Obligation to Arbitrate Disputes Upheld

Obligation to Arbitrate Disputes Upheld

      In a recent decision from the Kentucky Court of Appeals, there was upheld the obligation to arbitrate certain disputes with respect to allegations of negligence in a patient’s care and treatment. Specifically, there were rejected assertions that the agreement to arbitrate was procedurally and substantively unconscionable. Estate of Green Through Moore-Stuart v. LP Louisville South, LLC, No. 2018-CA-000738-MR, 2020 WL 3401188 (Ky. App. June 19, 2020).

      The patient, Alona, originally brought this action through her mother/guardian Kathleen Moore-Stewart. Alona herself passed away during the pendency of the appeal, whereupon her estate was substituted through its administratrix.

      At the time Alona was admitted to Signature Healthcare of South Louisville, an assumed name of LP Louisville South, LLC, her mother, Kathleen, signed an arbitration agreement. Eventually a complaint was filed against Signature alleging negligence in Alona’s care and treatment. Signature, in response, sought to have the matter arbitrated. That effort was opposed on the basis that the arbitration agreement was procedurally and substantively unconscionable, and as well that it could not be performed in that the identified arbitration provider, National Arbitration Forum (“NAF”), no longer existed. The trial court denied the motion to compel arbitration, and Signature appealed. In a prior decision, LP Louisville South, LLC v. Green, 2016 WL 1069034 (Ky. App. March 18, 2016), Court of Appeals held that the decision of the trial court was insufficient as to findings of fact and conclusions of law, and remanded the matter to the trial court for reconsideration. On that reconsideration, arbitration was ordered. An appeal thereof was denied on the basis that an order compelling arbitration is interlockutory in nature. Alona Green, through Her Mother and Legal Guardian Kathleen Moore-Stuart v. Signature Healthcare, LLC, No. 2016-CA-001206-MR (Ky. App. Feb. 16, 2017). Ultimately the arbitration did take place (although not before NAF) and the arbitrator found in favor of Signature. This appeal followed.

      With respect to the arguments that the agreement to arbitrate was procedurally unconscionable, allegations were made that Kathleen was misled as to its terms and implications and never provided a copy of the document for review by an attorney. The agreement to arbitrate contained a provision permitting it to be voided during the 30 days after it was executed. In her deposition, Kathleen admitted that she did not read the agreement to arbitrate before signing it. Ultimately the trial court’s findings of fact with respect to the process by which the arbitration agreement was entered into was upheld. It was ultimately found that there was no procedural unconscionability on the basis of unequal bargaining position in that entering into an agreement to arbitrate was not a condition to admission and that Alona “would have received the same quality of care and treatment irrespective of whether her mother signed [the agreement to arbitrate].” Further, as the agreement contained, a statement that entering into the agreement would waive the right to a jury, there could be no argument that its effect was concealed.

      Turning to substantive unconscionability and impossibility of performance, efforts were made to set aside the agreement on the basis that NAF no longer provides arbitration of disputes of this nature. It was also asserted that arbitration would be prohibitively expensive. Specifically:

Alona argues that because the agreement incorporates the NAF Code that can only be administered by the NAF, the arbitration agreement effectively requires the NAF as arbitrator. Because the NAF is unavailable to arbitrate the dispute, argues Alona, the agreement is impossible to perform. 2020 WL 3401188, *5.

This assertion was rejected on the basis that the agreement, in addition to referencing NAF, contained qualifiers such as “but if that is not possible” and “if possible.” Further, it provided “if the NAF process is no longer in existence at the time of the dispute, or the NAF is unwilling or unable to conduct the arbitration, then the arbitration shall be administered by another alternative dispute resolution association, pursuant to NAF rules if possible.” Id., *5-6. Hence, the agreement contemplated that the arbitration could take place other than through the NAF.

      As for the allegation that arbitration is “prohibitively expensive,” no evidence was submitted in support thereof, so the court set aside that argument.

Proving (or Not) the Existence of an Agreement to Arbitrate

Proving (or Not) the Existence of an Agreement to Arbitrate

      In the recent decision from the Federal District Court, it considered and ultimately rejected the defendant’s assertion that the plaintiff had agreed to arbitrate all disputes. That defendant was unable to prove a copy of the signed agreement to arbitrate and the testimony it solicited was internally inconsistent as to whether or not such an agreement would have been put in place. Tassy v. Lindsay Entertainment Enterprises, Inc., Civ. Act. No. 3:16-CV-00077-TBR, 2019 WL 1455797 (W.D. Ky. April 2, 2019).

