Marcia Rankin, et al. v. Brinton Woods of Frankford, LLC, et al. (Ct. of Special Appeals)

Filed: June 27, 2019

Opinion by: J. Sharer

Holding: A contract was held to be procedurally and substantively unconscionable for failing to highlight arbitration, mediation and waiver of jury trial provisions through formatting; using misleading, contradictory, and undefined terms; and including an arbitration deposit requirement and loser-pay-all provision that could preclude recourse for parties lacking financial resources. 

Facts: Plaintiff filed a negligence suit for survival and wrongful death against the Defendant, a care center where the deceased allegedly developed serious health concerns. Defendant filed a motion to compel arbitration pursuant to the admission contract. The circuit court granted the motion as to the survival claims and stayed the wrongful death proceedings. On appeal, Plaintiff argued that the admission contract was unconscionable. 

Analysis: In order to decline to enforce an arbitration agreement, a court must find both procedural and substantive unconscionability. Doyle v. Fin. Am., LLC, 173 Md. App. 370, 383 (2007). The Court held that the contract was procedurally unconscionable because it was a standard-form contract, drafted entirely by Defendant. The first paragraph misleadingly stated that the contract contains financial obligations and residents’ rights. It failed to mention that the contract also contained a waiver of a constitutional right to a jury trial. Another section of the contract stated that it was impossible to cover all important matters in that document and that additional important documents were attached as exhibits. However, no attachments were included in the record, and there were no attachments regarding arbitration, mediation, and waiver. Additionally, the mediation and arbitration provisions were simply numbered paragraphs in the same format as the other paragraphs. They were not emphasized by bold, underlined or italicized font. The failure to highlight the arbitration, mediation and waiver provisions supported a finding of unconscionability. 

The Court held that the contract was substantively unconscionable because it did not provide criteria for the selection of mediators or scheduling and timing details for mediation. It did not address allocation of fees or costs of mediation. The arbitration provisions lacked clarity and were conflicting. The arbitration process would be consistent with the “American Arbitration Associate (sic)”. The terms “Arbitration Committee” and “subcommittee of three” were not defined; the latter was used only once. The word “binding” is used for the first and only time in section D of the clause. The last two paragraphs of section D present conflicting terms: the first paragraph states that the losing party can submit the matter to a state court. The next paragraph states that the “judgement” shall not be appealable; this is the first and only time the term “judgment” is used. Defendant is a sophisticated party, and these errors and ambiguities support a finding of unconscionability. Furthermore, there is no guidance on any estimated range of fees and costs, in addition to a loser-pays-all provision. A party who cannot pay the $1,000 arbitration deposit may have to forgo arbitration. These clauses could preclude recourse for a party lacking financial resources.

The circuit court had held that the admission contract was not unconscionable, but provided no factual support for its finding. See Henry v. Gateway, Inc., 187 Md. App. 647, 658 (unconscionability issues are often fact-intensive and the burden is on the party opposing arbitration). On appeal, Plaintiff also argued that the circuit erred in granting the motion based on its finding of apparent agency theory; the Court agreed. 

Full opinion available in PDF. 

Stone v. Wells Fargo Bank, N.A. (Maryland U.S.D.C.)

Filed January 17, 2019

Opinion by Judge Ellen L. Hollander

Holding: An arbitration agreement between a bank customer and the bank was enforceable because  the arbitration provision was broad and sufficiently related to the dispute between the parties.

Facts:

Plaintiff Meghan Stone (“Stone”) alleged that Wells Fargo Bank (the “Bank”) improperly took funds from her account, in violation of the terms of her service agreement (the “Agreement”) with the Bank.  The service agreement contained an arbitration provision requiring arbitration for any “dispute”  that could not be resolved informally. The Agreement defined “dispute” as “any unresolved disagreement” between the parties that relates “in any way to services, accounts or matters; to [Stone’s] use of any of the Bank’s banking locations or facilities; or to any means [she] may use to access [her] accounts.” The Agreement also incorporated the American Arbitration Association Rules (the “AAA Rules”), which state that “the 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 or to the arbitrability of any claim.”

In December 2014, Stone discovered that the Bank had removed approximately $45,000 from her accounts with the Bank and denied her use of her secure line of credit.  After she informed the Bank of its error, the Bank refused to return the funds and instead, suspecting identity fraud, investigated Stone’s account, resulting in fifteen felony counts and two misdemeanor counts relating to theft, fraud, and identity theft levied against Stone until they were dismissed in February 2015. 

Stone sued the Bank, alleging its employees improperly used and took her money and then negligently initiated the identity fraud investigation against her.  Her charges against the Bank included negligence, respondeat superior, and malicious prosecution (the “Charges”).  The Bank filed a Motion to Compel Arbitration and Dismiss the Action (the “Motion”), claiming the Agreement’s arbitration provision applied to the dispute with Stone.  Stone filed an opposition to the Motion, arguing the Charges were not governed by the Agreement because the Bank’s actions did not “relate or have anything to do with [her] accounts with [the Bank].”  The Bank replied, requesting either an AAA arbitrator to determine the scope of the arbitration provision, or the Court to hold Stone’s Charges arbitrable.

