Inside ADR: May 2018
District Court Did Not Err in Staying State Court Action and Ordering Parties to Arbitrate
Aptim Corporation v. McCall 2018
United States Court of Appeals, Fifth Circuit
Shaw sued former employee, Dorsey McCall, in state court for allegedly violating non-compete and non-solicitation agreements. The agreements provided for arbitration in New Orleans and indicated that the employer may sue for injunctive relief without waiving the right to arbitrate the underlying dispute. Soon after, Aptim acquired Shaw’s capital services segment, which included rights to McCall’s employment agreement with Shaw. Aptim, without Shaw, sued in federal court to compel arbitration and stay the state court proceedings. Before the federal court ruled, the state court issued an order joining Aptim in the state court action, finding that Shaw and Aptim had waived their arbitration rights by initiating the state court action, and granting McCall’s motion to stay arbitration. One month later, the federal court ordered Aptim and McCall – and all those in privity - to arbitration and stayed the state court action. McCall appealed.
The United States Court of Appeals for the Fifth Circuit affirmed. McCall argued that the district court erred by: declining to abstain under Colorado River (424 US 800), compelling the parties to arbitrate, and enjoining the state court proceedings in violation of the Anti-Injunction Act. Colorado River reflects a “heavy thumb” in favor of exercising federal jurisdiction, a presumption overcome only by exceptional circumstances. Six factors are considered in determining exceptional circumstances. Applied here:
- assumption by either court of jurisdiction over a res: weighed against abstention because there was no res;
- relative inconvenience of the forums: was neutral because the courthouses were within the same geographic location;
- avoidance of piecemeal litigation: weighed against abstention since this is not applicable in the FAA context, given the strong federal policy favoring arbitration;
- the order in which jurisdiction was obtained by the concurrent forums: slightly favored abstention because numerous motions were filed in state court before the federal case began. Not so much progress had been made, however, that the federal court should stay its hand;
- to what extent federal law provides the rules of decision on the merits: weighed against. Though the FAA is left in large part to state courts, it represents federal policy to be vindicated by the federal courts where otherwise appropriate;
- the adequacy of the state proceedings in protecting the rights of the party invoking federal jurisdiction: was neutral.
Exceptional circumstances were not demonstrated.
Aptim did not waive its arbitration rights. Aptim did not substantially invoke the state judicial process – Shaw did. McCall argued that Shaw’s conduct was attributable to Aptim, an argument weakened by his assertion in state court that Aptim should not be substituted for Shaw. McCall did not demonstrate prejudice, since the hearings in which he participated were related to the injunctive relief that Shaw was contractually permitted to seek without compromising arbitration rights.
The court did not err in enjoining the state court proceedings under the re-litigation exception to the Anti-Injunction Act: the injunction was proper to defend the federal district court’s final judgment in the face of a non-preclusive state-court order.
Voluntary Dismissal of Claim After Arbitration Ordered and Case Stayed Not an Appealable Final Decision
Keena v. Groupon, Inc.
United States Court of Appeals, Fourth Circuit
In purchasing a voucher for a massage from Groupon, Keena entered into an agreement with an arbitration provision. When she was unable to redeem her voucher, Keena sought reimbursement and received Groupon Bucks, which can only be used for goods and services on Groupon’s site. Keena filed suit against Groupon on the basis of the reimbursement policy. Groupon’s motion to compel arbitration was granted and the court stayed all further proceedings in the lawsuit pending arbitration. Keena moved to amend the arbitration order, requesting the court to dismiss her complaint because she was concerned that the costs of the process would outweigh the recovery. In the alternative, Keena asked for the court’s approval for an interlocutory appeal of the Arbitration order. The Court declined to certify an interlocutory appeal, but agreed to amend the order and grant Keena’s request to dismiss the complaint. Keena appealed the dismissal.
The United States Court of Appeals, Fourth Circuit, dismissed the appeal, finding that Keena’s voluntary dismissal of her claim, after being denied interlocutory review of the order staying the action and compelling arbitration, was not an appealable final decision. To appeal from the Arbitration Order, Keena was obligated to participate in the arbitration proceedings and then secure a final judgment. The voluntary dismissal “tactic” that she pursued would contravene a recent Supreme Court decision in Microsoft v. Baker, and a long-settled provision that “no appeal lies from judgment of a voluntary nonsuit.” The Court distinguished this case from Green Tree, where the Supreme Court found that the district court’s dismissal of a complaint was an appealable final order. This case was different because it was compelled to arbitration and stayed – and the dismissal was voluntary, rather than initiated by the other side.
Sequential Confirmation of Partial Final Award and Cost Award in Arbitration Affirmed
EHM Productions (TMZ) v. Starline Tours of Hollywood
Court of Appeal, Second District, Division 2, California
Starline and TMZ contracted to operate a Hollywood bus tour. In 2012, several drivers filed a class action complaint against Starline, later amended to include TMZ. TMZ subsequently filed a demand for arbitration, alleging that Starline breached their contract when it refused to defend TMZ in the lawsuit. The arbitrator issued a partial final award in favor of TMZ, finding that Starline was obligated to defend TMZ and ordering Starline to pay TMZ’s costs through January 2015. The arbitrator further ordered Starline to pay TMZ’s costs going forward. Starline appealed the award under JAMS Optional Appeal Procedure. The panel affirmed the partial final award. TMZ filed a petition to confirm the award, which was granted. Three days later, the JAMS Panel issued a final award on appeal, granting TMZ $41,429.92 in costs. TMZ’s petition to confirm the cost award was granted and Starline appealed.
The Court of Appeal, Second District, Division 2, California affirmed. The Court rejected Starline’s argument that the incremental judgments violated the one judgment rule, citing Hightower, which suggested that an incremental award may be appropriate in situations where not all issues may be resolved at the time of the initial partial final award. The partial final award did not violate the Code of Civil Procedure 1283.4, which provides that an arbitration award shall include a determination of all the questions submitted to the arbitrator; 1283.4 did not preclude the arbitrator from making a final disposition of a disputed matter in more than one award. Confirmation of the cost award was not in error. Code of Civil Procedure 1285 provides that when presented with a petition to confirm an award, the court may confirm, correct, or vacate the award – or dismiss the petition entirely; the award was not subject to dismissal or vacation. The Court rejected Starline’s argument that TMZ should be estopped from seeking separate confirmation of the award and the cost award in sequential fashion when those awards co-existed before the judgment was rejected. Starline argued that TMZ should have presented the initial award and cost award simultaneously but provided no legal authority or suggestion that TMZ was not entitled to confirmation of fees because it did not do so.