Editors

Dustin P. Smith

Hughes Hubbard & Reed LLP
One Battery Park Plaza
New York, NY 10004
(212) 837-6126
[email protected]
www.hugheshubbard.com

Michael D. Rubenstein

Liskow & Lewis APLC
1001 Fannin Street, Suite 1800
Houston, TX 77002
(713) 651-2953
[email protected]
www.liskow.com

§ 1.1 Recent Bankruptcy Litigation Decisions

§ 1.1.1 United States Supreme Court

Ritzen Group, Inc. v. Jackson Masonry, LLC, 140 S. Ct. 582 (2020). The Ritzen Group, Inc. agreed to buy real property in Nashville, Tennessee, from Jackson Masonry, LLC.  The transaction was never consummated and Ritzen sued for breach of contract in state court.  Days before trial was set to begin, Jackson filed for bankruptcy protection under Chapter 11 of the Bankruptcy Code.  Section 362(a) of the Bankruptcy Code stayed the litigation.  Ritzen filed a motion in the bankruptcy court for relief from the automatic stay.  The bankruptcy court denied the motion.  The bankruptcy court, in the context of an adversary proceeding, found that Ritzen was in breach of the contract because it had failed to secure the financing by the closing date.  Accordingly, the bankruptcy court disallowed Ritzen’s proof of claim.  Thereafter, the plan of reorganization was confirmed and all creditors were enjoined from commencing or continuing any proceeding against the debtor on account of claims.  Following confirmation, Ritzen filed two separate notices of appeal.  First, Ritzen challenged the bankruptcy court’s order denying stay relief.  Second, Ritzen challenged the court’s resolution of its breach of contract claim.  The district court, acting as the appellate court of first instance, dismissed the first appeal as untimely pursuant to 28 U.S.C. § 158(c)(2) and Rule 8002(a) of the Federal Rules of Bankruptcy Procedure.  With respect to Ritzen’s appeal of the breach of contract claim, the district court rejected the appeal on the merits.  The United States Court of Appeals for the Sixth Circuit affirmed.

The Supreme Court granted certiorari to resolve the question of whether orders denying relief from the automatic stay are final and, therefore, immediately appealable under Section 158(a)(1).  Justice Ginsburg, delivering the opinion for a unanimous court, began by noting that a majority of the circuit courts and the leading treatises consider orders denying relief from the automatic stay as final, immediately appealable decisions.  The Court agreed.

Jackson argued that adjudication of a stay-relief motion was a discrete proceeding, whereas Ritzen argued that it should be considered as the first step in the process of adjudicating a creditor’s claim against the estate.  The Supreme Court agreed with the appellate court and Jackson that the appropriate “proceeding” is the stay-relief adjudication.  The bankruptcy court’s order ruling on that motion disposed of “a procedural unit anterior to, and separate from, claim-resolution proceedings.”  The Court noted that “[m]any motions to lift the automatic stay do not involve adversary claims against the debtor that would be pursued in another form but for bankruptcy.  Bankruptcy’s embracive automatic stays stops even non-judicial efforts to obtain or control the debtor’s assets.”  The Court reasoned that there was “no good reason to treat stay adjudication as the relevant ‘proceeding’ in only a subset of cases.”  Because the appropriate “proceeding” was the adjudication of the stay-relief motion, the bankruptcy court’s order conclusively denying that request was “final.”  It ended the stay-relief proceedings and left nothing more for the bankruptcy court to do.  Accordingly, the appeal was untimely.  The Court held that “the adjudication of a motion for relief from the automatic stay forms a discrete procedural unit within the embracive bankruptcy case.  The unit yields a final, appealable order when the bankruptcy court unreservedly grants or denies relief.”

§ 1.1.2 First Circuit

Mission Prod. Holdings, Inc. v. Schleicher & Stebbins Hotels, LLC (In re Old Cold, LLC), 976 F.3d 107 (1st Cir. 2020). In the most recent litigation connected to the bankruptcy proceedings of Old Cold, LLC (the “Debtor”)—notable for spawning the Supreme Court’s decision in Mission Prod. Holdings, Inc. v. Tempnology, LLC, 139 S. Ct. 1652 (2019)—Mission Product Holdings, Inc. (“Mission”), a licensee of certain of the Debtor’s intellectual property, challenged the ability of the Debtor’s only secured creditor (and DIP lender), Schleicher & Stebbins Hotels, L.L.C. (“S & S”), to foreclose on the assets remaining in the Debtor’s estate following a section 363 sale process.  In its decision, the First Circuit Court of Appeals held first that Mission’s failure to obtain a stay of the bankruptcy court order lifting the automatic stay did not moot the appeal before turning to the merits of Mission’s appeal.  The First Circuit then affirmed the bankruptcy court order on the merits, overruling Mission’s arguments that Mission’s petition for certiorari divested the bankruptcy of jurisdiction on the lift stay motion and that S & S had implicitly waived its lien on certain Debtor assets when it agreed to exclude them as part of its bid during the course of the section 363 auction.

In 2015, the Debtor moved to sell all of its assets at auction pursuant to section 363 of the Bankruptcy Code.  S & S, the Debtor’s DIP lender, agreed to be a stalking horse bidder, with authority from the bankruptcy court to credit bid pursuant to section 363(k).  After a competitive bidding process, S & S’s bid, which excluded certain cash assets of the Debtor, was declared the successful bid and S & S entered into an Asset Purchase Agreement (APA) with the Debtor.

In 2018, S & S filed a motion for relief from the automatic stay, to which the Debtor assented, seeking to recover the then-sole remaining asset of the Debtor’s estate—$527,292 in cash that had been excluded from the 363 sale—by foreclosing on its valid, first-priority, perfected liens on the Debtor’s assets that it had received as a DIP lender.  Mission objected, arguing that its then-pending petition for a writ of certiorari arising from a separate litigation related to the termination of certain exclusive and nonexclusive intellectual property licenses divested the bankruptcy court of jurisdiction to decide the stay relief motion because, if stay relief were granted, S & S would look to the assets of the estate, including the cash that was subject to S & S lien, to satisfy any potential judgment.  Second, it argued that S & S no longer had a security interest in that property because, as part of the auction and sale, S & S had supposedly agreed either to recontribute those assets back into the estate free and clear of its liens or to waive those liens as part of the bidding process.  The bankruptcy court granted the stay relief motion, overruling Mission’s objections.

Mission sought a stay of the relief order from the bankruptcy court pending its appeal, which the bankruptcy court granted in part, extending the automatic fourteen-day stay of such orders so that Mission could seek a further stay of the relief order from the BAP.  In November 2018, the BAP denied Mission’s request for a further stay, concluding that Mission had not shown a likelihood of success on the merits or irreparable injury absent relief.  Upon expiration of Mission’s stay pending appeal, S & S demanded the remaining cash from the Debtor, and the Debtor complied.  The BAP then affirmed the bankruptcy court, concluding that both it and the bankruptcy court had jurisdiction to rule on the stay relief motion and that the bankruptcy court did not abuse its discretion in granting S & S relief from the stay.

On appeal, the First Circuit held that Mission’s failure to obtain a stay of the relief order and the subsequent disbursement of the Debtor’s remaining assets did not moot the appeal under Article III, the provisions of the Bankruptcy Code and rules, and equitable principles.  The court dismissed S & S’s arguments that the failure to obtain a stay pending appeal of the bankruptcy court’s order mooted any appeal.  Instead, the court noted that Mission was seeking a disgorgement of cash paid to S & S, and that a request for such relief did not result in “meaningful appellate relief [being] no longer practicable.”  The court also held that the granting of Mission’s petition for a writ of certiorari did not divest the bankruptcy court of jurisdiction to decide the stay relief motion, holding that it could order a disgorgement in this case if S & S had no right to the assets, and noted that the Supreme Court recognized that the disbursement of the cash had no impact on its ability to decide Mission’s appeal as long as there was “any chance of money changing hands.”  Mission Prod. Holdings, 139 S. Ct. at 1660.  Lastly, the court rejected Mission’s challenge to the bankruptcy court’s order granting S & S the requested relief from the automatic stay.  Mission’s primary argument was that S & S impliedly waived its liens on the Debtor’s property, as demonstrated by the discussion at the auction of a commitment to match Mission’s treatment of some Debtor assets by leaving them behind in the estate.  The court noted that Mission’s unsuccessful bid, let alone the prevailing bid, could not have eliminated any liens on the estate, as Mission did not have the power to eliminate S & S’s liens on the Debtor’s assets merely by agreeing to leave the assets in the estate.  As the court stated, “[t]he Bankruptcy Code itself plainly protects a security interest even when the assets to which the interests attach are sold in a section 363(f) sale, 11 U.S.C. § 363(e), which often means that those security interests attach to the proceeds of the sale.”  The court pointed out that “[i]t would be strange indeed to conclude that an auction that did not even result in the sale of that same asset would somehow destroy the security interest.”

Fin. Oversight & Mgmt. Bd. for P.R. v. Andalusian Glob. Designated Activity Co. (In re Fin. Oversight & Mgmt. Bd. for P.R.), No. 19-1699 (Jan. 30, 2020). In one of the latest decisions stemming from the proceedings under Title III of the Puerto Rico Oversight Management and Economic Stability Act (“PROMESA”), the First Circuit recently affirmed the finding of the court overseeing the Title III proceedings (the “Title III Court”) that the security interest held by holders of municipal bonds (“Bondholders”) issued by the Employees Retirement System of the Government of the Commonwealth of Puerto Rico (the “System”) did not extend to postpetition, statutorily required employer contributions to the Systems over the Bondholders’ opposition, overruling the Bondholders’ various arguments on the basis of section 552 of the Bankruptcy Code that the liens did extend to postpetition employer contributions.

The System is an independent agency of the Commonwealth that provides pensions and retirement benefits to employees and officers of the Commonwealth government, municipalities, and public corporations, as well as employees and members of the Commonwealth’s Legislative Assembly.  The System was funded through mandatory contributions from both employers and employees, as well as investment income.  In 2008, the statute authorizing the System was amended to authorize the System to issue bonds.  On January 24, 2008, the System’s Board adopted a resolution to issue $2.9 billion in bonds.  Per the resolution, the bonds would be secured by, among other things, “All Revenues” and proceeds thereof, where “Revenues” includes “Employers’ Contributions.”  The System also executed a security agreement with the Bondholders, which granted them a security interest in the property discussed above and “all proceeds thereof and all after-acquired property, subject to application as permitted by the Resolution.”

In 2016, shortly after the enactment of PROMESA, Puerto Rico and its various agencies, including the System, filed petitions for relief under Title III of PROMESA.  Sometime thereafter, the System sought a declaratory judgment against the Bondholders as to the “validity, priority, extent and enforceability” of the Bondholders’ asserted security interest in the System’s postpetition assets, including employer contributions received postpetition.  The Bondholders argued, both before the Title III Court and the First Circuit, that (i) their security interest extended to postpetition employer contributions by virtue of section 552(b)(1), incorporated into PROMESA by 48 U.S.C. § 2161(a); (ii) the section 552(a) bar did not apply pursuant to the exception under section 928, incorporated into PROMESA by 48 U.S.C. § 2161(a); and (iii) applying the section 552(a) bar to postpetition employer contributions amounted to a Fifth Amendment taking.  The First Circuit addressed and rejected each of the Bondholders’ arguments in turn.

The court held that the postpetition employer contributions did not qualify as “proceeds” within the meaning of section 552(b)(1).  The court analyzed the System’s statutory authority to receive postpetition Employers’ Contributions, distinguishing between the System’s expectancy in future contributions and a “property right.”  The court found that, since the amount of Contributions depended on work occurring on or after the petition date, the statutory merely afforded the System an expectancy in postpetition contributions, not a property right in postpetition contributions.  As a result, the Bondholders lacked any secured interest in the property that could produce postpetition “proceeds” to which they could be entitled under section 552(b)(1).

The court further held that the employer contributions were not “special revenue” as contemplated by section 928 of the Bankruptcy Code.  Looking at sections 902(2)(A) and 902(2)(D) of the Bankruptcy Code, the court noted that the analysis turned on whether the Employers’ Contributions are “derived from” the ownership or operation of “other services” provided by the System or the “particular functions” of the System.  Pointing to the plain language of the statute, the First Circuit held that the “special revenue” provisions could not apply because neither the System’s “particular function” nor its “ownership” or “operation” of providing pension services produced any revenue.  Because the System merely functioned as a “conduit for the distribution of Employers’ Contributions,” the contributions themselves could not be properly characterized as revenue produced by the System.  Therefore, the Employers’ Contributions did not qualify as “special revenue” under sections 902(2)(A) or 902(2)(D) of PROMESA.

Finally, the court ruled that there could be no impermissible taking under the Fifth Amendment because Congress clearly intended section 552 to apply retroactively to security interests created before the enactment of PROMESA.  In so doing, the court overruled the Bondholders’ argument that, because section 552 did not apply to the Bondholders’ liens when the bonds were authorized, it could not be applied to the Bondholders’ liens now by virtue of PROMESA without raising “grave constitution questions.”

In re Montreal, Maine & Atlantic Railway, Ltd., 956 F.3d 1 (2020). The First Circuit affirmed a ruling that a secured creditor could not object to the release of claims, over which the creditor purportedly had a security interest, as part of a settlement where the creditor had failed to prove the value of the claims being released.

In 2013, a train carrying crude oil, arranged by Western Petroleum Company and affiliates (“Western”), derailed, causing a fire that killed 48 people.  Soon after, the train operator, Montreal, Maine & Atlantic Railway, Ltd. (the “Debtor”), filed a Chapter 11 petition in the District of Maine for the purpose of liquidating its assets.  At the time of filing, the Debtor’s secured creditors included Wheeling & Lake Erie Railway Co. (“Wheeling”), which extended a $6 million secured line of credit to the Debtor in 2009.  Wheeling’s collateral included the Debtor’s accounts and other rights to payment, which encompassed any non-tort claims accrued by the Debtor.

In January 2014, the Debtor brought suit against Western to resolve liability between itself and Western.  The parties ultimately agreed to settle the suit, with Western agreeing, among other things, to pay $110 million for the benefit of the derailment victims in exchange for a release by the Debtor of its non-tort claims against Western, which constituted part of Wheeling’s collateral.  The bankruptcy court approved the settlement and confirmed the Debtor’s liquidating Chapter 11 plan over Wheeling’s objection, although the confirmed plan reserved Wheeling’s right to contend that its security interest attached to the settlement payments made in consideration of the released claims.

During a subsequent trial of the issue of whether Wheeling was entitled to compensation for the release of its non-tort claim collateral, the bankruptcy court held that (i) the Debtor did not have any cognizable non-tort claims against Western, and (ii) that even if the claims did exist, Wheeling had not carried its burden to establish the value of those claims in accordance with section 506(a)(1).  Wheeling had relied solely on the value of the economic damages as stipulated between Wheeling and the Debtor to support its contentions regarding value of the claim.

On appeal, the First Circuit affirmed the bankruptcy court.  The court held that, even assuming that the estate held cognizable non-tort claims against Western in which Wheeling held a security interest, there was “no clear error in the bankruptcy court’s finding that Wheeling failed to carry its burden of proving the value of the non-tort claims.”  The court reasoned that a claim’s settlement value involves many different factors, including, inter alia, the strength of the evidence, the viability of any defenses, the ability of the defendant to satisfy a judgment, and the litigation cost.  Wheeling’s stipulated “net economic damages” estimate was “plainly insufficient” to satisfy its burden of proving the value of its collateral by enabling the bankruptcy court either to assess the likelihood of recovery or to “gauge any of the relevant factors other than the estate’s potential recovery that may have affected the settlement value of the non-tort claims.”  Nor did Wheeling offer any expert testimony concerning a range of value for the settlement of non-tort claims.

§ 1.1.3 Second Circuit

In re Lehman Bros. Holdings Inc., 792 F. App’x 16 (2d Cir. 2019). The Second Circuit upheld the determination of the bankruptcy court that former employees of Lehman Brothers Inc. (“LBI”), who had agreed to defer portions of their compensation into a deferred pension plan in return for tax benefits and a favorable interest rate, were bound by subordination provisions contained in the plan agreements.  The court found that the claims were clearly and unambiguously subordinated.

In the 1980s, Shearson Lehman Brothers Inc., a predecessor entity to LBI, created deferred compensation plans for certain executives called the Executive and Select Employees Deferred Compensation Plan (the “ESEP Agreements”).  The ESEP Agreements explicitly provided that “the obligations of Shearson hereunder with respect to the payment of amounts credited to his deferred compensation account are and shall be subordinate in right of payment and subject to the prior payment or provision for payment in full of all claims of all other present and future creditors of Shearson whose claims are not similarly subordinated…”  After LBI’s collapse and the commencement of liquidation proceedings, the former employees submitted claims in connection with their deferred compensation under the ESEP Agreements.  Pursuant to the ESEP Agreements, the Trustee determined that these claims were subordinated.

The former employees sought to avoid the subordination provisions on the basis that (1) the subordination provisions only applied to Shearson Lehman Brothers Inc., not LBI; (2) LBI materially breached the ESEP Agreements and, thus, could not compel performance; and (3) the ESEP Agreements were rejected executory agreements.  These arguments were rejected by the bankruptcy court and the district court.  The Second Circuit found that LBI was a continuation of Shearson Lehman Brothers Inc. and a series of name changes was not sufficient to prevent application of the subordination provisions.  The court further determined that any breach was irrelevant because the Trustee was not trying to compel performance, but rather merely to classify the former employees’ claims.  Similarly, the court found that whether the ESEP Agreements were rejected executory contracts would have no impact on the subordination provisions.

Marsh USA, Inc. v. The Bogdan Law Firm (In re Johns-Manville Corp.), No. 18-2531(l) (2d Cir. Feb. 19, 2020). The U.S. Court of Appeals for the Second Circuit held that the appointment of a future claims representative ensured future asbestos-related claimants sufficient due process to be barred by the asbestos channeling injunction entered in 1986 in the Johns-Manville bankruptcy.

Salvador Parra, Jr. (“Parra”) argued that asserted state-law, asbestos-related claims against Marsh, a former insurance broker for Johns Manville, should not be enjoined and channeled into the trust.  He argued that the channeling injunction should not be enforceable against him because he had not received sufficient due process during the Manville bankruptcy proceeding.  The bankruptcy court rejected Parra’s argument, finding that the injunction was enforceable because Parra’s interests were represented in absentia by the future claims representative (the FCR) that was appointed during the Manville bankruptcy.  The bankruptcy court held that the FCR represented future claimants as to both their in rem and in personam claims.  The district court reversed.

The Second Circuit affirmed the bankruptcy court, finding no clear error where the bankruptcy court had relied on evidence in the bankruptcy proceedings demonstrating that the FCR had, in fact, argued against the order channeling in personam claims to the trust in 1985.  Thus, the bankruptcy court concluded, the FCR was engaged to advocate for future claimants in connection with their potential in personam claims, as well as their potential in rem claims.

The Second Circuit further held that the notice provided to future claimants “was constitutionally sufficient” because it “was designed to inform as many future asbestos claimants as possible . . . [about the] proceedings,” including national TV and radio ads and newspaper ads in U.S. and Canadian newspapers.

In re Motors Liquidation Company, 957 F.3d 357 (2d Cir. 2020). The Second Circuit held that the new General Motors (“New GM”) did not contractually assume liability for punitive damages arising from post-closing accidents involving cars produced by its predecessor (“Old GM”) when it purchased Old GM’s assets in a bankruptcy sale.

Following General Motors’ bankruptcy filing in June 2009, New GM purchased substantially all of Old GM’s assets.  The sale agreement provided that the purchaser would assume the liability of Old GM with respect to post-sale accidents involving automobiles manufactured by Old GM, including claims by those who did not transact business with Old GM (such as individuals who never owned Old GM vehicles and persons who bought Old GM used cars after the bankruptcy sale).  When New GM recalled certain Old GM vehicles in 2014, a number of lawsuits followed, including suits seeking punitive damages.  New GM moved the bankruptcy court to enforce the “free and clear” terms of the sale order.  In a November 2015 decision, the bankruptcy court determined that New GM could not be liable for punitive damages by reason of the conduct of Old GM.

In July 2017, the bankruptcy court again revisited its decision when certain claimants argued that they were not bound by the November 2015 decision on the basis that they were not party to the bankruptcy proceedings.  The bankruptcy court reaffirmed its November 2015 decision, applying it as “law of the case.”  The District Court affirmed and the claimants appealed.

On appeal, the Second Circuit considered not only whether the bankruptcy court correctly interpreted the sale order and agreement, but also whether res judicata applied.  On the res judicata point, the court held that because the appellants were not served with notice of the scheduling order in connection with the November 2015 decision, there was not a sufficient identity between the litigants such that res judicata would apply.  When considering the sale agreement, the Second Circuit concluded that New GM did not assume liability for punitive damages because punitive damages neither provide compensation “for” death and injuries, nor “ar[i]se directly out of” death and injuries.  Finally, the court held that the appellants could not escape language in the sale order providing that the sale “shall be free and clear of all liens, claims, encumbrances and other interests of any kind or nature whatsoever . . . , including rights or claims based on any successor or transferee liability,” solely by virtue of the fact that they had no relationship with Old GM at the time the sale order was entered.  The court dismissed this argument, determining that the issue of successor liability had no impact on whether New GM assumed liability for punitive damages.

In re Tribune Co. Fraudulent Conveyance Litig., 946 F.3d 66 (2d Cir. 2019). In the wake of the Supreme Court’s decision in Merit Management Group., LP v. FTI Consulting, Inc., 138 S. Ct. 883 (2018), the Second Circuit was asked to revisit its decision in In re Tribune Co. Fraudulent Conveyance Litigation, 818 F.3d 98 (2d Cir. 2016).  Because the Second Circuit determined that the holding in Merit Management did not address the question of whether section 546(e) preempts the creditors’ state law, constructive fraudulent conveyance claims, it reaffirmed its prior decision, which upheld the dismissal of the creditors’ state law, constructive fraudulent conveyance claims on preemption grounds.

In 2007, a struggling Tribune Media Company (“Tribune”) cashed out its shareholders in a leveraged buyout (“LBO”) for more than $8 billion.  Tribune effectuated the LBO by transferring the $8 billion sum, at least in part, to Computershare Trust Company, N.A. (“Computershare”), which acted as depositary in connection with the LBO.  In its capacity as depositary, Computershare received and held Tribune’s deposit of the aggregate purchase price for the shares and then received the tendered shares on Tribune’s behalf, and paid the tendering shareholders.

On December 8, 2008, Tribune and nearly all of its subsidiaries filed for bankruptcy in the District of Delaware.  An official committee of unsecured creditors (the “Committee”) was appointed.  In November 2010, the Committee commenced an action for an intentional fraudulent conveyance under section 548(a)(1)(A) of the Bankruptcy Code against the cashed-out Tribune shareholders, various officers, directors, financial advisors and others who allegedly profited from the LBO.  Two subsets of unsecured creditors subsequently moved the bankruptcy court to rule that (i) after the expiration of the two-year statute of limitations period during which the Committee was authorized to bring avoidance actions under section 546(a), eligible creditors regained the right to prosecute their state law creditor claims; and (ii) the automatic stay was lifted to permit filing of such complaints.  The bankruptcy court granted the relief sought in April 2011.  In June 2011, the creditors filed state law, constructive fraudulent conveyance claims in various federal and state courts, alleging that the LBO payments were for more than the reasonable value of the shares and were made at a time when Tribune was in financial distress.  These complaints were consolidated, along with the Committee’s complaint (now being prosecuted by a litigation trust pursuant to Tribune’s now-confirmed plan), in a multi-district litigation proceeding before the Southern District of New York.

After consolidation, the Tribune shareholders moved to dismiss the creditor’s state law, constructive fraudulent conveyance claims.  The district court granted the motion to dismiss on the grounds that the automatic stay prevented the creditors from having statutory standing to assert such claims while the litigation trust was pursuing avoidance of the same transfers under a theory of intentional fraud.  The district court rejected the Tribune shareholders’ argument that section 546(e) barred the creditors’ actions because the statute referred only to actions brought by a bankruptcy trustee.  The creditors appealed on the dismissal for lack of statutory standing, while the Tribune shareholders cross-appealed the rejection of their argument that the creditors’ claims were preempted by section 546(e).  The Second Circuit affirmed on the basis that section 546(e) preempts fraudulent conveyance actions, even those brought by creditors, as long as they fall within the statutory parameters of section 546(e).  Section 546(e) covers transfers “made by or to (or for the benefit of) a … financial institution … in connection with a securities contract, as defined in section 741(7).”  11 U.S.C. § 546(e).

While the creditors pursued further appellate relief, the Supreme Court handed down its decision in Merit Management, which held that section 546(e) did “not protect transfers in which financial institutions served as mere conduits.”  138 S. Ct. at 892.  Following the decision, Justices Kennedy and Thomas issued a statement suggesting that the Second Circuit recall its prior mandate in this case.

First addressing the question of statutory standing, the Second Circuit held that both the bankruptcy court’s prior order and the confirmed plan ensured that the creditors’ state law, constructive fraudulent conveyance claims were not subject to the automatic stay.  The bulk of the opinion, however, was spent discussing whether the creditors’ state law, constructive fraudulent conveyance claims were preempted by section 546(e).

Because Merit Management foreclosed the basis upon which the Second Circuit had originally ruled that the payments challenged by the creditors’ complaint fell within the scope of section 546(e)—that they were payments in which a “financial institution” served as an intermediary—the court had to reconsider whether either Tribune or the shareholders qualified as a covered entity under section 546(e).  Looking to the definition of “financial institution” in section 101(22) of the Bankruptcy Code, the court held that, because Tribune was a customer of Computershare, which was itself a qualifying “financial institution,” and because Computershare functioned as Tribune’s agent in the LBO, Tribune was imputed to be a “financial institution” as well, pursuant to the statutory definition under the Bankruptcy Code.  See 11 U.S.C. § 101(22)(A) (defining “financial institution” to include, inter alia, “an entity that is a commercial or savings bank, … trust company, … and, when any such … entity is acting as agent or custodian for a customer (whether or not a ‘customer,’ as defined in section 741) in connection with a securities contract (as defined in section 741) such customer”) (emphasis added).

After concluding not only that Tribune was an entity covered by section 546(e), but also that the transfers at issue were covered as transfers “in connection with a securities contract,” the court considered whether the presumption against preemption applied where Congress had not explicitly stated its intention that state laws should be limited by federal law.  The court found that the regulation of creditors’ rights has “a history of significant federal presence,” and there was not a “significant countervailing pressure[] of state law concerns” to militate against preemption.

Lastly, the court rejected the creditors’ legal theory that, upon the filing of the bankruptcy proceeding, the bankruptcy trustee merely interrupts the creditor’s ability to bring state law avoidance claims.  Rather, the court held that the causes of action become part of the bankruptcy estate, meaning that they become subject to the limitations of section 546(e) in all respects.  The termination of the bankruptcy trustee’s ability to bring the claims does not somehow remove the limitation of section 546(e) from the claims.

Accordingly, while the Supreme Court may have limited the ability to use section 546(e) as a shield in connection with LBOs by the mere presence in the transaction of a “financial institution,” the Second Circuit has ensured that LBO transactions remain unavoidable, holding that customers of “financial institutions” will also merit protection under section 546(e).

§ 1.1.4 Third Circuit

In re Millennium Lab Holdings, LLC, 945 F.3d 126 (3d Cir. 2019). In a narrow ruling on “exceptional facts,” the Third Circuit affirmed that bankruptcy courts have jurisdiction to confirm plans of reorganization that contain nonconsensual third-party releases and injunctions, but only if the releases satisfy the parameters laid out in Stern v. Marshall, 564 U.S. 462 (2011)—that the matter must be integral to the restructuring of the debtor-creditor relationship, notwithstanding whether the matter is dedicated by federal statute to the “core” jurisdiction of the bankruptcy court.

Millennium Lab Holdings, II, LLC and its wholly owned subsidiaries (collectively, “Millennium”) were providers of laboratory-based diagnostic services that entered into a $1.825 billion credit agreement with multiple lenders including certain funds managed by Voya Investment Management Co. LLC and Voya Alternative Asset Management LLC (collectively, “Voya”).  Millennium’s main shareholders were TA Millennium, Inc. (“TA”) and Millennium Lab Holdings, Inc. (“MLH”).  Millennium used the funds from the credit agreement to refinance certain existing debts while also paying almost $1.3 billion in dividends to shareholders.  Following a Department of Justice investigation, Millennium agreed to settle certain claims with various government entities for $256 million, which left Millennium unable to satisfy its obligations under the credit agreement.

Certain creditors formed an ad-hoc group to negotiate with Millennium to restructure its obligations, resolve other potential claims against it, and enable Millennium to pay the settlement with the government.  A restructuring support agreement was negotiated under which TA and MLH would pay $325 million and relinquish their equity interests in exchange for full releases under Millennium’s plan of reorganization, including the release of claims related to the credit agreement.  However, Voya refused the terms of the restructuring support agreement, preferring instead to preserve its legal claims in connection with the credit agreement.  When Millennium filed for Chapter 11 protection, seeking approval of a prepackaged plan of reorganization, Voya objected on the basis that the releases to TA and MLH were unlawful and the bankruptcy court lacked constitutional authority to approve them.

The central question before the Third Circuit was whether the bankruptcy court was “resolving a matter integral to the restructuring of the debtor-creditor relationship.”  Reflecting on the Supreme Court’s decision in Stern v. Marshall, the court indicated that (1) a bankruptcy court can violate Article III even where it has statutory authority over a “core” matter; (2) a bankruptcy court is within constitutional limits where it is resolving a matter that is integral to a debtor-creditor relationship; and (3) when determining constitutional authority, the court should look to the content of the proceeding rather than focusing on the category of “core.”

The court found that the sophisticated negotiations over the restructuring agreement suggested that, absent the releases, TA and MLH would not have contributed to the restructuring and Millennium would have been liquidated.  As a result, the bankruptcy court had authority to approve the plan because the releases were “integral” to the restructuring of the debtor-creditor relationship.  The court was careful to limit its holding to the facts of the case and noted that the ample evidentiary record that the bankruptcy court had relied on in making its ruling was instrumental to the result of the appeal.  The court also affirmed the district court’s decision that Voya’s remaining claims were equitably moot, since the plan—including the nonconsensual third-party releases—was substantially consummated and the releases could not be unwound without doing harm to the entirety of the plan.

In re Energy Future Holdings Corp., 949 F.3d 806 (3d Cir. 2020). In In re Energy Future Holdings Corp., the Third Circuit determined under what circumstances a bankruptcy court could discharge the claims of latent asbestos claimants.  In a Chapter 11 reorganization plan, the discharge of latent asbestos claims was permissible as long as the claimants received an opportunity to reinstate their claims after the debtor’s reorganization that comported with due process.  Because latent asbestos claimants were allowed to file proofs of claim after the bar date if they showed excusable neglect, the claimants’ right to due process was not compromised because the combination of both the pre-confirmation notice provided and the post-confirmation hearing were adequate.

Burdened with asbestos claims and liabilities, Energy Future Holdings Corporation (“EFH”) and its subsidiaries commenced Chapter 11 proceedings.  However, rather than establishing a section 524(g) trust, EFH relied instead on Rule 3003(c)(3) of the Federal Rules of Bankruptcy Procedure, which authorizes a court to extend the time for filing a claim “for cause shown.”  Future claimants—whose claims would be discharged by the order confirming the Chapter 11 plan—could obtain permission to file their claim after the bar date under Rule 3003(c)(3), and seek reinstatement of their discharged claims on due process grounds.  The bankruptcy court accepted this approach, set a bar date, and confirmed the plan.

Several claimants who did not file claims by the bar date and later were stricken by mesothelioma (the “Claimants”) appealed the bankruptcy court’s confirmation order, arguing that (i) the failure to include a pre-discharge process for addressing claims and (ii) deferring to the Rule 3003(c)(3) mechanism each amounted to a violation of their due process rights.  The district court rejected the challenge under section 363(m) of the Bankruptcy Code as statutorily moot.  The Claimants appealed to the Third Circuit Court of Appeals.

The Third Circuit held that section 363(m) partially barred, but did not entirely bar, the Claimants’ appeal.  The Third Circuit rejected the Claimants’ argument that there is a due process exception to section 363(m).  The court also rejected that the confirmation order was not “an authorization … of a sale” within the meaning of section 363(m), or that the Claimants’ appeal would “affect the validity of [the] sale.” Based on these determinations, the court concluded that it was barred from considering the Claimants’ argument that they were entitled to a pre-discharge claims process.  However, section 363(m) did not bar the Circuit Court from considering the adequacy of the Rule 3003(c)(3) procedure because the review of the Rule 3003(c)(3) process could not “affect the validity of the sale.”

The Third Circuit, therefore, turned to consider whether the Rule 3003(c)(3) process comported with due process.  Although the Claimants had demonstrated that the Rule 3003(c)(3) process deprived individuals of an interest “that is encompassed within the Fourteenth Amendment’s protection of life, liberty, or property,” the Claimants failed to demonstrate that the Rule 3003(c)(3) procedures were constitutionally inadequate.  EFH had published notices in consumer magazines, newspapers, union publications and Internet outlets encouraging latent claimants to file proofs of claim by the bar date.  Under established law, claimants who are unknown at the time of discharge are only entitled to publication notice.  However, because the bankruptcy court retained jurisdiction for the purpose of determining whether an individual latent claimant had demonstrated sufficient “cause” for filing an untimely proof of claim, adequate process was afforded.

The Third Circuit concluded by noting that this case is a “cautionary tale for debtors attempting to circumvent [section] 524(g).”  While EFH’s approach resulted in a similar outcome of a section 524(g) trust, it added unnecessary litigation that could have been avoided by opting to follow the process contained in section 524(g).

In re Tribune Co., 972 F.3d 228, 235 (3d Cir. 2020). The Third Circuit affirmed the order of the U.S. Bankruptcy Court for the District of Delaware confirming the plan of reorganization of the Tribune Company and its affiliated debtors, over the objections of certain senior noteholders, holding $1.283 billion in notes issued by Tribune (the “Senior Noteholders”).  The Senior Noteholders argued that (1) the bankruptcy court erred when it failed to strictly enforce the subordination provision in the indenture governing the senior notes, which required repayment of the senior notes before any other debt incurred by the company; and (2) the failure to strictly enforce the subordination provision resulted in the plan’s unfairly discriminating against the Senior Noteholders, in violation of section 1129(b)(1) of the Bankruptcy Code.  The Third Circuit rejected both arguments, determining that the section 1129(b)(1) cramdown provision allows for more flexible enforcement of subordination agreements where it would increase the likelihood of a successful plan and that the bankruptcy court’s analysis of any unfair discrimination was appropriate in the circumstances.

The Tribune Company (“Tribune”) was a large media company, composed of national newspapers, regional newspapers, and television and radio stations.  A failed leveraged buyout left Tribune with roughly $13 billion in debt, forcing the company to file for Chapter 11 protection.  Prior to the leveraged buyout, Tribune had previously issued unsecured notes, the indenture for which contained subordination provisions that required the notes to be paid before any other company obligations.  Two other debt instruments explicitly provided that they were subordinate to the Senior Noteholders: the so-called “PHONES Notes” and the “EGI Notes.”

Notwithstanding the contractual provision, which stated that the Senior Noteholders would be paid before any other debts of the company, the Tribune plan sought to subordinate the PHONES and EGI Notes—not just to the Senior Noteholders, but to certain unsecured “swap” claimants, retirees and trade creditors as well.  Rather than paying the Senior Noteholders the entirety of the recovery that would have been due to the PHONES and EGI Notes, Tribune sought to reallocate those recoveries equally among the Senior Noteholders, the swap claimants, the retirees, and the trade creditors.

The Senior Noteholders objected to the plan of reorganization on the basis that the approximately $30 million in recoveries that would have been paid to the PHONES and EGI Notes in the absence of the subordination provision should have been directed solely to the Senior Noteholders, and should not be shared amongst the Senior Noteholders, the swap claimants, the retirees, and the trade creditors.  As discussed above, the argument was twofold: first, the subordination should be strictly enforced pursuant to section 510(a) of the Bankruptcy Code; and, in the alternative, the plan should be rejected as unfairly discriminating against the Senior Noteholders in favor of the swap claimants, retirees, and trade creditors.  The bankruptcy court rejected these arguments, in part because under the plan, the Senior Noteholders would receive an equal distribution to other similarly situated unsecured creditors.  The bankruptcy court also found that the Senior Noteholders’ recovery under the plan would not be materially impacted by the reallocation of the $30 million from the PHONES and EGI Notes as contemplated by the plan versus as if the $30 million was allocated only to the Senior Noteholders and the swap claimants (who, the Senior Noteholders agreed, were also senior to the PHONES and EGI Notes).  The decrease in the Senior Noteholders’ percentage recovery was 0.90%.

On appeal, the Third Circuit considered both arguments.  As to the question regarding strict enforcement of the subordination provision in accordance with section 510(a), the court focused on the plain language of section 1129(b)(1), which uses the phrase “notwithstanding section 510(a).”  Based on prior precedent interpreting the term “notwithstanding” in the bankruptcy context, the court held that, as used in section 1129(b)(1), “notwithstanding section 510(a)” meant “[d]espite the rights conferred by [section] 510(a).”  Accordingly, section 1129(b)(1) trumped section 510(a), and the Bankruptcy Code allowed courts to flexibly construe subordination agreements when considering whether to confirm a plan vis-à-vis a cramdown under section 1129(b)(1).

As to the question regarding unfair discrimination, the court first described the different methods of analysis used by other courts to evaluate unfair discrimination: the “mechanical” test, the “restrictive” approach, the “broad” approach, and the “rebuttable presumption” test.  From these different approaches, the court distilled eight principles for determining unfair discrimination: (1) plans may treat like creditors differently, but not so much as to be unfair; (2) unfair discrimination applies only to classes of creditors rather than individual creditors; (3) unfair discrimination is considered from the perspective of the dissenting class; (4) the classes must be aligned correctly; (5) the court should determine recoveries based on the present value of payments or the allocation of risk connected with the proposed distribution; (6) subordinated sums should be included when the court considers the pro rata baseline distribution to creditors of the same class; (7) if there is a “materially lower” recovery or greater risk in connection with the proposed distribution to the dissenting class, there is a presumption of unfair discrimination; and (8) the presumption of discrimination is rebuttable.

Applying these principles to the case at hand, the Third Circuit found that the bankruptcy court did not err when it compared the Senior Noteholders’ recovery under the plan as against what the Senior Noteholders and the swap claimants would have received if only they were to benefit from the subordination.  Although the Senior Noteholders argued that the bankruptcy court should have compared their own recovery absent subordination (21.9%) to the recovery of the trade creditors under the plan (33.6%) who were unfairly favored by the plan, the court ruled that there was no per se requirement that the bankruptcy must compare discrimination as between classes.  Accordingly, although the court noted that the bankruptcy court’s analysis in this case was “not the preferred way to test whether the allocation of subordinated amounts under a plan to initially non-benefitted creditors unfairly discriminates,” the court found the minimal impact of the reallocation to the Senior Noteholders’ recoveries—0.90% as measured by the bankruptcy court—was not material and, thus, did not unfairly discriminate.  The court went further to emphasize that the unfair discrimination analysis “exemplifies the Code’s tendency to replace stringent requirements with more flexible tests that increase the likelihood that a plan can be negotiated and confirmed.”

Wells Fargo, N.A. v. Bear Stearns & Co., Inc. (In re HomeBanc Mortg. Corp.), 945 F.3d 801 (3d Cir. 2019). The Third Circuit provided clarity on certain issues in a contentious bankruptcy litigation matter involving certain securities subject to one of two repurchase agreements.  The decision covers the gamut, running from the good faith of the non-debtor repurchase counterparty in holding an auction for the subject securities to which statutory safe harbor afforded the counterparty the right to liquidate the securities at issue to simple matters of contractual compliance.

Debtor HomeBanc Corp. (“HomeBanc”), who was in the business of originating, securitizing, and servicing residential mortgage loans, obtained financing from Bear Stearns & Co. and Bear Stearns International Ltd. (together, “Bear Stearns”) pursuant to two repurchase agreements (“repos”) between 2005 and 2007.  The repos required Bear Stearns to reach a “reasonable opinion” of the fair market value of the securities outstanding in the event of HomeBanc’s default

On August 7, 2007, certain of HomeBanc’s repo transaction became due, requiring HomeBanc to buy back thirty-seven outstanding securities at an aggregate price of $64 million.  Bear Stearns, concerned about HomeBanc’s liquidity, offered two alternative solutions to HomeBanc:  (1) extend the repurchase deadline in exchange for roughly $27 million, or (2) purchase thirty-six of the securities outright for $60.5 million.  HomeBanc rejected both proposals and failed to repurchase the securities by the due date.  Bear Stearns notified HomeBanc of the default the next day.  Thereafter, on August 9, 2007, HomeBanc filed voluntary petitions for relief under Chapter 11.

Bear Stearns, claiming outright ownership of the securities, decided to auction them to determine their fair market value.  The auction was managed by Bear Stearns’ finance desk.  Bid solicitations were sent to approximately 200 different entities, including, subject to additional safeguards to prevent any insider advantage, Bear Stearns’ own mortgage trading desk.  Only two bids were received:  (i) one bid for two securities in the amount of approximately $2.2 million and, (ii) an “all or nothing” bid by Bear Stearns’ mortgage trading desk for $60.5 million.  Bear Stearns was declared the winning bid and the purchase price was allocated across the thirty-six purchased securities:  $52.4 million for twenty-seven securities and $900,000 each for the nine securities at issue.

After HomeBanc’s bankruptcy was converted to a Chapter 7, years of litigation ensued between Bear Stearns and the trustee, primarily regarding Bear Stearns entitlement to auction the securities as well as the conduct of the auction as a measure of fair market value.  Ultimately, these litigations reached the Third Circuit.

Two principal questions came before the Third Circuit as part of this appeal: (1) whether section 559 or section 562 controlled in determining whether Bear Stearns violated the automatic stay; and (2) whether the bankruptcy court correctly concluded that the Bear Stearns auction was conducted in good faith to ascertain fair market value of the securities.

The HomeBanc trustee first challenged whether the safe harbor provision of section 559 or section 562 applied to Bear Stearns.  Section 559 applies broadly to repurchase agreements, while section 562 is more limited, requiring proof of damages.  Looking to section 101(47)(A)(v)’s definition of repurchase agreement, the court held that “damages” encompasses legal claims for money.  Accordingly, because Bear Stearns did not initiate a damages action, section 559 was the relevant safe harbor, notwithstanding that the auction did not yield any excess proceeds.

The court then considered whether Bear Stearns adhered to the liquidation provisions of the repos, as required under section 559.  The bankruptcy court had found that Bear Stearns valued the securities at issue in good faith compliance with the relevant repo after a six-day trial, overruling several arguments from the trustee.  First, the bankruptcy court rejected the trustee’s claim that the repos required Bear Stearns to sell the securities to an outside party.  Second, the bankruptcy court rejected the trustee’s claims that the market for mortgage-backed securities in August 2007 was dysfunctional, such that it would not accurately price the securities.  On this point, the bankruptcy court held explicitly that the market was sufficiently function to conduct an auction as required by the repo.  The Third Circuit noted that the trustee overlook the crucial distinction between a declining market and a dysfunctional one.  Finally, the bankruptcy court concluded that auction procedures were not flawed.  The Third Circuit refused to disturb any of the bankruptcy court’s findings since the trustee failed to show that the bankruptcy court had clearly erred.

In re Wilton Armetale, Inc., No. 19-2907 (3d Cir. Aug. 4, 2020). The Third Circuit ruled that a Chapter 7 trustee may restore creditors’ statutory standing to pursue a cause of action that became property of the debtor’s estate by explicitly abandoning such causes of action.

When debtor Wilton Armetale, Inc. (“Wilton”) failed to pay creditor Artesanias Hacienda Real S.A. de C.V. (“Artesanias”) for the purchase of their wares, Artesanias obtained a judgement against Wilton for approximately $900,000 and all the owner’s shares in Wilton.  As a consequence of recovering all of the shares in Wilton, Artesanias obtained access to privileged documents held by Wilton’s law firm.  From these documents, Artesanias learned not only that Wilton was insolvent, but also that its previous owner and North Mill Capital, another creditor, had plotted with the law firm to plunder Wilton’s remaining assets.  After discovering the scheme, Artesanias sued North Mill and the law firm, seeking damages and an order stopping North Mill, who had obtained a lien on Wilton’s valuable warehouse, from foreclosing on the property.  Two months after Artesanias brought the suit, Wilton filed for Chapter 7 bankruptcy and a trustee was appointed to liquidate Wilton’s remaining assets.

At the same time, Artesanias’s claim against North Mill and law firm continued in District Court.  However, the District Court declined to rule on defendants’ motion to dismiss and instead referred the whole action to the bankruptcy court handling Wilton’s liquidation.  On referral, the bankruptcy court found that Artesanias lacked standing to sue because, once Wilton declared bankruptcy, the claims became property of the estate and, therefore, only the trustee had standing to sue on Wilton’s behalf.  Artesanias appealed and the District Court affirmed the Bankruptcy Court’s dismissal of the claims for lack of standing.

Applying the Supreme Court’s decision in Lexmark Int’l, Inc. v. Static Control Components, Inc., 572 U.S. 118, 125-28 & n.4 (2014), which distinguished between constitutional standing and additional statutory requirements that may be imposed, the Third Circuit reversed the District Court’s decision.  It held that “standing,” as used in the bankruptcy context, imposes additional requirements on litigants that exceed the three elements of constitutional standing required under Article III.  In so doing, the Third Circuit court adopted the Seventh Circuit’s interpretation of the term, clarifying that “standing to pursue causes of action that become the estate’s property means its statutory authority under the Bankruptcy Code, not its constitutional standing to invoke the federal judicial power.”  Based on this distinction, the Third Circuit determined that the bankruptcy proceedings did not divest Artesanias of its constitutional standing, but rather only its statutory standing to pursue the claims that were property of the Wilton bankruptcy estate, and committed to the purview of the Chapter 7 trustee.  However, the court determined that the trustee explicitly abandoned the right to pursue the claims against North Mill and the law firm pursuant to an order of the bankruptcy court.  Accordingly, Artesinias’ standing to pursue its initial causes of action was restored by the trustee’s actions.  The court further noted that the instant decision was consistent its prior decision in Official Comm. of Unsecured Creditors of Cybergenics Corp. ex rel. Cybergenics Corp. v. Chinery (In re Cybergenics Corp.), 226 F.3d 237, 244-45 (3d Cir. 2000), which the district court had relied on in its holding that the trustee could not transfer a cause of action because Artesinias’ suit would benefit only itself and not the entire creditor body.  Thus, when a creditor pursues an asset recovery action prepetition, the trustee may restore the cause of action to that creditor, for its own benefit, rather than the benefit of all creditors, by abandoning the claim.

§ 1.1.5 Fourth Circuit

Ayers v. U.S. Dep’t of Def., No. 19-2230 (4th Cir. Sept. 20, 2020). Adding greater clarity to the corpus of case surrounding the question of appellate jurisdiction of bankruptcy court orders, the Fourth Circuit has held that bankruptcy court orders that do not completely dispose of adversary proceedings are not appealable.  An individual debtor brought an adversary proceeding against one of her creditors, the United States Department of Defense.  The bankruptcy court dismissed all but one of her claims challenging her debt and denied her motion to amend all but one claim—her request for an undue hardship discharge pursuant to 11 U.S.C. § 523(a)(8).  The Fourth Circuit held that the bankruptcy court’s order was not a final, appealable order because the “discrete dispute” was the adversary proceeding itself, notwithstanding that the bankruptcy court’s order conclusively disposed of all but one of the debtor’s causes of action.  Because one cause of action remained viable, subject to amendment of the complaint, the Fourth Circuit held that it did not have jurisdiction to review the bankruptcy court’s order dismissing the other claims.

In re Highland Construction Management Services, L.P., No. 18-2450 (March 30, 2020). Affirming the decisions of the U.S. Bankruptcy Court and District Court for the Eastern District of Virginia, the Fourth Circuit Court of Appeals agreed that a security interest in the debtor’s membership interest in an unrelated LLC could only extend to the debtor’s own property interest, and did not encompass the debtor’s economic interest in the unrelated LLC through the debtor’s subsidiary’s separate interest in the same LLC.

Prior to declaring bankruptcy, debtor Highland Construction Management Services, LP (“Highland Construction”) entered into a security agreement in favor of Creditor Wells Fargo Bank, for the benefit of Jerome Guyant IRA (“Guyant IRA”).  The security agreement assigned fifty percent of Highland Construction’s membership interest in Sanford, LLC to Guyant IRA.  Since Highland Construction had a twenty percent membership interest in Sanford, Highland Construction argued in the bankruptcy proceeding that the agreement assigned to Guyant IRA a ten percent membership interest in Sanford.  Creditor Guyant IRA interpreted the scope of the security agreement differently and contended that, rather than assigning half of its twenty percent membership interest in Sanford LLC, Highland Construction assigned to Guyant IRA sixteen percent of all funds it received from distributions from Sanford.  Guyant IRA argued that it was owed the extra six percent based on debtor Highland Construction’s interest in a second LLC, named Foothills, LLC.  Highland Construction had a fifty percent membership interest in Foothills, LLC, which had its own twenty-four percent interest in Sanford.  Guyant IRA argued that Highland Construction’s fifty percent interest in Foothills meant that Highland Construction received an additional twelve percent distribution from Sanford through Foothills, and, therefore, Guyant IRA had a fifty percent interest in Highland Construction’s indirectly held twelve percent interest of Sanford, in addition to the twenty percent that Highland Construction held directly.  However, Foothills, LLC was not named in the security agreement.  Notwithstanding that the recitals of a 2008 amendment to the security agreement between Highland Construction and Guyant IRA referred to a sixteen percent interest in Sanford,the Bankruptcy Court agreed with the debtor Highland Construction, holding that Highland Construction only owed Guyant IRA fifty percent of its directly held membership interest in Sanford, LLC—i.e., ten percent.  The District Court affirmed without issuing a written opinion.

The Fourth Circuit affirmed the decision, explaining that Virginia corporations law would only ever allow Highland Construction to assign a portion of its own property; therefore, Highland Construction could not have assigned any portion of Foothills’ property, including its interest in Sanford, LLC.  Since Highland Construction could not have assigned Foothills’ membership interest in Sanford in the security agreement, the fifty percent membership interest assignment in the security agreement could only be Highland Construction’s twenty percent direct membership interest in Sanford, LLC.  Therefore, the Bankruptcy Court had correctly interpreted the scope of the security interest.

§ 1.1.6 Fifth Circuit

In re DeBerry (Whitlock L.L.C. v. Lowe), 945 F.3d. 943 (5th Cir. 2019). The debtor’s wife opened a joint bank account with her sister-in-law, Ms. Whitlock.  The joint bank account was funded with a cashier’s check for $275,000.00 that had been withdrawn from a joint marital account.  Three days after opening the account, the debtor’s wife removed herself from the newly opened joint account, leaving it solely in Ms. Whitlock’s name.  One month later, the $275,000.00 was transferred out of the account in a series of transactions.  Two wire transfers were at the heart of the case.  Ms. Whitlock signed these wire transfers at the debtor’s wife’s request and had no knowledge regarding the transfers.  The trustee commenced an adversary proceeding against the sister-in-law to recover a total of $275,000.00 in fraudulent transfers.  Following the settlement with the debtor’s daughter, $241,500.00 was at issue.  The trustee argued that Ms. Whitlock was liable for the entire amount pursuant to Section 550 of the Bankruptcy Code, which allows a bankruptcy trustee to recover fraudulently transferred funds from transferees.  Ms. Whitlock contended that she was not a “transferee” because the money never belonged to her and that she was a mere conduit.  Second, Ms. Whitlock argued that the funds had already been returned to the debtors via the wire transfers, so they could not be recovered.

The bankruptcy court held that, as Ms. Whitlock was the sole owner of the bank account, she was the initial transferee of an avoidable transfer subject to recovery under Section 550(a)(1).  Although the Bankruptcy Code provides that the trustee is “entitled to only a single satisfaction” for avoided transfers, 11 U.S.C. § 550(a) & (d), the bankruptcy court took the view that the single-satisfaction rule does not apply to funds that were returned to the debtor prior to the petition date.  Accordingly, the bankruptcy court entered judgment for the trustee.  The question for the Fifth Circuit was whether the trustee can recover funds that were already returned to the debtor.  The court began by noting that Section 550(a) permits the trustee to “recover” the property.  The court found that obtaining a duplicate of something is not getting it back, which is the definition of “recover,” but that it would be a windfall.  Property that has already been returned simply cannot be recovered.

Every other court to consider this issue has agreed with the foregoing plain reading of the text.  Some courts cite Section 550(d)’s ‘satisfaction rule’ and others rely on the bankruptcy court’s equitable powers.  The trustee could not point to a single decision supporting his reading of Section 550, but raised four arguments in opposition to the uniform interpretation of Section 550.  The trustee’s primary argument was that a plain reading of Section 550(d) means the single satisfaction rule does not extend to a prepetition reconveyance directly to the debtor.  Instead, the trustee argued that the single-satisfaction rule only applies to a satisfaction pursuant to Section 550(a), which a prepetition transfer could not be.  The court rejected “this strained reading.”  Looking to the plain meaning of the word “satisfaction,” the court held that, if an obligation has already been satisfied, the transferee has no further obligation.  That is “the trustee’s ‘avoidance action was satisfied before it was ever commenced.’”  Second, the trustee argued that nothing in the legislative history suggested that Congress intended Section 550(d) to be triggered by a prepetition repayment to the debtor.  The court noted that legislative history is not the law.  However, even assuming that the legislative history was relevant in general, it found the particular bit of legislative history cited by the trustee to be irrelevant.  Third, the trustee argued that, because the bankruptcy estate does not exist until the petition is filed, a prepetition satisfaction does not count as recovery “for the benefit of the estate.”  The court rejected this argument because it did not hold that the return of the property constituted a recovery for the benefit of the estate under Section 550(a), but instead held that there cannot be a recovery at all if the property has already been returned.  Fourth, and finally, the trustee argued that the bankruptcy court cases rejecting his reading were distinguishable because they actually involved a windfall to the bankruptcy estate.  The trustee argued that the recovery in this case could not provide a windfall to the estate because it did not remain in the estate at the time of the petition.  The Fifth Circuit noted that the bankruptcy code does not give the trustee the power to review for reasonableness the debtor’s prepetition expenditures.  Whether the debtor frittered away the money or not was simply irrelevant to the case.  Accordingly, the judgment was reversed.

In re Willis (Tower Loan of Mississippi, L.L.C. v. Willis), 944 F.3d. 577 (5th Cir. 2019). The debtor commenced an adversary proceeding pursuant to the Truth in Lending Act.  The lender moved to dismiss or, in the alternative, to compel arbitration.  The bankruptcy court denied the motion and the district court affirmed.  On appeal, the Fifth Circuit began by focusing on the agreement signed by the debtor when he borrowed money from the lender.  The court noted that “in signing the loan agreement, [the debtor] agreed to an arbitration agreement found on its back side.”  Similarly, in an insurance policy purchased in connection with the loan, the debtor agreed to a second arbitration agreement.  The lender did not sign the second agreement, but its representative handed it to the debtor for his signature.  The two arbitration agreements were similar but not identical.  Both broadly required arbitration for all disputes, including for any arising pursuant to the loan or the insurance policies.  Further, both agreements gave the arbitrator the power to decide gateway arbitrability.  The agreements, however, conflicted with respect to several procedural aspects of arbitration: e.g., selection and number of arbitrators, time to respond, location, and fee shifting.

In denying the lender’s motion, the bankruptcy court held that the first and second arbitration agreements formed a single contract and the conflicting provisions meant that the debtor and the lender had not formed a sufficiently definite contract to arbitrate under state law.  The court began its analysis with state law to determine whether the parties formed an arbitration agreement at all.  If so, the court would interpret the contract to determine whether the claim at issue was covered by the agreement.  This second step is normally for the court, but this analysis changes where the agreement delegates that question to the arbitrator.

The Fifth Circuit, applying Mississippi law, agreed with the lower courts that the two agreements constituted a single contract.  However, the Fifth Circuit disagreed with the bankruptcy court’s holding that conflicts between the two agreements prevented a meeting of the minds.  The court found that, notwithstanding these conflicts, the parties’ intention was unmistakable: “They wished to arbitrate any dispute that might arise between them.”  The conflicting terms were not essential and, as a matter of Mississippi law, the parties validly contracted to arbitrate.  Turning to whether the claim was arbitrable, the court found that there was clear intent to have the arbitrator decide the issue.  Accordingly, it was for the arbitrator to decide whether the Truth in Lending Act claim was subject to arbitration and to resolve the inconsistent procedural terms.  The court reversed and remanded to the district court with directions to refer the dispute to arbitration.

In re Sherwin Alumina Co. (Port of Corpus Christi Auth. v. Sherwin Alumina Co.), 952 F.3d. 229 (5th Cir. 2020). The Port of Corpus Christi Authority owned an 1,100-acre parcel of land adjacent to land owned by the debtor.  The Port also held an easement granting use of and access to a private road on the debtor’s land, which provided the primary means of commercial access to the Port’s land.  The debtor sought Chapter 11 relief from the United States Bankruptcy Court for the Southern District of Texas and filed its initial joint plan for reorganization.  In that plan, the debtor proposed to sell its real property free and clear of all liens, claims, charges, and other encumbrances in accordance with Section 363(f) of the Bankruptcy Code.  In accordance with bankruptcy court-approved bidding procedures, an auction was held and a third party emerged as the successful bidder.  Over the subsequent months, the debtor filed various modified plans and purchase agreements.  In each such document, it was clear that encumbrances other than those deemed permitted would be stripped off the estate’s property in accordance with Section 363(f).  Although permitted encumbrances were to be defined in a future proposed confirmation order, no document ever suggested that the Port’s easement would be a permitted encumbrance.

On the day of the confirmation hearing, the debtor filed a proposed confirmation order that defined permitted encumbrances to include a number of specific servitudes, easements and encumbrances, but the Port’s easement was not included.  The Port was served with that proposed confirmation order.  At the confirmation hearing that day, debtor’s counsel stated that the proposed order had been submitted with extensive modifications but he did not believe those modifications were material.  The bankruptcy court entered the order without objection and the plan was confirmed.

More than a month after confirmation, a subsequent owner of the debtor’s property notified the Port that its easement had been extinguished by the sale of the land pursuant to the plan.  Because the time to appeal the confirmation order had expired, the Port commenced an adversary proceeding to collaterally attack the confirmation order as having been procured by fraud, obtained via a denial of due process for want of notice, and as having barred by sovereign immunity.  The bankruptcy court dismissed the claims of fraud and sovereign immunity without leave to amend but failed to dismiss the due process claim.  The Fifth Circuit considered the Port’s appeal of the dismissal.

With respect to the question of sovereign immunity, the court looked to the United States Supreme Court’s decision in Tennessee Student Assistance Corporation v. Hood, which held that “a bankruptcy court’s discharge of an individual’s debt to the state of Tennessee did not violate the Eleventh Amendment.”  In that decision, the Supreme Court found that a discharge proceeding was an exercise of the bankruptcy court’s in rem jurisdiction over the debtor’s estate; that the debtor did not seek affirmative relief against the state; and that the proceeding did not subject the state to any coercive judicial process.  Accordingly, the Eleventh Amendment was not violated.  The Fifth Circuit reached a similar conclusion in connection with the Port’s appeal.  The court noted that the servient land was part of the bankruptcy estate and that the Port’s easement was “a non-possessory property interest” in that land.  Because the bankruptcy court’s order authorizing the sale free and clear of the Port’s interest neither awarded affirmative relief nor deployed coercive judicial process, the bankruptcy court was not exercising in personam jurisdiction over the state.  The court found that the Port’s easement was similar to Tennessee’s debt in the Hood case.  The Port held an interest burdening the bankruptcy res.  Moreover, the bankruptcy court properly exercised its in rem jurisdiction over the estate to extinguish that burdensome interest.

The court noted that it was not considering whether the proposed sale met the requirements for a sale free and clear pursuant to Section 363(f).  That argument was foreclosed because it had not been raised on direct appeal and could not be raised in a collateral attack.

The court then turned to Section 1144 of the Bankruptcy Code, which provides “[o]n request of a party in interest at any time before 180 days after the date of entry of the order of confirmation, and after notice and a hearing, the court may revoke such order if and only if such order was procured by fraud.”  The appellate court rejected the Port’s Section 1144 claim because it failed to allege any intentional false representation.  In reviewing the record, the court of appeals noted that from the initial bankruptcy filing until the confirmation hearing, more than a year later, the debtor had always proposed a sale in which property of the estate would be sold free and clear of all liens, claims, charges, and other encumbrances.  The court noted that under Texas law an easement is a type of encumbrance.  While the last-minute submission of the proposed confirmation order did carve out certain encumbrances from the sale order, there were not any changes at all with respect to the Port’s easement.  Accordingly, the court affirmed the dismissal of the Port’s Eleventh Amendment and fraud claims, but noted that the due process claim was still pending before the bankruptcy court and that it was not addressed.

In re Hidalgo County Emergency Services Found. (Hidalgo County Emergency Services Found. v. Carranza), 962 F.3d. 838 (5th Cir. 2020). Congress responded to the coronavirus pandemic by enacting the Coronavirus Aid Relief and Economic Security Act (the “CARES Act”).  Among other things, the CARES Act made available government-guaranteed loans to qualified small businesses through the Paycheck Protection Program (“PPP”).  The PPP is administered by the Small Business Administration (“SBA”).  The SBA promulgated regulations concerning PPP eligibility.  One of those regulations provided that a debtor in a bankruptcy proceeding would be ineligible to receive a PPP loan.  A Chapter 11 debtor alleged that it was denied a PPP loan based on its status as a bankruptcy debtor and filed an adversary proceeding against the SBA.  The debtor contended that the SBA’s decision to preclude bankrupt parties from obtaining PPP loans violated Section 525(a) of the Bankruptcy Code which prohibits discrimination based on bankruptcy status and was arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law, and finally that it was in excess of the statutory jurisdiction granted to the SBA.  The bankruptcy judge agreed with the debtor and issued a permanent injunction mandating that the SBA handle the debtor’s PPP application without consideration of its ongoing bankruptcy.  The case was certified for direct appeal to the United States Court of Appeals for the Fifth Circuit.  On appeal, the SBA Administrator argued that the Small Business Act prohibited injunctive relief against his office.  15 U.S.C. § 634(b)(1).  The Fifth Circuit had previously held “that all injunctive relief directed at the SBA is absolutely prohibited.”  The court noted that the “issue at hand is not the validity or wisdom of the PPP regulations and related statutes, but the ability of a court to enjoin the administrator, whether in regard to the PPP or any other circumstance.”  The court held that “under well-established Fifth Circuit law, the bankruptcy court exceeded its authority when it issued an injunction against the SBA Administrator.”  Accordingly, the preliminary injunction was vacated.

In re Ultra Petroleum Corp. (Three Rivers Holdings, L.L.C. v. Ad Hoc Committee of Unsecured Creditors of Ultra Resources, Incorporated), 943 F.3d. 758 (5th Cir. 20219). In this case, the Fifth Circuit addressed what it considered “exceedingly anomalous facts.”  Those anomalous facts were that the debtor entered its bankruptcy proceeding insolvent, but then became solvent.  These unique facts arose “by virtue of a lottery-like rise in commodity prices.”  As a result, “the debtors proposed a rare creature in bankruptcy—a reorganization plan that (they said) would compensate their creditors in full.”  With respect to certain unsecured notes, the debtors proposed to pay three sums: “the outstanding principal on those obligations, pre-petition interest at a rate of 0.1%, and post-petition interest at the federal judgment rate.”  Based on this treatment, the debtors’ plan treated this class of creditors as unimpaired, who could, therefore, not object to the plan.  Notwithstanding their designation as unimpaired, the class of creditors objected insisting that they were impaired because the plan did not provide for payment of a contractual make-whole premium and additional post-petition interest at contractual default rates.  The make-whole premium was triggered upon prepayment and was designed to provide compensation for the noteholder’s right to maintain its investment free from repayment.  The relevant loan agreements provided that a bankruptcy petition made the outstanding principal, any accrued interest, and the make-whole amount immediately due and payable.  The debtors acknowledged that their plan did not call for payment of the make-whole amount or provide post-petition interest at the contractual rates.  They nonetheless insisted that the creditors were not impaired because federal law barred them from recovering the make-whole premium and entitled them to receive post-petition interest only at the federal judgment rate.

The Fifth Circuit began its analysis by noting that the Bankruptcy Code “provides that a class of claims is not impaired if ‘the [reorganization] plan … leaves unaltered the legal, equitable, and contractual rights to which such claim … entitles the holder.”  The court noted section 502(b)(2) of the Code requires a court to disallow a claim to the extent it seeks unmatured interest.  The debtors argued that the make-whole amount qualified as unmatured interest.  They also argued that it was an unenforceable liquidated damages provision under New York law.  As a result, something other than the plan, either the Bankruptcy Code or New York law, prevented this class of creditors from recovering the disputed amount.  The debtors made a similar argument with respect to post-petition interest.  Section 726(a)(5) of the Code entitles creditors at most, to post-petition interest at the legal rate, and not the contract rate.  The bankruptcy court rejected these arguments.  It held that New York law permitted recovery of the make-whole premium and imposed no limit on contractual post-petition interest rates.  The Fifth Circuit noted that the bankruptcy court did not address whether the Bankruptcy Code disallowed the make-whole amount as unmatured interest or what section 726(a)(5)’s “legal rate” of interest means.  Based on these holdings, the bankruptcy court ordered the debtors to pay the make-whole premium and post-petition interest at the contractual rate.  The question was certified for direct appeal to the Fifth Circuit.

The appellate court found that the plain text of section 1124(1) requires that the alteration of the creditor’s rights be as a result of a plan and not otherwise, in order for that creditor to be impaired.  It held that “a creditor is impaired under [section] 1124(1) only if ‘the plan’ itself alters a claimant’s ‘legal, equitable, [or] contractual rights.’”  The court noted that the creditors could not point to a single decision suggesting otherwise.  To the contrary, the court noted that Collier on Bankruptcy “states the point in unequivocal terms: ‘Alteration of Rights by the Code Is Not Impairment under Section 1124(1).’”  The court, therefore, concluded that, when “a plan refuses to pay funds disallowed by the Code, the Code—not the plan—is doing the impairing.”  The court then turned to the question of whether the Bankruptcy Code disallowed the claims for the make-whole amount and post-petition interest at the contractual rate.  The creditors argued that their contract should be honored “under bankruptcy law’s long-standing ‘solvent-debtor’ exception.”  The debtors argued that no such exception exists under the Bankruptcy Code.  The Bankruptcy Court had never reached these questions.  The Fifth Circuit noted that the issue of make-whole premiums had become a common issue in modern bankruptcy.  While the court cited cases holding that it was sometimes very easy to tell whether such premiums were effectively unmatured interest that was disallowed by section 502(b), it also cited cases finding that it can be a harder question depending “on the dynamics of the individual case.”  The court noted that the bankruptcy court would be best equipped to address this question and the question of post-petition interest.  The court noted that its review of the record revealed no reason why the solvent-debtor exception could not apply in applying that exception.  Moreover, other circuits had held that “absent compelling equitable considerations, when a debtor is solvent, it is the role of the bankruptcy court to enforce the creditors’ contractual rights.”  The appellate court, therefore, remanded the matter to the bankruptcy court.

§ 1.1.7 Sixth Circuit

Fed. Energy Reg. Comm’sn v. First Energy Sols. Corp. (In re First Energy Sols. Corp.), 945 F.3d 431 (6th Cir. 2019). In a ruling at the intersection of energy law and bankruptcy, the Sixth Circuit held that (i) energy contracts do not amount to de jure regulations in the context of bankruptcy, and are, thus, capable of rejection; (ii) bankruptcy courts do not have unfettered jurisdiction superior to that of the Federal Energy Regulatory Commission (“FERC”), although the bankruptcy court may enjoin FERC from acting in circumstances where FERC might seek to directly interfere with a bankruptcy proceeding; and (iii) rejection of energy contracts should be governed by a standard that scrutinizes the impact of rejection on the public interest—something more than ordinary business judgment—aligning itself with the Fifth Circuit.

FirstEnergy Solutions Corp. (“FirstEnergy”) and its subsidiary commenced Chapter 11 proceedings in March 2018.  The day after it commenced bankruptcy proceedings, it filed an adversary proceeding against FERC seeking a declaratory judgment that the bankruptcy court’s jurisdiction was superior to FERC’s and injunctions prohibiting FERC from interfering with FirstEnergy’s intended rejection of certain energy contracts that it had previously filed with FERC.  The bankruptcy issued broad injunctions against FERC, prohibiting it from taking any action with respect to FirstEnergy.

The first question the court addressed was whether contracts filed with FERC cease to be ordinary contracts once they are filed, and instead become de jure regulations, which should not be subject to rejection in bankruptcy.  Considering the public necessity of federal regulation of the energy alongside the public necessity of ensuring the ability of energy companies to survive, even when burdened with unprofitable contract, the court determined that “the public necessity of available and functional bankruptcy relief is generally superior to the necessity of FERC’s having complete or exclusive authority to regulate energy contracts and markets.”  Thus, for bankruptcy purposes, the subject contracts were not de jure regulations beyond the ambit of rejection under the Bankruptcy Code.

The second question that the court addressed was whether the bankruptcy court was entitled to enjoin FERC “from doing anything and everything—from entering any orders or even holding its own hearing.” Id. at 448 (emphasis original).  The Sixth Circuit held that the bankruptcy court’s order strayed too far from precedent established under Chao v. Hospital Staffing Services, 270 F.3d 374 (6th Cir. 2001).  Although the Circuit Court did not necessarily disagree with the bankruptcy court’s holding that FERC proceedings were not excepted from the automatic stay under the public-policy test, it concluded that the bankruptcy court was wrong not to limit its holdings to the facts at hand (the bankruptcy court’s holding would have held that FERC’s interest in preventing bankruptcy rejection of any filed contract would be only incidentally public, and, thus, would always be subject to the automatic stay).  The Sixth Circuit further noted that the bankruptcy court improperly omitted a crucial point in Chao—that any conflict in jurisdiction should be decided by an appellate court with jurisdiction to hear appeals from both fora.

The Sixth Circuit further held that section 105(a) of the Bankruptcy Code did not provide the bankruptcy court with unfettered power to enjoin FERC.  Instead, relying heavily on the Fifth Circuit’s interpretation of a similar question in In re Mirant Corporation, 378 F.3d 511 (5th Cir. 2004), the Sixth Court held that section 105(a) afforded the bankruptcy court only the power to enjoin FERC from issuing potentially contradictory orders.  Because the bankruptcy court’s injunction prohibited FERC from taking any action whatsoever, even so far as holdings its own hearing, it went too far.  Thus, the court concluded that the bankruptcy court has jurisdiction superior to FERC in matters which might interfere with the bankruptcy proceeding, but does not have the unfettered right to enjoin FERC from “risking its own jurisdictional decision, conducting its (otherwise regulatory mandated) business, or issuing orders that do not interfere with the bankruptcy court.”

Finally, the Sixth Circuit decided the standard applicable to rejection of a FERC-regulated contract.  Relying on the standard established by the Fifth Circuit in Mirant, the court determined that the bankruptcy court must consider rejection of executory power contract in the context of the public interest, including the consequential impact on consumers and any tangential contract provisions concerning, for instance, decommissioning, environmental management, and future pension obligations, to ensure that “the equities balance in favor of rejecting the contracts.” Id. at 454 (citing Mirant, 378 F.3d at 525).

§ 1.1.8 Seventh Circuit

In re hhgregg, Inc., 949 F.3d 1039, 1041 (7th Cir. 2020). In a priority contest between a supplier seeking reclamation of inventory provided to the debtor and the debtor’s secured DIP lender with a floating lien on all of the debtor’s assets, including existing and after-acquired inventory and its proceeds, the Seventh Circuit Court of Appeals held that the secured lender’s interest in the inventory is superior to the supplier’s pursuant to section 546(c) of the Bankruptcy Code.

The debtor hhgregg, Inc. (the “Debtor”), which sold home appliances, electronics and related services to consumers, filed for Chapter 11 bankruptcy.  A prepetition lender, Wells Fargo Bank (“Wells Fargo”), became a DIP lender with the bankruptcy court’s approval, and obtained a priming, first-priority floating lien on substantially all of the Debtor’s assets, including existing and after-acquired inventory and its proceeds.  Subsequently, one of the Debtor’s suppliers, Whirlpool, sent a reclamation demand seeking the return of appliances it had delivered in the 45-day period before the bankruptcy petition.

Whirlpool then filed an adversary action against Wells Fargo seeking a declaration that its reclamation claim was first in priority as to the reclaimed goods, alleging, among other things, that Wells Fargo had not acted in good faith because it knew the Debtor was insolvent and still continued to provide financing, enabling the Debtor to acquire additional inventory from suppliers like Whirlpool in order to expand Wells Fargo’s own collateral base.  Wells Fargo moved to dismiss.  The bankruptcy judge treated the motion as one for summary judgment and entered final judgment for Wells Fargo.  The judge noted that the 2005 amendments to the Bankruptcy Code, which resulted in the current form of section 546(c), expressly made a seller’s reclamation right “subject to the prior rights of a holder of a security interest in such goods or the proceeds thereof,” and held that Whirlpool’s reclamation claim was subordinate to Wells Fargo’s prior, unbroken lien chain on the Debtor’s assets.  The district court affirmed.

The Seventh Circuit Court of Appeals also affirmed.  The court held that a reclamation claim was governed by 11 U.S.C. § 546(c), as modified by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which provides that a seller’s right to reclaim goods is “subject to the prior rights of a holder of a security interest in such goods or the proceeds thereof.”  The court examined the history of section 546(c), noting that although priority was uncertain under the old version of section 546(c), the 2005 amendments made it “crystal clear that a seller’s reclamation claim is subordinate to ‘the prior rights of a holder of a security interest.’  [11 U.S.C.] § 546(c)(1).  What this means as a practical matter is that ‘if the value of any given reclaiming supplier’s goods does not exceed the amount of debt secured by the prior lien, that reclamation claim is valueless.’”  In re hhgregg, Inc., 949 F.3d 1039, 1048 (7th Cir. 2020) (quoting In re Dana Corp., 367 B.R. 409, 419 (Bankr. S.D.N.Y. 2007)).

The court found that, under the terms of the DIP financing agreement and effective upon entry of the court’s interim DIP financing order, Wells Fargo obtained a perfected, first-priority security interest in all hhgregg assets, including the reclaimed goods, and it maintained a continuous lien chain that preceded Whirlpool’s reclamation demand.  Specifically, the court rejected Whirlpool’s argument that its reclamation claim was “in effect” as of the March 6 petition date and “jumped into first position” during a “gap in the lien chain” that occurred between March 6, when Wells Fargo’s prepetition security interest was superior, and March 7, when Wells Fargo’s postpetition security interest attached pursuant to the DIP financing order, finding that Whirlpool had no right under section 546(c)(1) until it served its written reclamation demand on March 10.

The court further dismissed Whirlpool’s arguments referring back to state law principles as explicitly overridden by the adoption of the federal priority rule implemented pursuant to section 546(c).

§ 1.1.9 Eighth Circuit

In re Peabody Energy Corporation, No. 19-1767 (8th Cir. May 6, 2020). The Eighth Circuit curtailed the ability of municipalities to make public nuisance-type claims against companies that have emerged from bankruptcy, when the behavior giving rise to the claim is abated prepetition.  The court affirmed decisions of the U.S. Bankruptcy Court and the U.S. District Court for the Eastern District of Missouri, finding that the plaintiff municipalities were barred from asserting claims for “contributions for global warming” from the debtor’s export of coal from California.

In April 2016, Peabody Energy Corporation (“Peabody”) filed for Chapter 11 bankruptcy.  Ultimately, Peabody emerged from bankruptcy as a reorganized company.  Several months after Peabody emerged from bankruptcy, three California municipalities sued it—along with over thirty other energy companies—alleging claims of negligence, strict liability, trespass, private nuisance and public nuisance for the defendants’ former and ongoing contributions to global warming.  The public nuisance claims sought, among other things, damages and disgorgement of profits.  In response, Peabody moved the bankruptcy court to enjoin the municipalities from pursuing their claims and dismiss them with prejudice on the ground that the court-approved plan of reorganization had discharged the claims.  The bankruptcy court granted Defendant Peabody’s request, finding that the plaintiffs’ claims focused on acts occurring from 1965 to 2015 (except for Peabody’s continued export of coal from California), and was, therefore, discharged by Peabody’s plan as relating to Peabody’s prepetition conduct.

The Eighth Circuit rejected the municipalities’ arguments on appeal.  First, the Eighth Circuit agreed with the bankruptcy court that the municipalities’ common law claims did not qualify as “Environmental Laws,” as defined in Peabody’s plan, that were specifically excepted from discharge.  The court then affirmed that the municipalities’ claims were not an exercise of their police power because the municipalities were seeking money as victims of alleged torts, rather than exercising regulatory or police authority over Peabody.

The court also rejected the plaintiffs’ argument that their representative public-nuisance claims were exempt from discharge because the public-nuisance claims, asserted on behalf of the people of California, were not claims under bankruptcy law since California law does not permit them to recover damages under that theory.  Rather than relying on the statutory language, which limited recovery on public nuisance claims to an “equitable decree,” the Court probed further, and upon finding that such equitable decrees could include obligations to pay money, found that those claims too were dischargeable in bankruptcy.  It did not matter that the municipalities were not requesting this remedy in their complaint; the court found that fact that a California court could order the remedy was sufficient to make the claim dischargeable in bankruptcy.  Finally, the court rule that allegations in the complaint extending to Peabody’s postpetition conduct, exporting coal, were insufficient to change the nature of the complaint to one for postpetition conduct.

In re Family Pharmacy, Inc., No. 19-6025, 2020 WL 1291112 (8th Cir. BAP Mar. 19, 2020). The Bankruptcy Appellate Panel for the Eighth Circuit has held that oversecured creditors have an unqualified right to recover interest under section 506(b), and such right is not subject to reconsideration on the basis of enforcement as a penalty under Missouri law, nor is it subject to rebuttal based on equitable considerations.

Between July 2014 and March 2018, the Bank of Missouri (“BOM”) made eight loans in the total amount of approximately $11 million to Family Pharmacy, Inc. and four related entities (the “Debtors”).  The debt to BOM was secured by a first priority lien on the Debtors’ assets, consisting primarily of inventory, equipment and real estate used in operating their business.  The Debtors’ assets were also encumbered by two other secured creditors: Cardinal Health, who had a second priority lien securing $1 million in debt, and J M Smith Corporation and Smith Management Services, LLC (together, “Smith”), which had a third priority lien securing $18 million in debt.

In April 2018, the Debtors filed for Chapter 11.  They subsequently sold their assets at an auction free and clear of all liens in the amount of $13.975 million.  The bankruptcy court entered a sale order approving Smith as the purchaser.  BOM, as an over secured creditor, later filed a motion under 11 U.S.C. § 506(b) seeking allowance of interest calculated at a high default rate on the basis that it was oversecured.  The bankruptcy court denied BOM’s motion, holding that the default rate constituted an unenforceable liquidated damages penalty under Missouri law.  The bankruptcy court also held that the default interest rate could not be enforced based on equitable considerations.

On appeal, the Eighth Circuit Bankruptcy Appellate Panel reversed.  The Panel began its analysis by acknowledging that all over secured creditors are entitled to postpetition interest.  The Panel observed that most courts have concluded that such postpetition interest should be calculated at the rate provided in the contract.  It also noted that the parties had agreed that the substantive law of the state of Missouri would apply.  Missouri law permits parties to loans to agree in writing to any rate of interest, fees and other terms and conditions.

The Panel pointed out that liquidated damage provisions and default interest provisions are often conflated.  However, default interest is not subject to rebuttal if it is construed as a penalty.  The analysis is more straightforward—if there has been a default, the default interest rate negotiated by the parties will apply; a liquidated damages provision merely fixes the amount of damages payable in the event of a specified breach.  The panel held that the bankruptcy court erred by applying a liquidated damages analysis because doing so imputed a “reasonableness” analysis to the question of BOM’s unqualified right to interest.

The Panel also reversed the bankruptcy court’s ruling that the equities of the case mandated disallowance of the default interest rate, noting that “no section of the Bankruptcy Code gives the bankruptcy court authority, equitable or otherwise, to modify a contractual interest rate prior to plan confirmation.”  It concluded that absent some compelling reason to the contrary, BOM should be permitted to collect interest at the higher rate if the bankruptcy court concluded that the default rate applied.  The Panel remanded the matter for further proceedings before the bankruptcy court.

§ 1.1.10 Ninth Circuit

In re Gardens Reg’l Hosp. & Med. Ctr., Inc., 975 F.3d 926 (9th Cir. 2020). The Ninth Circuit recently added greater contours to the definition of recoupment versus setoff when it affirmed in part and reversed in part a bankruptcy court determination that the California Department of Health Care Services (the “State”) was entitled to recoup a debtor’s prepetition and postpetition health-related tax assessments from the obligations the State owed to the debtor.  The court held that, while one of the State’s obligations running to the debtor bore the necessary logical connection to the assessment to qualify for recoupment, the other stream of payments from the State to the debtor, just by virtue of arising out of the State’s Medicaid program from which the assessment arose, did not.

The State imposed a Hospital Quality Assurance Fee (“HQAF”) on private hospitals that the debtor, Gardens Regional Hospital and Medical Center, Inc. (“Gardens Regional”) failed to pay before filing for bankruptcy.  If a hospital failed to pay, the State was authorized by statute to immediately deduct the unpaid assessment from any payments the State owed to the hospital.  California’s Medicaid program used a “fee-for-service” system through which a covered individual would receive treatment with a participating hospital and the state would pay the provider for the service.  As a result of the fee-for-service system, the State owed certain payments to Gardens Regional.  The State also owed Gardens Regional certain “supplemental” payments that resulted from the HQAF scheme.  The State recovered the entirety of its prepetition debt arising from the HQAF assessments, as well as a significant portion of HQAF assessments arising postpetition, by withholding portions of the fee-for-service payments as well as the supplemental payments to which Gardens Regional was entitled.

Gardens Regional filed a motion to compel the State to return the amounts, arguing that the withholdings were in violation of the automatic stay and constituted an impermissible setoff.  The State maintained that the withholdings were exempt from the automatic stay under the equitable doctrine of recoupment.  The bankruptcy court held that the HQAF assessments had a logical relationship to the fee-for-service payments and the supplemental payments, and denied the Gardens Regional’s motion.  The BAP affirmed the holding of the bankruptcy court.

Before discussing the case at hand, the Ninth Circuit described the difference between setoff, the exercise of which is subject to the automatic stay, and recoupment, the exercise of which is not subject to the automatic stay.  While setoff involves mutual debts and claims these debts and claims could arise from different transactions.  Recoupment, on the other hand, involves defining the amount owed under a single claim.  However, the rights giving rise to recoupment must also stem from the same transaction or occurrence.  The court emphasized that the most important consideration when analyzing a claim for recoupment was whether the claims or rights for which recoupment was sought by the creditor had a “logical relationship” to the obligations owed by the debtor to the creditor.

The Ninth Circuit considered both compensation streams from which the State withheld payment to Gardens Regional.  It found there was a direct connection between the HQAF payments, which went to a segregated fund, and the supplemental payments that were made to hospitals from that very same fund.  Further, the HQAF statute explicitly detailed that the purpose of the HQAF program was to allow for certain fees to be paid by hospitals, which would then be used to increase federal financial participation which allowed the State to then make supplemental payments back to the hospitals.  Gardens Regional argued that federal law actually prohibits any specific linkage between the HQAF assessments of a taxpayer and the amount of Medicaid payments made to that taxpayer however the Court indicated that, while this was true, the HQAF program created an “overall linkage” between the payment systems in and out of the fund which was sufficiently connected as to permit recoupment.  However, with regards to the payments owed to the Gardens Regional under the fee-for-service payments, the court found that these deductions were an improper setoff because the same statutory relationship that existed as between the supplemental payments and the HQAF assessments was lacking as between the fee-for-service payments and the HQAF assessments such that the payments lacked any legal or factual connection to the HQAF assessments.

Blixseth v. Credit Suisse, No. 16-35304 (9th Cir. June 11, 2020). Overturning a district court’s dismissal of a challenge to an exculpation provision under a Chapter 11 plan on equitable mootness grounds, the Ninth Circuit nonetheless affirmed the dismissal on its merits.  The Court held that section 524(e) did not bar a narrow exculpation provision contained in the plan, notwithstanding that the exculpation barred certain claims against non-debtors for actions related to the plan approval process.

In 2000, Timothy Blixseth (“Blixseth”) and his wife (“Edra”) founded the Yellowstone Club in Big Sky, Montana.  In 2005, Blixseth obtained a $375 million loan from Credit Suisse and other lenders, secured by the assets of companies related to the Yellowstone Club (collectively, the “Yellowstone Entities”).  When Blixseth and Edra divorced in 2008, Edra became the indirect owner of the Yellowstone Entities.  Largely because Blixseth had “mismanaged and misused” the 2005 loan proceeds, which the companies could not afford to pay back, Edra decided to pursue an asset sale through a Chapter 11 proceeding.

The exculpations became a hot button issue as the parties came to the plan negotiation stage of the Chapter 11 proceedings.  Credit Suisse objected to confirmation, in part on grounds that the releases then contained in the plan were over-inclusive and, therefore, forbidden in the Ninth Circuit.  Eventually, Credit Suisse, the Yellowstone Entities, and the asset purchaser entered into a global settlement, upon which an amended plan was formulated.  The amended plan included an exculpation which extended to Credit Suisse, the asset purchaser, and Edra for “any act or omission in connection with, relating to or arising out of the Chapter 11 Cases, the formulation, negotiation, implementation, confirmation or consummation of this Plan, Disclosure Statement, or any contract, instrument, release or other agreement or document entered into during the Chapter 11 Cases or otherwise created in connection with this Plan.”  Blixseth, who has not covered by the exculpation, objected to the plan.  The bankruptcy court approved the plan over Blixseth’s objection.  Blixseth appealed to the district court, which reversed based on the breadth of the exculpation.  On remand, the bankruptcy court again confirmed the plan, without modification, holding that the exculpation was “narrow in both scope and time.”  Again, Blixseth appealed to the district court.  This time, the district court dismissed the appeal for Blixseth’s lack of standing, after rejecting the plan proponents’ argument that the appeal was barred by equitable mootness.  The Ninth Circuit revered in part and affirmed in part, holding that Blixseth had standing to pursue the appeal, which was not equitably moot.  The Circuit Court remanded to the district court for a determination on the merits of Blixseth’s appeal.  However, on remand, the district court did not reach the merits, instead ruling that Blixseth’s appeal was barred by equitable mootness.

After refusing to dismiss Blixseth’s appeal for failing to abide by certain scheduling orders, the Ninth Circuit determined, as it had previously, that Blixseth’s appeal was not equitably moot.  Because the court had the capacity to fashion a remedy that would resolve Blixseth’s appeal, at least in part, the appeal was not moot.  Furthermore, because the Ninth Circuit had already ruled on the issue, its prior decision was binding as law of the case.

Nonetheless, since Blixseth’s appeal involved only questions of law regarding the validity of the exculpation, the Ninth Circuit proceeded to the merits of Blixseth’s appeal:  whether the bankruptcy court could release Credit Suisse, as a creditor, from liability for certain potential claims against it by approving the exculpation provision.  The basis for Blixseth’s argument was that the exculpation amounted to a discharge of the debt of a non-debtor under section 524(e).  Considering the history and purpose of section 524(e), the court concluded that section 524(e) was intended to prevent non-debtors from discharging debts on which they were co-liable with the debtors, and for which the debtors had received a discharge.  Because the claims released in the exculpation provision were unrelated to the Yellowstone Entities’ discharged debts, the limitation in section 524(e) did not apply to bar the exculpation provision at issue.

§ 1.1.11 Tenth Circuit

Drivetrain, LLC v. Kozel (In re Abengoa Bioenergy Biomass of Kansas, LLC), No. 18-3120 (10th Cir. May 5, 2020). The Tenth Circuit Court of Appeals extended the applicability of its equitable mootness doctrine to Chapter 11 plans of liquidation, rather than limiting the doctrine solely to plans of reorganization.

Debtor Abengoa Bioenergy Biomass of Kansas (“ABBK”), which constructed and operated an ethanol conversion facility in Kansas with the financial support of its four subsidiaries, converted a Chapter 7 proceeding into a voluntary petition for reorganization pursuant to Chapter 11.  The bankruptcy plan was confirmed, over Drivetrain’s objection, and substantially consummated when ABBK auctioned the Kansas facility and distributed most of the estate’s other assets to creditors, subordinating all inter-company claims.

Drivetrain sought to stay the plan’s enforcement and implementation, which the bankruptcy court denied on the ground that Drivetrain had failed to demonstrate a likelihood of success in overturning the plan.  Drivetrain appealed the stay denial, while the ABBK trustee moved before the district court to dismiss Drivetrain’s appeal of the plan confirmation as equitably moot, given that the plan had been substantially consummated.  After the district court granted that motion, on the basis that a successful appeal of the plan confirmation could harm innocent third-party creditors, the Tenth Circuit consolidated both matters on appeal.

Drivetrain argued that the equitable mootness doctrine only applies to conventional reorganizations—not cash-only liquidations under Chapter 11.  However, the Tenth Circuit held that the flexible, multi-factor test guiding equitable mootness in the context of substantially completed plans—factors which include, among other things, the effect of the relief requested on the plan and the harm to third parties who have justifiably relied on the plan’s confirmation—does apply to Chapter 11 liquidation plans.  Abengoa Bioenergy Biomass of Kansas, LLC, 958 F.3d 949, 956 (10th Cir. 2020) (citing Search Market Direct, Inc. v. Paige (In re Paige), 584 F.3d 1327, 1335 (10th Cir. 2009)).  The court noted that other circuits (including the Tenth Circuit) have affirmed equitable mootness rulings within the context of Chapter 11, and refused to “erect a categorical bar to equitable mootness in the context of a Chapter 11 liquidation.”  Id. at 957.  The court found that the factors in the Paige test—in particular, the impact on reorganization, the costs created by ongoing litigation, and the benefits provided by a successful reorganization—enable courts to evaluate the propriety of equitable mootness within the context of a cash-only liquidation.  Id. at 954 n.3, 956.

The court then applied the six-factor Paige inquiry and found that, among other things, the substantial consummation of the plan, the negative effects of reversing the plan on innocent third parties’ rights, and the need for creditors to be able to rely upon decisions of the bankruptcy court, weighed in favor of equitable mootness.  Accordingly, the Tenth Circuit held that the district court did not abuse its discretion in dismissing Drivetrain’s appeal of the confirmed plan of liquidation as equitably moot.

In re Rumsey Land Co., LLC, 944 F.3d 1259, 1265 (10th Cir. 2019). Debtor Rumsey Land Company, LLC (“Rumsey”) commenced the adversary proceeding that spawned this appeal against Pueblo Bank & Trust Company, LLC (“PBT”) and Resource Land Holdings (“RLH”) in 2015, asserting, among other things, claims for fraudulent concealment and violations of section 363(n)’s prohibition on collusive bidding.  The bankruptcy sale in question took place in 2011.  The Tenth Circuit affirmed the decision of the district court dismissing the claims on various grounds, although the court emphasized that the alternative forms of relief demanded in connection with the section 363(n) claim needed to be addressed separately.

Rumsey filed for bankruptcy in January 2010.  Soon thereafter, in March 2010, Rumsey sought to sell certain real property, encumbered by a first deed of trust held by PBT, to RLH for approximately $7.5 million.  However, multiple creditors objected to the transaction and the bankruptcy court ordered that Rumsey market the property more broadly.

In December 2010, having failed to purchase the property directly from Rumsey in the bankruptcy sale, RLH signed a loan purchase agreement with PBT to purchase Rumsey’s debt.  However, on February 1, 2011, PBT refused to close on the loan purchase agreement.  Thereafter, RLH sued PBT to enforce the loan purchase agreement.  Rumsey did not know about the loan purchase agreement or the lawsuit at the time.

Meanwhile, in March 2011, Rumsey obtained bankruptcy court approval of its sale and notice procedures.  RLH submitted a $4 million stalking horse bid in cash.  PBT submitted a competing $5 million credit bid as the stalking horse bid.  Rumsey chose to proceed using PBT’s $5 million credit bid as stalking horse.  Although a third party was selected as the winning bid in May 2011, when the successful bidder was not able to close in August 2011, Rumsey accepted PBT’s bid as the backup.

In September 2011, RLH and PBT settled their lawsuit.  As part of the settlement, PBT and RLH agreed that RLH would buy the Rumsey property from PBT for $4.75 million after the bankruptcy sale.  After the bankruptcy sale to PBT closed on October 6, 2011, PBT then transferred the property to RLH on October 13.  Rumsey did not learn of this transaction until 2015, at which point Rumsey initiated the adversary proceeding against PBT and RLH, alleging six causes of action on the premise that they entered into a secret, collusive agreement that undermined the auction.  After RLH filed a motion to withdraw the reference, the proceedings were transferred to the district court where summary judgment was granted on the merits on all six claims.

Only Rumsey’s fraudulent concealment claim and collusive bidding claim under section 363(n) were challenged on appeal.  With regards to fraudulent concealment, as to RLH, the circuit court ruled that RLH was not a party to a business transaction with Rumsey and had no duty to disclose any information to Rumsey.  As to PBT, the court ruled that Rumsey had waived its claim for fraudulent concealment against PBT because Rumsey failed to advance any specific arguments regarding PBT’s duty to disclose.  With regard to the collusive bidding claim under section 363(n), the circuit court found that the district court had erred by considering both Rumsey’s claim for damages and avoidance of the bankruptcy sale barred by Federal Rule of Civil Procedure 60(c)(1).  Instead, the court determined that the Rule 60(c)(1) limitation applied only to Rumsey’s claim to avoid the sale; the claim for damages was not barred by Rule 60(c)(1).  Nonetheless, the district court did not err in its ruling because, as the circuit ruled, Rumsey had failed to prove that the purpose of PBT and RLH’s agreement was to control the price of Rumsey’s original section 363 sale.

§ 1.1.12 Eleventh Circuit

In re Bay Circle Properties LLC, 955 F.3d 874 (2020). The Eleventh Circuit Court of Appeals added further clarity to the parameters for standing to bring an appeal of a bankruptcy court order when it held that an individual who is not himself the owner of a parcel of real property on which a creditor foreclosed, but only asserts some undefined “beneficial” interest therein and claims to be the guarantor of underlying debt, lacked standing not only because he had suffered no injury but also because he was not a “person aggrieved” by an order of the bankruptcy court.

This case featured co-plaintiffs Chittranjan Thakkar (“Thakkar”) and DCT Systems Group, LLC (“DCT”), with which Thakkar claim to “affiliated.”  Both Thakkar and DCT had separate loans issued by Wells Fargo.  When DCT declared bankruptcy, both parties entered into a settlement agreement with the bank, offering two properties DCT owned and to which Thakkar asserted a “beneficial interest” as collateral for the loans.  The settlement agreement included a deeds-in-lieu-of-foreclosure remedy, which allowed Wells Fargo to recover the encumbered property without necessity of a foreclosure judgment.  At some point thereafter, Wells Fargo sold its interest in the settlement to Bay Point Capital Partners (“Bay Point”).  DCT subsequently defaulted on the loans and Bay Point chose to record the properties deeds and pursue foreclosure on both properties.  Two days before the foreclosure sale, DCT purported to offer $2.8 million in payment of the remaining debt to Bay Point, but Bay Point did not respond to the offer.  Bay Point then sold the properties through the foreclosure sale for $2.85 million.

Thakkar and DCT sued Bay Point in state court, alleging that Bay Point’s foreclosure of the two properties caused Thakkar to lose the collateral’s value exceeding the debt balance and to suffer mental anguish.  Bay Point removed the case to the U.S. Bankruptcy Court for the Northern District of Georgia and moved for judgment on the pleadings, which the bankruptcy court granted.  The District Court for the Northern District of Georgia affirmed the bankruptcy court’s ruling in all respects.  Originally, both Thakkar and DCT appealed to the circuit court, but DCT eventually settled with Bay Point, agreeing to relinquish all claims regarding the two properties.  As a result, Thakkar became the sole appellant, challenging both Bay Point’s decision to record both properties deeds, as opposed to one, and Bay Point’s failure to accept the purportedly proper “tender.”

The Eleventh Circuit analyzed the three elements for Article III standing to determine that Thakkar alone did not have standing to bring the case because he had not suffered an injury personal to him.  The court noted that DCT undoubtedly had standing, but since it had relinquished all claims, Thakkar could “no longer piggyback” on its standing.  Since Thakkar pled that it was DCT that owned the two properties and failed to elaborate on his “beneficial interest” in DCT, the court could not find that Thakkar personally suffered an actual injury.

The court also found that Thakkar did not have standing under the “person aggrieved doctrine,” which limits the right to appeal a bankruptcy court order to those parties having a direct and substantial interest in the question being appealed.  The standard imposes an additional limitation on constitutional standing, over and above Article III’s requirements.  The court found that Thakkar’s inability to articulate his financial interest in DCT’s properties meant that he was not directly harmed by the bankruptcy court’s order.  In addition, the Court dismissed Thakkar’s argument that the lack of “inherent fairness of the bankruptcy proceeding” was sufficient to meet the “person aggrieved” standard because his interest in the DCT properties did not fall within the scope of the Bankruptcy Code.