Analysis:

The Court first determined whether an arbitrator or the Court itself should decide whether the Charges were arbitrable.  Citing First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944 (1995), the Court emphasized that courts should not assume the parties agreed to “arbitrate arbitrability” without “clear and unmistakable” evidence that they intended to arbitrate the scope of an arbitration agreement.  While in some circuits, incorporating the AAA Rules into an agreement provides “clear and unmistakable” evidence, in the Fourth Circuit it remains an open question as to whether an unsophisticated party like Stone can provide clear and unmistakable evidence simply by incorporating the AAA Rules.  Given the Bank’s status as a Fortune 500 company and the fact that Stone, as a consumer, most likely did not intend for the incorporation of the AAA rules to demonstrate her desire for arbitration, the Court determined that the Court itself, and not an arbitrator, should determine whether the Charges were arbitrable. 

The Court then analyzed whether the Charges were subject to arbitration by first determining whether the parties had voluntarily agreed to arbitration, and then what subject matter the parties agreed was subject to the arbitration provision.  In this case, there was no dispute that there was a written arbitration agreement between the parties.  The Court then proceeded to consider whether the claims made by Stone were within the scope of that agreement, stating that “any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration.” In this case, the Court analyzed the language of the arbitration clause itself and categorized it as a "broad" provision.  This, coupled with the strong public policy of federal courts in favor of arbitration, required Stone to provide  "positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute."

The Court concluded that the arbitration provision relates to (i) the negligence charge because it concerns the Bank’s services; (ii) the respondeat superior charge because it is directly related to the negligence charge, which is covered by the arbitration clause; and (iii) the malicious prosecution charge because there is a “significant relationship” between the events underlying the malicious prosecution charge and Stone’s use of the Bank’s services and accounts.  Thus, the Court granted the Bank’s Motion to Compel Arbitration on all of Stone's claims.

The full opinion is available in PDF.

WSC/2005 LLC v. Trio Ventures Associates (Ct. of Appeals)

Filed:  July 30, 2018

Opinion by:  Adkins, J.

Holding:  Although it is not recognized in the Maryland Uniform Arbitration Act (the “MUAA”), manifest disregard of applicable law is a proper ground to vacate an arbitration award.

Facts:  Plaintiff filed a petition to vacate an arbitration award in the Circuit Court for Montgomery County.  The petition argued that the arbitrator “manifestly disregarded well-established Maryland law in several respects” and that the arbitrator wrongly concluded the Plaintiff breached a contract provision.  Defendant moved to dismiss arguing that the Plaintiff did not allege any of the statutorily permitted vacatur grounds enumerated in the MUAA.

The MUAA governs the arbitration process in Maryland.  Once an arbitrator issues an award, a circuit court shall vacate an award on certain grounds enumerated in the MUAA.  The MUAA also provides that “the court shall not vacate the award or refuse to confirm the award on the ground that a court of law or equity could not or would not grant the same relief.”

Analysis:  The Court reviewed precedent decisions demonstrating that Maryland recognizes manifest disregard of the law as a permissible common-law ground for vacating an arbitration award.  The Court then analyzed whether the General Assembly abrogated the common law in this respect when it adopted the MUAA.

For an abrogation to occur, “the statutory language must indicate an express abrogation or an abrogation by implication by adoption of a statutory scheme that is so clearly contrary to the common law right that the two cannot occupy the same space.”  The Court agreed with Plaintiff that the MUAA does not pronounce an intention to expressly abrogate the common-law vacatur grounds.  The Court also agreed that the list of five grounds upon which a circuit court may vacate an award does not indicate the grounds are exclusive.  Further, the circumstances in which a circuit court cannot vacate an arbitration award under the MUAA do not include common-law vacatur grounds.

While disfavored, abrogation by implication is possible in two situations:  conflict preemption and field preemption.  The Court stated that conflict preemption does not apply because the common-law ground for “vacating an arbitration award will not conflict with any of the statutory grounds or render them nugatory.”  Field preemption occurs if a new enactment repeals and replaces the entirety of the prior law on a comprehensive basis.  Here, the Court stated that the MUAA’s “lack of universal applicability means the General Assembly did not preempt the entire field of arbitration common law.”

The Court then stated that manifest disregard of the law requires a “palpable mistake of law or fact appearing on the face of the award.  A court should look for an error that is readily perceived or obvious; an error that is clear or unquestionable.”  Finding no such mistake, the Court affirmed the Circuit Court’s dismissal.  

The opinion is available in PDF.