      Tassy, on behalf of herself and others similarly situated, sought to bring a class action against Lindsay Entertainment Enterprises, Inc. on the basis of her misclassification as an independent contractor in contrast to being an employee. In response to the action, Lindsay asserted that Tassy was subject to an arbitration agreement. She denied that allegation, and the trial court conditionally certified the FLSA class. At a subsequent hearing, Lindsay proffered the testimony of three individuals to support that Tassy had entered into an agreement to arbitrate. The court framed the debate as follows:

At least regarding this threshold issue, the parties’ arguments are not complicated.  Tassy claims that she never signed an agreement containing an arbitration clause. On the other hand, Lindsay Entertainment Enterprises claims that she did.  Lindsay Entertainment Enterprises [a “gentleman’s club”] claims that pursuant to its standard practice, prior to working, all their dancers [of which Tassy was one] sign lease agreements that contain an arbitration clause. However, Lindsay Entertainment Enterprises is unable to produce such paperwork for Tassy because it was allegedly lost in a flood caused by a rusted-out water heater in the backroom where Tassy’s paperwork was stored. Lindsay Entertainment Enterprises claims further that, even if Tassy never signed the lease agreement containing the arbitration clause, Tassy accepted the terms of that lease agreement by acting in accordance with the agreement’s terms and continuing her employment.

2019 WL 1455797, *2 [bracket language added].

      The court noted as well that while there is a strong presumption in enforcing arbitration agreements, that presumption is not applicable in determining whether, in the first place, there exists an agreement to arbitrate. The court noted as well the rule that a contract is enforceable only if both parties agreed to be bound thereby.

      Parsing the testimony of those individuals called by Lindsay, the court noted a number of inconsistencies as to their testimony including when the alleged meetings took place, when in the hiring process the paperwork is completed and the failure to demonstrate that, at the time the alleged paperwork was completed, that it contained an agreement to arbitrate. The three persons called upon were not able to demonstrate that Lindsay had a standard business practice as to the completion of the paperwork and the hiring process. Ultimately:

The defendants were required to make a prima facia case for the existence of an arbitration agreement. For the reasons detailed above, they have not. ….  Ultimately, after weighing all the evidence, the Court finds that Lindsay Entertainment Enterprises has failed to make out a prima facia case for the existence of an arbitration agreement between itself and Tassy. Id., *5.

      The court would go on to reject the notion that by continuing to work, Tassy agreed to arbitrate any disputes. Rather, while in certain circumstances an unsigned arbitration agreement may be enforceable, the existence of various workplace rules and regulations “provide no indication that [Tassy] was ever made aware the one of those policies was an agreement to arbitrate.”

      The court concluded by addressing the decision rendered in Northern Kentucky Area Dev. Dist. v. Snyder and recently approved Kentucky Senate Bill 7, noting:

Finally, the Court takes due note of Tassy’s Notice of Supplemental Authority. The Court is aware of the Supreme Court of Kentucky’s recent holding in Northern Kentucky Area Dev. Dist. v. Snyder, No. 2017-SC-000277-DG. Tassy was correct—at the time—to bring such authority to the Court’s attention. However, since Northern Kentucky Area Dev. Dist. v. Snyder, Kentucky State Senate Bill 7, which amends KRS 336.700 and will apply both prospectively and retroactively, was signed into law on March 25, 2019. It effectively nullifies the Supreme Court’s holding in Northern Kentucky Area Dev. Dist. v. Snyder.

Id.

Evidentiary Hearing to Determine Whether There Was an Agreement to Arbitrate

Evidentiary Hearing to Determine Whether There Was an Agreement to Arbitrate

Consequent to a recent decision, the defendant will be required to respond to certain discovery request so that there can be a substantive ruling as to whether the named plaintiff, on behalf of an as of yet uncertified class, is otherwise obligated to arbitrate the dispute. Tassy v. Lindsay Entertainment Enterprises, Inc., Civ. Act. No. 3:16-CV-00077-TDR, 2018 WL 1702335 (W.D. Ky. April 6, 2018).

At its core, this dispute involves whether or not there existed a valid agreement to arbitrate disputes. The question was whether the individual was properly classified as an independent contractor versus an employee. If classification should have been as an employee, there is a claim for failure to pay appropriate wages as mandated by federal law.

Tassy, an individual, on her behalf and on behalf of similarly situated persons, sought to bring a class action to resolve this dispute. In response, Lindsay Entertainment asserted that Tassy was bound by an agreement to arbitrate any disputes. Lindsay Entertainment could not, however, produce a copy of the allegedly signed agreement to arbitrate. In this dispute, the Sixth Circuit had directed that the District Court “‘summarily’ determine whether the parties had agreed to arbitrate.” Lindsay Entertainment wanted to rely upon testimony from Scott Lindsay, owner of Lindsay Entertainment, and another employee to that effect. Tassy, in part to collect testimonial evidence to the contrary, sought from Lindsay Entertainment a listing of all of the employees/independent contractors for a particular period, including their dates of service, last known address, last known phone number, etc. Lindsay Entertainment objected. That objection was overruled. To that end, the court wrote:

Allowing parties to conduct limited discovery prior to holding an evidentiary hearing, and for the purpose of determining the validity of arbitration agreements, is an accepted practice.

