Archive for October, 2013

Consumer Arbitration Unconscionability Trumps FAA Pre-Emption in Ninth Circuit Once Again

Wednesday, October 30th, 2013

A California grocery chain, presumably emboldened by Supreme Court decisions that appeared to sustain corporate arbitration policies used to stifle consumer and employee class actions, took a gamble and, at least in the U.S. Ninth Circuit Court of Appeals, lost. This grocer fashioned an arbitration policy, imposed on applicants for employment as a condition for receiving their applications, that: (1) ensured that when an employee demanded arbitration, the grocer would pick the sole arbitrator, and (2) required the arbitrator to obtain advance deposits in equal shares from employee and employer at the start of the arbitration, with no prospect of reapportionment based on outcome.  A federal district judge in Los Angeles held this policy was unconscionable under California law, and that the Federal Arbitration Act did not pre-empt that California law, and denied the grocer’s motion to compel arbitration, thereby allowing a class action for California Labor Code violations to proceed. A unanimous panel of the Ninth Circuit has affirmed. Chevarria v. Ralphs Grocery Stores, 2013 WL 5779332 (9th Cir. Oct. 28, 2013).

Having in mind that the U.S. Supreme Court’s decision in AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011) reversed a Ninth Circuit panel decision that had applied California unconscionability principles to deny enforcement of an arbitration agreement that required individual rather than class proceedings, a natural point of departure for considering Ralphs Grocery is a brief revisitation of Concepcion. The five-justice Supreme Court majority in Concepcion (the Court’s conservative bloc) was troubled by the perceived behavioral tendency of the so-called “Discover Bank Rule” (that deemed unconscionable arbitration agreements whose tendency was exculpate corporate misconduct against consumers by making small claims not worth pursuing) : in the majority’s view, corporations that did not draft their consumer agreements to allow class-wide arbitration would bear the risk that they could not require consumers to arbitrate, making the Discover Bank Rule an anti-arbitration rule.  The Rule was deemed to “stand in the way of the accomplishment of the FAA’s objectives” because one of those objectives was “to facilitate streamlined proceedings.” 131 S.Ct. at 1748. That was and remains a very debatable perspective on the FAA.  The Ninth Circuit in Ralphs Grocery does not challenge that premise of Concepcion, but in effect embraces it.   No conceivable objective of the FAA is obstructed, the Ninth Circuit tells us, by an unconscionability rule that prohibits enforcement of an arbitration agreement designed to prevent employees from arbitrating with employers, and designed to ensure that the employer wins if the employee does arbitrate. Thus, says the Ninth Circuit panel: “Federal law favoring arbitration is not a license to tilt the arbitration process in favor of the party with more bargaining power.  California law regarding unconscionable contracts, as applied in this case, is not unfavorable towards arbitration, but instead reflects a generally applicable policy against abuses of bargaining power.” 2013 WL 5779332 at *9. The Ninth Circuit also did not see the Supreme Court’s recent American Express decision as an obstacle. The arbitration policy at issue here imposed prohibitive costs upon consumers as a condition of filing an arbitration demand — requiring the employee to advance half the cost of the arbitrator’s expected fees without prospect of reapportionment after the result– whereas the costs involved in American Express were expert costs for proving a claim not for initiating the claim.

The Supreme Court of the United States might well send a message to corporate drafters of consumer arbitration clauses by denying certiorari in the Ralphs Grocery case. The Court’s temptation to dodge this case may prove irresistible, because to decide the case would conceivably require the Court to develop a new dimension of pre-emption analysis — i.e. whether the FAA applies at all to an adhesive employment agreement that requires an employee to abide by whatever arbitration policy if any that employer may impose from time to time. The best view of Ralphs Grocery may well be that no agreement to arbitrate was present because the agreement permitted the employer at any time to modify the arbitration policy or eliminate it entirely. The only agreement made by the employee was submit to the unilateral whim of the employer as it might be exerted from time to time. Within existing pre-emption doctrine, one could readily see the Supreme Court holding that this application of California unconscionability law has a disproportionate impact “on arbitration.” But the impact is, in practical terms, not upon a bilateral arbitration agreement but a unilateral employer-imposed term and condition of the application for employment. The FAA should not apply to such “arbitration,” and so pre-emption should not be an issue. It is considerably less difficult for the Supreme Court to embrace that view sub silentio by denying certiorari, than by granting certiorari and taking that bold a step in doctrine expressly.

Protecting Arbitral Jurisdiction of The Merits With a Foreign Anti-suit Injunction

Tuesday, October 15th, 2013

The pro-arbitration foreign anti-suit injunction is not mentioned in the text of the New York Convention or the U.S. Arbitration Act (FAA). But its importance to the enforcement of agreements to arbitrate transnational disputes is considerable. To be reminded of this, read a recent New York federal district court decision granting such an injunction: Bailey Shipping Ltd. v. American Bureau of Shipping, 2013 WL 5312540 (S.D.N.Y. Sept. 23, 2013). Or continue reading this Commentary.