Deutsch v. G&D Furniture Holdings (Ct. of Special Appeals, Unreported)

Filed: August 28, 2017

Opinion by: Judge Nazarian

Holding:

A business owner’s requests for inspection of financial books and records relating to the management of a corporation and for the appointment of a receiver fall within the arbitration provision in a Stockholders Agreement that set forth comprehensive agreements involving many businesses and 55 investors.

Facts:

Plaintiff and Defendant jointly owned many retail furniture businesses.  In 2006, the parties executed a Stockholders Agreement, which replaced a 1990 agreement.  The Stockholders Agreement set forth comprehensive agreements regarding the ownership of the companies, transferability of corporate shares, management of the companies, composition of the board of directors, division of profits, payment of dividends, maintenance of life insurance policies on stockholders, as well as providing for mediation and arbitration “in the event that there is any dispute between the parties regarding this Agreement.”

As the businesses encountered setbacks, the parties held different views about the operation and management of the business, financial decisions, the creation of other entities to which business assets allegedly were transferred, and decisions to wind down the original businesses.  The disputes between the parties ultimately led to litigation.  The Court of Special Appeals affirmed the Circuit Court for Anne Arundel Court’s decision that the Stockholders Agreement’s arbitration clause should be read broadly to include the requests for a receiver and to inspect the books.

Analysis:

The Maryland Uniform Arbitration Act “embodies a ‘legislative policy’ in favor of the enforcement of agreement[s] to arbitrate.”  Harris v. Bridgford, 153 Md. App. 193, 201 (2003) (quoting Allstate Ins. Co. v. Stinebaugh, 374 Md. 631, 641 (2003)).  Although arbitration is favored, the contract language and intent of the parties must be respected.   “Where there is a broad arbitration clause calling for the arbitration of any and all disputes arising out of the contract, all issues are arbitrable unless expressly and specifically excluded.”  Gold Coast Mall, Inc. v. Larmar Corp., 298 Md. 96, 104 (1983).

Combined with the policy to read arbitration clauses broadly (The Redemptorists v. Coulthard Servs. Inc., 145 Md. App. 116, 149 (2002) (citing NSC Contractors, Inc. v. Borders, 317 Md. 394, 403 (1989)), the Court held the arbitration clause’s “regarding this Agreement” language indicated that the parties intended to require alternative resolution of everything they disputed.

The Court also held that the Defendants did not waive their right to compel arbitration of the claims in the counterclaim merely by filing pleadings in this litigation (their pleadings requested the court compel arbitration).

This is an unreported opinion.  See Md. Rule 1-104.

The full opinion is available PDF.

Schneider Electric Buildings Critical Systems v. Western Surety (Ct. of Appeals)

Filed: July 28, 2017

Opinion by: Judge Adkins

Holding:

A surety company that guarantees performance of a construction subcontract with a performance bond is not bound by the subcontract’s mandatory arbitration clause when the subcontract is incorporated by reference into the bond and the clause refers only to the subcontract’s parties and the bond allows for dispute resolution in court.

Facts:

In May 2009, Plaintiff, a construction contractor, signed a Master Subcontract Agreement (“MSA”) with NCS, an electrical subcontractor, to cover future projects.  The MSA included a mandatory arbitration clause (the “Clause”).  In October 2009, Plaintiff was hired by another construction contractor to help build a medical research facility.  Plaintiff in turn hired NCS to help with the project.  Plaintiff and NCS signed a subcontract (“NCS Subcontract”) that incorporated the MSA by reference.  The NCS Subcontract required NCS to furnish a performance bond (“Bond”), which it obtained from Defendant.  The Bond made NCS and Defendant jointly and severally liable to Plaintiff for performance of the NCS Subcontract.

During construction, a dispute arose, NCS abandoned the site and Plaintiff terminated the contract.  In February 2014, Plaintiff filed a demand for arbitration with NCS.  In April 2014, Plaintiff amended the demand to include Defendant.  Defendant filed a petition in Howard County Circuit Court in which it requested a declaratory judgment that it was not bound by the Clause.

The case was transferred to a more proper venue, Harford County Circuit Court, which granted partial summary judgment for Defendant.  That court explained that the Bond is only insuring that Defendant is liable for any construction that has not been performed, and found no evidence of an intention that Defendant should be bound to dispute resolution provisions of the MSA.  

The Court of Special Appeals affirmed, holding that “the ‘joint and several’ obligation clause in the (Bond) does not evince (Defendant’s) assent to be bound by the (Clause) in the incorporated-by-reference chain of documents.”  Schneider Elec. Bldgs. Critical Sys., v. Western Sur. Co., 231 Md. App. 27, 46 (2016).  The Court of Appeals granted Plaintiff’s petition for a writ of certiorari.

