Be Careful What You Ask For
DoorDash, the internet restaurant food delivery service required its couriers to sign a mutual arbitration agreement that required that claims be arbitrated under AAA rules and included a class action waiver. AAA rules required the employees/independent contractors to pay $300 each and the employer is responsible to pay $1,900 for each case. Approximately 6000 couriers filed for individual arbitrations asserting that they were improperly misclassified as independent contractors and paid their required fees. Having required claimants to file individual arbitration agreements waiving class action procedures, DoorDash was facing the obligation to pay over $13,000,000 in arbitration fees and sought to disrupt the AAA arbitration by not paying the fee.
The claimants sued to compel arbitration. The California Federal District Court, in Abernathy, et al. v. DoorDash, Inc. (United States District Court Case No.: C-19-07545WHA ordered the parties to proceed with individual arbitrations for over 5000 of the claimants. The Court chided DoorDash’s hypocritical actions, stating:
“For decades, the employer-side bar and their employer clients have forced arbitration clauses upon workers, thus taking away their right to go to court, and forced class-action waivers upon them too, thus taking away their ability to join collectively to vindicate common rights. The employer-side bar has succeeded in the United States Supreme Court to sustain such provisions. The irony, in this case, is that the workers wish to enforce the very provisions forced on them by seeking, even if by the thousands, individual arbitrations, the remnant of procedural rights left to them. The employer here, DoorDash, faced with having to actually honor its side of the bargain, now blanches at the cost of the filing fees it agreed to pay in the arbitration clause. …This hypocrisy will not be blessed, at least by this order.”
Evident partiality as grounds for overturning arbitration awards.
Courts across the country are divided on the proper standard applicable to vacating arbitration awards when an arbitrator fails to make a complete and proper disclosure of potential conflict. In the comments to the Revised Uniform Arbitration Act (RUAA) the Uniform Laws Commissioners observed that:
[The] Commonwealth Coatings Corp. v. Continental Casualty Co., 393 U.S. 145 (1968), a decision under the FAA. In that case the Supreme Court held that an undisclosed business relationship between an arbitrator and one of the parties constituted “evident partiality” requiring vacating of the award. Members of the Court differed, however, on the standards for disclosure. Justice Black, writing for a four-judge plurality, concluded that disclosure of “any dealings that might create an impression of possible bias” or creating “even an appearance of bias” would amount to evident partiality. Id. at 149. Justice White, in a concurrence joined by Justice Marshall, supported a more limited test which would require disclosure of “a substantial interest in a firm which has done more than trivial business with a party.” Id. at 150. Three dissenting justices favored an approach under which an arbitrator’s failure to disclose certain relationships established a rebuttable presumption of partiality.
The split of opinion in Commonwealth Coatings is reflected in many subsequent decisions addressing motions to vacate awards on grounds of “evident partiality” under federal and state law.
Courts remain divided on this issue. Recently, a Texas appellate court applied the reasonable impression of partiality standard. In Sebastian v. Wilkerson, No. 09-18-00223-CV (Tex. App – Beaumont, February 7, 2019), a residential construction defect case, the homeowners prevailed against the contractor. The contractor sought to vacate the arbitration award citing the following alleged non-disclosures by the arbitrator:
Failure to disclose that the arbitrator had made a judicial campaign contribution to an attorney in the law firm that represented the homeowners;
The arbitrator was a Facebook “friend” of that same attorney;
The arbitrator and that attorney were members of a Republican women political group; and
The arbitrator had purchased something from the Homeowners’ business some 15 years previous.
The Court overturned the trial courts vacatur of the award, ruling that:
A campaign contribution, in and of itself, without an indication of communication about, or coordination of, the handling of a case, does not create bias or the appearance of impropriety.
A Facebook friendship does not show the degree or intensity of a judge’s relationship with a person, and thus, standing alone, provides no insight into the nature of a relationship.
A political campaign contribution does not reasonably translate into a conclusion that the arbitrator would be biased in favor of the contributor or their attorneys;
There was a failure to show that there was a significant social relationship or any other fact that might cause a person to reasonably doubt the arbitrator’s ability to be impartial, nor a showing of any pecuniary interest, direct or indirect, flowing to the arbitrator from her relationship with the attorney in the law firm of the homeowners’ advocate.