A definitional note is a useful place to begin. This brand of injunction is “pro-arbitration” because it is granted to protect the jurisdiction of the arbitral tribunal over a dispute that has been lodged with such a tribunal, or that the court has required to be so lodged. It is “foreign anti-suit” because its purpose is to coerce the plaintiff in a pending foreign litigation, who is required to arbitrate, to cease and desist from its prosecution.

Bailey Shipping is such a case. The enjoined party here was was the plaintiff, a sea freight agent that rented cargo space on Greek-flag ships for its customers, and relied on certifications of seaworthiness given by a Greek inspector. Denying any duty to arbitrate, plaintiff — seeking to shift a cargo damage loss — brought suit in a Greek court on several theories including negligent misrepresentation, violation of certain international treaties, and a Greek consumer protection law. Plaintiff then commenced the U.S. federal action to enjoin defendant from pursuing arbitration of any of these claims, and defendant cross-moved to compel arbitration. The latter motion was granted early on, setting the stage for the dispute over whether Plaintiff should be enjoined from pursuing the Greek lawsuit.

Here in the U.S. Second Circuit (the appellate judicial district embracing New York), when attention turns to foreign anti-suit injunctions, the judges turn to a leading Second Circuit case, known in shorthand as China Trade (China Trade & Dev. Corp. v. M.V. Choong Yong, 837 F.2d 33 (2d Cir.1987)). That case provides a multi-factor equation for solving anti-suit injunction issues, and usually the focus is on “comity” — balancing an important U.S. policy served by the U.S. litigation with the sovereign interests of the foreign forum. Usually the dueling lawsuits are essentially in lockstep: the parties are the same and the claims are the same, so the focus shifts quickly to “comity.” But here in Bailey Shipping only one of the several Greek litigation causes of action had been held to be arbitrable — the negligent misrepresentation claim —  and so the scope of the anti-suit injunction turned on whether and to what extent the arbitral award would be dispositive of the Greek litigation.

The remarkably difficult issue presented by this case was whether the U.S. Action (more precisely, the arbitration compelled by the Court in the U.S. Action) would be “dispositive” of the Greek Action. Claimant/Plaintiff, evidently keen on resisting arbitration or at least exerting maximum pressure by fighting a two- front battle in a foreign court and in arbitration, did what claimant will predictably do: fathom causes of action under foreign law that can be said to arise from a source other than the contract containing the arbitration agreement. In this case, the clearly arbitrable cause of action was for negligent misrepresentation. This was based on the defendant’s duty to certify the seaworthiness of the vessel, and the Plaintiff/Claimant’s allegation that the certification had been negligently made (leading to reliance on the certification, and leading ultimately to cargo damage in an accident involving the allegedly unseaworthy vessel). But in the Greek court litigation the Plaintiff also asserted causes of action for alleged violations of Greek consumer protection laws and certain international treaties.

This District Court judge, having no specific federal appellate guidance, adopted a functional approach, seeking to determine which elements of the causes of action pleaded in the Greek Action would necessarily be determined by the arbitral tribunal when it would eventually decide the negligent misrepresentation claim.  The Court did not dwell on the theme of the pro-arbitration “policy” in federal arbitration jurisprudence, but in this approach it was evident that the Court was striving to protect the exclusivity of the arbitrators’ jurisdiction over factual issues involved in the misrepresentation claim. The consequence of the Court’s functional analysis in this case was that prosecution of the treaty-based causes of action in the Greek litigation was enjoined, as those causes of action embraced essentially the same legal and factual elements as the arbitrable negligence claim — the existence and breach of a duty to act with reasonable care and diligence in providing a certification of the seaworthiness of the ship. But the cause of action under the Greek consumer protection law, found to be essentially a strict liability statute dependent only on the falsity of the statement and the status of the claimant as a “consumer,” was held to be in a different category. Whereas the arbitral tribunal would not have occasion to address the status issues involved in consumer protection claim, the arbitration was deemed not dispositive of that claim, and its prosecution was not enjoined.

Given the shortage of definitive appellate guidance, this painstaking District Court decision is likely to be an important reference point in future pro-arbitration anti-suit injunction litigation. We may also expect to see heightened complexity in such disputes, with conflicting expert opinions on foreign law submitted to persuade the U.S. court concerning the essential elements of foreign law causes of action in a foreign court. We may also look forward to such issues arising before arbitral tribunal, with the tribunal invited to issue its own anti-suit injunction as a provisional measure in the form of a partial final award that could be immediately confirmed by a court (perhaps indeed the court in which the foreign litigation is pending). Thus it is a good thing for U.S. and non-U.S. arbitrators who sit on U.S.-seated tribunals to be familiar with the China Trade anti-suit injunction jurisprudence.