2018 WL 1702335,*4.

Still, Tassy was not granted free range but rather “discovery shall be limited to only the information necessary to prepare for the upcoming evidentiary hearing regarding whether there exists a valid agreement to arbitrate.”

Agreement to Arbitrate Disputes Did Not Survive Contract Termination

Agreement to Arbitrate Disputes Did Not Survive Contract Termination

      In a recent decision by the Sixth Circuit Court of Appeals, it was held that an agreement to arbitrate disputes did not survive the termination of the agreement that contained that provision. On that basis, there being no agreement to arbitrate disputes, an arbitration decision was essentially vacated with, presumably, the parties now left to litigate their dispute in court. Gridsmart Technologies, Inc. v. Marlin Controls, Inc., Case No. 17-5121, 2017 WL 3084419 (6^th Cir. July 20, 2017).

      Under the subject contract, Marlin Controls, Inc. had the exclusive right to distribute certain traffic-signal equipment manufactured by Gridsmart Technologies, Inc. On June 30, 2015, Gridsmart terminated that distribution agreement effective July 31, 2015. Thereafter, they attempted to reconcile how certain outstanding orders, delivered to Marlin on September 30, 2015, would be addressed. They were unable to come to agreement as to that point:

According to Marlin, it’s construction contracts did not pan out, so it sent the equipment for those projects back to Gridsmart. Gridsmart then demanded full payment for the returned equipment. Gridsmart argued that the returned equipment had been specifically made for Marlin and was obsolete by the time Marlin returned it.

      Ultimately, Gridsmart would file a claim with the American Arbitration Association. Marlin refused to participate in that arbitration. Ultimately, the arbitrator granted summary judgment to Gridsmart. Gridsmart then sought to enforce that arbitration judgment in court. After removing the case to federal court, Marlin moved that the district court vacate the arbitration award, which it ultimately did. Gridsmart then appealed to the Sixth Circuit Court of Appeals. It would determine that, under both the language of the agreement itself and the Tennessee Uniform Commercial Code, there was no agreement to arbitrate post-termination disputes.

     Section 6.2 of the subject Distribution Agreement provided (italics added by the court):

Effect of Termination on Unfulfilled Orders.  If at the time this Agreement is terminated for any reason by either Party, all orders for Products made by Distributor or the Company, that have not been fulfilled and/or shipped (whether partial or full) by the company to Distributor shall be fulfilled by mutual agreement between the Parties; provided, however, should Distributor terminate this Agreement for any reason within sixty (60) days of placing an order for Products, Distributor shall remain liable for payment of such order to the extent fulfilled by the Company unless the Company provides written notice that the order is deemed canceled.

      Applying this language, the court found:

Since the orders at issue were pending at the time the Distribution Agreement was terminated, those orders were subject to a different mutual agreement than the Distribution Agreement. Under the plain language of the contract, absent a second contract or new mutual agreement, the parties ceased to have any rights or obligations concerning the orders at issue.

      Also, applying the Tennessee UCC and specifically Tenn. Code Ann. § 47-2-106(3), which provides “all obligations which are still executory on both sides are discharged [upon termination of a contract] but any right based on prior breach or performance survives.”, the court held:

The Tennessee UCC instructs that once the Distribution Agreement was terminated, the parties’ rights and obligations, including the obligation to arbitrate disputes, as to those orders were also terminated.

      In response to suggestions that the agreement to arbitrate should survive termination, the court noted that in other instances particular provisions of the contract were identified as surviving termination. As the arbitration clause was not so identified as surviving termination, there was further support for the court’s to decision.

      The guidance of this case is rather clear. If there is an agreement to arbitrate disputes during the pendency of the contract, and it is desired that that right/obligation survive the contract termination, the agreement needs to so provide.