It has never been more important for organizations to enact purposeful agendas around workplace harassment and diversity, equity and inclusion (“DEI”). When implemented thoughtfully, high quality training programs can be vital and cost-effective tools for improving workplace culture while mitigating the significant risks the modern world carries.

Companies have long used training to meet compliance requirements. Harassment prevention training focuses on the difficult topic of sexual harassment, as well as other forms of harassment and discrimination. DEI training demonstrates how employees experience the workplace differently depending on their identities; how unconscious bias, microaggressions and other forms of exclusion cause harm; and how everyone can support DEI initiatives. Effective training should be deeply engaging and should reinforce your organization’s policies while providing practical tools for addressing issues that arise.

Traditionally, these issues have fallen to human resources, but in our current climate they represent enterprise risks that demand attention from the highest levels. It’s important for all risk and compliance professionals to grasp the real stakes of this training.

Understanding the Cost of Training

The true cost of harassment prevention and DEI training can be deceptive: it’s easy to focus on the price of obtaining the training, when in fact it is a small expense when measured against your total costs.

The first hidden cost to consider is the opportunity cost of your employees’ time while training. Like all-staff meetings costing thousands per minute, having everyone in an organization complete a training is inherently expensive. Employers are right to look for the highest quality training to ensure employees receive the greatest value and learning for time spent.

The cost of training administration is also easy to overlook. HR teams can invest significant time and money keeping records of completed trainings and managing annual and state-specific training for both employees and managers.

Online training has emerged as an option that delivers a consistent, convenient and impactful experience. Though training may cost thousands of dollars depending on organization size, it is powerful and easy to administer, especially with the shift to remote work.

Accounting for Risk

There is, however, even more to the cost story around this training. From a risk management perspective, these prevention costs are easily offset against the real risks of harassment and discrimination, or the failure of a company’s DEI efforts. There can also be a compliance component, depending on the state.

Of course, harassment and discrimination can have a lasting, harmful impact on those who endure it that organizations must consider first and foremost when planning prevention efforts. Beyond that, companies must consider the impact of costly lawsuits or administrative proceedings, in which damages and penalties can be significant if you lose, and legal fees in the hundreds of thousands even if you win. By adopting a comprehensive anti-harassment policy and providing adequate training, employers show that they’ve made good faith efforts to prevent harassment.

Training can even protect your company from claims for punitive damages, according to Kevin O’Neill, a principal at the employment law firm Littler. “If you have done effective training,” says O’Neill, “it has been deemed through case law to be one of the strongest mitigating factors to avoid punitive damages exposure.” The quality of training can also mitigate a company’s risk. High-quality training is a “huge element of proof and effectiveness when you have to show that you have done all that you could to prevent and correct the harassment,” says O’Neill.

Even more serious, however, are the indirect costs and risks to an organization, including:

• Employee attrition, lost productivity and depressed morale. Employees who suffer harassment or an unfair environment are likely to leave, and replacing these employees costs employers billions of dollars annually. Even when employees don’t leave, failure to reckon with these issues can harm productivity and hamper innovation and collaboration for the victims and their colleagues alike.
• Management and governance continuity risk. For years we’ve witnessed managers, executives, and board members resign for failing to respond effectively to harassment. This trend is only continuing.
• Reputation and brand risk. Stakeholders, as well as regulators and the media, have high expectations that organizations will prevent harassment and discrimination and, increasingly, demonstrate real improvements in DEI. No organization is exempt, which is why companies are retiring out-of-date and offensive brands despite the massive cost.
• Eroding customer and market position. Organizations that suffer reputational and brand damage can lose valuable customers and market positioning. The days when companies can remain neutral on these topics are over — your customers expect more.
• Vendor risk and insurance costs. Failure to cure harassment can also lead to increased insurance costs and companies to be cut off from vendor relationships.

If you think spending four or five figures to obtain high-quality training is expensive, consider the costs of not advancing a safe and inclusive culture.

Making an Informed Selection

Given these risks and costs, it is vital that you select the highest quality provider that meets your needs. The bar for these training programs is high. Content needs to approach Netflix quality we’ve come to expect from subscription streaming services, or employees will tune out — programs that rely on stock videos and images or green screens are not compelling and will fail to have the needed impact.

Moreover, it’s important to work with a provider that has deep experience and is able to create program content that can genuinely influence employees. Free or low-cost options can be appealing when budgets are tight. However, saving money in this way carries its own risks. Employees are increasingly vocal about negative training experiences relating to these issues, and companies can find themselves embroiled in social media crises simply by selecting a low-quality option.

Investing in high-quality, comprehensive training is about more than just reducing risk and liability. As Sarah Rowell, CEO of Kantola Training Solutions, says: “It also has the ability to change behavior, if not that of an egregious harasser, then that of bystanders, managers, front line supervisors or oblivious offenders.”

Courses that address cultural trends and engage learners in real-world experiences will prepare employees to identify and address workplace issues. Immersive training that goes beyond checking boxes can change corporate culture and how employees experience the workplace, leading to real, lasting change.

Co-Editors

Lee Applebaum

Fineman, Krekstein & Harris, P.C.
1801 Market Street, 11th Floor
Philadelphia, PA 19103
215.893.8702
[email protected]

Benjamin R. Norman

Brooks, Pierce, McLendon, Humphrey & Leonard LLP
2000 Renaissance Plaza
230 North Elm Street
Greensboro, NC 27401
336.271.3155
[email protected]

Contributors

Brett M. Amron
Peter J. Klock, II

Bast Amron LLP
SunTrust International Center
1 Southeast Third Avenue, Suite 1400
Miami, FL 33131
305.379.7904
www.bastamron.com

Andrew Anderson
Stacie Gonsalves Linguist
Monika Sehic

Faegre Drinker Biddle & Reath LLP
801 Grand Avenue, 33rd Floor
Des Moines, IA 50309
515.248.9000
www.faegredrinker.com

Lee Applebaum

Fineman Krekstein & Harris, P.C.
1801 Market Street, Suite 1100
Philadelphia, PA 19103
215.893.9300
www.finemanlawfirm.com

Alan W. Bakowski

Troutman Pepper Hamilton Sanders LLP
600 Peachtree Street, NE Suite 3000
Atlanta, GA 30308
404.885.3000
www.troutman.com

Laura A. Brenner
Jeunesse M. Rutledge

Reinhart Boerner Van Deuren, SC
1000 N. Water Street, Suite 1700
Milwaukee, WI 53202
414.298.1000
www.reinhartlaw.com

Jacqueline A. Brooks
Lelia F. Parker

Saul Ewing Arnstein & Lehr LLP
Lockwood Place, 500 East Pratt Street
Suite 900
Baltimore, MD 21202
410.332.8600
www.saul.com

George F. Burns
Eviana Englert

Bernstein, Shur, Sawyer & Nelson, PA
100 Middle Street
Portland, ME 04104
207.774.1200
www.bernsteinshur.com

Joseph F. Caputi
Gregory D. Herrold
Stephen J. Brody

Duane Morris LLP
1940 Route 70 East, Suite 100
Cherry Hill, NJ 08003
856.874.4200
www.duanemorris.com

Emily T. Dodane
Emanuel L. McMiller

Faegre Drinker Biddle & Reath LLP
300 N. Meridian Street, Suite 2500
Indianapolis, IN 46204
317.237.0300
www.faegredrinker.com

Woods Drinkwater

Nelson Mullins Riley & Scarborough LLP
One Nashville Place
150 Fourth Avenue, North
Suite 1100
Nashville, TN 37219
615.664.5300
www.nelsonmullins.com

Patrick A. Guida
Duffy & Sweeney LTD

321 South Main Street, Suite 400
Providence, RI 02903
401.455.0700
www.duffysweeney.com

Edward J. Hermes
Alysha Green

Snell & Wilmer LLP
400 East Van Buren Street, Suite 1900
Phoenix, AZ 85004
602.382.6000
www.swlaw.com

Russell F. Hilliard
Nathan C. Midolo

Upton & Hatfield LLP
159 Middle Street
Portsmouth, NH 03801
603.224.7791
www.uptonhatfield.com

Matthew Kaufman
Jerry James

Hathaway & Kunz, LLP
2515 Warren Avenue, Suite 500
Cheyenne, WY 82003
307.634.7723
www.hkwyolaw.com

Douglas L. Toering
Nicole B. Lockhart

Mantese Honigman, PC
1361 E. Big Beaver Road
Troy, MI 48083
248.457.9200
www.manteselaw.com

Benjamin R. Norman
Daniel L. Colston

Brooks, Pierce, McLendon, Humphrey & Leonard LLP
2000 Renaissance Plaza
230 North Elm Street
Greensboro, NC 27401
336.271.3155
www.brookspierce.com

Thomas Rutledge

Stoll Keenon Ogden PLLC
500 West Jefferson Street, Suite 2000
Louisville, KY 40202
502.333.6000
www.skofirm.com

Jennifer Rutter

Gibbons P.C.
300 Delaware Avenue, Suite 1015
Wilmington, DE 19801
302.518.6320
www.gibbonslaw.com

Michael J. Tuteur
Andrew C. Yost

Foley & Lardner LLP
111 Huntington Avenue, Suite 2600
Boston, MA 02199
617.342.4000
www.foley.com

Marc E. Williams
Alex C. Frampton

Nelson Mullins Riley & Scarborough LLP
949 Third Avenue, Suite 200
Huntington, WV 25701
304.526.3500
www.nelsonmullins.com

Stephen P. Younger
Muhammad U. Faridi
Louis M. Russo

Patterson Belknap Webb & Tyler LLP
1133 Avenue of the Americas
New York, NY 10036
212.336.2000
www.pbwt.com

§ 1.1 Introduction

The 2021 Recent Developments describes developments in business courts and summarizes significant cases from a number of business courts with publicly available opinions.[1]

There are currently functioning business courts of some type in cities, counties, regions, or statewide in twenty-four states: (1) Arizona; (2) Delaware; (3) Florida; (4) Georgia; (5) Illinois; (6) Indiana; (7) Iowa; (8) Kentucky; (9) Maine; (10) Maryland; (11) Massachusetts; (12) Michigan; (13) Nevada; (14) New Hampshire; (15) New Jersey; (16) New York; (17) North Carolina; (18) Ohio; (19) Pennsylvania; (20) Rhode Island; (21) South Carolina; (22) Tennessee; (23) West Virginia; and (24) Wisconsin.[2]  Wyoming has established a Chancery Court, which is not yet operational at the time of this writing in 2020.[3]  States with dedicated complex litigation programs encompassing business and commercial cases, among other types of complex cases, include California, Connecticut, Minnesota, and Oregon.[4]  The California and Connecticut programs are expressly not business court programs as such.[5

§ 1.2 Recent Developments

§ 1.2.1 Business Court Resources

American College of Business Court Judges.  The American College of Business Court Judges (ACBCJ) provides judicial education and resources, in terms of information and the availability of its member judges, to those jurisdictions interested in the development of business courts.[6]  The ACBCJ’s Fifteenth Annual Meeting took place in Savannah, Georgia from October 28, 2020 to October 30, 2020.[7]  Like much else in 2020, the meeting focused on COVID-19’s impact.  Among other topics, the meeting addressed shareholder value, business interruption insurance and COVID-19, the impacts of emergency relaxation of licensing and other regulatory requirements in response to COVID-19, state court receiverships in light of COVID-19’s economic impact, docket and court resource management, pharmaceutical regulation, and force majeure and frustration of contract.

Section, Committee, and Subcommittee Resources.  In 2020, The Business Lawyer’s 75th Anniversary edition published two articles on business courts.  The first article, Through the Decades: The Development of Business Courts in the United States of America,[8] by attorneys Lee Applebaum, Mitchell Bach, Eric Milby and Richard Renck, completes a trilogy of Business Lawyer articles on the history and development of business courts.[9]  The second, an essay by Michigan business court judge Christopher P. Yates, The ABA’s Contribution to the Development of Business Courts in the United States,[10] provides an overview of the Section of Business Law’s 25-year involvement in developing business courts.

The Section of Business Law has created a pamphlet, Establishing Business Courts in Your State.[11]  The Business and Corporate Litigation Committee’s Subcommittee on Business Courts provides 150 documents and/or hyperlinks to business court resources.[12]  This includes links to public sources and legal publications, as well as business court related materials and panel discussions presented at ABA Section of Business Law meetings.  The Section’s Judges Initiative Committee also provides links to business court resources, such as judicial opinions published by various business courts, and standardized forms used in business and complex litigation courts. [13]  The Section also has established a Business Courts Representatives (BCR) program,[14] where a number of specialized business, commercial, or complex litigation judges are selected to participate in and support Section activities, committees, and subcommittees.  These BCRs attend Section meetings, and many have become leaders within the Section.  The Section also has a Diversity Clerkship Program that sponsors second year law students of diverse backgrounds in summer clerkships with business and complex court judges.[15]  Finally, this publication has included a chapter on updates and developments in business courts every year since 2004.

Other Resources. “The National Center for State Courts (NCSC) and the Tennessee Administrative Office of the Courts have developed an innovative training curriculum[16] and faculty guide[17] – along with practical tools – to help state courts establish and manage business court dockets more efficiently and effectively.”[18]  The Business Courts Blog[19] aims to serve as a national library to those interested in business courts, with posts on past, present, and future developments.  This includes posts on reports and studies going back twenty years,[20] as well as recent developments in business courts.  In 2020, in addition to the two Business Lawyer articles mentioned above, there were other articles and reports addressing some aspects of business courts.[21]  There are also various legal blogs addressing business courts in particular states.[22]

§ 1.2.2 Developments in Existing Business Courts

Arizona Commercial Court

In 2019, the Commercial Court became a permanent part of the Arizona judicial system after operating as a pilot program since 2015.[23]  The Commercial Court hears cases seeking monetary relief in excess of $300,000 that involve business organizations or business transactions.[24]  Both plaintiffs and defendants can request assignment to the Commercial Court, and it is mandatory that all qualifying cases proceed in Commercial Court.[25]

There were no substantial changes to the structure or rules of the Commercial Court in 2020.  In a year of countless unknowns and unanticipated delays, as courts nationwide transitioned from in person hearings to remote proceedings, the Commercial Court carried on.  In 2020, the Commercial Court heard matters ranging from contract disputes regarding commercial lease spaces[26] to temporary injunctions challenging executive orders in the wake of COVID-19.[27]  While still in its infancy, the Commercial Court has become an indispensable part of Arizona’s judicial process.

Florida’s Complex Business Litigation Courts

Regular readers of this update will recall that the Ninth Judicial Circuit’s complex business litigation (CBL) court re-opened last year after a one-year closure due to funding limitations.  With the re-opening of the court, the Ninth Judicial Circuit took the opportunity to revise the jurisdiction of its sole CBL court.[28]  The original administrative order establishing the court’s jurisdiction provided for blanket jurisdiction over eleven general case types without any minimum amount-in-controversy requirements (and also specifically identified certain case types that are not generally assigned to the CBL division).  The amended administrative order now provides for jurisdiction over 16 case types (but makes no changes to the list of specifically excluded case types), the majority of which have a $500,000 minimum amount-in-controversy threshold.[29]  Additionally, the order provides that, for those cases with an amount-in-controversy requirement, plaintiffs must set forth the actual amount at issue in the matter in their complaint, rather than simply pleading that the amount at issue is in excess of the threshold.[30]

As it was last year, Florida is lucky enough to have six circuit court divisions dedicated to resolving CBL.  Florida’s six CBL judges are spread across Orange County (Ninth Judicial Circuit), Miami-Dade County (Eleventh Judicial Circuit), Hillsborough County (Thirteenth Judicial Circuit), and Broward County (Seventeenth Judicial Circuit).  The judges currently assigned to hear CBL cases are: Judge John E. Jordan (Division 01) in Orlando,[31] Judges Michael A. Hanzman (Division 43) and William Thomas (Division 44) in Miami,[32] Chief Judge Jack Tuter (Division 07) and Judge Patti Englander Henning (Division 26) in Fort Lauderdale,[33] and Judge Darren D. Farfante (Division L) in Tampa.[34]  Judges Michael A. Hanzman and John E. Jordan began their respective CBL assignments during 2020, and Judge Darren D. Farfante began his CBL assignment in January 2021.

Cases may be directly filed or reassigned/transferred to a complex business division based on a number of factors, including: the nature of the case; complexity of the issues; complexity of discovery; number of parties in the case; and specific criteria enumerated by each circuit.

Indiana Commercial Courts

In August 2020, the Indiana Office of Court Services created a new beta search engine for substantive Indiana Commercial Court Orders.[35]  The database allows users to narrow their search by date and the specific commercial court.  Users are encouraged to provide feedback, as the Court staff works to identify and build historical content.

Additionally, the Indiana Commercial Courts Handbook, which is updated regularly, continues to be an aid for both judges and attorneys, covering topics such as case management conferences, discovery, and trial preparation, and including sample case documents and forms.[36]

On January 1, 2021, Indiana’s Commercial Court expanded to four new counties, bringing the total number of counties with a Commercial Court to ten.[37]

Iowa Business Specialty Court

The goal of the Iowa Business Specialty Court (Iowa Business Court) is to provide litigants with an expeditious and cost-effective court system where parties and their attorneys can have their cases heard before one of five judges with business litigation experience.[38]  The Iowa Business Court became a component of the Iowa court system in 2016.[39]  Since its inception, the Iowa Business Court has disposed of 69 cases and approximately 37 cases are pending.[40]

A case is eligible for the Iowa Business Court if it meets or exceeds $200,000 in compensatory damages or the claim primarily seeks injunctive or declaratory relief.[41]  The case must also meet one of nine dispute types, including but not limited to business disputes involving breach of contract, fraud, or misrepresentations and tort claims between or among business entities.[42]

Starting January 1, 2020, the State Court Administrator is expected to report findings from annual reviews and make recommendations for the Iowa Business Court’s improvement to the Iowa Supreme Court.[43]

Michigan Business Courts

In response to the Coronavirus pandemic, the Michigan Supreme Court issued nineteen administrative orders addressing modifications to court protocol.[44]  Perhaps the most noteworthy is Administrative Order 2020-6 (AO 2020-6), dated April 7, 2020.[45]  This requires all Michigan judges to “conduct proceedings remotely whenever possible using two-way interactive videoconferencing technology…,” like Zoom.  The effects of AO 2020-6 hit Michigan courts almost overnight.[46]  In fact, the statewide justice system surpassed one million hours of Zoom hearings in six months.[47]  Today, Zoom proceedings have become common practice for Michigan courts, including business courts, with Zoom proceedings ranging from status conferences to motion hearings and bench trials.  Douglas L. Toering polled many of the Michigan business court judges on their use of Zoom for the Michigan Business Law Journal.  The consensus was clear: Zoom proceedings are “here to stay.”[48]

To address various concerns about court proceedings via Zoom, the Michigan State Court Administrative Office released the Michigan Trial Courts Virtual Courtroom Standards and Guidelines on April 7, 2020 (revised August 5, 2020).[49]  These guidelines recommend that courts and parties agree in advance as to how exhibits will be displayed to witnesses.  Additionally, the revised guidelines address concerns as to potential witness coaching.  Courts may now, sua sponte, order parties to readjust cameras so that all present persons are visible.  AO 2020-6 directly addressed Michigan’s backlogged dockets stemming from this public health crisis by directing that “all matters…proceed as expeditiously as possible under the circumstances….”  This is consistent with one of the purposes of the Michigan business court statute, which is to resolve business disputes with the “expertise, technology, and efficiency required by the information age economy.”[50]  Opinions from the Michigan business court judges continue to be posted on a comprehensive website, which includes twenty-five categories of business court opinions.  In February 2020, a new category, “Discovery,” was added.

New York Commercial Division

Justice Robert Reed Appointed to New York County Commercial Division.  On October 5, 2020, just days after Justice Peter Sherwood and Justice Marcy Friedman announced their upcoming retirements from the bench, the Chief Administrative Judge announced the news that Justice Robert Reed would join the New York County (Manhattan) Commercial Division.  Justice Reed started hearing cases in the Court in October 2020.[51]

Rule 11-g Amended to Include “Attorneys Eyes Only” Designation.  On September 23, 2020, Chief Administrative Judge Marks amended Commercial Division Rule 11-g and the Division’s Standard Form Confidentiality Order (SFO) to allow parties to designate certain documents as highly confidential for attorney’s eyes only (AEO).  Such a designation already exists in federal court, and it will be useful in the Commercial Division in matters involving particularly confidential issues such as the disclosure of confidential business information between competitors and disclosure of trade secrets.[52]

Rule 6 Amended to Require Hyperlinking in Documents.  On September 29, 2020, Chief Administrative Judge Marks amended Commercial Division Rule 6, effective November 16, 2020.  The amendments consist of adding subsections (b) and (c) concerning the use of hyperlinks and bookmarks in electronically filed documents.[53]  Hyperlinking is to external documents, and bookmarks link to other parts of the same document.  Hyperlinking to docketed documents is required unless those documents are under seal.  In addition, a court “may require that electronically submitted memoranda of law include hyperlinks to cited court decisions, statutes, rules, regulations, treatises, and other legal authorities in either legal research databases to which the Court has access or in state or federal government websites.  If the Court does not require such hyperlinking, parties are nonetheless encouraged to hyperlink such citations unless otherwise directed by the Court.”

Philadelphia Commerce Court’s Temporary Financial Monitor Program in Response to COVID-19 Business Crisis

Philadelphia’s Court of Common Pleas has considerable experience in creating programs responsive to financial crises.[54]  In that tradition, a new program has been created in Philadelphia’s Commerce Court, the Temporary Financial Monitor Program.  This program will use volunteer lawyers and accountants as Temporary Financial Monitors (TFM) “to provide assistance to keep local enterprises operational,” during the COVID-19 pandemic.  There is a petition process for bringing troubled businesses and their creditors into the program.  Once a matter is initiated, the TFM “shall be responsible for evaluating the financial information provided by the petitioning entity and, upon consultation with the entity and its creditors, shall prepare a proposed Operating Plan to enable the entity to resume and/or continue operations while paying off its accumulated debts.”

The program will be under Commerce Court Supervising Judge Gary S. Glazer’s general supervision.  The Court’s enabling Order[55] observes that the Commerce Court has jurisdiction over “disputes between or among two or more business entities and handles dissolution and liquidation of business entities,” and “takes judicial notice that the COVID-19 pandemic has caused significant economic harm to local for-profit businesses and non-profit institutions, many of which were forced to close for lengthy periods of time and have been unable to generate sufficient income to pay their debts or retain their staff, and it appears that the current economic climate threatens their ability to operate in the future….”

The enabling Order has six parts: (1) “Establishment and Eligibility of the Monitor Program”; (2) “Assignment to Monitor the Program”; (3) “Information to be included in the Petition”; (4) “Court Review and Assignment of Temporary Financial Monitor”; (5) “Duties and Obligations of Temporary Financial Monitor”; and (6) “Termination or Conclusion of Assignment of Temporary Financial Monitor”.  

Rhode Island Superior Court Business Calendar Non-Liquidating Receivership Program, and Protocols during COVID-19 Pandemic

On March 31, 2020, Rhode Island Superior Court Presiding Justice Alice Gibney entered an Order allowing the Superior Court Business Calendar to administer a more measured response to the COVID-19 crisis in the form of a business protection/recovery program, designated the “COVID-19 Non-Liquidating Receivership Program.”[56]  The purpose of the Program is to allow the Business Calendar of the Superior Court to supervise and provide protection from creditors through injunctive relief for eligible Rhode Island business entities in order that they might remain operational while seeking new capital and rearranging their debt structure.  This is not, however, a debt discharge program.

Under the Order, a business entity, including a sole proprietorship, which was not in default of its obligations as of January 15, 2020, may voluntarily seek to be petitioned into a Non-Liquidating Receivership, whereby the business entity may demonstrate eligibility for the Program, have a Temporary Non-Liquidating Receiver appointed, and while protected by a Superior Court injunction and stay order, proceed to secure the approval of the Superior Court of a “Recommended Operating Plan,” whereupon the Temporary Non-Liquidating Receiver may be appointed as the permanent Non-Liquidating Receiver to administer the Program.  During the non-liquidating receivership, management remains in place and must develop an operating plan to address its pre-receivership debts and continue to pay current debts as they become due.  If the business defaults on its plan, the court may convert the case to a liquidating receivership.  The ultimate objective being that a Receivership Business might exit the Non-Liquidating Receivership as a viable continuing business under order of the Superior Court.

On the same date of March 31, Presiding Justice Gibney also entered an Order identifying the Program Coordinators, who under Section 8(b) of the Order are assigned to interface with members of the Bar to assist business entities in entering the Program, and to provide other services relating thereto.

On April 21, 2020, Rhode Island Superior Court Business Calendar Justices Brian P. Stern and Richard A. Licht issued an Order setting forth “Protocols” for “Providence and Out-County Business Calendars—Proceedings during COVID-19 Crisis.”[57]  This order provides the procedural rules for matters to be considered on the Superior Court business calendar.  All matters are to be done remotely.  Parties may request that a matter be decided on the pleadings.  If a matter cannot be determined on the pleadings, the hearing will be held remotely by WebEx Videoconferencing.  Parties may also request a conference with a judge by emailing the request to the judge’s clerk.  Conferences will also be held by WebEx Videoconference.

Tennessee Business Court

This year, the Tennessee Administrative Office of the Courts, in collaboration with the National Center for State Courts and the State Justice Institute, developed and released an innovative curriculum and training guide designed to help states establish and manage business court dockets.[58]  The curriculum was developed as part of Tennessee’s Business Court Docket Pilot Project, which was initially established in 2015 to address complex corporate and commercial cases.[59]

The training program will help other states that are embarking on the creation of their own business courts by providing them with a blueprint for managing their own business court dockets.

West Virginia Business Court Division

In the past year, 14 motions to refer cases to the West Virginia Business Court Division were filed.  Of these, 10 were granted.  Since its inception, there have been 179 motions to refer filed, with a total of 103 of those motions granted.  The Business Court Division has resolved 86 of these.  Currently, there are 17 cases pending before the Business Court Division with an average age of 451 days.[60]

Wisconsin Commercial Docket Pilot Project

On April 11, 2017, Wisconsin’s Supreme Court issued an order creating a “pilot project for dedicated trial court judicial dockets for large claim business and commercial cases.”[61]  The order includes an appendix with interim rules.[62]  A majority of the court approved the pilot project, with a written dissent from two of the seven justices.  The original three-year pilot program began on July 1, 2017, and was established in Waukesha County and in Wisconsin’s Eighth Judicial Administrative District.[63]  In February 2020, the program was extended to 2022 to include the Second and Tenth Judicial Districts and Dane County.[64]  The commercial docket pilot program may be expanded in the future to other Wisconsin counties and districts.  The new court rules allow for cases outside these regions to be heard within the new docket, subject to the discretion of the chief judge within the regions.

The new docket includes both mandatory and discretionary case assignment.  There are seven categories of cases subject to mandatory assignment.  These include: (1) internal business organizational claims; (2) prohibited business activity (e.g., “tortious or statutorily prohibited business activity, unfair competition or antitrust . . . claims of tortious interference with a business organization; claims involving restrictive covenants and agreements not to compete or solicit; claims involving confidentiality agreements”); (3) business sale/ consolidation/ merger; (4) sale of securities; (5) intellectual property rights; (6) franchisor/ franchisee claims; and (7) UCC claims greater than $100,000.[65]  The categories of cases were expanded in 2020 to include (8) receiverships in excess of $250,000; (9) confirmation of arbitration awards and compelling/enforcing arbitration awards; and (10) cases involving commercial real estate construction disputes over $250,000.  There is also a specific list of excluded cases, including consumer claims, claims where a government entity is a party, and disputes involving enforcement of various civil rights, environmental, and tax statutes and regulations.[66]  Discretionary inclusion exists for cases that are neither expressly mandatory nor excluded.  Under the new rules, parties may jointly move the chief judge of the judicial administrative district in which the Commercial Court sits for discretionary assignment of a case to the Commercial Court docket.  The chief judge of the judicial district shall consider the parties to the dispute, the nature of the dispute, the complexity of the issues presented, and whether the Commercial Court’s resolution of the case will provide needed guidance to influence future commercial behavior or assist in resolving future disputes.[67]  The chief judge’s decision cannot be appealed.

The rules set out the parties’, judges’, and court clerks’ roles in case assignment, and the court has created forms to be used in connection with commercial docket cases.  A training program for clerks of court has been initiated so that they better recognize when a case qualifies as a commercial case under the program.  The pilot program also establishes recommended customs and practices for judges assigned to the commercial court dockets including ESI awareness and case management, timing of mediation, early consideration of protective orders, regular status conferences, and written published decisions.

Since its inception in 2017, the commercial docket has handled 103 total cases, 69 of which are now closed.[68]  The commercial docket has published sixteen decisions, ten from 2019 and 2020 alone.[69]  The vast majority of the cases have dealt with prohibited business activities or internal business organization (71 of 103) and have been resolved within six months of filing (48 of 61).

§ 1.2.3 Other Developments

State-wide Business Court in Georgia Begins Operations

Georgia’s new State-wide Business Court officially began its operations in 2020, with Judge Walter W. Davis serving as the first judge of the court.[70]  The State-wide Business Court has jurisdiction to hear a wide variety of claims relating to disputes involving corporations, partnerships, or other business entities, including those arising under Georgia’s Uniform Commercial Code, Uniform Securities Act, Business Corporation Code, and Trade Secrets Act.[71]  Cases involving only claims for damages must have an amount-in-controversy of at least $500,000 ($1 million for cases involving commercial property) to fall within the jurisdiction of the State-wide Business Court.  Cases may be filed directly with the State-wide Business Court or transferred to the State-wide Business Court from another state court if one or more parties files a petition for transfer within 60 days after service of a pleading that is within the jurisdiction of the State-wide Business Court.[72]  The State-wide Business Court began accepting case filings on August 1, 2020 but has not yet issued any substantive opinions.  Proposed rules for the State-wide Business Court were developed by an eight-person rules commission consisting of private lawyers, judges, and a law professor, and these rules must be approved by the Georgia Supreme Court before taking effect.[73]  The State-wide Business Court does not replace the Metro Atlanta Business Case Division, which continues to adjudicate business disputes in Fulton and Gwinnett Counties.

Kentucky’s Business Court Docket

Kentucky began its experiment with the business courts with the Business Court Docket of the Jefferson County Circuit Court, it becoming effective January 1, 2020.  While it is anticipated that the Business Court Docket of the Jefferson Circuit Court will be emulated in other counties, no additional steps have yet been taken in that direction, no doubt consequent to both the early stage of the effort in Jefferson County (which comprises Louisville, the largest city in the state) and as well the COVID-19 pandemic of 2020.  Currently, the judges on the Business Court Docket are Charles Cunningham and Angela McCormick-Bisig.  Only cases filed on or after January 1, 2020 have been eligible for assignment to the Business Court Docket.  Through October 30, 2020, sixty-nine cases have been assigned to the Business Court Docket.  For example, as of the end of August, cases currently pending included:

• a breach of contract action against a municipal authority with respect to roadwork;
• a dispute between a homeowners association and a condo owner with respect to short-term leases;
• challenges to noncompetition limitations in an employment agreement;
• several actions for breach of real estate lease agreements;
• a dispute over a lease of the commercial hauling vehicle;
• trademark infringement with respect to sport official uniforms;
• a dispute between a subcontractor and the general contractor with respect to work performed on an elementary school renovation;
• an action for breach of an employment agreement and violation of wage and hour laws based upon failure by a defendant to pay the plaintiff;
• an action for breach of a real estate purchase agreement and specifically the failure to pay taxes due; and
• an action for breach of contract and fraud in the failure to install swimming pools.

Substantive descriptions of the Business Court Docket are published on the Business Court Docket webpage of the Kentucky Department of Justice website.[74]  The only decision published to date was rendered by Judge McCormick-Bisig in the case of Isco Industries, Inc. v. O’Neill.[75]  In a judgment entered on June 2, 2020, a temporary injunction was denied in connection with a suit brought based upon the defendant’s alleged violation of the terms of certain restrictive covenants he entered into as an employee of the plaintiff, that denial of the injunctive relief being based upon the plaintiff’s failure to carry its burden.

Pennsylvania Legislation to Create Statewide Appellate and Trial Level Commerce Courts

Pennsylvania’s Legislature unanimously adopted legislation,[76] Senate Bill 976, to create Commerce Courts in the Superior Court of Pennsylvania, an intermediate appellate court, as well as in Pennsylvania’s trial courts, the Courts of Common Pleas.  Senate Bill 976 was submitted to Governor Wolf on October 26, 2020, and signed into law on November 3, 2020.[77]  This new statute creates the first appellate business court in the United States.  It ultimately remains within each court’s discretion, however, whether to create Commerce Courts within their jurisdictions.

Pennsylvania has two existing business courts.  The Philadelphia Court of Common Pleas has a twenty-year-old Commerce Case Management Program,[78] and the Allegheny County Court of Common Pleas in Pittsburgh has had its Commerce and Complex Litigation Center[79] since 2007.[80]  The new law should not require any changes in these well-established programs.  The legislation also gives Pennsylvania’s Supreme Court authority to create an advisory council, and the position of Commerce Court coordinator to work with the Courts of Common Pleas in establishing and developing Commerce Courts.

The legislation includes identical subject matter jurisdiction for the appellate and trial level Commerce Courts, identifying two basic areas: (1) a wide range of internal business disputes and (2) “disputes between or among two or more business enterprises relating to a transaction, business relationship or a contract.”  This contrasts to some degree with the more detailed list of case types used to define subject matter jurisdiction in Philadelphia’s Commerce Court, but the basic concept is the same, i.e., jurisdiction is limited to business and commercial disputes only.  Both the Superior Court and Courts of Common Pleas may adopt rules governing their Commerce Courts, but these rules must be consistent with the general rules of court established by Pennsylvania’s Supreme Court.  The new statute also makes clear that it does not alter the Superior Court’s jurisdiction.

Notably, the legislature is neither going to provide additional funding for any of these Commerce Court programs, nor for the coordinator position or advisory committee.

Wyoming Chancery Court

In March 2019, the Wyoming Legislature established the Chancery Court of the State of Wyoming.[81]  The Wyoming Supreme Court has been vested with the overall creation, management, supervisory powers, and the authority to promulgate rules of civil procedure for the new chancery court by January 1, 2020.[82]

With rulemaking underway through the newly created Chancery Court Committee, which was created and appointed by the Wyoming Supreme Court and made up of Judges, practitioners, court clerks, and various representatives from State Government, Wyoming is actively building out an administrative framework for Wyoming Chancery Court launch within the next two years.

The Wyoming Chancery Court is a court of limited jurisdiction, hearing cases related only to commercial, business, trust disputes or disputes relating to topics as discussed below.[83]  The court is further limited to presiding over cases where the relief sought is in equity, declaratory relief or monetary damages in excess of $50,000 excluding punitive or exemplary damages, attorneys’ fees, costs, etc.[84]  In addition, matters coming before the court must be accompanied with a filing fee of no less than $500.[85]  The Wyoming Chancery Court strives for an efficient and expeditious disposition of matters before the court and as such, cases are to be resolved within one hundred and fifty (150) days from the date of filing.[86]  As a result of such expeditious resolution of disputes, the Wyoming Chancery Court provides no supplemental jurisdiction to claims that are not specifically covered in the statute.[87]  The chancery court shall comprise of a maximum of three (3) judges who meet the statutory requirements to preside over matters coming before the court.[88]  However, initially the Wyoming Supreme Court is enabled to employ a panel of sitting District Court Judges to serve as the initial Chancery Court Judges.  Pending Wyoming legislation may extend the allowable use of this panel until 2026.[89]

Though the new Wyoming Chancery Court’s jurisdiction is limited in nature, the scope of matters the court may preside over includes a wide variety of legal topics such as breach of contract, fraud, misrepresentation, environmental insurance coverage, transactions governed by the UTC and commercial class actions, securities, corporate law, and general business matters, to name a few.  Additionally, the court may preside over cases related to entity dissolutions, but the monetary minimum in such cases is waived by the court.[90]

The Wyoming Rules of Civil Procedure for Chancery Court take effect November 15, 2020, and provide litigants with ample resources to resolve all their commercial and business disputes, including an electronic database to search cases and matters resolved in the court and advanced courtroom technology for remote attendance by participants.[91]  Given the plethora of attractive corporate features Wyoming provides for businesses, adding this new chancery court feature should propel more corporate action in the Equality State.

§ 1.3 2020 Cases

§ 1.3.1 Arizona Commercial Court

Mountainside Fitness Acquisitions, LLC v. Ducey[92] (Demonstrating the diversity of commercial disputes adjudicated by the Commercial Court, which include issues of Constitutional law).  In response to the Coronavirus pandemic, the State of Arizona issued Executive Order 2020-43, which provided that “indoor gyms and fitness clubs or centers had to pause operations until at least July 27, 2020” and further required the gyms, clubs, and centers to “complete and submit” a state health department form proving their “compliance with guidance issued by [the health department] related to COVID-19 business operations.”  The form did not “give fitness centers an opportunity to re-open during any mandatory shutdown period.  Rather, gyms that fill out the form must attest that they will remain closed through any mandatory shutdown periods.”  Mountainside Fitness, a gym operating in Arizona, challenged the Executive Order, arguing that it violated their “Constitutionally-protected post-deprivation procedural due process rights and substantive due process rights” and sought injunctive relief.

The Commercial Court first considered whether gyms had a Constitutionally protected property interest to conduct business.  The Court answered affirmatively.  The Court found that “the government forcing a business to shut down indefinitely, to the point where it might not be able to survive, implicates a property interest.”  Having found a Constitutionally protected interest, the Court considered the “unprecedented” nature of the Executive Order to determine that it was neither legislative or quasi-legislative, thus requiring the State to afford the businesses due process.  The Court reasoned that the State had not afforded the gyms procedural due process, as there was no “system for applying to reopen” but had satisfied the requirements of substantive due process, because there was “some rational basis” for the Executive Order.  Upon weighing the hardships and determining the indefinite nature of the gym closures, the Court ordered the state to provide the gyms post-deprivation due process in the form of an opportunity to apply for reopening.

§ 1.3.2 Delaware Superior Court Complex Commercial Litigation Division

Specialty Dx Holdings v. Lab. Corp. of Am. Holdings[93] (Active participation in litigation will waive a contractual right to arbitration).  In Specialty Dx Holdings, the parties entered into an asset purchase agreement containing an arbitration clause.  The plaintiffs originally filed an action in the Delaware Court of Chancery for breach of contract.  After the defendant filed a motion to dismiss one of five counts relating to the breach, and it was fully briefed by the parties, the Court of Chancery transferred the case to the Superior Court’s CCLD.  The Superior Court ordered supplemental briefing on the motion to dismiss, held a hearing, and issued an extensive opinion staying the dismissal pending arbitration.  Two months later, the defendant filed a second motion to dismiss.  In its second motion to dismiss, the defendant argued for the first time that the court lacked subject matter jurisdiction over the remaining counts for breach due to the asset purchase agreement’s arbitration clause.  Specifically, it argued that lack of subject matter jurisdiction due to an arbitration agreement cannot be waived.  The court expressly rejected this argument.  Although Delaware’s policy strongly supports the resolution of matters through arbitration, the court will not allow parties to waste the court’s limited resources and “test the waters” through litigation before asserting their contractual right to arbitration.  The court reiterated that the goal of arbitration is to secure the speedy and efficient resolution of disputes, which is not how the defendant proceeded here.  Therefore, although the court agreed that the additional counts were subject to arbitration, it held that the defendant waived its right to arbitration through its litigation conduct.

Infomedia Group, Inc. v. Orange Health Solutions, Inc.[94] (Sophisticated parties’ agreements to limit their reliance to contractual interpretations will be enforced).  Pursuant to an asset purchase agreement, the buyer purchased the seller’s rights and obligations under a series of service contracts.  In performing its due diligence, the buyer specifically asked the seller whether any of its customers had expressed an intent to change or terminate their contracts as a result of the proposed sale.  On several occasions during negotiations, the seller represented to the buyer that it was not aware of any such issues.  But two weeks before signing the asset purchase agreement, the seller had in fact received oral notice from a customer that it intended to terminate its contract.  Under the terms of the asset purchase agreement, however, the seller only represented that it had not received written notice from any customers of an intent to terminate their contract.  Because the contract contained an anti-reliance clause, and the parties to the agreement were sophisticated, the court held that the buyer could not state a claim for fraudulent inducement or negligent misrepresentation based on extra-contractual representations.  “Rather, sophisticated parties are free to limit the possibility of future claims of fraud or misrepresentation by contractually specifying what representations the parties are and are not making and relying upon.”  This decision upholds Delaware’s firm public policy against fraud while preserving its abundant body of precedent enforcing sophisticated parties’ contracts as written.

Ferrellgas Partners L.P. v. Zurich Am. Ins. Co.[95] (Reasonable invoices for fees can be submitted in support of declaratory judgment enforcement).  In Ferrellgas Partners L.P., the plaintiffs sought declaratory relief against their insurance companies for the alleged breach of director and officer liability policies based on the insurance companies’ failure to pay defense costs in excess of $1,000,000.00.  The court granted the plaintiffs’ motion for partial summary judgment requiring one of the defendant insurance companies to advance and reimburse the plaintiffs’ defense expenses for the underlying litigation.  When the insurance company failed to make those payments, the plaintiffs renewed their previous request for declaratory relief rather than seek a rule to show cause as to why the insurance company should not be held in contempt for failure to comply with the court’s order requiring payment.  The court again held that the plaintiffs are entitled to advancement for reasonable fees, and that the burden is on the advancement claimant to prove the reasonableness of the fees.  It did not require the insured to further seek the entry of a final monetary judgment to enforce its rights.  Notably, the court detailed the exact procedure to be used for advancement requests going forward by referring to the well-established and time-tested protocol used in the Delaware Court of Chancery.[96]  The court required the parties to follow the Fitracks-style protocol of invoice submission, review, and dispute resolution going forward and for those invoices to be unredacted to the greatest extent possible.

§ 1.3.3 Florida’s Complex Business Litigation Courts

In Re: Assignment for the Benefit of Creditors of Miami Perfume Junction, Inc.[97] (Power to hold and assert attorney- and accountant-client privileges passed from assignors to Chapter 727 assignee upon executions of assignments for the benefit of creditors).  Four insolvent companies executed assignments for the benefit of creditors pursuant to Chapter 727, Florida Statutes.  Although the assignments expressly included all company books, records, and electronic data, the assignors subsequently challenged their assignee’s ability to review pre-assignment communications between assignors and their counsel and accountants, as well as the assignee’s right to subpoena privileged communications from the assignors’ former counsel.  After the assignee moved for a ruling from the court on the issue, Judge William Thomas of the 11th Judicial Circuit’s Complex Business Litigation division granted the assignee’s motion and found that control of the privileges passed to the assignee by virtue of the assignments.  In coming to his decision, Judge Thomas considered the purpose of Chapter 727 and the nature of a Chapter 727 assignee’s duties, and found that the assignee would be unable to fully or effectively discharge his obligations without full and complete access to all books, records, and communications of the corporation.  The assignors appealed the ruling to the Third District Court of Appeal, which denied their petition for writ of certiorari.

Luzinski v. Bond[98] (Chapter 727 assignee can, on behalf of assignor corporation, bring claims in Florida where forum selection clause provides that corporation may consent to jurisdiction outside of Delaware).  An insolvent Delaware corporation headquartered in Hillsborough County, Florida executed an assignment for the benefit of creditors under Chapter 727.  When the assignee brought claims for breach of fiduciary duty against the former officers and directors of the assignor in Hillsborough County, the defendants moved to dismiss on the basis of a forum selection clause in the assignor’s articles of incorporation.  The clause provided that Delaware was the exclusive jurisdiction for certain types of claims, including claims against the officers and directors, but that the corporation could consent to litigating such claims in other venues.  Arguing that the assignee was not empowered to take what the defendants alleged were the “general corporate acts” of bringing the claim and consenting to jurisdiction outside of Delaware, the defendants urged Judge Scott Stephens of the 13th Judicial Circuit’s Complex Business Litigation Division to dismiss the case for improper venue.  During the hearing on the motion to dismiss, Judge Stephens found that the ability to consent to the suit being brought in a particular place passed to the assignee with the execution of the assignment, and denied the motion to dismiss.  The defendants have appealed the ruling to the Second District Court of Appeal.

§ 1.3.4 Indiana Commercial Court

Frontier Prof’l Baseball, Inc. v. Murphy[99] (Denying defendant’s motion to dismiss for lack of personal jurisdiction).  In Frontier, defendant Ysursa, an attorney licensed in Illinois and Missouri, had served as outside counsel to Frontier from 2009 until early 2019.  Frontier sought advice from Ysursa, during the course of a shareholder derivative action in an Indiana federal court.  Despite advising Frontier that he could not represent it because he was a potential witness and recommending the selection of Murphy as litigation counsel, Ysursa continued to provide substantive advice for the duration of the federal case.  On January 4, 2019, Frontier filed a legal malpractice action in Indiana Commercial Court against multiple defendants including Ysursa, as a result of the defendants’ handling of the federal court action.

On August 5, 2019, the Court denied Ysursa’s Motion to Dismiss for Lack of Personal Jurisdiction.  The Court found that while Ysrusa may not have had a substantial number of contacts with Indiana prior to or even during the federal lawsuit, his alleged involvement related directly to the actions which constituted the malpractice that was said to have occurred during that lawsuit.  Although he did not appear in the matter, he was heavily involved in drafting a report and providing an affidavit that was used in support of Frontier’s failed summary judgment motion in the federal case.  The Court found that Ysursa’s act of knowingly offering assistance in a case being adjudicated in Indiana constituted sufficient minimum contacts for finding personal jurisdiction over any claims arising from that assistance.  The Court also noted that Indiana had an interest to oversee malpractice claims that arose out of Ysursa’s specific actions in Indiana.

In the same Order, the Court also denied defendant’s Motion for Summary Judgment which was based on the argument that Frontier was not the real party in interest.  The Court found that there was contractual language identifying Frontier as the client in any subsequent malpractice cases and that Frontier stood to receive amounts from the judgment or settlement award, even though any award would first go to the litigation coordinator until his legal costs were satisfied.  The fact that Frontier permitted another party to control the direction of the malpractice litigation did not prevent Frontier from being the real party in interest.

On December 12, 2019, the Court granted Ysursa’s Motion to Certify the August 5th Order for Interlocutory Appeal.[100]  Despite its previous ruling that the facts and case law supported a finding of personal jurisdiction, the Court agreed that the issue presented a substantial question of law.  Although there were appellate opinions providing guidance on when an out-of-state attorney’s conduct might subject them to Indiana’s personal jurisdiction, there had not been any appellate decisions analyzing when an out-of-state attorney serving as inside counsel to a business involved in Indiana litigation may become subject to Indiana’s personal jurisdiction as a result of their representation.  The Court held that this lack of clarity affects attorneys serving as inside counsel to multi-state companies, especially for attorneys practicing on areas bordering other jurisdictions.  The Indiana Court of Appeals affirmed the Commercial Court’s decision to deny the motion to dismiss.

Walters v. Andy Mohr Auto. Group, Inc.[101] (Denying defendants’ combined motion to dismiss based on the alter ego doctrine and standing).  In Walters, plaintiffs filed a class action against a group of automotive dealerships alleging violation of the Indiana Deceptive Consumer Sales Act, constructive fraud, and unjust enrichment.  Each of the plaintiffs purchased or leased a vehicle from one of the named automotive dealerships and alleged that the itemized documentation preparation fee (Doc Fee) included in the total purchase price was inflated.  The plaintiffs further alleged that seventy-seven of the defendants (in addition to the dealerships involved directly in the transactions) operated as alter egos of each other and as a single business enterprise with respect to the charging of the alleged unlawful Doc Fee.  The defendants filed a motion to dismiss based on the alter ego doctrine and standing.

The court analyzed the sufficiency of the complaint under Trial Rule 12(B)(6).  First, the court evaluated whether plaintiffs pled sufficient facts to support their alter ego claims against the defendants that were not involved directly in the transactions at issue.  The court noted that—as alleged by plaintiffs—the Alter Ego Defendants and the Transaction Defendants: (1) shared similar corporate names; (2) shared overlapping offices; (3) had similar business purposes; and (4) often had the same phone number and certain shared offices.  Based on these factors, the court held that the plaintiffs demonstrated a claim under the alter ego doctrine, making dismissal improper.

Second, the court analyzed whether plaintiffs lacked standing to pursue claims against the Alter Ego Defendants.  The court held that the plaintiffs did have standing as they demonstrated a personal stake in the outcome of the lawsuit and that they sustained some direct injury as a result of the conduct at issue.  Additionally, the court held that the juridical link doctrine did apply in this case.  The plaintiffs’ complaints specifically alleged the class action was a result of numerous individuals suffering an identical injury at the hands of several defendants related by way of a conspiracy or concerted scheme surrounding dealership Doc Fees.  Further, the complaints alleged in detail how the defendants were juridically linked together such that neither Transaction Defendants nor Alter Ego Defendants should be dismissed.

On September 16, 2020, the court granted defendants’ motion to certify its July 31, 2020 Order for interlocutory appeal.[102]  To date, the appeal remains pending.

First Fin. Bank v. TA Partners, LLC[103] (Granting plaintiff’s partial motion for summary judgment holding a valid savings clause existed).  Throughout July 2019, First Financial Bank (tenant) failed to timely pay rent as required by its lease with TA Partners, LLC (landlord).  On July 23, 2019, TA Partners, LLC notified First Financial Bank that their lease was being terminated and that TA Partners, LLC was accelerating rent for the balance of the term and demanding payment of the accelerated rent.  First Financial Bank field suit for declaratory judgments and breach of contract.  Both parties filed cross-motions for partial summary judgment.

The court analyzed whether the lease had a valid savings clause, and whether the tenant accrued liability for future rent following the landlord’s termination of the lease.  First, the court held that the lease contained a valid savings clause.  The general rule in Indiana is that after termination of a lease, all liability under the lease for future rent is extinguished.  However, an exception to the general rule applies when the lease includes a savings clause that expressly states that the landlord is entitled to future rents after the termination of the lease.  Based on Indiana law and the court’s reading of the lease, the court held that the savings clause was clear and unambiguous that the landlord could recover accelerated unpaid rent in the event of default.

Additionally, the court analyzed whether evidence submitted with TA Partners, LLC’s partial motion for summary judgment, including emails and prior drafts of the lease, should be excluded as inadmissible parol evidence.  The court noted that under Indiana law extrinsic evidence may be considered only if the language of a contract is ambiguous.  However, Indiana law is clear that a written instrument governs, and evidence of prior negotiations, and evidence of such matters as prior expectations and conversations, cannot be allowed to alter its terms.  Therefore, the court held that any reference to prior drafts of the lease was inadmissible.

§ 1.3.5 Iowa Business Specialty Court

EMC Ins. Group, Inc. v. Shepard[104] (Perfection of statutory appraisal rights).  In EMC Insurance Group, Inc. v. Shepard, pursuant to a merger, the Court reviewed summary judgment motions relating to a merger and the sale of the defendant Gregory M. Shepard’s (Shepard) minority shares and his failure to perfect his appraisal rights.  Employers Mutual Casualty Company (EMCC) purchased 1.1 million shares of stock from Shepard, who was the largest single minority shareholder of EMC Insurance Group, Inc. (EMC).  EMC argued that Shepard failed to perfect his appraisal rights because he did not obtain consent from the legal titleholder of his shares, Cede & Co. (Cede), prior to the date of the merger.

The first issue in front of the Business Court was one of statutory interpretation where the Court had to determine the scope of what persons or entities are the registered titleholders in a corporation’s records under Iowa Code § 490.1301(8).  Specifically, the court analyzed whether Shepard did not obtain the required consent because he obtained consent from Morgan Stanley Smith Barney, LLC (Morgan Stanley), which held corporate records in “street name” as holder of Shepard’s 1.1 million shares instead of Cede.

The court entered summary judgment for EMC and concluded the record shareholder is the person whose name is registered in the records of the corporation, and those records do not include participants such as brokers.  Accordingly, because Shepard did not obtain written consent to assert his appraisal rights from Cede, he failed to perfect his rights as required by Iowa law.

The second issue the court reviewed was whether EMC waived and/or was equitably estopped from arguing Shepard failed to comply with the strict requirements of the appraisal provision because EMC did not comply with statute and concealed material facts from Shepard to his detriment.  The court found that Shepard did not establish facts in support of his motion for summary judgment on either of his defenses.

First, Shepard argued that EMC waived any challenges to his appraisal rights because it did not strictly comply with the appraisal statute.  The court disagreed and concluded EMC complied with its obligations by sending Shepard a notice acknowledging EMC’s receipt of Shepard’s intent to seek appraisal rights and advising Shepard what he needs to do to seek those rights.

Second, Shepard argued that EMC concealed its belief that the consent obtained from Morgan Stanley was insufficient to perfect his appraisal rights, and because EMC knew he intended to exercise his appraisal rights, Shepard’s statutory non-compliance was excused.  The court held that Shepard could not establish EMC made any false representations or concealed any material facts.

§ 1.3.6 Maine Business and Consumer Docket

H&B Realty, LLC v. JJ Cars, LLC[105] (Racial discrimination claim in commercial sublease claims).  This matter arose from a commercial lease dispute and involves a claim that the landlord racially discriminated against the tenant’s sublessees.  H&B Realty, LLC (H&B) was the owner of property in Portland, Maine, and Sterling Boyington (Boyington) was H&B’s sole member.  In May of 2011, H&B leased the property to JJ Cars, LLC (JJ Cars), with Mokarzel as its sole member.  From July 2011 to February 2013, Mokarzel operated his car dealership at the property.  During this period, Boyington would occasionally stop by to check on the property and to socialize.  During his visits, Boyington would make racist remarks about people of color to the Caucasian employees of JJ Cars.  By February 2013, Mokarzel was in financial duress, and decided to close his business and sublease the property.  JJ Cars sublet the property to several individuals for consecutive periods, and although Mokarzel did not provide H&B with the prerequisites necessary to obtain H&B’s consent to sublet the property, Boyington nevertheless consented or never objected.  On one instance, Boyington made racist comments and used expletives about people of color to one of the subleasing tenants.  Finally, by November 2015, JJ Cars attempted to sublease the property to a Caucasian individual, but Boyington refused to meet with the individual and approve a sublease.

The property sat unoccupied.  Mokarzel ceased paying rent, and Boyington took no steps to find a new tenant but simply decided that he no longer wanted H&B to lease the property.  In March 2016, a FED action was commenced and Boyington eventually obtained judgment.  H&B sold the property in April 2016.  H&B filed a Complaint seeking damages for unpaid rent for the period November 2015 through April 2016.  JJ Cars attempted to avoid paying damages on several grounds.  The court found that Boyington, pursuant to the Lease Agreement, “unreasonably withheld or delayed” his consent to the proposed sublease to the Caucasian individual, and that had he provided reasonable consent, JJ Cars would have been able to pay rent from November 2015 through April 2016.  Although in the commercial lease context a landlord has no duty to mitigate damages, the lease provisions here imposed such an obligation.  Additionally, the court concluded that because when JJ Cars began missing rent payments, Boyington took no steps to lease the property to someone else, he failed to mitigate damages.  The court granted judgment to JJ Cars and Mokarzel on Boyington’s complaint.

In their third party complaint against Boyington, JJ Cars and Mokarzel sought damages for public accommodation discrimination pursuant to the Maine Human Rights Act, 5 M.R.A. § 4592.  Their theory was that Boyington harbored racial animus, harassed and discriminated against JJ Cars’ subtenants, and caused those subtenants to vacate.  However, the court determined that the evidence did not support the theory, at least as to causation.  Boyington’s bigoted comments credibly established by the evidence occurred while JJ Cars was still in business, but there was no evidence that Boyington made similar comments “directed at” the subtenants of JJ Cars or caused them to vacate the property.  On the contrary, Boyington consented to subletting to subtenants who were persons of color, objecting only to the Caucasian subtenant.  The court concluded that JJ Cars and Mokarzel did not satisfy their burden of proving discrimination, and granted judgment to Boyington on the third party complaint.

Clavet v. Dean[106] (Fiduciary duty forms basis of failure to disclose claim against LLC member).  This Order for Entry of Judgment followed a 2019 bench trial, which centered around a September 2016 purchase by the defendants of the plaintiff’s membership interests in two entities they jointly owned: Blue Water, LLC and Covered Marina, LLC (hereinafter, the “Marinas”).  The parties had a long history of operating businesses in Maine and Texas, including real estate development, hotels, a storage facility, a car wash, two small insurance entities, and the utility Electricity Maine.  Both business partners and good friends, the parties owned the Marinas for over ten years on the gulf coast of Texas.  Finding the Marinas both unprofitable and difficult to insure, the parties sought to sell the Marinas.  In September 2016, a broker called Dean to discuss a purchase.  In reviewing the documented communications between the parties, the court found that Dean breached a number of legal duties he owed to Clavet.

Specifically, the court found that Dean intentionally omitted material information that he had a duty under Maine law to provide to the other member of Blue Water, Clavet.  The information consisted of the inquiries and communications from the broker to purchase the Marinas for a sum of 8 million dollars, which changed to 7.5 million dollars two days before Dean emailed Clavet to tell him that their wives needed to provide personal guarantees in order to have a line of credit.  The purchase and sale agreement between Dean and the broker was completed shortly thereafter, and Clavet, on that same day and completely in the dark about the agreement between Dean and the broker, signed over his membership interest in the Marinas to Dean.  Further, Clavet was not told about the sale of the Marinas until months later, when prior disclosure would have revealed to Clavet that Dean had timed and manipulated his buyout of the Marina interests from Clavet in order to keep the proceeds for himself—at the same time Dean made the contract to sell the Marinas for 7.5 million dollars, he was persuading Clavet to sell him his membership interests for a significantly lower price.

The court held that an omission by silence could constitute the supplying of false information as proof of intentional misrepresentation, but only in circumstances where there exists a special relationship such as a fiduciary relationship, which imposes an “affirmative duty to disclose.”  The information was intentionally withheld “for the purpose of inducing” Clavet to refrain from acting in reliance upon it.  The court further found that the omissions were material, “if for no other reason but that there is such a substantial difference between the sales price of 7.5 million dollars … and the purchase price of Clavet’s interest for 2.5 million dollars by Dean.”  The court entered judgment for plaintiff on the counts for fraudulent misrepresentation and breach of fiduciary duty.  The court also entered judgment for defendants on the counts for unjust enrichment and fraudulent transfer.

§ 1.3.7 Maryland’s Business and Technology Case Management Program

SACHS Capital Fund I LLC v. EM Group LLC[107] (Granting dismissal as to all but one of defendants’ claims).  SACHS Capital Fund I LLC, et al. v. EM Group LLC, et al., concerned a derivative action that was brought in an attempt to undue a $17 million loan that was made to EMSG, LLC, a Maryland limited liability company (EMSG), by TZG-Sachs Empire, LLC (TZG Sachs) to fund its expansion.  EMSG was formed by EM Group LLC, a Maryland limited liability company (EM Group), owning 67% of EMSG and the plaintiffs, Sachs Capital Fund I, LLC, Sachs Capital-Empire, LLC, and Sachs Capital-Empire B, LLC (collectively, the “Sachs Entities”), owning 33% of EMSG.  The lender, TZG-Sachs, agreed to amend the loan such that the maturity date was extended by three years from November 21, 2016 to November 21, 2019.  Beginning in April 2019, however, EMSG began to materially and repeatedly breach the payment terms of the amended promissory note.  The court, applying the Tooley test,[108] denied EM Group’s direct claims on the basis that they were largely derivative claims and that any recovery EM Group would receive would be based on its interest in EMSG, as EM Group and the other plaintiffs did not suffer injury that was distinct from the injury suffered by EMSG itself.

The court also considered EM Group’s claim that challenged the operating agreement that formed EMSG as an enforceable contract.  According to EM Group, the operating agreement favored the Sachs Entities to EM Group’s disadvantage.  The court, in applying Maryland contract law, concluded that EM Group was a sophisticated entity that should have readily understood the clear terms of the operating agreement.  The court, however, preserved EM Group’s declaratory judgment claim, which sought an interpretation of what proceeds could be distributed under the terms of the operating agreement.  EM Group also sought a declaration that the loan from TZG-Sachs was void and unenforceable because Sachs members of EM Group had failed to disclose that they (Sachs members) would reap a financial benefit in the event that EM Group defaulted on the loan.  The court, having found that the time for rescission had passed, dismissed this count.

Additionally, EM Group claimed that Mr. Sachs, the sole member of the managing member of the Sachs Entities, and TZG-Sachs fraudulently induced EM Group to enter into the EMSG operating agreements by: (1) making false representations regarding the treatment of EM Group under the terms of the agreements; (2) failing to disclose that the law firm that drafted the operating agreement held equity interests in the Sachs Entities; or (3) failing to disclose the interests of Mr. Sachs and TZG-Sachs in connection with the Sachs Entities and the loan being made to EMSG.  According to EM Group, it did not learn of these fraudulent statements and omissions until 2018 and 2019.  The court dismissed the claim finding that EM Group failed to plead fraud with the required requisite particularity.[109]  The court went on to note that Mr. Sachs’ failure to disclose that he had a 9.2% interest in TZG-Sachs and the law firm’s 1% interest in the Sachs Entities were not material conflicts of interest and therefore could not support a fraud claim.  The court also noted that EM Group’s claim was untimely as the President of EMSG had been on inquiry notice of the various interests as early as 2011, when it received letters describing both Mr. Sachs and TZG-Sachs interests and roles of the parties to the loan.

The court also dismissed EM Group’s civil conspiracy claim on the basis that EM Group had not met the clear and convincing standard for this claim.[110]  The court dismissed EM Group’s breach of fiduciary claim which alleged that Mr. Sachs owed EMSG and the investors a duty as a board member and financial advisor and that he violated this duty through a lack of disclosure of his investments that competed with EMSG.  The court concluded that there was no breach of any fiduciary duty, as the operating agreement expressly permitted the Sachs to invest in competing entities.  Finally, the court dismissed EM Group’s unjust enrichment claims on the basis that there was a valid contract between the parties.

United Cmty. Patrol Servs., Inc. v. Sepehri [111](Awarding a non-breaching party 49% ownership of stock in the breaching party).  In United Community Patrol Services, Inc., et al. v. Sepehri, the Circuit Court for Montgomery County ordered the defendants to transfer shares in United Community Patrol Services, Inc. (United) such that Plaintiff McClure, would own 49% in United.  In his complaint, Plaintiff McClure alleged that United had breached its contract to sell United stock to the plaintiff, a shareholder of United.  In February 2015, McClure, who had worked for United for over a year as a 1099 independent contractor, was terminated.  In April 2015, McClure paid $49 to Mr. Sepehri, a 49% owner of United, for the purchase of 49 shares of United.  McClure and Mr. and Mrs. Sepehri executed a Stock Purchase Agreement (the “Purchase Agreement”) which memorialized McClure’s purchase of the 49 shares of United.

Although his role as owner of United had not been discussed prior to the execution of the Purchase Agreement, McClure assumed that he would be responsible for bringing in business to the company.  Further, the extent of the discussion regarding compensation only involved an agreement between McClure and Mr. Sepehri that money would not be taken out of the business to compensate the parties.  From 2015 to 2018, McClure worked to secure business for United and became so involved with United that he had hired and managed its employees.  As of April 2018, however, McClure had not received a stock certificate or a transfer of Mr. or Mrs. Sepehri’s stock in United.  In fact, the Sepehris began excluding McClure on integral business decisions and terminating employees who had been hired by McClure.  McClure filed suit after his inspection of United’s accounting statements showed that Mrs. Sepehri had been paid $87,692.00 in wages in 2018 compared to the $18,500 issued to McClure in 1099 wages.

The court, in considering McClure’s breach of contract claims, held that the Purchase Agreement was valid, dismissing the defendants’ contention that the Purchase Agreement was an “agreement to agree.”  According to the court, the Purchase Agreement could not be interpreted as contemplating future negotiations, which is a critical feature of agreements to agree.  The court noted that this interpretation was also buttressed by the fact that the Sepehris accepted McClure’s $49 as payment for the shares of United stock.  The court determined that the plaintiff’s expert, who determined that United had a total gross income of $2,164,585.00 for the years 2015 to 2019, was not credible due to the expert’s failure to consider the entirety of the United’s financial records, including its debt.  Without the expert testimony, the court found that McClure had failed to prove his compensatory damages.  Rather, the court fashioned a remedy in which the Sepehris were ordered to issue stock in United such that McClure would become an owner of 49% of United’s issued and outstanding stock.

The court dismissed McClure’s derivative claims on the basis that McClure had not and would not become a stockholder until the Sepehris issued the stock pursuant to the court’s order.

Connaughton v. Day[112] (Denying plaintiffs’ motion for class certification).  In Connaughton, et al. v. Day, et al., the Circuit for Montgomery County denied the plaintiffs’ motion for class certification in a securities fraud lawsuit.  The plaintiffs alleged that the named defendants were principals of a “feeder fund” that procured investors for a Ponzi scheme run by non-party entities (the “MLJ Group”).  Plaintiffs alleged that the defendants solicited and sold investments in securities offered by the MLJ Group who would then use the proceeds to acquire debt portfolios.  Over the course of the litigation, the defendants grew in number from 4 to 18, a group that included the entities to which the original defendants allegedly funneled money and the counsel for one of the original named defendants.

Plaintiffs sought a class certification of “all persons who lent money to the MLJ Borrowers,” and excluded from the class, individuals who made a net profit on the participation in the Ponzi Scheme and those who were affiliates of the 18 defendants or the MLJ Group.  The court found that the plaintiffs did not meet three of the four threshold requirements for class certification under Maryland law.[113]  Specifically, the court found that plaintiffs neither demonstrated how joinder of the purported 35 class members would not be impracticable, nor did they demonstrate the typicality of the class.  With regard to typicality, the court found that purported class members received varying non-scripted emails and calls from defendants before the plaintiffs decided to complete the transactions.  Thus, different plaintiffs may have relied upon different misrepresentations from defendants, which negated any typicality amongst the class.  Finally, the court concluded that the class representatives could not adequately represent the class because of the difference in what the representations that were relied upon by the class representatives and other class members and because the class representatives could not represent the interests of another plaintiff who was also the target of potential claims of the other class members.

After finding that the plaintiffs had failed to meet the threshold requirements for class certification, the court considered plaintiffs’ claims under Maryland Rule 2-231(c)(3).  The court, having concluded that common law fraud claims are not susceptible to class action treatment because reliance can be unique to each class member, found that individual questions of fact predominated the putative class.

RCPR Acquisition Holdings, LLC v. Zurich Am. Ins. Co.[114] (Granting plaintiff’s motion to compel privileged documents).  In RCPR Acquisition Holdings, LLC v. Zurich American Insurance Company, the Circuit Court for Montgomery County granted plaintiff’s motion to compel the production of documents that defendant claimed were privileged communications between counsel and client.

The plaintiff, RCPR Acquisition Holdings, LLC (RCPR), is the owner of the Ritz Carlton San Juan hotel and casino in San Juan, Puerto Rico and the defendant is RCPR’s insurer.  Plaintiff filed a complaint against defendant on November 1, 2018, following the defendant’s alleged failure to satisfy its contractual obligations to indemnify plaintiff for property damage, business interruption and other losses sustained by RCPR as a result of Hurricane Maria under plaintiff’s insurance policy with defendant.  In connection with RCPR’s first set of requests for production of documents, the defendant withheld certain documents and provided a privilege log showing the nature of the documents and emails.  With respect to each document that was withheld, the defendant asserted that the document was protected by the attorney-client privilege because it was communications between counsel and client for purposes of providing legal advice.  In filing its motion to compel, the plaintiff asserted that defendant has failed to show that any privilege was applicable and that, even if the documents were privileged, the privilege was waived when the documents and emails were exchanged with an outside adjuster that was neither an employee of or counsel to the defendant.

The court determined that communications, which concerned insurance coverage, were not privileged as they were not exchanged for the purpose of seeking legal advice.[115]  The court found that, although the defendant’s outside counsel had been included on the emails, the emails demonstrated that counsel was included for the purpose of being involved in the insurance claim process and not for the purpose of providing legal advice.  In addition, the court noted that although the timing of the emails and the nature of the insurance claim at issue indicated that the communications with outside counsel were made at a time when the defendant could have anticipated litigation, the defendant had not provided any information to the court suggesting that that was in fact the case.  Ultimately, the court, finding that the communications were not privileged, ordered the defendant to produce the communications.

§ 1.3.8  Massachusetts Business Litigation Session

Attorney General v. Facebook, Inc.[116] (Attorney-client privilege and work product doctrine).  The Massachusetts Attorney General (AG) filed a petition to compel Facebook, Inc.’s compliance with a civil investigative demand (CID) issued in connection with the AG’s investigation into Facebook’s management of Facebook user data.  Beginning in late 2015, Facebook’s privacy policies came under increasing scrutiny after media outlets reported that a University of Cambridge professor, Aleksandr Kogan, managed to collect personally identifying information from the accounts of approximately 87 million Facebook users through a Facebook app that Professor Kogan had developed.  Professor Kogan then sold some of this data to a political data analytics and advertising firm, Cambridge Analytica, which used the data to send targeted campaign advertisements to Facebook users during the 2016 U.S. presidential election.  Facebook responded to these news reports by launching an internal App Developer Investigation (ADI) to audit Facebook apps for compliance with Facebook’s policies concerning the collection and use of user data.  Facebook retained a law firm, Gibson Dunn & Crutcher LLP, to design and direct the ADI.  In the ensuing months and years, Facebook issued periodic statements to update the public on the ADI’s progress.  In March 2018, the Massachusetts AG opened its own investigation into Facebook’s user data policies, issuing three CIDs that sought, among other things, information about the ADI and any apps that Facebook identified as problematic.  Facebook refused to produce documents generated in the course of the ADI, arguing that the material was protected by the work-product doctrine and attorney-client privilege.

The court first addressed Facebook’s claims of work product, emphasizing that the doctrine only protects material “prepared in anticipation of litigation or for trial.”  As the court concluded, the history of the ADI and Facebook’s own public statements showed that the ADI was not undertaken in anticipation of litigation; rather, the ADI was undertaken as part of Facebook’s normal business operations, being another iteration of its continuing efforts to ensure that app developers complied with Facebook’s policies concerning user data.  The court rejected Facebook’s argument that documents generated in the ADI were work product because the ADI was a “lawyer-driven effort.”  In the alternative, the court held that the AG had overcome the qualified protection of the work-product doctrine, concluding that the majority of the requested information was fact work product, and that the AG had demonstrated a substantial need for the information and an inability to obtain it from other sources.  Turning to Facebook’s claims of attorney-client privilege, the court similarly concluded that internal communications generated in the course of the ADI were not categorically privileged.  The attorney-client privilege, for example, did not extend to “any underlying facts or other information learned by Facebook during the ADI, including the identity of the specific apps, groups of apps, and app developers” that Facebook might have flagged.  Moreover, Facebook’s public statements about the ADI were inconsistent with its broad assertion of attorney-client privilege because “Facebook has touted the ADI as an investigation and enforcement program undertaken for the benefit of the Company’s users, and it has pledged to share information of suspected data misuse uncovered in the course of the ADI with its user community.”  The court recognized that some internal communications sought in one disputed CID request might contain privileged information, giving Facebook an opportunity to identify these documents in a privilege log.  Yet, the court held that the remaining five requests in dispute sought factual materials pertaining to an investigation that Facebook “touted . . . to the public in an effort to explain and defend its actions,” and therefore were not protected by attorney-client privilege.

Jinks v. Credico (USA) LLC[117] (Employee classification under state wage and overtime statutes).  The plaintiffs sued their former employer, DFW Consultants, Inc. (DFW), a marketing and sales company that provides door-to-door sales services.  In 2013 and 2015, respectively, DFW entered into a “Subcontractor Agreement” and a “Services Agreement” with Credico (USA) LLC (Credico), in which DFW agreed to provide sales services to Credico’s clients, and Credico agreed to compensate DFW for those services.  DFW hired the plaintiffs to do door-to-door marketing work for Credico’s clients.  The plaintiffs brought claims alleging that they were improperly classified as independent contractors and for violation of the Massachusetts minimum wage and overtime statutes.  In addition to their direct employer, DFW, the plaintiffs brought claims against Credico, alleging that DFW and Credico were “joint employers.”

The court disagreed, granting Credico’s motion for summary judgment on the ground that Credico was not a joint employer.  The court first rejected Credico’s argument that the minimum wage and overtime statutes only contemplate that an employee has a single employer.  Although the statutes use the singular term “employer,” the court concluded, based on appellate precedent and the remedial purpose of the statutes, that the statutes should be construed to encompass claims against joint employers.  The court then addressed what test determines whether a defendant is an “employer” under the Massachusetts statutes.  Under the common law “right to control” test, a company could be deemed a joint employer if it has “sufficient control over the work of the employees of another company.”  The plaintiffs argued that the “ABC Test,” outlined in a Massachusetts statute defining “independent contractor,” had supplanted the common law “right to control” test.  But the court rejected this argument, holding that the independent contractor statute “applies only where a worker provides services directly to a potential employer.”  Because the plaintiffs never provided services to Credico directly, the “right to control” test still determined whether Credico could be deemed a “joint employer.”  Applying the “right to control” test, Credico could not be deemed a joint employer because the undisputed evidence showed that Credico had no power to hire or fire the plaintiffs; no authority over their work schedules or compensation; and did not maintain employment records for them.

The minimum wage and overtime claims against DFW turned on whether the plaintiffs fell within certain statutory exemptions for workers engaged in “outside sales.”  To be exempt under the minimum wage statute, a worker engaged in “outside sales” cannot make daily reports or visits to the employer.  The court denied the summary judgment motions of DFW and its manager, Jason Ward, because there was a genuine dispute of material fact as to whether the plaintiffs did so.  The court held, however, that the outside sales exception to the overtime statute applies regardless of whether an employee makes daily reports.  As such, it granted summary judgment for DFW and Ward on the overtime claims.  The court also granted summary judgment for certain plaintiffs on their misclassification claims, concluding that the undisputed facts showed that they were improperly classified as independent contractors.

CommCan, Inc. v. Baker[118] (Equal Protection challenges to Governor’s executive order).  On March 10, 2020, the Governor of Massachusetts, Charlie Baker, declared a state of emergency in Massachusetts due to the spread of the COVID-19 virus.  The Governor subsequently ordered all businesses in Massachusetts to close their brick-and-mortar workplaces and facilities unless they provided certain “COVID-19 Essential Services.”  The orders included liquor stores and licensed medical marijuana treatment centers in the lists of essential businesses allowed to remain open.  The orders did not include nonmedical adult-use marijuana retailers as essential businesses, requiring such stores to close.  The plaintiffs—nonmedical marijuana retailers, marijuana cultivators that sell to nonmedical retailers, and an individual that uses marijuana medically but lives over an hour away from the nearest medical marijuana treatment center—brought a constitutional challenge to the Governor’s orders, arguing that they violated the equal protection provisions of the Fourteenth Amendment of the U.S. Constitution and Articles 1 and 10 of the Massachusetts Declaration of Rights.  The plaintiffs sought a preliminary injunction barring enforcement of the Governor’s closure orders against them.

The court denied the plaintiffs’ request for a preliminary injunction, concluding they ultimately would not succeed on the merits of their claims.  To begin, the court emphasized the broad powers of the State to restrain liberty and the use of private property to protect the public health.  At the same time, the court rejected the Governor’s argument that the court lacked subject matter jurisdiction over the case because the Massachusetts declaratory judgment statute does not allow for declaratory relief against the Governor.  Even if declaratory relief were not available by statute, an executive order of the Governor “may be challenged on the grounds that it is unconstitutional or otherwise unlawful.”  “The fact that the challenged orders were issued under the Governor’s broad emergency powers does not mean that they are immune from judicial review.”  Turning to the merits, the court held that because the “right to pursue one’s business” is not a “fundamental right,” the constitutional question turned on whether there was a “rational basis” for the Governor’s orders to draw a distinction between, on the one hand, medical marijuana treatment centers and liquor stores, and, on the other hand, nonmedical marijuana retailers.  The Governor put forth two justifications for not exempting nonmedical marijuana retailers from the COVID-19 closure orders.  First, nonmedical marijuana retailers tend to attract large crowds of customers because there are so few of these businesses licensed in the Commonwealth.  Second, nonmedical marijuana retailers tend to attract out-of-state customers.  The plaintiffs “convincingly” argued that both concerns could be addressed by less burdensome alternative measures.  This argument failed, however, because equal protection does not require the State to employ less burdensome alternatives.  Moreover, the Governor was not required to cite or rely upon these justifications when he actually issued the orders.  Accordingly, because the Governor’s orders requiring nonmedical marijuana retailers to close were not “arbitrary or capricious,” they passed constitutional muster.

§ 1.3.9 Michigan Business Courts

Farm Bureau Gen. Ins. Co. of Mich. v. ACE Am. Ins. Co.[119] (Insurance dispute).  On remand from the Michigan Supreme Court, the Kent County Business Court addressed whether Farm Bureau could rescind its policy that was procured through fraud when an innocent third party is involved under the framework in Bazzi v. Sentinel Ins. Co., 502 Mich. 390, 919 N.W.2d 20 (2018).  Relying on Bazzi, the court found that plaintiff was not entitled to rescission.

In this case, the injured claimant, the wife of the named insured, attempted to claim no-fault benefits through her husband’s policy with plaintiff.[120]  On May 22, 2013, the wife was injured as an intoxicated pedestrian when a vehicle failed to yield.  However, on his insurance application to plaintiff, the insured husband had omitted his wife as a named insured under the policy—only indicating that he was married.[121]  Without further inquiry into the wife’s identification and driving history, plaintiff issued the policy on February 25, 2013.  However, due to the omissions on the husband’s application, plaintiff issued a notice of policy cancellation on April 22, 2013, effective May 25, 2013.  The subject accident occurred two days before the cancellation date.

Plaintiff filed suit to rescind the insurance policy based on fraudulent inducement after discovering the wife’s history of drunk driving, leading to a license suspension.  In finding that plaintiff was not entitled to rescission, the court noted that while insurers may rescind insurance contracts based on fraud, the court must balance the equities to determine which innocent party should assume the loss.  There the court conducted a two-day evidentiary hearing.  The court found, among other things: (1) plaintiff should have immediately investigated the glaring omissions on the application; (2) despite intoxication, the wife had the right-of-way and was not at fault for the accident; (3) and plaintiff waited six months after the policy cancellation date to refund the premiums.  Thus, plaintiff was not entitled to rescission.

Happy Little Tree Co., LLC v. Prof’l Prop. Dev., LLC[122] (Breach of commercial lease).  This case addresses the budding uncertainty in Michigan regarding the application of contract principles to commercial lease disputes in the medical marijuana industry.  In Happy Little Tree, the court found in favor of plaintiff, a licensed medical marijuana growing facility, on its breach of commercial lease agreement and related claims.

Plaintiff and defendant entered into a commercial lease for plaintiff to operate a medical marijuana growing facility.  The subject property was in total disrepair.  As such, the lease term would not commence until and unless defendant made specific repairs within forty-five days of the lease execution date.  When defendant failed to timely repair the premises, plaintiff offered to purchase the property and continue operations independently.  Defendant refused.  Subsequently, defendant discovered that there was a current city ordinance halting the opening of new medical marijuana facilities.  Defendant informed plaintiff of this and provided an ultimatum: plaintiff could either terminate the lease or continue paying rent.  Plaintiff declined both offers and retained access to the property until defendant changed the locks and leased it to a new tenant.

Plaintiff filed suit for breach of commercial lease, unjust enrichment, and violations of the Michigan Anti-Lockout Law.  The court held that defendant breached the lease by failing to complete the repairs within the required time frames.  Further, the court rejected defendant’s argument that it could not have breached the lease because the purpose of the lease was banned by city ordinance.  The court reasoned that the ban was lifted in enough time for plaintiff to fulfill the lease purpose, had defendant timely completed the repairs.  The court also noted that the lease provided that the premises could be utilized for any other agreed use.  Finally, the court held that defendant violated Mich. Comp. L. § 600.2918, Michigan’s Anti-Lockout Law, because defendant interfered with plaintiff’s possessory interest in the property.

Liberty Plus, LLC v. Vill. Crest Condo. Ass’n[123] (Breach of contract, unjust enrichment, and constructive trust).  In this case, a delay in discovery proceedings due to the COVID-19 pandemic precluded summary disposition under Mich. Ct. R. 2.116(C)(10) (the state counterpart to Fed. R. Civ. Pro. 56).  At issue was the validity of an affidavit submitted by Village Crest in opposition to Liberty’s motion for summary disposition.  The affidavit was not notarized due to COVID-19 restrictions.  With a seamless balance of fairness and public safety, the court observed that “while the [a]ffidavit … is not notarized” Liberty initiated suit on February 12, 2020, one month before the “pandemic effectively shut down the country,” causing significant delays in the litigation process.  As such, the court held that “in light of the need for [additional] discovery,” summary disposition was not appropriate.

Corktown Hotel, LLC v. Caspian Constr. Grp., Inc.[124] (Negligence and commercial construction dispute).  This business dispute involved whether defendant Caspian Construction Group (Caspian), the substitute general contractor, could be held liable to plaintiff hotel, in contract or tort, for non-code installation of shower handles that defendant did not design or select.  Plaintiff hired ROK Construction Services, LLC (ROK) to perform construction management services in connection with its plan to renovate an old Holiday Inn.  Plaintiff also contracted with an interior designer to design a two-handle shower valve.  Plaintiff approved the design and authorized the replacement of the valves, which were installed by ROK on half the floors before Caspian replaced ROK.  Subsequently, plaintiff hired Caspian to complete the renovation.  The contract between plaintiff and Caspian specifically called for the remaining showers to be equipped with the two-valve design.  Additionally, permits and plans were specifically excluded from the scope of the contract.  Upon completion of the renovation, the valve design was found to violate city code, and plaintiff did not receive its necessary permit.

Plaintiff filed suit for breach of contract and negligence based on the non-code installation of the shower valves.  In granting summary disposition on both counts for Caspian under Mich. Ct. R. 2.116(C)(10), the court held, “[d]efendant owed no professional duty of care (tort) to Corktown independent of the contract” unless plaintiff demonstrated a duty “separate and distinct from the contractual obligation.”  Thus, because the shower handles were included in the contract, plaintiff was barred from recovery.

§ 1.3.10 New Hampshire Commercial Dispute Docket

Control Techs. v. ENE Systems of New England[125] (Nondisclosure agreements).  This case stems from a dispute between two commercial entities, both of whom are building management solution providers that design, install, and maintain commercial heating and ventilation systems.  Defendant hired co-defendant from plaintiff.  According to plaintiff, prior to leaving for defendant, co-defendant accessed numerous confidential client files and sent the confidential information to defendant in violation of a nondisclosure agreement.  In ruling in favor of the plaintiff during a preliminary injunction hearing, the court found that, although the noncompetition agreement between plaintiff and co-defendant was overbroad, the nondisclosure provisions of the agreement were still enforceable.  According to the court, “when a noncompetition agreement is overbroad on its face, the court need not consider whether it could be narrowed where the relief requested is enforcement of misappropriation of confidential information.”

Here, the nondisclosure provision was enforceable because (1) plaintiff had a significant and legitimate interest in preventing employees from appropriating its goodwill to its detriment, (2) the provisions did not impose an undue hardship upon the co-defendant, and (3) the nondisclosure agreement was not injurious to the public interest.  Finally, the court held injunctive relief was appropriate because irreparable injury can occur if appropriation of trade secrets such as confidential information is not enjoined, and it is difficult to quantify the impact of lost sales and diminished customer relationships.

High Liner Foods (USA), Inc. v. Groves[126] (Noncompetition agreements, RSA 275:70, modification of restrictive covenant by court, trade secrets, preliminary injunctions).  This case arose out of a former employer’s effort to enforce restrictive covenants and confidentiality obligations in an employment agreement.  The novel issue presented was whether the employee’s agreement occurred before or after the restrictive covenants were reflected in a formal written agreement.  New Hampshire has a statute that prohibits an employer from enforcing a noncompete agreement unless it was provided to the prospective employee prior to the acceptance of an offer of employment.  The statute does not affect other provisions of such an agreement, including confidentiality, nondisclosure of trade secrets, intellectual property assignment, or other similar provisions.

Here, the prospective employee met with a representative of the employer, and reached an understanding regarding the basic terms of the proposed employment, reflected in notes on a napkin.  The so-called “Napkin Memo” did not include any description of the noncompete agreement, but this was reflected in the formal offer of employment that came from authorized representatives of the employer, and was ultimately executed by the employee.  The business court determined, on these facts in the context of a request for preliminary injunctive relief, that Napkin Memo was not the offer of employment, and that accordingly, the restrictive covenants in the formal written agreement would be enforceable.  The decision also applied customary standards to the request for injunctive relief, as well as the law regarding enforceability of restrictive covenants, including redlining to cure overbroad provisions.

Legacy Global Sports, LP v. St. Pierre[127] (Choice of law, breach of contract, wrongful termination, aiding and abetting breach of fiduciary duty, tortious interference with contractual relations, fraudulent inducement to contract, indemnification of corporate officers, intervention).  This matter has resulted in a number of decisions from the business court respecting several theories of liability in a commercial dispute context.  This decision deals with several of them.

The New Hampshire Supreme Court has never addressed the theory of aiding and abetting a breach of fiduciary duty, but a federal appellate opinion predicted that New Hampshire would do so if and when the issue was presented.  The business court agreed with this prediction, adopting the formulation in Restatement (Second) of Torts § 876(b): (1) a breach of fiduciary obligations; (2) knowing inducement or participation in the breach by the one aiding and abetting; and (3) damages as a result of the breach.  The court went on, however, to find that the complaint did not adequately allege facts to support each of these elements, and dismissed the claim.  The dismissal of this claim, as well as one for conspiracy, was also based on the principle that a corporation cannot conspire with its agents, as now reflected in numerous decisions, although again, not as yet addressed directly by the New Hampshire Supreme Court.

The court also dismissed a claim of breach of the implied covenant of good faith and fair dealing.  Noting that a “party who pleads a breach of an express term of a contract can hardly assert a breach of contract based upon the same term, alleging that it is implied.”  For this reason, this claim was also dismissed.  Finally, the court declined to dismiss a fraudulent inducement claim, addressing an argument that a party seeking rescission based upon a fraudulent concealment must tender any benefits received under the contract.  In contrast, a tort claim for damages when there has been a fraudulent concealment does not seek rescission, and accordingly, the tender rule does not apply.

Legacy Global Sports, LP v. St. Pierre[128] (Electronic discovery).  This same matter produced a decision focused solely on discovery subpoenas issued for emails, both to parties and non-parties.  There were also subpoenas directed toward Google for these same parties and non-parties, and the court dealt with motions to quash them, basically on over-breadth, and therefore abusive, grounds.

The subpoenas to Google requested so-called “header information,” i.e., from and to, date, and subject matter for a specified email address, as well as information about the owner of the account associated with the address.  The subpoenas further sought information regarding any deleted emails during a relevant timeframe.

While recognizing that the request was “akin to a privilege log,” the court found that these requests were classic examples of fishing expeditions, and quashed them.  Likewise, without an adequate basis to identify potentially relevant communications, and the need for them in the circumstances, the subpoenas to the parties and non-parties were also quashed.

Boudreau v. Wax Specialists, LLC[129] (Restrictive covenant not to compete).  In this case, defendant required plaintiff (an esthetician) to sign three separate non-competition agreements while she worked for defendant.  In determining that the non-competition agreements were unreasonable, the court applied a three-part test and found in favor of plaintiff regarding each factor.

First, the non-competition agreement was not reasonably limited in geographic scope and was not advanced for a legitimate business purpose.  Estheticians do not have assigned territories and are not traditionally positions subject to non-competition agreements.  The fact defendant paid for plaintiff’s training also did not justify the non-competition agreement because defendant required the training as part of the job and plaintiff signed an agreement indicating she would repay the cost of training if she left employment early.  Second, the court found an undue burden on plaintiff.  Enforcement of the non-competition agreement had already cost plaintiff one job, and there was a real risk that enforcement would jeopardize plaintiff’s ability to provide for her children as the sole financial support for her family.  Finally, the court held the work of an esthetician is personal in nature, and the public has an interest in enabling customers of the service provided by plaintiff and defendant to see the provider of their choice.

§ 1.3.11 New Jersey’s Complex Business Litigation Program

Hana Trading Corp. v. Cardinale[130] (Defendants’ distinct entities, no breach of fiduciary duty).  New Jersey Bergen County Superior Court Complex Business Litigation Judge Robert C. Wilson ruled in favor of defendants’ summary judgement motion finding the defendants were separate legal entities and they did not breach their fiduciary duty owed to the plaintiff.  Plaintiff Hana Trading Corp. (Hana), a business involved in exporting scrap materials from the United States to Asia, agreed to purchase batteries from Jutalia Recycling (Jutalia).  Hana traveled to Jutalia’s New Jersey yard twice, and on both occasions, failed to observe the batteries being loaded into containers.  Hana only relied upon the fraudulent invoices, packing slips, and sale orders issued by Jutalia and its agent.  Hana hired Defendants World Logistics USA, LLC (World LLC) and Olympiad Line, LLC (Olympiad) to assist in the shipment of Hana’s purchased scrap batteries to export to South Korea.

In its discussion, the Superior Court first determined that Defendants World Inc., World LLC, and Olympiad were not one entity as Hana alleged in its amended complaint.  The court reasoned that they were set up as separate corporate structures for separate business purposes.  The court next analyzed whether the defendants breached their fiduciary duty to Hana.  The court concluded that Hana did not ensure it was receiving the correct amount of batteries when it purchased the order from Jutalia even though it traveled to Jutalia’s New Jersey property and confirmed the numbers were accurate.  Defendant Olympiad had no way of knowing the information it received from Hana was false, did not have prior access to the containers, and did not receive tickets that would show a weight discrepancy; and therefore, did not commit a breach of fiduciary duty to Hana.

L’Oreal USA, Inc. v. Wormser Corp.[131] (Plaintiff cannot ignore its own forum selection clause).  Complex Business Litigation Judge Wilson ruled that the New Jersey Superior Court did not have subject matter jurisdiction when the parties were governed by a forum selection clause selecting a foreign jurisdiction, even when the Court had jurisdiction over a place of business for the plaintiff and the defendant’s principal place of business.  L’Oreal (plaintiff) filed suit against Wormser and Process Technologies and Packaging LLC (defendants) in the District Court of New Jersey, subsequently withdrew that suit due to lack of federal diversity jurisdiction, and then filed suit in Bergen County, New Jersey.  Further, plaintiff ultimately filed an amended complaint, which contended that Bergen County was the appropriate venue because it was defendant Wormser’s principal place of business.  The relationship between all parties was governed by an agreement that was not negotiated between the parties, but rather contained plaintiff’s unilaterally dictated terms.

Moreover, the agreement contained a forum selection clause and choice-of-law provision that stated, “any dispute shall be brought before the Courts of the city where [plaintiff]’s registered address is located and the laws of the state of such registered address shall apply.”  The plaintiff claimed that “registered address” referred to a New Jersey office; however, the court found that the plain and ordinary meaning of “registered address” is the address of plaintiff’s USA headquarters, which was used by the plaintiff when it was required to register an address with the United States Trademark Office and the Federal Trade Commission.  The court held that because the plaintiff drafted the forum selection clause, the plaintiff cannot in turn claim fraud, undue influence, or a violation of public policy and a forum selection clause will govern even when an alternative forum contains a place of business for the plaintiff and the principal place of business for the defendant.

§ 1.3.12 New York Supreme Court Commercial Division

Lazar v. Attena, LLC[132] (Petition for dissolution of LLCs).  In Lazar, Justice Andrea Masley of the New York County Commercial Division granted Arik Mor and Uriel Zichron’s (together, “Respondents”) motion to dismiss a petition to dissolve three limited liability companies, Attena LLC, Hemera LLC, and Nessa LLC (collectively, the “LLCs”).  The court’s opinion addressed whether the LLCs should be dissolved on the ground that they were no longer functioning in accordance with their stated purpose, which was defined broadly to include “any lawful business purpose.”

Gabriel Lazar and Joel Scheinbaum (Petitioners), who were members of the LLCs, initiated a special proceeding under New York Limited Liability Company Law § 702 to dissolve the LLCs.  Section 702 permits judicial dissolution of an LLC, upon application of one of its members, “whenever it is not reasonably practicable to carry on the business in conformity with the articles of organization or operating agreement.”  In order to show entitlement to such a dissolution, the member seeking such relief “must establish, in the context of the terms of the operating agreement or articles of incorporation, that (1) the management of the entity is unable or unwilling to reasonably permit or promote the stated purpose of the entity to be realized or achieved, or (2) continuing the entity is financially unfeasible.”[133]

Petitioners alleged that: (1) the sole purpose of the LLCs was to acquire, own, and operate five separate multi-family properties located in Manhattan; (2) such properties were acquired between 2012 and 2013; and (3) all of these properties were sold in 2015.  Accordingly, petitioners alleged, the LLCs had run their course and could no longer be operated consistent with their purpose.

The court began its analysis by rejecting petitioners’ allegation regarding the purpose of the LLCs.  The court stated that, “[n]owhere in the operating agreements does it state, as [p]etitioners allege, that the ‘sole purpose of the LLCs was to acquire, own and operate five separate multifamily properties located in Manhattan.’” Rather, the court explained, the stated purpose of the LLCs according to their operating agreements was “any lawful business purpose.” And, the court noted, petitioners had not claimed that “[r]espondents have failed to promote or permit [that] stated purpose.” Thus, the court held that petitioners had not satisfied the failed-purpose test of Section 702.  In so holding, the court distinguished two cases cited by petitioners, Matter of Fassa Corp. and Matter of 47th Rd. LLC.[134]  The court distinguished Fassa Corp., in part, because the operating agreement in that case specifically provided that the company’s purpose was to acquire real property and resell the property.  And the court found that 47th Rd. was distinguishable because there was clear evidence in that case that the broad stated purpose of the company was no longer being fulfilled.  The court then cited Yu v. Guard Hill Estates, LLC[135] as an example of another case where the Commercial Division dismissed a dissolution petition on the basis of a broad purpose provision.  In Yu, the operating agreement provided that “the purpose of the companies was to acquire certain real property and engage in any other lawful act or activity for which limited liability companies may be formed under [New York law] and engaging in any and all activities necessary or incidental to the foregoing.”  The court next held that petitioners failed to satisfy the financial-failure test of Section 702, noting that there was “no evidence that the LLCs are in financial turmoil, insolvent or otherwise cannot meet their debts and obligations.”  Finally, the Commercial Division held that petitioners’ allegations regarding Respondents’ “oppressive conduct,” even if true, did not justify dissolution.

Setter Capital, Inc. v. Chateauvert[136] (Personal jurisdiction as a factor in obtaining preliminary injunction).  In Setter, Justice Andrea Masley of the Commercial Division ruled that the issue of whether a court has personal jurisdiction over a defendant is relevant to determining whether to grant a motion for a preliminary injunction.  In Setter, plaintiff Setter Capital, Inc. (Setter), a financial services firm, moved pursuant to CPLR § 6301 for a preliminary injunction against defendant Maria Chateauvert, Setter’s former employee.  The motion sought to restrain her from soliciting or recruiting Setter’s customers or otherwise interfering with its business relationships.  Chateauvert’s job had involved calling potential clients to identify buyers and sellers of securities.  A resident of Canada, Chateauvert had previously signed an agreement with Setter which contained confidentiality and non-compete clauses.  The agreement also contained a choice-of-law clause providing it was governed by the laws of New York, and a forum-selection clause in which the parties agreed to submit to the jurisdiction of the Division.  Under New York law, a plaintiff moving for a preliminary injunction bears the burden of establishing: (1) a likelihood of success on the merits; (2) the danger of irreparable injury in the absence of preliminary injunctive relief; and (3) that the balance of equities favors the plaintiff.  However, as the Commercial Division explained, whether the court has jurisdiction over the defendant is a “threshold issue” that is relevant to determining the plaintiff’s likelihood of success on the merits.

Here, it was unclear whether the Commercial Division could exercise jurisdiction over Chateauvert pursuant to the agreement, because under N.Y. Gen. Oblig. Law §§ 5-1401 and 5‑1402,[137] choice-of-law and forum-selection provisions in contracts for labor or personal services are not enforceable against non-residents, and Chateauvert’s agreement with Setter specified that it was a “personal service” agreement.  Additionally, the Commercial Division questioned whether Chateauvert, who was only two years out of college when she signed the agreement, “was the sophisticated business person the legislature envisioned in 1985 when GOL §5-1401 and §5-1402 were enacted.”  Setter therefore bore the burden of establishing jurisdiction over Chateauvert without reference to the agreement.  Justice Masley ruled that “this was an issue of fact that undermines plaintiff’s likelihood of success.”  The Commercial Division concluded that Setter had otherwise failed to show likely success on the merits, given that there was no showing of protected trade secrets and Setter’s rating system was available online.  The court also ruled that Setter had not shown irreparable harm, and that the balance of equities favored Chateauvert.  Accordingly, the Commercial Division denied Setter’s motion for a preliminary injunction.  Setter illustrates that on a preliminary injunction motion, the issue of whether the court has jurisdiction over the defendant may be a threshold issue of fact that must be satisfied in determining the plaintiff’s likelihood of success on the merits.

