Northwest Business Litigation

U.S. Supreme Court hands issue of contract enforceability to arbitrators

The U.S. Supreme Court yesterday limited the role of courts in interpreting and enforcing arbitration agreements under the Federal Arbitration Act.  At issue in Rent-A-Center West, Inc. v. Jackson was an arbitration agreement that Jackson signed as a condition of his employment with Rent-A-Center.  When Jackson filed an employment discrimination lawsuit, the employer sought to dismiss based on the agreement.  Jackson argued that the agreement was unconscionable and unenforceable. The agreement specifically provided that the arbitrator would determine the enforceability of the agreement.

In a 5-4 decision, the Supreme Court held that, because Jackson challenged the enforceability of the agreement as a whole, the challenge had to be resolved by an arbitrator.  But if Jackson had challenged just the portion of the agreement stating that the arbitrator would determine the enforceability of the agreement, the issue would properly be resolved by a court.

U.S. Supreme Court: FAA does not mandate class arbitration

Today the U.S. Supreme Court held that the Federal Arbitration Act (FAA) does not require class arbitration unless the parties' arbitration agreement expressly provides for class arbitration. 

In Stolt-Nielsen, S.A. v. AnimalFeeds Int'l Inc., AnimalFeeds claimed that Stolt-Nielsen violated the antitrust laws by charging supracompetitive prices.  The parties' agreement provided for arbitration of all disputes arising from the contract.  AnimalFeeds initiated an arbitration claim on behalf of a class of purchasers, and Stolt-Nielsen disputed that class arbitration was available under the contract.  While the arbitration clause was silent on the issue of class arbitration, the arbitration panel determined that it was appropriate to proceed with a class arbitration, and the Second Circuit agreed.

The Supreme Court reversed, holding that, because the parties did not expressly agree to arbitration of claims by a class of claimants, class arbitration was not available.  According to Justice Alito, writing for the majority, despite the FAA's policy favoring arbitration of disputes, "a party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the parties agreed to do so."

Oregon Court of Appeals upholds arbitration clause in employment contract

The Oregon Court of Appeals has again enforced an arbitration clause in an employment contract, rejecting the employee's claim that the clause is unconscionable.  In Livingston v. Metropolitan Pediatrics, LLC, the plaintiff, a pediatrician, took issue with the conduct of his employer and other doctor members and employees related to an investigation of the clinic's child vaccine program.  He alleged he was ultimately terminated because of the concerns he expressed to his employer and government authorities. 

Plaintiff filed common law and statutory employment claims against his employer and the others in court.  The employer moved to abate the claims and compel arbitration, citing a clause in the employment agreement that required arbitration of "[a]ny controversy, dispute or disagreement arising out of or relating to this Agreement, or the breach thereof."  The trial court denied the employer's motion, ruling that the arbitration clause is "unconscionable" and, therefore, unenforceable.  The employer appealed, and the Court of Appeals last week agreed with the employer and sent the case back for arbitration of all claims.

The test for "unconscionability" in Oregon has two parts, one procedural and the other substantive.  A contract is procedurally unconscionable, and therefore not enforceable, if there is "oppression" or "surprise" in the "conditions of contract formation," but unequal bargaining power alone is insufficient for a finding of procedural unconscionability.  A contract is substantively unconscionable if the "terms" of the contract are "unreasonably" one-sided, such that their "effect" makes the parties' respective obligations "so unbalanced as to be unconscionable."