Analysis:

The Court of Appeals applied Maryland contract law to determine if Defendant is bound by the Clause.  Precedent in Maryland requires courts to look at the intention of the parties as expressed in the language of the contracts.  The Court of Appeals explained in Hartford Accident & Indem. Co. v. Scarlett Harbor Assocs., 346 Md. 122, 127 (1997) that “arbitration is a process whereby parties voluntarily agree to substitute a private tribunal for the public tribunal otherwise available to them” and an arbitration clause “cannot impose obligations on persons who are not a party to it and do not agree to its terms.” 

The Court of Appeals interpreted the Bond by “constru(ing) (the Bond, NCS Subcontract, and MSA) as a whole…not (by) read(ing) each clause or provision (of each contract) separately.”  Owens-Illinois v. Cook, 386 Md. 468, 497 (2005).

Here, the Court of Appeals agreed with the lower courts because the Clause refers to the “parties” to the NCS Subcontract (which are Plaintiff and NCS) and the Bond permits court actions to resolve disputes between NCS and Defendant.  Since Defendant was not a “party” to the NCS Subcontract, the Clause does not apply to Defendant.  The Court of Appeals found support in its holding in Liberty Mutual Insurance v. Mandaree Public School District #36, 503 F.3d 709 (8th Cir. 2007), whose facts are similar to this case.

The full opinion is available PDF.

James Dillon v. BMO Harris Bank, N.A. (4th Circuit)

Filed: May 10, 2017

Opinion by: Judge Barbara Milano Keenan

Holding: An arbitration agreement containing choice-of-law provisions applying tribal law and disclaiming the application of federal and state law was held to be unenforceable because (1) by its unambiguous language, it triggered the prospective waiver doctrine, which disallows arbitration agreements that prevent litigants from vindicating federal substantive statutory rights as contravening public policy; and (2) the provisions could not be severed as they went to the essence of the agreement and were negotiated by a party, not in good faith, with superior bargaining power.

Facts:  Plaintiff, a resident of North Carolina, applied for and received a “payday loan” in 2012. “Payday loans” are short, unsecured consumer loans for small amounts and with generally high interest rates (sometimes in excess of 400%). The loan was offered through the website of Great Plains Lending, LLC (the “Company”), which was wholly owned by a federal tribe.  Plaintiff executed a contract (the “Contract”) that contained a loan agreement and an agreement to submit disputes to arbitration. Both agreements contained choice-of-law provisions that required the application of tribal law and disclaimed the application of state or federal law.

Plaintiff filed a putative class action lawsuit in district court, claiming that the Company and other tribal lenders had issued unlawful loans. Instead of suing the lenders for violating state usury laws, Plaintiff sued the financial institutions that facilitated the electronic lending transactions. Plaintiff claimed that the institutions constituted an enterprise whose members, including Defendant BMO Harris (“Defendant”), conducted and participated in the collection of unlawful acts in violation of the Rackeeter Influenced and Corrupt Organizations Act.

In district court, Defendant sought to compel arbitration pursuant to the terms of the Contract and relying on the Federal Arbitration Act (“FAA”). The district court held the Contract unenforceable because it denied the applicability of all federal and state law. Defendant appealed.

Analysis: Pursuant to the FAA, the Court has jurisdiction to review de novo the order denying the motion to compel arbitration. The FAA provides that arbitration agreements are valid and enforceable, except upon grounds at law or in equity for the revocation of any contract. Consistent with such contract principles, the Supreme Court has held that arbitration agreements that operated as prospective waivers of a party’s right to pursue statutory remedies are unenforceable as violating public policy. This prospective waiver doctrine keeps courts from enforcing arbitration agreements that prevent a litigant from vindicating federal substantive statutory rights. 

A mere foreign choice-of-law provision is insufficient to trigger the application of the doctrine. A court must first analyze whether, as a matter of law, “the choice-of-forum and choice-of-law clauses operate in tandem as a prospective waiver of a party’s right to pursue statutory remedies.” Where it is unclear, the arbitrator should decide in the first instance whether a litigant is deprived of those remedies, and the waiver issue is not ripe until a federal court is asked to enforce the arbitrator’s decision. 

In Hayes v. Delbert Services Corp., 811 F.3d 666 (4th Cir. 2015), the Court applied the prospective waiver doctrine to a contract governing an internet payday loan by another federal tribe lender. The choice-of-law provision disclaimed the application of any law other than that of the tribe. The Hayes Court held that this language flatly and categorically renounced the authority of federal statutes. The provision was not severable from the contract because it went to its essence; the animating purpose of the agreement was to circumvent federal law. Another disclaimer of the application of federal and state law in the contract lent support to this position.

Here, Defendant argued that the waiver issue was not ripe as it had not yet come before an arbitrator. Plaintiff countered that the issue was ripe because the language of the choice-of-law provision was unambiguous, thus triggering the prospective waiver doctrine. The Court agreed with Plaintiff. The choice-of-law and other provisions in the Contract are similar or identical to the provisions in Hayes; these applied the law of the federal tribe or disclaimed the application of federal and state laws as to the Contract and lender. As in Hayes, the Contract was an unambiguous attempt to apply tribal law to the exclusion of federal and state law.