South Coll. St., LLC v. Ares Capital Corp.[138] (Corporate veil piercing in New York Debtor and Creditor Law claims).  In South College Street, Justice Schechter of the New York State Supreme Court, Commercial Division, dismissed petitioner’s New York Debtor and Creditor Law claims, which were premised on alter ego liability.  The opinion addressed the types of allegations a plaintiff must make in order to successfully plead a veil-piercing claim.  The case involved South College Street, LLC, a company that purchased a property in North Carolina that was subject to a lease for Charlotte School of Law (CSL).  The lease was guaranteed by CSL’s parent company, InfiLaw Corporation (InfiLaw).  In October 2017, CSL stopped paying its rent, so plaintiff commenced a North Carolina action against CSL and InfiLaw to enforce the lease.  In that action, plaintiff obtained a judgment against CSL and InfiLaw, jointly and severally, for $24.55 million.  Plaintiff then commenced a New York lawsuit against Ares Capital Corporation (Ares), a creditor of InfiLaw and a company to which InfiLaw’s parent company, InfiLaw Holding, LLC (InfiLaw Holding), had conveyed certain payments.  Specifically, plaintiff asserted New York Debtor and Creditor Law (DCL) claims, arguing that “between June 2015 and August 2016, more than $32 million was fraudulently conveyed to Ares” and seeking to “enforce its judgment against [InfiLaw] by setting aside those conveyances.”  Ares moved to dismiss plaintiff’s complaint.

In considering Ares’s motion to dismiss, the court noted that although DCL claims can generally only be asserted by creditors of the transferor, DCL liability can extend to alter egos.  “Alter ego liability requires piercing the corporate veil, which is an exception to the presumption that corporate entities are distinct from their owners[.]”  As Justice Schechter explained, “[w]hether veil piercing is warranted, is governed by the law of the state of incorporation of the entities whose veils were sought to be pierced[.]”  Because InfiLaw and InfiLaw Holding are both incorporated in Delaware, the Court applied Delaware law.  Under Delaware law, “to state a veil-piercing claim, the plaintiff must plead facts supporting an inference that the corporation, through its alter-ego, has created a sham entity designed to defraud investors and creditors[.]”  The court remarked that it is “difficult” to meet this standard because a plaintiff must allege facts showing a parent company’s domination over its subsidiary, as well as facts demonstrating that the corporate structure itself was used to perpetuate a fraud.

Justice Schechter concluded that plaintiff had not adequately alleged facts supporting a reasonable inference that the corporate structure of and InfiLaw and InfiLaw Holding was designed to defraud InfiLaw’s creditors.  Specifically, the court found that “[w]hile plaintiff alleges that [Infilaw Holding] dominates and controls [Infilaw], that is not enough.”  Instead, the court reasoned, “plaintiff must plead, for instance, that the capital structure of [InfiLaw Holding] and [InfiLaw] was specially designed to ensure [InfiLaw]’s creditors would be left seeking to collect from an empty shell.”  The court further noted that “the fraud prong of a veil piercing claim must rely on something other than merits of the underlying claim on which alter ego liability is sought[.]”  Thus, the court concluded that plaintiff’s allegations supporting its DCL claims—that CSL was destined to fail because of InfiLaw’s underlying debt structure—were insufficient to plead alter ego liability.  Accordingly, the court granted Ares’s motion to dismiss.

Matlick v. AmTrust Fin. Servs., Inc.[139] (Failure to disclose delisting of securities).  In Matlick, et al. v. AmTrust Financial Services, Inc., Commercial Division Justice Andrew Borrok found that an issuer cannot be held liable under the Securities and Exchange Act of 1933 for the failure to disclose the risk that certain securities could be delisted when the issuer never guaranteed the listing of such securities in the first instance.

In January 2019, AmTrust announced that it would delist and deregister certain securities that it had issued between 2013 and 2016, effective the following month.  As a result of this announcement, the stock price of the securities fell by approximately 35%.  Each offering of the relevant securities was registered through a number of offering documents that included representations, including that the securities were listed with the SEC, and AmTrust would list the securities on the New York Stock Exchange.  Plaintiffs sued AmTrust for delisting the securities asserting claims for violations of Sections 11 and 12(a)(2) of the Securities and Exchange Act, based on AmTrust’s alleged material misstatements in and omissions from the offering documents, as well as claims for breach of contract, breach of the implied covenant of good faith and fair dealing, and promissory and equitable estoppel.

Justice Borrok focused on the language of the offering agreements in ruling for AmTrust.  As the Court explained, “the gravamen of the Plaintiffs’ Complaint is that AmTrust failed to disclose in its Offering Documents that delisting the Securities was a possibility.”  However, courts evaluate whether statements are false or misleading at the time they were made—“not retroactively, in hindsight.”  The court held that plaintiffs had failed to allege any actionable misstatement or omission as required to state their Securities and Exchange Act claims because AmTrust was under no obligation to disclose publicly available information and its “ability to delist is publicly set forth by statute, in regulation, and in the NYSE rules.”  The Commercial Division went on to explain that “all the Complaint alleges is that AmTrust should have disclosed the fact that the company could delist at some point in the future,” and this “is, indeed, too speculative (and, indeed, too obvious) to have required disclosure.”  Justice Borrok also dismissed the contract claims, concluding that there was no contractual promise to list the securities or to keep them listed forever.  Other claims were dismissed on technical grounds.  Under the Commercial Division’s ruling in Matlick, the onus is on purchasers of securities to familiarize themselves with publicly available information, which need not be disclosed in the offering documents.

§ 1.3.13 North Carolina Business Court

Reynolds Am., Inc. v. Third Motion Equities Master Fund, Ltd.[140] (Appraisal rights).  In this appraisal action, dissenting former shareholders of Reynolds American, Inc. (Reynolds), the holding company that owned R.J. Reynolds Tobacco Company, asserted that they did not receive fair market value for their shares in connection with the purchase of Reynolds by British American Tobacco (BAT).  Dissenters argued that despite a general decline in the tobacco industry, Reynolds had enjoyed strong revenues and earnings growth leading up to the transaction, which was not reflected in the offer price.  They claimed that BAT’s 42 percent ownership in Reynolds tainted the transaction and that Reynolds should have pursued negotiations with other potential buyers.

Ultimately, the court found the dissenters’ valuation of the shares “unreasonable both as a matter of common sense fact-finding and under North Carolina law,” concluding that the fair market value of the shares was what they had been paid.  Recognizing the lack of North Carolina appellate authority on the court’s appraisal process, the court turned to Delaware law to determine the fair value, “a price that is one that a reasonable seller, under all of the circumstances, would regard as within a range of fair value; one that such a seller could reasonably accept[.]”  The court determined that in this instance, the deal price was a fair price because Reynolds stock traded in an efficient market, the deal was an arm’s-length transaction, there was sufficient publicly available information about the company, and there were no conflicts of interest among members of the board and transaction committee.  Notably, the evidence showed that Reynolds had managed to negotiate four price increases from BAT during the course of the transaction.

The court rejected the dissenters’ theory that Reynolds should have solicited other bidders and pressed BAT to encourage other bids, concluding that there were few if any alternative bidders in the heavily consolidated tobacco market, none of which had expressed any interest in purchasing Reynolds.  Additionally, despite their expert’s testimony, the dissenters also failed to provide evidence of any negative effect on the deal price stemming from BAT’s large ownership interest in Reynolds.  Finally, the court rejected the dissenters’ claims that the Reynolds management and financial advisors conspired to sell the company at a depressed price.  In conclusion, the court determined the “imperfect, but nonetheless robust, deal process” resulted in a fair deal price of $59.64 per share.

Aldridge v. Metro. Life Ins. Co.[141] (Effect of bankruptcy settlement on defendants’ motion to dismiss).  This case arose out of an alleged Ponzi scheme operated by Charlotte businessman Richard C. Siskey prior to his suicide in 2016, after the FBI publicly revealed that they were pursuing fraud charges against him.  Plaintiffs were investors who claimed that MetLife was on notice of the “routinely questionable transactions” that Siskey engaged in, but it did nothing to stop Siskey once it learned of his fraudulent behavior.  Rather, plaintiffs asserted that MetLife actively worked to conceal Siskey’s actions.  Plaintiffs also claimed that several individual defendants at MetLife had aided Siskey in inducing them to invest in the scheme.

In January 2017, an involuntary bankruptcy proceeding was initiated against one of Siskey’s entities involved in the alleged scheme.  Several of Siskey’s other entities plaintiffs had invested in entered bankruptcy as well.  Plaintiffs filed proof of claim forms, and in late 2018, the Bankruptcy Trustee entered into a settlement agreement releasing all claims against MetLife in exchange for MetLife’s contribution to a bankruptcy settlement fund.  Thus, in considering defendants’ motion to dismiss for lack of standing, the Business Court was required to construe the scope of the “first-crack” doctrine.  This doctrine relies on the premise that only the Bankruptcy Trustee has standing to pursue claims that belong to the bankruptcy estate unless and until the trustee abandons those claims.  Therefore, defendants argued that plaintiffs lacked standing to bring individualized claims.

The Business Court determined that the first-crack doctrine would not be applicable to all of plaintiffs’ claims.  Under North Carolina law, plaintiffs would have standing if they could show (1) an individualized injury separate from damages to the bankrupt entities; or (2) a special duty owed to them by defendants.  The court found that plaintiffs had individualized injuries with respect to the individual defendants, as they would never have invested but for being enticed by the individual defendants.  However, the court granted the motions seeking dismissal of plaintiffs’ fraud, constructive fraud, and negligent misrepresentation claims brought directly against MetLife.  In those cases, plaintiffs failed to show any individualized harm because they failed to show any misrepresentation made by MetLife.  Likewise, plaintiffs failed to plead any special duty owed to them by MetLife that would give them individual standing.  The court further found that plaintiffs’ claims against MetLife for its negligent supervision of Siskey failed to show individualized harm and dismissed them.  Nevertheless, the court concluded that plaintiffs’ claims were allowed to go forward to the extent they sought to hold MetLife liable for the actions of Siskey and the individual defendants on a theory of vicarious liability.  Finally, the court determined that certain plaintiffs who failed to allege their policies were involved in the Ponzi scheme had failed to allege a particularized injury with respect to their unfair trade practices claims, and thus lacked standing to pursue those claims.

Klos Constr., Inc. v. Premier Homes & Props., LLC[142] (Fiduciary duties in the context of an LLC operating agreement).  On these cross motions for summary judgment, the court had to determine whether and to what extent the parties owed each other fiduciary duties.  In late 2008, plaintiff formed Premier Homes and Properties, LLC with defendants Key Marco Consulting and Marketing, Inc. and Alpat Properties, LLC for the purposes of constructing homes in a real estate development near Wilmington, North Carolina.  The operating agreement disclaimed liability for managers to the company or other members for any of the following: (1) conflicts of interest; (2) any transaction from which a manager derived an improper personal benefit; or (3) any acts or omissions occurring prior to the date the agreement became effective.  Furthermore, the agreement stated that upon any amendment to the North Carolina Limited Liability Act, liability for managers would be limited to the fullest extent possible under the amended Act.  Premier Homes and Properties then entered into an agreement whereby T. Ando Construction and Consulting, Inc. and its owner, licensed real estate broker Terrance Ando, would be its “sales manager” and “broker-in-charge” for the newly constructed homes.

Construction began in 2009.  However, in 2015, Key Marco’s sole shareholder, Robert Weinbach, formed another entity, Premier Homes and Communities, LLC, with Ando also for the purpose of building homes in the same residential community.  Plaintiff brought suit alleging that Weinbach, Key Marco, and Ando had, among other things, breached their fiduciary duties owed to Premier Homes and Properties.  Construing the agreement, the court found that Weinbach was not a party to the operating agreement, but instead was merely a designee who signed on behalf of Key Marco.  As a result, the court denied plaintiff’s motion for summary judgment and granted Weinbach’s motion with respect to plaintiff’s claims for breach of fiduciary duty, constructive fraud, and breach of the implied covenant of good faith and fair dealing.  Additionally, the court determined that the plain language of the operating agreement clearly gave the parties the right to establish competing businesses.  The court also noted that in 2014, the North Carolina Limited Liability Act was amended to allow managers to waive their duty of loyalty.  Thus, the court granted Key Marco’s motion for summary judgment on plaintiff’s breach of fiduciary duty and constructive fraud claims because the operating agreement no longer required any duty of loyalty among the managers.  However, the court denied Key Marco’s motion with respect to the breach of the duty of good faith claim, explaining that unlike the duty of loyalty, contractual obligations of good faith cannot be waived in an operating agreement.  Finally, the court determined that Ando and T. Ando Construction did owe fiduciary duties to Premier Homes and Properties by virtue of their agreement to be its real estate broker, thus denying their motions for summary judgment on plaintiff’s fiduciary duty and constructive fraud claims.

Rickenbaugh v. Power Home Solar, LLC[143] (Class action arbitration).  James and Mary Rickenbaugh brought suit on behalf of a class of plaintiffs alleging they were fraudulently induced to purchase defendant’s solar panels based on promises of energy savings that never materialized.  The parties’ contract contained a broad arbitration provision stating that “any dispute arising out of . . . any aspect of the agreement” would be settled according to the AAA Construction Industry Rules.  The court was called on to determine (1) whether the FAA or the North Carolina Uniform Arbitration Act applied; (2) whether the parties agreed that arbitrability was a matter for the court or the arbitrator to decide; and (3) whether the availability of class arbitration was an issue for the court or the arbitrator to determine.

First, the court determined that despite language in the arbitration clause stating that North and South Carolina law would apply, the FAA preempted the parties’ choice of law provision because plaintiffs’ claims were based on an alleged fraudulent scheme occurring in five states, thus evidencing a transaction involving interstate commerce.  Secondly, the court determined that based on the broad language of the arbitration clause and the inclusion of the AAA Rules, under North Carolina precedent, there was “clear and unmistakable evidence” showing that the parties agreed the arbitrator would determine issues of substantive arbitrability.  Finally and most importantly, the court determined that the parties had “clearly and unmistakenly agreed” that the availability of class arbitration was also a decision for the arbitrator.  The court recognized the federal circuit split on the issue but determined that the inclusion of the AAA Construction Rules provision showed that the parties had agreed that the arbitrator would decide the scope of the arbitration proceedings, including whether class arbitration was available.  Defendants have currently appealed the ruling on the class certification issue to the North Carolina Supreme Court.

Vanguard Pai Lung, LLC v. Moody[144] (Advancement of litigation expenses for an LLC manager).  Defendant William Moody served as president and CEO of plaintiff for nearly a decade.  Plaintiff alleged Moody engaged in wide-ranging misconduct detrimental to plaintiff, including the siphoning of money and assets from plaintiff.  Plaintiff sued Moody, three members of his family, and two entities he owns.  Plaintiff’s lawsuit alleged sixteen causes of action, including fraud, embezzlement, breach of fiduciary duty, and breach of contract.  Moody was fired prior to the institution of the lawsuit, but remained a manager of plaintiff.

Moody contended that plaintiff must advance his expenses incurred in legal defense of the lawsuit pursuant to the terms of plaintiff’s operating agreement, including attorneys’ fees.  Moody asserted a counterclaim demanding the advancement of those expenses, and moved for judgment on the pleadings on his advancement counterclaim.  The operating agreement provided a broad, mandatory right to advancement if two conditions were met: (1) the manager must have been sued “by reason of the fact” that he was an authorized representative of plaintiff; and (2) that the manager must repay the advancement if ultimately determined not to be entitled to indemnification.  The parties contested whether the first condition was met.  Citing supportive Delaware law, the court found the phrase “by reason of the fact” only requires a “nexus” between the underlying claim and the official’s corporate capacity.  The court concluded that all claims against Moody “arise ‘by reason of the fact’ that he was a manager and officer of [plaintiff].”  Therefore, the court determined that Moody was entitled to the advancement of his litigation expenses in defending the lawsuit.  Further, the court allowed advancement related to Moody’s counterclaims for advancement and indemnification, but did not allow advancement related to Moody’s counterclaims that did not directly respond to the allegations against him.  The court rejected plaintiff’s arguments that Moody forfeited his right to advancement based on its affirmative defenses against Moody’s counterclaims, including that Moody allegedly materially breached the parties’ contract.  The court also rejected plaintiff’s arguments that determination of the advancement claim was improper for a motion for judgment on the pleadings.  The court advised future litigants to bring an advancement dispute to the court’s attention in the case management report to allow early motions practice and limited discovery if necessary on the issue.

§ 1.3.14 Philadelphia Commerce Case Management Program

Chhaya Mgmt., LLC v. Cigar Wala, LLC[145] (Cannot pierce corporate veil against uninvolved owners who did not benefit from fraud).  Chhaya Management won a $660,000 judgment against Cigar Wala, but could not pierce the corporate veil against two principals named as defendants, Shah and Patel.  The Commerce Court found that a third principal, Desai, solely caused Cigar Wala’s breach by diverting its funds to himself, leaving Cigar Wala unable to make payments due to Chhaya Management.  Plaintiff did not name Desai as a defendant.  There was no evidence, however, linking Shah and Patel to Desai’s fraudulent conduct, “or to any conduct giving rise to a piercing of a corporate veil as to them.”

The court first held Chhaya’s claims were for breach of contract, and dismissed its tort claims for conversion and conspiracy under the gist of the action doctrine.  As to piercing the corporate veil, courts will pierce the corporate veil against equity owners who control the business and misuse it to their personal benefit.  The court found Shah and Patel did not control Cigar Wala at the time Desai pilfered its funds for his own use.  Even though the court earlier determined Shah and Patel should have been the controlling (75%) owners of Cigar Wala, Desai had frozen them out.  Thus, at the time of the breach, Shah and Patel neither had the ability to control Cigar Wala, nor did they gain any benefit from Desai’s fraud.  Rather, Desai’s fraud harmed Shah and Patel as well.  The decision was affirmed on appeal in relevant part.

Humphrey v. GlaxoSmithKline PLC[146] (Non-signatories not bound by arbitration agreement).  In Humphrey, the Commerce Court addressed the issue of whether non-signatories to an arbitration agreement could be bound by the agreement.  Plaintiffs were two individuals and a corporation, ChinaWhys Company, Ltd.  Another company they owned, ChinaWhys (Shanghai) Consulting Co. Ltd., entered a consulting agreement with a foreign subsidiary of GlaxoSmithKline PLC (GSK PLC) to carry out an investigation.  That agreement included an arbitration clause.  Plaintiffs allege they were imprisoned and otherwise subjected to considerable suffering in connection with the investigation, and sought relief in the Commerce Court against GSK PLC and another subsidiary, GlaxoSmithKline, LLC (GSK LLC).  Plaintiffs did not name GSK PLC’s foreign subsidiary as a defendant, nor was ChinaWhys (Shanghai) named as a plaintiff.  One of the individual plaintiffs, however, signed on ChinaWhys (Shanghai)’s behalf.  The defendants moved to compel arbitration of the entire matter under the consulting agreement.

Supervising Commerce Court Judge Gary S. Glazer observed that the usual presumption favoring enforcement of arbitration clauses does not apply to non-signatories.  In those circumstances, “the parties opposing arbitration … are given the benefit of all reasonable doubts and inferences that may arise.”  Here, four of the five parties did not sign the agreement at issue, and the individual plaintiff only signed on the corporation’s behalf and not in his individual capacity.  Judge Glazer found the facts alleged in the complaint “completely extrinsic” to the consulting agreement embodying the arbitration clause.  Plaintiffs did not seek relief under the contract, but brought tort claims against non-parties to that contract, to which plaintiffs were also not parties.  Although the individual plaintiffs were principals of ChinaWays (Shanghai), their individual claims were unrelated to the ChinaWays (Shanghai)’s consulting agreement.  The court rejected defendants’ arguments that there was an “obvious and close nexus” between plaintiffs, their claims, and the consulting agreement.  Judge Glazer likewise rejected defendants’ agency, estoppel, alter ego and contract assumption theories.

Am. Entrance Servs., Inc. v. ACME Mkts., Inc.[147] (Abuse of process and wrongful use of civil proceedings distinguished).  In American Entrance Services, the Commerce Court found no abuse of process, and described the difference between “abuse of process” and “wrongful use of civil proceedings” under Pennsylvania law.  ACME had joined American as a third party defendant in numerous personal injury suits concerning maintenance of automatic doors.  The factual gravamen of American’s abuse of process claim was the allegation that American repeatedly forewarned ACME there was no factual basis for these joinders, because ACME itself failed to maintain and upgrade the doors contrary to American’s advice.  Judge Ramy I. Djerassi found these allegations did not make out an abuse of process case.

The court defined common law abuse of process “as the use of legal process against another primarily to accomplish a purpose for which it is not designed.”  There must be “some definite act or threat not authorized by the process, or aimed at an objective not legitimate in the use of the process….”  “[T]here is no liability where the defendant has done nothing more than carry out the process to its authorized conclusion, even if done with bad intentions, though not necessarily the case here.”  At best, American was attempting to state a claim for wrongful use of civil process in initiating meritless claims.  Abuse of process claims, however, are not based on improperly initiating a case, but “on a perversion of the legal process after it is initiated.”  Thus, American’s allegations of improperly filing meritless joinder claims did not fall within the abuse of process penumbra.

§ 1.3.15 Rhode Island Superior Court Business Calendar

Richmond Motor Sales, Inc. v. Nationwide Mut. Ins. Co.[148] (Insurer cannot be sued directly).  A rental company rented motor vehicles to various customers.  The customers provided their own motor vehicle insurance information to the company as proof of insurance.  The vehicles were returned with damage, and the rental company sued the insurance carriers directly for the damage.  The court held that R.I. Gen. Laws Sections 27-7-3 and 27-7-6 did not give the rental company the right to pursue the carriers.

Cashman Equip. Corp., Inc. v. Cardi Corp.[149] (Motion to strike jury demand).  Before the court was plaintiff Cashman Equipment Corporation, Inc.’s (Cashman) motion to strike defendants RT Group, Inc. (RTG), James Russell, and Steven Otten’s jury demand.  At issue was whether the action must be tried without a jury.

Here, the applicable statute provides that:

any person, firm, or corporation which is awarded a contract subsequent to July 1, 1977, with the state of Rhode Island, acting through any of its departments, commissions, or other agencies, for the design, construction, repair, or alteration of any state highway, bridge, or public works other than those contracts which are covered by the public works arbitration act may, in the event of any disputed claims under the contract, bring an action against the state of Rhode Island in the superior court for Providence county for the purpose of having the claims determined

and that “[t]he action shall be tried to the court without a jury.”  G.L. 1956 § 37-13.1-1(a).

The court found there was no question that Cashman’s amended complaint, and this entire case, arose out of disputes related to the contract between RIDOT and Cardi.  Section 37-13.1-1 clearly states that disputes arising out of a contract with the State involving the “design, construction, repair, or alteration of any state . . . bridge” must be tried “without a jury.”  This statute must be strictly construed, and it does not provide any exception for cases in which the State is a third-party defendant or is not the subject of direct claims by the original plaintiff to the case.  Instead, the statute has been strictly construed to apply to and protect the State’s sovereign immunity in cases when the State is a third-party defendant in cases involving disputes between subcontractors and general contractors such as the dispute here.  Therefore, the motion to strike jury demand was granted, and the case must be tried without a jury.

Premier Land v. Kishfy[150] (Party breached contract through non-payment and change in scope of work).  Defendant Kishfy entered into a construction contract with the plaintiff pursuant to which the defendant agreed to perform certain renovations as set forth in a scope of work and subject to certain cost allowances.  Defendant agreed to pay for such renovations in monthly installments.  Defendant ended up substantially modifying the scope of work, which led to increased costs and delays.  He subsequently stopped making payments on the grounds that the project was taking too long to complete.  The court found that the defendant had materially breached the contract through his nonpayment and his increases to the scope of work.

Sadler v. 30 Route 6, LLC[151] (Real estate purchaser granted right to specific performance).  The court granted a real estate purchaser specific performance against his vendor.  Although the purchaser missed the stated closing date, there was no “time of the essence” clause in the contract.  Further, the purchaser worked in good faith to prepare for the closing.  The vendor could not use the purchaser’s failure to obtain financing as an excuse, because the financing contingency was solely for the benefit of the purchaser.  Finally, the vendor’s notice that it did not intend to close constituted an anticipatory breach that excused the purchaser but did not terminate the contract.

Atsalis Bros. Painting Co. v. Aetna Bridge Co.[152] (Subcontractor permitted to correct technical defect in making good faith claim).  Aetna entered into a $39 million Contract Agreement (Prime Contract) with Rhode Island Turnpike and Bridge Authority (RITBA) to perform certain rehabilitation work on the Claiborne Pell Bridge (Project).  The Agreement between Aetna and RITBA incorporated into it inter alia the Rhode Island Department of Transportation, Division of Public Works standard specifications for road and bridge construction (the Blue Book) and other supplemental materials.  Aetna entered into a $26 million contract (Subcontract) with Atsalis Brothers Painting Co. (Atsalis) as subcontractor to perform approximately two-thirds of the work on the project called for by Prime Contract.  The subcontract contained a provision that made the Prime Contract documents between Aetna and RITBA, including the Blue Book, a part of the Subcontract.  The Blue Book required that a subcontractor certify that its claims for payment were made in good faith.  The plaintiff made a claim, but failed to include that certification.  The court held that this was a formal defect that “can easily be rectified” and gave the plaintiff leave to amend its certificate if it could in fact assert its claim in good faith.  The subcontractor also claimed that the contractor defrauded the subcontractor when it said it would settle up at the end of the contract.  Analogizing from Massachusetts common law and Rhode Island law on false pretenses, the court denied the contractor’s motion to dismiss a fraud claim, because a promise to do something in the future can still constitute fraud if the party never intended to act.

§ 1.3.16 Tennessee Business Court

Falcon Pictures Group v. HarperCollins Christian Publ’g, Inc.[153] (Motion for summary judgment and judgment on the pleadings).  This case involves a dispute between two businesses in the entertainment industry.  The plaintiff and the defendant entered into a business relationship in 2006.  The plaintiff was to produce, and the defendant was to market and sell, a product known as the New Testament Audio Bible.  The parties entered an agreement for the defendant to advance funds to plaintiff and to pay royalties according to the terms of the contract.  Additionally, the parties entered into separate contracts for an Old Testament Audio Bible and a Kids Audio New Testament.  Eventually, plaintiff began to question whether defendant was properly calculating and paying royalties.

The court found that the defendant was entitled to dismissal of the claim for breach of the duty of good faith and fair dealing under Rule 12.  That cause of action is not an independent cause of action in Tennessee, but must be brought in conjunction with and as part of a breach of contract claim.  The court dismissed that cause of action on that basis.  The court denied all the other relief requested by the defendant pursuant to Rule 12 or 56 because the plaintiff was able to demonstrate sufficient factual disputes to prevent judgment or was entitled to develop the facts for the court’s consideration.

Romohr v. The Tenn. Credit Union[154] (Motion to dismiss).  Romohr v. The Tennessee Credit Union involves a dispute between plaintiff, individually and on behalf of all others similarly situated, and the Tennessee Credit Union (TCU).  The complaint alleges that Romohr is a member of the TCU and has a checking account governed by TCU’s Membership Account Agreement.  The central issue of the lawsuit centers around insufficient funds penalties and the pertinent language of the membership account agreement.  Romohr alleges that TCU charged three separate insufficient funds penalties against his account following attempted charges by a third-party vendor.  Romohr brings this suit for breach of contract and unjust enrichment.

The court noted a multitude of pending litigation involving this subject matter and further noted that each case pivots on the specific language within each agreement, specifically, whether or not certain terms contained therein are sufficiently defined.  Because the agreement in question contains some ambiguities, this case survived a Rule 12.02(6) motion to dismiss.

Family Trust Servs., LLC v. Green Wise Homes, LLC[155] (Civil conspiracy, fraud, and defamation of title).  This case with a lengthy history involves an alleged civil conspiracy related to fraudulently created documents to misappropriate and undercut the Tennessee redemption process following delinquent tax sales in Middle Tennessee.  The plaintiffs alleged that the defendants engaged in a systematic conspiracy by creating and recording false deeds in various counties to undermine the redemption process and profit at the expense of purchasers for value at tax sales.  Plaintiffs brought causes of action for civil conspiracy, defamation of title, fraud, trespass, and unfair competition, and sought to certify a class action for similarly situated victims.

This case has, thus far, involved removal and remand to bankruptcy court and criminal contempt charges against a defendant.  Recently, the court considered a motion to dismiss and motion for class certification.  Ultimately, the court dismissed plaintiffs’ claim for conversion of the intangible right of redemption and denied class certification.  Litigation will continue.

§ 1.3.17 West Virginia Business Court Division

Highmark W. Va., Inc. v. MedTest Labs., LLC[156] (Personal jurisdiction over third-party defendants).  This case was referred to the Business Court Division on June 18, 2019, and arises from a contractual dispute between a West Virginia-based insurance carrier, Highmark West Virginia, and a West Virginia-based medical test provider, MedTest Laboratories.  Initially, Highmark filed this suit alleging that MedTest was carrying out a fraudulent billing scheme.  However, it is the counterclaim and third party action instituted by MedTest that prompted the order being discussed.  Highmark is part of the national Blue Cross Blue Shield insurance network.  MedTest has a contract with Highmark to provide laboratory testing services to anyone in the national Blue Cross Blue Shield network in exchange for payment from Highmark, allowing Blue Cross Blue Shield’s insureds to receive coverage for healthcare regardless of where they were in the country.  MedTest’s counterclaim and third party action centered on Highmark’s failure to pay MedTest for services performed as required by contract.  In response, the third party defendants filed a motion to dismiss, alleging that West Virginia lacked personal jurisdiction over the third party defendants.

The Business Court Division disagreed and found that West Virginia had personal jurisdiction over the foreign third party defendants.  First, the court found that West Virginia’s long-arm statutes were met.  The court reasoned that the contracts involved meant that MedTest would provide a service, Highmark would process and pay the claim, and then the third party defendants would reimburse Highmark.  Further, each of the third party defendants was required to participate in the program.  This was enough to satisfy West Virginia’s long-arm statutes.  Second, constitutional due process was satisfied when all of the third party defendants listed MedTest as an available provider in their provider directory.  Because the third party defendants advertised—even just through an online post of provider directories—to their insureds that they could use MedTest and be covered by their plan that they had purposefully availed themselves of the forum and were thus subject to personal jurisdiction.  The court handed down the order denying the motion to dismiss on March 27, 2020.

The third party defendants filed a petition for writ in prohibition with the Supreme Court of Appeals of West Virginia, seeking review of the finding by the Business Court that there was personal jurisdiction over all of the out of state Blue Cross plans.  The Supreme Court of Appeals issued a rule to show cause and has the case under submission for decision.

Am. Bituminous Power Partners, LP v. Horizon Ventures of W. Va., Inc.[157] (Commercial lease dispute).  Two orders come from this case, which arose from a decades-long dispute over the terms of a lease between American Bituminous, the operator of a power plant, and Horizon Ventures, the landlord, which was only referred to the Business Court Division on January 10, 2019.  The lease required American Bituminous to use locally mined coal to produce electricity, and foreign fuel could only be used for non-operational purposes.  Monthly rent is a percentage of the power plant’s gross revenue, varying based on the type of fuel on site.  If locally-sourced fuel is used, rent is 3% of gross revenue; if foreign fuel is used, rent is only 1% of gross revenue.  However, subsequent to the lease, the parties agreed that if any Local Fuel remained on the premises—whether useable or not—the rent would be 2.5% of gross revenue.  Eventually, American Bituminous stopped using Local Fuel, but did not ask Horizon Ventures to reduce its rent.  The action before the Business Court Division involved a dispute over the percent of gross revenue paid as rent and whether American Bituminous’s use of Foreign Fuel was within the discretion provided by the lease contract.

The court entered two separate orders granting summary judgment on these issues.  First, the court granted summary judgment to Horizon Ventures regarding American Bituminous’s claim that the percent of gross revenues paid as rent was too high.  Looking at the length of the dispute between the parties, and the origin of the contracts, the court reasoned that the doctrines of waiver and laches apply.  American Bituminous had known since 1989 that its rent could be reduced based on the usage of foreign fuel, and knew it had stopped using Local Fuel for operating purposes; American Bituminous’s failure to act was an indication it had waived the contractual right and had otherwise waited too long to assert the claim.  Second, the court granted American Bituminous summary judgment with regards to the assertion that American Bituminous had been arbitrary and capricious in its decision to use Foreign Fuel.  The court looked at American Bituminous’s decision-making process, including factors such as cost, safety, and longevity of the power plant, and determined that American Bituminous had considered all relevant factors such that its conduct was not arbitrary and capricious as defined by law.  As a result, the court granted American Bituminous summary judgment on the final issue before the court and the matter was dismissed.

§ 1.3.18 Wisconsin Commercial Docket Pilot Project

Mattheis v. Ihnen[158] (Judicial estoppel and sham affidavit rule).  In Mattheis, the court was asked to interpret both the doctrine of judicial estoppel and the sham affidavit rule as it relates to statements made by a party in previous court cases.  The defendant Ihnen moved for summary judgment on all Mattheis’s claims, each of which suggested that Mattheis had alleged ownership interest in various entities.  As the court outlined in its decision, Mattheis had previously testified via interrogatories, deposition, and affidavits in both a divorce proceeding and a federal case for fair wage violations that he had sold his ownership interest in both companies.

Using the doctrine of judicial estoppel, the court cited State v. Ryan[159] and found that the three elements for judicial estoppel were satisfied: (1) the later position must be clearly inconsistent with the earlier position; (2) the facts at issue should be the same in both cases; and (3) the party to be estopped must have convinced the first court to adopt its position.  The court found that all these elements were met even though the earlier position was taken in other cases and that to meet the third element, the previous court need not explicitly find that the position at issue was adopted.  Instead, following Seventh Circuit precedent, the court found that it was enough that the party prevail using the inconsistent statement.  For Mattheis, the court was persuaded that Mattheis was able to leverage the positions taken in his divorce proceeding and federal case to sidestep a determination of the disputed issue of his ownership interests and prevailed.  As such, the court granted summary judgment to Inhen based on judicial estoppel and dismissed all claims.

Similarly, the court applied the sham affidavit rule as another basis to grant summary judgment.  Just as with the judicial estoppel argument, the court held that statements in Mattheis’s affidavit were directly contrary to his statements in the divorce proceedings and in his state and federal income tax returns, which stated that he sold his business shares.  Following a recent decision from the United States District Court for the Eastern District of Wisconsin,[160] the court found that the earlier statement (in this case, the divorce proceeding and tax returns) must stand unless the party can adequately explain why the recent statement was necessary.  Here, the court was unconvinced that Mattheis provided any legitimate explanation as to the recent statements and struck his affidavit pursuant to the sham affidavit rule, again granting summary judgment to Inhen.

[1] For a more detailed discussion on what may be defined as a business court, see generally A.B.A. Bus. Law Section, The Business Courts Bench Book: Procedures and Best Practices in Business and Commercial Cases (Vanessa R. Tiradentes, et al., eds., 2019) [hereinafter Business Courts Bench Book]; Mitchell L. Bach & Lee Applebaum, A History of the Creation and Jurisdiction of Business Courts in the Last Decade, 60 Bus. Law. 147 (2004) [hereinafter Business Courts History].

[2] For an overview of business courts in the United States, see, e.g., Business Courts Bench Book, supra note 1, Business Courts History, supra note 1, Lee Applebaum & Mitchell L. Bach, Business Courts in the United States: 20 Years of Innovation, in The Improvement of the Administration of Justice (Peter M. Koelling ed., 8th ed. 2016); Joseph R. Slights, III & Elizabeth A. Powers, Delaware Courts Continue to Excel in Business Litigation with the Success of the Complex Commercial Litigation Division of the Superior Court, 70 Bus. Law. 1059 (Fall 2015); John Coyle, Business Courts and Inter-State Competition, 53 Wm. & Mary L. Rev. 1915 (2012); The Honorable Ben F. Tennille, Lee Applebaum, & Anne Tucker Nees, Getting to Yes in Specialized Courts: The Unique Role of ADR in Business Court Cases, 11 Pepp. Disp. Resol. L. J. 35 (2010); Ann Tucker Nees, Making a Case for Business Courts: A Survey of and Proposed Framework to Evaluate Business Courts, 24 Ga. St. U. L. Rev. 477 (2007); Tim Dibble & Geoff Gallas, Best Practices in U.S. Business Courts, 19 Court Manager, no. 2, 2004, at 25. Further, the Business Courts chapter of this publication has provided details on developments in business courts every year since 2004. Finally, the Business Courts Blog went online in 2019, and serves as a library for past, present and future business court developments, www.businesscourtsblog.com (last visited Oct. 26, 2020).

[3] Chancery Court, Wyoming Judicial Branch, https://www.courts.state.wy.us/chancery-court/?hilite=%27chancery%27 (last visited Oct. 27, 2020).

[4] Business Courts Bench Book, supra note 1, at xx.

[5] Business Courts History, supra note 1, at 207, 211.

[6] American College of Business Court Judges, https://masonlec.org/divisions/mason-judicial-education-program/american-college-business-court-judges/ (last visited Oct. 25, 2020).

[7] See Meeting Agenda, Law & Econ. Ctr, https://web.cvent.com/event/06352f8d-9bfa-4f3d-92e3-6f31a4bab9ac/websitePage:07353687-c94e-4e27-833b-e23dfda94fee (last visited Nov. 14, 2020).

[8] 75 Bus. Law. 2053 (2020).

[9] ABA Ad Hoc Comm. On Business Courts, Business Courts: Towards a More Efficient Judiciary, 52 Bus. Law. 947 (1997); Business Courts History, supra note 1.

[10] 75 Bus. Law. 2077 (2020).

[11] Establishing Business Courts in Your State, https://higherlogicdownload.s3-external-1.amazonaws.com/AMERICANBAR/Establishing%20Business%20Courts%20in%20Your%20State%20(2008)%20(01522032xB05D9)1.pdf?AWSAccessKeyId=AKIAVRDO7IEREB57R7MT&Expires=1603691764&Signature=6bVmJ%2Fnf5IYTGu4Td%2FjqlBRk8X4%3D (ABA login required) (last visited Oct. 26, 2020).

[12] These materials are located on the Business Court Subcommittee’s Library web page, https://connect.americanbar.org/businesslawconnect/communities/community-home/librarydocuments?communitykey=bc39752c-30bc-441b-bf28-5777940d1112&tab=librarydocuments&LibraryFolderKey=&DefaultView= (ABA login required) (last visited Oct. 26, 2020).

[13] A.B.A. Section of Business Law Judges Initiative Committee, https://connect.americanbar.org/businesslawconnect/communities/community-home?CommunityKey=8ea16c0e-4aea-4e4a-ba02-c30ab8536a39 (ABA login required) (last visited Oct. 26, 2020).

[14] Business Court Representatives, ABA: Bus. Law Section, https://www.americanbar.org/groups/business_law/initiatives_awards/bcr/ (ABA login required) (last visited on Oct. 26, 2020).

[15] Diversity Clerkship Program, ABA: Bus. Law Section, https://www.americanbar.org/groups/business_law/initiatives_awards/diversity/ (ABA login required) (last visited on Oct. 27, 2020).

[16] Business and Commercial Courts Training Curriculum, Nat’l Ctr. for State Courts, https://ncsc.contentdm.oclc.org/digital/collection/traffic/id/92/rec/9 (last visited Oct. 26, 2020).

[17] Faculty Guide, Business and Commercial Litigation Courts Course Curriculum, Nat’l Ctr. for State Courts, https://ncsc.contentdm.oclc.org/digital/collection/traffic/id/91/rec/4 (last visited Oct. 26, 2020).

[18] New business court docket curriculum developed for courts nationwide, Nat’l Ctr. for State Courts, https://www.ncsc.org/newsroom/at-the-center/2020/new-business-court-docket-curriculum-developed-for-courts-nationwide?SQ_VARIATION_52227=0 (last visited Oct. 26, 2020) [hereinafter Business Courts Curriculum].

[19] www.businesscourtsblog.com.

[20] See, e.g., Business Court Studies and Reports 2000–2009, Bus. Courts Blog (Jan. 5, 2019), https://www.businesscourtsblog.com/business-court-studies-and-reports-2000-2009; Business Court Studies and Reports 2010–2018, Bus. Courts Blog (Jan. 5, 2019), https://www.businesscourtsblog.com/business-court-studies-and-reports-2010-2018; New York Commercial Division Advisory Council Report on Business Court Benefits, Bus. Courts Blog (July 10, 2019), https://www.businesscourtsblog.com/category/reports-and-studies.

[21] See, e.g., Douglas L. Toering & Ian M. Williamson, Business Courts in Michigan – Seven Years and Counting, 99 Mich. Bar J. 20 (Jan. 2020), http://www.michbar.org/file/barjournal/article/documents/pdf4article3850.pdf; Hon. Brian Stern & Christopher J. Fragomeni, An Introduction to the Business Calendar, The Business Recovery Program, and Virtual Hearings, 68 RI Bar Jnl. 3 (May 2020), https://ribar.com/UserFiles/file/Bar%20Journal/COVID-19_Special-Issue_Final2.pdf; Pamela K. Bookman, The Adjudication Business, 45 Yale J. Int’l Law 227 (Summer 2020); William J. Moon, Delaware’s New Competition, 114 Nw u. L. Rev. 227 (2020); Gerhard Wagner & Arvid Antz, Commercial Courts in Germany, 79 Ius Gentium 3 (2020); 2019 Annual Report, West Virginia business Court Division, http://www.courtswv.gov/lower-courts/business-court-division/pdf/2019AnnualReport.pdf  (last visited Oct. 26, 2020).

[22] See, e.g., Delaware Corporate & Commercial Litigation Blog, http://www.delawarelitigation.com (last visited Oct. 26, 2020); Mass Law Blog, http://www.masslawblog.com (last visited Oct. 26, 2020); New York Business Divorce Blog, http://www.nybusinessdivorce.com (last visited Oct. 26, 2020); NY Commercial Division Blog, https://www.pbwt.com/ny-commercial-division-blog/ (last visited Nov. 13, 2020); New York Commercial Division Practice, https://www.nycomdiv.com/ (last visited Oct. 26, 2020); Duane Morris Delaware Business Law Blog, http://blogs.duanemorris.com/delawarebusinesslaw/ (last visited Oct. 26, 2020); Commercial Division Blog: Current Developments in the Commercial Division of the New York State Courts, http://schlamstone.com/commercial/ (last visited Oct. 26, 2020); The North Carolina Business Litigation Report, http://www.ncbusinesslitigationreport.com (last visited Oct. 26, 2020); The Nevada Business Court Report, https://www.sierracrestlaw.com/news-blog/ (last visited Oct. 26, 2020); It’s Just Business (North Carolina), https://itsjustbusiness.foxrothschild.com/ (last visited Oct. 26, 2020); The  Westchester Commercial Division Blog, https://www.westchestercomdiv.com/ (last visited Oct. 26, 2020); and the New  York Commercial Division Roundup, https://www.newyorkcommercialdivroundup.com/ (last visited Oct. 26, 2020).

[23] Commercial Court Review Committee Report to the Ariz. Judicial Council, p. 4, (2018), https://www.ncsc.org/~/media/Microsites/Files/Civil-Justice/AZCCRCreport.ashx.

[24] Ariz. R. Civ. P. 8.1(b); (c).

[25] Ariz. R. Civ. P. 8.1(d)(6).

[26] DTR1C-SGW, LLC v. Ulta Salon Cosmetics & Fragrance Inc., No. CV 2019-052749, 2020 WL 4586231 (Ariz. Super. July 20, 2020).

[27] Mountainside Fitness Acquisitions LLC, v. Ducey, No. CV 2020-093916, 2020 WL 4586233 (Ariz. Super. Aug. 5, 2020).

[28] Ninth Judicial Circuit of Florida, News, Business Court to Reopen on October 21, 2019 (Oct. 25, 2019), https://www.ninthcircuit.org/news/business-court-reopen-october-21-2019.

[29] Amended Administrative Order Governing Business Court (Oct. 25, 2020), https://www.ninthcircuit.org/sites/default/files/2019-08-01%20-%20Amended%20Order%20Regarding%20Business%20Court.pdf.

[30] Id.

[31] Ninth Judicial Circuit of Florida, About the Court, Judges, Circuit Judges, Judge John E. Jordan (Oct. 25, 2020), https://www.ninthcircuit.org/about/judges/circuit/john-e-jordan.

[32] Eleventh Judicial Circuit of Florida, About the Court, Civil Court, Complex Business Litigation (Jan. 8, 2021), https://www.jud11.flcourts.org/About-the-Court/Ourt-Courts/Civil-Court/Complex-Business-Litigation.

[33] Seventeenth Judicial Circuit of Florida, Circuit Civil (Oct. 25, 2020), http://www.17th.flcourts.org/01-civil-division/.

[34] Thirteenth Judicial Circuit of Florida, Judicial Director, Judge Darren D. Farfante (Jan. 8, 2021), https://www.fljud13.org/JudicialDirectory/DarrenDFarfanteaspx.

[35] Commercial Court Document Search, https://public.courts.in.gov/CCDocSearch (last visited Oct. 24, 2020).

[36] Indiana Commercial Courts Handbook, https://www.in.gov/judiciary/iocs/files/comm-ct-handbook.pdf (last visited Oct. 24, 2020).

[37] Commercial Courts Committee, https://www.in.gov/judiciary /iocs/2944.htm (last visited Jan. 11, 2021).

[38] Iowa Judicial Branch, https://www.iowacourts.gov/iowa-courts/district-court/iowa-business-specialty-court/.

[39] Id.

[40] Kathy A. Bolton, Notebook: Could ‘high-profile’ foreclosure case move to an Iowa specialty court? Business Record, https://businessrecord.com/MobileContent/Default/The-Insider-Notebook/Article/NOTEBOOK-Could-high-profile-foreclosure-case-move-to-an-Iowa-specialty-court-/-3/1041/91497.

[41] Supra note 37.

[42] Id.

[43] Id.

[44] For more information see https://courts.michigan.gov/News-Events/COVID19-resources/Pages/AOs.aspx

[45] Mich. Admin. Ord. Administrative Order No. 2020-6.

[46] Id.

[47] John Nevin, Michigan’s Justice System Reaches 1 Million Hours of Zoom Hearings, (Sept. 17, 2020), https://courts.michigan.gov/News-Events/press_releases/Documents/1%20Million%20Zoom%20Hours%20news%20release.pdf. This article is not an endorsement or critique of Zoom or any other video conferencing program.

[48] For those interested in learning more about the use of Zoom in Michigan business courts, see Douglas Toering & Ryan Hansen, Touring the Business Courts, Mich. Bus. L. J., Summer 2020 at 11, https://connect.michbar.org/businesslaw/newsletter/summer20 (last visited Oct 30, 2020).

[49] State Court Administrative Office, Michigan Trial Courts Virtual Courtroom Standards and Guidelines (Revised August 5, 2020), https://courts.michigan.gov/News-Events/COVID19-resources/Documents/VCR_stds.pdf

[50] Mich. Comp. L. § 600.8033(3).

[51] Justice Robert Reed Appointed to New York County Commercial Division, NY Commercial Division Blog, (Oct. 7, 2020), https://www.pbwt.com/ny-commercial-division-blog/justice-robert-reed-appointed-to-new-york-county-commercial-division/.

[52] Administrative Order of the Chief Administrative Judge of the Courts, AO/134/20 (Sept. 23, 2020), https://www.pbwt.com/content/uploads/2020/10/2020_09_23_09_26_51.pdf.

[53] Administrative Order of the Chief Administrative Judge of the Courts, AO/133/20 (Sept. 29, 2020), https://www.businesscourtsblog.com/wp-content/uploads/2020/10/01722221.pdf. 

[54] See Residential Mortgage Foreclosure Diversion Program, https://www.courts.phila.gov/mfdp/.

[55] In re: Commerce Court Temporary Financial Monitor Program, Order No. 42 of 2020, Court of Common Pleas of Philadelphia County (Pa. 1st Jud. Dist., June 22, 2020), https://www.courts.phila.gov/pdf/regs/2020/42-of-2020-PJ-ORDER.pdf.

[56] R.I. Superior Court Administrative Order No. 2020-04, COVID-19 Business Recovery Plan (Mar. 31, 2020), https://www.courts.ri.gov/Courts/SuperiorCourt/SuperiorAdmOrders/20-04.pdf.

[57] R.I. Superior Court Order (Apr. 21, 2020), https://www.courts.ri.gov/Courts/SuperiorCourt/SuperiorMiscOrders/Business_Calendar_Motions_Protocal_4-21-20.pdf.

[58] New Business Court Docket Curriculum Developed for Courts Nationwide, National Center for State Courts (Oct. 26, 2020), https://www.ncsc.org/newsroom/at-the-center/2020/new-business-court-docket-curriculum-developed-for-courts-nationwide?SQ_VARIATION_52227=0.

[59] See Business Courts Curriculum, supra note 18.

[60] See The 2019 Annual Report of the West Virginia Business Court Division, http://courtswv.gov/lower-courts/business-court-division/pdf/2019AnnualReport.pdf.

[61] In re creation of a pilot project for dedicated trial court judicial dockets for large claim bus. & com. cases, 2017 WI 33, https://www.wicourts.gov/sc/rulhear/DisplayDocument.pdf?content=pdf&seqNo=188391.

[62] Id.

[63] This district covers circuit courts in a number of northeastern Wisconsin counties including Door, Kewaunee, Brown, Marinette, Oconto, Waupaca, and Outagamie.

[64] PowerPoint Presentation, Thomas Schappa, Dist. Court Adm’r, Com. Ct. Docket Pilot Program (Oct. 2020) (on file with author).

[65] In re creation of a pilot project for dedicated trial court judicial dockets for large claim bus. & com. cases, 2017 WI 33, https://www.wicourts.gov/sc/rulhear/DisplayDocument.pdf?content=pdf&seqNo=188391.

[66] Id.

[67] Id.

[68] This calculation includes cases that had been filed or resolved as of October 20, 2020. See Schappa supra note 60.

[69] This number includes cases published through October 20, 2020. Commercial Docket Pilot Project, Wis. Court Sys., https://www.wicourts.gov/services/attorney/comcourtpilot.htm (last updated Sept. 24, 2020).

[70] See Georgia State-wide Business Court, http://www.georgiabusinesscourt.com.

[71] See O.C.G.A. § 15-5A-3(a).

[72] See O.C.G.A. § 15-51-4.

[73] See https://www.georgiabusinesscourt.com/rules/.

[74] See https://kycourts.gov/courtprograms/business-court/Pages/default.aspx.

[75] Case No. 20-CI-003079 (Jeff. Cir. Ct. June 20, 2020), https://kycourts.gov/courtprograms/business-court/Documents/BCorder06042020.pdf. 

[76] See S.B. 976 (2019), https://www.businesscourtsblog.com/wp-content/uploads/2020/10/Senate-Bill-976-2020-01722134xB05D9.pdf.

[77] Pennsylvania General Assembly, Bill Information History, Senate Bill 976; Regular Session 2019-2020,  https://www.legis.state.pa.us/cfdocs/billInfo/bill_history.cfm?syear=2019&sind=0&body=S&type=B&bn=976.

[78] Business Courts History, supra note 1, at 176-180.

[79] See https://www.alleghenycourts.us/civil/commerce_complex_litigation.aspx.

[80] Through the Decades, supra note 8 at 2062.

[81] See http://www.courts.state.wy.us/wp-content/uploads/2019/08/SF0104.pdf, providing the rules and procedures of the chancery court in Wyoming.

[82] W.S. § 5-13-104(a).

[83] See W.S. § 5-13-115(a).

[84] See W.S. § 5-13-115(b).

[85] W.S. § 5-13-104-104.

[86] See Id.

[87] W.S. § 5-13-115(c).  However, the Chancery Court Committee in Wyoming may suggest a statutory amendment to provide further ancillary jurisdiction.

[88] W.S. § 5-13-103.

[89] See 21LSO-0027 v.0.3 Chancery Court vacancy amendments.

[90] See W.S. § 5-13-115(b).

[91] See https://www.courts.state.wy.us/chancery-court/.

[92] No. CV 2020-093916, 2020 WL 4586233 (Ariz. Super. Ct. Aug. 5, 2020).

[93] No. N19C-06-054 EMD CCLD, 2020 LEXIS 2723 (Del. Super. Ct. July 27, 2020), https://courts.delaware.gov/Opinions/Download.aspx?id=309220.

[94] No. N19C-10-212 AML CCLD, 2020 LEXIS 570 (Del. Super. Ct. July 31, 2020), https://courts.delaware.gov/Opinions/Download.aspx?id=308900.

[95] No. N19C-05-275 MMJ CCLD, 2020 LEXIS 2745 (Del. Super. Ct. Aug. 20, 2020), https://courts.delaware.gov/Opinions/Download.aspx?id=309670.

[96] See Danenberg v. Fitracks, Inc., 58 A.3d 991, 1001-04 (Del. Ch. 2012).

[97] No. 2020-012763-CA-44 (Fla. 11th Jud. Cir. Sept. 1, 2020) (Order On Assignee’s Motion to Determine Who Owns Assignor’s Attorney-Client and Accountant-Client Privileges).

[98] No. 20-CA-001233 (Fla. 13th Jud. Cir. April 30, 2020) (Order Denying Defendants’ Motion to Dismiss for Improper Venue Based Upon a Mandatory Forum Selection Clause).

[99] No. 49D01-1901-CT-000576, (Ind. Comm. Ct. Aug. 5, 2019), https://public.courts.in.gov/mycase/#/vw/Search or https://public.courts.in.gov/CCDocSearch.

[100] No. 49D01-1901-CT-000576, (Ind. Comm. Ct. Dec. 12, 2019), https://public.courts.in.gov/mycase/#/vw/Search or https://public.courts.in.gov/CCDocSearch.

[101] No. 49D01-2003-PL-009617 (Ind. Comm. Ct. July 31, 2020), https://public.courts.in.gov/mycase/#/vw/Search or https://public.courts.in.gov/CCDocSearch.

[102] No. 49D01-2003-PL-009617 (Ind. Comm. Ct. Sept. 16, 2020), https://public.courts.in.gov/mycase/#/vw/Search or https://public.courts.in.gov/CCDocSearch.

[103] No. 49D01-1911-PL-048001 (Ind. Comm. Ct. June 5, 2020), https://public.courts.in.gov/mycase/#/vw/Search or https://public.courts.in.gov/CCDocSearch.

[104] No. LACL146273 (Iowa Dist. Ct. Nov. 12, 2019), https://www.iowacourts.gov/static/media/cms/05771_LACL146273_OROT_8217686_7C34F49A83158.pdf.

[105] No. BCD-CV-16-33 (Me. Business and Consumer Ct. Jan. 3, 2020), https://www.courts.maine.gov/opinions_orders/bcd/CV%20Orders/CV-16-33/BCD-CV-16-33-decision.pdf.

[106] No. BCD-CV-18-04 (Me. Business and Consumer Ct. Jan 8, 2020), https://www.courts.maine.gov/opinions_orders/bcd/CV%20Orders/CV-18-04/BCD-CV-18-04-findings-and-order-for-entry-of-judgment.pdf.

[107] No. 480195V ((Md. Cir. Ct. Sept. 28, 2020), https://www.mdcourts.gov/businesstech/opinions.

[108] Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1033 (Del. 2004).

[109] See McCormick v. Medtronic, Inc., 219 Md. App. 485, 527 (2014).

[110] Darcars Motors of Silver Spring, Inc. v. Borzym, 379 Md. 249, 270 (2004).

[111] No. 466145V (Md. Cir. Ct. Sept. 1, 2020), https://www.mdcourts.gov/businesstech/opinions.

[112] No. 461362V (Md. Cir. Ct. Nov. 12, 2019), https://www.mdcourts.gov/businesstech/opinions.

[113] See Md. Rule 2-231(b).

[114] No. 457043V (Md. Cir. Ct. Dec. 9, 2019), https://www.mdcourts.gov/businesstech/opinions.

[115] E.I. Du Pont de Nemours & Co. v. Forma-Pack, Inc., 351 Md. 396, 414 (1998).

[116] No. 1984CV02597-BLS1, 2020 Mass. Super. LEXIS 6 (Mass. Super Ct. Jan. 16, 2020).

[117] No. 1784CV02731-BLS2, 2020 Mass. Super. LEXIS 36 (Mass Super. Ct. Mar. 31, 2020).

[118] No. 2084CV00808-BLS2, 2020 Mass. Super. LEXIS 70 (Mass. Super. Ct. Apr. 16, 2020).

[119] No. 13-10616-CKB (Kent County Cir. Ct. Jan. 29, 2020), https://courts.michigan.gov/opinions_orders/businesscourtssearch/BusinessCourtDocuments/C17-2013-10616-CKB%20(January%2029,%202020).pdf.

[120] See Mich. Comp. L. § 500.3114 (1) on priority.

[121] The husband omitted the wife’s name, date of birth, and all other identifying information; however, he did provide all identifying information for his daughter and listed her as a named insured.

[122] No. 17-777-CB (Ingham County Cir. Ct. Jan. 7, 2020), https://courts.michigan.gov/opinions_orders/businesscourtssearch/BusinessCourtDocuments/C30-2017-777-CB%20(Jan%207,%202020).pdf.

[123] No. 20-179615-CB (Oakland County Cir. Ct. July 28, 2020), https://courts.michigan.gov/opinions_orders/businesscourtssearch/BusinessCourtDocuments/C06%202020-179615-CB%20(July%2028,%202020).pdf.

[124] No. 18-002677-CB (Wayne County Cir. Ct. Mar. 4 2020), https://courts.michigan.gov/opinions_orders/businesscourtssearch/BusinessCourtDocuments/C03-2018-002677-CB%20(March%204,%202020)%202.pdf.

[125] No. 217-2019-CV-0849 (N.H. Super. Ct. Mar. 26, 2020), https://www.courts.state.nh.us/superior/orders/bcdd/Control-Technologies-v-ENE-Systems.pdf.

[126] No. 218-2019-CV-1780 (N.H. Super. Ct. Apr. 12, 2020), https://www.courts.state.nh.us/superior/orders/bcdd/High-Liner-Foods-v-Groves.pdf. 

[127] No. 218–2019–CV–198 (N.H. Super. Ct. Apr. 27, 2020), https://www.courts.state.nh.us/superior/orders/bcdd/Legacy.pdf.

[128] No. 218–2019–CV–00198 (N.H. Super. Ct. May 15, 2020), https://www.courts.state.nh.us/superior/orders/bcdd/Legacy-v-St-Pierre-3.pdf.

[129] No. 216-2020-cv-0476 (N.H. Super. Ct. June 30, 2020), https://www.courts.state.nh.us/superior/orders/bcdd/216-2020-CV-476.pdf.

[130] Docket No. BER-L-8213-17 (N.J. Super. Law Div. March 22, 2020), https://njcourts.gov/attorneys/assets/opinions/trial_unpub/hanavcardinal.pdf.

[131] Docket No. BER-L-6069-19 (N.J. Super. Law Div. May 13, 2020), https://njcourts.gov/attorneys/assets/opinions/trial_unpub/lorrealvwormser.pdf.

[132] 2020 N.Y. Slip Op. 33003(U), 2020 N.Y. Misc. LEXIS 5706 (N.Y. Sup. Ct. Sept. 9, 2020), http://www.nycourts.gov/reporter/pdfs/2020/2020_33003.pdf.

[133] FR Holdings, FLP v. Homapour, 154 A.D.3d 936, 937–38, 63 N.Y.S.3d 89, 91 (2d Dep’t 2017).

[134] Matter of Fassa Corp., 31 Misc. 3d 782, 785, 924 N.Y.S.2d 736 (N.Y. Sup. Ct. 2011); Matter of 47th Rd. LLC, 54 Misc. 3d 1217[A], 54 N.Y.S.3d 610 (N.Y. Sup. Ct. 2017).

[135] 2018 N.Y. Slip Op. 32008(U), 2018 WL 3953795 (N.Y. Sup. Ct. Aug. 17, 2018).

[136] No. 651992/2020, 2020 BL 308734 (N.Y. Sup. Ct. July 15, 2020), http://www.nycourts.gov/reporter/3dseries/2020/2020_20199.htm.

[137] N.Y. Gen. Oblig. Law § 5-1401 provides for the enforcement of choice-of-law provisions in contracts over $250,000 and N.Y. Gen. Oblig. Law § 5-1402 provides for the enforcement of forum selection provisions in contracts over $1 million.

[138] Index No. 655045/2019, NYSCEF Doc. No. 49 (N.Y. Sup. Ct. June 15, 2020), http://www.nycourts.gov/reporter/pdfs/2020/2020_31862.pdf.

[139] 651349/2019, 2020 WL 129669, slip. op. at *3 (N.Y. Sup. Ct. Mar. 16, 2020), http://www.nycourts.gov/reporter/pdfs/2020/2020_30811.pdf.

[140] No. 17-CVS-7086, 2020 NCBC 35 (N.C. Super. Ct. Apr. 27, 2020), https://www.nccourts.gov/documents/business-court-opinions/reynolds-am-inc-v-third-motion-equities-master-fund-ltd-2020-ncbc-35.

[141] No. 18-CVS-1050, 2019 NCBC 81 (N.C. Super. Ct. Dec. 31, 2019), https://www.nccourts.gov/documents/business-court-opinions/aldridge-v-metro-life-ins-co-2019-ncbc-81.

[142] No. 18-CVS-3078, 2020 NCBC 53 (N.C. Super. Ct. July 21, 2020), https://www.nccourts.gov/documents/business-court-opinions/klos-constr-inc-v-premier-homes-props-llc-2020-ncbc-53.

[143] No. 19-CVS-244, 2019 NCBC 79 (N.C. Super. Ct. Dec. 20, 2019), https://www.nccourts.gov/documents/business-court-opinions/rickenbaugh-v-power-home-solar-llc-2019-ncbc-79.

[144] No. 18-CVS-13891, 2020 NCBC 56 (N.C. Super. Ct. Aug. 4, 2020), https://www.nccourts.gov/documents/business-court-opinions/vanguard-pai-lung-llc-v-moody-2020-ncbc-56.

[145] June Term 2015 No. 00691, (C.C.P. Phila. Jan. 27, 2020) (Djerassi, J.), https://www.courts.phila.gov/pdf/opinions/150600691_10282020164426448.pdf, aff’d in part, reversed in part, No. 1285 EDA 2019 (Pa. Super. Ct. Oct. 14, 2020), http://www.pacourts.us/assets/opinions/Superior/out/j-a17021-20m%20-%20104574353116015816.pdf#search=%22chhaya%20%27Superior%2bCourt%27%20%27Non-Precedential%27%22.

[146] Oct. Term 2018, No. 03237 (Feb. 12, 2020) (Glazer, J.), https://www.courts.phila.gov/pdf/opinions/181003237_342020101854771.pdf.    

[147] Dec. Term 2017, No. 00051 (Mar. 2, 2020) (Djerassi, J.), https://www.courts.phila.gov/pdf/opinions/171200051_332020111145555.pdf.

[148] C.A. No. PC-2015-5141 (R.I. Super. Ct. Sept. 18, 2019) (Licht, J.), https://www.courts.ri.gov/Courts/SuperiorCourt/SuperiorDecisions/Richmond_Motor_Sales-9-18-19.pdf#search=richmond.

[149] C.A. No. PB-2011-2488 (R.I. Super. Ct. Sept. 9, 2019) (Taft-Carter, J.), https://www.courts.ri.gov/Courts/SuperiorCourt/SuperiorDecisions/11-2488.pdf#search=cashman.

[150] C.A. No. PC-2012-0341 PM-2012-1218 (R.I. Super. Ct. Apr. 30, 2020) (Taft-Carter, J.), https://www.courts.ri.gov/Courts/SuperiorCourt/SuperiorDecisions/12-0341-12-1218.pdf#search=PC%2D2012%2D0341.

[151] C.A. No. PC-2018-8928 (R.I. Super. Ct. Aug. 28, 2019) (Stern, J.), https://www.courts.ri.gov/Courts/SuperiorCourt/SuperiorDecisions/18-8928-6994-6384.pdf#search=PC%2D2018%2D8928.

[152] C.A. No. PC-2018-1076 (R.I. Super. Ct. Aug. 8, 2019) (Silverstein, J.), https://www.courts.ri.gov/Courts/SuperiorCourt/SuperiorDecisions/18-1076.pdf#search=PC%2D2018%2D1076.

[153] No. 20-0282 (Tenn. Ch. Ct. 20th Jud. Dist. July 22, 2020), http://www.tncourts.gov/sites/default/files/docs/20-0282-bc_sj_memorandum_and_order_jd-signedpdf.pdf.

[154] No. 19-1542 (Tenn. Ch. Ct. 20th Jud. Dist. May 19, 2020), http://www.tncourts.gov/sites/default/files/docs/19-1542_ii_5-19-2020_order_jn-signedpdf.pdf.

[155] No. 15-780-BC (Tenn. Ch. Ct. 20th Jud. Dist. April 22, 2020), http://www.tncourts.gov/sites/default/files/docs/memorandum_and_order_4-22-2020.pdf.

[156] No. 18-C-271 (W. Va. Cir. Ct. Wood Cnty. Mar. 7, 2020) (Order denying third-party defendants’ motion to dismiss), http://www.courtswv.gov/lower-courts/business-court-division/pdf/significantOrders/2020/18-C-271OrderDenyingMotionThirdPartyDismiss.pdf.

[157] No. CC-24-2018-C-130 (W. Va. Cir. Ct. Marion Cnty. July 30, 2020) (Order granting plaintiff’s renewed motion for summary judgment), http://www.courtswv.gov/lower-courts/business-court-division/pdf/significantOrders/2020/18-C-130MRNOrderGrantingMotion7-30-20.pdf.

[158] No. 18CV1639 (Wis. Cir. Ct. Waukesha Cnty. Aug. 10, 2020), https://www.wicourts.gov/services/attorney/docs/cdpp_dec2018CV001639.pdf.

[159] 2012 WI 16, 338 Wis. 2d 695, 809 N.W.2d 37 (2012).

[160] CapitalPlus Equity, LLC v. Glenn Rieder, Inc., No. 17-CV-639-JPS, 2018 WL 276352, at *4 (E.D. Wis. Jan. 3, 2018).

Editors

Grant T. Christensen*

University of North Dakota
215 Centennial Dr.
Stop 9003
Grand Forks, ND 58201
(701) 777-2104
[email protected]

Ryan D. Dreveskracht†

Galanda Broadman, PLLC
8606 35th Avenue NE, Ste. L1
Seattle, WA 98125
(206) 909-2843
[email protected]
www.galandabroadman.com

Heidi McNeil Staudenmaier**

Snell & Wilmer L.L.P.
One Arizona Center
400 E. Van Buren
Phoenix, AZ 85004-2202
(602) 382-6366
[email protected]
www.swlaw.com

§ 1.1 Tribal Litigation & The Third Sovereign

We have been writing this annual update of cases relevant to tribal litigation for years.  Recognizing that the average practitioner consulting this volume may not have much experience with federal Indian law, we have endeavored to provide historical context and citation to most relevant circuit and even district court cases in every volume.  This had resulted in a chapter that had grown to almost 70 pages in length and had increasingly made it difficult for the reader to identify the most recent cases.

To both be more consistent with the other chapters in this volume, and to focus on the cases decided in the last year, we decided to change the format of this chapter beginning with the 2019 Edition.  This chapter will continue with that format and focus on cases decided between Oct. 1, 2019 – Oct. 1, 2020.  While other chapters have arranged themselves by circuit, we will begin with a Supreme Court overview and then structure this chapter around sovereigns; Indian Tribes, the United States, and the fifty sister States.  Within each sovereign we now provide a more concise overview of each subject, with more limited and deliberate citation, followed by longer and more intentional discussion of recent cases.  We hope the reader appreciates the change in format and we welcome comments via email to any of the chapter authors.

Retired Supreme Court Justice Sandra Day O’Connor has aptly referred to tribal governments as the “third sovereign” within the United States.[1] Much like federal and state governments, tribal governments are elaborate entities often consisting of executive, legislative, and judicial branches.[2]  Tribes are typically governed pursuant to a federal treaty, presidential executive order, tribal constitution and bylaws, and/or tribal code of laws, implemented by an executive authority such as a tribal chairperson, governor, chief, or president (similar to the president or a state’s governor) and a tribal council or senate (the legislative body).  Tribal courts adjudicate most matters arising from the reservation or under tribal law.[3]

Indian tribes are “distinct, independent political communities, retaining their original natural rights” in matters of local self-government.[4]  Thus, state laws generally “have no force” in Indian Country.[5]  While in the eyes of federal and state government, tribes no longer possess “the full attributes of sovereignty,” they remain a “separate people, with the power of regulating their internal and social relations.”[6]

This chapter explores the repose of tribal sovereignty, federal plenary oversight of that sovereignty, and perennial state encroachment upon that sovereignty.  Federal trial and appellate courts issue more than 650 written opinions in cases dealing with Indian law each year,[7] and settle, dismiss, or resolve without opinion countless others.  This chapter introduces those cases most relevant to a business litigation focused audience.

§ 1.2 Indian Law & The Supreme Court

§ 1.2.1 The 2019–2020 Term

The Supreme Court hears an average of between two and three new Indian law cases every year.[8] During the 2019-2020 term, the Court decided only a single Indian law case, but one of incredible importance to federal Indian law and to practitioners in Oklahoma or who regularly do business with the Five Tribes.

McGirt v. Oklahoma, 140 S. Ct. 2452 (2020).  McGirt is an extension of a case granted last term, Carpenter v. Murphy, where the Court deadlocked 4-4 after Justice Gorsuch was recused for having participated in a decision not to review the case en banc while still a member of the Tenth Circuit.  Instead of affirming the case by an equally divided Court, the Court ordered re-argument.  It then granted McGirt raising the same issue—whether the Muscogee (Creek) Reservation had been diminished.

Diminishment is discussed in more detail in Section 8.4.1, but, functionally, the question deals with whether an Indian tribe may continue to assert its inherent powers over land owned by non-members of the tribe but within the original boundaries of the reservation.  The presumption has always been that a reservation retains its Indian status (and is thus not diminished) unless Congress expressed its clear intent to diminish the reservation.  In order to determine Congressional intent the Court has traditionally looked at three factors: (1) the statutory language of the relevant allotment act(s), which opened the land on the reservation to non-Indian settlement, (2) the events surrounding passage of the act, and (3) the Indian character of the land.

In a 5-4 opinion authored by Justice Gorsuch, the Court in McGirt held that the Muscogee (Creek) reservation was not diminished, and it modified the test to virtually eliminate all but the first factor.

Justice Gorsuch opened the opinion with a line that will be cited in Indian law cases for generations: “On the far end of the Trail of Tears was a promise.” The opinion makes clear that Indian reservations remain intact unless modified by Congress and that, to “ determine whether a tribe continues to hold a reservation, there is only one place we may look: The Acts of Congress.” The Court expressly rejected the idea that the events surrounding passage, or the Indian character of the land must be considered, reasoning that, if the statutory language used by Congress is unambiguous, there is no need to look anywhere else for Congressional intent.  “When interpreting Congress’s work in this arena, no less than any other, our charge is usually to ascertain and follow the original meaning of the law before us.  That is the only ‘step’ proper for a court of law.  *** Nor may a court favor contemporaneous or later practices instead of the laws Congress passed.  As Solem explained, ‘[o]nce a block of land is set aside for an Indian reservation and no matter what happens to the title of individual plots within the area, the entire block retains its reservation status until Congress explicitly indicates otherwise.’”

As a result of the opinion, the entire Muscogee (Creek) reservation remains Indian country, and the tribal government may extend its inherent powers over even non-members of the tribe in some circumstances.  Moreover, the tribal courts may generally hear disputes arising on the reservation, even those concerning non-members.  The Muscogee (Creek) reservation includes the southern portion of the City of Tulsa, and the case sets a precedent that other members of the Five Tribes (Cherokee, Choctaw, Chickasaw, and Oklahoma Seminole) with similar treaty and allotment histories may also remain Indian country.

While the McGirt case was ostensibly a case about criminal jurisdiction, the conclusion that the reservation is undiminished will have potentially large consequences for everything from taxation and regulation[9] to forum selection and adjudicative powers for the tribal courts.

§ 1.2.2 Preview of the 2020-2021 Term

As of October 1, 2020, the Supreme Court has not granted certiorari to any Indian law case for the 2020–2021 term, although there is always the possibility that additional cases will be added to the docket and still decided before June 2021.  If any new cases are granted and decided, they will be included in next year’s volume.

There one was notable dissent from denial of cert. in a relevant Indian law case.  On Oct. 19, 2020, Justice Thomas dissented from the denial of cert. in Rogers County Board of Tax Roll Corrections v. Video Gaming Technologies Inc. 592 U.S. ___ (2020).  The case is discussed in more detail in §8.5 below—but, briefly, the Supreme Court of Oklahoma had ruled that the Indian Gaming Regulatory Act preempted the State of Oklahoma’s ad valorem tax on gaming machines used exclusively on an Indian reservation at the tribal casino but owned by a non-Indian entity.  The County appealed the decision to the U.S. Supreme Court and the Court denied cert.

In his dissent from the denial of certiorari, Justice Thomas explained that he would have ordered the case considered.  In his short dissent, Justice Thomas explained that the Court has applied a “flexible” test to the preemption of state taxes on non-Indian property in Indian country and has provided little guidance other than that courts should “balance federal, tribal, and state interests.” He would have granted the case to clarify to what extent a state may tax non-Indian property in Indian country, and he noted that the clarity is particularly needed now because McGirt (discussed above) had enlarged Indian country substantially in Oklahoma.

§ 1.3 The Tribal Sovereign

§ 1.3.1 Tribal Courts

More than half of the 574 federally recognized tribes have created their own court systems and promulgated extensive court rules and procedures to govern criminal and civil matters involving their members, businesses, and activity conducted on their lands.  Notwithstanding federal restrictions on tribal adjudicatory power, tribes have extensive judicial authority.  As the complexity of life on reservations has increased, so has Congress’s willingness to enhance and aid tribal courts’ adjudicatory responsibilities.

While tribal courts are similar in structure to other courts in the United States, the approximately 275 Indian courts currently functioning throughout the country are unique in many significant ways.[10]  It cannot be overemphasized that every tribal court is different and distinct from the next.[11]  For example, the qualifications of tribal court judges vary widely depending on the court.[12]  Some tribes require tribal judges to be members of the tribe and to possess law degrees, while others do not.[13]  Some tribal courts meet regularly and have a fairly typical court calendar, while others may meet on Saturdays or only a couple days a month in order to meet the more limited needs of a court system serving a smaller population or particularly isolated tribal community.

Tribal courts can have their own admissions rules and counsel should not assume that because they are licensed in the state where the tribal court is located that they can automatically appear in tribal court.  While many tribes allow members of the state bar to join the tribal bar, often for a nominal annual fee, the requirements vary from one tribe to another.  For example, the Navajo tribe has its own bar exam that tests knowledge of Navajo tribal law.[14]

Counsel should keep this uniqueness in mind when addressing a tribal court orally or in writing.  If counsel has never appeared before a particular tribal court previously, it would be wise to solicit common court practice from persons who regularly appear before the court.

Tribal court jurisdiction depends largely on (1) whether the defendant is a tribal member[15] and (2) whether the dispute occurred in Indian Country,[16] particularly lands held in trust by the United States for the use and benefit of a tribe or tribal member or fee lands within the boundaries of an Indian reservation.[17] These two highly complex issues should be analyzed first in any tribal business dispute.

In the context of a tribe’s civil authority, the important distinction is between tribal members and non-members (whether or not the non-member is an Indian).  Generally, tribal courts have jurisdiction over a civil suit by any party, member, or non-member against a tribal member Indian defendant for a claim arising on the reservation.[18] Even in tribal court, claims against the tribe itself require a waiver of tribal immunity.[19] Indian tribes also generally have regulatory authority over tribal member and non-member activities on Indian land.[20]

In the “pathmaking” decision of Montana v. United States,[21] however, the U.S. Supreme Court held that a tribal court cannot generally assert jurisdiction over a non-tribal member when the subject matter of the dispute occurs on land owned in fee by a non-member, explaining that “exercise of tribal power beyond what is necessary to protect tribal self-government or to control internal relations is inconsistent with the dependent status of tribes, and so cannot survive without express Congressional delegation.”[22]  To help lower courts determine when the assertion of tribal power is necessary, the Court articulated two exceptions: (1) a tribe may have civil authority over the activities of non-tribal persons who enter into consensual relations with the tribe or its members via a commercial dealing, contract, lease, or other arrangement; or (2) the tribe has civil authority over non-Indians when their actions threaten or have a direct effect upon the “political integrity, the economic security, or the health or welfare of the tribe.”[23]

These exceptions are “limited,” and the burden rests with the tribe to establish the exception’s applicability.[24]  The first exception specifically applies to the “activities of non-members,” and the second exception is extremely difficult to prove, as it must “imperil the subsistence of the tribal community.”[25]  These exceptions have, oddly, become known as the “Montana rule.”

There are new opinions issued every year on the limits of tribal court jurisdiction that are built upon Montana and its exceptions.  This section highlights a couple of the most relevant.[26]

FMC Corp. v. Shoshone-Bannock Tribes, 942 F.3d 916 (9th Cir. 2019): FMC operated an elemental phosphorous plant, which produced 22 million tons of hazardous waste stored on fee land located within the Shoshone-Bannock Fort Hall Reservation.  In 1990, the EPA classified the site as a National Priority List Superfund Site under CERCLA and, in 1997, charged FMC with violating the Resource Conservation and Recovery Act (RCRA).  Consequently, FMC agreed to a Consent Degree in which it would obtain a permit from the tribe to continue storing the hazardous waste for $1.5 million per year, but it stopped paying in 2002 after ceasing active plant operations.

FMC had regularly applied to the Tribe’s Land Use Policy Commission for a use permit for the land.  The Commission provisionally granted a use permit but imposed an annual permit fee of at least $1.5 million and a one-time building permit fee.  FMC twice appealed to the Fort Hall Business Council, which affirmed the Commission’s decision.  FMC then appealed to the tribal court.

The tribal trial court and court of appeals held that the Tribe had regulatory and adjudicatory powers over FMC.  The appellate panel held that the Tribe had regulatory and adjudicatory jurisdiction under the second Montana exception because FMC’s storage threatened the welfare and cultural practices of the Tribe.  FMC then sued the Tribe in federal district court, which affirmed the Tribal Court but held that the judgment was enforceable under the first but not the second Montana exception.  FMC appealed to the Ninth Circuit.

The Ninth Circuit held that the Tribes had regulatory and adjudicatory jurisdiction under both Montana exceptions, that FMC was not denied due process, and that the Tribal Court of Appeals’ judgment was enforceable under principles of comity.  First, it held that, under the first Montana exception, FMC had entered into a consensual relationship with the Tribes when it negotiated and entered into the permit agreement.  The Consent Decree was a “sweetheart” business deal that was not the product of coercion, and, because of FMC’s long history of prior business dealings with the Tribe, it should have reasonably anticipated that its interactions with the Tribe might trigger tribal authority.

Second, the Ninth Circuit found that, under the second Montana exception, the storage of hazardous waste on the reservation constituted a threat to tribal natural resources and tribal self-governance, health, and welfare.  As noted by the EPA in the Tribal Court of Appeals’ evidentiary hearing, millions of tons of toxic, carcinogenic, and radioactive hazardous waste directly threatened the tribes’ political integrity, economic security, and health and welfare.  FMC petitioned to the Supreme Court of the United States for review and the Court called for the views of the Solicitor General.  As of this writing, the case has not yet been granted or denied.

Employers Mut. Cas. Co. v. McPaul, 804 F. App’x 756 (9th Cir. 2020): The Navajo Nation sued Employers Mutual Casualty Company (EMC) in tribal court, alleging that EMC failed to defend and indemnify its insureds after the insureds caused a gas leak on tribal lands.  The Navajo tribal court denied EMC’s motion to dismiss for lack of subject matter jurisdiction and the Navajo Nation Supreme Court denied a writ of prohibition.  EMC then sued Navajo Nation officials in federal district court, which granted summary judgment for EMC, concluding that the tribal court lacked jurisdiction.  The Navajo Nation officials then appealed to the Ninth Circuit.

The Ninth Circuit addressed each Montana exception in turn.  It dismissed the first exception because both parties stipulated that EMC’s relevant actions (which involved “negotiating and issuing general liability insurance contracts to non-Navajo entities”) occurred outside of tribal land.  It then rejected the second exception because EMC’s conduct took place outside the reservation and its refusal to defend and indemnify its insureds does not “imperil the subsistence of the tribal community.” Therefore, the Ninth Circuit affirmed the district court’s holding, recognizing that the tribal courts lacked jurisdiction under either of the two Montana exceptions.

Walker v. Boy, No. 19-0043, 2019 WL 5700770 (D. Mont. Nov. 4, 2019): Plaintiff, a member of the Gros Ventre Tribe, sued his former employer, the Rocky Boy Health Center, and its CEO, a member of the Assiniboine Tribe, in district court for gender discrimination and retaliation.  The health center is located on the Rocky Boy’s Indian Reservation on property held in trust by the federal government for the benefit of the Rocky Boy Chippewa Cree Tribe.  Defendants filed a motion to dismiss alleging that the Plaintiff had failed to exhaust his tribal court remedies, the federal court lacked subject matter jurisdiction over the claims, and the federal statutes cited in Plaintiff’s complaint were inapplicable and provided no basis for jurisdiction.

The district court held that Plaintiff had not exhausted his tribal court remedies because tribal jurisdiction was “colorable” for two reasons.  First, the claims were based on events that allegedly occurred on trust land within the exterior boundaries on the Reservation.  Second, the claims arose out of a consensual employment agreement between the Plaintiff and the tribal entity, which satisfied the first Montana exception even if the events had occurred off tribal land.  Thus, the district court granted Defendant’s motion to dismiss.

Rosebud Sioux Tribe v. Trump, 428 F. Supp. 3d 282 (D. Mont. 2019): Rosebud Sioux Tribe and Fort Belknap Indian Community sued President Trump and other government entities alleging that they violated various treaties, the Foreign Commerce Clause, the tribes’ inherent sovereign powers, and various federal statutes when the President issued a Presidential permit to build the Keystone XL oil pipeline.

The federal district court addressed several claims, the most relevant of which involves Defendant’s motion to dismiss.  It held that, because tribes have inherent authority to exclude non-Indians from their reservations, under Montana’s second exception, they may exercise civil authority over the conduct of non-Indians on fee lands when that conduct threatens the political integrity, economic security, or health and welfare of the tribe.  Therefore, because Rosebud alleges that Keystone will cross over tribal surface and mineral estates, the court determined that they alleged enough facts at this point in the litigation to support that they have jurisdiction over Keystone.

Gustafson v. Poitra, 2020 ND 9, 937 N.W.2d 524 (2020): The parties before the court were involved in three prior actions.  The first action involved a foreclosure on two parcels of Defendant’s property, where tribal jurisdiction was raised in the district court, but not the appeal.  The second case involved an action in which Plaintiff sued Defendants in district court claiming that one of the Defendant’s estates owed him money for maintenance and repairs, but the court vacated judgment on appeal because the district court lacked subject matter jurisdiction over the lease.  Finally, in the third action, Plaintiff sued two of the Defendants, alleging that Plaintiff was a non-Indian fee owner of two parcels within the Turtle Mountain Reservation.  There, the district court quieted title to the Plaintiff, and the North Dakota Supreme Court affirmed that the tribal courts lacked jurisdiction under either Montana exception.

In this action, Plaintiff sued Defendants in state court to evict them from the property in the prior quiet title action.  The district court determined that it had subject matter jurisdiction over the claim and granted the eviction.  Defendants appealed, arguing that the district court lacked jurisdiction over an eviction regarding non-Indian fee land located within the reservation, that the eviction should have been brought in tribal court, and that sending a North Dakota law enforcement officer onto the reservation to evict them was a clear violation of Montana.

On appeal, the Supreme Court of North Dakota held that Defendants failed both to meet their burden under either Montana exception or to explain how a district court lacked subject matter jurisdiction to grant a judgment of eviction.  The burden rested on the Tribe to establish that one of Montana’s exceptions applied to allow extension of tribal authority to regulate nonmembers on non-Indian fee land, and these limited exceptions should not be constructed in a way that swallows the rule.  The court found no discernable argument by Defendants addressing the first exemption, and although Defendants argued that Plaintiff’s use of a nonfederal law enforcement officer from a foreign jurisdiction to enforce the eviction harmed the political integrity and health and welfare of the tribe, they failed to provide legal support for this argument.  Thus, Defendants failed to meet their burden and the state had authority to enforce the eviction ordered by the district court.

Warfield for Cheryl Sam & Carleen Sam Bankr. Estates v. Ledbetter Law Firm PLC, No. 1 CA-CV 18-0636, 2019 WL 6215905 (Ariz. Ct. App. Nov. 21, 2019): The Tabaha family sued members of the Navajo Nation (Carleen and Cheryl Sam) for personal injury in the Navajo Nation District Court after the Sams injured them in a car accident on the Navajo Reservation.  The Sams’ insurance company, State Farm, retained the Ledbetter Law Firm, who attempted to settle with the Tabahas.  The Tabahas refused to accept a settlement, and Ledbetter recommended that the Sams declare bankruptcy.  The bankruptcy court then discharged the Sams’ personal liability for pre-bankruptcy debts.

Warfield, the trustee for the Sams’ bankruptcy estate, claimed that the orders enjoined the Tabaha family from collecting any debt from the Sams’ post-petition assets.  Ledbetter, on the other hand, claimed that the orders discharged any personal liability to the Tabaha family.  Warfield then sued State Farm and Ledbetter in Maricopa County Superior Court, alleging breach of contract, breach of the implied covenant of good faith and fair dealing, aiding and abetting bad faith, legal malpractice, and punitive damages.  After the case transferred to Yavapai County, Ledbetter moved for summary judgment for lack of subject matter jurisdiction.  The trial court dismissed most of Warfield’s claims and granted Ledbetter’s motion for summary judgment for lack of subject matter jurisdiction.

On appeal, the Arizona Court of Appeals recognized that, because neither Warfield nor Ledbetter was a member of the Navajo Nation, jurisdiction presumptively lay in state court.  However, Ledbetter argued that the tribal court has exclusive jurisdiction over the claims because the Montana exceptions applied.  The court rejected this argument, holding that Montana never held that the tribal court has exclusive jurisdiction just because it establishes one of the Montana exceptions.  Rather, even if the tribal court has jurisdiction, it does not preempt state court jurisdiction unless it unduly infringes on tribal self-governance.  Because this case is between two non-Indians, the Arizona appellate court reasoned that the infringement test did not preclude state court jurisdiction.

§ 1.3.2 Exhaustion of Tribal Court Review

The doctrine of exhaustion of tribal remedies reflects the ongoing tension between tribal and federal courts.  If a tribal court claims jurisdiction over a non-Indian party to a civil proceeding, the party usually[27] is required to exhaust all options in the tribal court prior to challenging tribal jurisdiction in federal district court.[28] If tribal options are not exhausted prior to bringing suit in federal court, the federal court will likely dismiss[29] or stay[30] the case.

Ultimately, the question of whether a tribal court has jurisdiction over a nontribal party is one of federal law, giving rise to federal questions of subject matter jurisdiction.[31] Thus, non-Indian parties can challenge the tribal court’s jurisdiction in federal court.[32] Pursuant to this doctrine, a federal court will not hear a matter arising on tribal lands until the tribal court has determined the scope of its own jurisdiction and entered a final ruling.[33] Ordinarily, a federal court should abstain from hearing the matter “until after the tribal court has had a full opportunity to determine its own jurisdiction.”[34]  And again, notwithstanding a provision that appears to vest jurisdiction with an arbitrator, several federal courts have ruled that a tribal court should be “given the first opportunity to address [its] jurisdiction and explain the basis (or lack thereof) to the parties.”[35]

After the tribal court has ruled on the merits of the case[36] and all appellate options have been exhausted,[37] the non-tribal party can file suit in federal court, whereby the question of tribal jurisdiction is reviewed under a de novo standard.[38] The federal court may look to the tribal court’s jurisdictional determination for guidance; however, that determination is not binding.[39] If the federal court affirms the tribal court ruling, the nontribal party may not relitigate issues already determined on the merits by the tribal court.[40]

There are several exceptions to the exhaustion doctrine.  First, federal courts are not required to defer to tribal courts when an assertion of tribal jurisdiction is “motivated by a desire to harass or is conducted in bad faith . . . or where the action is patently violative of express jurisdictional prohibitions, or where exhaustion would be futile because of the lack of an adequate opportunity to challenge the court’s jurisdiction.”[41]  Second, when “it is plain that no federal grant provides for tribal governance of non-members’ conduct on land covered by Montana’s main rule,” exhaustion “would serve no purpose other than delay.”[42]  Third, where the primary issue involves an exclusively federal question, exhaustion of tribal remedies may not be mandated.[43]

Because litigation is expensive, the question of whether the defendant is required to exhaust their tribal court remedies before challenging the jurisdiction of the tribal court is regularly litigated.  Several of these cases were decided in the last year.[44]

Magee v. Shoshone Paiute Tribes of Duck Valley Reservation, 19-0697, 2020 WL 2468774 (May 11, 2020 D. Nev.): The Duck Valley Tribe brought suit against their CFO for financial impropriety in tribal court.  The CFO claimed sovereign immunity based on his status as a tribal employee and asked for the case to be dismissed for lack of subject matter jurisdiction.  The Tribal Court denied the motion and the Tribal Appellate Court refused to hear the appeal because the trial court’s order was merely interlocutory.  The CFO then sought an order from the federal district court prohibiting the tribal court from continuing the proceedings on the basis of a lack of jurisdiction.

The district court held that the CFO had not yet exhausted all tribal remedies, and therefore, dismissed the federal action.  Federal courts give broad latitude to tribal courts to exercise authority under their jurisdiction.  The CFO asserted that the tribal suit was commenced in bad faith, and, therefore, falls within the bad faith exception to exhaustion.  The district court clarified that bad faith applies only to the tribal court acting in bad faith, not the parties in litigation.  With no alternative justification to assert bad faith, the court concluded there was no relevant exhaustion exception.

Hanson v. Parisien, No. 19-0270, 2020 WL 4117997 (July 20, 2020 D.N.D.): In a dispute about whether a non-Indian contractor had to pay TERO fees for work performed on the reservation the North Dakota Supreme Court ultimately held that exhaustion of tribal court remedies required of tribal administrative remedies, as well as judicial remedies.  In this case, a non-Indian contractor obtained a letter from tribal legal counsel advising that it would not owe TERO fees on a bid for services, but the TERO office ended up issuing a fee anyway.  The non-Indian contractor contested the fee in tribal court and prevailed, but, on appeal, the Turtle Mountain Court of Appeals reversed and remanded the case to the TERO Commission.  At that point the non-Indian contractor filed a suit in federal court.

The federal court held that the Plaintiffs had not yet exhausted their tribal remedies and therefore it was premature for the suit to be brought in federal court.  The Court reasoned that tribal exhaustion applies to administrative, as well as judicial, proceedings and is mandatory.  The federal court reasoned that the non-Indian contractor must first exhaust their tribal administrative remedies before seeking redress in the federal court and emphasized that additional tribal proceedings would assist in developing the factual record for the case, as well as provide additional expertise from the Tribe.  Therefore, the court dismissed the instant action as premature until all tribal avenues—administrative or judicial—have been exhausted.

Hengle v. Asner, 433 F.Supp. 3d 825 (E.D. Va. 2020): This class action suit is based off several payday loan companies created by the Habematolel Pomo of Upper Lake, a federally recognized Native American tribe.  With the help of their attorneys, the Tribe set up several companies that issued small payday loans ($1,000) to qualified buyers.  The loans had unusually high interest rates that violated usury laws in many states.  Plaintiffs filed a class action suit in district court with counts including RICO claims, usury violations, and declaratory judgment relief to nullify the loans.

In this case, Defendants filed a motion to compel arbitration pursuant to the loan contracts.  In addition to the arbitration clause, Defendants sought to have the claims adjudicated in the “Tribal Forum” as specified in the contract.  Stemming from the Tribal Forum Clause, the Defendants claimed there was a lack of exhaustion of tribal remedies before filing suit in federal court.  Plaintiffs countered that there is no comparable claim in a tribal court, so comity cannot apply.

The court denied the motion to compel arbitration and denied the claim seeking tribal exhaustion.  The Court reasoned that there was no basis for tribal court jurisdiction over non-members for loans that existed outside of the reservation so exhaustion would serve no purpose other than delay.

Corporation of President of Church of Jesus Christ of Latter-Day Saints v. BN, No. 19-0062, 2019 WL 5423937 (Oct. 23, 2019 D. Utah): A law suit was brought in Navajo tribal court on behalf of a Navajo minor who alleged that she was injured while participating in the Indian Student Placement Program, which placed tribal members with church families so that they can attend school.  The Church claimed that there was no tribal jurisdiction, since none of the placements took place on the reservation.  It sought a writ of prohibition from the Navajo Nation Supreme Court, holding that it did not have sufficient information to determine jurisdiction because no trial court record had yet been created.

The Church then sought an order from the federal district court that the tribal court had no jurisdiction.  It claimed that it had first sought the order from the Navajo Nation Supreme Court and so it had exhausted its tribal court remedies.  The District Court disagreed.  It held that the Navajo Nation had not yet had an opportunity “to determine its own jurisdiction.” “At minimum, exhaustion of tribal remedies means that tribal appellate courts must have the [full] opportunity to review the determinations of the lower tribal courts,” which includes complete appellate review.  Because the Navajo Nation Supreme Court did not yet decide its jurisdiction, the Church had not exhausted its tribal court remedies.

Clements v. Confederated Tribes of Colville Reservation, No. 19-0201, 2019 WL 6051104 (Nov. 15, 2019 E.D. Wash.): A non-Indian business entered into a contract to install fiber optic cable for the Confederated Tribes of the Coleville Reservation.  The contract stipulated the tribal court would govern all disputes under the contract.  The business then “walked off” the job and the Tribe brought suit in tribal court seeking the return of funds advanced for incomplete work.  The tribal court denied a motion to dismiss for lack of jurisdiction and the non-Indian business filed in federal court seeking a declaration that the tribal court lacked jurisdiction over the subject matter.

The federal court held that the Plaintiff had not exhausted its tribal court remedies; it had merely lost a preliminary motion to dismiss.  It further reasoned that tribal court jurisdiction was colorable under the first Montana exception because there was a contract for services between the Plaintiff and the Tribe.  In this case, the Tribal Court had yet to make any determination on jurisdiction.  It therefore dismissed the complaint until exhaustion of tribal court remedies could be completed.

§ 1.3.3 Tribal Sovereignty & Sovereign Immunity

An axiom in Indian law is that Indian tribes are considered domestic sovereigns.[45] Like other sovereigns, tribes enjoy sovereign immunity.[46] As a result, a tribe is subject to suit only where Congress has “unequivocally” authorized the suit or the tribe has “clearly” waived its immunity.[47] The U.S. Supreme Court, in a 2008 decision, pronounced that tribal sovereign immunity “is of a unique limited character.”[48]  Unlike the immunity of foreign sovereigns, the immunity enjoyed by sovereign tribal governments is limited in scope and “centers on the land held by the tribe and on tribal members within the reservation.”[49]

Nontribal entities must be aware that, absent a clear and unequivocal tribal immunity waiver, tribes and tribal entities may not be subject to suit should a deal go bad.  With regard to contracts, “[t]ribes retain immunity from suits . . . whether those contracts involve governmental or commercial activities and whether they were made on or off a reservation.”[50]

Tribal immunity generally shields tribes from suit for damages and requests for injunctive relief,[51] whether in tribal, state, or federal court.[52] Sovereign immunity has been held to bar claims against the tribe even when the tribe is acting in bad faith.[53]

Tribes enjoy the benefit of a “strong presumption” against a waiver of their sovereign immunity.[54] Moreover, federal courts have made clear that simply participating in litigation does not waive the tribe’s sovereign immunity.[55] Any waiver of tribal sovereign immunity “cannot be implied but must be unequivocally expressed.”[56]

Exactly what contract language constitutes a clear tribal immunity waiver is somewhat unclear.[57] The Supreme Court in C & L Enterprises, Inc. v. Citizen Band Potawatomi Indian Tribe of Oklahoma[58] ruled that the inclusion of an arbitration clause in a standard-form contract constitutes “clear” manifestation of intent to waive sovereign immunity.[59] In C & L Enterprises, the tribe proposed that the parties use a standard-form contract that contained an arbitration clause and a state choice-of-law clause.[60] Although the contract did not clearly mention “immunity” or “waiver,” the Supreme Court believed the alternative dispute resolution (ADR) language manifested the tribe’s intent to waive immunity.[61]

Finally, waivers of immunity must come from a tribe’s governing body and not from “unapproved acts of tribal officials.”[62]  Attorneys must evaluate a tribe’s structural organization to determine precisely which tribal agents have authority to properly waive tribal sovereign immunity or otherwise bind the tribal entity by contract.  If attorneys do not have a working knowledge of pertinent tribal documents, they risk leaving their clients without an enforceable deal.  Below are summaries from some of the most relevant sovereign immunity cases of the last year.[63]

**Immunity may be asserted by tribal corporations, as well as tribal governments.  Some recent sovereign immunity cases dealing with tribal corporations are collected and discussed in 8.3.4.

Drake v. Salt River Pima-Maricopa Indian Community, 411 F. Supp. 3d 513 (D. Ariz. 2019): Plaintiff, patron of Defendant’s casino, alleged Defendant violated the Americans with Disabilities Act (“ADA”) by not allowing her to bring her service dog inside casino.  Defendant asserted tribal sovereign immunity and moved to dismiss the case.  The Court granted Defendant’s motion to dismiss.

Relying on the language of the ADA, the Court stated, “Congress did not clearly waive tribal immunity [under the ADA], but did so with respect to the states’ sovereign immunity, demonstrat[ing] that the [Tribe’s] immunity should remain intact.”