The fact that the arbitrator had been a customer of homeowners business 15 years ago was a “was a trivial and insubstantial matter” that to an objective observer would create a reasonable impression of partiality. The relationship was remote and had no effect on the arbitrator’s interest in the outcome of the arbitration.
Ninth Circuit Court vacates arbitration award based on reasonable impression of arbitrator bias
In Monster Energy Co. v. City Beverages, LLC, Nos. 17-55813 & 17-56082 (9th Cir. Oct. 22, 2019), the United States Court of Appeals for the Ninth Circuit, vacated an arbitral award based on later-discovered information that created a reasonable impression of arbitrator bias.
The facts leading up to the application for vacatur
The arbitration giving rise to this case arose out of a dispute between Monster Energy Company (“Monster“) and Olympic Eagle Distributing (“Olympic Eagle“) regarding Monster’s right to terminate a franchise contract between the parties. Monster compelled arbitration before JAMS, as specified in the agreement. The parties chose a sole arbitrator, who found in favor of Monster. Monster sought to confirm the award before the district court, and Olympic Eagle cross-petitioned for vacatur of the award based on later-discovered information that caused them to question the arbitrator’s impartiality.
The Federal Arbitration Act permits a court to vacate an arbitration award “where there was evident partiality . . . in the arbitrators.” [9 U.S.C. § 10(a)(2)]. In his disclosures, the arbitrator disclosed that he practices “in association with JAMS” and “[e]ach JAMS neutral, including me, has an economic interest in the overall financial success of JAMS.” However, the arbitrator failed to disclose that he had a direct ownership interest in JAMS, and that JAMS had administered 97 arbitrations for Monster over the previous five years. Despite this, the district court confirmed the award. Olympic Eagle appealed.
Appeal proceedings and decision of the Appeal Court
On appeal, Monster argued that Olympic Eagle had waived its partiality claim because it failed to timely object when it first learned of the potential “repeat player” bias and the sole arbitrator’s economic interest in JAMS. The court found that, while the arbitrator disclosed that he had an “economic interest” in JAMS and had previous arbitration activities that directly involved Monster, the arbitrator did not disclose his direct ownership interest in JAMS, and it was not evident that Olympic Eagle could have discovered this information prior to the arbitration. The court thus found that Olympic Eagle lacked the requisite constructive notice of the arbitrator’s potential non-neutrality for waiver.
In considering whether to vacate the award on the basis of “evident partiality,” the court relied on U.S. Supreme Court precedent that vacatur of an award is supported where the arbitrator fails to “disclose to the parties any dealings that might create an impression of possible bias.” The arbitrator’s undisclosed interest in an entity must be substantial, and that entity’s business dealings with a party to the arbitration must be nontrivial. Here, the court found that the sole arbitrator’s ownership interest in JAMS was substantial and Monster’s dealings with JAMS were not trivial; Monster had held 97 arbitrations with JAMS over the previous 5 years and had a JAMS clause in all of its form contracts. These were all facts that created a reasonable impression of bias, should have been disclosed, and therefore supported vacatur of the award.
Circuit Judge Friedland dissented, disagreeing that the additional information that should have been disclosed would have made a material difference. First, by entering into a contract that required arbitration, the parties gave up Article III(U.S. Constitution) protections against judicial impartiality. While the dissent acknowledged that the lack of disclosures might require vacatur in some instances, the disclosures here were not so extreme. The dissent further noted that the majority leaves it unclear how detailed an arbitrator’s disclosures must be or what constitutes nontrivial business dealings requiring disclosure. (From the global arbitration law blog of Baker McKenzie)
Trust Language Binding Co-Trustees and Beneficiaries to Mediate or Arbitrate Disputes Is Enforceable
In Bazazzadegan v. Vernon , (2019 Ark. App. 496, Oct. 30, 2019), the settlor of the trust provided in the living trust document that:
If my Trustees are unable to agree on a matter for which they have joint powers, I request that the matter be settled by mediation and then by arbitration, if necessary, in accordance with the Uniform Arbitration Act.