The Court held that the choice-of-law provisions could not be severed from the Contract. Severance is allowed only if the provision is not essential to the agreement and the party seeking to enforce the remainder of the agreement negotiated it in good faith. Restatement Second of Contracts § 184 (1981). Here, as in Hayes, the provision went to the essence of the agreement. The Court did not accept Defendant’s request to grant Plaintiff access to federal substantive rights because this would essentially allow Defendant to rewrite the Contract and defeat the purpose of the Contract entirely.

Additionally, the Company used its superior bargaining power to avoid the application of state and federal law, and Section 184 does not permit redrafting where superior bargaining power is used to extract a promise offensive to public policy. Thus, the Company did not meet the second prong to negotiate in good faith.  

The full opinion is available in PDF. 

Charles and Margaret Levin Family Limited Partnership v. Greenberg Family Limited Partnership (Cir. Ct. Mont. Cnty)

Filed:  December 27, 2016

Opinion by:  Ronald B. Rubin

Holding:  Judicial dissolution is an inappropriate remedy for deadlock over the identity of a managing member of an LLC where an LLC’s members have (1) a reasonable exit mechanism to receive fair value for their interest and (2) the Operating Agreement provides an alternative dispute resolution mechanism such as arbitration.

Facts:  Plaintiff and Defendant, each a family limited partnership involved in a series of commercial real estate transactions since the late 1980’s, jointly operated a lucrative office and retail complex.  Originally a general partnership, the joint venture’s organizational structure in 1999 converted to an LLC whose members were Plaintiff and Defendant, each with a 50% stake.

The Operating Agreement provided that Defendant would be the managing member with an initial 5-year term, followed by one or more successive 3-year terms if members unanimously consented to each successive term.  Expiration of the initial term was met with acquiescence by both parties, and Defendant continued to serve as managing member of the LLC.

By 2013, operation of Plaintiff’s family business had passed through several hands and a separation of interests was proposed.  Negotiations were contentious and unsuccessful.  By late 2014, Plaintiff accused Defendant of material breach of the operating agreement, alleging improper authorization of an increased property management fee and exceeding its term as managing member without consent.  At a members’ meeting, Defendant agreed not to increase the management fee, but refused to step aside as managing member.

Pursuant to the Operating Agreement, Plaintiff in 2014 filed a demand for arbitration to remove Defendant as managing member.  Defendant filed a complaint in circuit court seeking a declaratory judgment that the matter was not subject to arbitration.  Each party then withdrew their demands and attempted to negotiate a resolution.  Negotiations ultimately failed, and Plaintiff filed the instant suit in mid-2015.

Plaintiff sought relief in the form of a declaration that Defendant’s term as managing member had expired, and judicial dissolution of the LLC.  Defendant generally denied the allegations, sought a declaration that Defendant could remain as managing member, and requested that judicial dissolution be found an inappropriate remedy in such a dispute.

In March 2016, the court denied cross-motions for summary judgment and set a trial date for November.  By June, Plaintiff filed an amended complaint alleging the parties were deadlocked, and moved for a preliminary injunction for Defendant’s removal as managing member.  Plaintiff again requested judicial dissolution, but alternately requested appointment of a special fiscal agent.

At a preliminary injunction hearing in July, the court granted the motion in part, ordering removal of Defendant as managing member, but denied the request for judicial dissolution.  At the hearing, the court learned that the property management firm, although an affiliate of Defendant, had run day-to-day operations for over fifteen years without serious complaint.  The court found the parties’ unaddressed disagreements to be premised on the unsuccessful attempts to wind up the business, and allowed the property management firm to carry on in conformity with the Operating Agreement despite absence of a managing member.

In October, Defendant moved again for summary judgment, arguing that its removal as managing member rendered the complaint moot, and that any remaining operational or management disputes could be resolved by pursuing arbitration according to the Operating Agreement.  The court denied the motion in favor of full examination of the parties’ relationship, motive, and intent.

Analysis:  The court began by evaluating Plaintiff’s contention that judicial dissolution was the only remedy in light of the fact that without a managing member, the LLC could neither operate generally, nor operate in conformity with its Operating Agreement.  Examining the Operating Agreement, the court found several sections reserving sole authority to bind the LLC to the Managing Member or its specially authorized agents.  Further, the Operating Agreement plainly stated that mere status as a member did not vest with capacity to bind the LLC.  Noting that the practice of stockholders running a corporation might vitiate the protections of the corporate shield, the court concluded that leaving Plaintiff and Defendant as mere members would be improper.  Nor was the property management firm an appropriate substitute for a Managing Member.