Eglise Baptiste Bethanie De Ft. Lauderdale, Inc. v. Seminole Tribe of Fla., 19-62591, WL 43221 (S.D. Fla. Jan. 3, 2020): On July 26, 2014, Plaintiff Eglise Church’s pastor died.  After his death, Co-Defendant Auguste (pastor’s wife) and the board of directors of the Church contended for church leadership.  Id.  On September 29, 2019, during a church service, co-defendant Auguste entered the church property with six officers from the Seminole Police Department, expelled the congregation, changed the locks and security system of the church, and began occupying the church.

Eglise Church filed suit against the Seminole Tribe alleging interference with business relationships and the Tribe moved for dismissal on the basis of sovereign immunity.  The federal district court dismissed the complaint on the basis of tribal sovereign immunity.  It explained, “absent some definitive language making it unmistakably clear that Congress intended to abrogate tribal sovereign immunity … Defendant Seminole Tribe is entitled to immunity from suit in the instant action.”

Caddo Nation of Oklahoma v. Wichita & Affiliated Tribes, 786 Fed. Appx. 837 (10th Cir. 2019): Plaintiff Caddo Tribe brought suit against Defendant Wichita Tribe for alleged violations of the National Environmental Policy Act (NEPA) and the National Historic Preservation Act (NHPA).  Wichita was in the process of building a Tribal History Center funded by the Department of Housing and Urban Development (HUD).  The district court denied Caddo’s temporary restraining order preventing construction of the History Center.  On appeal, the Tenth Circuit Court of Appeals held it lacked jurisdiction because the History Center was completed during the pendency of the appeal.  Caddo then filed an amended complaint and Wichita filed a motion to dismiss, arguing Caddo’s claims were mooted by completion of the History Center and the claims were also barred by tribal sovereign immunity.  The district court held the claims were mooted by construction of the History Center and Caddo appealed to the Tenth Circuit.

The Tenth Circuit first examined Wichita’s assertion that Caddo’s claim was barred by sovereign immunity, reasoning that “a ruling in [Wichita’s] favor would fully resolve the appeal.  The Court then held that the Wichita Tribe was barred from asserting tribal sovereign immunity against claims under the Administrative Procedures Act because the Tribe “accept[ed] and assum[ed] HUD’s rights, duties, and obligations to act in conformity with NEPA and NHPA.  Thus, the tribe waiv[ed] its sovereign immunity for just the type of APA-based suit at issue in [the] case.” However, the Court found Caddo’s claims were moot because the History Center had already been completed.

Eyck v. United States, 19-4007, WL 2770436 (D.S.D. May 28, 2020): Plaintiffs are parents of Eyck, who was a passenger in a car pursued by South Dakota Highway Patrol, Moody County Sheriffs, and Flandreau Tribal Police Officers.  No one in the car was Indian and the chase took place off tribal land.  Defendant Neuenfeldt, Chief of Police for the Flandreau Santee Sioux Tribe, was assisting County Sheriff Deputies on non-tribally-owned land.  The car chase ended with an accident that caused Eyck severe injuries and medical bills.  The Plaintiff brought suit against the pursuers and Defendant Nuenfeldt claimed sovereign immunity.

Although Neuenfeldt argued that he was acting as the Tribe’s Chief of Police (and exercising inherent powers of the Tribe) during the car chase, the Court held that Neuenfeldt could not assert tribal sovereign immunity as a defense.  It explained that Neuenfeldt was not exercising inherent sovereign powers of the Tribe during the chase because all persons involved were non-Indians and the chase took place entirely off tribal land.

Gilbert v. Weahkee, No. 19-5045, 2020 WL 779460 (D.S.D. 2020): Plaintiffs—Native Americans residing in Rapid City, SD—challenged the decision of the Indian Health Service to enter into a self-determination contract with the Great Plains Tribal Chairmen’s Health Board.  The contract at issue permitted the Health Board, a non-profit organization, to operate portions of IHS’s facilities in Rapid City.  The Health Board was established “to make known the needs and desires of the Indian people for assistance of the [IHS] in formulating programs and establishing services [on behalf of the United States in accordance with treaty obligations].” Plaintiffs argued the contract with the Health Board violated the Fort Laramie Treaty of 1868 and the Indian Self-Determination and Education Assistance Act (ISDEDA).  Defendants filed a motion to dismiss, arguing Plaintiffs failed to join the Health Board, that the Health Board was an indispensable party that could not be joined due to sovereign immunity, and thus the case must be dismissed.  The Court determined the Health Board was a tribal organization entitled to sovereign immunity under ISDEDA.  The Court dismissed the case after determining the Health Board was an indispensable party that could not be joined due to its sovereign immunity.

Genskow v. Prevost, No. 19-1474, 2020 WL 1676960 (E.D. Wis. 2020): The Court held Plaintiff’s claim against the Tribe, related to her expulsion from a tribal meeting, was barred by tribal sovereign immunity because “the exercise of federal jurisdiction over the Oneida Nation’s ability to conduct [a] meeting of its governing body on its own land would be a blatant violation of its sovereignty.” Further, the Court held the tribal police officer who was asked to eject Plaintiff from the tribal meeting was entitled to sovereign immunity as an “arm or instrumentality of the state.” Finally, the Court ruled the Tribe did not waive its federal sovereign immunity when its tribal police department was deputized by a neighboring county sheriff office and as part of the agreement with the sheriff office “waive[d] [its] sovereign immunity to allow enforcement of liabilities [arising from acts of tribal police officers] in the courts of the State of Wisconsin.”

Holtz v. Oneida Airport Hotel, No. 19-1682, 2020 WL 2085287 (E.D. Wis. 2020): The Court granted Defendant hotel’s motion to dismiss Plaintiff’s employment discrimination claims because the hotel shared in the tribal sovereign immunity of the Oneida Nation when it was owned and operated by the Oneida Nation for the benefit of the Oneida Nation.

Kiamichi River Legacy Alliance v. Bernhardt, No. 19-0108, 2020 WL 1465885 (E.D. Okla. 2020): Environmental organization brought action against Secretary of Interior and multiple Indian Tribes alleging that parties to a tribal water settlement did not consult with U.S. Fish & Wildlife as required by the Endangered Species Act.  The Court held Congress did not expressly waive tribal immunity when passing the Endangered Species Act and granted Tribes’ motions to dismiss because the Tribes were entitled to sovereign immunity.

§ 1.3.4 Tribal Corporations

A majority of non-Alaskan tribes are organized pursuant to the Indian Reorganization Act of 1934 (IRA).[64] Under Section 16 of the IRA, a tribe may adopt a constitution and bylaws that set forth the tribe’s governmental framework and the authority given to each branch of its governing structure.[65] A tribe may also incorporate under Section 17 of the IRA, under which the Secretary of the U.S. Department of the Interior issues the tribe a federal commercial charter.[66]

Through Section 17 incorporation, the tribe creates a separate legal entity to divide its governmental and business activities.[67] The Section 17 corporation has a federal charter and articles of incorporation, as well as bylaws that identify its purpose, much like a state-chartered corporation.[68] Section 17 incorporation results in an entity that largely acts like any state-chartered corporation.[69]

An Indian corporation may also be organized under tribal or state law.[70] If the entity was formed under tribal law, formation likely occurred pursuant to its corporate code; but it could have also occurred by tribal resolution (i.e., specific legislation chartering the entity).[71] Under federal common law, the corporation likely enjoys immunity from suit.[72] However, it is unclear whether a tribal corporation’s sovereign immunity is waived through state incorporation such that the entity may be sued in state court.[73]

Therefore, when negotiating a tribal business transaction, counsel should consult the tribe’s governmental and corporate information—for example, treaty or constitution, federal or corporate charters, tribal corporate code—which, taken together, identify the entity with which you are dealing, the authority of that entity, and any applicable legal rights and remedies.

There are comparatively few cases decided on the basis of tribal corporate formation, but tribal corporations are often able to claim immunity from suit.  In addition to IRA Section 17 entities, Native Alaskan communities are organized as corporations under some unique provisions within the Alaska Native Claims Settlement Act.  Below find a discussion of recent cases dealing with tribal corporations.[74]

** Some Cases Dealing with Tribal Corporations are discussed in 8.3.3 because they deal with whether a Tribal Corporation may assert their tribe’s sovereign immunity

Hwal’Bay Ba: J Enterprises, Inc. v. Jantzen in & for Cty. of Mohave, 458 P.3d 102 (Ariz. 2020): The Arizona Supreme Court set forth its first-ever test to determine whether an entity is a subordinate economic organization of a tribe and entitled to sovereign immunity.  The plaintiff in this case was a white-water rafter that was injured on a boat operated by Hwal’Bay Ba: J Enterprises, Inc., d.b.a.  Grand Canyon Resort Corporation (“GCRC”).  “GCRC is a tribal corporation whose sole shareholder is the Hualapai Indian Tribe.” The Court decided to grant review here to finally create a state standard to determine when “a tribal entity enjoys sovereign immunity as a ‘subordinate economic organization’ of the tribe,” since this is “a recurring issue of statewide importance.”

The six factors the Court settled on are: (1) The entity’s creation and business form, (2) the entity’s purpose, (3) the business relationship between the tribe and the entity, (4) the tribe’s intent to share immunity with the entity, (5) the financial relationship between the entity and the tribe, and (6) whether immunizing the entity furthers federal policies underlying sovereign immunity.  Applying the six factors to this case, the Arizona Supreme Court found that GCRC was not a subordinate economic organization of the Tribe.  Accordingly, GCRC did not have sovereign immunity.

Applied Scis. & Info. Sys., Inc. v. DDC Constr. Servs., LLC, No. 19-0575, 2020 WL 2738243 (E.D. Va. Mar. 30, 2020): The Navajo Nation’s governing body created the Dine Development Corporation (DDC), “a wholly-owned corporation of the Navajo Nation, to ‘facilitate economic development in and for the Navajo Nation and its citizens by, among other things, forming and assisting to capitalize subsidiary corporations.’” Pursuant to the Navajo Nation Limited Liability Company Act, DDC’s Board of Directors established a limited liability company, DDC 4C, which had a single member parent company—DDC—and “provide[d] construction development and management services, facilities operation and management services, and environmental remediation services.” The plaintiff sued DDC, claiming that it breached the parties’ settlement agreement and asset purchase agreement.

The court recognized that, unlike the tribe, “a tribally created entity is not given a presumption of immunity until it has demonstrated that it is in fact an extension or an ‘arm of the tribe.’” After extensive discussion of the purpose and history of the corporation the federal district court determined that the DDC was an arm of the tribe and, therefore, was immune from suit.  The Court placed special emphasis on the fact that DDC was created for the purpose of promoting tribal self-governance and economic development and that the Navajo Nation controls the Board and therefore has ultimate control of the corporation.

McCoy v. Salish Kootenai Coll., Inc., 785 F. App’x 414 (9th Cir. 2019): The Defendant in a civil action, the Salish and Kootenai Tribal College, claimed sovereign immunity from suit as an arm of the tribal government.  The district court found immunity proper and the Ninth Circuit affirmed.  The appellate court concluded that, while the fact that the College is incorporated under Montana law augers against immunity, all other factors weighed in favor of sovereign immunity because the tribe had “significant control over the College” and “the College is structured and operates for the benefit of” the tribe.

Cadet v. Snoqualmie Casino, No. 19-1953, 2020 WL 3469222 (W.D. Wash. June 25, 2020): Plaintiff brought suit against the Snoqualmie Casino, which was organized and operated under tribal laws and was “wholly owned and operated by the Tribe.” The court recognized that the tribe’s sovereign immunity would only extend to a tribal enterprise if that enterprise functioned as an arm of the tribe.

The court concluded that the Casino was an arm of the tribe and was “therefore immune from suit unless the Snoqualmie Tribal Council has expressly waived sovereign immunity.” The court came to this conclusion because “the Casino is owned and operated by the Tribe on tribal land, [] its purpose is to promote tribal prosperity by providing revenue for the Tribe, [and] the Tribe has intended to extend its sovereign immunity to its enterprises, including the Casino.”

In regard to a waiver of immunity, the Court concluded that the “waiver of sovereign immunity located within the Tort Claims Act does not unequivocally indicate that the Tribe has waived its immunity from suits filed in federal court; instead, the waiver provides a remedy to those who are harmed while on tribal grounds through the tribal court system.” Accordingly, the Casino, as an arm of the tribe, had “not unequivocally waived its sovereign immunity.”

Min Zhang v. Grand Canyon Resort Corp., No. 19-0124, 2020 WL 1000608 (C.D. Cal. Jan. 15, 2020): Plaintiff sued Hwal’bay Bay Enterprises, Inc., d.b.a. Grand Canyon Resort Corporation (“GCRC”).  GCRC was a wholly owned tribal corporation “organized under the laws and constitution of the Hualapai Tribe” and it filed a motion to dismiss by asserting sovereign immunity.

The district court held that GCRC was entitled to sovereign immunity as an “arm of the tribe.” The court explained that “GCRC was created solely under the laws of the Hualapai Indian Tribe as described by the Plan.” Further, GCRC’s purpose is “creating economic development opportunities for the Hualapai Indian Tribe through various commercial activities.” Having concluded that the tribal corporation was generally able to assert immunity the district court further held that despite the presence of a “sue and be sued” clause in a prior corporate charter, there is a “strong presumption against waiver of tribal sovereign immunity.” The court reasoned that the previous charter was “not operative in the Court’s determination of GCRC’s current status as an ‘arm of the tribe’ or its subsequent waiver of sovereign immunity.”

§ 1.4 The Federal Sovereign

§ 1.4 1 Indian Country & Land Into Trust

The IRA authorizes the Secretary of the Interior to take land into trust for the benefit of an Indian tribe’s reservation.[75] In 2009, however, the U.S. Supreme Court issued a landmark ruling reversing the Interior’s prior interpretation of the IRA, 25 U.S.C. § 465, now located at 25 U.S.C. § 5108, and limiting the Secretary’s ability to take land into trust on behalf of tribes.[76] Carcieri held that the Secretary may only acquire land in trust for tribes that (1) were “under federal jurisdiction” in 1934, and (2) currently enjoy federal recognition.[77] This effectively precludes certain tribes from avoiding state tax and regulatory compliance, or conducting gaming or other economic development activities on newly acquired or reacquired lands.

Despite the Carcieri ruling, Interior seems willing to issue final decisions on fee-to-trust applications by tribes that were recognized, restored, or reaffirmed after June 1934 on the basis that the tribe may have been under the jurisdiction of the United States in 1934 even if that recognition was not formally documented.[78] Interior will continue processing applications for tribes that have enjoyed uninterrupted, formal recognition since June 1934 and for tribes that can point to a non-IRA statute granting the Secretary acquisition authority.[79] In sum, any non-Indian party looking to enter into a joint venture with a tribe to develop Indian lands not yet in trust status must pause to consider the implications of Carcieri.[80]

In response to the Carcieri decision, in 2014, the Interior Department issued a Memorandum that provided guidance on the meaning of “under federal jurisdiction.”[81]  The Solicitor’s M-37029 Memorandum outlined a two-part test for interpreting the phrase “under federal jurisdiction.” The first part of this inquiry examines whether, before June 18, 1934, the federal government took an action or series of actions through a course of dealings or other relevant acts reflecting its obligation to, responsibility for, or authority over, an Indian tribe, bringing such tribe under federal jurisdiction.[82] The second prong examines whether this jurisdictional status remained intact in 1934.[83] Satisfying either prong will suffice to establish that the tribe was “under federal jurisdiction.” In a recent decision, Confederated Tribes of Grand Ronde Community of Oregon v. Jewell, the D.C. Circuit Court of Appeals upheld Interior’s application of the two-part test outlined in M-37029.[84] M-37029 appears to be a non-statutory Carcieri fix.

As if Carcieri were not complicated enough, in 2012, the U.S. Supreme Court issued its opinion in Match-E-Be-Nash-She-Wish Band of Pottawatomi Indians v. Patchak.[85] In that case, a local landowner by the name of David Patchak launched a legal challenge against the Interior Secretary’s decision to take the tribe’s land into trust for the purpose of gaming.  Importantly, Patchak did not allege that he had a legal interest in the land to be taken into trust.  Rather, Patchak brought an action under the APA[86] asserting that the IRA did not authorize the Department of Interior to take land into trust for the tribe.  The remedy Patchak sought was the issuance of an injunction prohibiting Interior from taking the land into trust.  The basis for the injunction, in Patchak’s opinion, was that the requirements of the IRA were to be satisfied per the Supreme Court’s opinion in Carcieri.  Both the federal government and the tribe argued that only the Quiet Title Act (QTA)[87] could grant the waiver of sovereign immunity.  Under the theory advanced by the defendants, the APA waiver of sovereign immunity was negated.

The Court determined that the QTA only applies to quiet title actions where a person claims an interest in the property that conflicts with, or is superior to, the government’s claim in the property.[88] In addition, because the exception causing the APA waiver of sovereign immunity to be negated did not apply, the Court held Patchak had standing under the APA to pursue his challenge.

The result of this decision is that any party claiming harm to property nearby proposed trust land, even damage to an “aesthetic” interest, has legal standing under the APA to bring a lawsuit.  This creates considerable risk for casino developers because the statute of limitations under the APA is considerably longer than that of the QTA, creating much more time for a party to challenge Interior’s trust transaction.[89]

The Interior Department revised its land-into-trust regulations at Part 151 in response to the Patchak decision during the Obama Administration, in late 2013.[90] This “Patchak Patch” provides that if the Interior Secretary or Assistant Secretary approves a trust acquisition, the decision represents a “final agency determination” subject immediately to judicial review.[91] If a BIA official issues the decision, however, the decision is subject to administrative exhaustion requirements[92] before it becomes a “final agency action.”[93]  In this instance, parties must file an appeal of the BIA official’s decision within 30 days of its issue.[94] If no appeal is filed within the 30-day administrative appeal period, the BIA official’s decision becomes a “final agency action.” In October 2017, the Trump Administration’s Interior Department announced a consultation regarding a rulemaking that would reverse the “Patchak Patch,” and impose much newer criteria for off-reservation land-into-trust applications.  Assuming that rulemaking results in new Part 151 regulations, litigation will certainly follow.

A brief discussion of several of the year’s most prominent cases involving the diminishment of an Indian reservation and/or the taking of land into trust follow:[95]

** See the U.S. Supreme Court’s July 9, 2020 decision in McGirt v. Oklahoma holding that the Muscogee (Creek) Reservation was not diminished in 8.2.1.

Littlefield v. Mashpee Wampanoag Indian Tribe, 951 F.3d 30 (1st Cir. 2020): In 2015, the Bureau of Indian Affairs (“BIA”) approved the Mashpee Wampanoag Indian Tribe’s (the “Tribe”) land-into-trust application for two parcels of land in Massachusetts.  The BIA concluded the Tribe was eligible to have land taken into trust under the Indian Reorganization Act.  Local non-tribal residents challenged the decision.  The federal district court found that the definition of Indian in the IRA is unambiguous and refers to the entire phrase “members of any recognized Indian tribe now under Federal jurisdiction,” and remanded the application to the BIA.

The First Circuit affirmed the decision, concluding that the Secretary did not have the authority to take the land into trust for the benefit of the Tribe.  Using the principles of statutory interpretation, focusing on the plain meaning, the Court found that “such” refers to the entire phrase including “now under federal jurisdiction.” The Court reasoned that the text lacks a natural break or connector like “or” that would suggest that “such” refers only to a portion of the phrase.  The Tribe argued that, in other cases, the Court found the word “such” to be ambiguous.  But the Court refused to adopt a per se rule for the word “such” because it reasoned that ambiguity depends on context.

Mashpee Wampanoag Tribe v. Bernhardt, No. 18-2242, 2020 WL 3037245 (D.D.C. June 5, 2020): Interior approved the Mashpee Wampanoag Tribe’s land-into-trust application for two areas of land in Massachusetts based on the second definition of “Indian” in the Indian Reorganization Act (“IRA).  The decision was challenged by local non-tribal residents, and the district court found that the Tribe’s members were not “Indian” under the second definition unless they also qualified under the first.  The court remanded the application to the Secretary.  The Secretary decided in 2018 (“2018 Decision”) that the Tribe did not qualify as “Indian” because they were not under federal jurisdiction in 1934.  The Tribe challenged the 2018 Decision, arguing it was arbitrary, capricious, and an abuse of discretion and contrary to law.

The federal district court agreed with the Tribe and remanded the application to the Secretary to reassess.  The Court noted that the 2018 Decision the Secretary repeatedly reasoned that specific pieces of evidence “in and of itself” did not establish federal jurisdiction.  The Court found that this analysis directly contradicts the Solicitor’s M-Opinion, which states that evidence “when viewed in concert” with other probative evidence may support a finding of federal jurisdiction.

Stand Up for California! v. U.S. Dep’t of Interior, 410 F. Supp. 3d 39 (D.D.C. 2019): The Wilton Rancheria Tribe of California submitted a land-into-trust application for land in Elk Grove, California to be used for a casino.  Residents of Elk Grove and an advocacy organization (collectively “Stand Up”) challenged the Bureau of Indian Affairs on five counts.  The Court addressed the first two counts in a different case, finding that the Department had the authority to take the land into trust.  The BIA then accepted Wilton’s application.  The Court addressed the remaining three counts in this case.

A brief history of Wilton is necessary to understand the case.  In 1958, under the California Rancheria Act, the government distributed rancheria lands to various tribes, including Wilton, and then terminated them.  Then in 1994, Congress enacted the Federally Recognized Indian Tribe List Act (“List Act’) which repudiated those terminations and authorized the Secretary to decide whether previous federal recognition supports current recognition.  In 2009, the Department and Wilton entered a stipulated judgment in court that restored Wilton as a federally recognized tribe.

The Court quickly dismissed Count III finding that the plain language of the Stipulated Judgment restored Wilton’s status to what it was before the CRA, meaning Wilton qualified as “Indian” under the Indian Reorganization Act.  For Count IV, Stand Up argued that Wilton could not qualify as a “restored tribe” and Elk Grove could not qualify as a “restored land” to meet the Indian Gaming Regulatory Act (“IGRA”) “restored land” exception.  The Court easily found Wilton qualified as a “restored tribe” based on its previous federal recognition, CRA termination, and Stipulated Judgment restoration.  The Court also found that Elk Grove qualified as a “restored land” because it met all three criteria required in the IGRA.  First, Elk Grove was in the same state as Wilton.  Second, Wilton demonstrated a significant historical connection to Elk Grove by showing it was previously occupied by ancestors of Wilton members, is near historic village sites, and is within a few miles of the last reservation and a historical burial site.  Third, Wilton demonstrated a temporal connection between the date of acquisition and restoration in two independently sufficient ways.  First, Wilton included Elk Grove in its “first request for newly acquired lands” since restoration, and second, Wilton’s application for Elk Grove was submitted within 25 years of restoration.

Finally, Count V challenged the Department’s compliance with the National Environmental Policy and the Administrative Procedure Act.  The Court found that the Department complied with the NEPA when it detailed water analysis and mitigation measures, went beyond NEPA requirements to address public safety risks for a nearby propane facility, and addressed the need for a parking structure and its environmental impacts.  As for the APA, the Court noted it was suspicious that Interior made its decision within 40 hours but found no evidence of bad faith.  The Court accordingly affirmed the right of Interior to take the land into trust for the benefit of the Tribe.

Cherokee Nation v. Bernhardt, No. 12-0493, 2020 WL 1429946 (N.D. Okla. Mar. 24, 2020): The Cherokee Nation of Oklahoma and Cherokee Nation Entertainment, LLC, the Nation’s gaming enterprise, challenged the Assistant Secretary of Indian Affairs of the Department of the Interior’s decision to take a little over two acres of land in Oklahoma into trust for gaming purposes for the benefit of the United Keetoowah Band of Cherokee Indians (the “UKB”).

The Indian Gaming Regulatory Act (“IGRA”) generally bans gaming on lands taken into trust unless an exception permits the land acquisition.  One exception is if the tribe has no reservation and the lands are in Oklahoma “within the boundaries of the Indian tribe’s former reservation, as defined by the Secretary.” The Secretary promulgated a regulation defining “former reservation” as “lands in Oklahoma that are within the exterior boundaries of the last reservation that was established by treaty, Executive Order, or Secretarial Order for an Oklahoma tribe.” Here, the Secretary read the IGRA to give him the authority to determine the existence of a former reservation.  Thus, although the Secretary had previously recognized that the same land was the former reservation of the Nation, he concluded that it was also the former reservation of the UKB.

The Court held, among other things, that the Secretary’s determination was arbitrary and capricious.  The Court reasoned that the plain language of the IGRA gives the Secretary the authority to determine only the boundaries of the former reservation, not the existence of a former reservation.  The Court further reasoned that, even if it accepted the Secretary’s interpretation, because no reservation had ever been established by treaty, Executive Order, or Secretarial Order for the UKB the land cannot have been its former reservation.  Therefore, Court would have found that the Secretary abused his discretion because he ignored his own regulation.

Sault Ste. Marie Tribe of Chippewa Indians v. Bernhardt, No. 18-2035, 2020 WL 1065406 (D.D.C. Mar. 5, 2020): The Sault Ste. Marie Tribe of Chippewa Indians submitted a land-into-trust application to the Department of the Interior for parcels of land in Michigan to develop a casino.  The basis of the application was the Michigan Indian Land Claims Settlement Act (“MILCSA”).  Section 108 of this Act directs the Secretary to transfer the Tribe’s share of damages from lands stolen in the 1800s into a Self-Sufficiency Fund, notes that the Secretary has no responsibility for the use of the Funds nor does use require the Secretary’s approval, and that the Secretary shall take any land into trust that the Tribe acquires using the Fund.  Section 108 also deems the Tribe’s board of directors the “trustee” of the Fund to administer it for one of the listed purposes including for “enhancement of tribal lands.”  The Department denied the Tribe’s application because it found that the Tribe did not establish that the land would be used for the “enhancement of tribal lands.” The Tribe challenged the Department’s authority to decide if the land was acquired for a proper purpose.

The Court found that Congress vested the Tribe’s leaders, rather than the Department, with the power to determine whether the land was acquired for a permissible purpose under the MILCSA.  The Court reasoned that the plain language of Section 108 required the Secretary to take the lands the Tribe acquired with the Fund into trust and left no room for discretion.

Independently sufficient, the Court found that the Tribe acquired the land for “enhancement of tribal lands.”  The Court reasoned that the Department erroneously interpreted “enhancement” as only an increase in value of landholdings rather than an increase in value or amount.  However, the Court refused to order the Department to take the Tribe’s land into trust because the Department had not yet determined whether the Tribe acquired the land with Fund income.  Therefore, the Court set aside the Department’s decision and remanded it for a determination as to the income question.

§ 1.4.2 Federal Approval for Reservation Activity

Due to the unique trust status of Indian lands, contracts involving those lands are subject to various forms of federal oversight.  The Secretary of the Interior must approve any contract or agreement that “encumbers Indian lands for a period of seven or more years,” unless the Secretary determines that approval is not required.[96]  Federal regulations explain that “[e]ncumber means to attach a claim, lien, charge, right of entry, or liability to real property.”[97]  Encumbrances may include leasehold mortgages, easements, and other contracts or agreements that, by their terms, could give to a third party “exclusive or nearly exclusive proprietary control over tribal land.”[98]

Per Section 81’s year 2000 revisions, the Interior Secretary will not approve any contract or agreement if the document does not (1) set forth the parties’ remedies in the event of a breach; (2) disclose that the tribe can assert sovereign immunity as a defense in any action brought against it; and (3) include an express waiver of tribal immunity.[99]  Leaseholds for Indian lands, which typically run 25 years, also require secretarial approval.[100]  Failure to secure secretarial approval could render the agreement null and void.[101]  Therefore, if the transaction implicates tribal lands, counsel should analyze whether the Secretary must approve the underlying contract or lease.[102] Regardless of whether Secretary approval is necessary, all parties should be careful how they draft agreements which may encumber the land.[103] If the contract pertains to a tribal casino, the parties must also consider whether the contract should be submitted to the National Indian Gaming Commission (NIGC) for approval pursuant to the Indian Gaming Regulatory Act (IGRA).[104]  Any “management agreement” for a tribal casino or “contract collateral to such agreement” requires NIGC approval to be valid and enforceable.[105]  The NIGC has recently found that certain consulting, development, lease, and financing documents that confer management authority to the consultant, developer, landlord, or lender thereby constitute a management contract that is void unless approved by the NIGC.

Non-Indian contractors must also consider whether they need to obtain an Indian Traders License from the BIA and/or a tribal business license to properly do business with a tribe.[106]  Federal regulations do not preclude certain tribes from imposing additional fees on non-Indian contractors.[107]  Failure to obtain appropriate licenses could subject the contractor to a fine or forfeiture, if not tribal qui tam litigation.[108]

With much tribal and media fanfare, in 2012, President Obama signed into law the Helping Expedite and Advance Responsible Tribal Homeownership (HEARTH) Act.[109] As noted above, prior to the passage of this bill, under 25 U.S.C. § 415 every lease of a tribe’s lands must undergo federal review and approval by the Secretary of the Interior under a sprawling, burdensome set of regulations.[110] The HEARTH Act changes that scheme of Indian land leasing by allowing tribes to lease their own land.  The Act gives tribal governments the discretion to lease restricted lands for business, agricultural, public, religious, educational, recreational, or residential purposes without the approval of the Secretary of the Interior.  Tribes are able to do so with a primary term of 25 years, and up to two renewal terms of 25 years each (or a primary term of up to 75 years if the lease is for residential, recreational, religious, or educational purposes).

There are some caveats, though.  First, before any tribal government can approve a lease, the Secretary must approve the tribal regulations under which those leases are executed (and mining leases will still require the Secretary’s approval).  Second, before the Secretary can approve those tribal regulations, the tribe must have implemented an environmental review process—a “tribal,” or “mini” National Environmental Policy Act—that identifies and evaluates any significant effects a proposed lease may have on the environment and allows public comment on those effects.  The HEARTH Act authorizes the Interior Secretary to provide a tribe, upon the tribe’s request, with technical assistance in developing this regulatory environmental review process.  HEARTH Act implementing regulations went into effect in 2013.[111]  As of October 2018, the BIA lists twenty-six tribes whose regulations have been approved to exercise the enhanced rights of sovereignty associated with taking control over the leasing of tribal land.[112]

The following highlights several of the more relevant cases decided in the last year.[113]

State v. Ysleta Del Sur Pueblo, 955 F. 3d 408 (5th Cir. 2020): The Attorney General, on behalf of the State of Texas, brought action against federally recognized Indian tribe, the Yselta del Sur Pueblo, seeking to enjoin the tribe from operating certain gaming activities.  This case posed the question which federal law governs the legality of the Pueblo’s gaming operations—the Restoration Act (which bars gaming that violates Texas law) or the Indian Gaming Regulatory Act (which establishes Federal standards for gaming on Indian lands).  The Court concluded that the Restoration Act controls.  In 1987, Congress passed, and President Reagan signed, the Ysleta del Sur Pueblo and Alabama and Coushatta Indian Tribes of Texas Restoration Act.  But the Pueblo’s “restoration” came with a catch: In exchange for having its federal trust status restored, the Pueblo agreed that its gaming activities would comply with Texas law.  Not all tribes fall under the Restoration Act, many tribes conduct gaming operations under the less restrictive Indian Gaming Regulatory Act (IGRA).

The Fifth Circuit affirmed the district court’s conclusion that the Restoration Act governs gaming by the relevant Tribe.  As held in Ysleta I, Texas gaming law “functions as surrogate federal law” on the land of Restoration Act tribes.  Therefore, the Pueblo are subject to Texas’ regulations.  The Restoration Act governs the legality of the Pueblo’s gaming activities and prohibits any gaming that violates Texas law.

§ 1.4.3 Labor and Employment Law & Indian Tribes

When Indian tribes act as commercial entities and hire employees, they are not subject to the same labor and employment laws as nontribal employers.  For example, state labor laws and workers’ compensation statutes are inapplicable to tribal businesses.[114] Moreover, tribal employers may not be subject to certain federal labor and employment laws.[115]

Tribal employers are ordinarily exempt from antidiscrimination laws.  Both Title VII of the Civil Rights Act of 1964[116] and the Americans with Disabilities Act[117] expressly exclude Indian tribes,[118] and state anti-discrimination laws usually do not apply to tribal employers.[119] In addition, tribal officials are generally immune from suits arising from alleged discriminatory behavior.[120]

The circuits remain severely split regarding the application of federal regulatory employment laws to tribal employers.  The Eighth and Tenth Circuits have refused to apply to tribes such laws as the Occupational Safety and Health Act (OSHA),[121] the Employee Retirement Income Security Act (ERISA),[122] the Fair Labor Standards Act (FLSA),[123] the National Labor Relations Act (NLRA),[124] and the Age Discrimination in Employment Act (ADEA),[125] because doing so would encroach upon well-established principles of tribal sovereignty and tribal self-governance.[126]

Conversely, the Second, Seventh, and Ninth Circuits have applied OSHA and ERISA to tribes.[127] Moreover, the Seventh and Ninth Circuits lean toward application of FLSA to tribes.[128] These circuits reason that, because Indian tribes are not explicitly exempted from these statutes of general applicability, the laws accordingly govern tribal employment activity.[129] Following this reasoning, the Department of Labor has stated that the FMLA[130] applies to tribal employers.[131] However, aggrieved employees may experience difficulty enforcing federal employment rights due to the doctrine of sovereign immunity.[132] For example, the Second Circuit has held that, because Congress did not explicitly authorize suits against tribes in the language of the FMLA or the ADEA, tribal employers cannot be sued for money damages in federal court by employees under these statutes.[133]

Questions remain concerning whether federal statutes of general applicability extend beyond the labor and employment arena where they do not affirmatively contemplate whether Indian tribes govern tribal or reservation-based activities.  For example, do federal franchise laws apply in Indian Country? What about the federal Copyright Act or other federal intellectual property statutes? What about Sarbanes-Oxley? While subject to the split in circuits discussed immediately above, it is unclear in which federal jurisdictions a court would hold that such federal laws apply to tribes.[134]

In the last year, federal courts have continued to decide cases involving the application of federal labor and employment rules to tribal employers.  More generally, courts have grappled with how to apply statutes of general applicability to tribal sovereigns.  Several of the most prominent cases from the last year are discussed below:[135]

Tsosie v. Arizona Public Service, No. SC-CV-03-15, 2020 WL 3265425 (Navajo 2020).  The Arizona Public Service (“APS”) terminated Eldon Tsosie from his employment at the Four Corners Power Plant, a coal-fired generating plant located on trust land within the Navajo Reservation.  APS had a lease with the Navajo Nation for the development of the plant subject to the Four Corners Generating Preference Plan for hiring Native Americans.  The Preference Plan included provisions on selection, goals, training, recruiting, advertising, and dispute resolution, and was approved by the Navajo Nation Council.  The Preference Plan required any employment concerns to be resolved by an “Advisory Committee” having at “least two members of the Navajo Nation government.”

Tsosie filed a Complaint with the Navajo Nation Labor Commission “claiming APS terminated his employment…in violation of the Navajo Preference in Employment Act (“NPEA”).”  The NPEA requires employers provide “just cause” when terminating employees.  After unsuccessful settlement negotiations, the NNLC granted APS’s Motion to Dismiss, noting the Council had the authority to approve the alternative dispute process; Four Corners Generating Preference Plan.

Tsosie appealed and the Supreme Court of the Navajo Nation relied on the “Navajo Fundamental Law” to conclude the Council had the duty and authority to approve the lease and its amendments with APS.  The Supreme Court noted employment is “central to living a good life”; therefore, “the duty and authority to legislate or regulate employment relationships cannot be delegated or handed over wholesale to a non-Navajo entity.”  The Court reasoned that the Council “did not waive Navajo law but approved an alternative process…in adherence with Navajo law.”  Ultimately, the Court affirmed the Labor Commission’s dismissal because “the Council found a viable solution to ensure the Four Corners’ operation for jobs and economic development for the Navajo people,” in adherence to Navajo Fundamental Law.

Wilhite v. Littlelight, No. 19-0020, 2020 WL 1332231 (D. Mont. 2020):  Tammy Wilhite was fired from the Awe Kualawaache Care Center where she worked as a registered nurse.  The Care Center, owned by the Crow Tribe of Indians, “is a long-term nursing facility that provides 24-hour medical services exclusively to members of the Crow and Northern Cheyenne Tribes,” and operates under a “638 contract” between the Tribe and the federal government.  The contract provides for tribal administration of programs previously operated by the Bureau of Indian Affairs.

A patient confided in Wilhite that he was molested while being transported, allegedly by an individual related to Defendant Catolster.  Wilhite reported the incident to Catolster, but no action was taken, so Wilhite reported the incident to law enforcement.  After an investigation, the Montana Department of Public Health and Human Services substantiated the allegations in a report, which was made available to Catolster.  Wilhite was then terminated.  Wilhite subsequently brought this suit for wrongful termination alleging that she was fired for reporting “patient abuse to law enforcement.”

Wilhite’s initial claim was dismissed on the basis of sovereign immunity, and she filed a second action under the Federal Tort Claims Act directly against the individuals involved in the decision to terminate her employment.  The Defendants filed two motions to dismiss, arguing first that “Wilhite failed to state a claim upon which relief can be granted because her claim [was] barred by the [FTCA],” and, second, that the claim was “precluded by the doctrine of res judicata.”

The federal district court denied both motions.  It first held that the Defendant did not follow the proper procedure for invoking immunity FTCA and there was no basis to sustain the motion to dismiss for failure to state a claim.  The court then concluded that Wilhite’s first case was dismissed on the basis of sovereign immunity and so did not reach the merits required to qualify as preclusive.  The court relied on the Ninth Circuit’s two-part test to determine whether a Tribal employee’s actions are covered by the FTCA, which stated “first…courts must determine whether the alleged activity is…encompassed by the relevant federal contract or agreement,” and “[s]econd, courts must decide whether the allegedly tortious action falls within the scope of the tortfeasor’s employment under state law.” Because the previous ruling did not adequately address these issues, the Defendants’ motion was denied.

Janiver v. Seminole Hard Rock Hotel Casino, No. 19-62204, 2020 WL 509997 (S.D. Fla. 2020):  This claim arose from a complaint purporting to “allege a cause of action for employment discrimination based on race and national origin under Title VII.”  The Plaintiff alleged that, in response to her interest in a customer service representative position with the Seminole Tribe, an employee in human resources told her she “can only work in the back to do dishes” because she was Black and from Haiti.  The Plaintiff brought a suit against the Seminole Hard Rock Hotel Casino, which was removed to the District Court for the Southern District of Florida.  The Defendant filed a motion to dismiss because the proper defendant was the Seminole Tribe of Florida.

The Court granted the dismissal.  It held that the Seminole Tribe “is a federally recognized Indian tribe exempt from suit under Title VII” and that the Tribe did not waive immunity so there was no subject matter jurisdiction.  The Court also explained that the Plaintiff “failed to allege that she properly and timely exhausted her administrative remedies prior to filing the suit,” which is required before bringing an action under Title VII, “and that Plaintiff’s Complaint otherwise failed to state an actionable claim.” In denying the Plaintiff’s Motion to Reopen the Case, the court reiterated that Title VII does not apply to Indian tribes so there is no subject matter jurisdiction.

Thurmond v. Forest County Potawatomi Community, No. 18-1047, 2020 WL 488864 (E.D. Wis. 2020):  The Plaintiff filed a complaint against the Forest County Potowatomi Community and several employees of the Potowatomi Bingo Casino, alleging “the defendants discriminated against him based on his race and his verbal tic.” The defendants filed a motion to dismiss the complaint for failure to state a claim because “federal laws don’t apply to Indian tribes or their employees.”

Although it was unclear in the complaint, the court assumed that the Plaintiff was alleging either a violation of his civil rights under 42 U.S.C. § 1983, a violation of Title VII, or a violation of the Americans with Disabilities Act (the “ADA”).  As to the § 1983 claim, the court noted the Plaintiff can only sue the Defendants if they were “acting under color of any statute, ordinance, regulation, custom, or usage, of any State or Territory or the District of Columbia.” The court rejected this argument because the Defendants were “a sovereign Indian tribe and employees of that tribe” and were not employees of Wisconsin, of a territory, or of the district.  Furthermore, the Court recognized “an Indian tribe is not a ‘person’ subject to suit under § 1983.”

As to the Title VII claim, the court noted a person cannot sue an Indian tribe for violating Title VII, “even if the tribe discriminated against him in his employment based on his race,” because Title VII specifically says, “the term ‘employer’…does not include…an Indian tribe.”  The court further noted “a supervisor does not, in his individual capacity, fall within Title VII’s definition of employer.”

Finally, as to the ADA claim, the court noted the ADA specifically excludes Indian tribes from the definition of employer, and that “individuals who do not otherwise meet the statutory definition of ‘employer’ cannot be held liable under the ADA.” As such, even if the plaintiff was discriminated against based on a disability, he “cannot state an ADA claim.”

§ 1.4.4 Federal Court Jurisdiction

Federal court jurisdiction is limited to cases that invoke a federal court’s limited subject matter jurisdiction.  Such cases may involve a federal question[136] or claims that are brought involving diversity of citizenship.[137] Litigation that arises from a deal with a federally recognized tribe, or otherwise has federal overtones, does not necessarily present a federal question that will allow a federal district court to assume jurisdiction,[138] nor does the possibility that a tribe may invoke a federal statute in its defense confer federal court jurisdiction.[139] Moreover, courts have generally held that a tribe is not a citizen of any state for diversity purposes and, therefore, cannot sue or be sued in federal court based on diversity jurisdiction.[140] However courts are split on whether a business incorporated under federal statute, state law, or tribal law can qualify for diversity jurisdiction.[141] Because the potential judicial forums for commercial litigation arising out of Indian Country are likely restricted to state or tribal court, choosing federal court as the choice of venue may not make sense.

The following highlights several of the more relevant cases decided in the last year.[142]

Landreth v. United States, 797 F. App’x 521 (Fed. Cir. 2020):  Plaintiff Landreth brought an action against the United States as a trustee for the Quinault Indian Nation.  The Tribe had allegedly been asserting jurisdiction and control over Lake Quinault, forcing out the public owners, and restricting all uses of the lake for non-tribal members.  Landreth brought claims for deprivation of property rights by the Tribe’s trespassory actions, conversion of Lake Quinault, tortious interference with property, private nuisance, violations of the U.S. Constitution, and violations of various federal and Washington state laws.  The government filed a motion to dismiss for lack of subject matter jurisdiction, which the Claims Court granted.

The Federal Circuit affirmed.  It held that Landreth’s complaint failed to allege a taking by the United States sufficient to confer Tucker Act jurisdiction on the Claims Court because the complaint failed to mention the Takings Clause of the Fifth Amendment.  The court found that every alleged wrongful act was committed by the Tribe, not the United States, and the complaint did not allege sufficient facts to establish the responsibility of the United States for actions taken by the Tribe.  While there is a “general trust relationship between the United States and the Indian people,” Landreth did not demonstrate why the United States, as trustee, should be liable for the alleged wrongful acts of the Tribe.  Even if the United States was responsible for the alleged wrongful acts of the Tribe, the Federal Circuit held that the complaint failed to allege a valid takings claim under the Fifth Amendment.

Gila River Indian Cmty. v. Cranford, No. 19-0407, 2020 WL 2537435 (D. Ariz. May 12, 2020):  The Gila River Indian Community (“GRIC”) alleged that the defendants unlawfully irrigated their lands with well water from the Gila River, in derogation of GRIC’s rights.  GRIC’s complaint asserted four separate bases for jurisdiction, including subject-matter jurisdiction under 28 U.S.C. §§ 1362 and 1331.  The defendants filed a Rule 12(b)(1) motion to dismiss for lack of jurisdiction.

The federal district court found jurisdiction to be proper. § 1362 provides that district courts have original jurisdiction over “all civil actions, brought by any Indian tribe or band with a governing body duly recognized . . . wherein the matter in controversy arises under the Constitution, laws, or treaties of the United States.” Claims brought by a tribe to protect its federally derived property rights, including “possessory rights of the tribes to tribal lands” granted and governed by federal treaties and laws, are within the scope of § 1362.  The Court concluded that GRIC’s claims for water rights, rights which are held in trust by the United States and derived from federal law, are within the scope of § 1362.

The district court further held that § 1331 also conferred federal jurisdiction over the action.  It reasoned that a case brought by an Indian tribe to protect its water rights would “nearly always require recourse to federal law” as “[t]ribal water rights are created by the federal government and rooted in federal law.” Because the GRIC’s rights to the land, and the water rights appurtenant to the land, were granted and governed by federal law, the Tribe’s claim raised a federal question.

Leachmand v. United States, No. 19-0082, 2020 WL 1511262 (D. Mont. Mar. 30, 2020):  Members of the Fort Peck Indian Reservation brought a civil case in Fort Peck Tribal Court for breach of contract and other claims.  The tribal trial court ruled in favor of the tribal members, but the Tribal Court of Appeals reversed, finding that the tribal trial court had violated the appellee’s rights to due process and equal protection.

The tribal members then filed a claim in federal court under the Federal Tort Claims Act against the United States (“Government”) because the federal Bureau of Indian Affairs funded the Fort Peck Tribal Court.  The Government filed a motion to dismiss for lack of subject matter jurisdiction and the federal district court dismissed the complaint with no leave to amend.

The Court explained that, even if there was subject matter jurisdiction over the Government to hear the claims, the complaint had to be dismissed because Montana, the state in which the underlying contract dispute arose, recognized judicial immunity for members of the judiciary “for damages arising from the lawful discharge of an official duty associated with judicial actions of the court.” Thus, Montana’s judicial immunity would bar Plaintiffs from pursuing monetary damages against a federal judicial officer acting in their official capacity.  Here, even if the Government set up, funds, and administers the Fort Peck Tribal Court, the Tribal Court judge was protected by judicial immunity.  Given that the United States was exempt from suit under the theory of sovereign immunity and the Tribal Court judge had judicial immunity, the district court dismissed the case for lack of subject matter jurisdiction.

Cherokee Nation v. Dep’t of Interior, No. 19-2154, 2020 WL 224486 (D.D.C. Jan. 15, 2020):  This case arose from the Cherokee Nation’s request for an accurate accounting of its Trust Funds held by the Department of the Interior and other federal defendants (collectively, the “Government”).  The Government filed a motion to dismiss on jurisdictional grounds, arguing that sovereign immunity barred the lawsuit and that the Nation failed to set forth any relevant federal statutes for its claims.  The district court denied the Government’s motion, finding the Nation had met its burden at this stage of the litigation.

The Court found that there was federal question jurisdiction under 28 U.S.C. § 1331 because district courts have original jurisdiction over civil actions arising under the Constitution, laws, or treaties of the United States.  The D.C. Circuit has consistently interpreted the United States’ duties regarding Indian trust accounts “in light of the common law of trusts and the United States’ Indian policy” and that this case specifically involved trust accounting claims under statute, common law, and the Administrative Procedure Act (“APA”).  The Court further recognized that § 702 of the APA waived the Government’s immunity from actions when the requested relief is nonmonetary.  Accordingly, the Court found it had subject matter jurisdiction over the suit.

Ysleta Del Sur Pueblo v. City of El Paso, 433 F. Supp. 3d 1020 (W.D. Tex. 2020):  The Ysleta Del Sur Pueblo (“Pueblo”), a federally recognized Indian tribe, sought judicial confirmation of the Pueblo’s title to certain real property in Texas, claiming that the 1751 Spanish Land Grant vested ownership rights in the Pueblo.  Pueblo asked the Court to enter declaratory judgment that the City of El Paso had no estate, right, title, or interest in the property at issue.  The City filed a motion for summary judgment, which the district court construed as a motion to dismiss for lack of subject-matter jurisdiction and a motion for summary judgment in the alternative.

Pueblo asserted that the Court had subject-matter jurisdiction under 28 U.S.C. § 1331 and under § 1362 for civil lawsuits brought by Indian tribes.  The court held that § 1362 would provide a jurisdictional basis for a tribe’s claims only if the claims satisfied the “arising under” requirement of § 1331.  Pueblo invoked the Treaty of Guadalupe Hidalgo for their suit, asserting that the right to the property at issue derived from the 1751 Spanish Land Grant that was allegedly “recognized by federal law, and the laws of Spain and Mexico, and preserved by the United States in the Treaty of Guadalupe Hidalgo.”

The Court ruled that the claim did not raise a federal question because (1) the cause of action was not based on federal law, but rather state law; and (2) the Pueblo’s asserted right to the property at issue was not a federally derived right with a substantial federal issue.  Because an action to quiet title is rooted in state law, and the mere presence of a federal issue in a state cause of action does not automatically confer federal question jurisdiction.

Kangarlou v. Locklear, No. 18-2286, 2019 WL 5964008 (D. Nev. Nov. 13, 2019): Locklear, a member of the Lumbee Tribe of North Carolina, assaulted Kangarlou on the gaming floor of the Mirage Casino while he was attending a conference on behalf of the Lumbee Land Development, Inc. Kangarlou sued Locklear for assault and battery and sued the Lumbee Tribe (a non-federally recognized Tribe), Lumbee Land Development, Inc., and Lumbee Tribe Holdings, Inc. for negligence.

The district court held that “the presence of an unincorporated tribe destroys diversity.” Because an unincorporated Indian tribe is not a citizen of any state under 28 U.S.C. § 1332(a)(1), a tribe cannot sue or be sued in diversity “because they are not citizens of any state.” However, if an Indian tribe incorporates, it “may have state citizenship for diversity of citizenship purposes.  As “the parties are not diverse within the meaning of § 1332(a)(1) because an Indian tribe is not a citizen of any state,” there is not complete diversity of the parties.  Thus, because Kangarlou joined the unincorporated Lumbee Tribe in this suit, diversity was destroyed, and the complaint was dismissed with leave to amend.

Toahty v. Kimsey, No. 19-01308, 2019 WL 5104742 (D. Or. Oct. 11, 2019):  Pro se plaintiff Toahty brought a case for sexual misconduct, sexual harassment, and retaliation against Kimsey, the Tribal Employment Rights Ordinance Division’s Assistant Director with the Confederated Tribes of Grande Ronde.  Toahty alleges he was subject to sexual misconduct and harassment by Kimsey and that, when he reported this conduct to the T.E.R.O., he was subjected to retaliation.

The court found that there was no federal question jurisdiction, as Toahty failed to cite any federal law or constitutional provision in his complaint.  Even if he was able to assert a claim for employment discrimination, “Title VII excludes Indian tribes,” and civil liability for employment discrimination does not extend to individual agents of the employer.  Toahty’s complaint also failed to allege diversity of citizenship.  The Tribe was not a citizen of any state, so it could not be sued in diversity.  Accordingly, the court dismissed the complaint without prejudice.

§ 1.5 The State Sovereign

With billions of dollars being exchanged in Indian Country, state government is naturally looking for a piece of the action, giving rise to tax clashes between tribes and their business partners, and states and counties.  These conflicts are primarily decided under the “federal preemption doctrine,” which asks whether a state’s attempted regulation or taxation of non-Indian activities in Indian Country is preempted by federal statutes or treaties, taking into account overarching notions of tribal sovereignty.[143]

Generally, state taxes apply to everyone “outside a tribe’s reservation” and are “federally preempted only where the state law is contrary to express federal law.”[144]  Within Indian Country, on the other hand, “the initrequently dispositive question in Indian tax cases is who bears the legal incidence of the tax.”[145]  When the legal incidence falls on tribes, tribal members, or tribal corporations,[146] “[s]tates are categorically barred” from implementing the tax.[147]

When the legal incidence falls on non-Indians, however, a more nuanced analysis applies.  Although, historically, the U.S. Supreme Court asked whether any assertion of state power on Indian land would impinge on the tribal right to make its own laws and be ruled by them, in recent years, the High Court has moved away from that inherent tribal sovereignty analysis in favor of a federal preemption regime.[148] Because Congress does not often explicitly preempt state law,[149] the Supreme Court and the lower federal courts engage in a balancing act to determine whether tribal self-governance rights, bolstered by federal laws, preempt state laws.[150] This balancing act weighs a state’s interest in policing non-Indian conduct against combined federal and tribal interests in regulating affairs that arise out of tribal lands within the state’s boundaries.[151]

In New Mexico v. Mescalero Apache Tribe,[152] the Supreme Court explained that “state jurisdiction is preempted by the operation of federal law if it interferes or is incompatible with federal and tribal interests embodied in federal law, unless the state interests at stake are sufficient to justify the assertion of state authority.”[153]  In Mescalero, the Court held that New Mexico could not impose its own fishing and hunting regulations on non-Indians on the reservation because of strong federal interests in “tribal self-sufficiency and economic development” and a lack of state interests.[154]

When non-Indian parties operate in Indian Country, lawyers must proactively evaluate whether, or to what extent, a state or local government’s interest in policing or taxing conduct that relates to neighboring tribal lands outweighs relevant federal and tribal interests pertaining to that same conduct arising within those lands.

The issues of preemption and infringement are regularly litigated in the federal courts.  The following highlights several of the more relevant cases decided in the last year.[155]

Cayuga Nation v. Tanner, No. 14-1317, 2020 WL 1434157 (N.D.N.Y. Mar. 24, 2020): In 2003, the Cayuga Nation purchased, in fee simple by indenture deed, a parcel of land in the Village of Union Springs within the bounds of the Cayuga Historic Reservation.  After the Nation began renovating the parcel to contract a gaming facility under the Indian Gaming Regulatory Act, the Village sought to apply its local laws and ordinances to the development.

In 2019, the Nation filed an amended complaint seeking declaratory and injunctive relief against the Village and its officials and argued that all local regulation was preempted by IGRA.  The federal court agreed.  The court reasoned that the parcel qualifies as “Indian lands” because the unrestricted language of the IGRA includes all lands within the limits of any Indian reservation.  Second, in evaluating the jurisdictional requirement for IGRA Class II gaming, the court rejected the claim that Sherrill precluded the Nation from exercising any sovereignty over the parcel.  The court noted that Sherill’s advice to pursue the land-into-trust process was not the exclusive means for establishing IGRA jurisdiction on repurchased historic reservation land.  Instead the court concluded that an Indian Tribe is not required to exercise exclusive governmental authority to satisfy the jurisdiction requirement; some jurisdiction, even if concurrent with state and local authorities satisfies this test.  Because the Nation exercised concurrent jurisdiction over the parcel the IGRA applied and preempted the Village from regulating the Tribe’s gaming activities via local laws and ordinances.

Swinomish Indian Tribal Cmty. v. BNSF Ry. Co., 951 F.3d 1142 (9th Cir. 2020): The Interstate Commerce Commission Termination Act of 1995’s preemption clause is only applicable to state laws and actions; however, it does not repeal the Indian Right of Way Act nor abrogate the Treaty of Point Elliot.

Over a century ago, a predecessor to BNSF Railway Co. built a railroad across the Swinomish Indian Tribal Community without the Tribe’s consent.  Litigation ensued and resulted in a Settlement Agreement and an Easement Agreement.  Subsequently, BNSF obtained a right-of way (ROW) across the reservation under the Indian Right of Way Act of 1948.  The ROW incorporated the easement terms which included a daily maximum of one train in each direction with a maximum of 25 railcars and an annual reporting requirement detailing the cargo carried by the trains.  However, BNSF failed to comply with these terms.

The Tribe filed suit in 2015 seeking a declaratory judgment that BNSF breached the Easement Agreement, injunctive relief limiting the train traffic in accordance with the Agreement, and damages for both trespass and breach of contract.  BNSF contended that the Tribe’s claims were pre-empted by the Interstate Commerce Commission Termination Act of 1995 (ICCTA).  The district court ruled against BNSF on the breach of contract claim.

After hearing BNSF’s interlocutory appeal, the Ninth Circuit held that the ICCTA does not preclude the use of injunctive relief to enforce the terms of the Easement Agreement.  First, the court noted that the ICCTA only preempts “actions by states or localities” or “all state laws”.  The ICCTA’s preemption applies to the regulation of railroads; however, ROW easements are a voluntary agreement and not regulation, even in a state-law context.  Further, there is nothing in the legislative language or history to suggest that Congress intended the ICCTA to repeal the Indian Right of Way Act, nor to abrogate the Treaty of Point Elliot.  Because it does not repeal the Indian Right of Way Act, nor abrogate the Treaty of Point Elliot, the Tribe has a right to pursue injunctive relief to enforce the terms of the Easement Agreement.

Herpel v. Cty. of Riverside, 258 Cal. Rptr. 3d 444 (Cal. App. 2020):  The Agua Caliente Band of Cahuilla Indians has reservation land spread across three cities in Riverside County.  Some land is owned in trust by the federal government for the benefit of the Tribe and some is owned in trust for the benefit of individual Tribe members (Allotted Land).  Plaintiffs each hold a leasehold or other possessory interest in Allotted Land.  Plaintiffs filed a class action suit contending that the County’s possessory interest tax is preempted by federal law.  The trial court entered judgement in favor of the defendants and the plaintiffs appealed.

The Bracker interest test calls for courts to inquire into the “state, federal, and tribal interests at stake” to determine whether “in the specific context, the exercise of state authority would violate federal law.” In considering the federal interests, the court noted that the regulations governing the Long-Term Leasing Act do not signal an intent by Congress to exclude state taxation, but instead a simple purpose of removing restrictions that disadvantage tribal economic development.  In evaluating the Tribe’s interest, the court noted that the tax does not fall on the Tribe and that there is no evidence to suggest that the Tribe would be negatively affected if it imposed its own tax in addition to state or local tax on parcel holders.  Lastly, in evaluating the state’s interest, the court noted that the state interest in funding state services that have a substantial connection with on-reservation activity (police, fire, health and sanitation, road maintenance, etc.) is sufficient to justify the County possessory interest tax.

Video Gaming Techs., Inc. v. Rogers Cty. Bd. of Tax Roll Corr., 2019 OK 83, cert. denied, No. 19-1298, 2020 WL 6121479 (U.S. Oct. 19, 2020): Plaintiff owns Video Gaming Technologies Inc. (VGT), a non-Indian Tennessee corporation authorized to do business in Oklahoma.  The Plaintiff leased electronic gaming equipment to Cherokee Nation Entertainment (CNE), a business entity of the Cherokee Nation.  CNE gaming facilities are all located on tribal trust land.  Plaintiff sought relief from assessment of ad valorem taxes on the leased equipment imposed by Rogers County.  The district court found for the defendant, holding that Oklahoma’s tax statutes were not preempted by the IGRA.  Plaintiffs appealed contending that the taxes on equipment are indeed preempted by federal law.

The Oklahoma Supreme Court noted that, because the gaming equipment is used exclusively in a tribal gaming operation, it is “inextricably intertwined” with the regulation of gaming activities, and, therefore, IGRA applies to the dispute.  Next, the Court went on to apply the Bracker interest test.  Evaluating federal interests, the court noted that in enacting the IGRA Congress had a strong interest in prevention of corruption through the oversight over gaming and gaming equipment.  In evaluating the Tribe’s interest, the court noted that the tax burden will ultimately fall on the Nation because the County may seize property when taxes are not paid; thus, the County’s remedy for delinquent taxes would directly impact the Nation’s economic well-being.  Lastly, in evaluating the state’s interest, the court noted that the County provides no evidence that the taxes fund any regulatory services or function to VGT; an interest in revenue is insufficient to justify taxation.

The Oklahoma Supreme Court ultimately concluded that the state’s interests fail the Bracker test; because the IGRA’s comprehensive regulations occupy the field of ad valorem taxes imposed on gaming equipment used exclusively in tribal gaming, the present taxation of gaming equipment is preempted.  The Supreme Court denied cert. on October 19, 2020 over a dissent from denial of certiorari by Justice Thomas.  (See discussion of the denial of cert. in §8.2.2 above).

New York v. Mountain Tobacco Co., 942 F.3d 536 (2d Cir. 2019): Mountain Tobacco Company (MTC) shipped unstamped and untaxed cigarettes from the Yakama Indian Reservation in Washington State to Indian Reservations in New York State.  New York brought suit to enjoin MTC from making these shipments, claiming that they violated state and federal law. The district court granted partial summary judgment for the State on claims that MTC violated state laws on cigarette sales, enjoined future violations, and ruled that the injunction is not a violation of the Dormant Commerce Clause.  MTC appealed arguing that New York’s enforcement violates the Dormant Commerce Clause and that the injunction violates the Indian Commerce Clause and the Yakama Treaty of 1859.  The State cross-appealed claiming that the cigarette shipments were interstate commerce under Prevent All Cigarette Trafficking Act (PACT) and that MTC does not qualify for the “an Indian in Indian country” exception under the Contraband Cigarette Trafficking Act (CCTA).

The Second Circuit Court of Appeals ruled that there was no violation of the Dormant Commerce Clause because a lack of universal enforcement across in-state and out-of-state entities “does not bespeak discrimination.” Next, the court held that the state tax was not a violation of the Indian Commerce Clause because the tax falls on non-Indian consumers and New York’s stamping regime does not place an undue burden on MTC.  Despite these initial findings the Court ultimately held that the imposition of the State tax was preempted by the CCTA.  MTC is a business organized under Yamaka law, located on the Yakima reservation, and owned by a Yakima tribal member.  It is exempt from the CCTA under the “Indian in Indian Country” exception.  While the term “Indian” has not been defined by the CCTA, the court “decline[d] to interpret § 2346(b)(1) to mean that an “Indian” is not a “person,”” In turn, “person” has been defined to include corporations; therefore, MTC fits within this interpretation of the exception.

§ 1.6 Conclusion

Economic growth and development throughout Indian Country have spurred many businesses to engage in business dealings with tribes and tribal entities.  Confusion may arise during these transactions because of the unique sovereign and jurisdictional characteristics attendant to business transactions in Indian Country.  As a result, these transactions have prompted increased litigation in tribal and nontribal forums.  Accordingly, counsel assisting in these transactions, or any subsequent litigation, should conduct certain due diligence with respect to the pertinent tribal organizational documents and governing laws that may collectively dictate and control the business relationship.

To maximize the client’s chances of a successful partnership with tribes and tribal entities, counsel should ensure that the transactional documents contain clear and unambiguous contractual provisions that address all rights, obligations, and remedies of the parties.  Therefore, even if the deal fails, careful negotiation and drafting, and, in turn, thoughtful procedural and jurisdictional litigation practice, will allow the parties to more expeditiously litigate the merits of any dispute, without jurisdictional confusion.  As business between tribes and nontribal parties continues to grow, ensuring that both sides of the transaction fully understand and respect the deal will lead to a long-lasting and beneficial business relationship for all.

*        Grant Christensen is an Associate Professor of Law at the University of North Dakota School, the director of the law school’s Indian Law Certificate program, an Affiliated Associate Professor of American Indian Studies, and an Associate Justice on the Standing Rock Sioux Tribe’s Supreme Court. He is also one of the ABA Business Law Section’s Business Law Fellows for the 2018-2020 term. In addition to his J.D., Grant also holds an LL.M. in Indigenous Peoples Law and Policy from the University of Arizona and was a Fulbright Scholar. Before arriving at North Dakota, he taught Federal Indian Law at the University of Oregon as a Visiting Professor and at the University of Toledo as a Lecturer. Grant is the co-chair of the Tribal Court Litigation Subcommittee.

†        Ryan D. Dreveskracht is an attorney with Galanda Broadman PLLC. Ryan practices out of the firm’s Seattle office, focusing on representing businesses and tribal governments in complex litigation. He is also devoted to defending individuals’ constitutional rights and handles civil rights and intentional tort cases.

**        Heidi McNeil Staudenmaier is a Senior Partner with Snell & Wilmer LLP in Phoenix, Arizona, where her practice emphasizes Gaming Law, Native American Law, and Business Litigation. She has been recognized in Best Lawyers in America for many years and was named Best Lawyers “Phoenix Native American Law Lawyer of the Year” for 2015 & 2017 and “Phoenix Gaming Law Lawyer of the Year” for 2011, 2016, 2018 & 2020. Heidi is listed in Southwest Super Lawyers, Chambers Global and Chambers USA (Leading Lawyers for Business) for Native American Law and Gaming/Licensing. She is a member of the ABA Business Law Section’s Executive Council, Past Chair of the Business and Corporate Litigation Committee, an active member of the Gaming Law Committee, Past Editor-in-Chief of Business Law Today, Past Editor of the “Annual Review of Recent Developments in Business & Corporate Litigation,” and a former Section Fellow. Heidi received the prestigious Business Law Section Jean Allard Glass Cutter Award in 2019. Also, in 2019, she was inducted into the Maricopa County Bar Association Hall of Fame, named among the “Women Achievers of Arizona”, honored as Greater Phoenix Chamber Athena Finalist, and received the University of Iowa College of Law Alumni Service Award. In addition, she has been recognized among the AZ Business Leaders 2020 and 2021.

[1]        The Honorable Sandra Day O’Connor, Lessons from the Third Sovereign: Indian Tribal Courts, 33 TULSA L.J. 1 (1997).

[2]        Jack F. Williams, Integrating American Indian Law into the Commercial Law and Bankruptcy Curriculum, 37 TULSA L. REV. 557, 560 (2001).  See also Frank Pommersheim, What Must Be Done to Achieve the Vision of the Twenty-First Century Tribal Judiciary, 7 Kan. J.L. & Pub. Pol’y 8, 11-12 (1997).

[3]        Frank Pommersheim, What Must Be Done to Achieve the Vision of the Twenty-First Century Tribal Judiciary, 7 Kan. J.L. & Pub. Pol’y 8, 17 (1997).

[4]        Worcester v. Georgia, 31 U.S. (1 Pet.) 515, 559 (1832).

[5]        Id.

[6]        United States v. Kagama, 118 U.S. 375, 381-82 (1886).

[7]        Grant Christensen, A View from American Courts: The Year in Indian Law 2017, 41 Seattle U.L. Rev. 805 (2018).

[8]        Id. at 811.

[9]        See, e.g., Oneida Nation v. Vill. of Hobart, 968 F.3d 664, 667 (7th Cir. 2020).

[10]       TRIBAL COURT CLEARINGHOUSE, JUSTICE SYSTEMS OF INDIAN NATIONS [hereinafter TRIBAL COURT HISTORY], http://www.tribal-institute.org/lists/justice.htm (last visited Oct. 14, 2020).

[11]       Id.

[12]       B.J. Jones, Role of Indian Tribal Courts in the Justice System, NATIVE AMERICAN MONOGRAPH SERIES, Mar. 2000, at 6, http://www.icctc.org/Tribal%20Courts.pdf (last visited Oct. 13, 2019).

[13]       Id.; Steven J. Gunn, Compacts, Confederacies, and Comity: Intertribal Enforcement of Tribal Court Orders, 34 N.M. L. REV. 297, 306 (2004).

[14]       Kristen Carpenter and Eli Wald, Lawyering for Groups: The Case of American Indian Tribal Attorneys, 81 FORDHAM L. REV. 3085 (2013).

[15]       See Montana v. United States, 450 U.S. 544, 566 (1981) (“Indian tribes retain inherent sovereign power to exercise some forms of civil jurisdiction over non-Indians on their reservations . . . .” (emphasis added)); Means v. Navajo Nation, 432 F.3d 924, 930 (9th Cir. 2005) (holding that the tribe had jurisdiction over defendant because he was an Indian by political affiliation).

[16]       Indian Country includes: (1) all land within the limits of any Indian reservation, (2) “dependent Indian communities” within the borders of the United States, and (3) all Indian allotments, including rights-of-way. 28 U.S.C. § 1151 (2000).  “Although [that] definition by its terms relates only to . . . criminal jurisdiction . . . it also generally applies to questions of civil jurisdiction. . . .” Alaska v. Native Vill. of Venetie Tribal Gov’t, 522 U.S. 520, 527 (1998).

[17]       “The ownership status of land . . . is only one factor to consider in determining whether [tribal courts have jurisdiction over non-members].  It may sometimes be a dispositive factor.” Nevada v. Hicks, 533 U.S. 353, 360 (2001) (emphasis added).

[18]       Water Wheel Camp Recreational Area, Inc. v. LaRance, 642 F.3d 802 (9th Cir. 2011); see also Iowa Mut. Ins. Co. v. LaPlante, 480 U.S. 9, 14 (1987) (“We have repeatedly recognized the Federal Government’s long-standing policy of encouraging tribal self-government. . . . This policy reflects the fact that Indian tribes retain ‘attributes of sovereignty over both their members and their territory . . . .’”) (quoting United States v. Mazurie, 419 U.S. 544, 557 (1975)).

[19]       Lesperance v. Sault Ste. Marie Tribe of Chippewa Indians, No. 2:16-cv-232, 2017 U.S. Dist. LEXIS 64193 (W.D. Mich. Apr. 27, 2017) (a non-Indian sued the tribe in tribal court but provided notice in a letter to a customer representative and not to the tribal Secretary as required under the tribe’s waiver authority.  The tribal trial court and appellate court upheld dismissal and the federal district court affirmed.).

[20]       Water Wheel, 642 F.3d 802; Washington v. Confederated Tribes of the Colville Indian Reservation, 447 U.S. 134 (1980) (power to tax transactions on trust lands).  Indian land in this context includes land owned by the tribe or its members as well as land owned in fee by the United States but held in trust for the benefit of the tribe or its members.  Notably, the land beneath a navigable waterway is not “Indian land,” Montana v. United States, 450 U.S. 544 (1981); neither is land owned by the United States but with a right of way granted to a state for the purposes of the construction and use of a state highway, Strate v. A-1 Contractors, 520 U.S. 438 (1997).

[21]       Montana v. United States, 450 U.S. 544 (1981).

[22]       Id.

[23]       Plains Commerce, 554 U.S. 316 (2008).  Although Montana originally pertained to civil jurisdiction over non-Indians on non-Indian fee lands within reservation boundaries (450 U.S. at 564), the Ninth Circuit Court of Appeals has previously maintained “that the general rule of Montana applies to both Indian and non-Indian lands.” Ford Motor Company v. Todeecheene, 394 F.3d 1170, 1178-79 (9th Cir. 2005), overruled on other grounds, 488 F.3d 1215 (9th Cir. 2007).  More recently, however, the Ninth Circuit has indicated a reversion to its original rule.  See Water Wheel, 642 F.3d 802.

[24]       Plains Commerce, 554 U.S. at 340.

[25]       Id. It appears, however, that courts have become more sympathetic to the second exception as of late.  See, e.g., Knighton v. Cedarville Rancheria of N. Paiute Indians, 922 F.3d 892, 905 (9th Cir.), cert. denied, 140 S. Ct. 513 (2019); Norton v. Ute Indian Tribe of the Uintah & Ouray Reservation, 862 F.3d 1236, 1246 (10th Cir. 2017).

[26]       Charlene Smith helped to research and summarize the cases in this section.  Charlene is a rising third year law student at the University of Southern California Gould School of Law and expects to graduate in May 2021.

[27]       Exhaustion is not always required.  See Nat’l Farmers Union Ins. Co. v. Crow Tribe of Indians, 471 U.S. 845, 857 n.21 (1985) (“We do not suggest that exhaustion would be required where an assertion of tribal jurisdiction is motivated by a desire to harass or is conducted in bad faith, or where the action is patently violative of express jurisdictional prohibitions, or where exhaustion would be futile because of the lack of an adequate opportunity to challenge the court’s jurisdiction.”).

[28]       Id. at 857. (“Until petitioners have exhausted the remedies available to them in the Tribal Court system . . . it would be premature for a federal court to consider any relief.”); Progressive Advanced Ins. Co. v. Worker, No. CV-16-08107-PCT-DJH, 2017 U.S. Dist. LEXIS 19283 (D. Ariz. February 8, 2017) (Judge Humetewa writes: “Progressive issued an insurance policy that listed a tribal member as a named insured and covered vehicles that were kept on tribal lands . . . however Progressive never mailed anything to an address on tribal lands.  To the extent that factor is dispositive, it may be that the tribal court lacks jurisdiction.  But this is a question that must be answered first by the tribal courts of the Navajo Nation.”).

[29]       Whitetail v. Spirit Lake Tribal Ct., Civ. No. 07-0042, 2007 U.S. Dist. LEXIS 87312, at *4-*5 (N.D. Nov. 28, 2007).  The doctrine applies even to federal habeas corpus actions filed under 25 U.S.C. § 1303. See, e.g., Valenzuela v. Silversmith, No. 11-2212, 2012 WL 5507249 (10th Cir. Nov. 14, 2012).

[30]       See Rincon Mushroom, 490 Fed. Appx. 11, 13 (9th Cir. 2012) (“[H]old[ing] that the district court abused its discretion in dismissing the case rather than staying it.”); but see Progressive Advanced Ins. Co. v. Worker, No. CV-16-08107-PCT-DJH, 2017 U.S. Dist. LEXIS 19283 (D. Ariz. February 8, 2017) (dismissing the case); Window Rock Unified School District v. Reeves, 2017 U.S. App. LEXIS 14254 (9th Cir. August 3, 2017) (same).

[31]       Nat’l Farmers Union, 471 U.S. at 852.

[32]       Iowa Mut. Ins. Co. v. LaPlante, 480 U.S. 9, 19 (1987) (“If the Tribal Appeals Court upholds the lower court’s determination that the tribal courts have jurisdiction, petitioner may challenge that ruling in the District Court.”).

[33]       See Ford Motor Co. v. Todecheene, 474 F.3d 1196, 1197 (9th Cir. 2007), amended and superseded by 488 F.3d 1215, 1216 (9th Cir. 2007); Duncan Energy Co., Inc. v. Three Affiliated Tribes of the Fort Berthold Reservation, 27 F.3d 1294, 1300 (8th Cir. 1993); Plains Commerce Bank, 128 S. Ct. at 2726.  It is unclear whether state courts must likewise abstain from hearing a matter arising on tribal lands until the tribal court has determined the scope of its own jurisdiction and entered a final ruling.  In Drumm v. Brown, 245 Conn. 657, 716 A.2d 50 (Conn. 1998), the Connecticut Supreme Court held that “[o]ur analysis, which is based primarily on the three United States Supreme Court exhaustion cases, persuades us that the courts of this state must apply the exhaustion of tribal remedies doctrine.” 245 Conn. at 659.  However, the Drumm court found that exhaustion was not required in the absence of a pending action in tribal court.  Id. at 684.

[34]       Nat’l Farmers Union, 471 U.S. at 857; see, e.g., Evans v. Shoshone-Bannock Land Use Policy Comm’n, 4:12-CV-417-BLW, 2012 WL 6651194 (D. Idaho Dec. 20, 2012) (requiring plaintiff to exhaust its tribal court remedies).

[35]       See, e.g., Bruce H. Lien Co. v. Three Affiliated Tribes, 93 F.3d 1412, 1421 (8th Cir. 1996).

[36]       Iowa Mutual, 480 U.S. at 16.

[37]       See id. at 17 (“At a minimum, exhaustion of tribal remedies means that tribal appellate courts must have the opportunity to review the determinations of the lower tribal courts.”); see also Whitetail v. Spirit Lake Tribal Ct., No. 07-0042, 2007 U.S. Dist. LEXIS 87312, at *4 (D.N.D. Nov. 28, 2007) (declining review of the case because the plaintiff had failed to exhaust his tribal court remedies).

[38]       See Nat’l Farmers Union, 471 U.S. at 853 (reasoning that “a federal court may determine under § 1331 whether a tribal court has exceeded the lawful limits of its jurisdiction”).

[39]       Iowa Mutual, 480 U.S. at 19.

[40]       Id. (“Unless a federal court determines that the Tribal Court lacked jurisdiction . . . proper deference to the tribal court system precludes relitigation of issues raised . . . and resolved in the Tribal Courts.”).  A thorough analysis of post-judgment proceedings is beyond the scope of this chapter, but there is case law on the issue.  See, e.g., AT&T Corp. v. Coeur d’Alene Tribe, 295 F.3d 899, 903-904 (9th Cir. 2002); Burrell v. Armijo, 456 F.3d 1159, 1168 (10th Cir. 2006), cert. denied, 549 U.S. 1167 (2007); Brenner v. Bendigo, No. 13-0005, 2013 WL 5652457 (D.S.D. Oct. 15, 2013); Bank of America, N.A. v. Bills, No. 00-0450, 2008 WL 682399, at *5 (D. Nev. Mar. 6, 2008); First Specialty Ins. Corp. v. Confederated Tribes of Grand Ronde Community of Oregon, No. 07-0005, 2007 WL 3283699, at *4 (D. Or. Nov. 2, 2007); U.S. ex rel. Auginaush v. Medure, No. 12-0256, 2012 WL 5990274 (Minn. Ct. App. Dec. 3, 2012).

[41]       Nat’l Farmers Union, 471 U.S. at 857 n.21.

[42]       Nevada v. Hicks, 533 U.S. 353, 369 (2001); Strate v. A-1 Contractors, 520 U.S. 438, 459 n.14 (1997).

[43]       El Paso Natural Gas v. Neztsosie, 526 U.S. 473 (1999).

[44]       Megan Carrasco helped to collect and summarize the cases in this section. Megan is a rising third year law student at the Sandra Day O’Connor College of Law at Arizona State University.  She expects to graduate in May 2021.

[45]       25 U.S.C. § 450 (2000).

[46]       See Santa Clara Pueblo v. Martinez, 436 U.S. 49, 57-58 (1978).

[47]       Tribal immunity can be abolished via federal statute.  Alvarado v. Table Mountain Rancheria, 509 F.3d 1008, 1015-16 (9th Cir. 2007) (“[The] cornerstone of federal subject matter jurisdiction is statutory authorization.”); E.F.W. v. St. Stephen’s Indian High School, 264 F.3d 1297, 1302 (10th Cir. 2001) (“Tribal sovereign immunity is a matter of subject matter jurisdiction.”); McClendon v. United States, 885 F.2d 627, 629 (9th Cir. 1989) (“The issue of sovereign immunity is jurisdictional in nature.”).  Tribal immunity can be voluntarily waived. Kiowa Tribe of Okla. v. Mfg. Techs., 523 U.S. 751, 755-56 (1998); Filer v. Tohono O’odham Nation Gaming Enters., 129 P.3d 78, 83 (Ariz. Ct. App. 2006) (applying for a liquor license did not waive the tribe’s sovereign immunity); Seminole Tribe of Fla. v. McCor, 903 So. 2d 353, 359-60 (Fla. Dist. Ct. App. 2005) (purchasing liability insurance is not a clear waiver of a tribe’s sovereign immunity); Furry v. Miccosukee Tribe of Indians of Fla., 685 F.3d 1224, 1234 (11th Cir. 2012) cert. denied, 133 S. Ct. 663, 184 L. Ed. 2d 462 (U.S. 2012) (tribe did not waive its immunity from private tort actions by applying for a state liquor license).

[48]       Plains Commerce Bank v. Long Family Land & Cattle, 554 U.S. 316 (2008).

[49]       Id.

[50]       Kiowa Tribe v. Mfg. Tech., Inc., 523 U.S. 751, 760 (1998).  Constitution provides a basis for suits to enforce state election and campaign finance laws).  The U.S. Supreme Court has yet to take a position on this matter.

[51]       Santa Clara Pueblo v. Martinez, 436 U.S. 49, 58 (1978).

[52]       Id.; United States v. Oregon, 657 F.2d 1009, 1013 (9th Cir. 1981); Filer, 129 P.3d at 86; Bellue v. Puyallup Tribe of Indians, No. 94-3045 (Puyallup 1994); Colville Tribal Enter. v. Orr, 5 CCAR 1 (Colville Confed. 1998).

[53]       Miccosukee Tribe of Indians v. Tein, 2017 Fla. App. LEXIS 11442 (Fla. App. August 9, 2017) (even evidence of vexatious and bad faith litigation did not amount to a waiver of immunity, and “even where the results are deeply troubling, unjust, unfair, and inequitable”).

[54]       In re Greektown Holdings, LLC, No. 12-12340, 2012 WL 4484933 (E.D. Mich. Sept. 27, 2012), aff’d, 728 F.3d 567 (6th Cir. 2013) (holding that for Congress to waive the tribe’s immunity the waiver must be “express, unequivocal, unmistakable, unambiguous, clearly evident in statutory language, and allow the Court to conclude with perfect confidence that Congress intended to waive sovereign immunity”).  See also Demontiney v. United States ex rel. Bureau of Indian Affairs, 255 F.3d 801, 811 (9th Cir. 2001); Sanchez v. Santa Ana Golf Club, Inc., 104 P.3d 548, 551 (N.M. Ct. App. 2004) (reasoning that ambiguity within an immunity waiver should be interpreted in favor of the tribe).

[55]       Contour Spa at the Hard Rock, Inc. v. Seminole Tribe of Fla., 692 F.3d 1200, 1206 (11th Cir. 2012) cert. denied, 133 S. Ct. 843 (2013) (Indian tribe’s removal of action to federal court did not waive its sovereign immunity).  But see Guidiville Rancheria of California v. United States, 2017 U.S. App. LEXIS 14394 (9th Cir. August 4, 2017) (holding that by raising the issue of attorney’s fees was sufficient to constitute a waiver its right to claim sovereign immunity on the issue of attorney’s fees when defendant subsequently claimed for fees against the tribe).

[56]       Santa Clara Pueblo v. Martinez, 436 U.S. 49, 58 (1978) (internal quotation marks and citations omitted); see also Gilbertson v. Quinault Indian Nation, 495 F. App’x 779 (9th Cir. 2012) (language in the Quinault Indian Nation’s employee handbook indicating that employees were protected by Title VII was not a sufficiently clear waiver of the Nation’s sovereign immunity).

[57]       E.g., Memphis Biofuels, L.L.C. v. Chickasaw Nation Indus., Inc., 585 F.3d 917 (6th Cir. 2009) (holding that the presence of a sue-and-be-sued clause in the charter of a tribal corporation, alone, was “insufficient” to waive the corporation’s immunity because it made approval by the corporation’s board of directors a prerequisite to legal action by the corporation); accord Ninigret Dev. Corp v. Narragansett Indian Wetuomuck Hous. Auth, 201 F.3d 21, 30 (1st Cir. 2000) (holding that “the enactment of such an ordinance . . . does not waive a tribe’s sovereign immunity [where the ordinance] authorize[d] the [tribal corporation] to shed its immunity ‘by contract’” because “these words would be utter surplusage if the enactment of the ordinance itself served to perfect the waiver”); cf. Rosebud Sioux Tribe v. Val-U Constr. Co., 50 F.3d 560, 562 (8th Cir. 1995) (holding that the mere presence of an arbitration provision in the agreement represented a waiver of immunity from a judgment being enforced in federal court).

[58]       C & L Enter., Inc. v. Citizen Band Potawatomi Indian Tribe of Okla., 532 U.S. 411 (2001).

[59]       Id. at 418; see Trump Hotels and Casino Resorts Dev. Co. v. Rosow, No. X03CV034000160S, 2005 Conn. Super.  LEXIS 1224, at *41 (Conn. Super. Ct. May 2, 2005) (concluding that the tribe “clearly and unequivocally waived sovereign immunity” in its contract).

[60]       C & L Enterprises, 532 U.S. at 415-16.

[61]       Id. at 423.

[62]       Calvello v. Yankton Sioux Tribe, 584 N.W.2d 108, 114 (S.D. 1998) (holding that chairman of tribal business committee did not have authority to waive immunity); see also Sandlerin v. Seminole Tribe of Fla., 243 F.3d 1282, 1286-87 (11th Cir. 2001) (reasoning that the tribal chief did not have authority to waive the tribe’s immunity through contract where the tribal code provided procedure for effecting a waiver); Chance v. Coquille Indian Tribe, 963 P.2d 638, 639 (Or. 1998) (reasoning that the tribal corporation president did not have authority to bind the corporation to a contract waiving tribal immunity); Harris v. Lake of the Torches Resort and Casino, 363 Wis. 2d 656 (2015) (holding that a third-party workers compensation administrator lacked the authority to waive the tribe’s immunity).  But see Rush Creek Solutions, Inc. v. Ute Mountain Ute Tribe, 107 P.3d 402, 407 (Colo. App. 2004) (holding that the tribal chief financial officer had apparent authority to waive immunity when the tribal law was silent).

[63]       John Habib helped to research and summarize the cases in this section.  John is a rising third-year law student at the Sandra Day O’Connor College of Law, Arizona State University, and expects to graduate in May 2021.

[64]       25 U.S.C. §§ 461-79 (2000).

[65]       Id. § 476.

[66]       Id. § 477.

[67]       Id.

[68]       Id.

[69]       See Jack F. Williams, Integrating American Indian Law into the Commercial Law and Bankruptcy Curriculum, 37 Tulsa L. Rev. 557, 562-63 (2001).

[70]       Id. at 563.

[71]       Id.

[72]       Native American Distrib. v. Seneca-Cayuga Tobacco Co., 546 F.3d 1288, 1295 (10th Cir. 2008) (holding that, because the tribal enterprise was not a corporation with a “sue-and-be-sued clause,” the tribal enterprise was immune from suit, as it did not explicitly waive its sovereign immunity).  C.f. Grand Canyon Skywalk Dev. LLC v. Cieslak, 2015 U.S. Dist. LEXIS 73186 (D. Nev. June 5, 2015) (holding that, while sovereign immunity may protect the tribal corporation, it does not extend to an employee of the tribal corporation to allow the employee to refuse to comply with a federal subpoena).

[73]       See Seaport Loan Products et al. v. Lower Brule Community Development Enterprise LLC, 2013 NY slip op. 651492/12 [Sup Ct. NY County 2013] (concluding that an independent, state-incorporated, for-profit tribal enterprise that was principally operating in the financial services markets, with separate assets, liabilities, purposes, and goals could not claim immunity); Arrow Midstream Holdings v. 3 Bears Construction LLC, 873 N.W.2d 16 (N.D. 2015) (holding that a corporation wholly owned by tribal members but incorporated under state law was a non-member entity for the purposes of litigation and therefore subject to state jurisdiction).

[74]       Jada Allender helped to research and summarize the cases in this section.  Jada is a rising third year law student at the Sandra Day O’Connor College of Law, Arizona State University, and expects to graduate in May 2021.

[75]       25 U.S.C. § 463 (2000); see TOMAC v. Norton, 433 F.3d 852, 866-67 (D.C. Cir. 2006) (upholding Congress’s delegation of power to the Secretary to acquire land in trust for the tribe under § 1300j-5).

[76]       Carcieri v. Salazar, 555 U.S. 379 (2009).

[77]       Id. at 386.

[78]       Record of Decision, Trust Acquisition of, and Reservation Proclamation for the 151.87-acre Cowlitz Parcel in Clark County, Washington, for the Cowlitz Indian Tribe (Dec. 2010), http://www.bia.gov/cs/ groups/mywcsp/documents/text/idc012719.pdf.  The Cowlitz Indian Tribe was not federally recognized until 2002, but, in 2010, the BIA nonetheless approved a fee-to-trust application, determining that the tribe was “under Federal Jurisdiction” in 1934, even though the federal government did not believe so at that time.  Id.  The D.C. District Court upheld the BIA’s Record of Decision, Confederated Tribes of Grand Ronde Cmty. of Or. v. Jewell, 75 F. Supp. 3d 387 (D.D.C. 2014) and the D.C. Circuit upheld the District Court, Confederated Tribes of Grand Ronde Cmty. of Or. v. Jewell, 830 F.3d 552 (D.C. Cir. 2016); see also Record of Decision, Trust Acquisition and Reservation Proclamation for 151 Acres in the City of Taunton, Massachusetts, and 170 Acres in the Town of Mashpee, Massachusetts, for the Mashpee Wampanoag Tribe (Sept. 2015), http://www.indianaffairs.gov/cs/groups/public/documents/text/idc1-031709.pdf.  Although the Interior Department did not federally acknowledge the Mashpee Wampanoag Tribe until 2007, Interior applied M-37029 Memorandum’s two-part test to determine that the Tribe was “under federal jurisdiction” in 1934, which provided the legal basis for the trust acquisition outlined in the 2015 Record of Decision and circumvented the Tribe’s Carcieri issues.  However, the District Court of Massachusetts rejected the Secretary’s interpretation and has returned the decision to take land into trust on behalf of the Mashpee to the Secretary of Interior.  Littlefield v. U.S. Dept. of Interior, 2016 U.S. Dist. LEXIS 98732 (D. Mass. July 28, 2016).

[79]       BIA Weighs Land-Into-Trust after Supreme Court Ruling, (Mar. 26, 2009) http://indianz.com/News/2009/ 013782.asp (last visited Oct. 20, 2017).

[80]       See, e.g., Stand Up for California! v. U.S. Dept. of Interior, No. 12-2039, (D.D.C. Sept. 6, 2016) (challenging the Department’s fee-to-trust decision for the benefit of the North Fork Rancheria of Mono Indians on the basis that the tribe wasn’t a “federally recognized tribe under jurisdiction” in 1934 as required under Carcieri).

[81]       Memorandum from Hilary C. Tompkins, U.S. Dep’t of the Interior, Office of the Solicitor, to Sally Jewell, Secretary of the Interior, U.S. Dep’t of the Interior (Mar. 12, 2014) (hereinafter “M-37029 Memorandum”).

[82]       Id.

[83]       Id.

[84]       Confederated Tribes of Grand Ronde Cmty. of Or. v. Jewell, 850 F.3d 552 (D.C. Cir. 2016); see also Stand Up for California! v. U.S. Dept. of Interior, No. 12-2039, (D.D.C. Sept. 6, 2016); Citizens for a Better Way v. U.S. Dep’t of the Interior, No. 12-3021, ECF No. 168 (E.D. Cal. Sept. 24, 2015); No Casino in Plymouth v. Jewell, No. 12-1748, ECF No. 100 (E.D. Cal. Sept. 30, 2015); Cnty. of Amador v. Dep’t of Interior, No. 12-1710, ECF No. 95 (E.D. Cal. Sept. 30, 2015).

[85]       Match-E-Be-Nash-She-Wish Band of Pottawatomi Indians v. Patchak, 132 S.Ct. 2199 (2012).

[86]       5 U.S.C. §§ 551-59.

[87]       28 U.S.C. § 2409a.

[88]       The decision thus did not upset the rule that the “QTA provides the exclusive remedy for claims involving adverse title disputes with the government.” McMaster v. United States, 731 F.3d 881, 899 (9th Cir. 2013).

[89]       The statute of limitations under the APA is six years.  See, e.g., Cachil Dehe Band of Wintun Indians of Colusa Indian Cmty. v. Salazar, No. 12-3021, 2013 WL 417813, at *4 (E.D. Cal. Jan. 30, 2013) (holding that under Patchak, “federal district courts do have the power to strip the federal government of title to land taken into trust for an Indian tribe under the APA so long as the claimant does not assert an interest in the land.”).

[90]       Land Acquisitions: Appeals of Land Acquisitions, 78 Fed. Reg. 67,928, 67,929 (Nov. 13, 2013) (codified at 25 C.F.R. pt. 151).

[91]       See 25 C.F.R. § 2.6(c).

[92]       See 25 C.F.R. Part 2.

[93]       Id.

[94]       See 25 C.F.R. § 2.9.

[95]       Delilah Cassidy helped to research and summarize the cases in this section.  Delilah is a 2021 Juris Doctor and Master of Sports Law and Business candidate at Arizona State University, Sandra Day O’Connor College of Law.

[96]       25 U.S.C. § 81 (2000) (Section 81).  For a list of contracts that are exempt from secretarial approval, see 25 C.F.R. § 84.004 (2008).

[97]       25 C.F.R. § 84.004.

[98]       Id.

[99]       25 U.S.C. § 81.

[100]     Id. § 415.

[101]     Id. § 81.

[102]     The approval process for alternative energy projects on tribal lands has been particularly burdensome.  See Ryan Dreveskracht, The Road to Alternative Energy in Indian Country: Is It a Dead End?, 19 INDIAN L. NEWSL. 3 (2011).  For a jurisdictional analysis of the complications created by real property transactions in Indian Country see Grant Christensen, Creating Brightline Rules for Tribal Court Jurisdiction Over Non-Indians: The Case of Trespass to Real Property, 35 AM. INDIAN L. REV. 527 (2011).

[103]     Outsource Servs. Mgmt. v. Nooksack Bus. Corp., No. 74764-9-I, 2017 Wash. App. LEXIS 709 (Wash. App. April 3, 2017) (tribal business defaulted on a $15 million loan secured by future profits generated from tribal land on which the tribe intended to build a casino.  When the tribe subsequently used the land—not for a casino but for other revenue raising operations—the creditor sought those profits to satisfy the loan obligation.  The tribe claimed that the Creditor’s attempt would unlawfully encumber their lands in violation of 25 U.S.C. 81.  The court disagreed, holding that “[t]he pledged security is not a legal interest in the land itself.  Nor does [creditor]’s right interfere with the tribe’s exclusive proprietary control over the land” and that “[b]ecause the tribe retains complete control over the casino building and property and can use the facilities for any purpose, there is no encumbrance for purposes of Section 81, and thus the agreements did not require preapproval.”).

[104]     25 U.S.C. §§ 2701-21 (1988).  The jurisdictional and regulatory powers of the NIGC have received criticism in several court decisions.  In October 2006, the U.S. Court of Appeals for the District of Columbia Circuit ruled that the IGRA did not confer authority upon the NIGC to promulgate operational control regulations for Class III gaming operations.  See Colo. River Indian Tribes v. Nat’l Indian Gaming Comm’n, 466 F.3d 134, 140 (D.C. Cir. 2006) and Colo. River Indian Tribes v. Nat’l Indian Gaming Comm’n, 383 F. Supp. 2d 123, 137 (D.D.C. 2005). The Colorado River Indian Tribes cases are significant because some Indian tribes have interpreted the trial court’s decision to mean that the NIGC has no regulatory authority whatsoever over Class III gaming. Indeed, in the wake of the decision, several tribes advised the NIGC that they believe the decision strips the NIGC of all regulatory power over Class III gaming and therefore will not permit any NIGC auditors or other oversight into their casinos. As a result, the NIGC filed a petition for a panel rehearing in late December 2006.  This petition was denied per curiam on Dec. 27, 2007. Colo. River Indian Tribes, 466 F.3d 134 (denying the motion for rehearing).

[105]     25 U.S.C. § 2711; First Am. Kickapoo Oper. v. Multimedia Games, Inc., 412 F.3d 1166, 1172 (10th Cir. 2005); United States v. President, 451 F.3d 44, 50 n.5 (2d Cir. 2006).

[106]     25 U.S.C. § 264 (1882); 25 C.F.R. §§ 140-41 (1996).  “Trading” is broadly defined as “buying, selling, bartering, renting, leasing, permitting and any other transaction involving the acquisition of property or services.” 25 C.F.R. § 140.5(a)(6) (1984).  For an example of tribal business license requirements, see NAVAJO NATION CODE, 5 N.N.C. § 401, et seq. (2005).

[107]     25 C.F.R. § 252.11(a).

[108]     See 25 C.F.R. § 140.3. Dahlstrom v. Sauk-Suiattle Indian Tribe, NO. C16-0052JLR, 2017 U.S. Dist. LEXIS 40654 (W.D. Wash. March 21, 2017) (a former employee brought a qui tam action against the tribe and against a medical clinic for filing false claims through the Indian Health Service (IHS)).  The court barred the action against the tribe; “Like a state, a Native American tribe ‘is a sovereign that does not fall within the definition of a ‘person’ under the FCA.’”  However, the court held that the medical clinic was not “an arm of the tribe” and so it was ineligible to claim sovereign immunity.

[109]     Pub. L. No. 112-151 (2012).

[110]     Any failure of a federal agency to complete its obligations in relation to Indian lands can be catastrophic to businesses operating under federal permits.  See, e.g., Tribe v. U.S. Forest Serv., No. 13-0348, 2013 WL 5212317 (D. Idaho Sept. 12, 2013).

[111]     25 C.F.R. § 162.

[112]     United States Department of Interior, HEARTH ACT of 2012, https://www.bia.gov/bia/ots/hearth (last visited Oct. 28, 2018).

[113]     Kaitlyn Salmans helped to research and summarize the cases in this section.  Kaitlyn is a rising third year law student at Moritz College of Law, Ohio State University, and expects to graduate in May 2021.

[114]     See, e.g., Middletown Rancheria of Pomo Indians v. Workers’ Comp. Appeals Bd., 71 Cal. Rptr. 2d 105, 114-15 (Cal. Ct. App. 1998) (holding that the Workers’ Compensation Board has no jurisdiction over tribe); Tibbets v. Leech Lake Reservation Bus. Comm’n, 397 N.W.2d 883, 890 (Minn. 1986) (holding Minnesota workers’ compensation law inapplicable to tribal employer); see generally New Mexico v. Mescalero Apache Tribe, 462 U.S. 324, 332-33 (1983) (discussing applicability of state laws to tribes).

[115]     See generally Steven G. Biddle, Indian Law Theme Issue: Labor and Employment Issues for Tribal Employers, 34 ARIZ. ATT’Y 16 (1998) (discussing the applicability of federal labor and employment laws to tribal employers); but see State ex rel. Indus. Comm’n v. Indian Country Enters., Inc., 944 P.2d 117 (Idaho 1997) (applying 40 U.S.C. § 290 to require the application of state workers’ compensation laws to tribal companies incorporated under state law); State ex rel. Workforce Safety & Ins. v. J.F.K. Raingutters, 733 N.W.2d 248, 253-54 (N.D. 2007) (same); Martinez v. Cities of Gold Casino, Pojoaque Pueblo, and Food Industries Self-Insurance Fund, No. 28,762, slip op. at ¶ 27 (N.M. Ct. App. filed Apr. 24, 2009) (holding that a tribal corporation waived immunity from claims brought under the Workers’ Compensation Act by voluntarily complying with other provisions of the act and submitting to the jurisdiction of the Workers’ Compensation Administration).