US Supreme Court Holds That “Sacred” and “Inviolate” Right to Jury Trial is Subject to Waiver in Favor of Arbitration

US Supreme Court Holds That “Sacred” and “Inviolate” Right to Jury Trial is Subject to Waiver in Favor of Arbitration

      Last m onth, the United States Supreme Court issued an opinion reversing a decision of the Kentucky Supreme Court with respect to the enforcement of arbitration agreements. The Kentucky Supreme Court had held that certain agreements to arbitrate disputes arising out of care in nursing homes were not subject to arbitration because the powers of attorney, pursuant to which the admission documents were executed, did not specifically reference a right to enter into arbitration agreements on behalf of the principal. Rather, it held, that only a specific authority in the power of attorney to enter into arbitration would be effective to waive the “sacred” and “inviolate” right to a jury trial as enshrined in the Kentucky Constitution. The United States Supreme Court rejected that analysis, holding that an agreement to arbitrate could not be treated as different than any other agreement entered into on behalf of the principal pursuant to a power of attorney. Kindred Nursing Centers Limited Partnership v Clark, No. 16-32 (U.S. May 15, 2017).

       Under federal law and specifically the Federal Arbitration Act (the “FAA”), agreements to arbitrate disputes are fully enforceable on the same terms as is any other agreement. Put another way, courts are not allowed to single out agreements to arbitrate for special scrutiny or limitation. It may not do so directly and it may not do so indirectly. For example, in AT&T Mobility LLC v Concepcion, 563 U.S. 333, 342 (2011), the Supreme Court rejected a hypothetical law that declared invalid any contract that “disallow[ed.] in ultimate disposition [of the dispute] by a jury.”

      It was on that basis that the court struck down the Kentucky ruling, finding that its decision served “to safeguard a person’ ‘rght to access the courts and to trial by jury.’”.

      The Court also rejected the assertion that the FAA’ policy in favor of the enforcement of agreements to arbitrate should not apply with respect to the formation of the contract to arbitrate. In effect, while acknowledging that the FAA would require the enforcement of an agreement to arbitrate, they argued that the FAA did not apply to whether a contract to arbitrate had been entered into, that being exclusively a point of state contract law. The Supreme Court rejected this rule, finding:

A rule selectively finding arbitration contracts invalid because improperly formed fairs no better under the Act than a rule selectively refusing to enforce those agreements once properly made.

      This decision by the US Supreme Court is yet another in a line of decisions in recent years reinforcing the enforceability of agreements to arbitrate. Within the Commonwealth of Kentucky, the Supreme Court has clearly rejected the significant number of decisions in which, on a variety of bases, agreements to arbitrate nursing home and other healthcare disputes, those agreements having been entered into via powers of attorney, are invalid. In consequence, it should be expected that many of those disputes will now go to arbitration. There is, however, an additional cost that must be recognized. While the decedent's claim against the healthcare facility may now be resolved in arbitration, claims of spouses and children for consortium losses will continue to be litigated in state court, those claims not being subject to the decedent’s agreement to arbitrate.

The Off-Again, On-Again Limits on Arbitration Clauses in Nursing HomeAdmission Agreements

The Off-Again, On-Again Limits on Arbitration Clauses in Nursing Home
Admission Agreements

      There is in Kentucky a famous case dealing with the enforceability (or not) of an agreement to arbitrate disputes arising out of residency in a nursing facility. The name of that case, Ping v. Beverly Enterprises, Inc., 376 S.W.3d 581 (Ky. 2012), brings to mind the back-and-forth nature of a ping-pong match. This is a worthy analogy for certain recent developments in arbitration law.

      Earlier this year, the U.S. Department of Health and Human Services’ Centers for Medicare and Medicaid Services issued a rule that barred nursing homes from requiring patients to agree to arbitrate claims. As such, any patient claims would be resolved by lawsuits filed in court. While arbitration clauses pre-existing the regulation’s effective date (Nov. 28, 2016) would remain in effect and be enforceable, from the effective date of the rule, they could not be put in place.

        The rule is not long-lived. On November 7 a federal district court in Mississippi issued an injunction barring the enforcement of the new rule. But for this injunction, it would have gone in effect on November 28. Therefore, at least for the time being, nursing homes that receive either Medicare or Medicaid reimbursement (and there are very few that do not), may continue to include arbitration clauses in their admission documents.

Arbitration Award set aside on the Grounds that the Right to Arbitrate had been Waived

Arbitration Award set aside on the Grounds that the Right to Arbitrate had been Waived

      In a decision delivered by the Kentucky Court of Appeals, it held that an arbitration award would be set aside because, prior to reference of the action to arbitration, the plaintiff had taken actions inconsistent with bringing a claim in arbitration, including filing an action in Circuit Court.  Imhoff v Lexington Public Library Board of Trustees, No. 2014-CA-000385-MR, 2016 WL 192071 (Ky. App. Jan. 15, 2016).