The court went on to cite Maryland statutory law, noting that while judicial dissolution is appropriate only when “it is not reasonably practicable to carry on the business in conformity with the articles of organization or the operating agreement,” the statute failed to adequately define the phrase.  Md. Code Ann. Corps & Assn’s Art. §4A-903 (2015).  Nor had Maryland courts definitely construed the statutory language.  The court therefore looked to extent to which deadlock frustrated the purpose to which the LLC was created.  Finding Defendant, as prior Managing Member, had not abused its authority, unjustly enriched itself, or harmed Plaintiff’s economic interests, the court determined the business purpose of the LLC to have been faithfully fulfilled.

The court countenanced that judicial dissolution might have been appropriate but for the fact that the Operating Agreement specifically provided for arbitration as a dispute resolution mechanism.  Although Defendant reversed its initial pre-trial position that appointment of a managing member was not a proper subject of arbitration, Plaintiff failed to argue that Defendant was judicially estopped from taking this position.  Regardless, the court stated that because both parties’  2014 filings had been withdrawn voluntarily prior to the instant suit, judicial estoppel would not have precluded Defendant from taking such a stance.

Finding no ambiguity in the Operating Agreement’s dispute resolution mechanism, the court deemed judicial dissolution to be unnecessary.  The court went on to comment that the Operating Agreement also provided a reasonable exit mechanism in a dissenting member’s ability to exit and receive the fair value of its interest.  Subject to a right of first refusal with notification requirements, Plaintiff could have solicited offers for its interest, but failed to do so.  Further, Defendant in 2015 offered 50% of the appraised value of the joint venture.  Finding the price to be a premium over fair market value (given the limited marketability and/or lack of controlling interest), the court was satisfied in denying the request for judicial dissolution, finding arbitration to be a fair and equitable result.

The full opinion is available in PDF.

Lomax v. Weinstock, Friedman & Friedman, P.A. (Maryland U.S.D.C.)

Filed January 15, 2013

Opinion by Judge Catherine C. Blake

Holding: Under the doctrine of equitable estoppel, a party to a contract containing a mandatory arbitration provision cannot avoid arbitration of a claim against a nonsignatory to the subject contract when the basis for the claim is that contract.
 
Facts: Plaintiff Lomax financed the purchase of a car with a loan obtained through a retail installment contract (the “RISC”) with Credit Acceptance Corporation (“CAC”).  After CAC repossessed and sold the car it retained Weinstock to obtain a deficiency judgment against Lomax.  Lomax filed suit against Weinstock alleging the firm violated the Fair Debt Collection Practices Act, the Maryland Consumer Debt Collection Act and the Maryland Consumer Protection Act. Weinstock filed a motion to dismiss or, in the alternative, to stay the action and compel arbitration based on the RISC’s mandatory arbitration provision.
 
Analysis: It is settled that parties must submit claims to arbitration where they have a valid arbitration agreement and it covers the issues in dispute.  Lomax did not dispute the validity of the RISC or the arbitration agreement within it, but argued that Weinstock, as a nonsignatory to the RISC, could not invoke the arbitration clause.  The Court held, however, that when each of a signatory's claims against a nonsignatory makes reference to or presumes the existence of the written agreement, the signatory is equitably estopped from refusing to submit such claims to arbitration if the arbitration provision is sufficiently broad to encompass the claims.  Because Lomax relied on the RISC as the basis for her attempt to collect damages from Weinstock and the arbitration provision in the RISC was broadly worded so as to include claims against the seller’s attorneys, Lomax was estopped from disclaiming the mandatory arbitration provision contained in the RISC.
 
The Court granted the motion to dismiss.

The opinion is available in PDF. 

Bhari Information Technology System Private Limited v. Sriram (Maryland U.S.D.C.)

Filed December 2, 2013
Opinion by Judge Paul W. Grimm

Holding:  A court should grant a motion to dismiss on arbitration agreement grounds only if the terms of the agreement are free from ambiguity. 

Facts:  Defendant was the sole stockholder of a consulting company, incorporated in Maryland, which he sold to Plaintiff, a Dubai corporation.  Defendant moved to dismiss on several grounds, one of which included to dismiss the proceedings pending arbitration, pursuant to an arbitration clause in the contract for sale of the consulting company. The arbitration clause provided, in its entirety: "Arbitration.  Any arbitration shall be in accordance with ICC rules."

Analysis:  "In determining whether parties have agreed to arbitrate the dispute in question, the Court should consider (1) whether a valid agreement to arbitrate between the parties exists and (2) whether the dispute in question falls within the scope of that arbitration agreement."  The Court further noted that if the terms are free from ambiguity the Court should grant the motion to dismiss on arbitration agreement grounds.  The Court found the agreement to be ambiguous and not appropriate for resolution on a motion to dismiss.  

The Court granted the motion to dismiss on other grounds.  Please note that it is not clear from the case whether the contract was governed by Maryland law.

The full opinion is available in PDF. 

Raglani v. Ripken Professional Baseball, d/b/a Aberdeen Ironbirds (Maryland U.S.D.C.)