[116]     42 U.S.C. §§ 2000e-2000e-17 (1991).  Bruguier v. Lac du Flambeau Band of Lake Superior Chippewa Indians, 237 F. Supp. 3d 867 (W.D. Wis. 2017) (“Title VII expressly does not authorize suits against tribes; “the term employer . . . does not include . . . an Indian tribe . . . .”).

[117]     Id. §§ 12101-12117 (1990).

[118]     Id. §§ 2000e(b)(1), 12111(5).  Additionally, discrimination based on tribal affiliation is often not considered unlawful national origin discrimination.  See, e.g., E.E.O.C. v. Peabody W. Coal Co., No. 12-17780, 2014 WL 6463162 (9th Cir. Nov. 19, 2014) (discrimination based on tribal affiliation as it relates to lease agreements containing a Navajo reference in hiring provision does not constitute unlawful national origin discrimination but is a political classification and, thus, not within the scope of Title VII of the Civil Rights Act).  See also Morton v. Mancari, 417 U.S. 535 (1974) (holding that the United States Department of Interior may affirmatively hire and promote American Indians because the preference is based on a political classification (membership in a federally recognized tribe) and not a racial classification and is, therefore, subject only to rational basis scrutiny to avoid constitutional challenge).

[119]     See, e.g., ARIZ. REV. STAT. ANN. § 41-1464 (2005) (exempting tribes from Arizona’s discrimination laws).  Even if a state’s antidiscrimination laws do not provide an express exemption, the doctrine of sovereign immunity will ordinarily operate to achieve the same effect.  See Sanchez v. Santa Ana Golf Club, Inc., 104 P.3d 548, 554 (N.M. Ct. App. 2004) (affirming dismissal of employee’s state law discrimination claim based on tribal employer’s sovereign immunity); see also Aroostook Band of Micmacs v. Ryan, 404 F.3d 48, 67-68 (1st Cir. 2005) (discussing the probable inapplicability of state antidiscrimination laws to a tribal employer).

[120]     See Hardin v. White Mountain Apache Tribe, 779 F.2d 476, 479 (9th Cir. 1985) (extending the tribe’s sovereign immunity to tribal officials acting in a representative capacity).

[121]     29 U.S.C. §§ 651-78 (1998).

[122]     Id. §§ 1001-61.  Congress amended ERISA in 2006 to apply Indian tribal commercial enterprises, but tribal governments remain exempt.  29 U.S.C. §§ 1002(32) (as amended by Pension Protection Act of 2006, 29 U.S.C. § 1002(32)).

[123]     Id. §§ 201-19.

[124]     Id. §§ 151-69.

[125]     Id. §§ 621-34.

[126]     NLRB v. Pueblo of San Juan, 276 F.3d 1186, 1200 (10th Cir. 2002) (holding NLRA inapplicable to tribes); EEOC v. Fond du Lac Heavy Equip. & Const. Co., 986 F.2d 246, 248 (8th Cir. 1993) (refusing to apply the ADEA to an Indian employed by the tribe); Donovan v. Navajo Forest Prods. Indus., 692 F.2d 709, 712 (10th Cir. 1982) (holding OSHA inapplicable to the tribe partly because enforcement “would dilute the principles of tribal sovereignty and self-government recognized in the treaty”).

[127]     Menominee Tribal Enter. v. Solis, 601 F.3d 669 (7th Cir. 2010) (applying OSHA); Lumber Indus. Pension Fund v. Warm Springs Forest Prods. Indus., 939 F.2d 683, 683 (9th Cir. 1991) (applying ERISA); U.S. Dep’t of Labor v. OSHA Rev. Comm’n, 935 F.2d 182, 182 (9th Cir. 1991) (applying OSHA); Smart v. State Farm Ins., 868 F.2d 929, 935 (7th Cir. 1989) (stating the “argument that ERISA will interfere with the tribe’s right of self-government is over-broad,” and applying ERISA); Donovan v. Coeur d’Alene Tribal Farm, 751 F.2d 1113, 1116-17 (9th Cir. 1985) (right of self-government is too broad to defeat applicability of OSHA); see also Reich v. Mashantucket Sand & Gravel, 95 F.3d 174 (2d Cir. 1996) (following Ninth and Seventh Circuits to apply OSHA).

[128]     See Reich v. Great Lakes Indian Fish and Wildlife Comm’n, 4 F.3d 490, 493-94 (7th Cir. 1993) (holding that the tribe’s law enforcement officers were exempt from FLSA, but noting that not all employees of tribes are exempt); Solis v. Matheson, 563 F.3d 425, 434-35 (9th Cir. 2009) (applying FLSA to retail business on tribal land because business did not involve tribal self-governance and was not protected by treaty rights).

[129]     Reich, 4 F.3d at 493-94; Lumber Indus. Pension Fund, 939 F.2d at 683; U.S. Dept. of Labor, 935 F.2d at 182; Smart, 868 F.2d at 935; Donovan, 751 F.2d at 1113; see also Mashantucket Sand & Gravel, 95 F.3d at 174.

[130]     29 U.S.C. §§ 2601-54 (1993).

[131]     The Family and Medical Leave Act of 1993, 60 Fed. Reg. 2180 (Jan. 6, 1995).

[132]     Casino Pauma v. NLRB, 888 F.3d 1066 (9th Cir. 2018).

[133]     Chayoon v. Chao, 355 F.3d 141, 142-43 (2d Cir. 2004); Garcia v. Akwesasne Hous. Auth., 268 F.3d 76, 84-86 (2d Cir. 2001).

[134]     Cf. Multimedia Games, Inc. v. WLGC Acquisition Corp., 214 F. Supp. 2d 1131, 1131 (N.D. Okla. 2001) (holding that the federal Copyright Act of 1976 was inapplicable to tribes).

[135]     Chase Colwell helped to research and summarize the cases in this section.  Chase is a rising third year law student at the Sandra Day O’Connor College of Law, Arizona State University, and expects to graduate in May 2021.

[136]     28 U.S.C. § 1331 (“Federal Question: The district courts shall have original jurisdiction of all civil actions arising under the Constitution, laws, or treaties of the United States.”).

[137]     Id. § 1332 (“Diversity of Citizenship: The district courts shall have original jurisdiction of all civil actions where the matter in controversy exceeds the sum or value of $75,000, exclusive of interest and costs, and is between—(1) citizens of different states . . . .”).

[138]     See Peabody Coal Co. v. Navajo Nation, 373 F.3d 945, 945 (9th Cir. 2004) (dismissing a complaint against the Navajo Nation that sought enforcement of an arbitration agreement for lack of federal question jurisdiction); accord, TTEA v. Ysleta Del Sur Pueblo, 181 F.3d 676, 681 (5th Cir. 1999) (“The federal courts do not have jurisdiction to entertain routine contract actions involving Indian tribes.”); Gila River Indian Cmty. v. Henningson, Durham & Richardson, 626 F.2d 708, 714-15 (9th Cir. 1980) (finding “no reason to extend the reach of the federal common law to cover all contracts entered into by Indian tribes”). See also Burlington N. & Santa Fe Ry. Co. v. Vaughn, 509 F.3d 1085, 1089 (9th Cir. 2007) (holding that a federal court may review a denial of sovereign immunity by interlocutory appeal).

[139]     See Ysleta Del Sur Pueblo, 181 F.3d at 681 (holding that “an anticipatory federal defense is insufficient for federal jurisdiction”).

[140]     See Payne v. Miss. Band of Choctaw Indians, 159 F. Supp. 3d 724, 726-27 (S.D. Miss. 2015); Am. Vantage Cos. v. Table Mountain Rancheria, 292 F.3d 1091, 1095 (9th Cir. 2002); Akins v. Penobscot Nation, 130 F.3d 482, 485 (1st Cir. 1997); Romanella v. Hayward, 114 F.3d 15, 16 (2d Cir. 1997); Gaines v. Ski Apache, 8 F.3d 726, 728-29 (10th Cir. 1993); Oneida Indian Nation v. Cnty. of Oneida, 464 F.2d 916, 923 (2d Cir. 1972), rev’d and remanded on other grounds, 414 U.S. 661 (1974); Standing Rock Sioux Indian Tribe v. Dorgan, 505 F.2d 1135, 1040-41 (8th Cir. 1974); Tenney v. Iowa Tribe of Kan., 243 F. Supp. 2d 1196, 1198 (D. Kan. 2003); Victor v. Grand Casino-Coushatta, No. 02-2348, 2003 U.S. Dist. LEXIS 24770, at *4 (D. La. Jan. 21, 2003); Worrall v. Mashantucket Pequot Gaming Enter., 131 F. Supp. 2d 328, 329-30 (D. Conn. 2001); Barker-Hatch v. Viejas Group Baron Long Capitan Grande Band of Digueno Mission Indians of the Viejas Group Reservation, 83 F. Supp. 2d 1155, 1157 (D. Cal. 2000); Abdo v. Fort Randall Casino, 957 F. Supp. 1111, 1112 (D.S.D. 1997); Calvello v. Yankton Sioux Tribe, 899 F. Supp. 431, 435 (D.S.D. 1995); Whiteco Metrocom Div. v. Yankton Sioux Tribe, 902 F. Supp. 199, 201 (D.S.D. 1995); Weeder v. Omaha Tribe of Neb., 864 F. Supp. 889, 898-99 (N.D. Iowa 1994); GNS, Inc. v. Winnebago Tribe, 866 F. Supp. 1185, 1191 (D. Iowa 1994). But see Cook, 548 F.3d at 723 (holding that, for diversity purposes, a tribal corporation is “a citizen of the state where it has its principal place of business”). Cf. R.J. Williams Co. v. Fort Belknap Hous. Auth., 719 F.2d 979, 982 (9th Cir. 1983) (stating that the tribal corporation had its principal place of business in Montana); R.C. Hedreen Co. v. Crow Tribal Hous. Auth., 521 F. Supp. 599, 602-03 (D. Mont. 1981) (stating that a tribal corporation had its principal place of business in Montana and “[a]ccordingly, it is a citizen of the state for purposes of diversity jurisdiction”); Parker Drilling Co. v. Metlakatla Indian Cmty., 451 F. Supp. 1127, 1138 (D. Alaska 1978) (“As [the tribal corporation’s] only major business activities, and situs, are located in Alaska, it is an Alaskan corporation for diversity purposes.”).

[141]     See Inglish Interests LLC v. Seminole Tribe of Florida, 2011 U.S. Dist. LEXIS 6123 (M.D. Fla. January 21, 2011) (describing this split).

[142]     Caitlin White helped to research and summarize the cases in this section.  Caitlin is a rising third year law student at the Sandra Day O’Connor College of Law at Arizona State University and expects to graduate in May 2021.

[143]     White Mountain Apache Tribe v. Bracker, 448 U.S. 136, 143 (1980).

[144]     Mescalero Apache Tribe v. Jones, 411 U.S. 145, 148-49 (1973); Cabazon Band of Mission Indians v. Smith, 388 F.3d 691, 694-95 (9th Cir. 2004).

[145]     Wagnon v. Prairie Band Potawatomi Nation, 546 U.S. 95, 101 (2005).

[146]     There has been some question as to what exactly constitutes a tribally owned corporation.  The general rule is that “[a] subdivision of tribal government or a corporation attached to a tribe may be so closely allied with and dependent upon the tribe that it is effectively an arm of the tribe.  It is then actually a part of the tribe per se” and is nontaxable.  Uniband, Inc. v. C.I.R., 140 T.C. 230, 252 (U.S. Tax Ct. 2013) (quotation omitted).  Although preemption of state taxes “is most assured for tribal corporations organized pursuant to federal or tribal law,” Cohen’s Handbook of Federal Indian Law § 8.06 (2012 ed.), “the mere organization of such an entity under state law does not preclude its characterization as a tribal organization as well.”  Duke v. Absentee Shawnee Tribe of Okla. Housing Auth., 199 F.3d 1123, 1125 (10th Cir. 1999).

[147]     Wagnon v. Prairie Band Potawatomi Nation, 546 U.S. 95, 101 (2005); see also Bercier v. Kiga, 103 P.3d 232, 236 (Wash. Ct. App. 2004) (“[T]he State may not tax Indians or Indian tribes in Indian country . . . .”) (citing Wash. Admin. Code § 458-20-192(5)); Pourier v. S. D. Dept. of Revenue, 658 N.W.2d 395, 403 (S.D. 2003), aff’d in relevant part and rev’d in part on other grounds on reh’g, 674 N.W.2d 314 (S.D. 2004) (“If the legal incidence of a tax falls upon a Tribe or its members . . . the tax is unenforceable.”).  See also Seminole Tribe of Florida v. Stranburg, 799 F.3d 1324, 1345-46 (11th Cir. 2015) (reaffirming the legal incidence test but determining that a gross receipts tax more properly fell on utility companies instead of the tribe and, therefore, the tax was not preempted).

[148]     See McClanahan v. Ariz. State Tax Comm’n, 411 U.S. 164, 172-73 (1973).

[149]     Williams v. Lee, 358 U.S. 217, 220 (1959); but see 25 C.F.R. § 162.415(c) (“Any permanent improvements” on business leased Indian land “shall not be subject to any fee, tax, assessment, levy, or other such charge imposed by any State or political subdivision of a State, without regard to ownership of those improvements.”).  See also California v. Cabazon Band of Mission Indians, 480 U.S. 202, 216 (1987) (“Decision in this case turns on whether state authority is pre-empted by the operation of federal law; and “[state] jurisdiction is pre-empted . . . if it interferes or is incompatible with federal and tribal interests reflected in federal law, unless the state interests at stake are sufficient to justify the assertion of state authority.”).

[150]     Bracker, 448 U.S. at 143.

[151]     Id. at 144; see also Aroostook Band of Micmacs v. Ryan, No. 03-0024, 2007 WL 2816183, at *4, *9-11 (D. Me. Sept. 27, 2007) (discussing whether federal law or state law affects the Aroostook Band, even though the tribe is exempt from state civil and criminal laws).

[152]     New Mexico v. Mescalero Apache Tribe, 462 U.S. 324 (1983).

[153]     Id. at 334.

[154]     Id. at 344.

[155]     Martyna Sawicka helped to research and summarize the cases in this section.  Martyna is a rising second year law student at the University of Arizona James E. Rogers College of Law and expects to graduate in May 2022.

1. Introduction

Sellers in merger and acquisition (M&A) deals almost always run the risk of breaching a representation or warranty in the agreement. Such a breach (often unintentional) is almost an inevitable hazard that every seller must contemplate.[1] This consideration often leads sellers to invoke (and buyers to accept) certain well-established conventions to partially reduce the negative consequences to sellers of such breaches. Buyers and sellers generally accomplish this by incorporating limitations to the sellers’ indemnity liability into the indemnification provisions, such as:

• small deductibles (“baskets” and “thresholds”),
• de minimis minimum claims,
• maximum liability amounts (“caps”), and
• time limitations (“survival periods”) which shrink the period of time after the closing during which the buyer can make claims to be indemnified.

Deductibles, baskets, and thresholds tend to minimize or at least defer disputes over small amounts of alleged damages (the proverbial “nickels and dimes”) arising from breaches of representations, and can be regarded as fostering peace between buyer and seller. Survival periods (usually years shorter than applicable statutes of limitations) bring closure and finality in the near term. Caps reflect the confidence and optimism of buyers and sellers in the extensive and rigorous pre-closing due diligence and disclosure processes and in the historic operating results of the target enterprise. Caps also provide assurance that – even if this confidence is misplaced – the seller, under the usual benign circumstances, will not need to disgorge huge portions of the total purchase price. Caps on recovery for breaches of representations therefore contribute to certainty, finality and peace of mind at least to the seller.

The risk to the buyer is reduced by the typical provisions in that if the buyer can establish that it has been deliberately misled or defrauded by the seller, all the various limitations discussed become inapplicable. Baskets, survival periods and caps are so routine as to be almost universal; the only questions are how big the baskets, how low the caps, and how long the survival periods. Such well-established limitations on sellers’ indemnification liability have the salutary effects of peace, certainty, finality and closure – worthy goals in business transactions.

Although not nearly as broadly accepted to be considered a tradition-bound convention such as a basket, cap or survival period,[2] sellers often argue (on the basis of “fairness”) that the amount of indemnification sellers should be required to pay the buyers in a breach of representation context should be further limited and that the payment should be reduced to the extent the buyer or target can (for tax purposes) deduct the outlay needed to rectify the loss or damage occasioned by or underlying the breach as an expense, whether by settling or paying the undisclosed liability or rectifying the misrepresented negative condition (such outlays referred to herein as a “Rectifying Expenditure(s)”). To do otherwise, the sellers’ argument goes, would enable the buyer to reap a “windfall” consisting of not only the full recovery of actual damages but also the value of the buyer’s tax benefit for the item for which indemnification is sought.[3] This argument might be referred to as the tax benefit offset (“TBO”) argument.

2. Defeating a Proposed TBO

Preeminent M&A lawyer James C. Freund stated in his famous book Anatomy of a Merger, published in 1975, that he never developed a cogent rebuttal to the seller’s argument in favor of the TBO. Mr. Freund’s proposed response in a hypothetical negotiation with seller’s counsel was to acknowledge that the seller’s point was not unreasonable or uncommon, but then to convince the sellers’ attorney that it would be too difficult and time-consuming to figure out the net effect of the tax saving, particularly when different fiscal years could be involved. Mr. Freund, undoubtedly a persuasive negotiator, states that most sellers yield the point.[4]

The experience of many other M&A negotiators in recent times do not bear out Mr. Freund’s confidence and good fortune in making the troublesome pro-seller TBO provision go away. More than 40 years after Mr. Freund’s statements, TBO provisions are found in many acquisition documents governing deals between large publicly-held buyers in multimillion dollar transactions in which the sellers and buyers are usually represented by prestigious and extremely well-qualified law firms. Studies of deal documents ABA Studies published by the American Bar Association Business Law Section M&A Market Trends Subcommittee of the Mergers & Acquisitions Committee (the “ABA M&A Committee”), reported the percentage of deal documents studied that contained TBO provisions. The percentages varied from a high of 53% in 2011 to a low 27% in 2019, the most recent year in which the study was conducted. In that most recent study, which was published by the ABA M&A Committee in December, 2019 (the “Latest ABA Study”), of the 151 deals in 2018 and early 2019 covered, 41 deal documents included TBO provisions.[5]

Despite the prevalence of TBO provisions in modern M&A deal documentation, there are questions as to whether they are correctly conceived and effectively implemented. The purpose of this article is to examine the foundations (more correctly the lack of foundation) of the TBO provisions, examine the objections to such provisions, and hopefully discredit the TBO concept to the point of eradication in many or most taxable M&A deals.

A. Common Sense Objection

The authors suggest that, rather than being solicitous towards the seller advocate for the TBO gambit as Freund recommended, an incredulous response to and a summary dismissal of such an audacious theory would be more appropriate. If a TBO argument had been made by a defendant in a tort-based property damage claim, plaintiff’s reaction could be expected to be disbelief and firm rejection. If a defendant negligently or deliberately caused damage to a business owner’s truck, would a defendant successfully claim that the repair or replacement might be tax deductible to some extent and therefore the damages to be paid by the defendant should be reduced by the value of the benefit of any deduction or tax saving available to the plaintiff? In a breach of contract action brought by a business owner plaintiff for whom a defendant performed a contract in a faulty manner requiring rework or repair, could the defendant make a successful TBO argument? Legal intuition based on common sense would say absolutely not. The TBO gambit smacks of the apocryphal case of the man who murdered his parents seeking clemency because he is an orphan.

B. Lack of Legal Precedent Objection

Not only does the TBO gambit fail the “red face test” on first impression, it also fails to find any real historical legal support. Perhaps because of the sheer novelty and audacity of the TBO argument, little direct discussion of reduction of damages based on alleged tax benefit to a plaintiff has been found. However, several cases have indirectly addressed arguments by plaintiffs who have sought to increase damage award based on tax disadvantages suffered by plaintiffs who urged that the award of only pre-tax damages would not make the plaintiff whole. For example, in Sears v. Atchison Santa Fe Ry Co.,[6] employee plaintiffs were awarded over 15 years of back pay in a lump sum which would have been taxed in the year of receipt at a much higher rate than if taxed annually in increments over the period of employment. The court increased the ultimate award to “make the plaintiffs whole” in respect of the after-tax differential. However, even in these cases dealing with awards to plaintiffs, courts have been reluctant to venture into the tax area where complexity and variability of tax reporting positions and expert opinions abound.[7]

Randall v. Loftsgaarden is one of the few cases where a defendant sought to have damages reduced by the tax benefits received by the plaintiffs. The case involved the sale of tax-shelter investments by defendants to plaintiffs in violation of the federal Securities Act of 1933 and Securities Exchange Act of 1934.[8] In Randall v. Loftsgaarden, the Supreme Court held that the tax benefits resulting from the problematic tax shelter investments sold to the plaintiffs should not reduce the award to the plaintiffs. Another case, Hanover Shoe Inc. v United States Machinery Corp. (393 U.S. 481 (1968)[9] is particularly illuminating as it relates to the defendant’s use of the TBO argument. This was an anti-trust case where the defendant sought to reduce the amount recoverable by the plaintiff by calculating the plaintiff’s lost profits (the measure of damages in such anti-trust cases) on an after-tax basis. Plaintiff Hanover Shoe Inc. complained that the defendant only allowed the plaintiff to rent machinery instead of selling machines to plaintiff in violation of the anti-trust laws, causing the plaintiff to earn less profits because the rental arrangements were more costly to the plaintiff than an outright purchase of the machines. Defendant contended that the annual amount of lost profits should be reduced by the increased taxes that would have been payable by plaintiff on those lost profits, i.e., the profits should be calculated on an after-tax basis. Plaintiff responded that the defendant’s approach would result in double deduction for taxation on plaintiff: it had already been taxed on the profits actually earned and would be taxed again when the treble damages award was received. The Supreme Court rejected the defendant’s argument, and decided in favor of the plaintiff. The Supreme Court also noted the immense difficulty of attempting the recalculation of profits and taxes over a long period of time.[10]

Despite the absence of any jurisprudence supporting the TBO theory, and the likely judicial distaste for the concept, fairness requires the acknowledgement that the well-established notions of baskets, caps, survival periods also find no support in jurisprudence.

C. Complexity, Uncertainty and Unworkability Objection

Any indemnification regime which enables a seller to take account of the supposed actual tax benefits to the buyer leaves open the question as to how far the seller may venture in reviewing and evaluating the buyer’s federal and state income tax returns and the reporting positions buyer has taken. Such an inquiry and review would naturally open up the buyer’s tax positions, (perhaps very aggressive) tax reporting positions and tax strategy to discovery, and ultimately to disclosure. Opening the door of the inner sanctum to a hostile party and perhaps public record seems unwise at best.

There can be great uncertainty in calculating the value of a purported tax benefit to a buyer. Do tax rules limiting use of net operating loss carry-overs and built-in losses apply?[11] Taxation is a very complex area in which a variety of competing or conflicting reasonable tax reporting positions can be taken and where the opinions of learned tax experts can differ on many issues. Different reporting positions could lead to different outcomes and different tax-effected indemnification amounts. Who decides? Reporting can be challenged by the Internal Revenue Service long after the indemnification process has run its course. What happens then? Also, if the buyer was required to adopt a reporting position espoused by the seller, will the seller be willing or able to defend or to compensate the buyer if that position is successfully challenged by the IRS? Such uncertainty underscores the unworkability of the TBO mechanism.

The tax department of a buyer seeking to deal with a TBO provision would be required to continuously keep track of the effect and value of the impact of its reporting positions regarding Rectifying Expenditures as compared to the effect and value of a possible different reporting position (or range of reporting positions) as if the Rectifying Expenditure had not been made. In effect, the tax department would have to run a separate set of tax books on a hypothetical basis. Such double tax books requirement would be required for as long as the TBO’s specified period for recognizing receipt of tax benefits.

D. Tax Accounting and Reporting Objection

i. General Discussion

There are two basic types of taxable acquisitions: asset deals and stock deals.

The first type of taxable transaction, collectively referred to as “Asset Deals,” involves:

• an acquisition by the buyer of the assets of a target company,
• an acquisition by the buyer of the stock of a target company accounted for as an acquisition of assets pursuant to an election under section 338(h)(10) of the Internal Revenue Code , or
• a forward triangular merger of a subsidiary of the buyer and the target in which the target company is merged out of existence and which is accounted for as a purchase of assets of the target.

The use of limited liability companies (“LLCs”) as business entities has increased in recent years, and a correspondingly increasing number of targets doing business as LLCs have appeared in M&A transactions. LLCs generally use a pass-through entity status for tax purposes, unless they are covered by an election  to be treated as an association taxable as a corporation. In the case of an LLC as selling or target entity, the result of the purchase of all of the ownership interests in the entity is generally treated the same as a purchase of the assets of the entity for tax purposes. Revenue Ruling 99-6, Situation 2, provides that the purchase of all of the equity or membership interests in a target LLC by a buyer is treated the same as the sale by the former owners of all of the assets of the entity to the buyer — equivalent to a 338(h)(10) election for LLCs.[12]

The second type of taxable transaction involves a purchase by the buyer of the stock of the target company (without a section 338(h)(10) election) or a reverse triangular merger of a subsidiary of the buyer and the target in which the target company is the survivor (collectively, “Stock Deals”).

ii. General Tax Accounting Rules

A pre-closing event or negative condition that would constitute a breach of a representation by the seller may in real terms constitute an unfavorable occurrence for the buyer. But that does not mean that a buyer’s outlay to address the event or negative condition, in and of itself, will generate an expense that can currently be deducted by the buyer for federal income tax purposes. Certain post-closing expenditures, i.e. Rectifying Expenditures, by the buyer or a buyer subsidiary that are incurred to correct negative events or conditions that occurred prior to the closing, such as the misrepresented quantity or usable condition of inventory or machinery and equipment, would probably have to be capitalized by the buyer and would therefore not be immediately deductible. Accordingly, those Rectifying Expenditures would not give rise to an immediate “tax benefit” that could be viewed as a potential tax “windfall” which is the very basis of the “fairness” argument.

Further, even if the rectification of the misrepresented pre-closing event or condition does give rise to an otherwise legitimate deductible expense, it does not necessarily follow that the expense would be deductible by the buyer (or the target in the case of a Stock Deal). For an expense to be deductible as a trade or business expense by a taxpayer it must be an ordinary and necessary expense of that taxpayer’s trade or business. If the expense was incurred in some other taxpayer’s (i.e., the seller) trade or business it will generally not be deductible by a different taxpayer (e.g., the buyer) but may continue to be deductible by the first taxpayer (i.e., the seller).[13] Also, for an expense in respect of a liability to be deductible by an accrual basis taxpayer generally all the events needed to establish liability must have occurred, the liability must be fixed and determinable, and economic performance (which generally means payment by the taxpayer) must have occurred with respect to the expenditure  by the end of year in which the deduction would be claimed (or in certain cases shortly after the end of that year). If the buyer merely pays a liability properly attributable to the seller that does not provide any assurance that the buyer will be entitled to a deduction for that expense.[14]

The task then is to apply these general tax accounting rules to the types of taxable transactions described above: Asset Deals and Stock Deals.

iii. Asset Deals

Where the buyer or the buyer’s subsidiary takes title to the assets of the purchased business and there is a breach of a seller’s representation to the buyer and as a result the buyer becomes subject to a liability or negative condition, the question is whether the Rectifying Expenditure in undoing the damage occasioned by such liability or negative condition is properly deductible by either the buyer or the seller. For an expenditure to be deductible by a taxpayer under the accrual method of accounting, it must meet three conditions:

1) it must be an ordinary and necessary expense of the taxpayer’s trade or business;

2) the liability must be fixed and determinable; and

3) economic performance (which generally means payment) by the taxpayer must have occurred with respect to the expenditure.

All three conditions must generally be met before the end of the taxable period of the taxpayer claiming the deduction. If the misrepresentation by the seller concerns a liability or negative condition that was not fixed and determinable on or prior to the closing, even if it could not have been deducted by the seller prior to the closing, the Rectifying Expenditure by the buyer in respect of the liability or condition does not necessarily convert to one that could be deducted as an expense by the buyer. In such a case the Rectifying Expenditure is really more akin to a liability that the buyer assumed as part of the purchase and should more properly be treated as part of the purchase price. Under existing authority it is generally accepted that any liability – even a contingent liability – that is assumed by the buyer in the purchase of the assets of a business must be capitalized into the cost of the acquisition and that liability may not be deducted by the buyer.[15] If a liability was a contingent liability at the closing and did not become fixed and determinable until after the closing, that liability could still not be deducted by the buyer.[16] The fact that the buyer will be precluded from claiming a deduction for an assumed liability will be the result whether the assumed liability is fixed and determinable or is contingent, whether it is identified or not identified, or whether the liability is known or unknown at the time it is assumed.[17]

Thus, in an Asset Deal, there is no merit from a tax point of view to a seller’s argument that a buyer will have a potential tax windfall from a Rectifying Expenditure that should be reflected as a reduction of seller’s indemnity payment. Asset Deals do not give rise to a viable tax benefit offset (referred to hereinafter as “Viable TBO”)

iv. Stock Deals

1. Free-Standing and Not Pass-Through

In a taxable Stock Deal, the target company remains in existence as a separate entity following the closing and if it is an accrual basis taxpayer, it should generally retain the ability to deduct a Rectifying Expenditure that was necessitated by and arose from the circumstances underlying a breach of representation. This is the case whether the liability was a fixed and determinable liability that was properly accrued prior to the closing or was a contingent liability that was properly accrued after the closing. A Stock Deal does not involve the disqualifying element of a “new” or different taxpayer trying to claim a deduction that is attributable to another taxpayer’s trade or business, which was the critical problem in an Asset Deal. Thus, in taxable Stock Deals there might be a potentially Viable TBO.

However, if the target company was a member of the seller’s affiliated group and was included on the consolidated return filed by that group prior to the Stock Deal, the target company may still be precluded from deducting after the closing a Rectifying Expenditure. Preclusion would be the result if the deduction was or should have been properly accrued for tax purposes prior to the closing. If that deduction was or should have been properly accrued for tax purposes prior to the closing it should be claimed on a consolidated return for that prior period and it should not be available to the target company following the closing. As in the case of an Asset Deal, there is no prospect for a Viable TBO if target was not a free-standing taxpayer.[18]

The result would be similar if the target prior to the closing was a corporation covered by an S election (or if it was a pass-through entity not covered by an election  to be treated as an association taxable as a corporation). Under the S corporation rules, the income items and deductions of an S corporation that appear on its return for a particular year pass through to the stockholders of the corporation at that time and would not thereafter appear on any subsequent return filed by the corporation.[19] In other words, deductions that were or should have been properly accrued prior to the closing may not be available to the target company after the closing if the target company was covered by a consolidated return through the closing or if it was covered by an S election through the closing. The result is similar if the target was a limited liability company or other entity which is subject to “pass through” taxation. These Stock Deals involving pass-through targets do not present the possibility for a Viable TBO.

It may be observed that such Stock Deals where the target has been in a consolidated group or the target is a pass-through have a disqualifying feature that is shared with Asset Deals: the presence of an additional or different taxpayer entity (the consolidated group or the owners of the pass-through) which is entitled to claim the deduction. 

2. Code Sections 382 and 383

Even if the target was a C corporation through the closing and was not included on a consolidated return covering the seller’s affiliated group (i.e., it was free-standing), the target’s ability to claim a tax-saving deduction could be also reduced or eliminated by operation of the net operating loss carryover and the built-in loss rules of section 382 and section 383 of the Internal Revenue Code (“Built-in Loss Rules”). These rules restrict the ability of a target corporation, in any year after there has been a prohibited change in the ownership of the target, to utilize net operating losses and built-in losses that were in place at the time of the change in ownership. A prohibited change in ownership will generally occur if over any three-year period there is a shift in the ownership of more than 50% of the outstanding stock of the target corporation, and the Section 382 rules apply once that threshold has been exceeded.

The Built-in Loss Rules in general restrict – on an annual basis after the prohibited change in ownership (i.e., the closing) – the target’s ability to utilize those net operating loss carryovers and built-in losses that were in place at the closing to the value of the target at the time of the change in ownership times the long term tax-exempt interest rate.[20] In December of 2020 the long term tax exempt rate was 0.99%.[21] Using that rate, if a target was acquired in December of 2020 for $5,000,000, the annual limitation on utilizing those losses constituting Rectifying Expenditures would only be $49,500.

The authors believe (admittedly without the support of empirical data) that the vast majority of merger and acquisitions that take place each year in the United States, and certainly almost all of the deals covered by the Latest ABA Study, involve the single year transfer of more than 50% ownership of target enterprises. Accordingly, the Built-in Loss Rules would minimize the potential tax benefits alleged by sellers to be available to most buyers of C corporation targets depending on the value of the target at the time of the closing.

3. Summary of Stock Deal Issues

In short, the argument that a foundational “windfall” would give rise to a Viable TBO (even if it was available) would only be available to a buyer or a buyer subsidiary in a taxable Stock Deal if the target meets two conditions:

(1) the target had been prior to the closing a “free standing” individually taxed entity (i.e., not part of seller’s consolidated group); and

(2) the target is a C corporation (or an LLC covered by an election to be treated as an association taxable as a corporation and not covered by an S election).

If the target does not meet that two-part test, then the Rectifying Expenditure as to the buyer will be treated as part of the purchase price or it will be treated as an expense properly allocated to another taxpayer.And even if the target is a free-standing C corporation, any deduction opportunity would also be severely limited by the Built-in Loss Rules discussed above. If the target was an S corporation or other pass-through entity such as a limited liability company (which is taxed as a partnership) or a partnership, any deduction constituting a Rectifying Expenditure which is actually attributable to a period prior to the closing would be allocated to the equity owners of that entity and would not be available to buyer. Thus, in the case of taxable Stock Deals the potential of a tax benefit windfall to the buyer would not materialize. Overall, a Viable TBO mechanism which is intended to achieve the “fairness” arguably sought by sellers would fail.

3. How Are Actual Deals Being Done?

A. Overview

In the several ABA Studies published by the ABA M&A Committee over the past decade, TBO provisions in deal documents appeared in many instances although there has been a clear declining trend since 2011 when TBO provisions appeared in a slight majority of deals studied. As mentioned earlier, 41 of the 151 deals covered by the Latest ABA Study in 2019 contained pro-seller TBO provisions – just over 27%. Of those 41 deals, 3 were tax free reorganizations in which TBO provisions could be viable from a tax point of view, but which would nevertheless be subject to the other objections outlined earlier in this article including the Built-in Loss Rules which severely restrict tax savings that an indemnifying seller would seek to exploit. Of the remaining 38 deals, 10 were Asset Deals for tax purposes which as argued above do not present Viable TBO situations. All the remaining 28 deals were Stock Deals which included potentially Viable TBO provisions, but only if the target were free-standing and taxed as a C corporation.

B. Language

Given the inherent complexity of taxation in general, it could reasonably be expected that contractual provisions regarding TBO would likewise tend to be extensive and complex. In fact, the TBO provisions in the documents in question in the Latest ABA Study were brief and relatively simple. There follow several representative examples of TBO provisions which run the gamut from simple to detailed to very detailed.

• Simple
  “The amount of any and all Losses shall be determined net of …any Tax benefits realizable by or accruing to the Purchaser Indemnitees with respect to such Losses.”

• Simple
  “Without limiting the effect of any other limitation contained in this Section … for purposes of computing the amount of any Damages incurred by the Indemnified Party under this Section … there shall be deducted an amount equal to the amount of any Tax benefit actually realized within two (2) years of such Damages in connection with such Damages, as determined on a ‘with and without’ basis.”

• Conceptual
  “The amount of indemnification claims hereunder will be net of any tax benefits realized within three (3) taxable years by the Indemnified Party in connection with such claims.”

• More detailed
  “The amount of any Buyer Indemnified Losses shall be reduced by the amount of any Tax Benefit directly or indirectly available to the Buyer Indemnitee relating thereto. For purposes of this Section …a ‘Tax benefit’ shall mean a reduction in the Buyer Indemnitee’s Tax (calculated net of any Tax detriment resulting from the receipt of any indemnification payment, including the present value of any Tax detriment resulting from the loss of any depreciation and amortization deductions over time, calculated using a discount rate of 3.5%) arising out of any Damages that create a Tax deduction, credit or other tax benefit.” 

• Very detailed
  Indemnity payment regarding Losses “shall be reduced to reflect any Tax Benefit actually realized in the year in which the indemnity payment is required to be made or in any prior year by Buyer …. Tax Benefit means any deduction, amortization, amortization, exclusion from income or other allowance that actually reduces in cash the of Tax that Buyer … would have been required to pay (or actually increased the amount of the Tax refund to which Buyer… would have been entitled in the absence of the item giving rise to the claim….For purposes of this section … Buyer …. shall be deemed to use all other deductions, amortizations exclusions from income or other allowances …prior to the use of ‘Tax Benefits’….”

C. Calculation of Tax Benefit Amount

All of the TBO provisions require a calculation of the amount of the tax benefit offset. Those provisions effectively call for subtracting the amount of actual tax paid by the buyer from the amount of tax which would have been paid without including the tax-reducing item (sometimes referred to as the “with and without” method). A variation on the with and without method seen in a few of the deals studied calls for subtracting the amount of actual tax paid by the buyer from the amount that would have been paid if the tax-reducing item is the last item included (sometimes referred to as the “last in” method). It is unclear whether there is any real difference in result under the two methods.

D. When Must Tax Saving Be Actually Realized by Buyer?

Most of the 28 Stock Deals studied specify a period of time during which the tax benefit or savings must be actually received or realized by the buyer in order to reduce an indemnity payment. Where a time period is specified, it is usually expressed in tax years measured from the date of incurrence of the damages underlying the breach of representation. Additional periods of one, two or even three years are specified. It should be noted that the limiting effects of the Built-in Loss Rules (currently about 1% per year) combined with the specified short periods which tax savings must be realized by the buyer in Viable TBO provisions greatly reduces to minimal percentages any possible reduction of sellers’ indemnity obligation.

E. Mandate on Buyer to Seek Tax Benefits; Mitigation

Most of the TBO provisions refer to tax savings or tax benefits “actually” received or realized (some say “in cash”) by the buyer. None of the TBO provisions expressly compel the buyer to seek tax savings or benefits.

Even the stand-alone express general mitigation obligation contractually imposed on buyers (found in 18 of the 28 Stock Deals with TBO provisions) do not obligate the buyer to seek tax benefits. Those stand-alone general mitigation provisions do not mention tax issues at all. Furthermore, almost all such mitigation provisions address the “gross” losses or damages, but not the “net” indemnification payment. Such contractual mitigation provisions do not by their terms extend to the attainment of tax advantages favoring the seller.

It is worth noting that another pro-seller provision analogous to TBO often seen in M&A documentation reduces the indemnity payment a seller must pay by any insurance recovery received or receivable by the buyer on account of the circumstances underlying the breach of representation. Such insurance provisions are found in all 28 Stock Deals in the Latest ABA Study. Unlike the silence of the language of TBO provisions, the insurance offset provisions frequently do expressly require the seller to seek recovery under available insurance. The implication would be that such an affirmative duty would not apply in the case of TBO when the two offset provisions appear in the same document.

F. What Role Does Seller Have in Buyer’s Tax Strategy?

None of the 28 Stock Deals with potentially Viable TBO provisions give seller any a priori role in the preparation of the buyer’s tax returns or the selection of the buyer’s tax reporting strategy. It appears, appropriately so, that in the first instance the buyer has total control of its tax reporting and filing. However, there should clearly be litigable potential for the seller to inquire as to the existence of tax savings even in the absence of contractual provisions to that effect. In a dispute over indemnification and TBO there could be significant risk to buyer that a court would grant a seller some right of discovery taking into account mitigation obligations, either common law or contractual.

G. Lack of Buyer Protection

None of the 28 Stock Deals in question contained any provisions that would protect an indemnified buyer if TBO issues were in play. There were no provisions protecting the confidentiality of buyer’s tax reporting. Further, there was no express provision leaving all tax reporting decisions to the exclusive discretion of the buyer. It is left unsaid what happens if the buyer is forced to litigate an indemnity claim. If the buyer’s indemnity claim resulted in litigation it would expose the buyer’s tax returns and its reporting positions to scrutiny and disclosure. The buyer could also be forced to show that it has not been unreasonable in declining to adopt tax positions advocated by the seller. Would the buyer’s tax returns and the testimony of its tax advisors be part of the public record in the case or could they be sealed? Would the buyer be forced to adopt tax positions advocated by the seller and adopted by the court even though buyer’s tax advisors recommended against adopting those positions? What assurance would the buyer have that the seller would be willing or able to defend a buyer which adopted those seller-friendly positions if a taxing authority later questioned those positions? Such critical questions are not addressed whatsoever in any of the TBO provisions in any of the deals in question. The risks and uncertainties could very well chill the inclination of buyers to seek redress through indemnification for obvious breaches of representations.

H. Procedural Shortcomings

What is missing from all the TBO provisions in all 41 deals covered in the Latest ABA Study is any treatment of the mechanics of implementing an adjustment of the payment under a TBO scheme other than in many of the deals which require buyer to refund a portion of a tax saving subsequent to receiving an unadjusted indemnity payment. Since there is no express requirement that the buyer seek tax benefit or tax savings, and since any tax benefit or tax saving would ordinarily occur well after the buyer successfully sought an unadjusted indemnification payment from the seller it would seem that it is up to the seller to proactively monitor the activity of the buyer and query the buyer about tax benefits subsequent to the indemnity payment. Perhaps there is an implied duty (good faith and fair dealing) on the part of the buyer to keep the seller informed, but no explicit provision to that effect is found in any of the documents. In any event, the absence of treatment of the mechanics suggests that the sellers who extract a TBO provision from the buyer are not trying very hard to provide for a truly functioning and effective provision that will provide a possible advantage. It may be that sellers are satisfied with extracting from buyers a provision that might inhibit a buyer from seeking redress through indemnification than in actually seeking workable reduced indemnification liability.

I. Do the 28 Stock Deals Pass the Free-Standing C Corp Test?

The ultimate test of the viability of TBO provisions in a Stock Deal is whether the target company is a free-standing taxpayer and is treated for tax purposes as a C corporation. The authors are not aware of any publicly available databases that would answer either of those questions. However, in some cases the documents themselves contain indications of status in whereas clauses, representations and warranties, and certain other provisions. On that basis the authors conclude that all 10 Asset Deals and at least 5 of the Stock Deals would actually fail the free-standing C corporation test.[22] Accordingly, in 18% of all Stock Deals in the Latest ABA Study the TBO provisions are just not viable from a tax point of view.

4. Conclusion

Earlier in this article it is suggested that the traditional limitations on indemnification payments such as baskets, caps and short survival periods foster peace, clarity, finality and closure between buyer and seller. That is not true of TBO provisions. TBO provisions actually greatly prolong the period of hostility between buyer and seller, and give rise to numerous additional issues and grounds for dispute. It appears obvious that many M&A practitioners do not understand the tax law and the practical consequences (especially to the buyer) in negotiating TBO provisions in deal documents. Seller-side practitioners can be excused for blindly advocating for TBO provisions along with all other obstacles to indemnification by buyer. The same can’t be said for buyers. The acceptance by buyers of such TBO provisions, without at the least insisting on measures to protect the buyer, suggests a lack of vigilance or failure to perceive the dangers. 

When approximately 36% of all of the deals in the Latest ABA Study cannot possibly have the desired result under applicable tax law, and when the remaining 64% can only have an absurdly small percentage desired result under applicable tax law (i.e., the Built-in Loss Rules), it is time that the TBO concept is abandoned in all M&A transactions. It is the view of the authors, for all the reasons set forth in this article, that TBO provisions do not belong in M&A transactions.

[1] John F. Corrigan is a sole practitioner at John F. Corrigan Law. P.C. in Providence, Rhode Island. E. Hans Lundsten is of counsel at Adler Pollock & Sheehan P.C. in Providence, Rhode Island. The views expressed are solely those of the authors and do not necessarily represent the views of their respective firms or clients.

[2] Teams of experienced M&A lawyers, as members of the American Bar Association Business Law Section’s Mergers & Acquisition Committee (the “ABA M&A Committee”), have been studying the deal terms and conditions that have repeatedly been the subject of intense negotiations in merger and acquisition documentation for over a decade. This group—the Mergers & Acquisitions Market Trends Subcommittee—has conducted studies of critical deal terms found in acquisitions of private companies by public companies that are disclosed by the public companies as part of their reporting obligations under the Securities Exchange Act of 1934 (referred to in this article as “ABA Studies”). The ABA Studies are only available to members of the ABA M&A Committee. 

The most recent Study, released in December 2019, covered transactions for which definitive deal documents were executed or completed in 2018 and the first quarter of 2019 that involved private targets being acquired by public reporting companies (this most recent study is referred to in this article as the “Latest ABA Study”). In the Latest ABA Study only 41 out of 151 deal documents contained TBO provisions.

[3] This Article will not cover acquisitions that are structured as tax-free reorganizations under one of the categories of transactions described in Section 368(a) of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”) because the general accounting rules (discussed, infra, under the caption “General Tax and Accounting Rules”) that apply to assumed liabilities and that could preclude a buyer or the target company from deducting an assumed liability by statute do not apply to transactions that qualify as a tax-free reorganization under Section 381(c) of the Internal Revenue Code and the buyer or the target company acquired in the transaction should be entitled to claim the deduction. VCA Corp. v. U.S., 566 F2d. 1192 (Fed. C. 1977); Rev. Rul. 83-73, 1983-1 C.B. 84. Therefore, a tax windfall to a buyer is quite possible in a tax-free reorganization, although since the buyer does not get a basis step-up for the acquired assets in a tax-free reorganization any arguable inequity the seller faces if it does not share the supposed tax “windfall” accruing to the buyer is probably offset because the buyer has forgone the tax benefit of the basis step-up in the acquisition.

[4] James Freund, Anatomy of a Merger (1975), pp 376-8.

[5] Page 113 of the Latest ABA Study.

[6] Sears v. Atchison Santa Fe Ry. Co., 749 F. 2^nd 1451 (1984).

[7] R. Wood, “Getting Additional Damages for Adverse Tax Consequences,” Tax Notes, April 27, 2009.

[8] Randall v. Loftsgaarden, 478 U.S. 647 (1986).

[9] Hanover Shoe Inc. v. United Machinery Corp., 393 U.S. 481 (1968).

[10] See Wood, supra note 8.

[11] See Wood, supra note 8.

[12] Section 1.708-1(b)(1), Income Tax Regulations and Rev. Rul. 99-6, Situation 2, 1999-6 I.R.B.6 (2/8/99).

[13] Welch v. Helvering, 290 U.S. 111, 113 (1933); Deputy v. DuPont, 308 U.S. 488, 494 (1940).

[14] 188 BNA Daily Report for Executives J-1, 2003, Treatment of Contingent Liabilities in an Acquisition Evolving (2003).

[15] Federal Tax Coordinator, Second Edition PL-5404, Successor’s Contingent Liabilities – Reorganization Expenses as Capital Expenditures (2012).

[16] The Federal Tax Coordinator article described supra note 17 above, provides that while some of the decisions, including the Seventh Circuit in its opinion in Illinois Tool Works, infra note 19, have observed that it might be possible in some situations for the assumption of a contingent liability by the buyer as part of an acquisition to give raise to a deduction (and not have to be capitalized) none of the decided cases have allowed a deduction for an assumed liability and none of them have described those situations where an assumed liability would be give raise to a deduction.

[17] Holdcroft Transp. Co. v. Comm., 153 F2d 323 (C.A. 8, 1946); Pacific Transport Company v. Comm., 483 F2d 209 (C.A. 9, 1973), cert. denied, 415 U.S. 948 (1974); Illinois Tool Works v. Comm., 117 T.C. 39 (2001,) aff’d 355 F.2d 997 (C.A. 7, 2004).

[18] Section 1.1502-21(b)(2)(ii), Income Tax Regulations.

[19] Section 1366(a) of the Internal Revenue Code.

[20] Section 382(a) of the Internal Revenue Code.

[21] Rev. Rul. 2012-31, 2012-49 I.R.B. 636.

[22] Many of the deal documents contained provisions which were ambiguous or which referred to schedules which were not available for review. In the absence of incontrovertible evidence that the target was not a free-standing C corporation, the authors gave the deal the benefit of the doubt and assumed the provision was a Viable TBO provision.

See the first article in this series, on protecting financial institutions from enforcement actions.

Financial institutions face significant risks from enforcement actions by prudential regulators as well as agencies charged with protecting consumers, investors, or the public at large, such as the Consumer Financial Protection Bureau (CFPB), Securities and Exchange Commission (SEC), and Department of Justice (DOJ).  I recently published an article about what steps in-house counsel can take to mitigate those risks for their  financial institution clients.  This article has a different perspective.  Rather than focusing on threats to the institution, it focuses on threats to in-house counsel in their personal capacity.  At the outset, it is important to recognize that enforcement actions against in-house counsel are extremely rare.  They are not, however, non-existent. 

This article draws in part on an unpublished analysis prepared by one of my partners at Williams & Connolly that examines non-insider trading SEC action and DOJ criminal prosecutions against corporate in-house counsel over the past two decades.  The analysis focuses on threats that in-house counsel may face personally from government agencies, and what lessons can be drawn from prior enforcement actions and criminal prosecutions against individuals.  While not all of the lessons are drawn from actions involving in-house counsel specifically at financial institutions, the lessons are equally applicable to them. 

Common Factors in Actions Involving In-House Counsel

Factor #1 – The top lawyer is nearly always the target, either in their own right or to undermine an ‘advice of counsel’ defense for other top executives

When the SEC or DOJ takes action against in-house lawyers, they almost always focus on the General Counsel or Chief Legal Officer.  There are two overarching reasons for this.  First, the top lawyer indisputably had the power and the mandate to address issues, and—rightly or wrongly—the failure to do so is often laid at the feet of the General Counsel or Chief Legal Officer.  Another reason why General Counsel or Chief Legal Officers may find themselves in the crosshairs, particularly in criminal actions, may be to undermine the advice of counsel defense for other executives.  When the government threatens civil or criminal claims against in-house lawyers, self-preservation instincts may surface.  It is not uncommon for lawyers to disavow or distance themselves from certain positions being advanced by other targets of the investigation as a way to protect themselves. 

Factor #2 – Big losses to the institution bring unwanted scrutiny to in-house counsel

Another common factor in SEC enforcement actions and criminal prosecutions against in-house counsel is when the institution itself suffers substantial losses.  The bigger the failure of the institution, the greater the risk of exposure for the in-house counsel.  When the institution is handed a large judgment or damning indictment,  there is incredible pressure from consumers, politicians, and the media to hold someone accountable and actions may be second-guessed with the benefit of hindsight.  The in-house counsel often becomes the scapegoat.  

Factor #3 – In-house lawyers can insulate themselves by consulting outside counsel

Inside lawyers who relied upon outside lawyers are rarely, if ever, the targets of SEC enforcement actions or criminal prosecutions.  The advice of counsel defense is a real deterrent to prosecution or enforcement.  But to mount a viable defense, the consultation with outside counsel must be meaningful and – ideally – documented.  Outside counsel needs to be apprised of the material facts and their advice should be memorialized contemporaneously; by extension, in-house counsel should act in a manner that is consistent with outside counsel’s advice to clearly demonstrate reliance on the advice. 

Factor #4 – Complex or debatable problems are rarely a basis for individual enforcement action or prosecution, whereas perjury or obstruction are much easier cases

Enforcement lawyers and prosecutors prefer to pursue cases where there is a clear legal violation.  SEC enforcement counsel and prosecutors will vigorously pursue claims of perjury or obstruction against in-house counsel because these actions tend to be straightforward and easy to prove.  SEC enforcement proceedings against in-house counsel most commonly arise from disclosures, particularly omissions in disclosures.  Self-dealing or other actions to line one’s pockets is not necessary for the SEC to bring an enforcement action.  By contrast, when the violation itself is unclear or complicated, there is less risk to in-house counsel even if the SEC or DOJ decides to pursue an action against the institution.  It is much easier to fault somebody when the violation is unambiguous.  A corollary to this is that mere knowledge of conduct later deemed to be criminal is usually not enough to warrant prosecution against an in-house lawyer, unless the conduct was so egregious as to be unambiguously improper. 

Factor #5 – Generalist lawyers cannot insulate themselves from liability by claiming ignorance

Do not get in over your head.  In-house lawyers are expected to have the knowledge and experience necessary to discharge the responsibilities of their role.  It is not uncommon for in-house lawyers in smaller institutions to wear several hats, such as also serving in a compliance function (or at least overseeing the compliance function).  No matter how many hats they wear, in-house counsel will be held responsible for shortcomings, particularly when those shortcomings impact consumers or the institution in a material way.  Neither the SEC nor DOJ are moved by arguments that the individual charged with these roles lacked the sophistication to discharge those responsibilities. 

Practical Tips for In-House Counsel at Financial Institutions

These observations lead to some practical tips for in-house counsel for minimizing the enforcement profile of their institution and, by extension, themselves. 

1. Ensure that your institution’s risk management function is well-resourced and appropriately staffed with competent personnel. An enforcement action is almost always far more costly (both as a matter of reputation and penalty) than maintaining a well-functioning compliance team.  These staffing and resource investments can pay big dividends in terms of smooth regulatory relationships and the early identification and remediation of problems. 
2. Establish and maintain a close working relationship with the Chief Risk Officer. Most institutions have three lines of defense (line of business, compliance, and audit) and the Chief Risk Officer should have clear visibility into each one.  The Chief Risk Officer ideally should be not only a peer, but also a partner for in-house counsel.
3. Make sure that your institution is taking proactive steps to identify and address issues as they arise. Problems that fester or recur are more likely to provoke regulatory attention on in-house counsel’s action (or perceived inaction).  Being proactive will help establish that in-house counsel (and the institution as a whole) exercised appropriate business judgment.
4. Be on high alert if your institution’s CAMELS ratings start to slip, as this may signal deeper issues with institutional controls or management. This also signals greater regulatory scrutiny, particularly when a bank or credit union is operating under a consent order or memorandum of understanding, and an increased likelihood of second-guessing. 
5. When faced with particularly thorny questions: (1) consult with outside counsel; (2) make sure that their advice is memorialized in an appropriate fashion; and then (3) act on that advice. While there will invariably be a marginal cost associated with engaging outside counsel, the long-term benefits are almost always worth it. 

See the second article in this series, on how in-house counsel can protect themselves from SEC enforcement actions and criminal prosecutions.

There is a veritable alphabet-soup of scenarios which financial institution in-house counsel hope not to encounter:  CID, OOI, PWL, NORA, 15-Day Letter.[1]  When a bank or credit union receives a Civil Investigative Demand (CID), an Order of Investigation (OOI), a Preliminary Warning Letter (PWL), a Notice of Opportunity to Respond and Advise (NORA), or a 15-Day Letter, the institution knows one thing for sure: it is in the crosshairs of a potential enforcement action by a prudential regulator or the Consumer Financial Protection Bureau. 

This article identifies lessons that in-house counsel at banks and credit unions may find helpful as they advise their own institutions.  The lessons are drawn from my own experiences representing financial institutions – their directors and officers – under investigation or in enforcement litigation, and augmented by a review of other publicly filed actions and consent orders. 

Enforcement Actions by Prudential Regulators

Prudential regulators such as the Federal Deposit Insurance Corporation (FDIC), Office of the Comptroller of the Currency (OCC), National Credit Union Administration (NCUA), and Federal Reserve pursue formal enforcement actions when they believe that there have been violations of laws, rules, or regulations, unsafe or unsound banking practices, breaches of fiduciary duty, or violations of final orders or conditions imposed in writing or written agreements.  The enforcement actions may seek anything from cease-and-desist orders to civil money penalties. 

Banks or credit unions that find themselves the target of enforcement investigations rarely litigate against their prudential regulators, absent overreach in the agency’s jurisdiction or demand.  The supervisory relationship is usually too important to risk long-term damage, and the restrictions on an institution’s ability to pursue business opportunities without supervisory approval are usually too stifling to be tolerated for long. 

Individual executives are sometimes in a better position to fight.  Not only do they not have the same institutional concerns, they usually can draw on a directors and officers liability (D&O) insurance policy or have their fees indemnified and possibly advanced by the institution.  Moreover, they are often motivated to clear their reputation and avoid draconian sanctions, such as civil money penalties and/or removal and prohibition from the banking industry. 

Here are three key takeaways based on my work handling enforcement actions by prudential regulators.  These lessons might have forestalled or avoided the enforcement action altogether had they been part of the institution’s policies or performed at the outset.

Lesson #1 – An ineffective risk management function is a recipe for trouble

A common denominator in many enforcement actions is the lack of an effective risk management function with sufficient authority and voice within the bank to elevate concerns and drive changes.  Sometimes risk management failures manifest themselves in the failure to comply with existing consent orders, resulting in repeat violations that are invariably dealt with far more harshly than the original violation.  There are numerous examples where financial institutions failed to comply with existing consent orders that mandated changes to Bank Secrecy Act/Anti-Money Laundering (BSA/AML) practices, only to see recurring violations and correspondingly more draconian penalties. 

Other enforcement actions are premised on inattention to governance and compliance mechanisms.  This inattention can manifest in many ways, such as taking reactive approaches that depend on third parties – customers, credit reporting agencies, examiners – to identify problems; failing to investigate and address what in retrospect may be viewed as red flags; and providing superficial responses that fail to fix root causes.  These shortcomings may be attributed to competing management priorities, or an inexperienced or ineffective risk management team.  Institutions that have the most significant compliance violations tend to have risk management departments that are under-staffed, under-resourced, and under-appreciated.  Whatever the underlying cause, regulators (with the benefit of hindsight) are predisposed to pursue enforcement actions if an institution is perceived as having a substandard risk management function. 

The lesson here is that every financial institution should place a premium on having an effective and formidable risk management function.  Risk management should have the resources and ability to evaluate internal and external complaints or reports of misconduct, investigate and report suspicious banking activity, conduct risk-based assessments of operations, assess compensation systems, detect and investigate outliers, consider feedback given by departing employees, and adhere to a transparent and well-documented disciplinary system. 

Lesson #2 – Avoid high-risk products or services unless your institution has the requisite competence and expertise

Another common feature of investigations and enforcement actions is that they involve high-risk products, services, or customers.  There have been a number of enforcement actions around flawed or deficient BSA/AML compliance and monitoring processes emanating from high-risk customers.  For instance, third-party payment processors may pose heightened risk to financial institutions if they service merchants or businesses that regulators deem to be (potentially) fraudulent, predatory, or unsavory, such as telemarketers or internet gaming providers.  Financial institutions that cater to digital asset customers such as cryptocurrency exchanges and other crypto-related businesses run the risk that prudential regulators may find their Customer Due Diligence (CDD) processes inadequate for the risk posed by these customers.  Likewise, partnering with Fintech companies poses its own set of risks, as the financial institutional may be held accountable for the actions or omissions of the third-party company, which may be more focused on growth and product development than customer service and compliance without adequate oversight and controls. 

Financial institutions whose CAMELS ratings are less than satisfactory should be particularly wary of banking high-risk customers, products, or services.  Examiners rarely look fondly on this, and commonly criticize these practices and fault institutional management for the high-risk customer’s shortcomings when there is any problem.  For those financial institutions that are considering banking with higher risk customers or partnering with Fintech companies, it is advisable to keep an open line of communication with prudential regulators – this proactive step helps avoid surprises and demonstrates an ability to handle the relationship.  It is imperative to develop and periodically update an overarching banking strategy that has been approved by the Board and shared with regulators and to have a sophisticated and experienced BSA/AML officer charged with making sure that the strategy is followed.  Institutions should also have the technology and resources to develop and apply enhanced due diligence procedures to high-risk customers, both at the outset and throughout the course of the relationship, and have a demonstrated track record of compliance. 

Lesson #3 – Individuals may be held accountable for systemic shortcomings in institutional safety and soundness

Individual enforcement actions typically are predicated on breaches of the duty of loyalty and outright violations of law, and mostly focus on deception, obstruction, or self-dealing.  Such misconduct presents a straightforward case for proving that institution-affiliate parties (IAPs) breached their fiduciary duties.  By contrast, prudential regulators rarely pursue enforcement actions against individuals based solely on safety and soundness, as it can be difficult to blame any single individual for such a collective lapse. 

However, regulators have come under increased criticism and scrutiny over the past decade for not holding individuals accountable for bank failures and other systemic risk management shortcomings.  For example, in 2014 the Office of Inspector General analyzed bank enforcement actions and recommended that enforcement counsel pursue more cases against IAPs on safety and soundness violations.  More recently, politicians and the media have exerted pressure on regulators to hold individuals accountable for institutional misconduct, particularly when that misconduct occurred on a systemic basis or affected large numbers of customers.  As a result, there has been an uptick in enforcement actions against individuals premised on significant safety and soundness failures.  It is no longer enough to simply avoid engaging in personal dishonesty or self-dealing to stay out of enforcement’s crosshairs.  It is more likely now than ever that IAPs will be held personally accountable for institutional shortcomings if the problems are considered to be widespread or egregious.   

A corollary of this observation is that in-house counsel are no longer exempt from being held responsible for institutional problems.  It used to be that in-house lawyers were fairly insulated from enforcement actions unless they engaged in deception, obstruction, or some form of self-dealing.  Now, however, there are signs of an emerging willingness to hold in-house lawyers accountable when the institution engages in unsafe and unsound practices for an extended period of time.  This is not a strict liability regime; rather, enforcement counsel appear inclined to hold in-house counsel responsible when they believe (with the benefit of hindsight) that in-house counsel’s contemporaneous actions or inaction to address systemic problems were unreasonable, reckless, or grossly negligent. 

What does this mean as a practical matter?  To put it simply, if you see something, say (or do) something.  The best way to inoculate yourself and to protect your institution is to act.  In-house counsel should not ignore so-called red flags or other signs that there may be unsafe or unsound conduct.  This is especially true for systemic issues rather than isolated problems.  Warning signs can emanate from many different sources – for example, internal ethics complaints by employees, customer complaints, exit interviews with departing employees, or outlier analyses of the performance of employees or agents.  The critical question is whether in-house counsel monitors how the warnings are being handled and takes affirmative and effective action if problematic trends persist.  Ignoring systemic problems is a recipe for trouble; likewise, ineffective actions by counsel may not be enough to stave off an enforcement action, particularly if counsel does not take steps to elevate their concerns to others who can take effective action. 

This is not to say that a General Counsel must operate as a de facto Chief Risk Officer.  Most institutions of sufficient size separate those roles and establish independent reporting structures, and in-house counsel are permitted to rely on others (until it is no longer reasonable to do so).  But it does put a premium on in-house counsel keeping abreast of systemic problems identified by the Risk Management function and assessing whether appropriate action is being taken.  When problems persist and in-house counsel fails to follow up or take meaningful steps to ensure that those problems are being addressed in an effective manner, the risk of enforcement action for both the institution and the individual rises significantly. 

It also means that in-house counsel should carefully review the scope and coverage provided by their D&O insurance policy, including whether there is Side A coverage that is exclusively available to D&Os.  These policies can be critical to the defense of directors and officers, particularly in the unfortunate circumstance where the institution itself has been placed into receivership.  While D&Os with larger insurance policies may be a more attractive target, I have yet to meet a client who wishes their D&O coverage was less.  Indeed, more often than not the converse is true, and the individual clients wish their coverage was greater.  Although it may feel remote and unnecessary at the time, having a substantial D&O policy is an important factor in being able to mount an effective legal defense. 

Enforcement Actions by the CFPB

The Consumer Financial Protection Bureau (CFPB) presents a different regulatory challenge for financial institutions whose assets exceed the $10 billion jurisdictional threshold.  Unlike prudential regulators whose primary mission is to ensure institutional safety and soundness, the CFPB’s mandate is to an institution’s consumers and not the institution itself. 

The CFPB is charged with enforcing 18 different consumer protection statutes and armed with expansive unfair, deceptive, or abusive acts or practices (UDAAP) power under Title X of the Dodd Frank Wall Street Reform and Consumer Protection Act.  Historically, the CFPB has wielded its power aggressively.  The Bureau is known for taking enforcement positions that push the envelope.  And while that posture was modulated to a degree during the Trump administration, the pendulum appears to be swinging back to a more aggressive enforcement posture, with particular emphasis on pursuing fair lending violations and abusive acts or practices. 

While the key takeaways for dealing with prudential regulators continue to apply, there are other lessons that are unique to the CFPB’s enforcement investigations and actions.  Prioritizing a strong Compliance Management System under the direction of qualified and capable Risk Management personnel will always be the most important thing a financial institution can do to stay on the good side of regulators.  Institutions with a strong risk management function are more likely to spot issues and address them promptly, and therefore will have greater credibility with prudential and CFPB examiners alike.  But what else should an institution do to better position itself with regard to the CFPB?

Lesson #1 – Approach supervisory responses, even Supplemental Information Requests and PARR letters, from an advocate’s perspective

Often the decision whether to refer a matter inside the CFPB from Supervision to Enforcement is a judgment call.  In my experience, once a matter gets referred to Enforcement, it tends to take on a life of its own.  That is not to say that every investigation inevitably ends with an enforcement action, but most of them do.  That reality means that financial institutions should put a premium on their supervisory responses.  The deadlines for providing responses are often short, particularly for Supplemental Information Requests.  But institutions with the foresight to involve in-house counsel and – when appropriate – outside counsel, can improve the quality of their responses and frame them in ways that provide important context and ultimately make them more persuasive.  This does not guarantee that an institution can avoid a referral to Enforcement, but it can make the difference in a close case.  And even if there is a referral to Enforcement, having involved litigation counsel at the Supervisory stage ensures that the counsel is up-to-speed and ready to handle the matter from the outset. 

Lesson #2 – It is never too late to fix things, even after an investigation starts

Sometimes financial institutions fall short despite their best efforts.  Mistakes happen, or sophisticated databases do not function as expected, and consumers may be negatively impacted.  Institutions that identify these problems, promptly take corrective action, and voluntarily disclose the issue almost always find themselves in a better overall position when dealing with the CFPB than those that do not.  For starters, sometimes the Bureau will decline to take enforcement action if it believes that the institution was forthcoming, has a strong compliance management function, and took appropriate action to notify and remediate affected consumers.  But even when the Bureau does elect to bring an enforcement action, it will often acknowledge the voluntary corrective actions that were taken and negotiate a reduced penalty below what it otherwise might have demanded. 

Even when an institution does not identify the problem until after an investigation has begun, it still is not too late.  Investigations rarely move quickly; they are most often measured in years rather than months.  Financial institutions that take effective action early in an investigation to address deficiencies may come out ahead.  If the institution implements new and effective controls to address the issue, they can then point to those changes to demonstrate their responsiveness to supervision, the important role played by management in driving these changes, and the effectiveness of the controls. 

It is often quite compelling to have the institution’s own personnel showcase their work.  For example, it may make sense to arrange for an in-person demonstration of newly developed controls, and to have employees show how it functions and how its use now prevents the problem at the heart of the investigation from recurring.  When done correctly – i.e., with personnel who have the qualifications, credibility, and presentation skills needed to communicate their message – this sort of show-and-tell can reassure CFPB enforcement personnel that they do not need to make an example of the institution. 

Lesson #3 – Sometimes it pays to litigate

Given the Bureau’s tendency to take aggressive positions, it is sometimes difficult to reach a reasonable settlement with the CFPB in a pre-litigation posture.  There are institutional reasons why the Bureau tends to be more aggressive in enforcement actions.  First, it is still a relatively new agency and is trying to cement its reputation as a tough and effective consumer advocate.  The more wins it can get under its belt, and the more significant they are, the more fearsome it becomes.  Second, the Bureau cannot possibly file enforcement actions against everyone who violates any of the 18 federal consumer protection laws under its purview.  So it magnifies its leverage by pursuing high-profile entities – including financial institutions – to set examples for the rest of the industry, and then using those investigations and actions as templates to target others.  Third, to borrow a baseball analogy, in its early years the Bureau preferred swinging for the fences to adopting a more conservative strategy premised on hitting singles or doubles.  Early on, the CFPB pursued litigation on the periphery of its authority, such as around indirect auto lending, or controversial interpretations, such as around the proper interpretation of RESPA or Regulation E, rather than consistently tackling acts or practices more at the heart of its authority.  This approach sparked substantial criticism of the CFPB’s “regulation by enforcement” approach.  And fourth, the Bureau is trying to establish the parameters of its authority and therefore is incentivized to take more expansive and aggressive positions in order to do so. 

Despite these dynamics, it is common to resolve enforcement actions without litigation.  To their credit, CFPB enforcement counsel usually engages in substantive discussions about the merits of their claims.  This process usually begins in earnest with a NORA response, but often continues after enforcement counsel obtains authority to sue.  When they are fact- and principles-based, these discussions can lead both parties to modify their positions and reach an acceptable resolution.  When this happens, the CFPB typically will include additional factual recitals requested by the institution to add context or emphasize voluntary remedial measures. 

There are times, however, when management and the board of directors view the Bureau’s demands as too extreme or unreasonable.  Perhaps the CFPB predicates its demand on agreeing to certain conditions, such as the amount of restitution or civil money penalty, or frames the facts in the proposed consent order in a way that the institution feels is misleading or inaccurate, or is pursuing claims that exceed its authority.  In those circumstances, institutions are left with a stark choice:  they can take the offer on the table, or they can choose to litigate.  In those situations, financial institutions sometimes achieve substantially better outcomes when they choose to litigate the enforcement action. 

I co-authored an article on this topic: Sometimes It Pays to Litigate Against the CFPB, Law360, Oct. 13, 2017.  Although published over three years ago, the central premise of this article – that defendants threatened with CFPB enforcement actions should carefully weigh the merits of their legal and factual defenses and not assume that settlement will result in the best outcome – remains true today.  This is not to say that institutions should litigate simply for the sake of litigation.  To the contrary, if the institution lacks a compelling defense, then it may be best to accept the offer on the table.  But when there are unsettled legal questions and a factual narrative that diverges from the CFPB’s telling, then litigation can pay off.

*     *     *

The benefits of avoiding damaging and expensive enforcement actions and reputational hits are incalculable.  Financial institutions that internalize these lessons and devote the necessary resources to establishing a culture and system that prioritizes compliance will come out ahead in the long run.  But even sophisticated financial institutions make mistakes, and when that happens it is important to remember that there are still things that can be done to improve your position with regulators and the overall outcome of any enforcement actions. 

[1] Ryan Scarborough is a partner at Williams & Connolly LLP.  He litigates enforcement actions brought by prudential regulators targeted at financial institutions, their directors and officers, and other institution affiliated parties, as well as consumer protection actions brought by the CFPB, securities actions brought by the SEC, and investigations by the DOJ.    

Editors

Carolyn G. Nussbaum

Nixon Peabody LLP
1300 Clinton Square
Rochester, New York 14604
585-263-1000
[email protected]
www.nixonpeabody.com

Christopher M. Mason

Nixon Peabody LLP
Tower 46
55 West 46th Street
New York, New York 10036
212-940-3000
[email protected]
www.nixonpeabody.com

§ 1.1 Introduction

To illustrate the state of arbitration law in 2020, we describe in this chapter selected cases from the United States Supreme Court docket, the federal Circuit Courts of Appeals (and several noteworthy cases from the federal District Courts), and the highest courts of each state that raise unique issues, provide instructive guidance on recurring issues in arbitration law, or are likely to be of interest to the general legal profession.  We also discuss several legislative and regulatory developments and several discussions involving mediation issues.

Starting from the top, as we predicted in this chapter in the 2019 ANNUAL REVIEW OF RECENT DEVELOPMENTS IN BUSINESS AND CORPORATE LITIGATION (ABA 2020), the U.S. Supreme Court did not have a significant volume of arbitration cases in 2020.  The Court issued just one substantive arbitration decision and heard argument on just one potentially significant case in which a decision is expected in 2021.[1]  This, of course, meant that the Court denied review in a number of cases.  Among those, one denial of certiorari in particular may also have been somewhat notable.

This year, at least two issues revealed splits among the Circuits on arbitration issues.  First, numerous decisions considered whether and to what extent delivery workers in the “gig economy,” including those who carry goods the “last mile,” were within the scope of the residual clause of section 1 of the FAA[2] exempting from the Act contracts of “any other class of workers engaged in foreign or interstate commerce” as interpreted by the United States Supreme Court in Circuit City Stores, Inc. v. Adams.[3]  These cases are discussed in section 1.8.1.

In addition, 28 U.S.C.A. § 1782 permits any party or other interested person involved in proceedings taking place before a foreign or international tribunal, or the tribunal itself, to make a request to a U.S. federal district court for an order compelling discovery from a person or entity that resides or is found in the district in which the court sits.  Several decisions this year grappled with the question of whether discovery may be ordered in aid of private foreign and international arbitral proceedings, including the Seventh and Fourth Circuits, which came to conflicting conclusions relating to the same international proceeding.  These cases are discussed below in section 1.17.

2020 also was the year that federal regulators in the Antitrust Division of the Department of Justice (the “Division”) embraced arbitration after a well-publicized success in arbitrating the definition of the relevant product market in a challenged merger.  Capitalizing on that success, the Division issued its Updated Guidance Regarding the Use of Arbitration and Case Selection Criteria in November 2020, signaling an interest in increasing the use of arbitration.[4]

With a deeply divided Congress, and scant chance of abolishing the filibuster, broad-based legislative attacks on the growing use of arbitration agreements appear unlikely.  Still, watch for a renewed battle over the proposed Forced Arbitration Injustice Repeal Act (“FAIR”), a bill that has been introduced in one form or another for many years, and which has already passed the House.  FAIR would invalidate pre-dispute arbitration agreements in the employment, civil rights, consumer, and antitrust contexts, and would require employers to litigate workplace disputes in court.

§ 1.2 Legislative and Regulatory Development

§ 1.2.1 The Department of Labor

Countrywide Fin. Corp., 369 N.L.R.B. No. 12 (Jan. 24, 2020).  Arbitration agreement that does not expressly prohibit filing charges with the National Labor Relations Board (“NLRB”) interfered with employees’ rights to file such charges because a reasonable employee would interpret the exclusive remedy language of the agreement as imposing such a prohibition.

This case arose during the two-year period when Countrywide Home Loans, Inc. (“Countrywide”) required applicants seeking employment to sign an arbitration agreement.[5]  The agreement stated that covered claims included those “arising out of, relating to or associated with the Employee’s employment,” as well as “claims for benefits and claims for violation of any federal, state or other governmental constitution, statute, ordinance, regulation, or public policy” and provided that “[a]rbitration is the parties’ exclusive remedy for covered claims,” although it also stated that “[n]othing in this Agreement shall be construed to require arbitration of any claim if an agreement to arbitrate such claim is prohibited by law.”[6]  At issue was whether this arbitration agreement violated section 8(a)(1) of the National Labor Relations Act (“NLRA”) by interfering with employees’ rights to file charges of violations of the NLRA with the NLRB. The NLRB applied the three-part balancing test of its Boeing Co.[7] decision to conclude that, as reasonably interpreted, Countrywide’s arbitration agreement did interfere with employees’ rights to file charges with the NLRB because employees would reasonably interpret the “exclusive remedy” language to limit their ability to file charges with the NLRB.[8]  This was true even though the arbitration agreement did not explicitly prohibit filing charges with the NLRB.[9]  Applying its own precedent, the NLRB found that there was no legitimate justification to outweigh administration of the NLRA.[10]  The NLRB further applied its precedent to find that the savings clause language, which purported to except claims for which arbitration is “specifically proscribed” by federal law, was too vague to save the arbitration agreement.[11]  The court reasoned that although a reasonable employee would understand that the arbitration agreement does not apply where “prohibited by law,” the reasonable employee cannot be expected to have the legal background to know where the language of the provision would apply.[12] 

§ 1.2.2 The Department of Justice

In March 2020, the Antitrust Division of the Department of Justice (the “Division”) announced it had prevailed in its efforts in an arbitration to secure the divestiture by Novelis, Inc. (“Novelis”) of the North American aluminum production facilities of Aleris Corporation (“Aleris”) as a condition of Novelis’ acquisition of Aleris.  In September 2019, the Division had commenced an antitrust enforcement proceeding under the Clayton Act by filing a complaint against Novelis.  Prior to filing the Complaint, the Division and Novelis had agreed to refer the matter to binding arbitration in the event that the parties were unable to resolve certain issues within a certain period of time.  After preliminary discovery, they agreed to refer the key issue of relevant product market definition to binding arbitration before an arbitrator they had chosen pursuant to their agreement.  After a 10-day hearing, the arbitrator ruled in favor of the government.

The Division first released guidance on the potential use of arbitration in 1996 (the “1996 Guidelines”),[13] after passage of the Administrative Dispute Resolution Act of 1996 (“ADR Act”).[14]  In the wake of the successful Novelis arbitration, the Division released Updated Guidance Regarding the Use of Arbitration and Case Selection Criteria in November 2020 (“Updated Guidance”).[15]  The Updated Guidance addresses “the arbitration agreement, the decision whether to file a complaint in federal district court before the matter is referred to arbitration, selection, compensation and cost shifting, and the training of Antitrust Division staff on the use of arbitration,” as well as the Division’s learnings from the Novelis case.

The Updated Guidance highlights the potential advantages of alternative dispute resolution strategies such as arbitration, including the ability “to eliminate unnecessary civil litigation, shorten the time that it takes to resolve civil disputes, and achieve better case resolutions with the expenditure of fewer taxpayer resources.”[16]  The stated policy will be to “encourage” the use of ADR where it may “shorten the time necessary to resolve a dispute, reduce the taxpayer resources used to resolve a dispute, or otherwise improve the outcome for the United States.”[17]  However, where the prior guidance cautioned that “ADR techniques will likely be difficult to apply during the course of merger investigations,” due to time constraints, this language has been omitted from the Updated Guidance.[18]

The Updated Guidance includes selection criteria the Division will apply when considering arbitration.  While acknowledging that arbitration requires the consent of both parties, arbitration is favored for matters in which an arbitrator would be more efficient or where the expense of bringing suit is overly burdensome in comparison to the consumer benefit, cases in which the issues are clear and can be agreed upon by the parties, where issues are factually or technically complex and would be benefited by an expert factfinder, where litigating in federal court could result in unacceptable delay, or where parties have a particular need to control the scope of relief.[19]  The Updated Guidance also notes that “[a]rbitration also allows the parties to select an arbitrator with relevant expertise, such as in antitrust law or economics, which may allow the parties to streamline their advocacy or eliminate unnecessary expert testimony.”[20]  Conversely, the “lost opportunity to create valuable legal precedent” and where “[t]he public’s interest in the matter is of such significance that resolution by a federal judge in an open forum is necessary” both weigh against arbitration.[21]

A comparison of factors to consider between the 1996 Guidelines and the Updated Guidance reveals similarities and changes.  Several factors that favor arbitration have been repeated, including conservation of resources and technical or factual complexity.[22]  Dropped from the Updated Guidance are considerations that were included in the 1996 Guidelines such as numerosity of parties, divergence of interest among the aggrieved parties, absent stakeholders, an ongoing relationship between the Division and the parties, and a hostile decision maker in the form of an unsympathetic judge.[23]

The Updated Guidance also described the requirements of the arbitration agreement of the parties, derived from the ADR Act, including specifying a maximum award and other conditions limiting the range of possible outcomes.[24]  While the Updated Guidance cautions that the agreement should also address confidentiality of evidence and the proceedings, “[a]t a minimum, it is the policy and the strong preference of the Division that the arbitrator’s decision be made public.”[25]

While the ADR Act provides that the arbitrator can be “any … individual who is acceptable to the parties,” the Updated Guidance suggests the Division will have a strong preference toward “an antitrust specialist or former judge, either with economics training or with extensive experience handling complex antitrust cases,” stressing that a hand-selected arbitrator could bring enhanced expertise on economic issues and expert testimony, which could potentially be dispensed with where the arbitrator already possesses the appropriate knowledge and focused expertise.[26]

More than two decades after passage of the ADR Act, the Novelis case was the first use of arbitration in a merger enforcement action.  It likely will not be the last.

§ 1.2.3  Revised Uniform Arbitration Act

The Uniform Law Commissioners drafted and proposed the original Uniform Arbitration Act (the “UAA”) in 1955.  It provided, among other things, basic procedures for the conduct of an arbitration by agreement.  Forty-nine jurisdictions adopted the original UAA, including the District of Columbia, Puerto Rico, and the U.S. Virgin Islands.[27]  Four states, Alabama, Georgia, Mississippi, and West Virginia, did not enact any version of the original UAA.[28]

In 2000, the Commission revisited and substantially revised the UAA to produce the 2000 Uniform Arbitration Act (the “Revised UAA”).[29]  The Revised UAA allows for consolidation of separate arbitration proceedings, expressly provides for immunity for arbitrators from civil liability, authorizes the award of punitive damages and attorneys’ fees when such an award would be authorized in a civil action, and provides arbitrators with discretion to order discovery, issue protective orders, and decide motions for summary judgment, similar to a judicial proceeding.[30]

Twenty-two states have adopted the Revised UAA, including Alaska, Arizona, Arkansas, Colorado, Connecticut, the District of Columbia, Florida, Hawaii, Kansas, Michigan, Minnesota, Nevada, New Jersey, New Mexico, North Carolina, North Dakota, Oklahoma, Oregon, Pennsylvania, Utah, Washington, and West Virginia.[31]  No new states have adopted the Revised UAA in 2020, although legislation in Massachusetts was reintroduced in 2019 and given a study order in 2020,[32] while a bill to adopt the Revised UAA was proposed in Vermont in 2019 and is still awaiting a vote as well.[33]  The progress of states enacting the Revised UAA can be tracked at www.uniformlaws.org.

§ 1.2.4 Uniform Mediation Act

The Uniform Mediation Act (the “UMA”), as promulgated by the Uniform Law Commission in 2001 after a joint drafting effort with the American Bar Association’s Dispute Resolution Section,[34] and as amended in 2003 to incorporate the Model Law on International Commercial Conciliation,[35] was not adopted by any new states in 2020.  It continues in effect in the District of Columbia, Hawaii, Idaho, Illinois, Iowa, Nebraska, New Jersey, Ohio, South Dakota, Utah, Vermont, and Washington.[36]  The Act was introduced again in 2019 in Massachusetts, and was given a study order in 2020.[37]  The progress of states enacting the UMA may be tracked at www.uniformlaws.org.

§ 1.2.5 The United Nations Convention on International Settlement Agreements Resulting from Mediation

On August 7, 2019, 46 countries signed on to the United Nations Convention on International Settlement Agreements Resulting from Mediation (the “Singapore Convention”).[38]  The initial signatories included (in addition to Singapore, of course) major States such as the United States, China, and India, but did not include, for example, Australia, the European Union, or the United Kingdom.[39]  Since then, Ghana and Rwanda have signed on as well.[40]

As discussed in our 2019 compilation, the Singapore Convention provides, for the first time, an international process for the direct enforcement of cross-border settlement agreements arising out of mediation.[41]  To fall within the scope of the Singapore Convention, a settlement agreement must be in writing, must result from a mediation, must be between two or more parties who have their place of business in different States, and must involve, as the place of business of each party, a State that has acceded to or ratified the Singapore Convention.[42]  There are some substantial exceptions to its coverage, however: the Singapore Convention will not apply to settlement agreements that relate to consumer transactions, or to family law, inheritance issues, or employment law; to settlement agreements that have been approved by a court or concluded in the course of proceedings before a court and that are enforceable as a judgment in the State of that court; or to settlement agreements that have been recorded and are enforceable as an arbitral award.[43]

Mediation is defined under the new Singapore Convention as “a process, irrespective of the expression used or the basis upon which the process was carried out, whereby the parties attempt to reach an amicable settlement of their dispute with the assistance of a third person or persons (the ‘mediator’) lacking the authority to impose a solution upon the parties to the dispute.”[44]  Presuming that the Singapore Convention does go into effect, a settlement agreement that qualifies will allow a party to use a simplified procedure for enforcement.  That party will provide to the relevant authority in the State where the party seeks to enforce the settlement agreement two basic pieces of evidence: first, a copy of the signed settlement agreement; and, second, proof that the settlement agreement resulted from a mediation.[45]  This latter requirement can be satisfied by a mediator’s signature on the settlement agreement or by a document signed by the mediator confirming that there was a mediation.[46]

Once it receives this evidence, the relevant authority (most likely a court) is required to “act expeditiously.”[47]  Under limited circumstances it may refuse enforcement.  These include proof of the incapacity of a party to the settlement agreement; proof that the settlement agreement is null and void, inoperative, or incapable of being performed; proof that the settlement agreement is not binding, or is not final, according to its terms; proof that the settlement agreement has been subsequently modified; proof that necessary obligations for enforcement of the settlement agreement have not been performed or are not clear and comprehensible; proof that granting relief would be contrary to the terms of the settlement agreement; proof that the mediator committed a serious breach of standards applicable to him, her, or the mediation, without which breach the party seeking to avoid enforcement would not have settled; proof that the mediator failed to disclose circumstances raising justifiable doubts as to his or her impartiality or independence, which failure had a material impact or undue influence on a party, and without which failure the party would not have settled; proof that granting relief would be contrary to the public policy of the State in which enforcement is sought; or proof that the subject matter of the dispute was not capable of settlement by mediation under the law of that State.[48]

While this is not a short list, it is likely that, as with arbitration awards under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”),[49] enforcement of mediation settlements under the Singapore Convention is likely to be granted in most instances.  Importantly, however, the Convention does not itself define the remedies for breach of a settlement agreement.  Because permissible remedies are different in different countries, parties to international commercial mediation settlements will likely want to specify at least some remedies in their settlement agreements, and in doing so consider whether those remedies will be enforceable in the most likely jurisdictions of enforcement.  Similarly, such parties will want to think carefully about choice of law decisions in their settlement agreements.

§ 1.2.6 State Codes

• California

While no significant statutes were passed this year by the California state government regarding arbitration, we reported last year on Assembly Bill No. 51 (“AB 51”).[50]  In February, the United States District Court for the Eastern District of California issued a preliminary injunction blocking implementation of AB 51.[51]  AB 51 was passed in 2019 to prohibit employers from requiring employees to waive any right, forum, or procedure established by the California Fair Employment and Housing Act or the California Labor Code.[52]  This includes a bar of any agreement that requires employees to opt out of a waiver or take any affirmative action to preserve their rights to a judicial forum, as would occur in an agreement mandating arbitration of an employment dispute.[53]

AB 51 was set to take effect on January 1, 2020, but was challenged in court by the Chamber of Commerce of the United States of America, among other interested parties, alleging that the FAA preempted AB 51 and all legislation enacted under its mantle of authority.[54]  The District Court agreed with the plaintiffs and enjoined implementation of the laws enacted under AB 51 to preserve the mandate of the FAA.[55]  The court found that the challengers of the bill were likely to succeed on the merits because the FAA preempted AB 51 in two ways.  First, AB 51 imposed restrictions on the formation of arbitration agreements that do not apply to contracts generally, violating the express direction under Section 2 of the FAA requiring courts and state legislatures to “place arbitration agreements ‘on equal footing with all other contracts.’”[56]  Second, AB 51 punished the exercise of a federally protected right to include arbitration agreements in employment contracts, directly impeding the FAA.[57]

The District Court found that the challengers of AB 51 were likely to succeed on their strong arguments for preemption of the FAA, and granted a preliminary injunction blocking the bill from taking effect.  The litigation is continuing.

§ 1.2.7 Rules of the International Chamber of Commerce

On January 1, 2021, the International Chamber of Commerce’s (“ICC”) 2021 Rules of Arbitration (the “2021 Rules”) will become effective.[58]  These rules replace the ICC’s 2017 Rules of Arbitration (the “2017 Rules”).[59]  While the 2021 Rules do not significantly amend the predecessor 2017 Rules, there are several material changes to rules relating to the framework of ICC arbitration.

First, the 2021 Rules addressed virtual proceedings and communications by amending Article 26, which provides the rules for hearings.  Article 26(1) has been updated to explicitly provide the arbitral tribunal with authority to conduct virtual hearings at its discretion either in person or virtually through “videoconference, telephone or other appropriate means of communication.”[60]  Although tribunals were not previously prohibited from conducting virtual hearings, clarifying the rules to explicitly provide this power addresses any doubts that may exist in a time where COVID-19 has led to a shift to the use of virtual proceedings.  By including the “other appropriate means of communication” language, the ICC appears to have drafted this rule to anticipate evolving technology.[61]

The framework of how arbitration is conducted under the ICC Rules has been further changed by amending the rules involving multi-party arbitration.  One of the more significant changes in the 2021 Rules can be found in Article 7, which deals with the joinder of additional parties.  Article 7(5) is a newly added provision that allows parties to make requests for joinder after the confirmation or appointment of any arbitrator in the proceeding.[62]  The 2017 Rules required that all parties, including the party sought to be joined, agree to such joinder, but the 2021 Rules contain no such requirement and instead leave it to the arbitral tribunal to decide the request.[63]  Article 10’s provisions on consolidation of arbitration have also been changed under the 2021 Rules.  Under the 2017 Rules, Article 10 provided that the ICC’s International Court of Arbitration (the “ICC Court”) could consolidate two or more arbitrations where “all of the claims in the arbitrations are made under the same arbitration agreement.”[64]  This language created ambiguity as to whether consolidation was possible only for claims made under the same contract, or if it also applied when claims arise from multiple agreements with mirror arbitration clauses.  The 2021 Rules address this ambiguity by amending Article 10(b) to apply to claims made under the same “agreement or agreements,” so arbitrations may be consolidated where they involve multiple agreements with mirror arbitration clauses.[65]

The 2021 Rules also include multiple changes designed to address potential conflicts of interest in arbitration proceedings.  First, Article 11, which contains general provisions, has been revised with the inclusion of Article 11(7) requiring parties to promptly inform the ICC Secretariat of any agreements where a non-party has an economic interest in the outcome of the arbitration through an agreement to fund a party’s claims or defenses.[66]  This change places the affirmative obligation on parties at the outset to inform of the involvement of litigation funders to address potential conflicts at the outset.  Second, the 2021 Rules provide a new paragraph under Article 12(9) addressing the constitution of the arbitral tribunal.  The ICC Court now has the power to appoint each member of the arbitral tribunal, even if this method differs from what the parties had envisioned in their arbitration agreement.  However, this power is limited to “exceptional circumstances” that would avoid “a significant risk of unequal treatment and unfairness that may affect the validity of the award.”[67]  Third, Article 17 has been renamed to “Party Representation” and now requires parties to immediately notify the Secretariat, arbitral tribunal, and other parties of any change in their representation.[68]  Notably, the tribunal has been given the authority under this rule to exclude new representatives from participating in arbitration if necessary to avoid a conflict of interest with an arbitrator.[69]

Other noteworthy updates in the 2021 Rules include a new provision in Article 36(3) allowing a party to apply to the Secretariat for an additional award for claims made in the arbitral proceeding that the tribunal has omitted to decide.[70]  Additionally, the pecuniary threshold to avoid application of the expedited rules has been increased from $2 million under the 2017 Rules to $3 million under the 2021 Rules for arbitration agreements concluded on or after January 1, 2021.[71]

Lastly, the 2021 Rules reflect an effort to increase transparency, as a party may now, among other things, request that the ICC Court communicate its reasons for reaching its decisions, although the ICC Court is not required to communicate such reasons when exceptional circumstances dictate that it should not.[72]

§ 1.2.8 International Swaps and Derivatives Association (“ISDA”)

ISDA 2020 IBOR Fallbacks Protocol.  Largely unnoticed, a protocol by the International Swaps and Derivatives Association, Inc. (“ISDA”) may have the potential to subject very large numbers of transactions to arbitration if disputes arise.

On October 23, 2020, ISDA published its 2020 IBOR Fallbacks Protocol.  “IBOR” means “Inter-Bank Offered Rate,” that is, rates such as “LIBOR” (the “London Inter-Bank Offered Rate”) that have fallen into disrepute and are in the process of being replaced worldwide by different systems of base rates.  Trillions of dollars (and other currencies) of transactions are subject to IBOR rates.  The largest volume (by notional currency amount) of such transactions are derivatives such as interest rate swaps.  ISDA publishes standard documentation for such transactions and has been in the forefront of moving away from IBORs.

One of the features of ISDA’s approach to this transition has been to create a protocol that would amend existing deals (and apply to future deals) to provide fallbacks for existing IBOR rates and trigger events for such fallbacks generally by party, rather than transaction-by-transaction.[73]  Thus, under the ISDA 2020 IBOR Fallbacks Protocol (the “Protocol”), if any two parties agree to adhere to the Protocol to fix IBOR issues in one of their transactions, they agree to apply it to all of their transactions until one of them withdraws from the Protocol (in which case, only new transactions by that party will not automatically be subject to the Protocol).[74]  Furthermore, each of them, by agreeing to adhere to the Protocol, agrees to have adopted the Protocol for each transaction each of them has with any other entity that has adopted the Protocol.  As the Protocol puts it:

By adhering to this Protocol in the manner set forth in this paragraph 1, each Adhering Party agrees, in consideration of the mutual promises and covenants contained herein, that the terms of each Protocol Covered Document between such Adhering Party and any other Adhering Party will be amended in accordance with the terms and subject to the conditions set forth in the Attachment hereto.[75]

The only way ISDA provides for a party to adopt the Protocol is to send an “Adherence Letter” in a form prescribed by ISDA.[76]  That letter, addressed to ISDA, now contains what might be a surprise to some parties—an arbitration clause.[77]  Traditionally ISDA has required parties to agree that, in using ISDA’s documentation and procedures, they would waive any claims against ISDA.  Paragraph 2 of the Adherence Letter contains such a waiver: “we waive any rights and hereby release ISDA from any claims, actions or causes of action whatsoever (whether in contract, tort or otherwise) arising out of or in any way relating to this Adherence Letter or our adherence to the Protocol or any actions contemplated as being required by ISDA.”[78]

But paragraph 3 of the Adherence Letter further states that:

By adhering to the Protocol, we agree that all claims or disputes arising out of or in connection with adherence to the Protocol shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce (the Rules) by three arbitrators, and hereby waive any right to assert any such claims or disputes against ISDA as a representative or member in any class or representative action.  The claimant(s) (as defined in the Rules) shall nominate one arbitrator in the ‘Request for Arbitration’.  The respondent(s) (as defined in the Rules) shall nominate one arbitrator in the ‘Answer to the Request’.  The two party-nominated arbitrators shall then have 30 days to agree, in consultation with the parties to the arbitration, upon the nomination of a third arbitrator to act as president of the tribunal, barring which the International Chamber of Commerce Court shall select the third arbitrator (or any arbitrator that claimant(s) or respondent(s) shall fail to nominate in accordance with the foregoing).[79]

This agreement to arbitrate shall not be affected by the Revocation Notice as described in the Protocol.[80]

To the extent this clause was meant to apply only to claims between ISDA and a party adhering to the Protocol, it would probably seem consistent with ISDA’s purposes and practices.  For example, ISDA is an international association, and applying ICC rules to disputes with it is not illogical.

Nor is this the only foray by ISDA into arbitration issues.  Since 2007, it has indicated that arbitration can be appropriate for dispute resolution in ISDA transactions.  In 2013 it published recommended language for arbitration clauses.  And in 2018, it published updated recommendations for parties who wish to include arbitration provisions in their transactions.[81]  A few ISDA documents for specific transactions—the Schedule to the ISDA 2002 Master Agreement (French law version) and the ISDA/IIFM Tahawwut Master Agreement (English or New York law versions)—also provide for ICC arbitration in Paris, London, or New York, depending on the particular law involved, but can be amended by parties.  As to other documents, the 2018 ISDA guide provides non-binding guidance for arbitration clauses using ICC rules, London Court of International Arbitration (“LCIA”) rules, Dubai International Financial Centre-LCIA rules, American Arbitration Association-International Dispute Resolution Centre rules, Hong Kong International Arbitration Centre rules, Singapore International Arbitration Centre rules, Austrian law arbitration rules, Dutch law arbitration rules, Swiss law arbitration rules, Panel of Recognized International Market Experts in Finance (P.R.I.M.E.) rules, Arbitration Institute of the Stockholm Chamber of Commerce rules, German Arbitration Institute (DIS) rules, and Vienna International Arbitral Centre rules.[82]

In contrast to such flexibility, the Adherence Letter’s provision is mandatory, because to use the Protocol, a party must send ISDA an Adherence Letter.[83]  More importantly, the language in the Adherence Letter is not as clear as it could be as to its purpose.  It provides that “all claims or disputes arising out of or in connection with adherence to the Protocol” shall be arbitrated, not that “all claims or disputes with ISDA arising out of or in connection with adherence to the Protocol” shall be arbitrated.[84]  The independent clause providing that signatories to the Adherence Letter “hereby waive any right to assert any such claims or disputes against ISDA as a representative or member in any class or representative action” is just that—an independent clause—that does not on its face restrict the earlier clause to claims only against ISDA.[85]  Furthermore, paragraph 1 of the Adherence Letter demonstrates that the drafters knew how to write a clause that would not include ISDA, and instead be between only signatories to Adherence Letters (“[a]s between each Adhering Party and us . . . .”), thus implying that the drafters knew how to draft a clause that would be between only ISDA and signatories to Adherence Letters, not between and among them.[86]

While it seems more likely that ISDA did not intend to bind all signatories to Adherence Letters to arbitrate all disputes between them (as opposed to between ISDA and them), the language permits a different conclusion.  And there had been some commentary that ISDA’s earlier positions on arbitration were not entirely effective because they required individual amendments of multiple documents.[87]  Additional guidance or interpretation in 2021 may well be necessary to know for sure—otherwise, counterparties to conventional swap transactions may find themselves arguing over whether they must arbitrate (under ICC rules) issues such as disagreements over payments due when a swap is terminated.