      Imhoff had been the executive director of the Lexington Public Library, a position she filled pursuant to a written employment agreement.  The last of those agreements was entered into in June, 2007 for a period extending through June 30, 2011.  It provided that the agreement could be terminated by either party at any time upon 30 days prior written notice.  Eventually, the Board did give Imhoff 30 days’ notice of her termination, effective August 15, 2009.  Her salary was paid for a further 30 days, after which time the Library Board advised Imhoff that all of its financial obligations to her had been satisfied.  In response, Imhoff prepared a draft complaint and forwarded it to the Library Board, and they board engaged in an ultimately unsuccessful mediation.  A gender discrimination claim was pursued through the EEOC, which issued a right to sue letter.  Approximately a year after receiving notice of her termination, Imhoff filed suit against the Library Board, alleging it had breached the contract “by” failing to pay her salary and benefits through June 30, 2011, the employment agreement’s otherwise applicable termination date.  She also filed claims for defamation and gender discrimination, ultimately seeking both a jury trial and damages of approximately $5 million.  After the Library Board answered the complaint and sought dismissal of certain claims on grounds including sovereign immunity and failure to exhaust administrative remedies, Imhoff took part in additional court proceedings including a pretrial conference and the setting of a briefing schedule with respect to Library Board’s motion to dismiss.

      Some six weeks later, Imhoff gave notice that she intended to submit the dispute to arbitration pursuant to the arbitration clause in her employment agreement.  The Library Board argued against the referral of the dispute to arbitration, asserting that her conduct to date in the litigation constituted a waiver of her right to arbitrate.  Still, the Fayette Circuit Court stayed the action pending its resolution through arbitration, reserving the question as to whether her defamation and discrimination claims were subject to the arbitration agreement.  After ultimately dismissing the claim for defamation and granting summary judgment with respect to her allegation gender discrimination, only the claim for breach of contract was referred to arbitration by the Circuit Court.  Finally, nearly 3 years after the effective date of her termination, Imhoff filed a demand for arbitration with the American Arbitration Association.  Some seven months later, the arbitration panel would by majority decision hold that Imhoff’s employment agreement had a four-year term, and that the Library was obligated to pay her through the end of that term.  It would ultimately determine she was owed $907,761.55 including lost salary and other benefits, prejudgment interest and consequential damages.  The Library was also ordered to pay nearly $20,000 in arbitration costs.  

      Imhoff then filed a motion with the Fayette Circuit Court seeking to enforce the decision of the arbitration panel.  More than eight months later, the Fayette Circuit Court would hold that because of sovereign immunity enjoyed by the Library Board, the arbitration panel lacked the capacity to award consequential damages or pre- or post-judgment interest, and on that basis vacated a portion of the arbitration award.  It did, however, confirm $256,940.62 of the award, Imhoff’s unpaid salary for the remainder of the four-year term.  Imhoff would appeal on the basis that the Circuit Court should not have set aside those portions of the arbitration decision favoring her, asserting, in effect, that the Circuit Court had no authority to review the substance of that decision.  The Library Board in turn appealed, that the dispute should never have been referred to arbitration to begin with, arguing based on its sovereign immunity and Imhoff’s waiver of the right to arbitrate.  Imhoff’s response alleged that the Library Board lacked the capacity to, at this late date, argue arbitration should not have taken place.

      The Court of Appeals, as had the trial court, rejected the notion that the Library Board was late in appealing the referral of the case to arbitration. While the Library Board did not appeal the arbitration panel’s finding on breach of contract, the appeal of substantive arbitration awards being almost never permitted, it appealed the fact that the arbitration took place. In response to Imhoff’s argument that the appeal was untimely, the Court explained that while an order denying arbitration may be immediately appealed, an order granting arbitration may not be appealed until after the arbitration takes place, and after the trial court confirms the arbitration award, and reduces it to a judgment. Only then could the Library Board challenge the arbitrator’s decision, and as such, its appeal was timely.

      From there the Court of Appeals would hold that Imhoff had waived the contractual right to arbitrate her termination, which it reaffirmed is a question of law to be resolved by the court. Slip op. at 10, citing American General Home Equity, Inc. v. Kestel, 253 S.W.3d 543 (Ky. 2008). Working from there, the Court of Appeals explained why Imhoff’s right to arbitrate had in this instance been waived:

Imhoff was terminated from her position with the library effective August 15, 2009. She was aware of the arbitration clause included in the employment agreement since the terms of that agreement lie at the very heart of this dispute. Nevertheless, Imhoff sought to pursue legal action against the library board. She forwarded a draft complaint to the library board shortly after her termination. And she pursued an administrative claim through the Equal Employment Opportunity Commission to secure the right-to-sue letter from the agency. On July 13, 2010, Imhoff did, in fact, commence the threatened legal action against the library board in Fayette Circuit Court. In her complaint, Imhoff did not refer to the arbitration provision contained in the contract. Instead, she demanded a trial by jury. Imhoff’s decision to invoke judicial process is clearly at odds with an intention to assert her arbitration rights. Slip op. at 11.

