Northwest Business Litigation

US Supreme Court: Federal Arbitration Act bars state court from ruling on contract's validity

This week the U.S. Supreme Court again affirmed the broad scope of the Federal Arbitration Act, holding that when a contract includes a valid arbitration provision, an arbitrator, and not a court, should decide in the first instance whether the contract is valid under state law.

In Nitro-Lift Technologies, LLC v. Howard, an employer sought to enforce an employee non-competition agreement containing an arbitration clause.  Two employees subject to the agreement asked the Oklahoma state court to hold that it was void under state law.  While the employer argued that the contract's enforceability should be decided by an arbitrator in the first instance, the Oklahoma Supreme Court refused to send the issue to an arbitrator and held that the noncompetition agreement was "void and unenforceable as contrary to Oklahoma's public policy."

On review, the U.S. Supreme Court rebuked the Oklahoma court for displaying the type of "judicial hostility toward arbitration" that is foreclosed by the FAA.  The Oklahoma court ignored longstanding precedent establishing that attacks on the validity of the contract as a whole, as distinct from attacks directed to the validity of the arbitration clause, must be resolved by the arbitrator. 

Oregon Court of Appeals dismisses age discrimination suit for failure to follow employer's ADR policy

Last week, the Oregon Court of Appeals upheld the dismissal of an employee’s age discrimination claim under state law for failure to comply with the employer’s grievance and arbitration procedure.  In Hatkoff v. Portland Adventist Medical Center, the employee had signed a written acknowledgement that he had received the employee handbook and was responsible for reading it and understanding its contents.  The acknowledgement also stated that in the event he was dissatisfied with any action taken by his employer, the employee would submit the matter to the employer's grievance and arbitration procedures. 

For employers that have a written grievance or other alternative dispute resolution procedure in their handbook, the case opens the door for a complete defense to a claim by an employee who fails to follow the procedure. 

U. S. Supreme Court declines to apply state law, enforces waiver of class-wide arbitration

Last week, in a 5-4 decision, the United States Supreme Court strengthened the Federal Arbitration Act (FAA) by enforcing a term in a consumer contract that provided for arbitration of all disputes, but prohibited classwide arbitration. 

In AT&T Mobility LLC v. Concepcion, Mr. and Mrs. Concepcion entered into a contract for sale and service of cell phones with AT&T Mobility.  The contract provided for arbitration of all disputes, but required that any claims be brought in a party's individual capacity, and not as a class member.  The Concepcions later sought to participate in a class action lawsuit claiming false advertising and fraud by AT&T.  They claimed that the arbitration clause was unenforceable under Calfornia law because the waiver of classwide proceedings was unconscionable.

The Supreme Court, reversing the Ninth Circuit, agreed with AT&T that California's test for invaildating waivers of classwide arbitration stands as an obstacle to the purpose of the FAA.  For that reason, state law can't be used to invalidate such a clause as unconscionable.  The Court refused to apply state law even though the FAA expressly provides that arbitration agreements may be invalidated on grounds existing under state law.

This result apparently voids similar cases applying Oregon and Washington law, in which waivers of class arbitration have been found to be unconscionable.  See our coverage of those cases here and here. 

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.