§ 1.3 The United States Supreme Court Docket

We noted last year[88] that we did not expect the Supreme Court’s 2020 arbitration activity to be as heavy as in some past years.  This proved to be true, not only because there was only one case that had been selected for review when we made that prediction, but also because the Court then kept to a smaller than average docket during the year, perhaps because of expectations concerning disputes about the Presidential election.  In the end, the Court issued just one substantive arbitration decision and heard argument on just one potentially significant case in which a decision is expected in 2021.  This, of course, meant that the Court denied review in a number of cases.  Among those, one denial of certiorari in particular may also have been somewhat notable.

GE Energy Power Conversion France SAS v. Outokumpu Stainless USA LLC, 140 S. Ct. 1637 (2020).  Non-signatories to an international arbitration agreement have standing to enforce that agreement in a United States court if they can show a sufficiently strong connection to a signatory.

The Court’s one announced decision in 2020 ended a nagging circuit split and narrowed the differences between domestic and international arbitration.[89]  It did so by making it easier for non-signatories to enforce international arbitration agreements under the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”).[90]

GE Energy Power Conversion France SAS (“GE Energy”) manufactured electric motors that a general contractor for Outokumpu Stainless USA (“Outokumpu”) installed in a steel plant now owned by Outokumpu in Alabama.  When the motors failed, Outokumpu sued GE Energy in Alabama state court.  GE Energy removed the case to federal court under 9 U.S.C.A. § 205, which permits removal of cases involving international arbitration, ^[91] and sought to compel arbitration.

GE Energy had a problem, however: it had no direct contractual relationship with Outokumpu.  The arbitration clause was in the relevant contracts between Outokumpu and its general contractor, not the subcontract between Outokumpu and GE Energy, although the contracts with the general contractor did define the “parties” to include subcontractors.  Given these facts, GE Energy argued that Outokumpu’s claim “arose out of” the agreements with its general contractor; that subcontractors were either parties or intended to be treated as parties in such agreements; that GE Energy was such a subcontractor; and that GE Energy was therefore either a party, or that Outokumpu was equitably estopped from treating it any differently than a party, when it came to arbitration.

The District Court agreed with GE Energy by holding that it qualified as a “party” to the underlying contracts because those agreements defined the terms “Seller” and “Parties” to include subcontractors.[92]  Because the court concluded that both Outokumpu and GE Energy were “parties,” it did not reach or decide the equitable estoppel argument.[93]

On appeal, however, the United States Court of Appeals for the Eleventh Circuit reversed.[94]  It noted that the New York Convention (like the FAA) requires an agreement in writing, but that Article II of the New York Convention also provides that “[t]he term ‘agreement in writing’ shall include an arbitral clause in a contract or an arbitration agreement, signed by the parties or contained in an exchange of letters or telegrams.”[95]  The Court of Appeals observed that GE Energy might well have had standing to enforce the underlying arbitration clause in a domestic arbitration under the FAA.[96]  But, in its view, the New York Convention’s express reference to “signed by the parties” left less room than under the FAA for theories that would allow non-signatories to arbitrate, whether the specific contract language theory used by the District Court, or theories such as equitable estoppel.[97]  Instead, the Court of Appeals held that “to compel arbitration, the Convention requires that the arbitration agreement be signed by the parties before the Court or their privies.”[98]  Because GE Energy was not an actual signatory to the contracts between Outokumpu and its general contractor, no written agreement existed for GE Energy sufficient to satisfy Article II of the New York Convention.[99]

The Eleventh Circuit’s decision widened an existing circuit split.  Like the Eleventh Circuit, the Ninth Circuit had held that non-signatories could not enforce arbitration agreements under the New York Convention.[100]  Both the First Circuit and the Fourth Circuit had held the opposite.[101]

The Supreme Court resolved this split by first referring to the FAA and its allowance for the invocation of state law doctrines (such as equitable estoppel) applicable to contracts generally.[102]  It next turned to the content of the New York Convention, noting (among other things) that it focuses primarily on arbitral awards, that its Article VII(1) states that the “Convention shall not . . . deprive any interested party of any right he may have to avail himself of an arbitral award in the manner and to the extent allowed by the law or the treaties of the country where such award is sought to be relied upon,” and that only one Article—Article II, in just three sentences—“addresses arbitration agreements.”[103]

Justice Thomas, writing for the Court, then explained that, because the implementing legislation for the New York Convention appears in “Chapter 2 of the FAA,”[104] and because “Chapter 2” provides that “Chapter 1”—the domestic provisions of the FAA—“applies to actions and proceedings brought under” Chapter 2 “to the extent that [Chapter 1] is not in conflict with” Chapter 2 or the New York Convention,[105] this means that the question before the Supreme Court was “whether the equitable estoppel doctrines permitted under Chapter 1 of the FAA . . . ‘conflict with . . . the Convention.’”[106]  He concluded they “do not conflict.”[107]

The most fundamental reason that no conflict exists is that “[t]he text of the New York Convention does not address whether non-signatories may enforce arbitration agreements under domestic doctrines such as equitable estoppel” and “nothing in the text of the Convention could be read to otherwise prohibit the application of domestic equitable estoppel doctrines.”[108]  While Article II(3) of the New York Convention provided that “courts of a contracting state ‘shall . . . refer the parties to arbitration’ when the parties to an action entered into a written agreement to arbitrate and one of the parties requests referral to arbitration,” there is nothing in this provision which restricts “contracting states from applying domestic law to refer parties to arbitration in other circumstances.”[109]  That silence was therefore “dispositive.”[110]

In addition, nothing in the New York Convention rejects the use of domestic law.  For example, because the provisions in Article II of the New York Convention are not comprehensive, they necessarily leave certain matters to domestic law.  “Article II(1) refers to disputes ‘capable of settlement by arbitration,’ but it does not identify what disputes are arbitrable, leaving that matter to domestic law” and “Article II(3) states that it does not apply to agreements that are ‘null and void, inoperative or incapable of being performed,’ but it fails to define those terms,” leaving that to domestic law as well.[111]  “Thus, nothing in the text of the Convention ‘conflict[s] with’ the application of domestic equitable estoppel doctrines permitted under Chapter 1 of the FAA.”[112]

While not dispositive, Justice Thomas also reviewed the negotiation and drafting history of the New York Convention, concluding that it “confirm[s] our interpretation of the Convention’s text.”[113]  He looked as well to the “postratification understanding” by other countries concerning the use of domestic law in enforcing the New York Convention and found that “courts of numerous contracting states permit enforcement of arbitration agreements by entities who did not sign an agreement.”[114]

Because the decision by the Court of Appeals below rested on the theory that only a signatory could enforce the arbitration clauses at issue, that court never reached the issue of whether GE Energy “could enforce the arbitration clauses under principles of equitable estoppel or which body of law governs that determination.”  The Supreme Court therefore remanded the case for further proceedings.

The Supreme Court’s decision was unanimous.  But Justice Sotomayor issued a separate concurrence, noting a limitation to Justice Thomas’s analysis for the Court: “Any applicable domestic doctrines must be rooted in the principle of consent to arbitrate.”[115]  In her view, this principle “constrains any domestic doctrines under Chapter 1 of the FAA that might ‘appl[y]’ to Convention proceedings (to the extent they do not ‘conflict with’ the Convention).”[116]  For example, some theories of equitable estoppel do not account for this principle, while others do.  As a result, “[l]ower courts must therefore determine, on a case-by-case basis, whether applying a domestic non-signatory doctrine would violate the FAA’s inherent consent restriction.”[117]  Because the Court’s opinion in GE Energy itself is consistent with this “foundational FAA principle,” she joined it in full.

Henry Schein Inc. v. Archer & White Sales, Inc., No. 19‐963 (U.S. argued Dec. 8, 2020).  Who decides whether a dispute falls within a carve-out to an arbitration clause, a court or an arbitrator?

The Henry Schein antitrust dispute (which has been going on for eight years now with no progress on the merits) is a familiar one to the Supreme Court.  As we have previously reported,[118] in 2019 the Supreme Court decided that the FAA does not contain any “wholly groundless” exception that would permit a court to avoid deciding who should decide the issue of arbitrability.[119]  Having remanded the case to the Fifth Circuit for it to determine whether, under the parties’ contract, a court should determine who decides the case, or whether an arbitrator should make that decision, and the Fifth Circuit having decided that a carve-out for injunctive relief disputes from the arbitration clause at issue meant that a case for injunctive relief would not have to go to an arbitrator for a decision on whether the carve-out applied,[120] the case is now back at the Supreme Court.

The arbitration clause at issue in Henry Schein states that “[a]ny dispute arising under or related to this Agreement (except for actions seeking injunctive relief and disputes related to trademarks, trade secrets, or other intellectual property of [Pelton & Crane]), shall be resolved by binding arbitration in accordance with the arbitration rules of the American Arbitration Association.”[121]  While the general rule is that courts decide whether an arbitration clause covers a dispute,[122] if there is “clear and unmistakable evidence” that the parties agreed an arbitrator should decide the issue, then the arbitrator will do so.[123]  But arbitration clauses typically refer a case to arbitration before an arbitration provider such as the AAA or JAMS.  The rules of such organizations typically say that an arbitration they administer will proceed under the organization’s own rules.  And both the AAA and JAMS provide in those rules that arbitrators have power to decide their own jurisdiction.[124]

Against this background, the specific question on which the Court granted certiorari and heard argument at the end of 2020 was “whether a provision in an arbitration agreement that exempts certain claims from arbitration negates an otherwise clear and unmistakable delegation of questions of arbitrability to an arbitrator.”[125]  When the Court decides this issue, it will likely be determining how arbitration clauses (and arbitration rules) are drafted in the future.  Notably, the Court also rejected two other questions.  First, it avoided the question of whether incorporation of AAA rules by reference into a contract constitutes “clear and unmistakable intent to arbitrate arbitrability.”  Most federal Courts of Appeals believe that such rules incorporated by reference into arbitration clauses are “clear and unmistakable evidence” that the parties have elected to have an arbitrator decide whether a dispute is covered by the clause or not.[126]  But some courts disagree.[127]  Second, the Court avoided the question of whether it is an arbitrator or a court which must decide if a non-signatory to an arbitration agreement can enforce it using a theory of equitable estoppel.[128]

Monster Energy Co. v. City Beverages LLC, No. 19‐1333 (U.S. June 9, 2020).  The Supreme Court refuses to clarify when an arbitration award must be vacated for “evident partiality” under Section 10 of the FAA.[129]

As we reported last year[130] the Ninth Circuit recently overturned an arbitration award in favor of the beverage company Monster Energy because a JAMS arbitrator—retired California state judge John W. Kennedy—failed to disclose both his specific ownership interest in JAMS and that JAMS had administered 97 prior arbitrations with Monster Energy.  (Interestingly, he had provided, in addition to a general disclosure, a specific disclosure “that he [had] arbitrated a separate dispute between Monster and a distributor which resulted in an award of some $400,000 against Monster.”)[131]

The Ninth Circuit decision was somewhat surprising to some because, while Monster Energy is a multi-billion-dollar company, its opponent—City Beverages LLC—is itself a large and sophisticated distributor.  In addition, while the solution for arbitrators in California might seem simple (disclose everything you can), the decision was not as clear as it could have been about where the line should be drawn.  And, of course, it left arbitrators elsewhere uncertain of whether they must follow Ninth Circuit precedent.

In a different year, perhaps the Supreme Court would have granted certiorari.  The only time the Court has ever reviewed the “evident partiality” standard in the FAA was 52 years ago in the Commonwealth Coatings case.[132]  There Justice Hugo Black interpreted “evident partiality” as coextensive with the judicial standard for disqualification, holding as a result that an arbitrator must not only be unbiased, “but must also avoid even the appearance of bias.”[133]  The problem, however, was that a concurrence by Justice Byron White also concluded that vacatur of an arbitration award for evident partiality was only appropriate when the arbitrator failed to disclose “a substantial interest in a firm which has done more than trivial business with a party”—a somewhat less stringent test.[134]

Since Commonwealth Holdings, “[t]he First, Second, Third, Fourth, Fifth, and Sixth Circuits [require] those seeking vacatur of an arbitration award for evident partiality to show ‘a reasonable person would have to conclude that an arbitrator was partial to one party to an arbitration.’”[135]  The Ninth and Eleventh Circuits, however, appear to use a less-demanding standard which permits vacatur for only a “reasonable impression of partiality.”[136]  Despite this split, the Supreme Court passed—this time—on an opportunity to clarify the proper standard.

§ 1.4 Who Decides—The Court or the Arbitrator?

§ 1.4.1 Class Arbitration

Catamaran Corp. v. Towncrest Pharmacy, 946 F.3d 1020 (8th Cir. (Iowa) 2020).  Silence on the issue is not sufficient to imply an agreement to arbitrate on a class action basis.

Four pharmacies filed a demand for class arbitration with the AAA in a dispute with Catamaran Corporation (“Catamaran”), a pharmacy benefit manager over reimbursement agreements with Catamaran’s predecessor.[137]  The agreements contained similar provisions agreeing that disputes must be settled by arbitration.  None of the agreements used the word “class” or referred to class arbitration.  Catamaran initiated an action in federal court seeking to prevent the pharmacies from pursuing arbitration on a class-wide basis.  The District Court denied Catamaran’s motion for summary judgment, finding that the agreements required the question of class action arbitration to be determined by an arbitrator.

On appeal, the Eighth Circuit reversed and remanded to the District Court, holding that class arbitration is a substantive question of arbitrability for the court to decide.  On remand, the District Court granted Catamaran’s motion for summary judgment, finding that there was no contractual basis in the reimbursement agreements to support an agreement to class arbitration.  The pharmacies appealed, arguing that the agreements did establish a contractual basis for class arbitration.[138]

On the second appeal, the Eighth Circuit affirmed the District Court’s order, holding that the agreements did not provide for class arbitration.[139]  First, the court found that Supreme Court precedent prohibited compelling a party to submit to class arbitration under the FAA in the absence of a basis to conclude that the party agreed to do so,[140] and that neither silence nor ambiguity on the issue of class arbitration in the agreement to arbitrate provides a sufficient contractual basis to satisfy this inquiry.[141]  The Eighth Circuit rejected the pharmacies’ argument that the Supreme Court had recognized that class arbitration may be implicitly authorized in some cases, finding that precedent held that consent to class-wide arbitrations cannot be inferred solely from the fact that the parties agreed to arbitrate.[142]  Thus, the Eighth Circuit affirmed the District Court’s decision denying the pharmacies’ motion to compel class arbitration.

Marbaker v. Statoil USA Onshore Props., Inc., 801 F. App’x 56 (3d Cir. (Pa.) Feb. 13, 2020).  Where a party has not yet moved to compel arbitration, the issue of whether the party has waived its right to arbitrate is not yet ripe.  Further, neither silence on class arbitration nor a reference to the AAA Rules provide sufficient evidence of an agreement to arbitrate on a class-wide basis where the reference to the AAA Rules do not mention the AAA Supplementary Rules.

Landowners filed a class arbitration demand against Statoil USA Onshore Properties, Inc. (“Statoil”) for unpaid royalties allegedly owed to them under leases in which they agreed to allow oil and gas to be extracted from their property.[143]  The landowners also filed a complaint in federal district court seeking declaratory judgment that the leases permitted class arbitration.  Thereafter, the parties agreed to mediate, and the landowners voluntarily dismissed their lawsuit and agreed to stay the arbitration.  When mediation broke down, the landowners refiled their declaratory judgment suit, now asking the court to declare either that Statoil waived its right to enforce the leases’ arbitration clauses, or that those clauses permit class arbitration.  The District Court granted Statoil’s motion to dismiss the declaratory judgment suit in full, holding that the waiver issue was not ripe and that the leases did not permit class arbitration.  The landowners appealed.[144]

The Third Circuit affirmed the District Court’s decision, first holding that the landowners were not entitled to a declaratory judgment that Statoil waived its arbitration right because the issue was not ripe.[145]  To be sufficiently ripe for determination, the parties’ interests must be adverse, and the requisite adversity was not present here because Statoil had not yet moved to compel arbitration.[146]

The Third Circuit also affirmed the dismissal of the landowners’ request for judgment that the leases permitted class arbitration, holding that the leases did not contain the necessary evidence of an affirmative agreement to class arbitration.[147]  In reaching this conclusion, the court cited to Lamps Plus, Inc. v. Varela and Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., in which the Supreme Court held that there must be an affirmative contractual basis from which to infer that the parties consented to class arbitration before a court can compel a party to arbitrate on a class-wide basis.[148]

The Third Circuit found that the leases at issue fell well short of this standard, as they did not mention class arbitration.[149]  The court held that although it is not essential that an agreement contain the phrase “class arbitration,” the absence of a reference presents a challenge to demonstrating the requisite consent.[150]  A review of the language actually used in the leases did not convince the court that the parties consented to class arbitration because they used bilateral language to describe the leases themselves, as well as the parties.[151]  As a court sitting in diversity, the Third Circuit applied Pennsylvania law to reject the use of extrinsic evidence offered by the landowners because the leases were not ambiguous, as required to consider such evidence.[152]

Lastly, the Third Circuit rejected the landowners’ argument that the agreement to follow the AAA rules included an agreement to incorporate the AAA’s Supplementary Rules, which do refer explicitly to class arbitration.[153]  In reaching this decision, the court applied its own precedent holding that a “short, general reference to the AAA’s rules does not ‘incorporate[ ] a panoply of collective and class action rules,” in light of the structure of the AAA rules, which bury the Supplementary Rules in a chain of cross-references.[154]  It further held that the Supplementary Rules explicitly proscribe consideration of such references when determining whether an arbitration provision allows for class arbitration.[155]

§ 1.4.2 The Validity and Scope of an Arbitration Agreement and Arbitrability

SEIU Local 121RN v. Los Robles Reg’l Med. Ctr., 976 F.3d 849 (9th Cir. (Cal.) 2020).  In all arbitrations, including labor arbitration disputes, absent clear and unmistakable evidence of the parties’ intent to have an arbitrator—rather than the court—decide an issue, the court is responsible for deciding that issue.

The collective bargaining agreement (“CBA”) between a hospital and union provided for a three-step procedure to address grievances, with arbitration as the final step.[156]  The union filed a grievance asserting that the hospital placed certain types of patients with nurses who did not have the appropriate training to care for those patients.[157]  The hospital took the position that the grievance appeared to be a staffing issue, expressly excluded from the grievance procedures under the CBA.[158]  The union filed a complaint in federal court, followed by a motion to compel arbitration.[159]  The District Court determined that the parties were bound by the arbitration provision, but that it had to first determine whether the arbitration provision gave an arbitrator—rather than the court—the authority to decide its own jurisdiction (i.e., to decide if the grievance was subject to the arbitration provision).[160]

The District Court then proceeded to engage in a thorough analysis of Supreme Court and Ninth Circuit precedent on the issue, including in particular its own precedent in United Bhd. of Carpenters & Joiners of Am., Local No. 1780 v. Desert Palace, Inc.[161]  Although the District Court questioned whether Desert Palace was still good law in light of more recent Supreme Court decisions, the District Court concluded that it was bound by its precedent.[162]  Applying Desert Palace, the District Court found that the arbitration provision in the CBA was broad enough to authorize the arbitrator—rather than the court—to determine whether the grievance was arbitrable and therefore granted the union’s motion to compel arbitration without reaching the question of arbitrability.[163]  The hospital appealed.

On appeal, the Ninth Circuit held that the rationale in Desert Palace is “clearly irreconcilable with the reasoning or theory of intervening higher authority” set forth in Granite Rock Co. v. Int’l Bhd. Of Teamsters,[164] which expressly rejected the notion that labor arbitration disputes should be analyzed differently than commercial arbitration disputes.[165]  The panel concluded that it was therefore not bound by Desert Palace.  The dissent, on the other hand, saw no such conflict and construed Granite Rock to address only whether a specific issue is arbitrable, rather than the question of who decides.[166]  The court applied the rule that absent clear and unmistakable evidence of the parties’ intent to have an arbitrator—rather than the court—decide whether SEIU’s grievance is arbitrable, the District Court is responsible for deciding that issue, and reversed and remanded.[167]

Gibbs v. Sequoia Capital Operations, LLC, 966 F.3d 286 (4th Cir. (Va.) 2020); Gibbs v. Invs., LLC, 967 F.3d 332 (4th Cir. (Va.) 2020).  The question of enforceability of delegation provision was for the courts to decide, rather than the arbitrator, and the lower court properly determined the arbitration agreement was unenforceable where choice of law requiring tribal law amounted to a prospective waiver.

Groups of borrowers filed each of these suits against online payday lenders owned by a sovereign Native American tribe and others challenging the legality of the loans, and the defendants moved to compel arbitration.[168]  Although the borrowers claimed the loans would be illegal under state and federal law, the loan agreements provided they would be governed by tribal law.[169]  The agreements also contained a delegation clause stipulating that the parties would arbitrate “any issue concerning the validity, enforceability, or scope [of the loans]” and while borrowers could opt out of arbitration, any dispute resolution had to occur in the tribal court system.[170]  The District Court concluded in each case that because the choice of law provisions would apply tribal law to exclude federal law, including federal statutory claims by the borrowers, the agreements violated the prospective waiver doctrine and were unenforceable.[171]  The lenders appealed.

On appeal, the court first held in each case that because the borrowers sufficiently challenged the enforceability of the delegation clauses, the District Court was correct to consider the threshold enforceability of the arbitration agreements.[172]  Additionally, because the challenge to the delegation provision necessarily encompassed and included arguments that related to the entire arbitration agreement, the District Court did not err by assessing those arguments.[173]  As to the merits of the challenge, because the choice of law and venue provisions amounted to an illegal prospective waiver of a party’s right to pursue statutory remedies, the provision rendered the delegation clause, as well as the entire agreement, unenforceable.[174]  The District Court’s judgment refusing to compel arbitration was affirmed in both cases.

Williams v. Medley Opportunity Fund II, LP, 965 F.3d 229 (3d Cir. (Pa.) 2020).  Whether prospective waiver doctrine applied and rendered entire contract unenforceable, including the delegation clause, was for the court to decide.

Here, as in the Gibbs cases discussed above, borrowers obtained loans from online payday lenders pursuant to loan agreements that provide for mandatory application of tribal law, including in arbitration under the AAA or JAMS.  The borrowers sued the lenders in federal court for violations of federal and Pennsylvania state law.[175]  The choice of law provision called for application of tribal law and “such federal law as is applicable under the Indian Commerce Clause of the United States Constitution.”[176]  The lenders moved to compel arbitration and the District Court denied the motion, ruling that the arbitration agreement was unenforceable because the choice of law would not permit the arbitrator to consider any of the borrowers’ claims based on federal and state law, effecting an impermissible prospective waiver; and that the choice of AAA or JAMS did not provide an available arbitral forum because the arbitrators were required to apply policies and procedures that would not contradict tribal law.[177]

On appeal, the court first held that the issue of enforceability was for the court because the borrowers contended that the entire contract, including the delegation clause, was unenforceable.[178]  To determine whether the prospective waiver doctrine applied, the court examined the law of the forum to interpret the arbitration agreement to identify the law that would apply in arbitration under the agreement, and whether that law would preclude the borrower’s claims.[179]  Under Pennsylvania law, the arbitration agreement clearly provided for application of tribal law.[180]  As such, the arbitration agreement effects an impermissible waiver of statutory rights and is unenforceable.[181]  While the lenders claimed that the borrowers could still pursue their federal racketeering claim in arbitration, the court disagreed that a racketeering claim would be recognized as one under the “federal law as is applicable under the Indian Commerce Clause of the United States Constitution,” which would not capture all federal laws.[182]  Finally, the court held that the prospective waiver of statutory rights rendered the entire arbitration agreement (delegation clause included) unenforceable because the offending provisions were not severable, and affirmed the District Court’s order denying the motion to compel arbitration.[183]

Biller v. S-H OpCo Greenwich Bay Manor, LLC, 961 F.3d 502 (1st Cir. (R.I.) 2020).  Issues of arbitrability, including whether the arbitration agreement survived termination, were for the court to decide, and the arbitration obligation did survive termination and was not unconscionable.

Plaintiffs, a former resident in a long-term care facility and her daughter and attorney-in-fact, sued the facility in state court for injuries caused by medication lapses.[184]  The facility removed the action to federal court and sought to enforce the arbitration provision in the residency agreement.  The District Court denied arbitration, reasoning that when the resident had moved from assisted living to a memory care unit, the original agreement terminated, no other agreement to arbitrate was signed, and thus there was no arbitration agreement to enforce.[185]  The facility appealed.

On appeal, the court first held that the parties’ agreement, which provided that “disputes regarding interpretation, scope, enforceability, unconscionability, waiver, preemption and/or violability of this Agreement,” did not provide clear and unmistakable evidence that the parties agreed to have an arbitrator decide arbitrability, because it did not refer to disputes over the arbitration provision itself.[186]  Accordingly, the court would interpret the arbitration clause to determine whether it gave the arbitrator the authority to decide when the agreement terminated, and the court concluded that it did.[187]  To reach that conclusion, the court determined that the arbitration provision was severable and that the plaintiffs were challenging the entire contract on the grounds that the contract had terminated or that it was unconscionable.[188]  The court also invoked the presumption that arbitration obligations survive termination of the underlying agreement.[189]  However, the court reserved to itself the question of whether the parties had agreed to terminate the arbitration agreement by entering into a substitute agreement and, applying Rhode Island law, found a dearth of evidence to support the plaintiffs’ theory.  Moreover, the claims of unconscionability failed because plaintiffs could not meet the “daunting” standard Rhode Island imposed to show substantive unconscionability.[190]  Accordingly, the Court of Appeals reversed and remanded with a direction to compel arbitration.

Taylor v. Pilot Corp., 955 F.3d 572 (6th Cir. (Tenn.) 2020).  Courts have the authority to determine whether an arbitration agreement was formed before compelling arbitration in accordance with that agreement, even where questions of arbitrability are delegated to the arbitrator.

Employees brought an action against their employer for overtime violations under the Fair Labor Standards Act (“FLSA”) and the District Court granted conditional certification to a collective action.[191]  The employees then filed a motion to compel the employer to produce employment dates of all opt-in plaintiffs.[192]  One week after the motion was filed, the parties reached a partial settlement that resolved the claims of many of the opt-in employee-plaintiffs, and the employer filed a motion to compel the remaining opt-in employee-plaintiffs to arbitrate their claims, based on arbitration agreements the employer claimed each of the opt-in employee-plaintiffs had signed at their time of hire.[193]  There were a number of discrepancies in the information the employer provided, and the employees argued that there was no valid agreement to arbitrate where the opt-in employee-plaintiffs did not sign an arbitration agreement on the date the employer alleged they did.  The District Court granted the employees’ motion to compel the employer to disclose employment dates, and ordered the employer to produce the dates within two weeks.  However, instead of complying with that deadline, the employer filed a motion to reconsider the order compelling production of the dates, arguing that the purported arbitration agreements require the District Court to refer to the arbitrator whether it must produce employment dates and whether the arbitration agreements were validly formed.[194]  The District Court denied the motion to reconsider, and the employer appealed.  Thereafter, the court entered an order denying all outstanding motions by both parties, pending the resolution of the employer’s appeal, including the employer’s pending motion to compel arbitration.[195]  The employer appealed from that order as well.

On appeal, the Sixth Circuit identified the “core” of the parties’ dispute as whether the opt-in employees signed the alleged arbitration agreements, an issue of contract formation.[196]  Some number of employees claimed that they were not employees on the dates indicated on the alleged agreements and thus no binding arbitration agreement was formed.  The employer maintained that because of the broad delegation clauses in the alleged agreements, only an arbitrator can decide this question and that the district court’s orders to the contrary were unlawful denials of its valid petition for arbitration.[197]  Here, however, the court looked at the unusual status of the case and determined that it lacked jurisdiction under Section 16(a)(1)(B) of the FAA because the district court had not yet issued an order denying a petition to order arbitration to proceed, but merely delayed that decision pending the parties’ dispute regarding production of employment start dates.[198]

However, the court went on to discuss the current state of the law on contract formation issues.  Under Henry Schein, Inc. v. Archer and White Sales, Inc.,[199] the court must determine whether a valid arbitration agreement exists before referring a matter to arbitration.  And, under prior Supreme Court precedent, the district court “must resolve any issue that calls into question the formation or applicability of the specific arbitration clause that a party seeks to have the court enforce.”[200]  Left unresolved by these decisions was the question of whether the parties can contractually deprive the court of authority to decide these issues.[201]  Notwithstanding its decision to dismiss the appeal, the Sixth Circuit advised that the case law “strongly suggests” that even where agreements in this case purport to delegate the formation question to the arbitrator’s sole discretion, the precedent from the Supreme Court and the circuit indicate that the district court retains the authority to first satisfy itself that an agreement exists before granting a motion to compel arbitration.[202]  Otherwise, “[t]he FAA’s demand for consent-based arbitration agreements would be severely undermined.”[203]  Accordingly, the appeals were dismissed for want of jurisdiction and the matter was remanded to the District Court.[204]

Blanton v. Domino’s Pizza Franchising LLC, 962 F.3d 842 (6th Cir. (Mich.) 2020).  Incorporation of the AAA Rules provides “clear and unmistakable” evidence that the parties agreed to arbitrate disputes regarding arbitrability.

An employee of one of Domino’s Pizza Franchising LLC’s (“Domino’s”) franchises filed a putative class action against Domino’s, alleging that its franchise agreement violated federal antitrust law and state law.[205]  The employee contended that Domino’s requirement that its franchises agree not to solicit or hire employees from other franchises without the prior consent of their employer was unlawful.  The employee, already employed at one franchise, had obtained a second job from a different Domino’s franchisee in the same area, and signed an arbitration agreement with the second franchise that required him to arbitrate the merits of certain claims relating to his employment according to the AAA National Rules for the Resolution of Employment Disputes (“AAA Employment Rules”).  The first franchise terminated his employment, purportedly believing it was required to do so by Domino’s policy to allow him to work at the second franchise.  Domino’s moved to compel arbitration under the FAA, and the plaintiffs opposed the motion and argued that Domino’s could not enforce the arbitration agreements because only the franchises, and not Domino’s, were parties to the agreements.  The District Court held that employees had agreed to arbitrate both the merits of certain claims as well as the enforceability of the arbitration agreements, and ordered the employees to arbitration.[206]

The Sixth Circuit affirmed the District Court, holding that the parties clearly and unmistakably agreed to arbitrate questions of arbitrability.[207]  First, the court found that Supreme Court precedent requires an arbitrator to resolve disputes regarding arbitrability when there is “clear and unmistakable evidence” that the parties agreed to have an arbitrator resolve such issues.[208]  Here, the Sixth Circuit reasoned that the express incorporation of the AAA Employment Rules amounted to “clear and unmistakable” evidence because such rules provided that “[t]he arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement.”[209]  In reaching this interpretation of the arbitration provision, the court also addressed the question of whether to invoke federal or state law: questions of contract formation and interpretation generally involve state law, while the question of whether a particular agreement satisfies the “clear and unmistakable” standard seems to be one of federal law.[210]  However, the choice of law would not be dispositive here, because the relevant state law (from the state of Washington) had already found that the incorporation of the AAA Employment Rules provided the requisite clear and unmistakable evidence that the parties intended to arbitrate arbitrability.[211]  The court rejected the employees’ argument that the agreements incorporate the AAA Employment Rules only as to claims that fall within the scope of the agreement, finding that the text of the agreements did not limit incorporation of the rules in this way and that the employees’ interpretation was superfluous as the agreements state the arbitrator only has the power to determine the scope of the agreement.[212]  Accordingly, the decision of the District Court was affirmed.

Bowles v. OneMain Fin. Grp., 954 F.3d 722 (5th Cir. (Miss.) 2020).  Where it is alleged that there was no meeting of the minds on an arbitration agreement, the challenge of formation under Mississippi law is properly determined by a court.  However, a challenge that an arbitration agreement is procedurally unconscionable is an issue of enforceability under Mississippi law, which can be resolved by an arbitrator pursuant to a delegation clause.

A former employee of OneMain Financial Group (“OneMain”) was terminated for alleged inappropriate interactions with other employees under her supervision. ^[213]  She filed suit in federal court alleging age discrimination.  Prior to her termination, the former employee was required by OneMain to review and acknowledge its employment agreement, which provided that any employment-related dispute would be referred to arbitration.  The agreement also contained a delegation clause that delegated responsibility to the arbitrator to resolve “any legal dispute … arising out of, relating to, or concerning the … enforceability … of this Agreement.”[214]  The employee certified that she had reviewed the agreement and agreed to its terms.  OneMain moved to compel arbitration.  In opposition, the employee argued that a valid arbitration agreement was never formed because there was no meeting of the minds.  She also argued that the circumstances surrounding the formation of the agreement rendered it procedurally unconscionable.  The District Court rejected the meeting of the minds argument and held that her procedural unconscionability challenge must be decided by an arbitrator.  The former employee appealed. ^[215]

The Fifth Circuit affirmed the District Court’s order, first holding that it was proper for the District Court to determine the contract formation issue.[216]  The Fifth Circuit agreed that there was a meeting of the minds sufficient to support formation of an agreement to arbitrate under Mississippi law because it was clearly identified as an arbitration agreement, the former employee certified that she read and understood its terms, and her argument that she did not understand the agreement carried no weight because her unilateral lack of diligence did not preclude contract formation.[217]  The Fifth Circuit further held that the District Court correctly referred the procedural unconscionability argument to the arbitrator for resolution.[218]  This was a challenge of enforceability, rather than formation under Mississippi law, and thus the contractual delegation clause required the issue to be referred to the arbitrator.[219]

Fedor v. United Healthcare Inc., 976 F.3d 1100 (10th Cir. (N.M.) 2020).  Whether an arbitration agreement exists in the first instance is a question to be resolved by the court, regardless of whether the alleged agreement contains a delegation clause or whether a party specifically challenges such a clause.[220]

Plaintiff worked as a care coordinator for United Healthcare, Inc. (“UHC”) from 2013 until 2016.[221]  In 2017, she filed a collective suit alleging that UHC violated state and federal employment law, and eight other former employees of UHC joined her action.  UHC moved to compel arbitration, claiming that the former employees were bound by its policy requiring all employees to settle employment-related claims through arbitration and demonstrating that each former employee had received and signed an arbitration policy when they commenced employment with UHC.  The former employees commenced their employment in different years, and had signed four different versions of the agreements that were applicable at the various times.  UHC claimed the version in effect when it moved to compel arbitration (the “2016 Version”) was the controlling policy.  The 2016 Version contained a delegation clause providing that an arbitrator would resolve disputes regarding the policy’s “interpretation, enforceability, applicability, unconscionability, arbitrability or formation,” or whether the policy was “void or voidable.”[222]  The other three relevant versions of the arbitration policy, which all preceded the 2016 Version, did not include a delegation clause.  The prior versions also differed from the 2016 Version in that they each contained an amendment clause that allowed UHC to unilaterally alter the arbitration policy.  The employees opposed UHC’s motion to compel, arguing that the amendment clause rendered the prior versions illusory, and that the 2016 Version was never agreed to because none of the plaintiffs ever saw or signed it.  Although the District Court held that the prior versions were illusory, it nevertheless compelled arbitration based on the employees’ failure to challenge the delegation clause in the 2016 Version.  The employees appealed, arguing that courts must first determine whether an arbitration agreement was formed before the court can compel arbitration of issues pursuant to a delegation clause.[223]

The Tenth Circuit vacated the District Court’s judgment and remanded, holding that the issue of whether an arbitration agreement was formed must always be decided by a court regardless of whether the alleged agreement contains a delegation clause or whether a party specifically challenges such a clause.[224]  Here, the employees claimed that they never saw or agreed to any aspect of the 2016 Version, which the court found amounts to an issue of formation that cannot be delegated.[225]  The Tenth Circuit reached this decision after considering Supreme Court precedent that held that a court must find that an agreement to arbitrate exists between the parties before it can send a claim to arbitration.[226]  The court also rejected UHC’s argument to affirm on the alternate ground that the prior versions of the agreement were valid, holding that UHC did not file a cross-appeal.[227]

Lavigne v. Herbalife, Ltd., 967 F.3d 1110 (11th Cir. (Fla.) 2020).  For a delegation clause to exist, the court must decide whether there is an agreement to arbitrate.  Equitable estoppel will not apply to compel arbitration of claims against a non-party to an arbitration agreement when the claims against the non-party do not rely on the terms of the arbitration agreement or when the non-party’s misconduct is not founded in or intimately connected with such agreement.

A group of distributors of Herbalife Ltd. and its affiliates (“Herbalife”) filed a federal suit asserting racketeering claims against Herbalife and certain of its top distributors (the “Top Distributors”), alleging that the defendants were engaged in an enterprise to “disseminate misleading and fraudulent income claims,” to “recruit new members into the fraudulent business opportunity scheme,” and to “increase the investment and engagement of those already ensnared in the scheme.” ^[228]  The Herbalife defendants filed a joint motion to compel arbitration, arguing that each of the agreements with the distributors included a provision incorporating the Herbalife Rules of Conduct (which contain an arbitration provision) and that three of the agreements contained their own arbitration clauses.  The most recent version of the Herbalife Rules of Conduct provided that Herbalife and the distributor agree to arbitrate all disputes between them, including “claims arising out of or relating to any aspect of the relationship between Herbalife and [distributor],” as well as “claims by [distributor] against Herbalife or Herbalife against [distributor] which arise out of or relate in any way to any dispute between [distributor] and another Herbalife [distributor].”[229]  Importantly, references to Herbalife in this clause included its “subsidiaries, affiliates, officers, directors, agents, employees, predecessors in interest, heirs, successors and assigns.”[230]  Under the agreements, arbitration was to be governed by the AAA Rules.  Herbalife prevailed on its motion to compel at the district court.[231]  However, the District Court denied the motion to compel arbitration of the claims against the Top Distributors, who appealed from the District Court’s order.[232]

The Eleventh Circuit affirmed the District Court’s order to deny the Top Distributor’s motion to compel arbitration, holding that the Top Distributors could not enforce the arbitration clauses because they were not parties to any of the distributor agreements.[233]  The court first found that the Top Distributors were not Herbalife’s “subsidiaries, affiliates, officers, directors, agents, employees, predecessors in interest, heirs, successors, or assigns” as those terms were used in the agreements.[234]  Applying California contract law, the Eleventh Circuit then determined that the Top Distributors could not invoke the arbitration provisions in agreements to which they were not parties.[235]

The Eleventh Circuit also rejected the Top Distributors’ argument that the issue of whether there was an agreement to arbitrate claims was a threshold question of arbitrability that must be delegated to an arbitrator pursuant to the AAA Rules.  The court held that because there was no agreement to arbitrate with the Top Distributors, there was nothing to delegate.[236]  Lastly, the Eleventh Circuit held that the doctrine of equitable estoppel could not be invoked to compel arbitration of claims against the Top Distributors.  The court found that, under California law, a non-signatory to an arbitration agreement can only invoke equitable estoppel to compel arbitration in one of two circumstances: “(1) when the plaintiff-signatory ‘must rely on the terms of the written agreement in asserting [its] claims,’; or (2) when the plaintiff-signatory alleges ‘substantially interdependent and concerted misconduct’ by the signatories and non-signatories, and such alleged misconduct is ‘founded in or intimately connected with the obligations of the underlying agreement.’”[237]  Here, the Eleventh Circuit held that the distributors did not mention or discuss any terms of the agreements in the complaint and so were not relying on those agreements.[238]  Second, the court further held that the Top Distributors’ alleged misconduct, which it identified as making misrepresentations in coordination with Herbalife to convince the plaintiffs to spend money, was at least one step removed from the distributor agreements, and thus was not founded in or intimately connected with the obligations of that contract.[239]  Accordingly, the Top Distributors could not compel the distributors to arbitrate their claims.

MZM Construction Co., Inc. v. N.J. Building Laborers Statewide Benefit Funds, 974 F.3d 386 (3d Cir. (N.J.) 2020).  Where the formation of an arbitration contract that contains a delegation provision has been placed in issue, the court must resolve the dispute unless there is clear and unmistakable evidence that the parties agreed to delegate formation disputes to an arbitrator.

MZM Construction Company (“MZM”) hired workers from a local labor union for a construction project at Newark Liberty International Airport.[240]  MZM’s president signed a one-page, short-form agreement (“SFA”) with the union.  The SFA incorporated by reference a 1999 collective bargaining agreement and its 2002 successor (the “1999 CBA” and “2002 CBA,” and collectively the “CBAs”).  The 2002 CBA required MZM to make contributions to a statewide benefits fund.  It also contained an arbitration clause requiring the parties to agree to arbitrate “questions or grievances involving the interpretation and application” of the agreement as well as a provision that further provided that “[t]he Arbitrator shall have the authority to decide whether an Agreement exists, where that is in dispute.”[241]  After conducting an audit, the union determined that MZM owed about $230,000 in contributions to the union.  When MZM questioned the basis for this alleged liability, the union produced the SFA executed by MZM’s president, as well as an unsigned copy of the 2002 CBA.  The union unilaterally scheduled arbitration.

Thereafter, MZM filed a complaint in federal court seeking to enjoin arbitration and for a declaratory judgment that it was not a signatory to the CBA, had no obligation to arbitrate under any CBA, and was not liable to the union.  The complaint alleged that the SFA was fraudulently executed, so the SFA and incorporation of the CBAs voided any agreement between SFA and the union.  The union moved to dismiss and opposed the injunction, asking the District Court to refer the fraudulent execution claim to arbitration, along with the underlying collection dispute.  The union also argued that MZM presented a claim for fraudulent inducement, not fraudulent execution, which presumes that an agreement exists but is voidable rather than void at the outset, and as such the dispute is required to be sent to an arbitrator.  The District Court entered an order enjoining arbitration during the pendency of the action and denied the union’s motion to dismiss, and the union appealed.[242]

The Third Circuit considered whether the District Court had the power to resolve a question about the formation or existence of a contract where the contract contained a provision expressly delegating authority “to decide whether an Agreement exists” to an arbitrator.[243]  In finding that it did, the Third Circuit noted its prior determination that “courts ‘should not assume that the parties agreed to arbitrate arbitrability unless there is clea[r] and unmistakabl[e] evidence that they did so.’”[244]  The Third Circuit found that MZM had adequately stated a claim for fraudulent execution, which would render any arbitration agreement between the parties void.[245]  The union could not establish clear and unmistakable evidence that the parties agreed to delegate questions of arbitrability to an arbitrator where MZM disputed the existence of such an agreement.[246]  This triggered the authority of the District Court under Section 4 of the FAA to adjudicate the claim of fraudulent inducement.[247]  The Third Circuit was further persuaded by the fact that many other circuits had reached similar determinations.[248]

Wiggins v. Warren Averett, LLC, No. 1170943, 2020 WL 597293 (Ala. Feb. 7, 2020) (unpub.).  When an arbitration provision indicates that the AAA rules apply to the proceedings, substantive arbitrability decisions are to be made by the arbitrator, including whether the arbitration provision may be enforced against a non-signatory to the contract.

An individual physician filed a complaint against an accounting firm for accountant malpractice and the firm moved to compel arbitration, arguing that the individual physician was a third-party beneficiary to its contract with the medical practice requiring arbitration.[249]  The individual physician was a shareholder and employee of the practice and the contract required the accounting firm to prepare the tax returns for the individual physicians.[250]  The physician argued that the arbitration provision applied only to claims made by the practice against the accounting firm, and not to personal claims brought by the individuals.[251]  The trial court granted the motion to compel, and the physician appealed.[252]

On appeal, the physician argued that the dispute was excluded from the scope of the arbitration agreement and the accounting firm argued that because the agreement incorporated the AAA rules, a determination as to whether the claim is subject to the arbitration clause is an issue for the arbitrator to decide, not the court.[253]  The Supreme Court of Alabama held that when an arbitration provision indicates that the AAA rules apply to the proceedings, substantive determinations of arbitrability are to be made by the arbitrator, including whether the arbitration provision may be enforced against a non-signatory to the contract, and thus, the trial court properly granted the motion to compel.[254]

§ 1.4.3 Other Procedural Issues Related to Arbitration

Adams v. Postmates, Inc., 823 F. App’x 535 (9th Cir. (Cal.) 2020).  An arbitration agreement delegates authority to the arbitrator to resolve disputes regarding potential violations of class action waiver that are not excluded from the delegation provision or the arbitration agreement.

Claimants commenced more than 5,000 individual arbitrations against Postmates, Inc. (“Postmates”) in simultaneous filings.[255]  Postmates argued that its arbitration agreements with claimants contained class action waivers, and contended that the court must determine whether claimants had violated the waivers by the mass filings, which it contended amounted to de facto class-wide arbitration proceedings to which the parties had not agreed.[256]  After finding that the arbitration agreement clearly delegated responsibility to the arbitrator to resolve whether the claimants’ conduct violated the class action waivers, the District Court ordered Postmates to proceed with more than 5,000 individual arbitrations.  Postmates appealed.[257]

On appeal, Postmates argued that the arbitration agreement contained an exception to the delegation provisions that required a court to resolve disputes that arise from the class action waivers.  The Ninth Circuit affirmed the District Court’s order, holding that the arbitration agreement delegated authority to the arbitrator to resolve the dispute over the class action waiver.[258]  While the agreement excluded from the delegation provision claims that the class action waiver is “unenforceable, unconscionable, void, or voidable,” this did not cover the present dispute.[259]  As there was no applicable exception to the delegation provision, the court of appeals affirmed the District Court’s conclusion that the arbitrator must determine whether claimants violated the class action waivers.[260]

§ 1.5 What Constitutes an Agreement to Arbitrate?

Baten v. Mich. Logistics, Inc., No. 19-55865, 2020 U.S. App. LEXIS 32558 (9th Cir. (Cal.) Oct. 15, 2020) (unpub.).  Applying state law, court properly determined that no valid arbitration agreement ever existed where parties did not agree on the arbitrator selection process or the rules to govern arbitration process.

The parties entered into an agreement that provided that they would “resolve any disputes directly or with an agreed form of alternative dispute resolution.”[261]  One party had proposed proceeding under the auspices of the AAA, but that proposal was not accepted.  The District Court denied a motion to compel arbitration and this appeal followed.

The court of appeals first noted that it had jurisdiction to consider the interlocutory appeal under Section 16(a)(1)(B) of the FAA, even though the FAA was only invoked in supplemental briefing.[262]  Next the court concluded that it would look to state law to determine whether an agreement to arbitration exists, noting that it was in a minority of circuits to do so, as the First, Second, Sixth and Tenth Circuits would apply federal common law.[263]  Looking at the language in the parties’ contract, the court concluded that the reference to a “form of alternative dispute resolution” could mean other forms of ADR, such as mediation, and did not constitute an agreement to be bound to arbitrate disputes.[264]  Looking at the parties’ communications after the dispute arose, the court similarly found that the requisite agreement to arbitrate was still lacking: the parties never agreed on material terms, such as the mechanism for choosing an arbitrator and the applicable rules governing the arbitration, including the payment of the arbitrator’s fees.[265]  Finally, the court held that merely submitting a “demand to arbitrate” would not establish an implied-in-fact agreement to arbitrate, where the parties could not agree on how or where such an arbitration would proceed.[266]  The majority affirmed the District Court’s denial of the application to compel arbitration, over a dissenting opinion that came to a different conclusion that “the most reasonable reading of ‘an agreed form of Alternative Dispute Resolution’ is that the parties agreed to arbitration,” because interpreting the reference to ADR to include mediation would create a “no man’s land where there is no binding way to resolve any disputes.”[267]

§ 1.5.1 Issues of Contract Formation

In multiple decisions interpreting the same arbitration provision in form contracts between consumers and AT&T Mobility (“AT&T”), the Fourth and Ninth Circuits came to conflicting decisions whether DIRECTV, which was subsequently acquired by AT&T’s parent, could require the consumer to arbitrate claims brought under the Telephone Consumer Protection Act (“TCPA”).[268]  The contracts defined AT&T to includes its “affiliates” without specifying whether that term included after-acquired affiliates.  These cases are discussed below.

Mey v. DIRECTV, LLC, 971 F.3d 284 (4th Cir. (W.Va.) 2020).  In light of the expansive text of an agreement to arbitrate, and other context from the parties’ agreement, claims against an after-acquired affiliate were within the scope of the arbitration provision.

The District Court denied DIRECTV’s motion to compel arbitration of the consumer’s TCPA claims, concluding the dispute was outside of the agreement to arbitrate because the receipt of calls from DIRECTV was not an immediate and foreseeable result of the performance of the contract between the consumer and AT&T for cellular services, and the contract was susceptible of an interpretation imposing a limited duty to arbitrate disputes relating to such cellular services, noting that a construction that was not so limited might be unconscionably overbroad.[269]

On appeal, the court of appeals had no difficulty finding that there was an agreement to arbitrate, and held that there was no reason the term should be limited to only affiliates existing at the time the contract was entered into.[270]  Indeed, the court found the contractual context suggests the opposite, pointing to language binding “successors and assigns,” and rejected the assertion that the contract was ambiguous.[271]  Finally, the court looked at the scope of the agreement to arbitrate to see whether it covered these claims.  Starting with the “heavy presumption” favoring arbitration, the court of appeals suggested that the District Court’s question whether the provision could be limited had asked the wrong question; the correct inquiry was whether the agreement was susceptible to an interpretation that covers the dispute.[272]  In light of the expansive text of the arbitration agreement, requiring arbitration of “any and all disputes between us,” with no limiter to the services provided by AT&T, it did not exclude the TCPA claims against DIRECTV.[273]  The court found additional support for its conclusion in broadly worded categories of claims the agreement specifically listed as included, the contractual instruction to interpret its provisions broadly, and references to permission to send electronic communications to customers.[274]  The court did acknowledge that construing language broadly can lead in the abstract to “troubling hypothetical scenarios” but stressed that the question it was addressing was concrete rather than abstract, tethered to the facts of this dispute.[275]

The dissent would have held that there was no agreement to arbitrate, considering the language of the agreement as a whole, and interpreting the reference to “affiliate” to refer to those entities involved in some way in providing cellular phone services.[276]  In the view of the dissent, the issue was not only about temporal limits on the term “affiliate” to exclude or include future affiliates, but rather that a reasonable person would not anticipate arbitrating with DIRECTV, whose later affiliation with AT&T was “happenstance” and fortuity unconnected to the provision of cell phone service under the contract.[277]  The dissent cited as support the District Court’s decision in Revitch denying DIRECTV’s motion to compel, affirmed shortly thereafter by the Ninth Circuit as discussed immediately below.[278]

Revitch v. DIRECTV, LLC, 977 F.3d 713 (9th Cir. (Cal.) 2020).  Disagreeing with the Fourth Circuit, Ninth Circuit held that there was no agreement to arbitrate claims against an after-acquired affiliate where contract interpretation supporting arbitration would lead to an absurd result.

The District Court denied DIRECTV’s motion to compel arbitration, concluding that the contract between the consumer and AT&T did not reflect an intent to arbitrate the claim now asserted against DIRECTV, and DIRECTV appealed.[279]

On appeal, the Court of Appeals issued three opinions: a majority, a concurrence, and a dissent.  The majority looked to California state law (as provided in the AT&T contract) to answer the threshold issue of whether there is an agreement to arbitrate.  Analyzing the reasonable expectations of the parties, the court concluded that the consumer could not have reasonably expected when he signed his contract with AT&T to obtain cell phone service that he could be forced to arbitrate an unrelated dispute with an entity that did not become affiliated with AT&T until years later.[280]  Thus, this was a case that fell within the California rule that while courts normally look to “the written terms [of the contract] alone,” they will not do so if it would “lead to absurd results.”[281]  While DIRECTV argued that the FAA preempts the absurd results canon under the Supreme Court decision in Lamps Plus, Inc. v. Varela, the majority disagreed.[282]  Because the absurd results canon does not disfavor arbitration agreements compared to other contracts, it concluded that the canon would not be preempted by the FAA.

Significantly, the majority found that there was no agreement to arbitrate and thus never reached the question of the scope of the arbitration clause.[283]  The Ninth Circuit acknowledged that it was creating a split with a recent Fourth Circuit decision that reached the opposite conclusion on nearly identical facts in Mey v. DIRECTV, LLC, discussed above.[284]  The majority here reasoned that it was appropriate to consider hypothetical situations to bolster its conclusion that the parties’ intention was not to form an agreement to arbitrate of the kind that DIRECTV was urging.[285]  Adopting a different approach, the concurrence focused on the language of Section 2 of the FAA, asking whether the underlying controversy to be settled by arbitration was one “arising out of” the contract or transaction in which the consumer agreed to arbitrate.[286]  Concluding that it was not, the concurrence would affirm the District Court on that separate ground.[287]

Like the Fourth Circuit, the dissent here maintained that the issue was not about the existence of the agreement to arbitrate, but rather about the scope of that agreement.[288]  In its view, the “affiliate” language was not ambiguous and, even if it were, any ambiguity should be resolved in favor of arbitration, rendering the absurd results canon inapplicable.[289]  As such, the dissent would have reversed the District Court.

Given the split among the circuits over the rules of interpretation applicable to agreements to arbitrate, this issue may yet resurface.

Hill v. Emple. Res. Grp., LLC, 816 F. App’x 804 (4th Cir. (W.Va.) 2020).  The court properly denied in part employer’s motion to compel arbitration because no reasonable jury could find that the proof satisfies the applicable heightened burden to show an agreement to arbitrate by clear and convincing evidence.

Employer sought arbitration of wage and hour claims of a class of plaintiffs, employees at Applebee’s restaurants, who had opted in to the class.[290]  The employees opposed the motion, arguing that the employer was unable to produce agreements for at least 60 of the opt-in plaintiffs.[291]  The District Court granted the motion only as to potential class members for whom the employer produced signed agreements and the employer appealed.[292]

The court of appeals reviewed the denial of the motion to compel de novo, applying a summary judgment standard to determine whether there were sufficient facts to support the denial, invoking general contract formation principles.[293]  Because the employer asserted that contracts could not be found for certain opt-in employees, the court looked to the missing instruments law of the four states where the plaintiff-employees were employed, which all had heightened standards for proving the existence of missing or lost instruments through parole evidence.[294]  Looking at the employer’s evidence in the record, consisting of an affidavit setting forth the standard corporate employment practice of requiring employees to sign agreements, and the existence of several hundred agreements signed by other class members, the court held that the employer had failed to meet its burden to demonstrate a material issue of fact as to whether the employees had signed agreements.[295]  It had not, for example, provided sufficient context to demonstrate the rate of compliance across the system or testimony from the specific managers at the restaurants involved about individual compliance.[296]  For these reasons, the court affirmed the District Court’s order.[297]

Bacon v. Avis Budget Grp., Inc., 959 F.3d 590 (3d Cir. (N.J.) 2020).  Court properly denied motions to compel arbitration where proof did not show by undisputed facts that customers consented to arbitrate their disputes.

Plaintiff-customers brought putative class action against car rental company and licensees alleging consumer claims and the company moved to compel arbitration.[298]  Some customers had rented cars in the U.S., where the arbitration provision is printed on a jacket into which the signed one-page agreement is folded and given to the customer; one had rented a car in Costa Rica, where the arbitration provision is on the back side of a two-page form, which the customer had not signed; and several plaintiffs had used websites that included an arbitration provision in the terms of use.[299]  The District Court denied the initial motions and directed the parties to engage in discovery on the issue of arbitrability.[300]  After discovery, the defendants filed a new joint motion for summary judgment on the issue of arbitrability.  The District Court denied the motion, holding that the undisputed facts showed that the plaintiffs in the U.S. did not assent to the arbitration provision, a disputed factual issue existed as to whether the plaintiff renting in Costa Rica had reasonable notice of the arbitration provision, and the record for plaintiffs who rented on the website was not sufficiently developed concerning assent, allowing that the issue could be resolved after further discovery either on summary judgment or at trial.[301]

The Court of Appeals affirmed.  First, it held that it had appellate jurisdiction because the District Court’s orders denied motions to compel arbitration, regardless of finality.[302]  Turning to issues of contract formation, the court held the District Court properly denied the motions for summary judgment.  As to the plaintiffs who rented cars in the U.S., the terms of the rental jackets were not adequately incorporated into the rental agreements to create contractual assent under either New Jersey or Florida law.[303]  New Jersey law permits contract terms to be incorporated by reference from a separate document, where (1) the separate document “must be described in such terms that its identity may be ascertained beyond doubt” and (2) “the party to be bound by the terms must have had ‘knowledge of and assented to the incorporated terms.’”[304]  While the Florida standard on incorporation by reference is more lenient than New Jersey law, the defendants’ proof did not meet either standard, in large part because customers did not receive or see the rental jacket until after they had signed the rental agreement.[305]  For the Costa Rica customer, as New Jersey law requires the parties to have “reasonable notice” of the contract terms; the court held that the evidence did not indisputably show that the customer had reasonable notice of the arbitration provision printed on the back side of the rental form, where he had signed the front, but not the back, of the document.[306]  As to customers who used the website, the court held the evidence supporting the motion was not properly authenticated, because the screen shots of the website did not show the sites as they existed when the customers made their reservations, but rather were from data grabs taken over a year later.[307]  Accordingly, the orders denying summary judgment on the issue of arbitrability were affirmed.

Mason v. Midland Funding LLC, 815 F. App’x 320 (11th Cir. (Ga.) 2020) (per curiam).  Presumption in favor of arbitration does not apply to disputes concerning whether an agreement to arbitrate has been made, which is a threshold question to be resolved as a matter of contract law, requiring a specific showing that the party assented to the agreement to arbitrate.

Cardholders brought a putative class action against credit card companies, who sought unsuccessfully to dismiss, and then to compel arbitration.[308]  The cardholders had applied for credit online, a process that allegedly required them to accept terms and conditions including an arbitration agreement, which was then mailed to the cardholder along with their credit card.  The District Court denied the motion.[309]

On appeal, the court distinguished between issues of the scope of an arbitration clause, where the FAA requires doubts to be resolved in favor of arbitration, and disputes concerning whether an agreement to arbitrate has been made, which are matters of contract.[310]  Here, Utah law applied, and provided that a credit agreement is “enforceable without any signature as long as the ‘debtor is provided with a written copy of the terms of the agreement,’ the agreement states that ‘any use of the credit offered shall constitute acceptance of those terms,’ and the debtor ‘uses the credit offered.’”[311]  The court reviewed the District Court’s decision de novo and held that, as to one plaintiff-cardholder, the submissions by the credit card companies fell short of showing that the form of application submitted in support of the motion was the actual application the cardholder accepted and that the online application contained an agreement to arbitrate.[312]  Nor did the submission relating to that cardholder trigger the “mailbox rule” that creates a presumption of receipt where there is evidence of specific office procedures for preparing and mailing notices and receipt of mail from the purported sender at the same address because the proof was not based on personal knowledge where the mailing was conducted by outside vendors.[313]  The District Court had properly employed a summary judgment standard, finding the credit card companies were not entitled to discovery when they did not request a trial and their submissions were insufficient to raise a dispute about any material fact.[314]

However, as to the other named cardholder, the submission did trigger the mailbox rule because the declarant had personal knowledge of the mailing and the cardholder did not rebut the presumption.[315]  Accordingly, the District Court’s order was reversed as to the second named plaintiff-cardholder.

Nicosia v. Amazon.com, Inc., 815 F. App’x 612 (2d Cir. (N.Y.) June 4, 2020).  Where a party has notice of the existence of an arbitration clause, and manifests assent to be bound by the clause through conduct, the party can be compelled to arbitrate.  A consumer filed claims against Amazon.com, Inc. (“Amazon”) claiming that Amazon violated Washington state law and consumer protection laws based on two online purchases he made through Amazon in 2013 of a weight loss product that contained a controlled substance that had been banned by the Food and Drug Administration in 2010.[316]  The District Court granted Amazon’s motion to compel arbitration and dismiss the case, based on an arbitration clause that has been included in Amazon’s online conditions of use since 2011.  The consumer appealed, arguing that he was not bound by the arbitration clause because he never received notice of it or manifested his assent.  The consumer further contended that through its conduct, Amazon waived its right to compel arbitration.[317]

The Second Circuit affirmed the district court’s judgment, holding that the consumer was bound by the arbitration agreement based on principles of notice and assent.[318]  First, the court found that the question of whether the parties had agreed to arbitrate would be governed by Washington law, under which a party may be bound by an arbitration agreement through “inquiry notice,” even without actual notice of the contract term..[319]  The Second Circuit then reasoned that the consumer’s admission that he made at least 27 purchases through Amazon after receiving such notice was a manifestation of assent to arbitration.[320]  The Second Circuit also rejected the consumer’s waiver argument, finding that he failed to show any prejudice, such as specific cost, that resulted from Amazon’s delay in filing its motion to compel.[321]  Thus, the consumer was bound by the agreement to arbitrate.[322]

Skuse v. Pfizer, Inc., 244 N.J. 30 (2020).  Arbitration agreement is valid and binding on employee where employer disseminated notice of arbitration policy through a company-wide email informing employees that continuation of employment would be deemed acceptance of policy and waiver of right to pursue employment discrimination claims in court.

Pfizer, Inc. (“Pfizer”) notified employees through a companywide email of a new arbitration policy and attached a link to the agreement.[323]  Under the policy, if an employee continued to work for Pfizer for 60 days after receipt of the agreement, the employee would be deemed to have accepted and consented to the terms of the agreement.[324]  Plaintiff employee opened the email that attached the agreement, completed a “training module” regarding the arbitration provision, and clicked a box on her computer screen that asked her to “acknowledge” that she was required to assent to the agreement as a condition of her employment.[325]  Plaintiff continued to work for Pfizer for 13 months and subsequently filed suit under New Jersey state discrimination law when her employment was terminated based on her refusal to be vaccinated on religious grounds.[326]  The trial court granted Pfizer’s motion to dismiss the complaint and compel arbitration.[327]  The intermediate appellate division reversed the trial court’s judgment, holding that the agreement was not agreed to, was unenforceable, and that “the wording and method of Pfizer’s training module” was “inadequate to substantiate an employee’s knowing and unmistakable assent to arbitrate and waive his or her rights of access to courts.”[328]

On appeal to the New Jersey Supreme Court, the court applied a de novo standard to its review of the trial court’s determination that the employee’s claims were subject to an enforceable arbitration agreement.[329]  Following a discussion of relevant case law concerning waiver-of-right provisions, the court concluded that Pfizer had clearly informed the employee she would waive her right to pursue claims for employment discrimination in court by continuing her employment for 60 days following receipt of the agreement, noting that the employee was informed through a copy of the agreement itself, multiple emails, the “FAQs” document provided along with the agreement, and the training module.[330]  The court also found that while employees receive large volumes of emails in the workplace that may not be thoroughly reviewed, the employee’s failure to review the communications from her employer did not invalidate the agreement.[331]  Finally, the court found that neither Pfizer’s purportedly misleading labeling of materials provided to employees about the arbitration provision as “training,” nor the request that the employee “CLICK HERE to acknowledge” as opposed to “agree” to the agreement, invalidated the agreement.[332]  In holding that the agreement was valid and binding, the court concluded that the agreement explained to the employee in “clear and unmistakable terms the rights she would forego if she assented to arbitration by remaining employed at Pfizer for sixty day … [the] e-mails, the link to the Agreement contained in those e-mails, the ‘FAQs’ page, and the summaries that appeared on the four pages collectively explained, with the clarity that our law requires, the terms of the Agreement to which [the employee] agreed by virtue of her continued employment.”[333]  Accordingly, the Supreme Court reversed the intermediate court and reinstated the determination by the trial court.

Carrick v. Turner, 298 So.3d 1006 (Miss. 2020).  Discrepancies within agreement do not impact the enforceability of the agreement to arbitrate where the parties’ intent to arbitrate claims is unambiguous.

A client filed a lawsuit against a securities broker and his employer alleging negligent misrepresentation and supervision.[334]  In response, the brokerage moved to compel arbitration based upon its purported agreement with the client containing an arbitration provision.[335]  The client had signed an application to open an account incorporating an account agreement that did not require signatures.[336]  The application contained a clear reference to an arbitration provision in the account agreement, but may have referred to the provision by the wrong paragraph numbers (there were two versions of the account agreement, with the arbitration provision in different-numbered paragraphs, along with slight wording variations, and it was not clear which was provided to the client when she signed her application).[337]  The trial court denied the motion to compel arbitration and the broker and brokerage appealed.[338]

On appeal, the Supreme Court of Mississippi described the two-prong analysis courts must conduct when determining the validity of a motion to compel arbitration under the FAA, asking first whether the parties intended to arbitrate the dispute and then whether any external legal constraints foreclose arbitration of the claims.[339]  Here, despite a possible discrepancy in the numbered paragraph references, the language and execution of the application demonstrated the unambiguous intent of the parties to arbitrate this claim and thus, a valid arbitration agreement existed and the trial court should have compelled arbitration.[340]  To that end, the Supreme Court of Mississippi remanded the case with directions to compel the parties to submit to arbitration and to attempt to determine which version of the agreement, if either, applies, noting that if the court was unable to determine which provision governed, the trial court was to refer to the FAA for guidance regarding specifics of the arbitration.[341]

Jorja Trading, Inc. v. Willis, 598 S.W.3d 1 (Ark. 2020).  A self-help provision, class action waiver, and arbitrator-selection provision in an arbitration agreement did not destroy mutuality of obligation as to preclude formation of a valid contract.

Defendants purchased a car with an installment sales contract, failed to make payments, and surrendered the car.[342]  Plaintiff Jorja Trading, Inc. (“Jorja”), the assignee of the financing contract, sued in small claims court for the remaining balance on the contract and obtained a judgment.[343]  The purchasers appealed, counterclaimed for usury and UCC violations, and sought class certification.  In response, Jorja filed a motion to compel arbitration.[344]  The court denied the motion, holding that the arbitration agreement lacked mutuality of obligation because while it reserved the right to both parties to seek self-help remedies, only the lender would be able to resort to self-help to repossess the vehicle, the class action waiver only applied to limit the buyers’ rights (as only buyers would be pursuing claims as a class), and it allowed the lender to reject the purchasers’ appointment of an arbitrator, and because Jorja had waived its right to arbitration by proceeding in small claims court.[345]

On appeal, the Supreme Court of Arkansas applied ordinary state law principles governing contract formation.  The court started its analysis with the premise that the agreement to arbitrate was bilateral, and that mutuality does not require that every provision within a contract be bilateral.[346]  Requiring every provision in an arbitration agreement to be bilateral would hold arbitration agreements to a more stringent analysis than other contracts, in violation of the FAA.[347]  The court held that the self-help provision in the installment-sales contract did not void the arbitration agreement or negate mutuality.[348]  Likewise, as class action waiver provisions would not invalidate mutuality of obligations in other installment sales contracts, the provision cannot destroy the mutuality merely because it applies to arbitration.[349]  The court disagreed with the lower court’s interpretation of the provision regarding the selection of the arbitrator as unilateral, and found that the arbitration agreement was valid.[350]  Finally, the court found that the agreement specifically provided that a party may seek a monetary judgment in district court without waiving arbitration and, thus, Jorja did not waive the right to arbitrate and the motion to compel should have been granted.[351]

§ 1.5.2 Issues of FAA Preemption

Delisle v. Speedy Cash, 818 F. App’x 608 (9th Cir. (Cal.) 2020) (unpub.).  Court properly applied California law to invalidate agreements to arbitrate that would waive the borrowers’ rights to seek public injunctive relief, but remands to examine McGill factors in light of subsequently enacted law to determine whether requested injunctive relief would still prevent a threat of future harm.

Borrowers requested an injunction under California law barring Speedy Cash from issuing loans greater than $2,500 with an annual percentage rate of interest (“APR”) over 90% and requiring Speedy Cash to issue “corrective advertising” about prior loans.[352]  Speedy Cash sought an order requiring the borrowers to enforce an arbitration provision in the loan agreements that included a waiver of the borrower’ right to seek public injunctive relief in all forums.[353]  The District Court held that the requested injunction would benefit the general public because it would prevent Speedy Cash from continuing to engage in unlawful conduct that threatens future harm and concluded that the plaintiffs had requested public injunctive relief that the California Supreme Court deemed non-waivable in McGill v. Citibank, N.A.[354]  Accordingly, the District Court denied Speedy Cash’s motion to enforce the arbitration agreements and Speedy Cash appealed.

During the appeal, however, a California statute took effect that prohibited finance lenders from issuing certain loans.[355]  The new law raised issues about whether the injunction was still necessary to prevent a threat of future harm.[356]  Speedy Cash also contended that the District Court erred in applying California law to determine the enforceability of the arbitration provision because the loan agreement designated Kansas law as controlling.  The Court of Appeals concluded that California law was properly applied, because California holds a materially greater interest in this litigation, the loans were negotiated and executed in California, the plaintiffs reside in California and California law invalidates contractual waivers of the right to seek public injunctive relief in all forums.[357]  Accordingly, the District Court correctly applied California law, but the order was reversed and remanded in light of the new California statute’s further consideration of whether a public injunctive relief was warranted.

Roberts v. AT&T Mobility LLC, 801 F. App’x 492 (9th Cir (Cal.) 2020) (unpub.).  Denial of arbitration would not be disturbed, as FAA does not preempt McGill rule invalidating agreements that would purport to waive the right to seek public injunctive relief as against public policy.

This case made its second appearance in the Ninth Circuit on an arbitration issue.  Plaintiff-consumers had filed a class action lawsuit against AT&T Mobility LLC (“AT&T”) alleging AT&T used deceptive and unfair trade practices in marketing mobile service data plans as “unlimited.”[358]  The consumers asserted AT&T’s practices violates several California laws and sought, among other remedies, public injunctive relief, which AT&T’s arbitration clause prohibits.[359]  AT&T argued that the FAA preempts California’s public policy in favor of public injunctive relief.  Four years earlier, the district court had compelled arbitration and the Ninth Circuit had affirmed, rejecting the consumer’ argument that compelling arbitration violated their First Amendment right to petition the government.[360]  The consumers asked the District Court to reconsider based on the California Supreme Court’s supervening decision in McGill v. Citibank, N.A.,[361] which held that an agreement, like AT&T’s, that waives public injunctive relief in any forum is contrary to California public policy and unenforceable.  On their motion for reconsideration, the consumers argued that McGill’s holding provided the District Court with a new, intervening basis to deny arbitration.  The District Court agreed and granted the motion to reconsider and denied, in part, AT&T’s motion to compel arbitration.[362]  AT&T appealed.

On appeal, AT&T argued that the appeal should be resolved on a procedural issue—that the district court abused its discretion in reconsidering its initial order compelling arbitration.  The court of appeals disagreed, holding that this was the type of decision in which it should give the district court a substantial margin of discretion to decide the issue, and that the district court’s decision to grant rehearing was not “beyond the pale of reasonable justification,” illogical, implausible or without support.”[363]

Turning then to the merits of the District Court’s decision, the Ninth Circuit pointed to its recent decision in Blair v. Rent-A-Ctr., Inc., holding that the FAA does not preempt the McGill rule, on facts similar to this case.[364]  There, the Court of Appeals held that because the McGill rule is a generally applicable contract defense derived from long-established California public policy in favor of public injunctive relief, the rule fell within the FAA’s saving clause at the first step of the preemption analysis.[365]  Moreover, the McGill rule does not mandate procedures that interfere with arbitration, namely with arbitration’s informality.[366]  Bound by its prior decision in Blair that clauses such as AT&T’s are unenforceable in California under McGill, the Ninth Circuit once again affirmed the District Court’s order, this time denying AT&T’s motion to compel arbitration[367].

Belton v. GE Capital Retail Bank, 961 F.3d 612 (2d Cir. (N.Y.) 2020).  A dispute concerning the violation of a bankruptcy court’s discharge order framed as contempt is not arbitrable.

Two debtors opened credit card accounts with lenders (the “Banks”).[368]  When the debtors fell behind on their credit card payments, the Banks eventually “charged off” the delinquent debt and reported the change in the status of the debt to major credit reporting agencies.  In turn, those agencies updated the debtors’ credit reports to indicate their severely delinquent and outstanding credit card debt.  Eventually, both debtors filed for bankruptcy.  At the completion of the liquidation processes, the bankruptcy court entered a discharge order, which operated as an injunction against future collection attempts.  Thereafter, the debtors initiated adversary proceedings against the Banks seeking a contempt citation and damages based on allegations that the Banks’ failure to update the debtors’ credit reports violated the bankruptcy court’s discharge order.  In response, the Banks moved to enforce mandatory arbitration clauses in the debtors’ credit card account agreements.  The bankruptcy court denied the Banks’ motions, finding that the dispute was not arbitrable because of an inherent conflict between the bankruptcy code and the FAA, and the District Court affirmed.[369]  The Banks appealed, arguing that Supreme Court precedent rejected the notion that inherent conflict between statutory purpose and arbitration is independently sufficient to displace the FAA’s mandate that courts enforce arbitration agreements.[370]

The Second Circuit affirmed the district and bankruptcy courts’ orders denying the motion to compel the dispute over the discharge order. ^[371]  The Second Circuit disagreed with the Banks’ interpretation that Supreme Court precedent held that inherent conflict is not sufficient by itself to displace the FAA.[372]  The court found that, although the Supreme Court required courts to favor statutory text and legislative history over an inherent conflict when considering whether Congress intended to override the FAA’s mandate, Epic Sys. Corp. v. Lewis did not preclude the independent use of an inherent conflict to resolve such disputes when statutory text and legislative history are ambiguous.[373]  The Second Circuit reasoned that here, the bankruptcy code was ambiguous as to whether disputes about discharge orders were arbitrable in the context of contempt proceedings.[374]  Thus, the court found that it was bound by its own precedent in a nearly identical case that an inherent conflict did exist between the FAA and bankruptcy code with regard to discharge orders.[375]  In In re Anderson, the Second Circuit had held that an inherent conflict existed because discharge orders are integral to the bankruptcy process, their enforcement requires continuing court supervision, and the bankruptcy court’s power to enforce its own orders is integral to the code’s central structure, without considering the bankruptcy code’s text or legislative history.[376]  Bound by its precedent, the Second Circuit affirmed the District Court’s order denying the motions to compel arbitration. ^[377]

Robertson v. Intratek Computer, Inc., 976 F.3d 575 (5th Cir. (Tex.) 2020).  The federal whistleblower statute does not contain a Congressional command to override the FAA’s mandate to enforce arbitration agreements, and claims under the whistleblower law that are within an arbitration agreement must be arbitrated.

Plaintiff employee signed an arbitration agreement as a condition to beginning employment with Intratek Computer, Inc. (“Intratek”), to provide information and technology services to United States Department of Veterans Affairs (“VA”).[378]  The agreement required arbitration of any claims against Intratek and its officers, agents and employees relating to his employment.  Intratek fired the employee, and shortly thereafter he filed a whistleblower complaint with the VA’s Office of the Inspector General alleging that Intratek’s CEO bribed VA officials to secure lucrative government contracts.  The whistleblower complaint included allegations that Roger Rininger, a VA employee, had allegedly accepted the bribes.[379]

The employee filed suit in federal district court against Intratek, its CEO, and Rininger, alleging that Intratek violated the federal whistleblower statute[380] by firing him for reporting the bribes.  Intratek and its CEO moved to stay the suit and compel arbitration, and the employee effectively agreed to stay the case as it pertained to Rininger.  The District Court referred the matter to a magistrate judge who found that all of the employee’s claims, including those against Rininger, were subject to arbitration and should be dismissed.  The District Court adopted the magistrate judge’s report and recommendation, and dismissed all of the employee’s claims in favor of arbitration.[381]

The Fifth Circuit affirmed the District Court’s decision to dismiss the claims against Intratek and its CEO pursuant to the arbitration agreement, holding that the whistleblower statute does not override the FAA’s mandate to enforce arbitration agreements.[382]  The court, applying Supreme Court precedent, held that the employee must show “a contrary congressional command” in a purportedly conflicting federal statute to override the FAA’s mandate.[383]  The Fifth Circuit rejected the employee’s urging to find such a mandate in the whistleblower statute provision allowing either party to seek a jury trial.[384]  The court’s interpretation of the statute was that a jury trial is one way to vindicate a whistleblower’s statutory rights, but not itself a right or remedy created by the statute.  The Fifth Circuit also determined that the whistleblower statute’s legislative history lacked any congressional command to avoid arbitration.[385]  According to the court, the employee’s claims against Intratek and its CEO under the whistleblower statute, and for wrongful termination and tortious interference, were clearly covered by the arbitration agreement, which applied to any claims under federal and state law.[386]

However, the Fifth Circuit reversed the district court’s decision to dismiss the claims against Rininger, who, as a VA official, never signed an employment contract or any arbitration agreement with Intratek.[387]  As there was no arbitration agreement to enforce and the employee had never moved to compel arbitration of the claims against Rininger, its decision compelling arbitration of those claims was clearly erroneous.[388]

Sparks v. Old Republic Home Protection Company, Inc., 467 P.3d 680 (Okla. 2020).  Under reverse preemption of the McCarran-Ferguson Act, state law exempting contracts, which reference insurance from arbitration was enacted for the purpose of regulating insurance and preempts the application of the FAA.

Homeowners purchased a home warranty from Old Republic Home Protection (“OHRP”) that included a provision requiring disputes to be resolved by arbitration under the FAA.[389]  After damage to their home, OHRP selected the repair company.  Homeowners claimed the repairs were negligently performed, and filed a suit for breach of contract against OHRP.[390]  OHRP moved to compel arbitration, and the trial court denied the motion.[391]  After the motion was denied, OHRP amended its answer to allege that it was not an insurance company and the warranty contract was not an insurance contract.

OHRP appealed, arguing that the FAA controlled and preempted the application of Oklahoma Uniform Arbitration Act.[392]  The intermediate Court of Civil Appeals affirmed the trial court’s order, concluding that the Oklahoma Uniform Arbitration Act[393] prevented the trial court from compelling arbitration because the contract “referenced insurance” within the meaning of the Oklahoma statute and did not intend to exempt contracts made pursuant to other laws governing home services.[394]

On a writ of certiorari to the Supreme Court of Oklahoma, the court analyzed the interplay between the McCarran-Ferguson Act,[395] which authorized reverse preemption of federal statutes giving individual states the right to enact laws to regulate insurance, and the FAA.[396]  The court held that the Oklahoma Uniform Arbitration Act exempting contracts that reference insurance from arbitration is a state law regulating the business of insurance and thus, under the McCarran-Ferguson Act, the state law prevails over the FAA.[397]  The Supreme Court of Oklahoma held that the home warranty plan met the definition of insurance and was therefore exempt from the application of the Oklahoma Uniform Arbitration Act, pursuant to the application of the McCarran-Ferguson Act.[398]

§ 1.6 Jurisdiction Under the Federal Arbitration Act

Burgess v. Lithia Motors, Inc., 196 Wn.2d 187 (2020).  Once an arbitration begins under the FAA, judicial intervention is limited to ruling on gateway disputes, such as whether the arbitration clause is enforceable, and addressing the award at the conclusion of arbitration.

Plaintiff employee filed suit in state superior court against her former employer alleging discrimination, harassment, and wrongful termination.[399]  The case was moved to arbitration on the employer’s request pursuant to the arbitration provision in the parties’ employment agreement.[400]  During the arbitration, the employee claimed that the employer failed to timely respond to interrogatories and moved in the arbitration forum to compel discovery responses.[401]  After the arbitrator denied the motion, the employee returned to state court and filed a motion to vacate the arbitrator’s order, terminate the arbitration, and issue a case scheduling order.[402]  The employee argued that the employer had breached the arbitration agreement by failing to comply with discovery deadlines and the arbitrator had breached the arbitration agreement by failing to enforce the Federal Rules of Civil Procedure.[403]  The state court denied the motion, holding that the enforceable arbitration clause deprived the court of jurisdiction to address the employee’s motion.[404]

The intermediate state court of appeals granted the employee’s request for review and certified the following question to the Washington Supreme Court: “Does the superior court have jurisdiction to address an employee’s contractual breach argument based upon acts alleged in the course of binding arbitration, or is the superior court’s jurisdiction in a contractual arbitration limited to issues occurring before and after—but not during—the proceeding…”[405]  The Supreme Court analyzed a number of federal court cases that determined that the FAA generally restricts judicial involvement to the “bookends of arbitration” and precludes any judicial intervention once arbitration begins.[406]  The court next analyzed the statutory provisions that govern the interplay between judicial and arbitration proceedings under the FAA, and rejected the employee’s argument that Section 2 of the FAA authorized the court to resolve a breach of the arbitration agreement challenge during ongoing arbitration.[407]  The court concluded that once arbitration begins under the FAA, “the court’s authority to resolve the dispute is transferred to the arbitrator.  Judicial intervention is generally precluded during arbitration proceedings.”[408]  Because neither party challenged the validity of the arbitration agreement beforehand, and the final arbitration award had not yet been issued, the court could not intervene and rescind the arbitration agreement and thus, the superior court correctly determined that it was precluded from reviewing the employee’s motion.[409]

§ 1.6.1 Federal Appellate Jurisdiction Under Section 16 of the Federal Arbitration Act

Noe v. City Nat’l Bank, No. 20-1230, 2020 U.S. App. LEXIS 31088 (4th Cir. (W.Va.) Sept 30, 2020) (per curiam).  Appellate jurisdiction existed where District Court denied request for alternative relief to stay the action pending arbitration, and to the extent that the motion presented unresolved factual questions, the court should have considered matters outside the pleadings and held a summary hearing to resolve any issues.

Bank customer brought a class action lawsuit challenging the imposition of overdraft fees.[410]  In response, the bank moved to dismiss on the grounds that the pleading was insufficient and, in the alternative, asked the court to stay the action pending arbitration.  The District Court denied the motion, based on a question whether subsequent agreements modified the obligation to arbitrate contained in the original depository agreement that the court deemed unfit for resolution on a motion to dismiss.[411]

On the bank’s appeal, the court first examined its jurisdiction and concluded that the bank’s alternative request that the “matter be stayed pending referral of the matter to arbitration” equated to a motion seeking enforcement of a purported arbitration agreement and, thus, appellate jurisdiction existed to review the denial of that request, under Section 16(a)(1)(b) of the FAA.[412]  Proceeding to the merits of the appeal, the court held that the District Court had erred in denying the motion.  If the District Court had treated the motion as one to compel and stay pending arbitration, the court would not have been limited to a review of the pleadings before it.[413]  And, if after considering the bank’s evidence the District Court concluded that a genuine issue of material fact prevented it from deciding the issue of arbitrability, the court would have been required to hold a hearing to resolve the factual dispute.[414]  Accordingly, the District Court erred in denying the motion without determining arbitrability and the Court of Appeals vacated the District Court’s order denying arbitration and remanded to the District Court to determine whether the claims should be referred to arbitration with the direction that, if there are unresolved questions of material fact, the court should hold “an expeditious and summary hearing” to resolve those issues.[415]

Hermosillo v. Davey Tree Surgery Co., 821 F. App’x 753 (9th Cir. (Cal.) 2020).  District Court’s order compelling classwide arbitration staying non-arbitrable claims and neither explicitly dismissing nor staying the remainder of the claims failed to rebut the presumption that claims that were not explicitly dismissed by the District Court were stayed and thus, not final and immediately appealable under the FAA.

Employees brought claims in state court against employer, who removed the case to federal court and moved to compel arbitration pursuant to provision in employment applications and a stand-alone arbitration agreement.[416]  The court granted the motion to compel arbitration on a classwide basis pursuant to the employment applications, but stayed claims that were not arbitrable under the California Private Attorney General Act (“PAGA”).  The order did not explicitly stay or dismiss the arbitrable claims, but ordered the clerk to administratively close the file, and directed the parties to notify the court after the arbitration proceedings were completed.[417].  The employer appealed the portion of the order directing classwide arbitration, requesting reversal and an order compelling arbitration on an individual basis.

The court started with the rule that orders compelling arbitration are not immediately appealable under Section 16 of the FAA, unless the underlying claims are dismissed so that the order constitutes a final decision with respect to the arbitration.[418]  Because the order in this case did not explicitly dismiss all of the claims, the court assumed the claims not dismissed were stayed, and that it lacked appellate jurisdiction.[419]  While the employer argued that the order compelling class arbitration constitutes an order denying arbitration on an individual basis, the court disagreed because the court would then be required to consider the merits of the appeal, rendering the limitations on appellate jurisdiction meaningless.[420]  Instead, the court held that the employer could have pursued an interlocutory appeal, or asked the District Court to reconsider its ruling or sought clarification, or it could have appealed that part of the order denying individual arbitration; instead, it appealed the portion of the order that required arbitration.[421]  Accordingly, the appeal was dismissed for lack of appellate jurisdiction.

Torgerson v. LCC Int’l, No. 20-3020, 2020 U.S. App. LEXIS 25155 (10th Cir. (Kan.) 2020).  There is no appellate jurisdiction over an order denying a motion to decertify collective claims in arbitration because the order staying the action pending arbitration was not final and the orders did not deny an application to compel arbitration.

Employees filed a lawsuit against employer alleging violations of the FLSA.[422]  Based on the arbitration provision in the employment agreements, the employer filed a motion to dismiss or, in the alternative, to stay proceedings and compel arbitration.  The District Court granted the employer’s request to stay the case and ordered the parties to arbitrate their dispute.  However, the court declined to consider the employer’s request to decide whether the operative employee agreements permitted collective arbitration, as well as the employees’ motion for conditional certification of their FLSA class claims, as those were issues to be resolved by the arbitrator.[423]

The named employee then submitted a demand to the AAA, seeking to assert a collective action on behalf of himself and others similarly situated, and the employer filed a “Motion for Clause Construction” in the arbitration, asking the arbitrator to dismiss the collective action claims.[424]  The arbitrator entered an order that the arbitration provision was valid and enforceable and covered the employees’ FLSA claims, and authorized the employees to proceed on a collective basis.[425]  The arbitrator denied the employer’s request, describing the order as a non-final decision that pertains to opt-in collective action under the FLSA.  Thus, it was not a final ruling under the AAA rules as to whether an arbitration may proceed as an opt-out class action, and the proceedings would not be stayed to permit judicial review.[426]

The employer filed a federal court action seeking to vacate the arbitrator’s “Clause Construction Award.”  The District Court, citing Rule 3 of the AAA’s Supplementary Rules for Class Arbitrations, predicted that the court of appeals would conclude that a district court has jurisdiction to review an arbitrator’s order holding that the parties’ arbitration agreement allows a claimant to assert FLSA claims on a collective basis, but denied the petition to vacate, holding that the arbitrator had not exceeded his authority in concluding the parties’ agreement authorized collective arbitration of the employees’ FLSA claims.[427]  The employer did not appeal that award.

The arbitrator issued an order conditionally certifying a class of employees, and also granted the employer’s motion dismissing several opt-in employees.  Several months later, the employer filed a motion to decertify the class, citing the Supreme Court’s supervening decision in Lamps Plus, Inc. v. Varela.[428]  The arbitrator denied that motion as well, holding that the arbitration provision at issue here unambiguously established the parties’ agreement to arbitrate on a collective basis.  The employer returned to federal court, and asked the District Court to direct the parties to arbitrate on an individual and not collective basis.  The District Court denied the motion.[429]  The employer appealed.

On appeal, the court held that none of the subsections of Section 16 of the FAA authorized interlocutory review of the arbitrator’s refusal to decertify the FLSA class.[430]  The district court case remained stayed pending arbitration and thus the order appealed from was not final within the meaning of Section 16(a)(3) of the FAA.[431]  Lamps Plus did not apply because the district court did not “compel class arbitration”: it compelled arbitration, but left for the arbitrator to decide whether the employees could proceed collectively.[432]  Further, the employer was not appealing the order compelling arbitration, but instead, the district court’s order denying its motion to vacate the arbitrator’s refusal to decertify collective arbitration of the FLSA claims, and so Section 16(a)(1)(C) would not provide a basis for appellate jurisdiction.[433]  Finally, there was no jurisdiction under Section 16(a)(1)(D) because the employer was not appealing from the district court’s order refusing to vacate the arbitrator’s Clause Construction Award, but rather from the district court’s order denying its motion to vacate the arbitrator’s order refusing to decertify the collective arbitration, although the court declined to say whether such jurisdiction would have existed for such an appeal.[434]

Before dismissing the appeal for lack of jurisdiction, the court noted that, following the conclusion of the arbitration, any party could return to the district court to seek a review of the award under the criteria laid out in Section 10 of the FAA.[435]

Jin v. Parsons Corp., 966 F.3d 821 (D.C. Cir. 2020).  Where a trial court finds that a genuine issue of material fact exists as to whether an arbitration agreement was ever formed, the FAA requires that the court proceed summarily to trial solely to resolve the issue of formation before granting or denying the motion to compel arbitration.

Jin O. Jin (“Jin”) was a long-time employee of Parsons Corporation (“Parsons”) who sued Parsons for employment discrimination in federal district court.[436]  Parsons moved to compel arbitration, asserting that it instituted an Employee Dispute Resolution (“EDR”) program in 1998 that contained an agreement to arbitrate.  Parsons also asserted that it had sent an email to its employees to notify them that it had updated the EDR and asked them to complete a certification that they received the arbitration agreement.  The email also stated that continuing to work for Parsons after failing to sign the arbitration agreement constituted acceptance.  Parsons presented evidence that it sent this email to Jin on four occasions and that, although Jin never signed the agreement, his continued employment with Parsons for years thereafter amounted to acceptance.  Jin submitted as declaration evidence that he had no recollection of the EDR or receiving any emails from Parsons about an updated EDR, and that he never reviewed or signed the arbitration agreement.  The District Court denied Parsons’ motion to compel, concluding that a genuine dispute of material fact existed as to whether Jin intended to be bound by the agreement to arbitrate, and thus, as to whether an agreement was ever formed between the parties.  Parsons appealed.[437]

On appeal the Court acknowledged that Section 4 of the FAA requires a court to conduct a summary trial when the existence of a valid agreement to arbitrate is in issue. ^[438]  The Court of Appeals held that the District Court erred by denying Parsons’ motion to compel before definitively resolving the issue of whether an arbitration agreement was formed and remanded with an order to hold the motion in abeyance pending resolution of the formation issue through a limited trial.[439]  In reaching this decision, the D.C. Circuit first resolved a challenge to its jurisdiction over this interlocutory appeal from a decisions to deny a motion to compel arbitration.[440]  While the District Court’s ruling had some similarities to a denial of a motion for summary judgment based on issues of fact, from which there is no right to take an interlocutory appeal, the court held that it had jurisdiction under the plain language of 9 U.S.C. §16(a)(1)(A)-(B), which provides a right to appeal from an order denying a petition under the FAA.[441]  The court was also persuaded by similar interpretations from other circuits exercising jurisdiction in the same circumstances.[442]

INTL FCStone Fin. Inc. v. Jacobson, 950 F.3d 491 (7th Cir. (Ill.) 2020).  Court’s order requiring arbitration, designating an arbitration forum, and staying the case to address related issues is not appealable.

Defendants, commodities futures investors, maintained trading accounts with INTL FCStone Financial Inc. (“FCStone”), a clearing firm that handled the confirmation, settlement, and delivery of transactions.[443]  After extraordinary volatility in the natural gas market wiped out the investors’ account balances with FCStone, leaving some defendants in debt, lawsuits were filed.[444]  The investors alleged Commodity Exchange Act violations against FCStone; FCStone sought payment from investors with negative balances.  The investors filed arbitration proceedings against FCStone before the FINRA and FCStone responded with a declaratory judgment action claiming the parties must arbitrate their disputes before the National Futures Association, pursuant to the investors’ arbitration agreements and Commodity Futures Trading Commission (“CFTC”) regulations, arguing FINRA lacks jurisdiction over the underlying disputes, and seeking to compel arbitration under Section 4 of the FAA and enjoin the FINRA arbitrations.[445]  The investors complained that FCStone was seeking an impermissible anti-arbitration injunction.  The District Court ruled for FCStone (although it denied the request for injunctive relief) and directed the investors to arbitrate before the NFA.[446]

On appeal, the Seventh Circuit had no difficulty concluding that it had no jurisdiction over the appeal because it was not from a decision denying arbitration, but rather an order compelling arbitration.[447]  Moreover, there was no jurisdiction under § 1292(a)(1) of the Judicial Code, allowing interlocutory appeals of orders granting injunctions, which is superseded by Section 16(b) of the FAA in any event.[448]  Finally, as the action was stayed, there was no appellate jurisdiction under Section 16(a)(3).[449]

§ 1.7 Nonsignatories to an Arbitration Agreement

This past year, a number of cases were decided addressing whether corporate successor predecessors and after-acquired affiliates could compel, or be compelled, to arbitrate claims.  In addition to the decisions discussed in this section, significant decisions touching this issue are discussed above in sections 1.5.1 and 1.8.2.

§ 1.7.1  Can Nonsignatories Compel Signatories to Arbitrate?

Hart v. Charter Communs., Inc., 814 F. App’x 211 (9th Cir. (Cal.) 2020).  Successor by merger and its parent can enforce arbitration agreement between subscriber and predecessor internet provider where subscriber has reasonable notice of the agreement.

Plaintiff subscriber brought consumer claims in a putative class action against internet service provider and its parent alleging that the corporate predecessor misled consumers who enrolled in automatic bill payment.[450]  Provider moved to compel arbitration.  The District Court granted the motion, holding that the subscriber had had inquiry notice of the subscriber agreement with the predecessor through its billing statements and assented to the agreement by continuing to accept internet services and that the provider’s successor by merger and its parents could enforce the terms of the agreement, including the arbitration clause.[451]

The Court of Appeals held that the successor could enforce the arbitration agreements under California contract law, because there was “sufficient identity of parties.”[452]  Under Delaware law (the law of incorporation of the corporate entities), the successor assumed all of the rights and obligations of the acquired entity and therefore it had the authority to enforce the arbitration agreement between plaintiff and the predecessor.[453]  Its parent could also enforce the agreement because the consumer brought identical claims against each of them.[454]  The subscriber was on reasonable inquiry notice of the agreement from references in billing statements that were sufficiently clear and conspicuous to provide a reasonably prudent subscriber with constructive notice of the contract terms.[455]  Accordingly, the Court of Appeals affirmed the District Court’s order.

VIP, Inc. v. KYB Corp., 951 F.3d 377 (6th Cir. (Mich.) 2020).  As arbitration is matter of contract, a court must resolve threshold questions of whether there is an agreement to arbitrate with a non-signatory.

Plaintiff-retailers stock and sell various automotive replacement parts online and in retail stores.  They purchase shock absorbers manufactured and distributed by defendants through buying groups, and then resell the products to consumers.[456]  The buying group agreements themselves do not contain an arbitration provision.  However, the agreements require the retailers to honor the terms of the manufacturer’s limited warranty to consumers and the limited warranty mandates arbitration before the AAA.”[457]  The retailers brought an action in federal court alleging that defendants and other shock absorber manufacturers engaged in a myriad of anticompetitive activities in the auto parts industry, and the defendants moved to compel arbitration under the terms of the limited warranty, arguing that the arbitrator should determine issues of arbitrability under the AAA Rules.[458]  The district court disagreed and the defendants appealed.

On appeal, the court held that it is first required to satisfy itself that the agreement at issue encompasses the dispute between the parties before it, even assuming that the agreement the defendants were relying on unmistakably and clearly delegated issues of arbitrability to the arbitrator.[459]  Where there is a dispute about the formation of the parties’ arbitration agreement, the court must resolve the disagreement.[460]

Applying state law principles of contract construction, the court of appeals held that there was no plain language reading of the arbitration provision in the limited warranty that evidenced an intent to bind anyone to arbitration other than “original retail purchasers.”[461]  In fact, the warranty differentiated between “original retail purchasers” and “authorized [] product sellers.”[462] Accordingly, because the retailers, as product sellers, did not agree to any type of arbitration with the manufacturer, there was no agreement to arbitrate and no arbitration agreement to enforce.[463]

Landry v. Transworld Systems Inc., 485 Mass. 334 (2020).  A non-party to an arbitration agreement must present clear and unmistakable evidence of an intent to be bound to enforce the provision as a third-party beneficiary.

A debtor filed a class action complaint against a debt collector that had acquired the debt asserting violations of the consumer protection act and debt collection regulations.[464]  In response, the debt collector moved to compel arbitration, citing an arbitration provision in the agreement between the debtor and the original creditor that had assigned the debt to the collector.[465]  The Superior Court denied the motion to compel, reasoning that the debt collector, a non-signatory, did not present clear and unmistakable evidence that the plaintiff had agreed to arbitrate his claims as against the debt collector.[466]  The debt collector appealed.

The Supreme Court of Massachusetts analyzed the six theories under which a non-signatory may enforce a contract such as an arbitration agreement against a signatory.[467]  The Supreme Court held that the arbitration provision at issue was, at a minimum, ambiguous as to whether or not the debt collector could enforce it and susceptible to multiple interpretations.[468]  As a result, the debt collector was required to, and had not, put forth the clear and definite evidence of intent required to enforce the arbitration provision as a third-party beneficiary and thus the Superior Court properly denied the debt collector’s motion to compel.[469]

§ 1.7.2 Can Signatories Compel Nonsignatories to Arbitrate?

Burgess v. Johnson, No. 19-5098, 2020 U.S. App. LEXIS 34930 (10th Cir. (Okla.) 2020).  Trustee cannot invoke permissive arbitration provision in trust agreement to compel beneficiaries to arbitrate disputes.