In this case, Plaintiff did not contend that the agreement was procedurally unconscionable; the Court of Appeals noted that, in any event, because plaintiff is a highly educated physician, any inequality in bargaining power was minimal.  The trial court, however, had found these aspects of the agreement substantively unconscionable:  (1)  the possibility that plaintiff would have to pay defendant's attorney fees and costs if plaintiff is unsuccessful on his "blacklisting" claim; (2)  excessive arbitration fees assessed against plaintiff; (3)  ambiguity about which set of American Arbitration Association rules would govern the arbitration; and (4) a requirement of confidentiality.  Before the Court of Appeals, plaintiff asserted these and other grounds for a finding of unconscionability and further argued that the arbitration clause should not apply to intentional torts, statutory claims, and claims against non-signatories to the employment agreement.  The Court of Appeals addressed the trial court's findings as well as the other arguments put forth by plaintiff, and held that none of the concerns arises to the level of substantive unconscionability or otherwise requires court litigation of the parties' disputes.  Central to the ruling of the Court of Appeals is the very broad language of the arbitration clause allowing for arbitration of "any controversy, dispute or disagreement."

Ninth Circuit voids class action waiver in a consumer contract

Last week in Chalk v. T-Mobile USA, the Ninth Circuit Court of Appeals applied Oregon law to invalidate a contractual class action waiver.  The court held that, where individual damages from breach of a consumer contract are likely to be small, a waiver of the right to pursue a class action is substantively unconscionable and therefore unenforceable.

This case was filed in the federal district court in Oregon in 2006 by a plaintiff who bought a wireless internet plan and card from T-Mobile.  The service agreement provided for arbitration under the American Arbitration Association’s Wireless Industry Arbitration Rules.  The arbitration clause barred class-wide proceedings.  When the plaintiff could not get the wireless internet card to fit in her laptop, she commenced a putative class action against T-Mobile, alleging a violation of Oregon’s Unlawful Trade Practices Act (UTPA).  T-Mobile moved to compel arbitration pursuant to the service agreement.

In opposing the motion, the plaintiff argued that the bar on class-wide proceedings rendered the arbitration agreement unconscionable and therefore unenforceable. The district court rejected this argument and upheld the waiver.  The plaintiff also argued that the costs of arbitration would be prohibitively expensive and preclude her from vindicating her statutory rights.  The Court rejected this argument because the plaintiff did not present any evidence to support her cost estimates.

The district court did find merit in the plaintiff's argument that the arbitration agreement was unconscionable because it would prevent the arbitrator from awarding her attorney fees pursuant to the UTPA.  Instead of invalidating the arbitration agreement, however, the Court severed those provisions that would prevent the arbitrator from awarding attorney fees to the plaintiff.

On appeal, the Ninth Circuit relied on Vasquez-Lopez v. Beneficial Oregon, Inc., an Oregon Court of Appeals case decided after the district court issued its ruling.  Applying Vasquez-Lopez, the court held the class action waiver was substantively unconscionable and unenforceable under Oregon law due to its one-sided nature.  Class action waivers unfairly prevent individuals from vindicating their rights when the cost of pursuing each claim individually outweighs the potential relief, according to the court.  The court was careful to note that it did not hold that all class action waivers are necessarily unconscioniable.  Finally, because the arbitration agreement prohibited severance of the waiver, the court ruled the agreement as a whole unenforceable.

See our January 2007 coverage of the Vasquez-Lopez case here.

Denial of petition to compel arbitration in Oregon must be appealed within 30 days

The Oregon Court of Appeals held yesterday in Snider v. Production Chemical Manufacturing, Inc., that an order denying a petition to compel arbitration must be appealed within 30 days of the order.  In that case, the party seeking to arbitrate proceeded to a jury trial and appealed the arbitration issue after judgment was entered.  Judge Robert Wollheim, writing for the court, held that the appeal was untimely and the Court of Appeals lacked jurisdiction.  This result is mandated by the Uniform Arbitration Act, which Oregon adopted in 2003.

Waiver or breach of arbitration agreement must be resolved by court, Ninth Circuit holds

Once parties have entered into an arbitration agreement, the courts have a limited role in adjudicating a subsequent dispute.  While a court may generally decide whether a valid agreement to arbitrate exists, most other issues must be resolved by the arbitrator.