      In effect, the claim for breach of contract will now be litigated as if the arbitration had never taken place:

It was incumbent upon the [circuit] court to set aside its earlier order compelling arbitration to avoid the arbitration proceedings in their entirety, and to proceed with the litigation of this case in the judicial forum that Imhoff herself had elected. Slip op. at 14.

     This is the second decision in as many months in which the Court of Appeals has set aside proceedings that have, apparently, otherwise addressed the substance of the dispute between the parties. In the Adcomm case decided in December, 12 years of litigation was set aside on the basis that the initial lawsuit should not have been brought, as the plaintiff lacked authority to do so. In that case, the trial court was presented with the argument that the suit lacked authority, but it never ruled upon that motion. CLICK HERE FOR A LINK for my review of that decision. In this instance, while less egregious, the trial court’s failure to find waiver based upon the facts relied upon by the Court of Appeals drove both the plaintiffs and defendants to engage in a “wasted” exercise of arbitration.

An Amendment Too Far: Arbitration Provision Added to Amended Operating Agreement Not Be Enforced Against Objecting Members

An Amendment Too Far: Arbitration Provision Added to Amended Operating Agreement Not Be Enforced Against Objecting Members

      One of the great questions with respect to operating agreements that may be amended with less than unanimity is the maximum degree to which either new obligations or waivers of rights may be imposed upon any objecting members. The recent decision out of Ohio held that, even if one of the members had the capacity to amend the operating agreement, they did not have the authority to impose on the other members an obligation to arbitrate disputes. Leight v. Osteosymbionics, L.L.C., No. 102869, 2016 WL 193511 (Ohio Ct. App. Jan. 14, 2016).

      Osteosymbionics, L.L.C. was formed in 2006 by Cynthia Brogan, Troy Leight and John Nail. Brogan was the 55% member of the LLC. The operating agreement contemplated, with the exception of certain matters that could be approved by the board of managers, that the agreement could be amended by a member vote, and it was specifically provided that a majority vote of the members could affect an amendment of the operating agreement. Brogan, acting unilaterally, purported to adopt an amended and restated operating agreement that appointed her the sole manager of the company and requiring that all members arbitrate any disputes. Leight and Nail thereafter filed suit against the LLC and Brogan asserting a variety of claims including breach of fiduciary duty. Brogan would argue that those claims had to go to arbitration.

      Focusing upon the question as to whether the parties had agreed to arbitrate their dispute, and qualifying their analysis to “Under the unique facts of the instant case,”, the court would ultimately answer “no”. Relying on the decision rendered in Maestle v. Best Buy Co., 2005-Ohio-4120, notwithstanding the fact that Brogan might have had the right to unilaterally amend the operating agreement, there was no meeting of the minds as to an agreement to arbitrate. Ultimately:

Interpreting the meaning and scope of § 9.2 of the OA is giving Brogan unfettered authority to amend the a amounts to the assumption the Leight and Nail agreed ahead of time to be bound by any change Brogan chose to make. This is particularly concerning because there is no procedural or notice provision in the OA that the majority Members - in this case, Brogan - must follow before amending the OA. See generally Badie v. Bank of AM., 79 Cal. Rptr. 2d 273, 281 (1998) (California cases “do not support the proposition that a party with the unilateral right to modify a contract has carte blanche to make any kind of change whatsoever as long as the specified procedure is followed.”)

      It is hard to know how much further this case may be extended. Arbitration involves the waiver of the otherwise applicable constitutional right to access the courts, to appeal, etc., and is therefore markedly different from, for example, modifying decision making process or economic terms.

US Supreme Court Allows New Jersey Decision Restricting Arbitration Clauses to Stand

US Supreme Court Allows New Jersey Decision Restricting Arbitration Clauses to Stand

      Yesterday, the United States Supreme Court decided it would not review a case from New Jersey with respect to required wording of arbitration clauses.  U.S. Legal Group, L.P. v. Atalese.

       This case arose out of a dispute between a law firm that specializes in debt counseling and one of its clients. When that dispute arose, the firm sought to refer it to binding arbitration.  The client objected on the basis that the arbitration clause did not expressly advise her that by agreeing to arbitrate she was giving up the right to litigate the dispute in court.  At both the trial court and the New Jersey Court of Appeals, it was held that the arbitration clause was binding and effective, and there exists no rule requiring that an arbitration clause expressly explain that The right to a court trial is waived.

      Perhaps surprisingly, the New Jersey Supreme Court did not agree with that rule. Rather, it held that the arbitration clause was itself insufficient in that it did not explain that, by agreeing to arbitrate any dispute, The parties to the agreement are waiving the right to a court trial.  Specifically:

[n]owhere in the arbitration clause is there any explanation that plaintiff is waiving her right to seek relief in court for a breach of her statutory rights….