Beneficiaries of trust created under Oklahoma law sued trustee, alleging he had breached his fiduciary duty by converting trust assets.[470]  The trustee moved to compel arbitration, based on a provision in the declaration of trust that conveyed to the trustee the power “[t]o compromise, contest, submit to arbitration or settle all claims by or against, and all obligations of, the Trust estate or the Trustees[.]”[471]  The District Court denied the application and the trustee appealed.[472]

On appeal, the court reviewed the issue de novo, and applied the state law of contract construction.  Noting that the provision tracked Oklahoma statutory language, the court cited to a Texas decision that had concluded that virtually identical language drawn from a Texas statute merely authorized a trustee to exercise a full range of options to protect the interests of the trust.[473]  However, the language could not be construed to grant the trustee power to compel other parties to arbitrate their claims.[474]  While the trust declaration could have included language requiring beneficiaries to arbitrate any disputes, this clause could not be interpreted to accomplish that result.  Here, the District Court did not abuse its discretion by determining there were no triable issues.  Accordingly, the order denying the motion to compel arbitration was affirmed.[475]

GGNSC Administrative Services LLC v. Schrader, 484 Mass. 181 (Mass. 2020).  Claims against nursing home for wrongful death are derivative of claims the decedent would have had, and thus arbitration agreement executed by resident’s attorney in fact are binding on personal representative of estate and statutory beneficiaries.

After decedent died in the care of a nursing home, her daughter, as personal representative, brought a wrongful death claim against the nursing home.[476]  The nursing home sued in federal court to compel arbitration and the daughter opposed, contending that the arbitration agreement was both procedurally and substantively unconscionable, and in the alternative that the agreement could not bind the decedent’s beneficiaries, who had not signed the contract.[477]  The district court found that the agreement was valid and enforceable and that because the wrongful death action was derivative of the decedent’s own rights, the arbitration agreement bound the estate on behalf of the wrongful death beneficiaries.[478]

On appeal, the First Circuit certified two questions to the Massachusetts Supreme Judicial Court: first, whether the state wrongful death statute provides rights to statutory beneficiaries that are derivative of or independent from what would have been the decedent’s own action, and second, whether the decedent’s arbitration agreement binds the decedent’s statutory beneficiaries of the wrongful death action.

As a matter of first impression, the Supreme Judicial Court of Massachusetts held that a cause of action for wrongful death brought by a personal representative was derivative and not independent of the rights the decedent would have had to sue for the conduct, consistent with the majority of other states that have considered the question.[479]  The court then determined that there were no contract defenses to enforcement and no bar to enforcement based on public policy or unconscionability. Finally, the court responded to the second certified question with the conclusion that the arbitration agreement signed by the decedent’s attorney in fact was binding upon the personal representative as well as the decedent’s statutory beneficiaries.[480]

§ 1.8 Scope of Arbitration Agreement

§ 1.8.1  Scope of Arbitration Clauses in Labor and Employment Actions

Numerous decisions in 2020 considered whether and to what extent delivery workers in the “gig economy,” and particularly those who carry goods the “last mile,” were within the scope of the residual clause of section 1 of the FAA[481] exempting from the Act contracts of “any other class of workers engaged in foreign or interstate commerce” as interpreted by the United States Supreme Court in Circuit City Stores, Inc. v. Adams.[482]  These decisions are discussed below.

Grice v. United States Dist. Court, 974 F.3d 950 (9th Cir. (Cal.) 2020).  District court’s decision that Uber drivers were not within the arbitration exemption in section 1 of the FAA was not clearly erroneous as required to obtain a writ of mandamus.

Uber drivers had filed a putative class action alleging that the company failed to safeguard the personal information of drivers and riders and mishandled a data security breach in which that information was stolen by online hackers.[483]  Uber moved to compel arbitration under its agreements with the drivers, who argued that they fell within the exemption in Section 1 of the FAA for “any other class of workers engaged in foreign or interstate commerce.”[484]  The District Court held that rideshare drivers who pick up and drop off passengers at airports do not fall within this residual category and therefore may be judicially compelled to arbitrate in accordance with the terms of their contracts[485].  The Uber drivers petitioned the appellate court for a writ of mandamus vacating the District Court’s decision.

First noting that a writ of mandamus is a drastic and extraordinary remedy requiring a showing that the District Court’s decision amounts to “clear error as a matter of law,”[486] the court went on to hold that where no prior binding authority prohibits the District Court’s ruling, or where the issue in question has not yet been addressed by any circuit court in a published opinion, the ruling cannot be clearly erroneous.[487]  Turning to the prior decisions from district and circuit courts that have analyzed whether rideshare drivers fall within the scope of the residual clause in Section 1, the court emphasized that no circuit has held that rideshare drivers, as a class, are engaged in foreign or interstate commerce.[488]  Based largely on the high bar required for a writ of mandamus, the Court of Appeals ruled that “even accepting that there are some tensions between the District Court’s ruling and recent circuit cases” regarding interpretation of the residual exemption in Section 1 of the FAA, that is not enough to render the District Court’s decision clear error as a matter of law, as required for mandamus.[489]

Rittmann v. Amazon.com, Inc., 971 F.3d 904 (9th Cir. (Wash.) 2020).  Drivers involved in the “last mile” delivery of products were within the scope of residual clause of Section 1 of the FAA exempting transportation workers who are engaged in the movement of goods in interstate commerce, even if they do not cross state lines themselves.

Individual drivers who contract with Amazon to make “last mile” deliveries of products from Amazon warehouses to the customer’s location using their own transportation brought a class action challenging their classification as independent contractors rather than employees and alleging wage and hour violations.[490]  Amazon moved to compel arbitration of the claims of those drivers who had not opted out of the arbitration provision in the contracts.  The Amazon terms of service (TOS) provides that it is governed by “the law of the state of Washington without regard to its conflict of laws principles, except for [the arbitration provision], which is governed by the Federal Arbitration Act and applicable federal law.”[491]  In denying Amazon’s motion to compel, the District Court concluded that the drivers fall within the scope of the FAA’s transportation worker exemption pursuant to § 1 because they deliver goods shipped from across the United States.[492]  The court further held that as the TOS bars application of Washington state law to the arbitration provision, and the FAA did not apply, there was no valid agreement to arbitrate and denied the motion to compel.[493]  Amazon appealed from the denial of the motion to compel arbitration.

On appeal, the panel agreed with the First Circuit and held that the delivery workers were exempt under the residual exception in Section 1 of the FAA because they were transportation workers engaged in interstate commerce when they made “last mile” deliveries of goods in the stream of interstate commerce.[494]  Considering the plain meaning of the relevant statutory text, case law interpreting the exemption’s scope and application, and the construction of similar statutory language, the panel held that Section 1 of the FAA exempts transportation workers who are engaged in the movement of goods in interstate commerce, even if they do not cross state lines themselves.[495]  The lengthy dissent took the opposite approach, reasoning that for the narrow exemption in Section 1 to apply, the worker must belong to a “class of workers” that crosses state lines in the course of making deliveries, based on statutory interpretation and problems of application that would result in inequities among similarly situated delivery workers.[496]

Amazon had also argued that, even if the workers were exempt from the FAA, the arbitration provisions could be enforced under Washington state law or other federal law.  However, the panel additionally held that there were no other federal laws that would govern and, even under a severability analysis, the plain language of the TOS would prohibit applying Washington law to the arbitration provision.[497]  In the absence of any law governing the arbitration provision, the court concluded there was no valid agreement and affirmed the District Court.[498]

Wallace v. Grubhub Holdings, Inc., 970 F.3d 798 (7th Cir. (Ill.) 2020).  Contracts with drivers delivering meals locally were not within the exemption under Section 1 of the FAA because the interstate movement of goods was not a central part of the job description of the class of the drivers.

In two suits, drivers for Grubhub in various cities filed suit claiming wage and hour violations.[499]  Grubhub moved to compel arbitration in each case based on agreements signed by the drivers, who contended that they fell within the scope of the residual clause in Section 1 of the FAA as “workers engaged in interstate commerce.”[500]  Each of the district courts held that the drivers had to demonstrate that the interstate movement of goods was a central part of the job description of the class of workers to which they belonged, that the drivers had not done that and granted the motions to compel arbitration.  The appeals from the two decisions were consolidated.

The Court of Appeals defined the issue as “not whether the individual worker actually engaged in interstate commerce, but whether the class of workers to which the complaining worker belonged engaged in interstate commerce.”[501]  Describing the exception in Section 1 as narrow, it is not enough that the goods have moved across state lines in some way; rather, the workers must be connected not simply to the goods, but to the act of moving those goods across state or national borders.[502]  As the drivers had not shown that the interstate movement of goods was a central part of the job description of the class of workers to which they belong, the contracts did not fall within the residual clause of section 1 and the district courts’ orders compelling arbitration were affirmed.[503]

Waithaka v. Amazon.com, Inc., 966 F.3d 10 (1st Cir. (Mass.) 2020).  Last mile delivery driver for an e-retailer was within the category of transportation workers whose contracts were exempt from the FAA, and class action waiver was unenforceable under state law.

The facts of this case were identical to those in Rittman v Amazon, discussed above, as was the outcome.  However, the reasoning of the First Circuit varied slightly from the Ninth Circuit.

Individual drivers who contract with Amazon to make “last mile” deliveries of products from Amazon warehouses to the products’ destinations using their own transportation brought a class action challenging their classification as independent contractors rather than employees and alleging wage and hour violations.[504]  Amazon moved to compel arbitration of the claims of those drivers who had not opted out of the arbitration provision in the contracts or in the alternative to transfer the case to Washington, where similar other cases were pending.[505]  The Amazon terms of service (TOS) provides that they are governed by “the law of the state of Washington without regard to its conflict of laws principles, except for [the arbitration provision], which is governed by the Federal Arbitration Act and applicable federal law.”[506]  The TOS also contained a class-action waiver.  The employee here delivered packages entirely within the state of Massachusetts and did not cross state lines in the course of his work.[507]  The District Court concluded that the agreement was exempt from the FAA, that Massachusetts law therefore governed the enforceability of the arbitration provision, and that the provision was unenforceable based on Massachusetts public policy.  However, the court granted Amazon’s alternative request to transfer the case, which has since occurred.[508]  Amazon appealed.

On appeal, the court first concluded that the agreements were within the residual clause of section 1 of the FAA for “workers … engaged in interstate commerce,” focusing on the meaning of the phrase “engaged in.”[509]  The court then delved an analysis of statutes contemporaneous with the FAA, the sequence of the text of the exemption, the FAA’s structure, and the purpose of the exemption and the FAA itself.[510]  Using the nearly identical text of the Federal Employers’ Liability Act (FELA)[511] and the case law interpreting that statute, and the text, structure, and purpose of the FAA, the court concluded that the last-mile delivery workers who haul goods on the final legs of interstate journeys are transportation workers “engaged in . . . interstate commerce,” regardless of whether the workers themselves physically cross state lines, because their work transports goods or people “within the flow of interstate commerce” and their contracts were not governed by the FAA.[512]

Turning next to the class action waiver, the court determined that Massachusetts would treat the class waiver provisions in the agreement as contrary to its fundamental public policy and that, based on conflict-of-laws principles, the contractual choice of Washington law would be unenforceable if it would permit such waivers, and accordingly individual arbitration could not be compelled pursuant to the applicable state law.[513]  Therefore, the District Court’s denial of the motion to compel arbitration was affirmed.[514]

Eastus v. ISS Facility Servs., 960 F.3d 207 (5th Cir. (Tex.) 2020).  Airport services employee who supervised ticketing and gate agents line and incidentally handled baggage was not within the scope of the transportation worker exemption in Section 1 of the FAA and was required to arbitrate disputes with her employer.

Plaintiff employee was employed at an airport, where she primarily supervised airline ticketing and gate agents and occasionally handled baggage services.[515]  She brought discrimination claims against her employer and the airlines and defendants moved to compel arbitration based on her employment contract.  The employee argued that she was exempt from the FAA under the residual clause of Section 1.[516]  The District Court held that plaintiff’s job was related to transporting passengers, that the handling of luggage was incidental to her primary duties, and that she herself was therefore not involved in the movement or transportation of goods in interstate commerce in the same way that railroad workers and seamen are, and ordered her to arbitrate her claims.[517]

On appeal, the court considered whether the employee was “engaged in interstate commerce” within the meaning of Circuit City, which it interpreted to exempt from the FAA “only contracts of employment of transportation workers.”[518]  In the court’s view, based on precedent in the Fifth Circuit, the key question in the appeal was whether the worker needs to be engaged in the movement of goods; the panel concluded that element is required and that plaintiff could not meet that test, because while the passengers moved in interstate commerce, plaintiff’s role preceded that movement and, at most, could be construed as loading or unloading airplanes.[519]  Accordingly, the exemption did not apply to her and the decision of the District Court was affirmed.[520]

Darrington v. Milton Hershey Sch., 958 F.3d 188 (3d Cir (Pa.) 2020).  Where collective bargaining agreement clearly and unmistakably waived the employees’ right to sue in state or federal court for disputes alleging discrimination under either federal or state law, arbitration was required.

Former houseparents sued their former employer, a residential school, alleging discrimination under both federal and state law.[521]  The CBA between the houseparents’ union and the school required arbitration of disputes.[522]  The District Court denied the school’s motion to compel arbitration because it found that the CBA did not clearly and unmistakably waive the employees’ right to sue for discrimination in state or federal court.[523]  The school appealed.

On appeal, the court first determined that the federal claims were within the scope of the CBA’s arbitration provision.  A federal statutory discrimination dispute falls within the scope of a CBA’s arbitration provision “when (1) the arbitration provision clearly and unmistakably waives the employee’s ability to vindicate his or her federal statutory right in court; and (2) the federal statute does not exclude arbitration as an appropriate forum.[524]  As the plaintiffs’ federal claims were arbitrable, they were within the scope of the provision.[525]  As to the state law claims, because the FAA preempts any state rule that “facially or covertly” prohibits arbitration,[526] and Pennsylvania had not yet explained what standard would govern the waiver of a judicial forum, the court examined the most onerous standard available and asked whether the CBA contained a clear-and-unmistakable-waiver of a judicial forum.[527]  To meet this standard, an arbitration provision’s waiver of a judicial forum for statutory claims must merely be “particularly clear” and “explicitly stated.”[528]  Here, the broad terms of the CBA’s arbitration provision clearly and unmistakably included within its scope the plaintiffs’ claims, and the decision of the District Court denying the motion to compel arbitration was reversed.[529]

§ 1.8.2 Scope of Arbitration Clauses in other Contracts

Cordoba v. DIRECTV, LLC, 801 F. App’x 723 (11th Cir. (Ga.) 2020).  Decision denying arbitration of claim based on nonconsensual disclosure of subscriber information in litigation reversed, because claim was derivative of, and thus arose out of, subscriber relationship and was arbitrable under subscriber agreement.

During the course of litigating a TCPA class action, DIRECTV allegedly shared its customers’ personal information with its expert witness.[530]  The district court granted plaintiffs’ motion to add an additional plaintiff and class representative along with new claims by that representative that such disclosure was nonconsensual, and therefore, in violation of the Satellite Television Extension and Localism Act of 2010 (“STELA”).[531]  DIRECTV responded by moving to compel arbitration under the arbitration provision in the customer agreement for “claims arising out of or relating to any aspect of the relationship between us, whether based in contract, tort, statute, fraud, misrepresentation or any other legal theory.”[532]  The district court denied the motion, finding that “DIRECTV ha[d] not established that the claim arises from the customer agreement” and thus the STELA claim was not within the scope of the agreement’s arbitration provision.[533]

On appeal, the Eleventh Circuit reversed.  Without addressing whether the relevant arbitration provision was so broad as to encompass “all claims and disputes” as DIRECTV contended, it held more narrowly that, based on the limited facts of this matter, the plaintiffs’ STELA claim indeed fell within its purview.[534]  The claim was a direct derivative of the “relationship” with DIRECTV, because if not for the subscriber relationship with DIRECTV, the factual predicate for a STELA claim would not exist.[535]  Necessarily then, the STELA claim arose out of the subscriber’s relationship with DIRECTV as contemplated by the arbitration clause and that claim was subject to arbitration.[536]  Accordingly, the court reversed and remanded.

Solo v. United Parcel Serv. Co., 947 F.3d 968 (6th Cir. (Mich.) 2020).  A party cannot be compelled to arbitrate under an arbitration clause that was not in effect at the time its dispute arose in the absence of agreement that such arbitration clause applies retroactively.

Several customers filed a putative class action against United Parcel Service Co. (“UPS”) seeking damages for, inter alia, breach of contract for allegedly overcharging for liability insurance in excess of the price set out in the UPS Terms and Conditions of Service (“TOC”).[537]  UPS moved to dismiss the complaint on the grounds that there was no breach of the TOC.  In the final paragraph of its motion, UPS stated that it reserved the right to move to compel arbitration and that its motion to dismiss did not waive its contractual right to arbitrate.[538]  The version of the TOC in effect at the time the customers mailed the packages at issue did not contain an arbitration clause but UPS referenced an arbitration clause in an amended terms of service that became effective thereafter.[539]  UPS also stated in its motion to dismiss that, because of the different versions of the TOC, it did not have sufficient information to know whether its arbitration clause could apply in this action.[540]

The District Court granted the motion to dismiss.  On appeal, the Sixth Circuit reversed the dismissal and remanded, finding the language of the TOC was ambiguous.  On remand, UPS filed an answer raising the obligation to arbitrate as its first affirmative defense, and sought limited discovery on the issue of arbitration.  The District Court rejected any limitation on discovery, and after conducting six months of full discovery, UPS moved to compel arbitration.  The District Court denied the motion, holding that UPS had waived its right to arbitrate.  UPS appealed again.[541]

The Sixth Circuit affirmed the District Court’s decision, first holding that UPS could not compel arbitration because the arbitration clause in the Amended UPS Terms did not apply retroactively to cover the shipments at issue.[542]  To find that the parties agreed to resolve their disputes under the arbitration clause, the court first had to find an agreement to arbitrate and then determine that this dispute was within its scope.[543]  The Sixth Circuit reasoned that the arbitration clause did not apply retroactively here because both versions of the terms contained critical language that “the shipper agrees that the version of the Terms . . . in effect at the time of shipping will apply to the shipment and its transportation.”[544]  The court rejected UPS’s argument that the boilerplate merger clauses in each document do not render an arbitration provision applicable from one contract to another.[545]

The Sixth Circuit further held that the evidence supported the district court’s finding that UPS waived its right to arbitrate.[546]  “[A]lthough ‘we will not lightly infer a party’s waiver of its right to arbitration,’ we may find waiver if a party (1) ‘tak[es] actions that are completely inconsistent with any reliance on an arbitration agreement; and (2) ‘delay[s] its assertion to such an extent that the opposing party incurs actual prejudice.’”[547]  The Sixth Circuit pointed to UPS’s motion to dismiss seeking a decision in court on the merits, which it vigorously litigated for two years as completely inconsistent with reliance on the arbitration clause.[548]  The court also pointed to prejudice the plaintiffs who incurred the expenses of defending against the merits-based motion to dismiss, appealing that decision, and then engaging in months of full discovery.[549]  The Sixth Circuit rejected UPS’s argument that it was plaintiffs who refused to limit discovery to arbitration issues, because UPS received the subject of the limited discovery after one month, but participated in another five months of merits discovery before moving to compel.[550]

§ 1.9 Validity or Invalidity of Various Provisions

Kramer v. Enter. Holdings, No. 19-16354, 2020 U.S. App. LEXIS 35671 (9th Cir. (Cal.) 2020).  While California law forbids a contract that forces a party to waive the right to seek public injunctive relief in any forum, court properly compelled arbitration of claims requesting damages for class and seeking injunctive relief in only general terms.

Customer filed a class action complaint in California state court, alleging that Enterprise improperly stored personal data from class members’ cell phones and other mobile devices when they paired their devices with their rental cars.  Enterprise removed the case to the District Court and moved to compel arbitration based on an arbitration provision in the rental agreement.[551]  The District Court granted the motion and the customer appealed, arguing that the arbitration agreement is unenforceable under California law because it denies him the right to seek public injunctive relief.[552]

Under the “McGill rule,”[553] California law courts will not enforce a contract that requires a party to waive the right to seek public injunctive relief in any forum, including an arbitration forum.  The rule is not preempted by the FAA.[554]  Here, however, the court concluded that the complaint did not seek public injunctive relief within the meaning of McGill because it specifically requested damages and asked only for injunctive relief “as the Court deems appropriate.”[555]  This remedy is in the nature of private, rather than public, injunctive relief.[556]  As McGill did not apply, the arbitration agreement was enforceable and the court affirmed the order compelling arbitration.

Shivkov v. Artex Risk Sols., Inc., 974 F.3d 1051 (9th Cir. (Ariz.) 2020).  Agreement to arbitrate will not be invalidated based on claims that purported fiduciaries had a duty under state law to point out the agreement, which survived termination of the underlying contract.

Plaintiffs were eighty-one individuals and companies that had entered into agreements with some of the defendants to create captive insurance companies that would purportedly bring tax benefits.[557]  The IRS disagreed.  Plaintiffs brought a putative class action and the defendants who established the structures moved to compel arbitration, relying on an arbitration clause in their agreements.[558]  Plaintiffs argued the clauses were unenforceable, arguing the defendants were fiduciaries and had failed to point out and fully explain the clauses and also argued the clauses had not survived the termination of the individual agreements.[559]  The District Court rejected these arguments and granted the motion to compel, ordering individual arbitrations and plaintiffs appealed.

On appeal, the court first addressed the enforceability of the arbitration provisions, and found no authority to suggest that these defendants had a fiduciary duty in connection with “purely commercial aspects” of an arbitration clause.[560]

Next, the court addressed the assertion that any agreement to arbitrate did not survive termination of the underlying agreements.[561]  Although the Supreme Court has not addressed the issue of post-termination arbitration of disputes in the FAA context, it has addressed this issue in the collective bargaining context and recognized a “presumption in favor of post-expiration arbitration of matters unless ‘negated expressly or by clear implication’ [for] matters and disputes arising out of the relation governed by contract.”[562]  The Supreme Court explained that “[w]e presume as a matter of contract interpretation that the parties did not intend a pivotal dispute resolution provision to terminate for all purposes upon the expiration of the agreement.”[563]  To hold otherwise would mean that a party could simply wait “until the day after the contract expired to bring an action regarding a dispute that arose while the contract was in effect.”[564]  The presumption applies where the parties’ dispute has “its real source in the contract.”[565]  Five circuits have addressed the issue and agreed.[566]  Turning to the case at hand, the Court of Appeals held that the presumption applied, notwithstanding the argument that the arbitration agreement was not expressly included in the list of provisions that would survive termination, looking at the agreement as a whole in light of the liberal policy favoring arbitration.[567] 

Turning to the issue of class arbitration, the court followed numerous other courts of appeals that have held that the availability of class arbitration is a gateway issue for the court to decide.[568]  Looking at the parties’ contracts, the court then concluded that a reference in the agreement to arbitrate to the AAA did not incorporate the rules of the AAA and did not provide clear and unmistakable evidence of an intent to delegate the gateway issue of class arbitration to the arbitrator.[569]  As the agreements were silent regarding class arbitration, there was no agreement to arbitrate on a class wide basis and the court affirmed the District Court’s decision compelling individual arbitration.[570]

Stover v. Experian Holdings, Inc., 978 F.3d 1082 (9th Cir. (Cal.) 2020).  Where plaintiff did not allege standing to pursue future injunctive relieve, California law against arbitration clauses that preclude public injunctive relief did not bar enforcement of an arbitration clause and class action waiver against a consumer attacking marketing of a credit scoring product.

In 2014, plaintiff signed up with Experian Holdings (“Experian”) for its “Experian Credit Score” service providing her with regular updates on her credit score as calculated by Experian.  As part of her purchase, she agreed to Experian’s terms and conditions (and to any changes to them in the future if she accessed the “Product Website” at Experian).[571]  The 2014 terms and conditions contained an arbitration clause providing that she would be required, “to the fullest extent permitted by law,” to arbitrate all claims arising out of her purchase of the service.[572]  The clause also included a provision in which she waived any right to participate in a class action for such claims.[573]

One month after she signed up for the service, plaintiff cancelled her subscription.  Four years later, she accessed the Experian website.[574]  By that time, Experian had changed the arbitration clause to exclude from its coverage claims under the Fair Credit Reporting Act (“FCRA”)[575] and similar state or federal laws about information in credit reports.[576]  The next day, the plaintiff sued Experian for allegedly violating the FCRA as well as California and Florida unfair competition laws.[577]  She based her claims on the theory that Experian had marketed its credit score as information on which lenders would rely in making decisions about creditworthiness when, in fact, the score used a formula that very few or no lenders actually used.[578]

Experian moved to compel arbitration and the trial court agreed, applying the 2018 arbitration clause, but holding that the plaintiff’s claims did not involve information in a credit report, and therefore were not excluded from arbitration.[579]  Plaintiff appealed, arguing that the 2018 carve-out applied or that, in any event, Experian’s earlier arbitration clause was unenforceable under California law because California forbids contract terms waiving a party’s right to seek public injunctive relief in court.[580]

The Ninth Circuit disagreed.  First, the plaintiff had not shown that, simply by accessing the Experian website, she had agreed to the 2018 arbitration clause.[581]  It therefore held that the trial court should have applied the 2014 arbitration clause (which contained no carve-out for FCRA claims).[582]  Second, while the 2014 arbitration clause was broad, it did not (because of its “to the fullest extent provided by law” language) on its face prohibit judicial resolution of all claims for public injunctive relief from a court.[583]  In addition, as applied, the clause would not bar the plaintiff from seeking public injunctive relief from a court, either.  This was because the plaintiff had not alleged that she would desire, or be likely, to purchase the Experian Credit Score Service again (much less that if she did, she would be misled in doing so).[584]  As a result, she had failed to allege Article III standing to seek an injunction against Experian’s allegedly deceptive future advertising.

While the plaintiff had made a request in her appellate reply brief for leave to amend her complaint to add allegations of Article III standing, the Ninth Circuit denied that request as untimely.[585]  It also doubted that the plaintiff could validly amend to allege the necessary facts for such standing.[586]

B&S MS Holdings, LLC v. Landrum, 302 So.3d 605 (Miss. 2020).  An arbitration provision and waiver contained in the operating agreement of an LLC is valid and enforceable.

A majority member of limited liability company (“LLC”) sought judicial dissolution and the minority member responded with a motion to dismiss, or in the alternative to compel arbitration in accordance with an arbitration provision contained in the entity’s operating agreement.[587]  The majority member argued that Mississippi Code Section 79-29-123(3)(m) prohibited an operating agreement from contracting away the power of a court to decree dissolution.[588]  The trial court held that operating agreements were to be treated like contracts and members of an LLC have the authority to agree to binding arbitration and to waive their right to judicial dissolution.[589]  The Supreme Court of Mississippi affirmed, holding that while Mississippi Code Section 79-29-123 provides that an operating agreement may not vary the court’s power to decree dissolution in certain circumstances, Mississippi Code Section 79-29-803 states that a trial court may decree dissolution, not that it must do so.[590]  Because the members agreed to expressly waive their right to maintain an action for a decree of dissolution in the LLC’s operating argument, the Supreme Court affirmed the order of the Chancery Court ordering the parties to submit to binding arbitration.[591]

§ 1.10 Class Actions and Arbitration

Class Action Waivers Enforceable or Unenforceable

Laver v. Credit Suisse Sec. (USA), LLC, 976 F.3d 841 (9th Cir. (Cal.) 2020).  FINRA Rule prohibiting class arbitration and enforcement of arbitration agreements directed at members of putative or certified class claims does not apply to invalidate general class action waivers in an agreement that also contains a separate arbitration clause.

Plaintiff, a financial adviser formerly employed by Credit Suisse Securities, USA (“CSSU”), filed a putative class action against his former employer alleging breach of contract and other state law claims.[592]  The employment contracts between CSSU and its financial advisers provided for deferred compensation unless the advisers resigned or were terminated for cause, and contained a “Change in Control” provision, which provided that they would retain their right to unvested deferred compensation in the event of certain corporate transactions.[593]  CSSU entered into a “recruiting agreement” with Wells Fargo, shutting down the CSSU financial advisory operations, and providing that Wells Fargo would recruit financial advisers formerly with CSSU.[594]  The plaintiff alleged that CSSU was circumventing the “Change in Control” provision in his employment contract as CSSU would only pay deferred compensation to those CSSU financial advisers Wells Fargo chose to hire.[595]

CSSU moved to dismiss the suit and compel arbitration, arguing that the financial advisers were bound by their agreement to CSSU’s Employee Dispute Resolution Program, which contained an arbitration clause and a general class waiver.  The arbitration clause required CSSU employees to arbitrate employment related claims.  The class waiver provided that: “An employee’s agreement to abide by the terms of the [CSSU program] includes an agreement not to serve as a class representative or class member or act as a private attorney general in any dispute with [CSSU].”[596]  FINRA Rule 13204(a)(1) prohibits arbitration of class actions, and Rule 13204(a)(4) precludes enforcement of an arbitration agreement against a member of a certified or putative class action until certification is denied, the class is decertified, or the member opts out or is excluded from the class.  The financial advisor argued that FINRA Rule 13204(a)(4) precluded CSSU’s motion to dismiss.  The District Court disagreed with the financial adviser and dismissed the action in favor of arbitration.

The Eleventh Circuit affirmed, holding that the prohibition in FINRA Rule 13204(a)(4) was inapplicable here because CSSU was not attempting, in the first instance, to enforce the arbitration provision.[597]  Rather, CSSU was seeking dismissal of the class action claims under the general class action waiver, which precluded class actions in any forum, and was a conceptually distinct agreement from an agreement to arbitrate.[598]  Once the class action claims were dismissed, a motion to compel arbitration of individual claims would not run afoul of Rule 13204.  According to the court, Rule 13204(a)(4) only bars agreements to arbitrate class actions.[599]  As the general class action waiver here was not an agreement to arbitrate a class action, it was not barred under the text of Rule 13204(a)(1).[600]

On appeal, the Eleventh Circuit also disagreed with the financial consultant’s contention that Rule 13204 barred class action waivers, finding that such an interpretation would entirely bar the enforcement of agreements to arbitrate claims that could be maintained as part of a putative or certified class.[601]  The Eleventh Circuit also found that the consultant failed to establish a clear and manifest intent that Rule 13204 prohibited class waivers, since it never mentions or addresses waivers.  Moreover, Rule 13204’s final sentence that its provisions “do not otherwise affect the enforceability of any rights under the [FINRA] Code of Arbitration Procedure for Industry Disputes] or any other agreement,” evidenced a lack of clear and manifest intent to bar separate class waivers.[602]

As the class waiver was enforceable, the court held that the District Court had properly dismissed the class claims.[603]  Left with only individual claims, the District Court correctly ordered arbitration of those claims.  In reaching this decision, the Eleventh Circuit aligned itself with the Second Circuit, which came to a similar decision in a materially identical dispute.[604]

§ 1.11 Waiver of Arbitration

Brickstructures, Inc. v. Coaster Dynamix, Inc., 952 F.3d 887 (7th Cir. (Ill.) 2020).  A party waives its right to arbitrate when it acts inconsistent with its right to pursue arbitration by withdrawing its request for arbitration and will generally not be permitted to rescind its waiver and renew its request.

Brickstructures, Inc. and Coaster Dynamix, Inc. joined forces to create a LEGO-compatible roller coaster set.[605]  When the venture soured, Brickstructures filed a federal lawsuit and Coaster Dynamix unsuccessfully moved to dismiss and then raised the parties’ agreement to arbitrate on a second motion to dismiss as a challenge to venue.[606]  When threatened with sanctions by Brickstructures, Coaster Dynamix withdrew its arbitration demand and the court denied the remainder of its motion to dismiss.[607]  Coaster Dynamix moved shortly thereafter to compel arbitration and the District Court denied the resurrected request on the grounds that the earlier withdrawal amounted to a waiver of the right to arbitrate.[608]

On appeal, the Seventh Circuit agreed.  Describing the question of waiver as a mixed question of fact and law, and granting deference to the district court’s assessment of the facts, the court held there was no clear error in the District Court’s finding that Coaster Dynamix waived its right to arbitrate.[609]  While parties do not waive their right if they take certain actions before seeking to compel arbitration, such as moving to dismiss or requesting a transfer of venue, Coaster Dynamix voluntarily chose to withdraw its initial motion seeking arbitration and was not entitled to rescind that waiver based on these facts.[610]

Davis v. White, 795 F. App’x 764 (11th Cir. (Ala.) Jan. 7, 2020) (per curiam).  Where a party files a motion to dismiss for failure to state a claim, it seeks judgment on the merits that is inconsistent with the intent to arbitrate and waives its right to pursue arbitration.

A local municipality entered into agreements with an outside individual to own and operate its sewer system through private sewer companies that would provide sewer services to homes through utility services agreements with residents.[611]  The utility services agreements contained mandatory arbitration provisions.[612]  Three families filed separate law suits against the individual and the sewer companies asserting, inter alia, violations of their civil rights by state actors under federal law,[613] state-law trespass, and state-law deprivation of property rights.[614]  Among other things, the residents asserted claims alleging that that the sewer companies shut off the families’ water for delinquency by placing a lock on the water line, charged them substantial fees after falsely accusing them of tampering with the lock, and threatened them with criminal prosecution for failure to pay bills.[615]

The sewer Companies filed motions to dismiss, arguing that the residents failed to meet pleading standards for each claim and failed to state any plausible claim to relief.[616]  The residents opposed the motion, and litigation proceeded over the course of approximately one year, including issuing scheduling order, selecting a bench trial date, litigating discovery disputes, and filing amended complaints, which the District Court deemed implied motions to amend.  The District Court granted the implied motions to amend the complaints, found that they stated plausible claims to relief as amended, and terminated the sewer companies’ motions to dismiss as moot.[617]  Instead of answering the amended complaints, the sewer companies immediately filed an appeal, which the Eleventh Circuit denied as premature.  The residents then moved for the clerk’s entry of a default judgment against the sewer Companies for their failure to answer the amended complaint.  In response, the sewer Companies indicated an intent for the first time to submit the disputes to arbitration.  More than 18 months after the initial complaints were filed, the sewer Companies moved to compel arbitration and to stay proceedings pending arbitration.[618]  The residents argued that the sewer Companies had waived any right to arbitration by substantially engaging in litigation and causing the residents prejudice.[619]  The District Court agreed and denied the motions to compel and stay.  The sewer companies appealed.[620]

The Court noted that in Johnson v. Keybank Nat’l Ass’n (In re Checking Account Overdraft Litig.),[621] the Eleventh Circuit had previously found that “[w]aiver occurs when, under the totality of the circumstances, ‘both: (1) the party seeking arbitration substantially participates in litigation to a point inconsistent with an intent to arbitrate; and (2) this participation results in prejudice to the opposing party.’”[622]  The Eleventh Circuit applied this rule here and found that the sewer companies acted inconsistently with an intent to arbitrate by filing motions to dismiss for failure to state a claim, opposing the implied motions to amend, and filing a frivolous appeal to a ruling that was clearly not immediately appealable.[623]  Although not every motion to dismiss is inconsistent with an intent to arbitrate, a motion to dismiss for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6) is merits-based, and therefore inconsistent.[624]  Further, the sewer companies’ extensive participation in litigating the claims prejudiced the residents by causing them to incur litigation costs that arbitration was designed to alleviate.[625]  Accordingly, the court of appeals affirmed the District Court’s order denying the motions to compel.[626]

Jeoung Lee v. Evergreen Hospital Medical Center, 195 Wash. 2d 699 (2020).  Party waived its right to compel arbitration by litigating the case in court for nine months before raising the issue of arbitration.

Employees brought a putative class action against employer for failure to give required rest and meal breaks.[627]  Several months after the action was commenced, the employer moved to compel arbitration, arguing that the claims arose under the relevant collective bargaining agreement.  The trial court denied the motion to compel arbitration and the Court of Appeals affirmed, holding that the employees’ claims were statutory and not subject to arbitration, and that the employer waived arbitration by litigating the case for nine months before moving to compel.[628]  In affirming the Court of Appeals, the Supreme Court of Washington held that the employer knew of its right to arbitrate the employees’ claims, chose to litigate the case in court, and that transferring the case to arbitration at this point in the litigation would prejudice the plaintiffs.[629]

§ 1.12 Arbitration Agreements and Unconscionability

§ 1.12.1 Language or Agreement Not Unconscionable

Innovative Images, LLC v. Summerville, 848 S.E.2d 75 (Ga. 2020).  Engagement letter for legal services containing a mandatory arbitration provision was neither unconscionable nor void as against public policy.

Plaintiff, a limited liability company, sued its former attorney for legal malpractice.[630]  In response, the attorney moved to dismiss and compel arbitration in accordance with the parties’ engagement agreement, which included a mandatory arbitration clause.  The trial court denied the attorney’s motion and held that the arbitration was “unconscionable” and unenforceable because it violated Rule 1.4(b) of the Georgia Rules of Professional Conduct.[631]

The Court of Appeals reversed the trial court’s ruling and held that the arbitration clause was not void against public policy or unconscionable.[632]  In affirming the ruling of the Court of Appeals, the Supreme Court of Georgia held that regardless of whether the attorneys violated Georgia Rules of Professional Conduct 1.4(b) (“GRPC”) by entering into an engagement agreement with a mandatory arbitration clause without obtaining the client’s informed consent by explaining the advantages and disadvantages of the same to the client, the clause was not void as against public policy.  The alleged failure to obtain informed consent went to the process of entering into the contract, and not the actual agreement.[633]  As to the latter, binding arbitration agreements are generally not in contravention of the public policy of the state, as the Georgia Arbitration Code demonstrates a public policy favoring arbitration, and nothing about the attorney-client relationship would alter that policy, particularly as the State Bar and the courts established a fee arbitration program.[634]  Moreover, the client had not sustained its burden to show that the arbitration provision was substantively or procedurally unconscionable.  Even if the agreement involved a violation of the ethical rules, there was no evidence that it was procured by fraud, so the judgment of the Court of Appeals holding that the arbitration clause was enforceable was affirmed[635] 

Goff v. Nationwide Mut. Ins., 825 F. App’x 298 (6th Cir. (Ohio) 2020).  Arbitration agreement allowing employer to change the rules and procedures of the arbitration without notice to the employee was enforceable as the provision was not procedurally unconscionable because it did not pertain to the formation of the arbitration agreement.

Employee signed an agreement requiring arbitration of disputes and allowing the employer to change, alter, amend or otherwise modify the arbitration rules and processes at any time.[636]  After he was terminated, the employee filed an action in federal court and the employer moved to compel arbitration, which the District Court granted.[637]

On appeal, applying Ohio law, the court limited its review to the issue of unconscionability, the sole defense that the employee raised in response to the employer’s motion to compel.[638]  To invalidate the arbitration provision as unconscionable, Ohio law required the employee to demonstrate both procedural and substantive unconscionability.  Procedural unconscionability requires a showing that the “totality of the circumstances indicate that ‘the individualized circumstances surrounding the contract were so unfair as to cause there to be no voluntary meeting of the minds.’”[639]  “While the employee alleged there was an imbalance of power. the Court of Appeals affirmed the District Court, holding that any imbalance was not sufficient to warrant a finding of unconscionability based on the employee’s “relative sophistication,” ten-year employment history, and familiarity with the program.[640]

§ 1.12.2 Language or Agreement Unconscionable

A party attempting to prevent enforcement of an arbitration provision based on unconscionability has the heavy burden of showing both procedural and substantive unconscionability.  Additional cases that rejected arguments of unconscionability are discussed above in Section 1.4.2. Choice of Law: § 1.4.2: The Validity and Scope of an Arbitration Agreement and Arbitrability.

§ 1.13 Other Procedural Issues in Arbitration

Wash. Nat’l Ins. Co. v. OBEX Grp. LLC, 958 F.3d 126 (2d Cir. (N.Y.) 2020).  Federal court had subject matter jurisdiction over petition to enforce summonses to require non-parties to attend arbitration, based on diversity of citizenship between party enforcing subpoenas and the subpoenaed witnesses, the lack of diversity among the parties to the arbitration was no determinative.

Petitioner, one of the claimants in the underlying arbitration seeking reinsurance from several reinsurance companies, brought an action in district court to enforce subpoenas issued by the arbitration panel to testify and bring documents after respondents failed to appear under Section 7 of the FAA, invoking the court’s diversity jurisdiction.[641]  The respondent-witnesses moved to dismiss the petition, arguing, first, that the court was required to “look through” the petition to the location of the parties to the underlying arbitration, who were not diverse.[642]  The witnesses also argued that the additional parties to the arbitration were indispensable parties to the federal action to enforce the subpoenas and their joinder would destroy diversity.[643]  Addressing the merits of the petition, the witnesses asserted that the subpoenas required impermissible pre-hearing discovery and privileged information, and were duplicative, overbroad, and burdensome.[644]  In the underlying arbitration, after the claimants had served an initial subpoena, with which the witnesses complied and produced documents without a hearing, the claimants served further subpoenas directed to the witnesses to produce additional documents, returnable at a hearing.[645]  In response, the witnesses demanded compensation, which claimants refused.[646]  The witnesses did not appear at the noticed hearing and the panel issued an order granting leave to claimants to pursue judicial intervention to obtain compliance.[647]  The District Court denied the witnesses’ motion to dismiss the petition and then denied their motions for reconsideration and to quash as well.[648]  The witnesses ultimately produced responsive documents without a hearing in the arbitration and the parties to the underlying arbitration subsequently settled their dispute.[649]

Noting that the subsequent events had not mooted the dispute, the court held that the “look through” analysis applies only for those court proceedings predicated on federal question jurisdiction under 28 U.S.C.A. § 1331.  Where diversity jurisdiction is invoked, diversity is to be determined based upon the citizenship of the parties in the action before it.  In this case, the citizenship that was relevant was that of the petitioner who had issued the subpoena and the witnesses resisting the subpoena, as well as any indispensable parties.[650]  The court then held that the other parties to the arbitration proceeding were not indispensable because the District Court could (and did) afford complete relief notwithstanding the absence of the other parties to the arbitration.[651]  As to the argument that subpoenas may not be used to obtain pre-hearing discovery in arbitration, the court noted that the subpoenas were returnable at a noticed hearing that was dispensed with at the request of the witnesses.[652]  Finally, as to the witnesses’ objections to the breadth of the subpoenas, the court held that Section 7 of the FAA did not require the District Court to evaluate the merits of those objections under the Federal Rules of Civil Procedure, without deciding whether the District Courts have the power to do so.[653]

§ 1.14 Confirmation and Vacatur of Arbitration Awards

American Intl. Specialty Lines Ins. Co. v. Allied Capital Corp., 35 N.Y.3d 64 (N.Y. 2020).  Arbitration panel did not exceed its authority by reconsidering an initial determination titled “Partial Final Award” that addressed some of the issues submitted for arbitration, but not all, and without deciding whether the doctrine of functus officio was still valid, as the rule would not apply where reconsidered award did not resolve all of the issues in the arbitration.

Ciena Capital LLC and Allied Capital Corporation settled a federal qui tam action with the government involving allegations of loan origination fraud and subsequently sought payment from their insurer for their defense costs and indemnification for the settlement under two insurance policies issued by American International Specialty Lines Insurance Company (AISLIC).[654]  AISLIC denied coverage and the insureds demanded arbitration under the arbitration clauses contained in the insurance policies, seeking damages for the refusal to defend and indemnify.[655]  AISLIC argued that the amounts claimed were not a “loss” within the meaning the policies, and that the legal invoices submitted by the insureds appeared to be for unrelated legal work not covered by the policies.[656]  The parties moved for summary disposition with the insureds noting that the exact amount owed to them for defense costs would be the subject of a subsequent evidentiary hearing should the panel determine that AISLIC was liable.[657]  The parties and the panel never agreed to a partial summary disposition, but the panel issued a “Partial Final Award” holding that only the insurance policy covering Allied Capital was applicable, the federal settlement did not constitute a covered loss for which indemnification was available, and that Allied Capital was entitled to defense costs, and left the question of damages for defense costs to be resolved after a separate evidentiary hearing.[658]  Prior to the evidentiary hearing, the insureds sought reconsideration of the Partial Final Award, arguing that the panel erred in concluding that the settlement did not constitute a covered loss and AISLIC opposed on both procedural grounds that the panel did not have the authority to reconsider the Partial Final Award under the doctrine of functus officio and on the merits.[659]  The functus officio doctrine recognizes that the authority of arbitrators to take action terminates after issuing a final award.  The panel issued a Corrected Partial Final Award holding that the settlement did constitute a covered loss and rejected AISLIC’s argument that functus officio precluded reconsideration.[660]  The panel conducted an evidentiary hearing on damages and issued a Final Award granting Allied Capital damages for the settlement and defenses, less offsets paid to Ciena.[661]

AISLIC sought vacatur of the Corrected Partial Final Award and Final Award and reinstatement and confirmation of the original Partial Final Award, arguing that the doctrine of functus officio precluded the panel’s reconsideration of the Partial Final Award.  The trial court denied the petition and confirmed the Final Award.[662]  The intermediate Appellate Division reversed, with one justice dissenting, granted AISLIC’s petition and vacated the Corrected Partial Final Award and Final Award, holding that the parties agreed to a determination as to liability which they expected would be final and under the doctrine of functus officio it was improper and in excess of the panel’s authority to reconsider the Partial Final Award.[663]

The Appellate Division granted leave to the insureds to appeal to the Court of Appeals.  On appeal, the Court of Appeals recognized New York’s strong public policy in favor of arbitration and the limitation imposed by CPLR Article 75 on judicial involvement in arbitration.[664]  The Court of Appeals discussed the doctrine of functus officio, which has historically terminated the authority of arbitrators to take additional actions after issuing a final award.[665]  The insureds argued on appeal that the doctrine of functus officio is no longer valid under New York law and was grounded upon anti-arbitration sentiments that are no longer valid under arbitration law.[666]  The Court of Appeals did not decide whether the doctrine still existed under New York law, but held that if functus officio did apply, it would only apply after a final award and not to the issuance of a Partial Final Award, which was not final because it did not resolve the entire arbitration.[667]  The court held that even if parties may agree to bifurcate arbitration proceedings and obtain awards that are final as to some issues but not others, that had not happened here, as AISLIC never consented to bifurcate the proceedings.[668]  “Absent an express, mutual agreement between the parties to the issuance of a partial and final award, the functus officio doctrine would have no application in this case.”[669]  The Court of Appeals therefore rejected the argument that the arbitration panel exceeded its authority by reconsidering the Partial Final Award, reversed the Appellate Division, and confirmed the Final Award.[670]

§ 1.14.1 Jurisdictional Issues

Transcon. Gas Pipe Line Co LLC v. Permanent Easement for 2.59 Acres, No. 19-2738 & 19-3412, 2020 U.S. App. LEXIS 33924 (3d Cir. (Pa.) Oct. 28, 2020).  Court had jurisdiction to affirm vacatur under Section 10(a)(4) of the FAA because the arbitrator exceeded his powers where the parties never agreed to arbitrate.

The underlying litigation involved a condemnation dispute between Transcontinental Gas Pipeline Company (“Transco”), authorized by the federal government to construct a natural gas pipeline, and Regec, which owned properties condemned by Transco to obtain rights-of-way.[671]  Regec, proceeding pro se, made multiple filings attacking the court and “questioning the premise of virtually every aspect of the proceedings.”[672]  The District Court struck Regec’s multiple filings on several occasions and imposed sanctions.  One of the struck filings included a copy of a “foreign final judgment via arbitration award” purportedly issued by an organization called the Healing My People Arbitration Association for approximately fifty million dollars.[673]  Regec then sought to confirm the award, Transco moved to vacate the award, and the District Court granted Transco’s application “primarily on its conclusions that ‘the parties never agreed to arbitrate and so the arbitrator here had no jurisdiction,’ and that ‘Transco received no notice of the ex parte arbitration proceeding or opportunity to be heard, and . . . suffered prejudice as a result.’” ^[674]  Regec appealed.

On appeal, the Court of Appeals first examined a number of jurisdictional issues, and concluded that the District Court had jurisdiction to consider the motion to vacate on several grounds including diversity jurisdiction, as well as supplemental jurisdiction under 28 U.S.C.A. §1376 (a) based on the original jurisdiction over the underlying claims brought under the Natural Gas Act.  The court also examined whether Transco had properly served its motion to vacate, sent by email and first class mail, under Section 12 of the FAA, which requires service by a marshal.[675]  Such service was not required here because Regec was already a party before the district court.

As to the merits, the appellate court considered the District Court’s conclusions as a ruling under Section 10(a)(4) that the arbitrator has exceeded his powers.  Noting that “proving entitlement to relief under § 10(a)(4) will in the main be a terribly difficult task, for it is not enough to show that the arbitrator ‘committed an error—or even a serious error,’” the court found that the standard was easily satisfied in this case.[676]  Without a valid agreement to arbitrate, the arbitrator had no power to act.  The court also noted in dicta that it remains an open question whether manifest disregard of the law provides grounds for vacatur, in light of a split among the circuits not yet addressed by the Third Circuit, but did not need to reach that issue to affirm the District Court’s decision.[677]

Badgerow v. Walters, 975 F.3d 469 (5th Cir. (La.) 2020).  Applying “look-through” analysis, federal courts have subject matter jurisdiction over a removed petition to vacate an arbitration award where the entire controversy between the parties is one over which they would have had jurisdiction.

A panel of FINRA arbitrators issued an award dismissing the employee’s claims against her employer and three of its principals.[678]  The employee filed a petition in Louisiana state court to vacate that arbitration award, as to the principals only.  The defendants in the state court proceeding removed the action to vacate to federal court, and the employee moved to remand, asserting that the federal court lacked subject matter jurisdiction over the petition to vacate, because the claims she had asserted in the arbitration against the principals were state law tort claims.  The District Court held that it did have subject matter jurisdiction over the petition to vacate and denied remand and ruled on the merits of the petition to vacate, denying the employee’s claims with prejudice.[679]  The employee appealed only the jurisdiction of the federal court over the petition to vacate.

In Vaden v. Discover Bank, the Supreme Court adopted the so-called “look-through” analysis for determining federal jurisdiction in actions to compel arbitration under Section 4 of the FAA.[680]  The Fifth Circuit has held that applications brought under Sections 9, 10, and 11 of the FAA are also to be analyzed under the look-through approach endorsed in Vaden.[681]  Vaden emphasizes a broad view of the underlying controversy, asking “whether the whole controversy between the parties—not just a piece broken off from that controversy—is one over which the federal courts would have jurisdiction.”[682]  Applying the look-through analysis, the Court of Appeals held that the District Court correctly found that the employee’s claim against her employer in the FINRA arbitration was a federal law claim, that all of her claims against the principals and the employer in the arbitration arose from the same common nucleus of operative facts, and that under the principle of supplemental jurisdiction, federal jurisdiction exists over her state law tortious interference and whistleblower claims as well.[683]  Therefore, the District Court properly held that the federal court had jurisdiction over the employee’s state court petition to vacate the award as to the principals, and affirmed the denial of remand to the state court.[684]

Teamsters Local 177 v. UPS, 966 F.3d 245 (3d Cir. (N.J.) 2020).  Court has jurisdiction to confirm an arbitration award where employer has accepted award and agreed to abide by it, even in the absence of a live dispute, as the underlying dispute remains until an award is confirmed.

Union sought confirmation of an award in its favor, and the employer opposed confirmation and filed a cross-motion to dismiss, arguing that there was no subject-matter jurisdiction because the employer agreed to abide by the award and correct any subsequent violations and thus there was no case or controversy as required by Article III of the Constitution.[685]  The District Court denied the union’s motion to confirm and granted the employer’s motion to dismiss on the ground that it lacked subject-matter jurisdiction, acknowledging a circuit split on whether a court may confirm an award absent an active dispute.[686]

On appeal, the Third Circuit agreed with the Second Circuit that FAA not only authorizes, but mandates, that district courts confirm arbitration awards by converting them into enforceable judgments through a summary proceeding, even in the absence of a new dispute[687]  Rejecting the employer’s argument that the union has not suffered and will not suffer an injury where the employer has agreed to abide by the award, the appellate court held that under the FAA, a party’s injuries are only fully remedied by the entry of a confirmation order.[688]  The court reversed and remanded to the District Court with instructions to confirm the award absent statutory grounds for vacatur.[689]S

§ 1.14.2 Standards for Affirmance or Vacatur of Arbitration Awards

EB Safe, LLC v. Hurley, No. 19-38592020, 2020 U.S. App. LEXIS 33066 (2d Cir. (N.Y.) Oct. 20, 2020) (unpub.).  Court properly rejected challenge that the fee award in the parties’ arbitration was in manifest disregard of the law because it was clear that the arbitrators applied a reasonableness standard and provided a colorable justification for the fee award.

EB Safe, LLC (“EB Safe”), majority owner of Fiduciary Network, LLC (“Fiduciary”), commenced an arbitration against Mark Hurley, its former CEO and founder, seeking a declaration that Hurley was precluded from participating as a bidder in a process to sell Fiduciary under the Fiduciary LLC Agreement, and Hurley counterclaimed seeking a declaration regarding the authority of the committee tasked with supervising the sale.[690]  During the arbitration, EB Safe asked the Fiduciary board to investigate Hurley, based on his recent arrest for domestic violence, and then called for his suspension.  Hurley added claims to the arbitration challenging EB Safe’s contractual rights to investigate or suspend him.[691]  The arbitrators issued a unanimous award determining that Hurley was not precluded from participating in the sale process, but finding the EB Safe board was not prohibited from investigating and suspending him.[692]  The arbitrators also determined that Hurley was the prevailing party and awarded him fees under the Fiduciary LLC Agreement, but significantly reduced the amount he had requested.  The District Court confirmed the award on the parties’ competing applications to confirm the parts of the award that favored them, denied EB Safe’s motion to vacate the fee award, and entered judgment for the fees the arbitrators had awarded.[693]  EB Safe appealed, claiming that the award of fees was in manifest disregard of the law and that Hurley had procured the fee award by fraud through perjury during the arbitration.

Applying a de novo standard of review for findings of law and clear error to findings of fact, the Court of Appeals rejected both of EB Safe’s grounds for vacatur.  As to manifest disregard, the court noted that manifest disregard of the law would be grounds for vacatur where “(1) ‘the law that was allegedly ignored was clear, and in fact explicitly applicable to the matter before the arbitrators,’ (2) ‘the law was in fact improperly applied, leading to an erroneous outcome,’ and (3) ‘the arbitrator [knew of the law’s] existence, and its applicability to the problem before him.’”[694]  Granting deference to the arbitrators’ decision, the court found that the arbitrators applied a proper reasonableness standard in determining the amount of the fees awarded and had provided a colorable justification for their award.[695]  The court had no issue rejecting EB Safe’s fraud argument.  The standard for vacatur for fraud requires a showing of (1) fraudulent activity; (2) that could not have been discovered, even with the exercise of due diligence; and (3) materially related to an issue in the arbitration.[696]  Vacatur for perjury should be granted only where it is “abundantly clear” that the award was obtained through perjury.[697]  Here, the court concluded that inconsistencies in Hurley’s testimony had little or no significance in the arbitration and had not been shown to have resulted from intentional conduct, so the District Court’s judgment was affirmed.[698]

Salinas v. McDavid Houston-Niss, L.L.C., No. 20-20003, 2020 U.S. App. LEXIS 32842 (5th Cir. (Tex.) Oct. 13, 2020).  Court properly confirmed arbitration award, including an award of fees where state law permitted prevailing party to recover fees.

Automobile dealership sought to confirm arbitration award against customer who claimed dealership had represented it would insure her vehicle, where the car was totaled in a collision just three days after it was purchased.[699]  After the District Court confirmed the award, and denied the customer’s motion to vacate the award, the customer appealed.[700]

On appeal, the court methodically rejected each of the customer’s arguments, noting that the standard of review of arbitration awards is “exceedingly deferential,” resolving all doubts in favor of arbitration.[701]  As the arbitration provision in the purchase agreement stated that “[e]ach party shall be responsible for its own attorney[’s] . . . fees, unless awarded by the arbitrator under applicable law,” the arbitrator had properly awarded the dealership its attorney’s fees pursuant to the Texas Civil Practice and Remedies Code, which allows the prevailing party to recover reasonable attorney’s fees for claims asserted in contract.[702]  Accordingly, the decision of the District Court was affirmed.

Kohn Law Grp., Inc. v. Jacobs, 825 F. App’x 465 (9th Cir. (Cal.) 2020).  Arbitration award properly confirmed over claims that arbitrator had exceeded her powers and acted in manifest disregard of the law.

Law firm appealed from the District Court’s decision confirming an arbitration award.  On appeal, noting the deferential standard of review of arbitration decisions, the court rejected the law firm’s claims that the award should be vacated in part.  Contrary to the firm’s objections, the arbitrator had not exceeded her authority by interpreting a provision in a different way than what the firm urged.[703]  The Court of Appeals did not question whether manifest disregard of the law would be grounds to vacate an award, but explained that the party challenging an arbitration award must show that the arbitrator understood and correctly stated the law, but proceeded to disregard it.[704]  That burden will not be sustained where the arbitrator thoughtfully examined the law and applied it to the facts, as had occurred in this arbitration.  The court affirmed the judgment confirming the arbitration award.[705]

Floridians for Solar Choice, Inc. v. Paparella, 802 F. App’x 519 (11th Cir. (Fla.) 2020) (per curiam).  Award was properly confirmed, including an award of attorneys’ fees entered after the 30-day deadline in the AAA Rules.

Consultant entered into a contract with Floridians for Solar Choice, Inc. (“FSC”) to obtain signatures to support a proposed ballot initiative for a solar energy amendment to the Florida Constitution.[706]  A dispute arose over whether FSC agreed to pay the consultant for unexpected expenses, and after an arbitration under the AAA Commercial Rules, as their contract provided, the arbitrator ruled in favor of FSC.  The District Court confirmed the award to PSC for damages, interest, costs and fees.[707]

On appeal, the court rejected the consultant’s argument that FSC had committed fraud by changing its theory of damages in its post-hearing brief hearing to increase the amount it sought.[708]  The increase was supported by the record, and the arbitrator was not mislead where he had rejected the same objection on a post-award motion for rehearing.[709]  Nor was there any merit to the consultant’s objection that it was entitled to a three-arbitrator panel under the AAA Rules based on the amount sought, where the parties had stipulated to a single arbitrator and the consultant did not object until FSC moved for an award of attorneys’ fees.[710]  Finally, there was no error in the arbitrator’s belated award of attorneys’ fees.  The initial award found that FSC was entitled to an award of its reasonable attorneys’ fees under a contractual prevailing party provision, and the parties agreed that the amount of the fees would be addressed after the hearing.  At best, the failure to include an express reservation of jurisdiction in the award to address fees was a “clerical error” and the arbitrator was not deprived of authority to decide the issue of fees after the 30-day deadline in the AAA Rules to issue an award after a hearing.[711]  As a matter that can be waived, forfeited or contracted around, that deadline is not jurisdictional, the parties had agreed that the matter of fees would be addressed after the hearing, and the arbitrator did not exceed his authority when he entered an award of attorneys’ fees more than 30 days after the hearing concluded.[712]  Accordingly, the judgment of the district court was affirmed.

Auto Equity Loans of Delaware, LLC v. Baird, 232 A.3d 1293 (Del. 2020) (unpub.).  Questionable legal support or a misreading of the law alone are insufficient to vacate an arbitration award.

Borrowers of high-interest loans invoked arbitration provision and brought three arbitrations against their lender, asserting claims that the loans were usurious under Pennsylvania law, the state where they all resided.[713]  The lender claimed that the law of Delaware – where the loans were made – controlled, and that the loans were not usurious under Delaware law.  The arbitrator applied Pennsylvania law, after acknowledging that he had changed his mind after ruling otherwise in a prior arbitration, declared the loans usurious and awarded damages to the borrowers.  The lender brought an action in Delaware state court to vacate the three awards based on the arbitrator’s manifest disregard of the law.  The Delaware court agreed with the lender, found that the arbitrator’s choice of law analysis was clearly erroneous and the legal errors amounted to a manifest disregard of the law and vacated two of the awards.[714]  On appeal, the intermediate Superior Court reversed, finding that the arbitrator had some basis for applying Pennsylvania law and thus had not manifestly disregarded the law.

The Delaware Supreme Court affirmed the Superior Court decision, even though it found the choice-of-law analysis by the arbitrator and Superior Court “doubtful.”[715]  Noting the deferential standard to be applied when reviewing arbitration awards, the court described the burden of demonstrating that an arbitrator exceeded his powers by manifestly disregarding the law to be a “steep hill to climb,” requiring a showing that “the arbitrator (1) knew of the relevant legal principle, (2) appreciated that this principle controlled the outcome of the disputed issue, and (3) nonetheless willfully flouted the governing law by refusing to apply it.”[716]  The arbitrator’s analysis here may have been dubious, but questionable legal support or a misreading of the law are not sufficient to vacate an arbitration award.[717]  On the basis that by choosing arbitration the lender had accepted the heavy burden required to vacate an arbitration award, the Supreme Court affirmed the Superior Court’s reinstatement of the two vacated awards.[718] 

Cinatl v. Prososki, 307 Neb. 477 (2020).  Courts are required to give extraordinary level of deference to arbitration awards, and have no discretion to deny confirmation under the Uniform Arbitration Act where there is no pending application for vacatur or modification of the award.

Buyer of orthodontics practice brought a claim against the estate of the seller, claiming fraud and seeking rescission of the acquisition.[719]  After a hearing, the arbitrator issued an award in favor of the seller’s estate based largely on the seller’s continued operation of the practice for two years after the acquisition, and the buyer sought vacatur, arguing that the arbitrator exceeded his authority by rendering a decision based upon issues and defenses that had not been raised in the pleadings, including estoppel, laches, statute of limitations and waiver.[720]  The trial court denied the application, holding that the arbitrator had not substantially relied on the equitable defenses cited by the buyer.[721]  In its decision, the court noted that it did not have the written arguments the parties had presented to the arbitrator.  The buyer then filed a motion seeking to vacate the court’s decision and for a new trial and a motion to prepare the record from the arbitration hearing, and the seller’s estate filed an application to confirm the arbitration award.[722]  The trial court rejected the motion for a new trial, holding that the arbitrator’s decision was not necessarily grounded in the defenses of laches or estoppel, and confirmed the arbitration award.[723]  The buyer appealed.[724]

On appeal, after addressing appellate jurisdiction issues, the Supreme Court of Nebraska addressed the grounds set forth in the Nebraska Uniform Arbitration Act (“UAA”) for vacatur, noting the “extraordinary level of deference” given to arbitration awards.[725]  The Supreme Court held that the trial court properly denied vacatur as there was no merit to the argument that the arbitrator decided the matter based on unpleaded defenses and, even if he had, the court did not err in rejecting the application.[726]  Having rejected the application for vacatur, the trial court had no discretion to refuse the application to confirm the award under the UAA, which uses mandatory language.[727]  Accordingly, the judgment confirming the award was affirmed.

§ 1.14.3 Scope of Review of Award

Gherardi v. Citigroup Global Mkts., Inc., 975 F.3d 1232 (11th Cir. (Fla.) 2020).  Judicial review of arbitration award does not permit the court to examine the legal merits of the arbitrators’ award where they arguably construed the contract.

Bank employee obtained a significant award from his former employer.[728]  The employee moved to confirm and the employer moved to vacate the award.  The bank argued that, as an at-will employee, the panel had exceeded their authority by ignoring the employment agreements and awarding the employee damages for wrongful termination.[729]  The District Court determined that the arbitrators “exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made,” within the meaning of Section 10(a)(4) of the FAA,[730] and granted the motion to vacate.

The Court of Appeals reversed.  Noting that § 10(a)(4)‘s language is to be interpreted “narrowly—very narrowly” and that judicial review of arbitration decisions is “among the narrowest known to the law,”[731] the sole question for the court was “whether the arbitrators (even arguably) interpreted the contract, not whether [they] got its meaning right or wrong.”[732]  Because this was not a case where the arbitrators flagrantly defied the terms of the parties’ contract, nor an expansion beyond the arbitrable issues, the court reversed.[733]  The dissent took a different view, reasoning that the arbitrators exceeded their powers by issuing an award that appeared to “flatly contradict” the express language of the employee handbook.[734]

Diverse Enters., Co., L.L.C. v. Beyond Int’l, Inc., No. 19-51121, 2020 U.S. App. LEXIS 29650 (5th Cir. (Tex.) Sept. 17, 2020).  An award of attorneys’ fees at an hourly rate in excess of the actual amount charged did not exceed the arbitration panel’s contractual authority and was not grounds for vacatur.

Distribution agreement contained a broad arbitration clause as well as a provision granting the prevailing party its reasonable attorneys’ fees.[735]  The panel ruled in favor of plaintiffs on virtually every issue and entered an award, including an amount for attorneys’ fees.  Initially, the parties stipulated to an hourly rate for the plaintiffs’ fees that, unbeknownst to the defendant, exceeded the rate the plaintiffs were actually charged.  When plaintiffs moved to confirm the award, defendant argued the arbitrators had exceeded their authority by awarding fees in excess of the amount actually incurred, and that the award contained “an evident material miscalculation of figures or evident material mistake” in violation of Section 11(a) of the FAA.[736]  The District Court confirmed the award, concluding that the panel did not exceed its authority, noting the “exceedingly deferential” standard of review and the lack of limiting language in the parties’ agreement concerning the arbitrator’s authority.[737]

On appeal, the court stressed the limited role of the courts in reviewing arbitration awards, including the requirement to resolve all doubts about the authority of the arbitrators in favor of arbitration.[738]  Based on the broad arbitration provision and the prevailing party clause, the court held that the word “reasonable” did not necessarily limit the authority of the arbitrators to only award the amount of fees that plaintiffs had actually incurred.[739]  Accordingly, the Court of Appeals affirmed the decision confirming the award.[740]

Bay Shore Power Co. v. Oxbow Energy Sols., LLC, 969 F.3d 660 (6th Cir. (Ohio) 2020).  Where parties’ agreement to arbitrate expressly excluded any determination of attorneys’ fees, but a separate contract provision allowed the prevailing party to seek reimbursement of its attorneys’ fees, the court was not precluded from considering an award of fees to prevailing party.

Customer brought an arbitration and obtained an arbitration award against supplier under a long-term supply agreement.[741]  The arbitration provision expressly carved out and excluded attorneys’ fees from the damages and costs that the panel could award, and such fees were to be born equally by the parties.[742]  However, a separate provision in the contract allowed the prevailing party to seek reimbursement of its attorneys’ fees.[743]  The customer filed suit to confirm the award and recover its fees incurred in the arbitration under the prevailing party provision.  The District Court confirmed the award but granted summary judgment to the supplier on the claim for attorneys’ fees, finding that the agreement was ambiguous as to whether an award of fees was available and thus there was no meeting of the minds allowing a prevailing party to recover fees.[744]

On appeal, the Court of Appeals first determined the threshold issue of arbitrability and the extent to which the parties had delegated authority to resolve their disputes to the arbitrator.[745]  Because the parties did not delegate the issue of attorneys’ fees to the arbitrators’ discretion, the motion for attorneys’ fees was not an impermissible attempt to modify the panel’s binding arbitration award, but rather was an effort to vindicate a separate contract right with respect to an issue that was not delegated to the arbitrators.[746]  The provisions of the contract could be reasonably read together to allow the court to consider an award of fees, and the District Court’s ruling to the contrary was accordingly reversed.[747]

Star Dev. Grp., LLC v. Darwin Nat’l Assur. Co., 813 F. App’x 76 (4th Cir. (Md.) 2020).  Where the parties expressly reference state arbitration law in an agreement, that law applies to review of the arbitrator’s decision.

Property owner and construction and development manager brought an action in state court to recover delay damages from the general contractor and its surety they had incurred during the construction of a hotel.[748]  The action was removed to federal court and moved to arbitration as the contract prescribed arbitration of disputes to be governed by the Maryland Uniform Arbitration Act.  The arbitration panel issued an award in favor of the general contractor.[749]  The parties then returned to federal court with competing petitions to confirm and vacate the award.  The District Court confirmed the award, and granted the general contractor its fees for both the costs of the petition to confirm and the defense of the vacatur application.[750]

On appeal, the court first turned to the choice of law, and the District Court’s holding that the proceedings were governed by the Maryland state arbitration law, rather than the FAA.  Reviewing the choice of law de novo, and applying the law of the forum, the Court of Appeals had little difficulty affirming the District Court.  While a generic choice-of-law provision stating generally that a contract is subject to state law is typically insufficient to invoke state arbitration law, here, the choice of law provision expressly provided that the arbitration itself would be subject to the state arbitration statue and the parties’ choice of state law would not be preempted by the FAA.[751]  As such, the state statute would govern the request for vacatur.

In addition to the grounds provided under the FAA, the Maryland statute allows vacatur (1) if the award “manifestly disregards” the law or (2) if the award is “completely irrational,”[752] although the scope of the latter ground has been cast into doubt.[753]  Regardless, under any formulation of the standard, the arguments for vacatur fell far short.[754]  The District Court’s decision was affirmed.

Mid Atl. Capital Corp. v. Bien, 956 F.3d 1182 (10th Cir. (Colo.) 2020).  Court may correct only those miscalculations of figures that appear on the face of an arbitration award and cannot look beyond the face of the award.

FINRA arbitration panel issued an award in favor of investors and against brokerage for damages, attorneys’ fees and required the investors to reassign ownership of certain investments to the brokerage.  The brokerage moved to amend the award based on “an evident material miscalculation of figures,” under Section 11(a) of the FAA, claiming that the award had double counted certain damages.[755]  The District Court denied the motion because the alleged error did not appear on the face of the arbitration award.  However, the District Court amended the award in several respects and both parties appealed.

In the amended final judgment, in addition to ordering the brokerage to pay the investors certain damages, the court ordered that prejudgment interest would accrue on the damages portion of the award and that post-judgment interest would accrue at the federal rate specified in 28 U.S.C.A. § 1961.  Lastly, the court ordered the investors to reassign to the brokerage their ownership interests in the investments, including any distributions that they had received since the arbitration award due to the investments.

On appeal, the court held that § 11(a) embodies a face-of-the-award limitation, based on the FAA’s purpose, history, and structure, bolstered by the narrow and deferential standard of review of arbitration awards.[756]  Here, the brokerage did not satisfy that burden to show an error; even if the panel inadvertently awarded damages on both measures of recovery presented as alternatives methods of calculating damages, that mistake was not evident on the face of the award.[757]  As to the investors’ complaints regarding the assessment of interest and fees, the Court of Appeals held that these issues rested on the panel’s interpretation of the investors’ contract and were within the authority of the panel.[758]  Finally, the District Court had not erred in applying the federal post-judgment interest rate or in requiring the investors to reassign post-award distributions to the brokerage, along with their investments.[759]  Accordingly, the judgment was affirmed.[760]

Interactive Brokers LLC v. Saroop, 969 F.3d 438 (4th Cir. (Va.) 2020).  When considering whether an arbitration panel manifestly disregarded the law, the court’s role is to determine whether the panel did its job, not how well it did its job.

A group of investors opened accounts with an online broker dealer, signing contracts with mandatory arbitration provisions that provided that “[a]ll transactions are subject to rules and policies of relevant markets and clearinghouses, and applicable laws and regulations.”[761]  The investors hired a third-party investment manager, who executed trades of a certain high-risk security through the investors’ portfolio margin accounts with the broker, which executed the investment manager’s strategy.[762]  FINRA Rule 4210(g) prohibits trades through portfolio margin accounts of the high-risk security traded here.[763]  At first, the investment strategy was successful, but after a substantial drop in the market, the value of the investors’ margin accounts fell below the minimum required amounts.  Pursuant to the parties’ contracts, the broker auto-liquidated the investors’ accounts, leaving the investors with an obligation to pay the broker $384,000 for the leverage the broker provided to acquire the now-liquidated investments.[764]

The investors filed an arbitration with FINRA to recover their claimed losses, but they did not assert a claim based on FINRA Rule 4210(g).  The broker counterclaimed for payment of the debt.  The parties did not request a reasoned decision from the panel.  The arbitration panel found for the investors, awarding them the value of their accounts at the time of liquidation, but did not specify which cause of action formed the basis of liability.  The panel dismissed the broker’s counterclaim based on its violation of FINRA Rule 4210(g).[765]  The broker successfully challenged the award in District Court, and the panel issued a modified award with a brief explanation for the award of damages, which it calculated as the value of the account on a date when the account was holding cash, with no open investment positions, and rejecting the broker’s counterclaim based on the violation of Rule 4210(g).[766]  The broker then returned to the District Court seeking vacatur of the modified award, and the District Court granted the broker’s motion to vacate, reasoning that there was a “a manifest disregard of the law because the law is clear that there is no private right of action to enforce FINRA rules.”[767]  The investors appealed.

The Fourth Circuit vacated the District Court’s judgment, finding that it erred by vacating the modified arbitration award.[768]  The court applied its own precedent to find that the manifest disregard standard is met only upon a showing that “(1) the disputed legal principle is clearly defined and is not subject to reasonable debate; and (2) the arbitrator refused to apply the legal principle.”[769]  The Fourth Circuit found that the arbitration panel did not manifestly disregard the law for three reasons.  First, the panel did not base its award on violation of a FINRA Rule for which there is no private right of action, but merely based its rejection of Broker’s counterclaim on such a violation.[770]  Second, because the panel did not specify which cause of action the award was predicated on, the broker was required to show manifest disregard as to all of the causes of action, and the Fourth Circuit found that there was no manifest disregard as to the breach of contract cause of action because the parties’ contracts contained an obligation to comply with FINRA Rules.[771]  Third, the arbitration panel did not manifestly disregard the law by awarding damages based on the value of the accounts on the date selected by the panel because this arguably returned the parties to the status quo before the broker’s alleged wrongful liquidation or high-risk trading, under Connecticut law, which governed the parties’ contracts.[772]

In addressing the dissent, the Fourth Circuit was careful to specify that although the arbitration panel’s application of damages law may not be the best reading of the law, the court’s job is to determine merely whether the panel did its job and not whether it did its job well.[773]  The dissent would have affirmed the District Court’s order on the ground that his was a “rare circumstance” for vacatur because no theory of compensatory damages would have permitted an award based on the specific date selected by the panel with no sufficient explanation as to why or consideration as to what came before or after such date.[774]

Blondeau v. Baltierra, No. 20282, 2020 Conn. LEXIS 203 (Sept. 24, 2020).  Judicial review of an arbitration award based on an unrestricted submission to arbitration is limited to a determination of whether the arbitrator exceeded her powers by issuing an award that fell outside of the scope of the submission or manifestly disregarded the law.

Spouses entered into a premarital agreement that included a French choice of law provision and an agreement to arbitrate any claim for marriage dissolution, to be guided by the laws of Connecticut except that the French Civil Code would apply to any claim regarding the enforceability of the premarital agreement and the determination of what property fell within the scope of the premarital agreement.[775]  The arbitrator issued an opinion designating the parties’ home as joint property, applying Connecticut law to determine how equity in the home would be distributed and to his order for payment of the children’s living expenses as well as expenses of childcare, health insurance, and life insurance.[776]  The wife moved before the arbitrator for articulation/clarification/reargument of the arbitration award, arguing that the arbitrator had failed to apply French law to the division of equity in the property, as the premarital agreement required, which the arbitrator denied.[777]  The husband filed an application in court to confirm the award and the wife filed a motion to vacate, which the trial court granted, holding that the arbitrator exceeded her powers and manifestly disregarded the law by failing to comply with the parties’ arbitration agreement to apply the law of France to the division of property.[778]

The husband appealed, arguing that the trial court lacked subject matter jurisdiction to consider the wife’s motion to vacate on numerous grounds, including because the arbitrator neither exceeded her authority under the arbitration agreement nor manifestly disregarded the law.[779]  The husband also argued that the wife was not aggrieved by some of the arbitrator’s award that she was now seeking to vacate.  The court examined several jurisdictional challenges the parties raised, and concluded that any party to an arbitration agreement can seek vacatur of an arbitration award, regardless of whether the party is aggrieved.[780]  Turning to the merits of the competing applications to vacate and confirm, the court differentiated between restricted and unrestricted submissions to arbitration.  In the former, the breadth of issues delegated to the arbitrator is limited and subject to the court’s de novo review.  In an unrestricted submission, the award is final and binding and not subject to review for errors of fact and law.[781]  Applying the standards for an unrestricted submission, the Supreme Court held that judicial review of the arbitration award is limited to a determination of only whether the arbitrator exceeded her powers by issuing an award that fell outside of the scope of the submission or manifestly disregarded the law.[782]  The Supreme Court held that neither ground for judicial intervention existed in this case, noting that although the wife’s legal interpretation may be correct, it is not “obviously correct based on the explicit requirements of the premarital agreement” as would be required to permit a court to vacate the arbitration award.[783]  Finally, the court held that the wife did not and could not waive the state statutory prohibition against arbitration of issues related to child support and that portion of the award was severable and properly vacated, and in all other respects the decision of the trial court was reversed and the award confirmed.[784]

§ 1.15 Preclusive Effect of Arbitration Awards

Tex. Brine Co., L.L.C. v. Am. Arbitration Ass’n, Inc., 955 F.3d 482 (5th Cir. (La.) 2020).  The FAA provides the exclusive remedy for claims arising from arbitral bias and seeking reimbursement for arbitration fees and expenses, and collateral attacks are not allowed.

In 1975, Texas Brine Company, L.L.C. (“Texas Brine”) entered into a contract to supply brine to a customer.[785]  Many years later, the contract was amended to include an arbitration agreement, and the contract was thereafter assigned to Occidental Chemical Corporation (“Oxy”).  After a dispute arose between Texas Brine and Oxy in 2012, Texas Brine invoked the arbitration clause.  Three arbitrators were selected, and each was required to disclose conflicts of interest and acknowledge a continuing duty to disclose any further conflicts.  Four years later, Texas Brine learned that one of the arbitrators failed to disclose that he was serving as counsel in an unrelated matter opposite Texas Brine’s arbitration attorneys.  Texas Brine also learned that another of the arbitrators was representing the first conflicted arbitrator in a related legal malpractice action.  Neither arbitrator had disclosed this information.  Texas Brine moved to remove both arbitrators, and the AAA denied the motions.  Eventually, the AAA removed one of the arbitrators after he made an offensive comment, Texas Brine renewed its urging to remove the other, and both remaining arbitrators resigned.  Thereafter, Texas Brine filed a motion in Louisiana state court to vacate all rulings that had been issued by the arbitral panel and for reimbursement of fees and expenses paid to the AAA, and the state court granted the motion.

Texas Brine then filed suit against the AAA and the conflicted arbitrators in Louisiana state court, requesting more than $12 million in damages and equitable relief based on claims of fraud in connection with the arbitration proceedings.  The AAA, the only out-of-state defendant, removed the case to federal court before the in-state defendants could be served, a process referred to as “snap removal,” and moved to dismiss.  The District Court denied Texas Brine’s motion to remand based on a challenge to “snap removal,” and granted the motions to dismiss.  Texas Brine filed the instant appeal.[786]

The Fifth Circuit affirmed the refusal to remand, following similar decisions in other circuits.[787]  At the outset, it reasoned that the plain language of 28 U.S.C.A. § 144(a), known as the forum-defendant rule, prohibits removal when an in-state party has been “properly joined and served” as a defendant.[788]  Here, because the in-state arbitrator defendants had not been served before the AAA removed the case, “snap removal” was permissible.[789]

The court also held that the Louisiana action amounted to an impermissible collateral attack on the arbitration award for three reasons.[790]  First, it reasoned that Texas Brine’s allegations of wrongdoing relating to the conflicts of interest resembled the same wrongdoing that led the Louisiana court to vacate the arbitration award in the first state court proceeding.[791]  The court ruled that a proceeding under section 10 of the FAA for vacatur based on evident arbitrator bias is a party’s exclusive remedy for undisclosed conflicts.[792]  Second, section 10 provides the remedy for harm that manifests in the arbitration award.[793]  Texas Brine’s argument that the conflict provided a strategic disadvantage and tainted the arbitration were the same kinds of harm that are remedied through vacatur under section 10.[794]  Third, Texas Brine’s request for reimbursement of the costs and fees paid during arbitration amounted to a collateral attack on the award.  Thus, the Fifth Circuit affirmed the District Court’s decision dismissing the action.[795]

Gulf LNG Energy, LLC v. Eni USA Gas Marketing LLC, No. 22, 2020, 2020 Del. LEXIS 380 (Nov. 17, 2020).  Even where the parties have agreed to a broad arbitration clause, courts have jurisdiction to enjoin arbitration of claims that amount to an effort to collaterally attack a final award the court previously confirmed.

The parties entered into an agreement for the use of a facility to receive, store, regasify and deliver liquefied natural gas (“LNG”) that contained an arbitration clause.[796]  In 2016, defendant Eni USA Gas Marketing LLC (“Eni”) filed the “First Arbitration” with the AAA, and the panel issued a final award finding that the purpose of the parties’ agreement had been substantially frustrated as a result of a radical and unforeseeable change in the domestic natural gas market, declaring that the agreement terminated as of March 1, 2016, and directing Eni to compensate plaintiff Gulf LNG Energy, LLC (“Gulf”) for the value of partial performance under the agreement.[797]  Gulf sued in the Court of Chancery to confirm the award and the court entered judgment confirming the award.

A few months later, in June 2019, Eni filed a Second Arbitration against Gulf seeking declaratory relief and damages, alleging breaches of the agreement and negligent misrepresentation as a result of Gulf’s wrongful conduct in the First Arbitration.[798]  Gulf responded by bringing an action in the Court of Chancery under the FAA and Delaware state law seeking a permanent injunction and a declaratory judgment that Eni was barred from pursuing the Second Arbitration.[799]  The Court of Chancery rejected Eni’s arguments that it did not have jurisdiction to enjoin claims that it determined to be collateral attacks on the Final Award, and enjoined Eni from bringing the negligent misrepresentation claim, but entered judgment for Eni allowing it to pursue the breach of contract claims in the Second Arbitration.[800]  The court reasoned that the panel in the First Arbitration never ruled on the merits of Eni’s contract claim, the claims were not an impermissible attack on the final award and it would be up to the panel in the Second Arbitration to determine whether the contract claim was arbitrable and whether it was precluded.

On appeal to the Delaware Supreme Court, Gulf argued that the Court of Chancery erred in refusing to enjoin all claims in the Second Arbitration as improper attacks on the final award, and Eni cross-appealed, contending that the Court of Chancery lacked jurisdiction to enjoin the Second Arbitration in light of the parties’ broad arbitration clause, and that the enjoined misrepresentation claims were not a collateral attack on the final award in the First Arbitration.[801]  In finding that the court had jurisdiction to enjoin Eni from pursuing the Second Arbitration, the Supreme Court held that Sections 10 and 11 of the FAA provide the exclusive means to vacate, modify or correct a final arbitration award and thus courts can enjoin or dismiss follow-on proceedings instituted in court or arbitration, such as in the instant case, that constitute collateral attacks on a confirmed arbitration award in direct contravention of the FAA.[802]  As the Supreme Court reasoned, “[w]hen the parties agreed that the FAA controls review of an arbitration award, they signed up for a court to apply an exclusive procedure and the restrictions that accompany it.”[803]  Even where the parties have agreed to a broad arbitration clause, the courts retain jurisdiction “to dismiss litigation or enjoin a second round of arbitration to vindicate the policies of finality and limited review of arbitration awards embedded in the FAA . . . ”[804]  The Supreme Court also rejected Eni’s characterization of its claims in the Second Arbitration as independent of the final award in the First Arbitration.  Rather, modifying the judgment of the lower court, the Supreme Court found that Eni was seeking, through the Second Arbitration, to effectively appeal the final award outside of the FAA’s review process.  It determined that the correct analysis was not whether res judicata applied, and the panel had addressed the claim Eni was pursuing, but instead whether Eni’s ultimate objective was to attempt to “rectify” a harm it suffered as a result of the final award in the First Arbitration.[805]  Here, because Eni was attempting to litigate once again whether the agreement was terminated and the remedy for that termination, the Second Arbitration constituted an improper collateral attack on the final award.[806]  The court concluded that because Eni’s claims sought to revisit the core issues addressed in the First Arbitration, and to modify the final award, the claims were a collateral attack on the final award and should be enjoined.[807]  Over a dissent that would have referred all issues of arbitrability to the panel in the Second Arbitration, the Supreme Court affirmed in part, reversed in part and remanded to the Court of Chancery with instructions to enter an injunction preventing Eni from pursuing all claims in the Second Arbitration.[808]

§ 1.16 Mediation

Accent Delight Int’l Ltd. v. Sotheby’s, No. 18-CV-9011 (JMF), 2020 U.S. Dist. LEXIS 230272 (S.D.N.Y. Dec. 8, 2020).  A party seeking discovery of private mediation materials must satisfy a heightened standard of need.

The plaintiffs (working for a Russian billionaire) hired a private art dealer, Yves Bouvier, to help the billionaire assemble a “world-class” art collection.[809]  But Mr. Bouvier, rather than acting as an agent and advisor, “improperly and secretly, acting as a dealer,” allegedly bought some of that “art himself and [resold] . . . it to Plaintiffs at a higher price.”[810] One of those works was Leonardo da Vinci’s Christ as Salvator Mundi.

Plaintiffs claimed that the auction house Sotheby’s was part of this scheme.  In particular they asserted that Sotheby’s had facilitated the sale of Christ as Salvator Mundi from a group of sellers to Mr. Bouvier for $83 million, and that Mr. Bouvier then sold the painting to the plaintiffs for $127.5 million.[811]  Plaintiffs also alleged that Sotheby’s assisted Mr. Bouvier “to justify th[is] fraudulent price.”[812]

Sotheby’s had not waited for these claims before addressing the sale, however.  In 2016 it had sued for a declaratory judgment that it had not breached its obligations to the original seller group in the sale to Mr. Bouvier.  And even before that lawsuit, Sotheby’s had begun a mediation with that original seller group, using former United States District Court Judge Barbara Jones as their mediator.  Sotheby’s, the original sellers, and Judge Jones agreed in writing that the mediation would be “a settlement negotiation deemed private and confidential.”[813]

The mediation was successful and led to a settlement agreement.  In 2020, the plaintiffs suing Mr. Bouvier decided it would be to their advantage to see the settlement agreement and mediation materials in the mediation between Sotheby’s and the original sellers.  They served a subpoena to that effect, which Sotheby’s moved to quash.[814]

The court quashed the subpoena as to the settlement agreement itself, but not the mediation materials requested.  Sotheby’s then objected to the production of various documents, including communications between its counsel and counsel for the original sellers, and communications between it and the mediator.  In reply, the plaintiffs moved to compel production of those documents.[815]

In deciding the motion to compel, the court first addressed whether a party seeking materials from a private mediation must meet the three-part test announced in In re Teligent,[816] for proof of “‘(1) a special need for the confidential material, (2) resulting unfairness from a lack of discovery, and (3) that the need for the evidence outweighs the interest in maintaining confidentiality.’”[817]  In the In re Teligent case, the mediation in question had been court annexed and subject to an order of confidentiality.[818]  Sotheby’s, in contrast, had only a private agreement as to confidentiality.[819]

The only two full decisions to have addressed whether the standard from In re Teligent applied to private mediations had reached different conclusions.[820]  The court in Accent Delight sided with the decision in Dandong, for several reasons.

First, the “the Second Circuit itself has applied the heightened Teligent standard in relation to a confidential private mediation,” albeit in a summary order.[821]  Second, the In re Teligent decision did not depend on the existence of a court order, but “on the rationale that promising confidentiality in mediation promotes the free flow of information that may result in the resolution of a dispute.”[822]  Third, “providing weaker protections to communications during a confidential private mediation than to communications during a court-sponsored mediation would discourage parties from agreeing to engage in private mediation.”[823]  According to the court, “in many cases, particularly more complex cases, private mediation (which is often conducted with a paid, highly experienced mediator who can devote more time to the matter) may be . . . more likely to succeed than[] . . . [court]-sponsored mediation,” and “when successful, [private mediation] lightens the court’s docket.”[824]  (but citing no proof of different success rates between public and private mediation).  Finally, applying a heightened standard would be consistent with decisions in other Circuits, both those that have formally created a general mediation privilege, [825] and those that have simply recognized a heightened standard for disclosure.[826]

Applying the heightened standard from In re Teligent meant that the plaintiffs would lose their motion to compel.  The court emphasized that the plaintiffs had to show more than mere relevance.[827]  While they had established that much, they had failed to show that they could not “obtain the information in [the] withheld documents”—not the documents themselves—from sources other than the mediation.[828]  Because the plaintiffs had access to the actual parties to the mediation, and to those parties’ other documents, they could not meet this requirement.

§ 1.17 International Arbitration

In a series of cases in 2020, decisions from the Second, Fourth, Sixth and Seventh Circuits deepened the split among the Circuits over whether district courts have the authority to compel discovery for use in private foreign arbitrations under 28 U.S.C.A. § 1782(a), which authorizes a district court to order a person within the district to give testimony or provide evidence for use in foreign litigation, either in response to letters rogatory or on application of a person with an interest in the litigation “for use in a proceeding in a foreign or international tribunal.”[829]  In March, the Fourth Circuit held that § 1782 should be interpreted to allow domestic discovery for use in a private arbitration in the United Kingdom.[830]  Six months later, the Seventh Circuit reached the opposite conclusion, rejecting an application for discovery for use in the same underlying private arbitration.[831]  In between these two cases, the Second Circuit examined the same issue and found no basis on which to disturb its prior precedent that no such authority exists.  Finally, the Sixth Circuit joined the Fourth Circuit in holding that § 1782 may be used in aid of private tribunals.  We discuss these cases below.

Servotronics, Inc. v. Rolls-Royce PLC, 975 F.3d 689 (7th Cir. (Ill.) 2020) (Servotronics I) and Servotronics, Inc. v. Boeing Co., 954 F.3d 209, 214 (4th Cir. (S.C.) 2020) (Servotronics II).  Deepening a split among the Circuits, Seventh Circuit and Fourth Circuit reach different conclusions on whether district courts have authority to compel discovery for use in the same private foreign arbitration.

The underlying dispute in each of Servotronics I and II was a claim for indemnification for losses to a Dreamliner aircraft when its engine caught fire during testing in South Carolina.  Boeing, the aircraft manufacturer, made a claim against Rolls-Royce, which manufactured the engine.  After Boeing and Rolls-Royce settled, Rolls-Royce sought indemnification from Servotronics, which manufactured a valve in the engine.  The contract between Rolls-Royce and Servotronics required arbitration in England under the auspices of the Chartered Institute of Arbiters (“CIArb”).[832]  Servotronics sought discovery in the U.S. from Boeing in two locations, invoking 28 U.S.C. § 1782(a).  In Servotronics I, Servotronics requested subpoenas to obtain testimony from Boeing employees located in South Carolina, which the District Court denied (Servotronics I).[833]  In Servotronics II, Servotronics filed an ex parte application in the federal district court in Illinois asking the court to issue a subpoena to compel Boeing to produce documents located within the district for use in the British arbitration.[834]  The court initially granted the application, and then, after Rolls-Royce moved to intervene and to quash the subpoena, joined belatedly by Boeing, the judge reversed course and quashed the subpoena after concluding that § 1782(a) did not authorize federal courts to provide discovery assistance to private foreign arbitrations.[835]

Section 1782 of Title 28 governs the authority of district courts to provide discovery assistance in litigation in foreign and international tribunals and empowers a district court to order a person within the district to give testimony or provide evidence for use in foreign litigation, either in response to letters rogatory or on application of a person with an interest in the litigation “for use in a proceeding in a foreign or international tribunal.”[836]  As the applications at issue were filed by a party to a pending proceeding, and not by letters rogatory from the arbitral forum, both courts of appeals focused their inquiry on whether the reference to “tribunal” in Section 1782 includes private arbitral panels.[837]

The issue was one of first impression in each of the Fourth and the Seventh Circuit, but had been addressed by several other circuits–with conflicting results.  In older decisions, the Second and Fifth Circuits had concluded that domestic federal courts may provide assistance only to state-sponsored foreign tribunals.[838]  After those decisions, the Supreme Court decided Intel Corp. v. Advanced Micro Devices, Inc.,[839] which held that a U.S. District Court could entertain an application under § 1782 to assist proceedings before the Commission of the European Communities, a public entity.  More recently, the Sixth Circuit concluded that Intel supported a broad statutory interpretation that would allow domestic discovery for use in private foreign arbitrations.[840]  Servotronics argued in both cases that Intel interpreted Section 1782 broadly and flexibly, casting doubt on the continuing validity of the older cases.  Boeing and Rolls-Royce took the opposite view, arguing that the potentially broad discovery available under Section 1782(a) would conflict with the narrow scope of discovery available in arbitrations under the FAA.[841]

Ultimately, the Fourth Circuit concluded that the CIArb was a foreign or international tribunal within the meaning of Section1782(a), because the UK law provides regulation and oversight of arbitrations such that the arbitration is the product of government-conferred authority to a potentially greater extent than in the U.S.[842]  The Fourth Circuit also minimized Boeing’s concerns of conflict with the FAA, reasoning that the role of the district court is to function as a “surrogate” for the foreign tribunal, exercising its discretion to limit the evidence requested and to be received.[843]  In fact, the court in Servotronics I questioned whether it could even consider the impact of Section 1782 on the FAA, interpreting Intel to reject any suggestion that an applicant “must show that United States law would allow discovery in domestic litigation analogous to the foreign proceeding.”[844]  The court refused, however, to direct that Servotronics’ request be granted, and instead reversed and remanded to the district court to determine whether to issue the requested subpoenas, in the exercise of its discretion.

Six months later, the Seventh Circuit diverged from the reasoning of the Fourth Circuit and came to the opposite conclusion in Servotronics II.  In the Seventh Circuit’s view, both common and legal parlance were not helpful, as the phrase “foreign or international tribunals” could be plausibly interpreted to support the position of either side.[845]  However, “context” provided a different outcome: Section 1782 uses the phrase “foreign or international tribunal” three times, and harmonizing those uses “suggests that a more limited reading of § 1782(a) is probably the correct one: a ‘foreign tribunal’ in this context means a governmental, administrative, or quasi-governmental tribunal operating pursuant to the foreign country’s ‘practice and procedure.’”[846]  Buttressing that conclusion, the court also pointed out that the narrow reading would avoid conflict with the FAA.[847]  Finally, the Seventh Circuit rejected Servotronics’ argument that the Supreme Court in Intel adopted a broader view of “arbitral tribunals,” concluding that nothing signaled a view that arbitral tribunals should be read to include private arbitral tribunals.[848]

Hanwei Guo v. Deutsche Bank Sec., 965 F.3d 96 (2d Cir. (N.Y.) 2020).  Based largely upon its own precedent, Second Circuit holds that Section 1782(a) did not authorize permit discovery for use in private international commercial arbitrations.

The petitioner (Hanwei Guo) had invested in companies through a series of transactions that he asserted were misleading, extortionate, and fraudulent[849].  Eventually, following a series of mergers, one of the investments became part of a global music streaming services company.  Guo initiated arbitration against a number of entities before the China International Economic and Trade Arbitration Commission (“CIETAC”), and sought discovery from four investment banks related to their work as underwriters for the streaming services company.  The respondents in the arbitration intervened to oppose the request.  The District Court denied Guo’s application based on its conclusions that (1) it was bound by its precedent in Nat’l Broad. Co. v. Bear Stearns & Co. holding § 1782 does not apply to private foreign arbitrations,[850] which remained good law in the wake of the Supreme Court’s decision in Intel; and (2) CIETAC was “closer to a private arbitral body than it is to a ‘governmental . . . tribunal[]’ or ‘other state-sponsored adjudicatory bod[y].’”[851]

The Second Circuit agreed.  Contrary to Guo’s insistence, it reasoned that NBC has not been overruled or otherwise undermined by the Supreme Court’s decision in Intel, and therefore remains good law.[852]  Just as the Seventh Circuit would conclude in Servotronics II, the Second Circuit decided that Intel considered only whether the Directorate General-Competition, a public entity, qualified as a tribunal within § 1782(a) and had not addressed whether foreign private arbitral bodies would also qualify as tribunals under the statute.  Moreover, the language that Guo, like Servotronics, relied on in Intel to support its argument is a passing reference in dicta, consisting of a parenthetical quotation of a footnote in an article by a law professor.[853]  The court doubted that “such a fleeting reference in dicta could ever sufficiently undermine a prior opinion of this Court as to deprive it of precedential force,” noting that even the Sixth Circuit, in reaching an outcome contrary to NBC, refused to ascribe such significance to the language in question. [854]

The court then turned to consider whether CIETAC was a private tribunal, and held that it was “clear” that CIETAC arbitrations are private international commercial arbitrations falling outside the ambit of § 1782, in large part because they derive their jurisdiction exclusively from the agreement of the parties.[855]

Abdul Latif Jameel Transp. Co. v. FedEx Corp. (In re Application to Obtain Discovery for Use in Foreign Proceedings), 939 F.3d 710 (6th Cir. (Tenn.) 2019).  A privately contracted-for commercial arbitration proceeding is a “foreign or international tribunal” as used in 28 U.S.C.A. § 1782(a), allowing an interested party to seek domestic discovery in the U.S.

