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Inside ADR: April 2018

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Inside ADR: April 2018

Source: Inside ADR
Date: April 2018

Statute of Limitations in Arbitration Agreement Unenforceable for FLSA Claims

Castellanos, et al., v Raymours Furniture Company, Inc.
United States District Court, E.D. New York

Castellanos and fellow employees (plaintiffs) brought a putative class action against their employer Raymours, alleging violations of the Fair Labor Standards Act (FLSA). All plaintiffs were bound by an Employee Arbitration Program, which required arbitration of any employment or compensation related claim. The EAP established a 180-day statute of limitations (SOL) for asserting a claim; contained a class action waiver; and included a provision that disputes about enforceability were for a court to decide. Raymours moved to compel arbitration, strike the class allegations and dismiss the complaint. Plaintiffs opposed the motions, asserting that the SOL provision was unenforceable and should be severed.

The United States District Court, Eastern District in New York granted the motion in part and denied the motion in part. Having determined that the SOL argument concerned enforceability rather than procedure and was in the purview of the Court, the Court found the SOL period unenforceable. The FAA’s mandate to enforce arbitration agreements according to their terms holds true for claims that allege a violation of a federal statute unless it has been overridden by a “’contrary congressional command.’” The EAP’s SOL did just that. The FLSA is a uniquely protected statute with a two-tiered SOL – 2 years to bring a claim and 3 years if the violation is willful. The EAP’s SOL eliminated this intended distinction. By limiting the time frame, the EAP SOL also limited plaintiffs’ recovery since plaintiffs may recover damages as far back as the SOL reaches under the FLSA. The Court found that the EAP’s SOL operated as a waiver of the plaintiffs’ rights to pursue the full amount of damages provided by the FLSA and severed the provision. Given the clear class action waiver in the EAP, the Court struck the class allegations and stayed the action while pending arbitration of the individual claims.

Provision for De Novo Review of Arbitration Award Unenforceable and Material

Citizen Potawatomi Nation v. State of Oklahoma
United States Court of Appeals, Tenth Circuit

Oklahoma and Citizen Potawatomi Nation (the Nation) entered into a Tribal-State gaming compact (the Compact). Part 12 of the Compact called for arbitration of disagreements arising under the Compact’s provisions; it also provided that either party could bring an action against the other in federal district court for de novo review of the arbitration award. When the OK Alcohol Beverage Laws Enforcement Commission (ABLE) initiated proceedings against the Nation for selling alcohol on Sundays in violation of an OK statute, the Nation asserted that arbitration was the only way to resolve this licensing dispute. OK filed a motion to dismiss, arguing that regulatory disputes should be resolved through administrative proceedings, not arbitration. The arbitrator refused to dismiss the demand, conducted a hearing, and issued an award in favor of the Nation. The Nation moved to enforce the arbitration award and OK moved to vacate, asserting that the arbitrator exceeded his authority and that it was entitled to de novo federal court adjudication on the factual and legal issues of the arbitration. The court enforced the award and concluded that OK’s argument for de novo review was foreclosed by the Supreme Court decision in Hall Street Associates, which provides that parties to an arbitration agreement cannot contract for any review other than the narrow review set out in §10 and §11 of the FAA. OK appealed.

The United States Court of Appeals for the Tenth Circuit remanded to the U.S. District Court to vacate the arbitration award. The Court focused on how to treat the de novo provision given the decision in Hall. The Nation asserted that the provision should be excised from the Compact, leaving intact the parties’ binding obligation to arbitrate. OK asserted that the de novo review provision was integral to the parties’ agreement to arbitrate disputes arising under the Compact and that the Court should sever the entire provision. The Court looked to the language of the agreement to decide whether the provision was a material aspect of the parties’ agreement to engage in binding arbitration – and determined that it was and should be severed. First, Compact Part 12(2), the provision establishing binding arbitration, specifically limited that requirement to the availability of binding arbitration, as set out in Compact 12(3). Second, the Compact linked the parties’ waivers of sovereign immunity to the kind of judicial review available, making clear that the parties’ waiver of sovereign immunity was only for the purpose of the type of de novo review contemplated in 12(3). Given the importance of immunity as an aspect of sovereignty, the purposeful waiver made clear that the availability of de novo review was a material aspect of the agreement to arbitrate.

No Arbitration Where No Agreement to Arbitrate

Matthew Warciak v. Subway Restaurants, Inc.
United States Court of Appeals, Seventh Circuit

Matthew Warciak’s mother had a T-Mobile cell phone plan that contained an arbitration clause. Matthew was an authorized user on his mother’s plan; however, he was not a party to the agreement with T-Mobile. In 2016, Matthew received a spam text message promoting a Subway sandwich. He sued Subway under federal and state consumer protection statutes. Subway moved to compel arbitration; however, because Subway and Matthew had never agreed to arbitrate, Subway based its motion on the agreement between T-Mobile and Matthew’s mother. The court applied federal estoppel law and granted Subway’s motion to compel arbitration. Matthew appealed.

The United States Court of Appeals for the Seventh Circuit reversed and remanded. Generally, a court can’t compel a party to arbitrate a dispute unless that party has agreed to do so. Here, Matthew and Subway did not agree to arbitrate. The Court applied state promissory estoppel principles to determine whether Matthew, a non-party to the arbitration agreement with T-Mobile, should be bound. In Illinois, a claim of estoppel exists if a person, by statements or conduct, induced a second person to rely, to his or her detriment, on the statements or conduct of the first person. Subway could not show detrimental reliance, so Matthew was not bound to arbitrate.