The provision does not explain what arbitration is, nor does it indicate how arbitration is different from a proceeding in a court of law. Nor is it written in plain language that would be clear and understandable to the average consumer that she is waiving statutory rights.

On that basis it was held that there was no agreement to arbitrate. Atalese v. U.S. Legal Services Group, L.P., 99 A.3d 306 (N.J. 2014)

     An appeal was filed with the Supreme Court on the basis that the New Jersey Supreme Court had inappropriately imposed an additional condition upon arbitration clauses in violation of the rule that agreements to arbitrate should be enforced just as are any other agreements.  As there is no legal requirement to explain the legal impact of other provisions of the agreement, it was argued, there cannot be a separate requirement to explain the implications of an agreement to arbitrate.

      The Supreme Court, however, determined that it would not review the ruling of the New Jersey Supreme Court. Hence, that remains the law in New Jersey, and it may, at least for now, be argued it is what the law should be in other jurisdictions.

Kentucky Supreme Court Finds No Agreement to Arbitrate Disputes; Document Architecture Matters

Kentucky Supreme Court Finds No Agreement to Arbitrate Disputes;
Document Architecture Matters

      In a decision rendered last month, the Kentucky Supreme Court held that students enrolling at Daymar College did not agree to arbitrate their disputes with the college.  In part this decision was based on the curious architecture of the agreement at issue.  Dixon v. Daymar College Group, LLC, __ S.W.3d ___, 2012-SC-000687-DG, 2015 WL 1544450 (Ky. April 2, 2015).

      Certain students brought action against Daymar based on allegations of fraud in the enrollment process, breach of contract, etc.  They also sought class action status.  Daymar sought to refer the complaints to arbitration.  In opposition to their efforts the students asserted, inter alia, that there was no agreement to arbitrate. 

      Students enrolling at Daymar completed a variety of forms.  One of those forms contained, on its reverse side, an “agreement” to arbitrate all disputes.  The signature block appeared, however, on the front of the document, and it never provided above the signature that the language on the reverse was incorporated by reference. 

      The trial court denied arbitration.  On appeal, the Court of Appeals reversed that decision.  That ruling is reviewed HERE IS A LINK.  The Supreme Court would reverse the Court of Appeals and affirm the decision of the trial court.  Ergo, no enforceable agreement to arbitrate.

      Kentucky has a statute, KRS § 446.060, which provides that the signature of a party to an agreement must appear at or near the end of the agreement, a requirement applicable only to agreements which must be in a signed writing.  While an agreement to arbitrate need not be in a signed writing, the programs for which the students enrolled all exceeded a year in length.  As such the enrollment documents needed to satisfy the Statute of Frauds (KRS § 371.010(7)).  From there KRS § 446.060 was applicable, and the agreement to arbitrate on the reverse of the signed document would be effective only if it was incorporated by reference above the signature block.  The Supreme Court found there to be no such incorporation.  Further, each student’s acknowledgement that they had read the reverse could not be extended into an agreement to be bound by the terms set forth on the reverse.

Sanctions Awarded For Interference with Arbitration

Sanctions Awarded For Interference with Arbitration

 

      A recent decision from the Court of Appeals Affirmed an award of sanctions against a person who interfered with an arbitration.  Cher-o-kee Truckbodies v. E.S.T. Tool & Machine, Inc., No. 2013-CA-001062-MR (Ky. App. March 27, 2015).

      Susan Cherry had an undefined relationship with Cher-o-kee.  In turn, Cher-o-kee and A.S.T. had a contractual dispute which was per the agreement referred to arbitration.  The arbitration took place, with $26,587.85 awarded to Cher-o-kee and $9,879.79 to E.S.T., yielding a net of $16,708.06 to Cher-o-kee.  Cher-o-kee moved for a new hearing, and both it and E.S.T. submitted arguments (presumably written).

      Before the arbitrator could rule as to the motion for a new hearing, Cherry sent an ex parte letter to the arbitrator insisting that he disqualify himself on the basis that in 2003 he “had donated five hundred dollars to the Attorney General campaign of Greg Stumbo, father of [E.S.T.’s] attorney.” The decision makes clear that Cherry’s then attorney was unaware of the letter.  The arbitrator contacted the KBA Ethics Hotline, who determined that the arbitrator did not have a conflict of interests.  Unhappy with that determination, Cherry again ex parte wrote to the arbitrator “demand[ing] to know if the arbitrator had any other connections to the father of opposing counsel.”  In response the arbitrator recused himself “because he did not want to continue dealing with Cherry’s persistent accusations.” 