Abdul Latif Jameel Transportation Company Limited (“ALJ”), a Saudi corporation, was involved in a foreign private commercial arbitration against FedEx Corporation (“FedEx”) and sought to subpoena FedEx documents and to depose one of its representatives in the United States.[856]  ALJ filed an application in the United States District Court for the Western District of Tennessee invoking 28 U.S.C.A. § 1782(a).[857]  The District Court denied the application, holding that the phrase “foreign or international tribunal” did not encompass the privately contracted-for commercial arbitration, which operated under the rules of the Dubai International Financial Centre-London Court of International Arbitration (“DIFC-LCIA”).  ALJ appealed, arguing that the phrase “foreign or international tribunal” does include the arbitration at issue and that its discovery request should be granted.[858]

The Sixth Circuit reversed and remanded for the district court to determine whether the application for discovery should be granted.[859]  The heart of the dispute, it found, centered not on whether the DIFC-LCIA arbitration was “foreign or international” in nature, but whether it involved a “tribunal.”[860]  The court reasoned that the arbitration panel here fit the meaning of a “tribunal” as used in § 1782(a), based on the statutory text, the meaning of such text based on dictionary definitions and common usage, and the statutory context and history of the provision.[861]  After finding that several legal and common dictionaries define “tribunal” broadly to include private arbitration but left room for interpretation, the court turned to common usage of the word in legal writing.[862]  According to the court, American judges and lawyers have long used and understood “tribunal” to include privately contracted-for arbitral bodies with the power to bind contracting parties.[863]  Lastly, Congress did not proscribe private arbitrations from the meaning of “tribunal” in its other usage of the word in the same legislative chapter that contains § 1782(a).[864]  Thus, the statutory text of § 1782(a) was found to include privately contracted-for commercial arbitration.[865]

Further, the Sixth Circuit interpreted the Supreme Court’s decision in Intel Corp. v. Advanced Micro Devices, Inc. as determining that § 1782(a) provides for discovery in non-judicial proceedings.[866]  The Sixth Circuit based its interpretation on the Supreme Court’s conclusion that an executive and administrative body of the European Union was a tribunal under § 1782(a).[867]  It also pointed to the Supreme Court’s note that this provision was amended to replace “any judicial proceeding in any court in a foreign country” with the current language “in a proceeding in a foreign or international tribunal,” which it interpreted as Congress providing the possibility of U.S. judicial assistance in administrative and quasi-judicial proceedings.[868]  Recognizing that its decision conflicts with decisions of the Fifth[869] and Second[870] Circuits, it was “unpersuaded” by the reasoning of those courts.  Rather it supported its conclusion with an analysis of legislative history as well as policy and efficacy considerations.  Having found that the District Court “may” order discovery, the court remanded to the District Court to consider what discovery was appropriate under the Intel factors.[871]

§ 1.17.1 Review of Awards in International Arbitration

Vantage Deepwater Co. v. Petrobras Am., Inc., 966 F.3d 361 (5th Cir. (Tex.) 2020).  Public policy exception to confirmation of arbitral award did not apply where a party claimed that the underlying contract was procured by bribery, rather than that the award itself, or where enforcement of the award itself would not violate public policy.

Oil and gas companies entered into a contract to provide offshore drilling services.  A Brazilian investigation subsequently revealed that the contractor’s shareholders had paid bribes to Petrobras to procure the contracts, as part of a larger scheme.[872]  The project was subject to a series of contracts, the last of which was signed after an initial media article reporting allegations of bribery, and provided for arbitration of any disputes under the ICDR of the AAA with a purported waiver of any rights of “any form of appeal, review or recourse to any court or judicial authority.”[873]  Petrobras terminated the contract, and the parties proceeded to arbitration.  After the hearings began, Petrobras moved to disqualify one of the three arbitrators, claiming he appeared partial, had incorrectly summarized evidence, and had dozed off; the AAA investigated and denied the motion.[874]  The hearings resumed and the panel issued an award against Petrobras, with one of the arbitrators dissenting and claiming unfairness in the proceedings that denied Petrobras fundamental fairness and due process.[875]

The parties filed competing motions to confirm and to vacate and Petrobras sought leave to depose the dissenting arbitrator and, two months later, requested leave to serve a subpoena on the AAA.[876]  Petrobras claimed that the award violated public policy because the underlying contracts had been procured through bribery and that the panel had failed to issue a reasoned award, required by the contract, as to some of the claims.[877]  The District Court denied the discovery and granted the petition to confirm the award and entered judgment on the award, relying on the arbitrators’ findings that, first, Petrobras had not proved bribery and, second, Petrobras had knowingly ratified the contract.  Accepting those fact findings, the District Court rejected the public policy challenge because Petrobras had not met its burden to show that the tribunal’s contract interpretation violated public policy.

Petrobras appealed.  The confirmation proceedings were subject to Sections 301-307 of the FAA, which govern nondomestic awards subject to the Inter-American Convention on International Commercial Arbitration of January 30, 1975 (the “Panama Convention”).[878]  The Court of Appeals first addressed the validity of the contractual waiver of review or appeal.[879]  Noting that waivers of all rights of federal court review are not enforceable, the court concluded that it did not need to decide the validity of the waiver if the District Court judgment could be affirmed on the merits.[880]

Turning then to the merits, the Panama Convention allows a country to refuse to recognize or execute an arbitration decision under the Convention if “the recognition or execution of the decision would be contrary to the public policy” of that country.[881]  Petrobras renewed its public policy argument that the contract had been procured through bribery.  Under the New York Convention, the tribunal’s rulings are entitled to deference; that standard applied here, where Petrobras’ claim was that the underlying contract violated public policy, as opposed to where the award itself, or enforcing the award, would violate public policy.[882]  While Petrobras claimed that the panel had applied a flawed definition of ratification on which the District Court relied in rejecting the public policy defense, that claim is that the panel made a mistake of fact or law, which would not provide grounds to refuse to confirm the award.[883]

Finally, the court examined the challenge to the award based on the refusal to allow discovery of the dissenting arbitrator or the AAA, claimed to be necessary to resolve the claim the award should be vacated based on evident partiality and misconduct.[884]  The court held that the District Court did not abuse its discretion in concluding that such discovery requests were barred by the rules of the forum, which were incorporated in the parties’ agreement to arbitrate.[885]

The review of the award itself was governed by the FAA, the law of the place where the award was made.[886]  Examining each of the bases asserted for vacatur, including the claim that the award against the guarantor was not reasoned, purportedly in violation of the parties’ agreement, the court upheld and affirmed the District Court’s decision that vacatur was not warranted.[887]

EGI-VSR, LLC v. Coderch, 963 F.3d 1112 (11th Cir. (Fla.) 2020).  Award properly confirmed under FAA and principles of international comity, with modifications to the calculations as permitted under the FAA.

Shareholder appealed from District Court judgment confirming an award of a Chilean arbitrator enforcing a shareholders’ agreement and requiring the controlling shareholders to buy back shares from EGI-VSR, LLC (“EGI”) under a contractual put provision.[888]  The controlling shareholder challenged service of the confirmation proceeding in Brazil under Brazilian law, and claimed the relief the District Court ordered had improperly modified the award.[889]

Service of the confirmation proceeding had been made under the Inter-American Convention on Letters Rogatory (“Convention on Letters Rogatory”).[890]  After several unsuccessful attempts to effect service, EGI obtained authority from a Brazilian court to make alternate service on the doorman at the shareholder’s residence.[891]  On appeal, the Court of Appeals affirmed the determination of the District Court that it would be improper for an American court to review a decision by the Brazilian court that service of process was carried out in accordance with Brazilian law, under principles of international comity.[892]  Turning to the merits of the decision to confirm the award, the court sustained in part the controlling shareholder’s objection that the District Court had erred when calculating the conversion of the price of EGI’s stock into U.S. dollars.  Applying U.S. law, based upon the invocation of the FAA, the Court of Appeals held that the proper day to use to calculate the share price was the day the cause of action arose under the FAA, which was the day the award was issued.[893]  Additionally, as the award was for specific performance directing the purchase of EGI’s shares, the court vacated the District Court’s order and remanded with instructions to recalculate the purchase price and require the parties to perform their obligations under the shareholders’ agreement by paying the purchase price and tendering the shares.[894]

Process & Indus. Devs. v. Fed. Republic of Nig., 962 F.3d 576 (D.C. Cir. 2020).  District court erred in requiring Nigeria to brief the merits of a petition to confirm an arbitration award before addressing immunity under the collateral order doctrine where underlying claim of immunity was colorable.

A dispute between the Federal Republic of Nigeria and Process and Industrial Developments Ltd. (“P&ID”) arising out of the construction of a natural gas processing facility in the Federal Republic of Nigeria was arbitrated under the parties’ contract in London.[895]  Nigeria unsuccessfully challenged the liability determination in the United Kingdom courts, and then in the Nigerian courts, which set it aside as inconsistent with Nigerian law.[896]  P&ID, which did not appear in the Nigerian proceeding, asked the arbitral panel to hold that the Nigerian court had no jurisdiction, and the panel agreed, considered damages and entered an award in favor of P&ID.  P&ID then filed a petition to confirm the award in the U.S. under the FAA, and Nigeria responded by invoking the Foreign Sovereign Immunities Act (“FSIA”).[897]  The District Court granted P&ID’s request and ordered Nigeria to present all its defenses—both jurisdictional and merits—in a single response to the petition to confirm.[898]  Nigeria appealed the briefing order, and P&ID then moved to dismiss the appeal for lack of jurisdiction.

On appeal, the court first determined that it had jurisdiction to review what P&ID characterizes as nothing more than a briefing order under the collateral order doctrine.  Because the District Court conclusively rejected Nigeria’s assertion of immunity from having to defend the merits in this case by requiring consolidated briefing and Nigeria’s immunity defense is at least colorable enough to support appellate jurisdiction.[899]  While the FAA seeks to streamline confirmation proceedings, “it does not prevent a foreign sovereign from seeking what the FSIA guarantees—resolution of an immunity assertion before the sovereign can be compelled to defend the merits.”[900]  Because immunity would afford complete protection from suit, the colorable assertion of immunity must be resolved before a foreign sovereign may be required to address the merits.[901]  Accordingly, the Court of Appeals denied the motion to dismiss the appeal and reversed the decision of the decision of the District Court.[902]

Earth Sci. Tech, Inc. v. Impact UA, Inc., 809 F. App’x 600 (11th Cir. (Fla.) 2020) (per curiam).  By incorporating United Nations Commission on International Trade Law (UNCITRAL) rules into their arbitration agreement, the parties agreed to submit the issue of the arbitrability of their dispute to the arbitrators because UNCITRAL Rule 23 provides that the arbitral tribunal has the power to rule on its own jurisdiction.

An exclusive distribution agreement to provide CBD oil for distribution provided for international arbitration through JAMS International using UNCITRAL rules in New York, New York.[903]  After a dispute arose, the supplier filed an arbitration demand, and distributor filed a state court action, which was removed to federal court, and stayed pending arbitration.  The parties disputed whether tort claims for conversion and tortious interference were within the scope of their broad arbitration clause.  The tribunal held the tort claims were arbitrable and proceeded, ultimately entering an award in favor of the supplier.  Back in court, the distributor sought to vacate the award claiming, among other things, that the tort claims were beyond the scope of the agreement to arbitrate.  The District Court granted the supplier’s motion to confirm the award.

On appeal, the court rejected the distributor’s challenge under Section 10(a)(4) of the FAA, because the arbitration is governed by the Panama Convention, which does not recognize § 10(a)(4) as a basis for refusing to enforce an arbitration award.  Under Section 202 of the FAA,[904] arbitration awards arising out of commercial relationships that are not purely domestic are subject to the provisions of the applicable convention.[905]  Section 302 of the FAA incorporates § 207, and requires federal courts to confirm an arbitration award unless it finds one of the grounds for refusal or deferral of recognition or enforcement of the award specified in the applicable convention.[906]  Article 5 of the Panama Convention provides limited exceptions to object to confirmation of an arbitration award, and none of those grounds were applicable here.[907]  As to the complaints about arbitrability, the parties agreed to submit the issue of arbitrability to the arbitrators by incorporation of the UNCITRAL rules, which empower tribunals to rule on their own jurisdiction.[908]  Dismissing the distributor’s other complaints about the award as outside the scope of deferential permissible review of arbitration awards, the court affirmed the District Court’s judgment.[909]

OJSC Ukrnafta v. Carpatsky Petro. Corp., No. 19-20011, 2020 U.S. App. LEXIS 14264 (5th Cir. (Tex.) 2020).  Federal court has jurisdiction to review international arbitration award, which is not subject to vacatur on any of the multiple challenges presented to contract formation, damages computation, and the preclusive effect of award.

Carpatsky Petroleum Corporation (“Carpatsky”), at the time a Texas company, signed a joint activity agreement (JAA) with Ukrnafta, Ukraine’s recently privatized state oil-and-gas enterprise, to develop a gas condensate field in Ukraine.[910]  Ukrainian law governed the JAA, and any disputes would be resolved by an international commercial arbitration tribunal in Kiev.  Thereafter, Carpatsky merged into a newly formed Delaware entity with the same name.  A few years later, the parties amended the JAA to provide for arbitration in Stockholm; Carpatsky signed with the seal from its Texas predecessor.[911]

After disputes arose, Carpatsky filed an arbitration in Stockholm, describing itself as a Delaware corporation.[912]  After initially answering the arbitration, Ukrnafta challenged jurisdiction, claiming that there was no agreement to arbitrate based on the change in Carpatsky entities, and filed suit in Texas state court, asserting claims of negligent misrepresentation, fraud, misappropriation of trade secrets, tortious interference with existing contracts, and unjust enrichment.  Carpatsky removed the case to federal court, asserting that the suit related to an arbitration agreement falling under the New York Convention.[913]  The federal court denied Ukrnafta’s attempt to seek injunctive relief and to remand the case to state court.  In the meantime, the arbitration panel rejected the challenge to its jurisdiction.  Ukrnafta then sued Carpatsky in Sweden and Ukraine, and obtained a ruling in Ukraine that the agreements executed after the change in Carpatsky entities were void, including the agreement to arbitrate in Stockholm.  Undeterred, the Stockholm tribunal proceeded, entered an award in favor of Carpatsky, and held that the Carpatsky corporation formed in Delaware was a party to the JAA, as the successor to the original Texas company under Delaware law.[914]  Carpatsky returned to the federal courts to confirm the award.  After the Swedish courts ruled against Ukrnafta, the Texas federal court confirmed the arbitration award, rejecting numerous challenges, and granted summary judgment dismissing Ukrnafta’s state law claims on preclusion grounds.[915]  Ukrnafta appealed both rulings.

On appeal, first considering Ukrnafta’s jurisdictional challenge, the Fifth Circuit reaffirmed the rule that federal jurisdiction exists whenever removal is based upon a “nonfrivolous connection” to an international arbitration agreement.[916]  Section 205 of the FAA is “one of the broadest removal provisions . . . in the statute books,” and thus removal may be proper even where it turns out that there is no arbitration agreement.[917]

Next, the court methodically dismissed each of the challenges to the arbitration award, deciding that Sweden, the place of the arbitration, had primary jurisdiction, despite the Ukraine choice of law provision, which does not overcome the “strong presumption that designating the place of the arbitration also designates the law under which the award is made.”[918]  With only secondary jurisdiction, the United States courts can deny enforcement of an award only on a ground set forth in Article V of the New York Convention.[919]

None of the challenges by Ukrnafta provided valid grounds to deny enforcement.  Any challenge to jurisdiction of the tribunal was both without merit, as well as waived by Ukrnafta’s submission to the jurisdiction of the tribunal.[920]  As to the merits of the award, the tribunal’s ruling that the JAA’s limitation of liability was unenforceable did not offend basic notions of due process or exceed the terms of the submission to the tribunal.[921]  Arguments based on this determination, as well as the panel’s other conclusions, amounted to impermissible challenges to the tribunal’s decision on the merits of the dispute.[922]

Lastly, the court considered the argument that recognition of the awards would violate principles of comity because Ukrainian law would not enforce a contract that country’s courts have deemed illegal.[923]  However, American policy favors arbitration, which “applies with special force in the field of international commerce.” [924]  Giving a party’s home court veto power over a recognition action in the U.S. would undermine that policy.[925]  Accordingly, the judgment was affirmed.

Soaring Wind Energy, L.L.C. v. Catic USA Inc., 946 F.3d 742 (5th Cir. (Tex.) 2020).  Where domestic arbitration involve claims of breach by a foreign entity on foreign soil and where the award is rendered against foreign entities, U.S. Federal Courts have jurisdiction over applications to confirm and vacate awards, which awards may be afforded high deference based on agreement between the parties and general principles favoring arbitration.

Catic USA (“Catic”) and Tang Energy Group (“Tang”) formed Soaring Wind Energy, LLC (“Soaring Wind”) and entered into an agreement providing for arbitration of disputes.[926]  The agreement provided that each member that is a party to the dispute could name its own arbitrator, and those selected as arbitrators would themselves choose an additional arbitrator (or two additional arbitrators if necessary to achieve an odd number of arbitrators).[927]  The panel would have the authority to grant injunctive relief and enforce specific performance and to issue a final, court-enforceable decision, though it would lack authority to award “special, exemplary, punitive or consequential damages.”[928]  A dispute arose over financing for Soaring Wind and Tang demanded arbitration against several members, including Catic, along with Catic’s Chinese affiliates, who had not signed the agreement.  Seven arbitrators were selected by the parties, other than the Catic affiliates who refused to participate, and the seven arbitrators chose two additional arbitrators.  Catic then sued preemptively in federal court, claiming the panel was improperly constituted, arguing both that fundamental fairness and the parties’ agreement required each side of the dispute to select an arbitrator, who would then select a third and final arbitrator.[929]  The District Court dismissed those claims for lack of subject matter jurisdiction under the FAA.  Catic made similar arguments before the arbitration panel, which determined for itself that it was constituted according to the agreement’s unambiguous terms.[930]  The panel conducted hearings in Texas and awarded Soaring Wind $62.9 million in damages against Catic (and its Chinese affiliates) and ordered that Catic be divested of its shares in Soaring Wind without compensation.[931]  The parties filed competing applications in federal court to vacate and confirm, and the court bifurcated the case against the Chinese affiliates upon Tang’s application and entered judgment confirming the award against Catic.

The Court of Appeals first turned to subject matter jurisdiction, sua sponte, asking whether the divestiture of Catic’s membership destroyed diversity jurisdiction over the action and whether jurisdiction existed under the New York Convention.[932]  As to the latter inquiry, the court examined whether there was sufficient “foreign character” to the parties’ agreement, finding Catic’s status as an affiliate of a Chinese corporate empire beside the point.[933]  This appeared to be a close question: the agreement itself made no reference to China or any Chinese citizen, place or entity.[934]  Going beyond the face of the agreement, the court found there was a sufficient relation to China to establish federal jurisdiction under the New York Convention because the claimed breach was triggered by the actions of a Chinese entity on foreign soil and the award was against these Chinese affiliates.[935]

As to the merits of the arguments for confirmation or vacatur, the court granted the requisite deference to the panel’s findings, and held that the panel was constituted in accordance with the parties’ agreement.[936]  Catic claimed that the arbitrators exceeded their authority by awarding lost profits and divestiture of its interest, because those damages were effectively punitive damages, which were precluded by the parties’ agreement.[937]  But the agreement here permitted the arbitrators to award injunctive relief.[938]  While conceding that Catic’s theory that divestment effectively doubled the damages and was therefore “substantively indistinguishable” from punitive damages was “well taken,” the broad scope of authority given to the panel, combined with the deference to arbitration, still warranted affirmance of the District Court’s decision confirming the award.[939]

[1] See § 1.3, infra.

[2] 9 U.S.C.A. § 1 (West 2020).

[3] Circuit City Stores, Inc. v. Adams, 532 U.S. 105, 113 (2001).

[4] See § 1.2.2.

[5] Countrywide Fin. Corp., 369 N.L.R.B. No. 12, at *2-4 (Jan. 24, 2020).

[6] Id.

[7] Boeing Co., 365 N.L.R.B. No. 154 (2017).

[8] Countrywide Fin. Corp., 369 N.L.R.B. No. 12, at *4 (Jan. 24, 2020).

[9] Id.

[10] Id. at *3 (citing Prime Healthcare Paradise Valley, LLC, 368 N.L.R.B. 10, at *6-7.).

[11] Id. at *4 (citing Everglades College, Inc. d/b/a Keiser University, 368 N.L.R.B. No. 123, at *3-4).

[12] Id.

[13] Dept. of Justice, Office of the Senior Counsel for Alternative Dispute Resolution, Policy on the Use of Alternative Dispute Resolution, and Case Identification Criteria for Alternative Dispute Resolution, 61 Fed. Reg. 36895 (July 15, 1996).

[14] Administrative Dispute Resolution Act of 1990, Pub- L. No. 101-551, 104 Stat. 2736-48.

[15] U.S. Dept. of Justice, Antitrust Division, Updated Guidance Regarding the Use of Arbitration and Case Selection Criteria (Nov. 12, 2020), https://www.justice.gov/atr/page/file/1336516/download.

[16] Id. at 1.

[17] Id.

[18] Compare 61 Fed. Reg. 36895 at 36896 and Updated Guidance at 1-2.

[19] Updated Guidance at 2-3.

[20] See Updated Guidance at 1-2.

[21] Id. at 3.

[22] 61 Fed. Reg. 36895 at 36898.

[23] Id.

[24] Updated Guidance at 3 (citing 5 U.S.C.A. § 575(a) (West 2020)).

[25] Id. at 4.

[26] Compare 5 U.S.C.A. § 573(a) and Updated Guidance at 4.

[27] See Uniform Law Commission, Arbitration Act (2000), available at https://www.uniformlaws.org/viewdocument/final-act-1?CommunityKey=a0ad71d6-085f-4648-857a-e9e893ae2736&tab=librarydocuments (last visited Feb. 7, 2021).

[28] Id. See also Thomas E. Carbonneau, The Law and Practice of Arbitration 209 (5th ed. 2014).

[29]  See Uniform Law Commission, Arbitration Act (2000), supra n.27.

[30] Id.

[31] See Uniform Law Commission, Arbitration Act (2000) Enactment Map, available at https://www.uniformlaws.org/committees/community-home?communitykey=a0ad71d6-085f-4648-857a-e9e893ae2736&tab=groupdetails (last visited Feb. 7, 2021).

[32] See Commonwealth of Massachusetts (191th Gen. Ct.), Bill H. 49 (Mass. 2019), https://malegislature.gov/Bills/191/H59 (last visited Feb. 7, 2021).

[33] See Vermont General Assembly, Bill H.288 (Vt. 2019), https://legislature.vermont.gov/bill/status/2020/H.288 (last visited Dec. 20, 2020).

[34] See Uniform Law Commission, Uniform Mediation Act, available at https://www.uniformlaws.org/committees/community-home?CommunityKey=45565a5f-0c57-4bba-bbab-fc7de9a59110 (last visited Feb. 7, 2021).

[35] The Model Law on International Commercial Conciliation is a 2002 product of the United Nations Commission on International Trade Law (“UNCITRAL”).  The 2003 amendment to the UMA provides that “unless there is an agreement otherwise, the UNCITRAL Model Act applies to any mediation that is an ‘international commercial mediation.’” Given the announcement and initial signature of the Singapore Convention on mediation, see infra § 1.2.7, it will be interesting to see if the UMA is amended to accommodate this development.

[36] See Uniform Law Commission, supra n.27.

[37] Id. See also Commonwealth of Massachusetts (190th Gen. Ct.), Bill H. 60, https://malegislature.gov/Bills/191/H60 (last visited Feb. 7, 2021).

[38] The Singapore Convention is another product of UNCITRAL.  The text is available at https://www.uncitral.org/pdf/english/commissionsessions/51st-session/Final_Edited_version_in_English_28-8-2018.pdf (last visited Feb. 7, 2021).

[39] The initial signatory States were: Afghanistan, Armenia, Belarus, Benin, Brunei Darussalam, Chad, Chile, China, Colombia, Congo, Democratic Republic of the Congo, Ecuador, Eswatini, Fiji. Gabon, Georgia, Grenada, Guinea-Bissau, Haiti, Honduras, India, Islamic Republic of Iran, Israel, Jamaica, Jordan, Kazakhstan, The Republic of Korea, Lao People’s Democratic Republic, Malaysia, Maldives, Mauritius, Montenegro, Nigeria, North Macedonia, Palau, Paraguay, Philippines, Qatar, Samoa, Saudi Arabia, Serbia, Sierra Leone, Singapore, Sri Lanka, Timor-Leste, Turkey, Uganda, Ukraine, United States of America, Uruguay, Bolivarian Republic of Venezuela.

[40] See United Nations, United Nations Commission on International Trade Law, available at https://uncitral.un.org/en/texts/mediation/conventions/international_settlement_agreements/status (last visited Feb. 7, 2021).

[41] See Carolyn G. Nussbaum and Christopher M. Mason, Alternative Dispute Resolution Law § 1.2.7, 2019 ANNUAL REVIEW OF RECENT DEVELOPMENTS IN BUSINESS AND CORPORATE LITIGATION (ABA 2020) (“2019 ADR Annual Review”).

[42] Id. at art. 1(1).

[43] Id. at arts. 1(2), 1(3).

[44] Id. at art. 2(3).

[45] Id. at art. 4(1)(a)-(b).

[46] Id. at art. 4(1)(b)(i)-(ii).

[47] Id. at art. 4(5).

[48] Id. at arts. 5(1) and 5(2).

[49] Convention on the Recognition and Enforcement of Foreign Arbitral Awards, June 10, 1958, 21 U.S.T. 2517.

[50] See 2019 ADR Annual Review, supra n.41 at § 1.2.8.

[51] Chamber of Commerce of the United States v. Becerra, 438 F. Supp. 3d 1078 (E.D. Cal. 2020).

[52] See California Legislative Information, text of Assembly Bill No. 51, available at https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201920200AB51 (last visited Feb. 7, 2021).

[53] See A.B.51, 2019-2020, Reg. Sess., § 3 (Cal. 2019).

[54] Id.

[55] Id.

[56] Id. at 1096.

[57] Id. at 1099.

[58] See International Chamber of Commerce, 2021 Arbitration Rules, available at https://iccwbo.org/dispute-resolution-services/arbitration/rules-of-arbitration/rules-of-arbitration-2021/#article_b5 (last visited Feb. 7, 2021).

[59] Id.

[60] Id. art. 26(1).

[61] Id.

[62] Id. at art. 7(5).

[63] Id.; see also International Chamber of Commerce, ICC Arbitration Rules 2017 & 2021 – Compared Version, available at https://iccwbo.org/content/uploads/sites/3/2020/12/icc-2021-2017-arbitration-rules-compared-version.pdf (last visited Feb. 7, 2021).

[64] Id. at art. 10(b).

[65] Id.

[66] Id. at art. 11(7).

[67] Id. at art. 12(9).

[68] Id. at art. 17(1).

[69] Id.

[70] Id. at art. 36(3).

[71] Id. at app’x VI, art. 1(2)(b).

[72] Id. at app’x II, art. 5(1)-(3).

[73] International Swaps and Derivatives Association, Inc. ISDA 2020 IBOR Fallbacks Protocol (Oct. 23, 2020), available at http://assets.isda.org/media/3062e7b4/08268161-pdf/ (last visited Feb. 7, 2021).

[74] Id.

[75] Id. at ¶ 1(a).

[76] Id. at ¶ 1(b).

[77] Id. at Exhibit 1.

[78] Id.

[79] Id.

[80] Id.

[81] See International Swaps and Derivatives Association, Inc., 2018 ISDA Arbitration Guide (2018), available at https://www.isda.org/a/5kDME/ISDA-2018-Arbitration-Guide.pdf (last visited Jan. 15, 2021).

[82] Id. § 3.3, at 15-17 & Appx. A-L.

[83] ISDA 2020 IBOR Fallbacks Protocol, supra n.73 at ¶ 1(b).

[84] Id. at Exhibit A.

[85] Id.

[86] Id. at ¶ 1(a).

[87] See Stephen Trevis, Arbitration Trending in the Derivatives Context: Perspectives, Kluwer Arbitration Blog (March 7, 2020), available at http://arbitrationblog.kluwerarbitration.com/2020/03/07/arbitration-trending-in-the-derivatives-context-perspectives/ (last visited Feb.. 7, 2021).

[88] See 2019 ADR Annual Review, supra n.41 at § 1.3.

[89] GE Energy Power Conversion France SAS v. Outokumpu Stainless USA LLC, 140 S. Ct. 1637 (2020).

[90] Convention on the Recognition and Enforcement of Foreign Arbitral Awards, June 10, 1958, 21 U.S.T. 2517.

[91] See 9 U.S.C.A. § 205 (West 2020).

[92] Outokumpu Stainless USA LLC v. Converteam SAS, No. CV 16-00378-KD-C, 2017 WL 401951, at *4 (S.D. Ala. Jan. 30, 2017), rev’d, 902 F.3d 1316 (11th Cir. 2018), rev’d, 140 S. Ct. 1637 (2020).

[93] See id. at *1 n.1.

[94] See Outokumpu, 902 F.3d 1316 (11th Cir. (Cal.) 2018), rev’d, 140 S. Ct. 1637 (2020).

[95] Id. at 1325 (citing Arthur Andersen LLP v. Carlisle, 556 U.S. 624, 630-31 (2009)).

[96] Id. at 1327.

[97] Id. at 1326-27.

[98] Id. at 1326.

[99] Id.

[100] See Yang v. Majestic Blue Fisheries, LLC, 876 F.3d 996, 1001-02 (9th Cir. (Guam) 2017).

[101] See Aggarao v. MOL Ship Mgmt. Co., 675 F. 3d 355, 375 (4th Cir. (Md.) 2012); Sourcing Unlimited, Inc. v. Asimco Int’l, Inc., 526 F.3d 38, 48 (1st Cir. (Mass.) 2008).

[102] See GE Energy, 140 S. Ct. at 1645 (citing, e.g., 9 U.S.C.A. § 2 (West 2020) and Volt Information Scis., Inc. v. Board of Trustees of Leland Stanford Junior Univ., 489 U. S. 468, 474 (1989)).

[103] GE Energy, 140 S. Ct. at 164.

[104] 9 U.S.C.A. §§ 201-08 (West 2020).

[105] 9 U.S.C.A. § 208 (West 2020).

[106] GE Energy, 140 S. Ct. at 1644.

[107] Id. at 1645.

[108] Id.

[109] Id.

[110] Id.

[111] Id. (citations omitted).

[112] Id.

[113] Id. at 1646.

[114] Id. (citing, e.g., 1 G. Born, International Commercial Arbitration § 10.02, at pp. 1418-84 (2d ed. 2014)).  Justice Thomas and the Court did not decide whether the Executive Branch’s interpretation of the New York Convention “should affect our analysis,” however.  Id. at 1647.  Noting that “[w]e have never provided a full explanation of the basis for our practice of giving weight to” such interpretation, or “the limitations of this practice, if any,” the Court concluded that because its “textual analysis” of the New York Convention was consistent with the Executive branch’s interpretation, “there is no need to determine whether the Executive’s understanding is entitled to ‘weight’ or ‘deference.’”  Id. (citation omitted).

[115] Id. at 1648 (Sotomayor, J., concurring).

[116] Id. (citations omitted).

[117] Id.

[118] See 2019 ADR Annual Review, supra n.41 at § 1.3.

[119] Henry Schein Inc. v. Archer and White Sales Inc., 139 S. Ct. 524 (2019) (“Henry Schein I”).

[120] See Archer & White Sales, Inc. v. Henry Schein, Inc., 935 F.3d 274, 277 (5th Cir. (Tex.) 2019), cert. granted, 141 S. Ct. 107 (U.S. June 15, 2020) (No. 19‐963).

[121] Henry Schein I, 139 S. Ct. at 528.

[122] Id. at 531.

[123] First Options of Chicago Inc. v. Kaplan, 514 U.S. 938, 944 (1995).

[124] See, e.g., AAA Commercial Arbitration Rule 7(a), available at https://www.adr.org/Rules (last visited Feb. 7, 2021).

[125] Petition for Writ of Certiorari, Henry Schein, Inc. v. Archer and White Sales, Inc., 141 S. Ct. 107 (U.S. June 15, 2020) (No. 19‐963).

[126] See Henry Schein I, 139 S. Ct. at 531.

[127] See, e.g., More on Delegating the ‘Who Decides’ Question, 38 Alternatives 87, 89-90 (June 2020) (discussing Missouri and Florida decisions which held that incorporation by reference in arbitration rules is not clear enough to constitute delegation to an arbitrator of the issue of who decides).

[128] See, e.g., Brief for the Cross‐Respondent in Opposition, Archer and White Sales, Inc. v. Henry Schein, Inc., No. 19‐1080 (U.S. Apr. 1, 2020).

[129] 9 U.S.C.A § 10(a)(2) (West 2020).

[130] See 2019 ADR Annual Review, supra n.41 at § 1.15.2.

[131] Martin v. NTT Data Inc., 2020 WL 3429423, No. 20‐CV‐0686, at *16-17 (E.D. Pa. Jun. 23, 2020).

[132] See Commonwealth Coatings Corp. v. Continental Cas. Co., 393 U.S. 145 (1968).

[133] Id. at 150.

[134] Id. at 151-52.

[135] Petition for Writ of Certiorari, Monster Energy Co. v. City Beverages LLC, 141 S. Ct. 164 (U.S. June 9, 2020) (citations omitted) (No. 19‐1333).

[136] Id. at 22 (citations omitted).

[137] Catamaran Corp. v. Towncrest Pharmacy, 946 F.3d 1020, 1024 (8th Cir. (Iowa) 2020).

[138] Id. at 1022.

[139] Id. at 1024.

[140] Id. at 1022-23 (citing Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 682 (2010)).

[141] Catamaran Corp., 946 F.3d at 1023 (citing Lamps Plus, Inc. v. Varela, 139 S. Ct. 1407, 1416-17 (2019)).

[142] Id. at 1024 (citing Stolt-Nielsen S.A., 559 U.S. at 685).

[143] Marbaker v. Statoil USA Onshore Props., Inc., 801 F. App’x 56, 59 (3d Cir. (Pa.) 2020).

[144] Id. at 58-59.

[145] Id. at 59.

[146] Id. (citing Lamps Plus, 139 S. Ct. at 1416; Stolt-Nielsen, 559 U.S. at 682-85 (2010)).

[147] Id. at 61.

[148] Id.

[149] Marbaker, 801 F. App’x at 60.

[150] Id. at 60-61.

[151] Id. at 61.

[152] Id. (citing Zuber v. Boscov’s, 871 F.3d 255, 258 (3d Cir. (Pa.) 2017) (citation omitted)).

[153] Id. at 61.

[154] Id. (quoting Chesapeake Appalachia, LLC v. Scout Petro., LLC, 809 F.3d 746, 761, 762 (3d Cir. (Pa.) 2016)).

[155] Marbaker, 801 F. App’x at 61-62.

[156] SEIU Local 121RN v. Los Robles Reg’l Med. Ctr., 976 F.3d 849 (9th Cir. (Cal.) 2020).

[157] Id. at 851.

[158] Id.

[159] Id. at 852.

[160] SEIU Local 121RN v. Los Robles Reg’l Med. Ctr., No. 2:18-cv-03928-SVW-RAO, 2019 U.S. Dist. LEXIS 40795 (C.D. Cal., Jan. 15, 2019).

[161] United Bhd. of Carpenters & Joiners of Am., Local No. 1780 v. Desert Palace, Inc., 94 F.3d 1308 (9th Cir. (Cal.) 1999).

[162] SEIU Local 121RN, 2019 U.S. Dist. LEXIS 40795, at *18.

[163] Id.

[164] SEIU Local, 976 F.3d at 861 (citing Granite Rock Co. v. International Brotherhood of Teamsters, 561 U.S. 287, 297 (2010)).

[165] Id.

[166] Id. at 856.

[167] Id. at 861.

[168] Gibbs v. Sequoia Capital Operations, LLC, 966 F.3d 286, 290 (4th Cir. (Va.) 2020); Gibbs v. Invs., LLC, 967 F.3d 332 (4th Cir. (Va.) 2020).

[169] Id.

[170] Gibbs v. Sequoia Capital Operations, LLC, 966 F.3d at 290; Gibbs v. Invs., LLC, 967 F.3d at 336.

[171] Id.

[172] Gibbs v. Sequoia Capital Operations, LLC, 966 F.3d at 290-291; Gibbs v. Invs., LLC, 967 F.3d at 337-338.

[173] Gibbs v. Sequoia Capital Operations, LLC, 966 F.3d. at 292; Gibbs v. Invs., LLC, 967 F.3d at 339.

[174] Gibbs v. Sequoia Capital Operations, LLC, 966 F.3d at 292-94; Gibbs v. Invs., LLC, 967 F.3d at 344-345.

[175] Williams v. Medley Opportunity Fund II, LP, 965 F.3d 229, 233 (3d Cir. (Pa.) 2020).

[176] Id. at 236.

[177] Id.

[178] Id. at 238.

[179] Id.

[180] Id. at 239.

[181] Id. at 241.

[182] Id. at 242.

[183] Id. at 243-244.

[184] Biller v. S-H OpCo Greenwich Bay Manor, LLC, 961 F.3d 502, 506-507 (1st Cir. (R.I.) 2020).

[185] Id. at 508.

[186] Id. at 510.

[187] Id. at 511.

[188] Id. at 511-512.

[189] Id. at 512-514.

[190] Id. at 517-518.

[191] Taylor v. Pilot Corp., 955 F.3d 572, 574 (6th Cir. (Tenn.) 2020).

[192] Id. at 574.

[193] Id. at 575.

[194] Id.

[195] Id. at 575-76.

[196] Id. at 576.

[197] Id.

[198] Id.

[199] Henry Schein I, 139 S. Ct. at 530.

[200] Taylor, 955 F.3d at 576 (citing Granite Rock Co., 561 U.S. at 297 (2010)).

[201] Id. at 576-577.

[202] Id. at 577.

[203] Id.

[204] Id. at 582.

[205] Blanton v. Domino’s Pizza Franchising LLC, 962 F.3d 842 (6th Cir. (Mich.) 2020).

[206] Id. at 843.

[207] Id. at 852.

[208] Id. at 844 (citing First Options of Chi, Inc. v. Kaplan, 514 U.S. 938, 944 (1995)).

[209] Blanton, 962 F.3d at 845.

[210] Id. at 846-47.

[211] Id. at 848.

[212] Id. at 847.

[213] Bowles v. OneMain Fin. Grp., 954 F.3d 722, 728 (5th Cir. (Miss.) 2020).

[214] Id. at 724.

[215] Id. at 724-25.

[216] Id. at 726.

[217] Id.

[218] Id. at 726-27.

[219] Id. at 727-728.

[220] Fedor v. United Healthcare Inc., 976 F.3d 1100, 1105 (10th Cir. (N.M.) 2020).

[221] Id. at 1023.

[222] Id. at 1104.

[223] Id. at 1103-04.

[224] Id. at 1105, 1108.

[225] Id. at 1107.

[226] Id. at 1106-07 (citing Granite Rock Co. v. Int’l Bhd. of Teamsters, 561 U.S. 287, 297 (2010)).

[227] Id. at 1107.

[228] Lavigne v. Herbalife, Ltd., 967 F.3d 1110, 1115 (11th Cir. (Fla.) 2020).

[229] Id. at 1116 (internal citations omitted).

[230] Id.

[231] Id. at 1117, n.4.

[232] Id. at 1115-17.

[233] Id. at 1117-18.

[234] Id. (citing Westra v. Marcus & Millichap Real Estate Inv. Brokerage Co., 129 Cal. App. 4th 759, 763 (Cal. Ct. App. 2005).

[235] Lavigne, 967 F.3d at 1118.

[236] Id.

[237] Id. at 1118-19 (citing Goldman v. KPMG, LLP, 173 Cal. App. 4th 209, 217 (Cal. Ct. App. 2009)).

[238] Lavigne, 967 F.3d at 1119.

[239] Id.

[240] MZM Construction Co., Inc. v. N.J. Building Laborers Statewide Benefit Funds, 974 F.3d 386 (3d Cir. (N.J.) 2020).

[241] Id. at 393.

[242] Id. at 392-395.

[243] Id. at 396.

[244] Id. at 398 (quoting Sandvik AB v. Advent Int’l Corp., 220 F.3d 99, 111 (3d Cir. (Del.) 2000).

[245] Id. at 406.

[246] Id. at 401.

[247] Id. at 406.

[248] Id. at 401-02.

[249] Wiggins v. Warren Averett, LLC, No. 1170943, 2020 WL 597293 *1 (Ala. Feb. 7, 2020).

[250] Id.

[251] Id.

[252] Id.

[253] Id. at *2.

[254] Id. at *3-4.

[255] Adams v. Postmates, Inc., 823 F. App’x 535, 535-36 (9th Cir. (Cal.) 2020).

[256] Id.

[257] Id.

[258] Id. at 36.

[259] Id.

[260] Id.

[261] Baten v. Mich. Logistics, Inc., No. 19-55865, 2020 U.S. App. LEXIS 32558, at *2 (9th Cir. (Cal.) Oct. 15, 2020).

[262] Id. at *1.

[263] Id. at *2, n.1.

[264] Id. at *2-3.

[265] Id. at *3-4.

[266] Id. at *4.

[267] Id. at *6-7.

[268] 47 U.S.C.A. § 227 (West 2020).

[269] Mey v. DIRECTV, LLC, 971 F.3d 284, 287-88 (4th Cir. (W.Va.) 2020).

[270] Id. at 290-291.

[271] Id.

[272] Id. at 292.

[273] Id. at 293-94.

[274] Id.

[275] Id. at 294.

[276] Id. at 297-98.

[277] Id. at 299.

[278] Id. at 298-300.

[279] Revitch v. DIRECTV, LLC, 977 F.3d 713 (9th Cir. (Cal.) 2020).

[280] Id. at 721.

[281] Id. at 717.

[282] Id. at 718 (citing Lamps Plus, Inc. v. Varela, 139 S. Ct. at 1418).

[283] Id. at 720.

[284] Id.

[285] Id.

[286] Id. at 724.

[287] Id. at 724.

[288] Id. at 724.

[289] Id. at 728.

[290] Hill v. Emple. Res. Grp., LLC, 816 F. App’x 804, 805-806 (4th Cir. (W.Va.) 2020).

[291] Id. at 806.

[292] Id.

[293] Id. at 807-808.

[294] Id. at 808-809.

[295] Id.

[296] Id. at 809-810.

[297] Id. at 810-811.

[298] Bacon v. Avis Budget Grp., Inc., 959 F.3d 590, 595 (3d Cir. (N.J.) 2020).

[299] Id. at 595-596.

[300] Id. at 596.

[301] Bacon v. Avis Budget Grp., Inc., 357 F. Supp. 3d 401, 432 (D.N.J. 2018).

[302] Bacon, 959 F.3d at 599.

[303] Id. at 600-602.

[304] Id. at 600 (citing and quoting Alpert, Goldberg, Butler, Norton & Weiss, P.C. v. Quinn, 410 N.J. Super. 510, 983 A.2d 604, 617 (N.J. Super. Ct. App. Div. 2009) (quoting 11 Samuel Williston & Richard A. Lord, A Treatise on the Law of Contracts § 30:25 (4th ed. 1999))).

[305] Id..

[306] Id. at 602-03.

[307] Id. at 603-04.

[308] Mason v. Midland Funding LLC, 815 F. App’x 320, 322 (11th Cir. (Ga.) 2020).

[309] Id. at 323.

[310] Id. at 323-24.

[311] Id. at 324 (quoting Utah Code § 25-5-4(2)(e)).

[312] Id. at 325.

[313] Id. at 326.

[314] Id. at 328.

[315] Id. at 329.

[316] Nicosia v. Amazon.com, Inc., 815 F. App’x 612, 614 (2d Cir. (N.Y.) 2020).

[317] Id. at 613.

[318] Id.

[319] Id. at 613-14.

[320] Id.

[321] Id.

[322] Id.

[323] Skuze v. Pfizer, Inc., 244 N.J. 30, 38 (2020).

[324] Id. at 37.

[325] Id. at 37.

[326] Id. at 42.

[327] Id. at 42-43.

[328] Id. at 44 (citing Skuse v. Pfizer, Inc., 457 N.J. Super 551, 561).

[329] Id. at 46.

[330] Id. at 48-50.

[331] Id. at 53-54.

[332] Id. at 56-61.

[333] Id. at 61.

[334] Carrick v. Turner by and through Walley, 298 So.3d 1006, 1008 (Miss. 2020).

[335] Id.

[336] Id. at 1009.

[337] Id. at 1009-10.

[338] Id.

[339] Id. at 1012.

[340] Id. at 1012-1013.

[341] Id. at 1013.

[342] Jorja Trading, Inc. v. Willis, 598 S.W.3d 1, 3-4 (Ark. 2020).

[343] Id.

[344] Id.

[345] Id.

[346] Id. at 5-6.

[347] Id. at 6.

[348] Id. at 6-7.

[349] Id. at 7.

[350] Id.

[351] Id. at 7-8.

[352] Delisle v. Speedy Cash, 818 F. App’x 608, 609 (9th Cir. (Cal.) 2020).

[353] Id. at 609.

[354] Id. (citing McGill v. Citibank, N.A., 2 Cal. 5th 945 (Cal. 2017)).

[355] See Cal. Fin. Code § 22304.5(a) (effective January 1, 2020).

[356] Delisle, 818 F. App’x at 610.

[357] Id. at 611.

[358] Roberts v. AT&T Mobility LLC, 801 F. App’x 492, 493 (9th Cir (Cal.) 2020).

[359] Id.

[360] Roberts v. AT&T Mobility LLC, 877 F.3d 833 (9th Cir. (Cal.) 2017).

[361] McGill v. Citibank, N.A., 2 Cal. 5th 945, 952 (2017).

[362] Roberts, 801 F. App’x at 494.

[363] Id. at 495 (quoting Boyd v. City & Cty. of San Francisco, 576 F.3d 938, 943 (9th Cir. (Cal.) 2009)).

[364] Blair v. Rent-A-Ctr., Inc., 928 F.3d 819 (9th Cir. (Cal.) 2019).

[365] Id. at 828.

[366] Id. at 830.

[367] Roberts, 801 F. App’x at 496.

[368] Belton v. GE Capital Retail Bank, 961 F.3d 612, 617 (2d Cir. (N.Y.) 2020), cert. denied,. No. 20-481 (Mar. 8, 2021).

[369] Id. at 614.

[370] Id. at 614-16 (citing Epic Sys. Corp. v. Lewis, 138 S. Ct. 1612, 1624 (2018)).

[371] Belton, 961 F.3d. at 617.

[372] Id. at 615 (citing Epic Sys. Corp., 138 S. Ct. at 1626).

[373] Id. at 616.

[374] Id. at 617.

[375] Id. (citing In re Anderson, 884 F.3d 382, 392 (2d Cir. (N.Y.) 2018), cert. denied, 139 S. Ct. 144, 144 (2018)).

[376] Id. at 388-90.

[377] Belton, 961 F.3d at 615.

[378] Robertson v. Intratek Computer, Inc., 976 F.3d 575, 579-80 (5th Cir. (Tex.) 2020).

[379] Id.

[380] 41 U.S.C.A. § 4712 (West 2020).

[381] Id. at 577-78.

[382] Id. at 578-79.

[383] Id. at 579 (quoting CompuCredit v. Greenwood, 565 U.S. 95, 98 (2012) (quotation omitted)).

[384] Robertson, 976 F.3d at 580.

[385] Id. at 582.

[386] Id. at 583.

[387] Id. at 583-84.

[388] Id. at 584.

[389] Sparks v. Old Republic Home Protection Company, Inc., 267 P.3d 680, 682 (Okla. 2020).

[390] Id.

[391] Id. at 683.

[392] Id. at 684.

[393] 12 O.S. 2011 § 1855(D).

[394] Sparks, 267 P.3d at 685.

[395] 15 U.S.C.A. §§ 1011 et seq. (West 2020).

[396] Id. at 686-687.

[397] Id. at 687.

[398] Id. at 691.

[399] Burgess v. Lithia Motors, Inc., 196 Wn.2d 187, 189 (2020).

[400] Id. at 189.

[401] Id.

[402] Id. at 190.

[403] Id.

[404] Id.

[405] Id. at 191.

[406] Id. at 191-192.

[407] Id. at 191, 196.

[408] Id. at 197.

[409] Id. at 196-197.

[410] Noe v. City Nat’l Bank, No. 20-1230, 2020 U.S. App. LEXIS 31088 (4th Cir. (W.Va.) Sept 30, 2020).

[411] Id. at *3.

[412] Id. at *2-3 (citing 9 U.S.C.A. § 16(a)(1)(b) (West 2020)).

[413] Id. at *6.

[414] Id. at *7-8.

[415] Id. at *8.

[416] Hermosillo v. Davey Tree Surgery Co., 821 F. App’x 753, 754 (9th Cir. (Cal.) 2020).

[417] Id.

[418] Id. at 755 (citing 9 U.S.C.A. § 16(b) (West 2020)).

[419] Hermosillo, 821 F. App’x  at 755.

[420] Id.

[421] Id. at 755-56.

[422] Torgerson v. Lcc Int’l, No. 20-3020, 2020 U.S. App. LEXIS 25155 (10th Cir. (Kan.) 2020).

[423] Id. at *3-4.

[424] Id. at *4-5.

[425] Id. at *5.

[426] Id.

[427] Id. at *6.

[428] Id. at *7 (citing Lamps Plus, Inc. v. Varela, 139 S. Ct. 1407 (2019)).

[429] Id. at *7-8.

[430] Id. at *8.

[431] Id. at *9 (citing 9 U.S.C.A. § 16(a)(3) (West 2020)).

[432] Id. at *10.

[433] Id. at *11-12 (citing 9 U.S.C.A. § 16(a)(1)(C) (West 2020)).

[434] Id. at *13 (citing 9 U.S.C.A. § 16(a)(1)(D) (West 2020)).

[435] Id. at *15 (citing 9 U.S.C.A. § 10 (West 2020)).

[436] Jin v. Parsons Corp., 966 F.3d 821, 827 (D.C. Cir. 2020).

[437] Id. at 823-24.

[438] Id. at 827.

[439] Id.

[440] Id. at 824.

[441] Id. at 824-25.

[442] Id. at 825.

[443] INTL FCStone Fin. Inc. v. Jacobson, 950 F.3d 491 (7th Cir. (Ill.) 2020).

[444] Id. at 493.

[445] Id. at 494, 49 (citing 9 U.S.C.A. § 4 (West 2020)).

[446] Id. at 495.

[447] Id. at 499- 501.

[448] Id. at 501 (citing 28 U.S.C.A. § 1292(a)(1) and 9 U.S.C.A. § 16(b) (West 2020)).

[449] Id. at 502 (citing 9 U.S.C.A. § 16(a) (West 2020)).

[450] Hart v. Charter Communs., Inc., 814 F. App’x 211, 213 (9th Cir. (Cal.) 2020).

[451] Id. at 213-14.

[452] Id. at 214 (quoting Jenks v. DLA Piper Rudnick Gray Cary US LLP, 243 Cal. App. 4th 1, (Cal. Ct. App. 2015) (quotations omitted)).

[453] Id.

[454] Id.

[455] Id.

[456] VIP, Inc. v. KYB Corp., 951 F.3d 377 (6th Cir. (Mich.) 2020).

[457] Id. at 383.

[458] Id. at 381.

[459] Id. at 382-383.

[460] Id.

[461] Id. at 383.

[462] Id.

[463] Id. at 384.

[464] Landry v. Transworld Systems Inc., 485 Mass. 334, 335 (2020).

[465] Id. at 336.

[466] Id.

[467] Id. at 339.

[468] Id. at 344.

[469] Id.

[470] Burgess v. Johnson, No. 19-5098, 2020 U.S. App. LEXIS 34930 (10th Cir. (Okla.) 2020).

[471] Id. at *4.

[472] Id. at *2.

[473] Id. at *6 (citing Casillas v. Cano, 79 S.W.3d 587, 589 (Tex. App. 2002)).

[474] Id. at *8.

[475] Id. at *10.

[476] GGNSC Administrative Services LLC v. Schrader, 484 Mass. 181, 182 (Mass. 2020).

[477] Id. at 183-184.

[478] Id. at 184.

[479] Id. at 192.

[480] Id.

[481] 9 U.S.C.A. § 1 (West 2020).

[482] Circuit City Stores, Inc. v. Adams, 532 U.S. 105, 113 (2001).

[483] Grice v. United States Dist. Court, 974 F.3d 950, 954 (9th (Cal.) 2020).

[484] Id. (citing 9 U.S.C.A §1 (West 2020)).

[485] Grice, 974 F.3d at 954.

[486] Id. at 954-55 (citing In re Van Dusen, 654 F.3d 838, 840-41 (9th Cir. (Ariz.) 2011)).

[487] Id.at 955 (citing In re Swift, 830 F.3d 913, 917 (9th Cir. (Ariz.) 2016)).

[488] Id. at 957.

[489] Id. at 958-59.

[490] Rittmann v. Amazon.com, Inc., 971 F.3d 904, 907 (9th Cir. (Wash.) 2020).

[491] Id. at 908.

[492] Id. at 908-909.

[493] Id. at 909.

[494] Id. at 910-911.

[495] Id. at 914-915.

[496] Id. at 924-925.

[497] Id. at 920.

[498] Id. at 920-921.

[499] Wallace v. Grubhub Holdings, Inc., 970 F.3d 798 (7th Cir. (Ill.) 2020).

[500] 9 U.S.C.A § 1 (West 2020).

[501] Id. at 800 (quoting Bacashihua v. U.S. Postal Serv., 859 F.2d 402, 405 (6th Cir. (Mich.) 1988) (emphasis added)).

[502] Id. at 802.

[503] Id. at 803.

[504] Waithaka v. Amazon.com, Inc., 966 F.3d 10 (1st Cir. (Mass.) 2020).

[505] Id. at 15-16.

[506] Id. at 14-15.

[507] Id. at 15.

[508] Waithaka v. Amazon.com, Inc., 404 F. Supp. 3d 335, 339 (D. Mass. 2019).

[509] Waithaka, 966 F.3d at 18.

[510] Id. at 18-26.

[511] 45 U.S.C.A § 51 (West 2020).

[512] Waithaka, 966 F.3d at 26 (citing Circuit City v. Adams, 532 U.S. 105, 118 (2001).

[513] Id. at 26-35.

[514] Id. at 35.

[515] Eastus v. ISS Facility Servs., 960 F.3d 207, 208 (5th Cir. (Tex.) 2020).

[516] Id.

[517] Id.

[518] Id. at 209-10 (quoting Circuit City, 532 U.S. at 119).

[519] Id. at 211.

[520] Id. at 212.

[521] Darrington v. Milton Hershey Sch., 958 F.3d 188 (3d Cir (Pa.) 2020).

[522] Id. at 190-91.

[523] Id. at 191.

[524] Id. at 192 (citations omitted).

[525] Id.

[526] Id.

[527] Id. at 193-94.

[528] Id. at 194 (quoting Wright v. Universal Mar. Serv. Corp., 525 U.S. 70, 79-80 (1998).

[529] Id. at 196.

[530] Cordoba v. DIRECTV, LLC, 801 F. App’x 723, 724 (11th Cir. (Ga.) 2020).

[531] Id. at 724-725.

[532] Id. at 725.

[533] Id.

[534] Id. at 725-726.

[535] Id. at 726.

[536] Id.

[537] Solo v. United Parcel Serv. Co., 947 F.3d 968, 974 (6th Cir. (Mich.) 2020).

[538] Id. at 971.

[539] Id.

[540] Id.

[541] Id.

[542] Id. at 974.

[543] Id. at 972 (citing Hergenreder v. Bickford Senior Living Grp., LLC, 656 F.4d 411, 415-16 (6th Cir. (Mich.) 2011) (citation omitted)).

[544] Id. at 973.

[545] Id. at 974 (citing Watch v. Sentinel Sys., 176 F.3d 369, 372 (6th Cir. (Tenn.) 1999)).

[546] Solo, 947 F.3d at 974.

[547] Id. at 975 (quoting Hurley v. Deutsche Bank Tr. Co. Ams., 610 F.3d 334, 338 (6th Cir. (Mich.) 2010) (citation omitted)).

[548] Solo, 947 F.3d at 975.

[549] Id. at 976-77.

[550] Id. at 977.

[551] Kramer v. Enter. Holdings, No. 19-16354, 2020 U.S. App. LEXIS 35671(9th Cir. (Cal.) 2020).

[552] Id. at *2.

[553] McGill v. Citibank, N.A., 2 Cal. 5th 945 (Cal. 2017).

[554] Kramer, 2020 U.S. App. LEXIS 35671 at *2 (citing Blair v. Rent-A-Center, Inc., 928 F.3d 819, 827-31 (9th Cir. (Cal.) 2019)).

[555] Id. at *3.

[556] Id.

[557] Shivkov v. Artex Risk Sols., Inc., 974 F.3d 1051, 1056 (9th Cir. (Ariz.) 2020).

[558] Id. at 1057.

[559] Id. at 1057.

[560] Id. at 1060.

[561] Id. at 1060-63.

[562] Id. at 1060 (quoting Litton Financial Printing Division v. NLRB, 501 U.S. 190, 204 (1991)).

[563] Id.

[564] Id. at 1061.

[565] Id. at 1062.

[566] See, e.g., Biller, 961 F.3d at 513; Breda v. Cellco P’ship, 934 F.3d 1, 7 (1st Cir. (Mass.) 2019); Huffman v. Hilltop Cos., LLC, 747 F.3d 391, 395-96 (6th Cir. (Ohio) 2014); Wolff v. Westwood Mgmt., LLC, 558 F.3d 517, 520-21, 385 U.S. App. D.C. 1 (D.C. Cir. 2009); Koch v. Compucredit Corp., 543 F.3d 460, 465-66 (8th Cir. (Ark.) 2008); CPR (USA) Inc. v. Spray, 187 F.3d 245, 254-56 (2d Cir. (N.Y.) 1999), abrogated on other grounds as explained in Accenture LLP v. Spreng, 647 F.3d 72, 76 (2d Cir. (N.Y.) 2011).

[567] Shivkov, 974 F.3d at 1061.

[568] Id. at 1065-66.

[569] Id. at 1068-69.

[570] Id. at 1069.

[571] Stover v. Experian Holdings, Inc., 978 F.3d 1082 (9th Cir. (Cal.) 2020).

[572] Id. at 1084.

[573] Id.

[574] Id. at 1085.

[575] 15 U.S.C.A. § 1681 et seq. (West 2020).

[576] Stover, 978 F.3d at 1084.

[577] Id. at 1085.

[578] Id.

[579] Id.

[580] Id.

[581] Id. at 1088.

[582] Id.

[583] Id. at 1087.

[584] Id. (citing Davidson v. Kimberly-Clark Corp., 889 F.3d 956, 969 (9th Cir. (Cal.) 2018)).

[585] Id. at 1088.

[586] Id.

[587] B&S MS Holdings, LLC v. Landrum, 302 So.3d 605, 607-608 (Miss. 2020).

[588] Id. at 608.

[589] Id. at 609.

[590] Id.

[591] Id. at 611.

[592] Laver v. Credit Suisse Sec. (USA), LLC, 976 F.3d 841, 848-49 (9th Cir. (Cal.) 2020).

[593] Id. at 843.

[594] Id.

[595] Id. at 844.

[596] Id.

[597] Id. at 848-49.

[598] Id.

[599] Id. at 847.

[600] Id.

[601] Id. at 846.

[602] Id. at 848.

[603] Id. at 848-49.

[604] Id. at 849 (citing Cohen v. USB Fn. Servs., Inc., 799 F.3d 174, 174 (2d Cir. (N.Y.) 2015)).

[605] Brickstructures, Inc. v. Coaster Dynamix, Inc., 952 F.3d 887 (7th Cir. (Ill.) 2020).

[606] Id. at 889.

[607] Id.

[608] Id. at 890.

[609] Id. at 892.

[610] Id. at 893.

[611] Davis v. White, 795 F. App’x 764, 766-67 (11th Cir. (Ala.) Jan. 7, 2020).

[612] Id. at 767.

[613] 42 U.S.C.A. 1983 (West 2020).

[614] Davis, 795 F. App’x 765-66.

[615] Id. at 766.

[616] Id.

[617] Id.

[618] Id. at 767.

[619] Id.

[620] Id.

[621] Johnson v. Keybank Nat’l Ass’n (In re Checking Account Overdraft Litig.), 754 F.3d 1290, 1294 (11th Cir. (Fla.) 2014) (quotation marks omitted).

[622] Davis, 755 F. App’x at 768.

[623] Id. at 768-69.

[624] Id. at 769.

[625] Id. at 770-71.

[626] Id. at 771.

[627] Jeoung Lee v. Evergreen Hospital Medical Center, 195 Wash.2d 699, 699 (2020).

[628] Id. at 704.

[629] Id. at 708.

[630] Innovative Images, LLC v. Summerville, 848 S.E.2d 75, 77 (Ga. 2020).

[631] Id.

[632] Id.

[633] Id. at 81.

[634] Id.

[635] Id. at 84.

[636] Goff v. Nationwide Mut. Ins., 825 F. App’x 298, 300 (6th Cir. (Ohio) 2020).

[637] Id. at 301.

[638] Id. at 303.

[639] Id. at 305 (quoting Sikes v. Ganley Pontiac Honda, Inc., No. 82889, 2004 WL 67224, at *2 (Ohio Ct. App. Jan. 15, 2004)).

[640] Id. at 306.

[641] Wash. Nat’l Ins. Co. v. OBEX Grp. LLC, 958 F.3d 126, 128-29 (2d Cir. (N.Y.) 2020).

[642] Id. at 129.

[643] Id.

[644] Id.

[645] Id. at 131.

[646] Id.

[647] Id. at 131.

[648] Id. at 132.

[649] Id.

[650] Id. at 134.

[651] Id. at 134-35.

[652] Id. at 136.

[653] Id. at 139.

[654] American Intl. Specialty Lines Ins. Co. v. Allied Capital Corp., 35 N.Y.3d 64, 67 (2020).

[655] Id.

[656] Id.

[657] Id. at 68.

[658] Id.

[659] Id. at 68-69.

[660] Id. at 69.

[661] Id.

[662] Id.

[663] Id. at 69-70.

[664] Id. at 70.

[665] Id.

[666] Id. at 71.

[667] Id.

[668] Id. at 73.

[669] Id. at 74.

[670] Id.

[671] Transcon. Gas Pipe Line Co LLC v. Permanent Easement for 2.59 Acres, No. 19-2738 & 19-3412, 2020 U.S. App. LEXIS 33924, at *2 (3d Cir. (Pa.) Oct. 28, 2020).

[672] Id. at *3.

[673] Id. at *5-6.

[674] Id. at *15.

[675] 9 U.S.C.A. § 12 (West 2020).

[676] Id. at *15-16 (quoting Oxford Health Plans LLC v. Sutter, 569 U.S. 564, 569 (2013)).

[677] Id. at *15, n.13.

[678] Badgerow v. Walters, 975 F.3d 469 (5th Cir. (La.) 2020).

[679] Id. at 472.

[680] Vaden v. Discover Bank, 556 U.S. 49 (2009).

[681] Badgerow, 975 F.3d at 473 (citing Quezada v. Bechtel OG & C Constr. Servs., Inc., 946 F.3d 837, 843 (5th Cir. (La.) 2020).

[682] Vaden, 556 U.S. at 66.

[683] Badgerow, 975 F.3d at 474-475.

[684] Id. at 475.

[685] Teamsters Local 177 v. UPS, 966 F.3d 245, 248 (3d Cir. (N.J.) 2020).

[686] Id.; Teamsters Local Union No. 177 v. United Parcel Servs., 409 F. Supp. 3d 285 (D.N.J. 2019) (citing Derwin v. Gen. Dynamics Corp., 719 F.2d 484, 492-93 (1st Cir. (Mass.) 1983) and Zeiler v. Deitsch, 500 F.3d 157 (2d Cir. (N.Y.) 2007)).

[687] Teamsters Local 177, 966 F.3d at 248 (citing Florasynth, Inc. v. Pickholz, 750 F.2d 171, 176 (2d Cir. (N.Y.) 1984)).

[688] Id. at 257.

[689] Id. at 251.

[690] EB Safe, LLC v. Hurley, No. 19-38592020, 2020 U.S. App. LEXIS 33066, at *2 (2d Cir. (N.Y.) Oct. 20, 2020).

[691] Id. at *2-3.

[692] Id. at *3.

[693] Id. at *4.

[694] Id. at *5 (quoting T.Co Metals, LLC v. Dempsey Pipe & Supply, Inc., 592 F.3d 329, 339 (2d Cir. (N.Y.) 2010).

[695] Id. at *7.

[696] Id. at *8 (citing Odeon Capital Grp. LLC v. Ackerman, 864 F.3d 191, 196 (2d Cir. (N.Y.) 2017)).

[697] Id. at *8 (citing Karppinen v. Karl Kiefer Mach. Co., 187 F.2d 32, 34 (2d Cir. (N.Y.) 1951)).

[698] Id. at *9.

[699] Salinas v. McDavid Houston-Niss, L.L.C., No. 20-20003, 2020 U.S. App. LEXIS 32842 (5th Cir. (Tex.) Oct. 13, 2020).

[700] Id. at *3.

[701] Id. at *5-6.

[702] See Tex. Civ. Prac. & Rem. Code Ann. § 38.001.

[703] Kohn Law Grp., Inc. v. Jacobs, 825 F. App’x 465, 466 (9th Cir. (Cal.) 2020).

[704] Id.

[705] Id.

[706] Floridians for Solar Choice, Inc. v. Paparella, 802 F. App’x 519 (11th Cir. (Fla.) 2020).

[707] Id. at 521.

[708] Id. at 522-23.

[709] Id. at 523.

[710] Id. at 524-525.

[711] Id. at 525-526.

[712] Id. at 526.

[713] Auto Equity Loans of Delaware, LLC v. Baird, 232 A.3d 1293 (Del. 2020).

[714] Id.

[715] Id.

[716] Id. at n.27 (quoting SPX Corp. v. Garda USA, Inc., 94 A.3d 745, 750 (Del. 2014) (internal quotation omitted)).

[717] Id.

[718] Id.

[719] Cinatl v. Prososki, 307 Neb. 477, 480 (2020).

[720] Id. at 483.

[721] Id. at 483.

[722] Id. at 483.

[723] Id. at 484.

[724] Id. at 484.

[725] Id. at 488-490 (citing Neb. Rev. Stat. § 25-2613 (2020)).

[726] Cinatl, 307 Neb. at 491.

[727] Id. at 492.

[728] Gherardi v. Citigroup Global Mkts., Inc., 975 F.3d 1232 (11th Cir. (Fla.) 2020).

[729] Id. at 1234.

[730] 9 U.S.C.A. § 10(a)(4) (West 2020).

[731] Gherardi, 975 F.3d at 1237 (quoting Bamberger Rosenheim, Ltd. v. OA Dev., Inc., 862 F.3d 1284, 1286 (11th Cir. (Ga.) 2017).

[732] Id. at 1238 (quoting Wiregrass Metal Trades Council AFL-CIO v. Shaw Envtl. & Infrastructure, Inc., 837 F.3d 1083, 1087 (11th Cir. (Ala.) 2016).

[733] Id. at 1239.

[734] Id. at 1244.

[735] Diverse Enters., Co., L.L.C. v. Beyond Int’l, Inc., No. 19-51121, 2020 U.S. App. LEXIS 29650 (5th Cir. (Tex.) Sept. 17, 2020).

[736] 9 U.S.C.A. § 11(a) (West 2020).

[737] Diverse Enters, 2020 U.S. App. LEXIS 29650 at *3.

[738] Id. at *4-5.

[739] Id. at *6-7.

[740] Id. at *7.

[741] Bay Shore Power Co. v. Oxbow Energy Sols., LLC, 969 F.3d 660, 661 (6th Cir. (Ohio) 2020).

[742] Id. at 662.

[743] Id. at 662-63.

[744] Id. at 663.

[745] Id. at 664.

[746] Id. at 667.

[747] Id.

[748] Star Dev. Grp., LLC v. Darwin Nat’l Assur. Co., 813 F. App’x 76, 78 (4th Cir. (Md.) 2020).

[749] Id. at 79-80.

[750] Id. at 80.

[751] Id. at 81-82.

[752] Id. at 83.

[753] Id. at 87.

[754] Id. at 83-87.

[755] Mid Atl. Capital Corp. v. Bien, 956 F.3d 1182, 1186 (10th Cir. (Colo.) 2020) (quoting 9 U.S.C.A. § 11(a) (West 2020)).

[756] Id. at 1191-1196.

[757] Id. at 1205-06.

[758] Id. at 1207.

[759] Id. at 1211-1212.

[760] Id.

[761] Interactive Brokers LLC v. Saroop, 969 F.3d 438, 440 (4th Cir. (Va.) 2020).

[762] Id. at 440-41.

[763] Id. at 440.

[764] Id.

[765] Id.

[766] Id. at 441-42.

[767] Id. at 442.

[768] Id.

[769] Id. (quoting Jones v. Dancel, 792 F.3d 395, 402 (4th Cir. (Md.) 2015)).

[770] Id. 443-44.

[771] Id. at 444.

[772] Id. at 445.

[773] Id.

[774] Id. at 449.

[775] Blondeau v. Baltierra, No. 20282, 2020 Conn. LEXIS 203 (Sept. 24, 2020).

[776] Id. at *2.

[777] Id.

[778] Id. at *1.

[779] Id. at *10-11.

[780] Id. (contrasting General Statutes § 522-418 (governing vacatur of arbitration awards) with General Statutes § 52-263 (providing the statutory right to appeal in civil actions)).

[781] Id. at *31.

[782] Id. at *10-11.

[783] Id. at *11, 16 (emphasis in original).

[784] Id. at *18.

[785] Tex.s Brine Co., L.L.C. v. Am. Arbitration Ass’n, Inc., 955 F.3d 482, 490 (5th Cir. (La.) 2020).

[786] Id. at 484-85.

[787] Id. at 490 (citing Gibbons v. Bristol Myers Squibb Co., 919 F.3d 699 (2d Cir. (N.Y.) 2019); Encompass Ins. Co. v. Stone Mansion Rest. Inc., 902 F.3d 147 (3d Cir. (Pa.) 2018)).

[788] Id. at 485-86.

[789] Id. at 487.

[790] Id. at 487-90.

[791] Id. at 489.

[792] Id.

[793] Id.

[794] Id.

[795] Id.

[796] Gulf LNG Energy, LLC v. Eni USA Gas Marketing LLC, No. 22, 2020, 2020 Del. LEXIS 380, at *1-2 (Nov. 17, 2020).

[797] Id. at *2-3.

[798] Id. at *3.

[799] Id.

[800] Id. at *4.

[801] Id. at *5.

[802] Id. at *5-7.

[803] Id. at *8.

[804] Id. at *9 (quoting the Chancery Court opinion in Gulf LNG Energy, LLC v. Eni USA Marketing LLC, No. 2018-0700-AGB, 2019 WL 428633, at *10 (Del. Ch. Feb. 1, 2019)).

[805] Id. at *11.

[806] Id. at *10.

[807] Id. at *12.

[808] Id. at *12.

[809] Accent Delight Int’l Ltd. v. Sotheby’s, No. 18-CV-9011 (JMF), 2020 U.S. Dist. LEXIS 230272, *3 (S.D.N.Y. Dec. 8, 2020).

[810] Id.

[811] Id. at *4.

[812] Id.

[813] Id. at *5.

[814] Id.

[815] Id. at *5-6.

[816] Id. at *6-7 (quoting In re Teligent, 640 F.3d 53 (2d Cir. (N.Y.) 2011)).

[817] Id. at *7.

[818] Id.

[819] Id.

[820] Compare Rocky Aspen Mgmt. 204 v. Hanford Holdings, 394 F. Supp. 3d 461, 463-65 (S.D.N.Y. 2019) (no), with Dandong v. Pinnacle Performance Ltd., 10 Civ. 8086 (LBS), 2012 U.S. Dist. LEXIS 145454, at *4 (S.D.N.Y. Oct. 9, 2012) (yes).

[821] Accent Delight, 2020 U.S. Dist. LEXIS 230272, at *11 (citing In re Tremont Sec. Law, State Law & Ins. Litig., 699 F. App’x 8, 15 (2d Cir. (N.Y.) 2017)).

[822] Id. (internal quotation marks omitted).

[823] Id. at *13.

[824] Id.

[825] See id. at *16 (citing Goodyear Tire & Rubber Co. v. Chiles Power Supply, Inc., 332 F.3d 976, 977 (6th Cir. (Ohio) 2003); Spruce Env’t Techs., Inc. v. Festa Radon Techs., Co., 370 F. Supp. 3d 275, 278-79 (D. Mass. 2019); ACQIS, LLC v. EMC Corp., Civil Action No. 14-cv-135602017, U.S. Dist. LEXIS 100856, at *2 (D. Mass. June 29, 2017); Folb v. Motion Picture Indus. Pension & Health Plans, 16 F. Supp. 2d 1164, 1181 (C.D. Cal. 1998), aff’d 216 F.3d 1082 (9th Cir. (Cal.) 2000); Sheldone v. Pa. Tpk. Comm’n, 104 F. Supp. 2d 511, 513 (W.D. Pa. 2000); In re RDM Sports Grp., Inc., 277 B.R. 415, 430 (Bankr. N.D. Ga. 2002)).

[826] See id. at *15 (citing United States ex rel. Strauser v. Stephen L. Lafrance Holdings, Inc., No. 18-CV-673-GKF-FHM, 2019 U.S. Dist. LEXIS 197688, at *2 (N.D. Okla. Nov. 14, 2019); Ford Motor Co. v. Edgewood Props., Inc., 257 F.R.D. 418, 423 (D. N.J. 2009); Lesal Interiors, Inc. v. Resol. Tr. Corp., 153 F.R.D. 552, 562 (D. N.J. 1994)).

[827] Id. at *16-17.

[828] Id. at *17 (emphasis added).

[829] 28 U.S.C.A § 1782(a) (West 2020).

[830] Servotronics, Inc. v. Boeing Co., 954 F.3d 209, 214 (4th Cir. (S.C.) 2020) (Servotronics I).

[831] Servotronics, Inc. v. Rolls-Royce PLC, 975 F.3d 689 (7th Cir. (Ill.) 2020) (Servotronics II).

[832] Id. at 691.

[833] Servotronics I, 954 F.3d at 214.

[834] Servotronics II, 975 F.3d at 691.

[835] Id.

[836] 28 U.S.C.A. § 1782(a) (West 2020).

[837] Servotronics II, 975 F.3d at 692.

[838]  See In re Guo, 965 F.3d 96 (2d Cir. (N.Y.) 2020); Nat’l Broad. Co. v. Bear Stearns & Co., 165 F.3d 184, 191 (2d Cir. (N.Y.) 1999); Republic of Kazakhstan v. Biedermann Int’l, 168 F.3d 880, 883 (5th Cir. (Tex.) 1999).

[839] Intel Corp. v. Advanced Micro Devices, Inc., 542 U.S. 241 (2004) (“Intel”).

[840] See Abdul Latif Jameel Transp. Co. v. FedEx Corp. (In re Application to Obtain Discovery for Use in Foreign Proceedings), 939 F.3d 710, 714 (6th Cir. (Tenn.) 2019).

[841] Servotronics I, 954 F.3d at 211-212.

[842] Id. at 214.

[843] Id. at 214-215.

[844] Id. at 216 (quoting Intel, 542 U.S. at 263).

[845] 975 F.3d at 693-694.

[846] 975 F.3d at 695.

[847] Id.

[848] Id. at 696.

[849] Hanwei Guo v. Deutsche Bank Sec., 965 F.3d 96 (2d Cir. (N.Y.) 2020).

[850] Nat’l Broad. Co. v. Bear Stearns & Co., 165 F.3d 184, 191 (2d Cir. (N.Y.) 1999).

[851] In re Hanwei Guo, 18-MC-561 (JMF), 2019 U.S. Dist. LEXIS 29572, at *2-3 (quoting NBC, 165 F.3d at 190).

[852] Hanwei Guo, 965 F.3d at 105.

[853] Intel, 542 U.S. at 258 (emphasis added) (quoting Hans Smit, International Litigation Under the United States Code, 65 Colum. L. Rev. 1015, 1026 n.71 (1965)).

[854] Hanwei Guo, 965 F.3d at 104 (citing In re Application, 939 F.3d at 725 n.9 (“determining only that ‘the Supreme Court’s approving quotation of the Smit article . . . provides no affirmative support’ for a reading of the statute that excludes private arbitration”)).

[855] Id. at 105.

[856] Abdul Latif Jameel Transp. Co. v. FedEx Corp. (In re Application to Obtain Discovery for Use in Foreign Proceedings), 939 F.3d 710 (6th Cir. (Tenn.) 2019).

[857] 28 U.S.C.A. § 1782(a) (West 2020).

[858] In re Application, 939 F.3d at 713-14.

[859] Id. at 714.

[860] Id. at 719.

[861] Id. at 714.

[862] Id. at 720.

[863] Id. at 722.

[864] Id. at 723.

[865] Id.

[866] Id. at 723 (citing Intel Corp. v. Advanced Micro Devices, Inc., 542 U.S. 241 (2004)).

[867] Id. at 724.

[868] Id.

[869] Republic of Kazakhstan v. Biedermann Int’l, 168 F.3d 880, 883 (5th Cir. (Tex.) 1999).

[870] National Broadcasting Co., Inc. v. Bear Stearns & Co., Inc., 165 F.3d 184 (2d Cir. (N.Y.) 1999).

[871] In re Application, 939 F.3d at 732.

[872] Vantage Deepwater Co. v. Petrobras Am., Inc., 966 F.3d 361, 365-66 (5th Cir. (Tex.) 2020).

[873] Id. at 366.

[874] Id. at 367.

[875] Id.

[876] Id.

[877] Id. at 368.

[878] T.I.A.S. No. 90-1027, reprinted following Pub. L. 101-369, 104 Stat. 448 (1990).

[879] Vantage Deepwater Co., 966 F.3d at 368.

[880] Id. at 369.

[881] Id. at 369-70.

[882] Id. at 371.

[883] Id. at 372.

[884] Id. at 373.

[885] Id.

[886] Id. at 374-75.

[887] Id. at 375.

[888] EGI-VSR, LLC v. Coderch, 963 F.3d 1112, 1115 (11th Cir. (Fla.) 2020).

[889] Id.

[890] Inter-American Convention on Letters Rogatory (“Convention on Letters Rogatory”), Jan. 30, 1975, O.A.S.T.S. No. 43, 1438 U.N.T.S. 288.

[891] EGI-VSR, LLC, 963 F.3d at 1118.

[892] Id. at 1119-1120.

[893] Id. at 1123.

[894] Id. at 1124.

[895] Process & Indus. Devs. v. Fed. Republic of Nig., 962 F.3d 576, 579-580 (D.C. Cir. 2020).

[896] Id.

[897] 28 U.S.C.A. § 1604 (West 2020).

[898] Process & Indus. Devs. v. Fed. Republic of Nig., No. 18-594, 2018 U.S. Dist. LEXIS 226627, at *3 (D.D.C. Oct. 1, 2018).

[899] Process & Indus. Devs., 962 F.3d at 582-584.

[900] Id. at 585.

[901] Id. at 586.

[902] Id.

[903] Earth Sci. Tech, Inc. v. Impact UA, Inc., 809 F. App’x 600, 603 (11th Cir. (Fla.) 2020).

[904] 9 U.S.C.A. § 10(a)(4) (West 2020).

[905] 9 U.S.C.A. §§ 301-307 (West 2020), incorporating § 202 by reference.

[906] 9 U.S.C.A. § 207 (West 2020).

[907] Earth Sci. Tech, 809 F. App’x at 605.

[908] Id. at 606.

[909] Id. at 609.

[910] OJSC Ukrnafta v. Carpatsky Petro. Corp., No. 19-20011, 2020 U.S. App. LEXIS 14264 (5th Cir. (Tex.) 2020), vacating on rehearing OJSC Ukrnafta v. Carpatsky Petro. Corp., 955 F.3d 465 (5th Cir. (Tex.) 2020).

[911] Id.at *4.

[912] Id.

[913] Id. at *5.

[914] Id. at *6.

[915] Id. at *7.

[916] Id. at *9 (citing Certain Underwriters at Lloyd’s v. Warrantech Corp., 461 F.3d 568, 575-76 (5th Cir. (Tex.) 2006).

[917] Id. (citing Acosta v. Master Maint. & Constr., Inc., 452 F.3d 373, 377 (5th Cir. 2006)).

[918] Id. at *11 (citing the New York Convention at Art. V(1)(e); Karaha Bodas Co. v. Perusahaan Pertambangan Minyak Dan Gas Bumi Negara, 364 F.3d 274, 287-88 (5th Cir. (Tex.) 2004)).

[919] Id. at *11-12.

[920] Id. at *14-15.

[921] Id. at *22-23.

[922] Id. at *22-24.

[923] Id. at *24-25.

[924] Id. at *26-27 (citing Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 631 (1985)).

[925] Id.

[926] Soaring Wind Energy, L.L.C. v. Catic USA Inc., 946 F.3d 742, 747 (5th Cir. (Tex.) 2020).

[927] Id. at 748.

[928] Id.

[929] Id.

[930] Id. at 749.

[931] Id.

[932] Id. at 750-51.

[933] Id. at 752-53.

[934] Id. at 753.

[935] Id.

[936] Id. at 755.

[937] Id. at 758.

[938] Id.

[939] Id.

INTRODUCTION

There are a multitude of issues and terms to address when companies merge or when one company acquires another. One aspect of the deal that is often overlooked is insurance. Specifically, directors and officers liability insurance, also known as D&O insurance, is an essential part of any merger or acquisition and must be carefully considered in order to avoid significant liability down the road. Companies should not overlook the option of representations and warranties coverage when planning a merger or sale.  

This is especially true in the current climate.  Merger and acquisition activity since the latter half of 2020 has seen unprecedented growth. Some bankers have said that the M&A market has gone into “overdrive” and the number of mergers and acquisitions is “far beyond the historical norm.”[1]  With this increased M&A activity, litigation resulting from the transaction – including shareholder lawsuits – is inevitable. According to Cornerstone Research, 82% of the significant deals announced in 2017 and 2018 were challenged by shareholders, resulting in roughly three lawsuits filed per challenged deal.[2] 

Suffice it to say, the risk and exposure in a merger or acquisition is high, for the companies involved but also individual executives. This article addresses some of the key insurance issues that decision makers should keep in mind to mitigate that risk and maximize coverage. 

D&O Insurance

D&O liability insurance is meant to protect directors and officers if they are named as individual defendants in lawsuits for acts taken in their roles as such. D&O insurance protects the insureds in the event of suits by plaintiffs such as employees, shareholders, competitors, investors, and customers.  Some D&O policies also provide coverage for the company.

D&O policies usually provide coverage for legal fees incurred as well as amounts paid by the insureds in judgments or settlement disbursements. If the directors and officers are entitled to indemnification from the company by way of company bylaws or their employment contracts, that indemnity obligation is typically backed financially by a D&O policy.

Change in Control Provisions

D&O insurance policies typically insure against certain “Wrongful Acts” as defined by the policy that the company or other insureds allegedly commit.  These policies often contain a “change in control” provision that limits the available coverage for these “Wrongful Acts” if there is a change in company ownership.  Before any merger or acquisition, it is crucial to review and understand any change in control provisions and corresponding notice requirements to keep the intended insurance in place, uninterrupted, or secure new coverage.

Change in control provisions are generally triggered upon the happening of a named event (i.e., mergers, acquisitions, or change in voting control). When that triggering event occurs, coverage under the policy changes. While the change in coverage will depend on the specific policy language, the provisions typically provide that the policy will not insure “Wrongful Acts” that occur after the triggering event and will only cover acts that occurred prior to the change in control. That is, the policy will cover acts and omissions which occurred in the regular course of business, but not those after a change in control when circumstances (e.g. management, business goals, or other essential characteristics of the insured) have been altered. When the triggering event occurs and the coverage terminates, the policy is placed into run-off (discussed below). Note that the change in control provisions in some D&O policies are even stricter and eliminate all coverage, even for acts and omissions that predate the change in control. 

Questions of change in control are highly fact-specific and are determined by the policy language, deal specifics, and the governing law. Therefore, it is important to understand these nuances before any deal, especially because once the provision is triggered, it can create unintended gaps or even eliminate all D&O coverage. 

A change in control provision can also include notice conditions that require the insured to provide notice to the insurer within a specific time frame (either in advance of a deal or after its completion) to preserve coverage for the new entity.  Like all notice requirements in an insurance policy, it is imperative that an insured not overlook these notice requirements, or the company risks losing coverage. 

Tail or Runoff Coverage

D&O insurance policies are typically written on a “claims-made” basis, which generally means that the policy covers claims made while the policy is in effect.  As addressed above, if a merger or acquisition triggers a policy’s change in control provision, then any claims based on conduct after the transaction date may not be covered and any claims presented for pre-transaction conduct will only be covered through the end of the policy period (likely a matter of months after the transaction).  This creates a potential gap in coverage because the acquiring company’s policy will not respond on behalf the selling company’s directors and officers for pre-transaction conduct. 

How, then, do you cover claims for pre-transaction conduct that are made after the policy expires?  The answer is “tail” or “runoff” coverage. This coverage extends the D&O insurance policy for a certain period of time beyond the standard policy period. Essentially, the D&O insurance policy is held open for a certain number of years to address claims that may arise after the deal is closed. Typically, the tail or runoff period is six years.

Accounting for tail or runoff coverage is critical because it safeguards the directors and officers of the selling company in the event the acquiring company refuses to protect them or, in the case of bankruptcy, is not there to protect them. Accordingly, the purchase of a tail or runoff policy should be a critical deal point for the selling company in any negotiation.

Bump-Up Clauses 

Following a merger or acquisition, it is not uncommon for shareholders of the purchased entity to file suit claiming that the consideration paid for the purchased shares was inadequate and seeking recovery of the difference between the amount they received in the transaction and what they claim is the actual value of those shares. Such a claim may implicate the “bump-up” clause found in many D&O policies. “Bump-up” provisions are generally found in the policy’s definition of Loss, and state that Loss does not include those amounts of any judgment or settlement that represent the amount by which the consideration paid in connection with the purchase of securities is increased.

Although such provisions are common, they vary substantially from policy to policy. For example, many bump-up provisions do not bar coverage for defense costs for claims asserting inadequate consideration. Others apply only to claims made under specific insuring clauses;[3] and yet others apply only when the amount representing the increase in consideration is paid by the insured corporation, and not by any director or officer.[4] Therefore, it is worthwhile to take a careful took at any D&O policy’s definition of “Loss,” both at the time of negotiation of the policy and in connection with any claims under the policy.

R&W Insurance: Coverage for the Merger or Acquisition Itself

While insurance considerations in corporate transactions are often focused on ensuring that there is adequate and available coverage in place if a company or other insured faces potential liability, insurance coverage is also available for the deal itself. This kind of insurance is called Representation and Warranties (R&W) insurance. Like the name suggests, R&W insurance protects a buyer or seller in a corporate transaction, like a merger or acquisition, from losses arising from inaccurate representations or warranties made by the seller or target company during the transaction. For example, a buyer-side R&W policy can protect the buyer by paying losses if the target company presents inaccurate information, misrepresents information, or fails to disclose particular liabilities. R&W insurance can also mitigate risk if a seller offers little or no indemnity protection for the deal itself.

Michael Gehrt, Mikaela Whitman and Pamela Woods are Partners at Pasich LLP, a national insurance recovery law firm. They can be reached at [email protected], [email protected] and [email protected].

[1] “M&A in 2021: An Accelerating Rebound,” (Feb. 8, 20201), available at https://www.morganstanley.com/ideas/mergers-and-acquisitions-outlook-2021-rebound-acceleration.

[2] https://www.cornerstone.com/Publications/Reports/Shareholder-Litigation-Involving-Acquisitions-of-Public-Companies-Review-of-2018-M-and-A-Litigation-pdf.

[3] See, e.g., Genzyme Corp. v. Federal Ins. Co., 622 F.3d 62, 72 (1st Cir. 2010) (“bump-up” provision applied only to Insurance Clause 3).

[4] See, e.g., Arch Ins. Co. v. Murdock, 2019 WL 2005750, at *9 (Del. Super. Ct., May 7, 2019) (definition of Loss did not include “any amount representing the increase in the consideration paid (or proposed to be paid) by the Policyholder in connection with its purchase of any securities or assets”).

Non-disclosure agreements (“NDAs”) serve a pivotal role in advancing research and development.  NDAs enable parties to collaborate using information that its owners would otherwise be unwilling to share absent the protections NDAs afford.  While NDAs can take many forms and be individually tailored to each situation, the basic premise is typically the same: at least one party possesses confidential information (for example, a new product, valuable research, special know-how, etc.) that it will share with the other party in furtherance of a common goal (producing the product, using the research, performing a task requiring the know-how, etc.).  In exchange, the receiving party agrees to keep that information secret and not otherwise take the knowledge for its own use without permission.  Sometimes the collaboration is successful; but other times, despite the parties’ best efforts, the project stalls and the sides part ways – amicably or not. 

As with any contract, disputes may occur, particularly when the results fall short of the goal.  Litigation is sure to arise when, a year or two later, a company announces a product that its former collaborator finds a bit too similar to the aborted joint project.  No one likes to be sued, but being accused of (and possibly found liable for) misusing someone else’s confidential information can be especially troublesome for a business.  The other company is a thief in the plaintiff’s eyes (and pleadings) – an accusation that can turn away customers or investors, and generate negative public opinion.  Even if the breach resulted from a misunderstanding, others may now be reluctant to share sensitive material with the accused company for fear of being its next “victim,” which can harm sales, development, and more. 

The potential for this public relations headache is why extra care and attention should be paid to ensuring compliance with an NDA.  Unfortunately, various factors can make this task difficult, particularly in larger companies that handle numerous NDAs or where a great number of people may be involved.  Below are some suggestions your company can take when entering and working under an NDA that may strengthen certain defenses in a later litigation, or hopefully help avoid a dispute altogether. 

1. Make Employees Aware

An NDA’s terms most directly apply to the engineers, scientists, technicians, or others actually working with the received confidential information.  But many of them never actually see the document, which is often signed and retained by an executive or general counsel.  This is a critical mistake – those with the greatest need for the information should be aware of their responsibilities in protecting it.  Provide a copy of the NDA to any employee you expect will access the received confidential information and get at least a written acknowledgement from those employees that they have received and reviewed the agreement.  This can even be made mandatory within the NDA itself.  For example, a form to be executed by the receiving employee may be included as an Appendix to the agreement.  The employee can sign and return the form upon receipt.  Copies of such acknowledgements can also be exchanged among the parties. 

This practice serves several purposes.  First and foremost, it lessens inadvertent disclosure by employees, who are now explicitly aware of their obligations not to misuse or divulge confidential information.  A better-informed employee can more easily avoid information-sharing mistakes.  Second, requiring written acknowledgements may limit the number of employees exposed to the confidential information.  Employees (or their supervisors) with only a tangential or trifling need to see the material may decide it is not worth the effort of complying with the rigid formalities of the NDA, thereby shrinking the potential pool of responsible employees to only those truly requiring access.  Finally, obtaining written acknowledgements is a great way to track viewers or custodians of the confidential information.  For example, if materials need to be collected for return to the disclosing party, the signed forms provide a self-contained list of employees who should be asked for such documents to return.  You will also know exactly who your most likely witnesses are should a dispute arise. 

2. Set Automatic Calendar Reminders

An NDA seldom includes only a single date or deadline.  In addition to an expiration date for the agreement, the NDA will typically recite another (usually later) date when confidentiality obligations cease.  For example, although the NDA’s basic terms could expire (or be cancelled) tomorrow, the parties may still have to avoid disclosing or using confidential information for another three years.  An NDA can also have deadlines for renewing or extending the agreement (e.g., thirty days before expiration), for returning or destroying confidential information in the receiving party’s possession (e.g., ten days after expiration), and for submitting notices to the other side regarding various aspects of the agreement, among other things.  So, there are potentially many dates to track from a particular NDA, and if your company sees hundreds of agreements a year, remembering all those dates is impossible. 

Every company has a computerized calendar in some form, but people do not often think to input contract dates in their calendars, particularly for NDAs.  Setting automated reminders for as many of these dates as possible is a great way to make sure your company does not miss an important milestone and potentially expose the company to litigation.  Having calendar alerts also minimizes the possibility of entirely overlooking actions that need to be performed.  Many agreements expire long after work on the project has already ceased, so deadline actions triggered by the expiration date might otherwise slip through the cracks because the NDA or the disclosing party is no longer front of mind.  For example, forgetting to return confidential material to the disclosing party can create long term issues for potential dispute, either by creating implications that your company used the information still in its possession or by providing an opportunity to mistakenly use it contrary to the agreement.  Rather than simply executing the NDA and filing it away, automated reminders should be set for your company’s protection.

3. Centralize Storage

Not all confidential information warrants protection by armed security guards and simultaneous key turning (although the disclosing party may believe differently), but the concept of centralizing and limiting access to the received materials is instructive.  Accidental disclosure or misuse is more likely to occur when access is unfettered and employees have documents lying unsecured on their desks.  When possible, physical embodiments of the confidential information (e.g., printed documents, prototypes, samples) should be kept in a single, preferably securable location, such as a lockable cabinet.  It may also be advisable to have employees sign in and out when removing and returning the materials.  That way, it can be easier to track who has what and where.  

Digital information is trickier, but comparable procedures can be implemented to secure the material.  Many companies (particularly after COVID-19 accelerated the transformation to remote work) now have centralized servers or cloud-based document storage options.  If the disclosing party allows, it is preferable to set up a folder or other similar structure in the server or cloud and encourage employees to store documents referencing or relating to the confidential information in that location, rather than on their local hard drives.  This reduces unnecessary and uncontrolled proliferation and lessens the danger from localized security breaches; it is, however, crucial that these central locations have appropriate security safeguards to prevent unauthorized outside access – so it is ideal to have the folders containing confidential information password protected or restricted to particular internal users.  Many document management software programs can limit access to specified folders to select individuals or groups, and wall off others.  In some of these programs, the very existence of the file or folder may be invisible to employees without proper credentials.  In short, it is much easier to maintain control over confidential information when it resides in one or two known and secured locations, as opposed to being scattered between offices or individual personal computers. 

4. Document Interaction

Make sure at least one person involved with the confidential information is a good note taker.  Work performed under an NDA often involves multiple meetings, telephone calls, and/or video conferences, both internally and with the disclosing party.  It is important to document these calls/meetings carefully and contemporaneously, and then store those notes safely.  The minutes should ideally list all of the attendees and the subject matter discussed.  For instance, issues may arise when it is discovered for the first time during a deposition years later that Bob, an employee unaware of the NDA, showed up at just one of many meetings about the confidential information and then started using what he learned there in his own work.  By tracking attendees, your company can know who was at the meetings and whether follow-up is needed with them to emphasize their responsibilities under the NDA (and obtain a signed acknowledgement, as discussed above). 

Moreover, some confidential information may only be communicated verbally during one of these meetings, rather than in a document or physical manifestation.  Meeting notes help establish whether (or not), when, and to whom such information was communicated.  Without a document trail showing the receipt (or non-receipt) of confidential information, these notes may be the only physical evidence available regarding information exchange.  If a disclosing party claims they told your company’s employees of their special widget during a meeting and legitimate documentation from that meeting exists indicating the contrary, your company is already in a better position than engaging solely in a battle of employee memories.  Of course, when technically possible and if all parties agree, recording a meeting via audio/visual means can accomplish this task as well. 

5. Demand Clarity

Many NDAs require that information deemed confidential be marked as such – for example, by placing a “Confidential” or similar label on appropriate documents.  The receiving party benefits from this requirement because it allows the receiving party to clearly distinguish between information that needs protection and information that does not.  But these NDAs are usually very forgiving for the disclosing party if they forget to label – unmarked information must typically be treated as confidential regardless, and if specifically brought to its attention, the disclosing party has a grace period to revise labels as appropriate. 

It is in your company’s own best interest to make sure a disclosing party is following the rules.  If information is received that may only arguably be confidential and is not marked, bring it to the disclosing party’s attention and get the issue resolved right away.  The disclosing party may otherwise believe the information is confidential, the receiving party may believe it is not based on the lack of marking, and now a fact-finder or jury is deciding who is right.  Avoid that later dispute and make the disclosing party be clear up front. 

6. Proactively Limit Overreach

A disclosing party’s solution to the above problem might be to mark everything confidential and save themselves the trouble.  But this overreach can be just as difficult for a receiving party as a lack of sufficient marking, since it inhibits clarity on what is permissible under the agreement.  An NDA always defines the scope of confidential information, and usually excludes information previously publicly available or already known to the receiving party.  To protect your company from overreach, search for articles, published patent applications, advertisements, or other similar publicly available information relevant to the project.  Better still, request copies of that information from the disclosing party.  Collect all of it, preferably before the collaboration gets heavily underway, and store it in a secure place with date stamps.

This research serves two primary purposes.  First, having it on hand during the collaboration helps those working on the project to know, at the time, which received information needs protection and dissuades the disclosing party from over-designating.  Second, doing the research up front shows diligence from the start, which will have better appeal to a fact-finder or jury in the event of a dispute.  Third parties (judges, arbitrators, jurors) may perceive research conducted after the fact as an effort to excuse a breach, whereas early research can lessen the impression of wrongdoing. 

7. Exercise Your Rights

Perception can have a powerful impact on a fact-finder or jury.  When the evidence suggests one side received everything and gave nothing, the odds of successfully defending a breach suit may drop, even if – technically – that side is right under the letter of the contract.  There is a worthwhile benefit in being able to show some important contribution to the project.  Accordingly, particularly when the NDA is mutual, be sure your company is protecting its own information.  For example, conspicuously label your company’s own confidential information appropriately when sharing it with the other side, and remember to request return or destruction of any of your company’s confidential information in the other side’s possession.  Even when the NDA is not mutual, be sure to contemporaneously document everything your company gives to, or shares with, the other side during development to establish that the flow of information is not a one-way street.  Juries are more willing to side with a party that actively collaborated in the process than a party that sat back and raked in the other side’s content. 

There are no guarantees when it comes to litigation.  But by following these steps before, during, and after an NDA’s term, your company can reduce the opportunities for breach (or perceived breach) and bolster its defenses with diligence.