In a case decided this week by the Ninth Circuit Court of Appeals, the court held that a claim that an arbitration agreement has been breached or waived goes to the validity of the agreement and must be resolved by the court and not the arbitrator.  In Cox v. Ocean View Hotel Corp., an individual filed a discrimination lawsuit against his former employer.  In response to the former employer's motion to enforce an arbitration agreement, the plaintiff claimed that the employer, by earlier refusing to arbitrate, had both breached and waived the agreement.  Judge A. Wallace Tashima, writing for the majority of the Ninth Circuit panel, held that plaintiff's claims went to the validity of the agreement and were properly decided by the district court.   

Judge Diarmuid O'Scannlain dissented regarding the scope of the court's role.  In this case, he wrote, the claim of breach and waiver went to enforceability and not validity, and should have been decided by the arbitrator and not the court.

U.S. Supreme Court finds Federal Arbitration Act states exclusive grounds for review of arbitration awards

A split U.S. Supreme Court ruled yesterday that the grounds for vacatur and modification of arbitration awards stated in the Federal Arbitration Act (FAA) at 9 U.S.C. sec. 9-11, are exclusive for parties seeking expedited review under the FAA.

The parties in Hall Street Associates, L.L.C. v. Mattel, Inc., proposed to arbitrate Hall Street’s claim for indemnification after Mattel’s right to terminate its lease was decided at a bench trial. The District Court approved and entered the parties' arbitration agreement as an order. The agreement required the court to vacate, modify, or correct any award if the arbitrator's conclusions of law were erroneous. In its ruling the Supreme Court noted that its holding decided “nothing about other possible avenues for judicial enforcement of awards.” It remanded the case for consideration of “independent issues.” The Court said that because the arbitration agreement was submitted to the District Court and adopted as an order, there was some question whether it should be treated as an exercise of the District Court's authority to manage its cases under Federal Rule of Civil Procedure 16.

U.S. Supreme Court: Federal Arbitration Act preempts state law

In a case widely followed because one of the parties is television personality "Judge Alex" Ferrer, the U.S. Supreme Court today bolstered the federal policy favoring arbitration.  The court held in Preston v. Ferrer that, where a contract provides for arbitration of disputes, a state cannot require that an administrative agency initially determine the contract's validity.  The Federal Arbitration Act preempts California's Talent Agencies Act to the extent that the state statute directs the state labor commissioner to determine the validity of a talent agency agreement, where that agreement includes an arbitration clause.

Washington Court of Appeals won't enforce a one-sided arbitration agreement

Although Washington law favors arbitration, the Washington Court of Appeals made clear this week that it will not enforce an arbitration agreement that lacks neutrality.  In Rodriguez v. Windemere Real Estate/Wall Street, Inc.  a real estate agent sued his brokerage, a franchisee of Windemere Real Estate Services (WRES), for unpaid commissions.  The brokerage moved to compel arbitration pursuant to a brokerage/sales associate agreement between the parties that required all disputes to be resolved through arbitration. The agreement entitled WRES to select the three-person arbitration panel from its “family” of owners, brokers, managers and sales associates, all of whom had contractual and financial ties to the company. On these facts, the court found the process lacked neutrality and was, therefore, unenforceable.

Oregon Court of Appeals on wrongful initiation of civil proceedings

If one person sues another without cause and with malice, the target of the lawsuit may have a tort claim for wrongful initiation of civil proceedings.  The Oregon Court of Appeals last week issued an opinion that may open the door to more such claims where the underlying lawsuit is resolved by a settlement and dismissal.

In Perry v. Rein, the court weighed in on a dispute in which a lawyer had been sued for his alleged role in a scam.  Following settlement and dismissal of that claim, the defendant sued the lawyer who prosecuted that first action, for wrongful initiation of civil proceedings.  One of the elements of such a claim is the termination of the first proceeding in favor of the party now suing for wrongful initiation.  The defendant in the second action obtained summary judgment on the ground that the settlement and voluntary dismissal in the first case showed that it was not terminated in the opposing party's favor.   The Court of Appeals reversed, holding, among other things, that it cannot be presumed that a dismissal associated with a settlement defeats a subsequent claim for wrongful initiation of civil proceedings.