      E.S.T. moved the Court to sanction Cherry under Rule 11, seeking the attorney fees and costs it had incurred in the arbitration.  It also sought dismissal of the action, or to approve the findings and award made by the arbitrator.  The trial court (i) awarded E.S.T. the monetary relief (attorney fees and expenses) it had requested, and (ii) declined to award Rule 11 sanctions.  In addition, the trial court approved the withdrawal of Cherry’s attorney.

 

      On appeal, Cherry proceeded pro se; how she was able to do so when a non-attorney may not represent a legal entity is not discussed.  While she argued that her conduct did not rise to the standard required for Rule 11, the Court of Appeals noted that was not the question.  Rather, the point was whether she “abused the process of Court-ordered arbitration.”  Citing Gentry v. Gentry, 798 S.W.2d 928, 938 (Ky. 1990), it was observed that a court has “wide discretion” to award fees “when a party’s ‘conduct and tactics … waste the court’s and attorney’s time.’”  Finding that an arbitrator is equivalent to a judge and that ex part communications are improper, it was observed that if Cherry thought the arbitrator’s determination was incorrect her recourse was review of the award by the courts.

We conclude that by persisting in circumventing our legal procedures, Cherry is responsible for the prolonged post-arbitration proceedings, comprising nearly three years.  Therefore the trial court did not abuse its discretion when it awarded fees to E.S.T.

Court of Appeals Upholds Agreement to Arbitrate Employment Dispute

Court of Appeals Upholds Agreement to Arbitrate Employment Dispute

 

In a decision rendered earlier this month by the Kentucky Court of Appeals, it determined that an employee's agreement to arbitrate disputes with his employer would be enforced. Gatliff v. Firestone Industrial Products Company, LLC No. 2013-CA-001568-MR (Ky. App. February 6, 2015). 

 

Gatliff charged her employer, Firestone Industrial Products Company, LLC, with violation of the Kentucky Civil Rights Act consequent to her termination from employment after completing gender reassignment surgery and allegations of creating a hostile work environment. The suit was initially removed to federal court, but then remanded to the Circuit Court on the basis that the claimed damages were not sufficient to meet the requirements of diversity jurisdiction. Firestone then sought to compel arbitration of the dispute, an effort which Gatliff resisted.

According to the Court of Appeals, Gatliff had agreed to arbitrate all disputes in a series of three separate documents. The first was signed when she applied for a full-time position with Firestone in 1998. Also in 1998, she acknowledged receipt of a copy of the Firestone employee dispute resolution policy, it containing an agreement to arbitrate. She is well, in 2003, signed a document referencing the employee dispute resolution policy and acknowledging that she had had opportunity to review it. Objecting to the enforcement of these agreements against her, Gatliff asserted that (i) no meeting of the minds occurred; (ii) no provision stated that she was waiving her right to a jury trial; (iii) no consideration existed for the 2003 agreement as to the revised employee dispute policy and (iv) the agreement is so unconscionable.

 

In support of the assertion that no meeting of the minds occurred, Gatliff claimed that “she did not read the plans referred to in the acknowledgments and the acknowledgments did not contain a jury waiver provision." The Court of Appeals rejected this assertion. Rather, the Court found that the documents signed by Gatliff referred to the dispute resolution plan and represented that the signatory acknowledged having had opportunity to review the plan, relying in part on the rule that "a signor to a contract is presumed to know the contents of the contract.”  Slip. Op. at 8 (citation omitted). 

 

The Court of Appeals stated that arbitration agreements need not contain an explicit waiver of the right to a jury trial as that waiver is an obvious consequence of an agreement arbitrate. As to the argument for a lack of consideration, the court, in reliance upon Spears v. Carhartt, Inc., 215 S.W.3d 1 (Ky. 2006), held that continued employment is itself sufficient consideration to support an agreement to arbitrate. In connection with, the court did not discuss the June, 2014 ruling of the Kentucky Supreme Court in Charles T. Creech, Inc. v. Brown, wherein it was determined that noncompete agreements require consideration to the employee (i.e., something of value) above and beyond continued employment. Seeking to avoid the agreement on the basis that it does not require that arbitration take place in Kentucky (see Ally Cat, LLC v. Chauvin, 274 S.W.3d 451, 455 (Ky. 2009)), the Court of Appeals relied upon the fact that the agreements with Firestone provided that they would be interpreted under the Federal Arbitration Act, and as the Federal Arbitration Act imposes no requirement as to the locale of the arbitration.  Likewise rejected were assertions of substantive unconscionability based on the failure to agree she would be provided a free record of the proceedings and for attorney fees and costs. The Court’s rejection of these challenges is likely dicta in that first the Court found that they were not timely in that they were not raised to the trial court below.