Filed: April 16, 2013
Opinion by Judge Catherine C. Blake

Held: Agreement requiring at-will employee to arbitrate disputes with employer, which recited only hiring and continued employment as consideration, which did not require employer to arbitrate, and which gave employer unilateral control over pool of potential arbitrators, was held unenforceable because it lacked mutuality of consideration and denied the employee access to a neutral arbitral forum.

Facts: Plaintiff was an employee at the Defendant company who was terminated in 2011.  Plaintiff alleged that she was discriminated against and terminated because of her gender and filed suit under Title VII of the Civil Rights Act of 1964 and Maryland state law.

When Plaintiff commenced employment with the Defendant company, she signed a Problem Support Policy that included “a valid and binding” arbitration agreement under which employees of the Defendant company promised to arbitrate disputes in consideration of only the employees’ hiring and continued employment.  Defendant had exclusive control over the list of potential arbitrators.  When an employee of Defendant elected to arbitrate a dispute, Defendant was to provide the employee with its list of qualified arbitrators from which the employee could choose.  The agreement required employees of the Defendant company to arbitrate but did not require the Defendant company to follow similar procedures or submit to arbitration.

Defendant filed a motion to dismiss or to stay and compel arbitration pursuant to the arbitration agreement signed by Plaintiff.

Analysis: Although the court acknowledged the Fourth Circuit’s liberal policy toward arbitration agreements, it emphasized it still must evaluate arbitration agreements as contracts.  The court therefore first analyzed whether the arbitration agreement was valid and enforceable.  The court found two independent reasons the arbitration agreement was unenforceable: (1) the agreement lacked consideration and (2) the agreement denied employees access to a neutral forum.  Because the arbitration agreement was unenforceable the court denied Defendant’s motion to dismiss the case or to stay and compel arbitration.

First, like all contracts, arbitration agreements must contain adequate consideration.  Cheek v. United Healthcare of Mid-Atlantic, Inc., 835 A.2d 656, 661 (Md. 2003); Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967); Noohi v. Toll Bros., Inc., 708 F.3d 599, 609 (4th Cir. 2013); Hill v. Peoplesoft USA, Inc., 412 F.3d 540, 543-44 (4th Cir. 2005).  The court followed the logic laid out in Cheek, supra, to conclude that employment or continued employment is not alone adequate consideration for an employee’s promise to arbitrate.  Cheek, 835 A.2d at 666.  Because it did not require Defendant to submit to arbitration, the arbitration agreement was entirely “one-directional” and therefore lacked mutuality of consideration.

Second, even if the arbitration agreement did have adequate consideration, it denied employees access to a neutral forum.  Although there is uncertainty as to whether an arbitration agreement that denies one party access to a neutral forum results in unconscionability, a material breach, or simply unenforceability of the agreement, courts agree that denial of access to a neutral forum in an arbitration agreement may make the agreement unenforceable.  Muriithi v. Shuttle Exp., Inc., 712 F.3d 173, 176 (4th Cir. 2013); Hooters of America, Inc. v. Phillips, 173 F.3d 933, 938-39 (4th Cir. 1999); Murray v. United Food & Commercial Workers Int’l Union, 289 F.3d 297, 302 (4th Cir. 2002).

Here the arbitration agreement denied Plaintiff access to a neutral forum because Defendant had exclusive control over the list of arbitrators from which employees were required to select.  In the Fourth Circuit an employer may not retain this exclusive right.  Murray, 289 F.3d at 303.  Defendant’s promise in the agreement to provide a list of impartial arbitrators was not deemed sufficient to overcome the lack of mutuality in the arbitration selection process.  In addition the arbitration agreement was vague with respect to the rules to be followed, thereby providing a further reason to challenge the neutrality of the forum.

The full opinion is available in PDF here.

Post written by Maria A. Stubbings

Penthouse 4C, LLC v. 100 Harborview Drive Council of Unit Owners (Cir. Ct. Balto. City)

Filed: June 5, 2012.

Opinion by Judge Evelyn Omega Cannon.

Held:   The Circuit Court for Baltimore City held that it had jurisdiction to confirm an arbitration award on a petition filed within 30 days after the arbitrators’ decision on a motion to modify the award, that the arbitrators did not exceed their jurisdiction in awarding the Plaintiff LLC the amount of costs of living and relocation expenses of the LLC’s sole member who was not a party to the arbitration, and that the award would not be vacated for manifest disregard of the law because the Defendant could not show that the arbitrators disregarded the law after understanding and correctly stating it. Finally, the Circuit Court refused to modify the specific performance part of the award based on Defendant’s evidence presented to the Court but not to the arbitrators.      

Facts: On March 9, 2010, the Plaintiff LLC, whose sole member was the primary resident of a condominium managed by the Defendant condominium council and directors, sued for specific performance and damages alleging that that the Defendant’s failure to perform required maintenance caused water exposure damage (mold) in the Plaintiff LLC’s condominium unit. The Plaintiff LLC’s sole member, an individual residing in the unit, was not individually named as a party to the suit.

