), Westover contended that much of the evidence presented at the hearing was inadmissible. Furthermore, Westover argued, absent the improper evidence, there was insufficient evidence to prove the existence of an enforceable agreement. The Court of Appeals agreed with Westover on both assertions.

The lower court had reasoned that the email was simply expressing already agreed-upon terms and that the deposition was simply the mediator’s opinion as to whether an agreement was reached. As a result, it held that the email was not connected to specific mediation services or proceedings and should be allowed. The Court of Appeals disagreed, noting the agreement was not signed and therefore, not being fully executed, did not qualify as an exception to mediation communications under the Dispute Resolution Act. Additionally, the draft agreement email was submitted specifically to show that oral communication and agreement occurred. Because the email documented communications made in the mediator’s presence, its contents fell within the scope of confidentiality.

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Lindsey Anderson and Andrew Jordan

Authors

Lindsey Anderson and Andrew Jordan are law students at the University of Oregon School of Law and serve as law student editors for Dispute Resolution Magazine.