Two co-trustees and beneficiaries of the trust had a dispute. One wanted to mediate and arbitrate and the other did not asserting that a non-signatory to the trust document has not agreed to be bound by an provision requiring mediation and arbitration.
The Court reviewed and relied upon case authorities from Texas, Tennessee and Alaska and ruled that:
…trust beneficiaries are bound by arbitration agreements that a trustee signed even though the beneficiaries did not sign the agreement. The basic rationale is that because the beneficiary sought to enforce the trust or benefit from it, he or she is bound by its terms.
Non-Signatory Additional Insured Bound to Arbitrate
In a coverage dispute, the California Court of Appeal, Third District, ruled in Philadelphia Indemnity Insurance Company v. SMG Holdings, Inc., Case No. C082841 that an arbitration agreement in a commercial general liability policy (“CGL”) bound an additional insured to arbitrate. The fact that the additional insured was not a signatory to the insurance agreement did not prevent the “third party beneficiary” under the policy from being “equitably estopped to avoid the arbitration clause. (From the insurance law blog of Duane Morris LLP – Daniel B. Heidtke)
Obtaining discovery in the United States to support an international arbitration.
A federal statute permits parties engaged in a proceeding in an international forum to obtain discovery from sources in the United States. 28 U.S.C. § 1782 (a) states:
The district court of the district in which a person resides or is found may order him to give his testimony or statement or to produce a document or other thing for use in a proceeding in a foreign or international tribunal.
Departing from the holdings of other federal courts of appeal, including the Second (New York, Connecticut, Vermont) and Fifth Circuits (Louisiana, Mississippi, Texas), the Sixth Circuit (Kentucky, Michigan, Ohio, Tennessee) recently ruled Abdul Latif Jameel Transp. Co. v. FedEx Corp., 939 F.3d 710 (6th Cir. 2019) that § 1782(a) permits discovery for use in private commercial arbitration.
In In Re: Application of Antonio del Valle Ruiz, 2019 WL 4924395 (2d Cir. Oct. 7, 2019), the Second Circuit held that there was no per se bar to the extraterritorial application of § 1782, and that the district court may exercise its discretion as to whether to allow such discovery. Further, the court examined the jurisdictional requirement that, to obtain discovery under § 1782, the person or entity to provide such discovery Copyright © 2020 Holland & Knight LLP All Rights Reserved 6 must reside or be found in the district, and held that this requirement extended § 1782’s reach “to the limits of personal jurisdiction consistent with due process. (Excerpted from the Holland & Knight’s China Practice Newsletter: January-February 2020 Holland & Knight LLP https://www.hklaw.com/ja/insights/publications/2020/01/holland–knights-china-practice-newsletter)
Confidentiality agreement of arbitration parties insufficient to require Court to place all documents and pleadings presented to Court in action to confirm arbitration award.
One of the key perceived advantages of arbitration is the confidentiality of the process. However, parties need to involve a court when confirmation and enforcement of an arbitration award is necessary. Can parties preserve confidentiality by stipulation?
A New York court says no. In Park Avenue Life Ins. Co. v. Allianz Life Ins. Co. of N.A., No. 19-cv-1089 (JMF) (S.D.N.Y. Sept. 25, 2019), parties to a reinsurance contract stipulated that the arbitration award and all documents in the case were to be kept confidential. The stipulation also set forth that submittals of the award and any supplemental information from the arbitration was to be submitted to a Court for confirmation was to be made under seal or redacted. The Court ruled that:
Courts must balance First Amendment considerations of public access to judicial documents citing consideration of “countervailing factors … not limited to the danger of impairing law enforcement or judicial efficiency and the privacy interests of those resisting disclosure;
The private agreement of parties to maintain confidentiality did not bar the authority of the Court to rule on a matter brought to the Court, stating “the mere existence of a confidentiality agreement . . . is insufficient to overcome the First Amendment presumption of access.”
Information pertinent to a Court’s ruling should not be hidden from public access.