The Circuit Court granted the Defendant’s motion to stay pending arbitration and after five days of hearings, on November 28, 2011 a majority of the three retired judges serving as arbitrators awarded the Plaintiff $1,252,487 in damages, including $433,722 for the sole member’s consequential costs, and ordered the Defendant to perform the required maintenance.

The Plaintiff filed a petition to confirm the award in the Circuit Court.   A day later the Defendant filed with the arbitrators a motion to modify the award as to what all agreed was an inadvertent mistake. On December 28, 2011 the majority panel issued its modification of the award, in part. On January 23, 2012 the Defendant filed in the Circuit Court a Petition to Vacate the Monetary Award and to Modify the Award’s order of specific performance.

Analysis:   The Circuit Court first addressed the Plaintiff’s claim that the Petition to Vacate was not timely filed. Relying on Mandl v. Bailey, 159 Md. App. 64 (2004),  the Circuit Court found that an arbitration award, although final and complete when issued, is rendered incomplete and no longer final when a motion is timely filed with the arbitrator to modify the award, therefore tolling the 30 day period in which a petition to vacate the award can be filed with the Court. In accordance with Mandl,  the Court found the Petition to Vacate was timely because filed within 30 days of delivery of the corrected award.

The Circuit Court next addressed whether the arbitrator panel exceeded its jurisdiction when making a $433,722 award to the Plaintiff LLC for consequential costs of the LLC’s sole member. The Court found that the Defendant participated in the arbitration without objection about jurisdiction or the appropriateness of a consequential costs award to the Plaintiff LLC’s sole member. The Circuit Court further found that the arbitration panel explicitly made the award to the Plaintiff LLC and not to the LLC’s sole member, therefore no jurisdictional issues were present.  

Next, the Circuit Court addressed the Defendant’s claim that the award for the consequential costs was “completely irrational” and a “manifest disregard of the law.” Although “manifest disregard of the law” is not stated as grounds to vacate an award in the Federal Arbitration Act or the Maryland Uniform Arbitration Act, the Court followed Sharp v. Downey, 197 Md. App. 123 cert. granted, 419 Md. 646 (2011) in applying the doctrine under principles of stare decisis. Reviewing authorities, the Circuit Court found that the “manifest disregard” standard requires some showing in the record, other than the obtained result, that the arbitrators knew the law and consciously disregarded it. The Circuit Court found that the Defendant never presented an issue to the arbitrators as to an award of the amount of the LLC’s sole member’s consequential costs and the arbitrators never provided any explanation for the award. In light of the Defendant’s silence, the award could not be “completely irrational” and the Defendant’s failure to refer the arbitrators to any law on consequential damages was fatal to the requirement of the “manifest disregard of the law” doctrine that the record show that the arbitrators were aware of the law and disregarded it.

Finally, the Defendant sought three modifications to the specific performance portion of the award: 1) incorporation of two Project Manuals that were not introduced into evidence, 2) allowing the Defendant to perform a peer-review of the Project Manuals, and 3) allowing value-engineering of the Project Manuals. Because the Project Manuals were not presented into evidence before the arbitrators, the Circuit Court could not conclude whether the proposed modifications would affect the award. Defendant also was silent during the arbitration hearing about peer-reviewing and value-engineering. Consequently, the Circuit Court denied the Defendant’s Petition to Vacate or Modify the Award and granted Plaintiff’s Petition to Confirm the Award.

The full opinion is available in PDF.

Kumar v. Dhanda (Ct. of Appeals)

Filed May 2, 2012
Opinion By Judge Clayton Greene, Jr.

Held:
While nonbinding arbitration, mandated by the contract, may have constituted a condition precedent to litigation, pursuing arbitration neither postponed the accrual of the underlying breach of contract claims nor otherwise tolled the statute of limitations applicable to maintaining an action in court.

Facts:
Petitioner and Respondent entered into an employment agreement on August 28, 2001. The contract contained a non-compete clause which prohibited Respondent from practicing within a specified radius of Petitioner’s multiple offices or soliciting or accepting Petitioner’s patients for three years following the expiration of the contract, or through August of 2005. The contract also included a standard mandatory, non-binding arbitration clause.

The agreement was not renewed upon termination on August 31, 2002. Soon thereafter, Respondent filed an initial suit for breach of contract against Petitioner in the Circuit Court for Anne Arundel County seeking damages for a breach of contract based on Petitioner’s refusal to grant Respondent partner status and the withholding of certain monies.

Four months later, on February 26, 2003, Petitioner filed a motion to compel arbitration and to dismiss the action. The judge presiding in Anne Arundel County dismissed the action without prejudice on April 24, 2003, stating that the “claims are subject to mandatory arbitration,” but noting that “[t]he case may be reopened to enforce the arbitration.”

On April 29, 2005 Petitioner filed, in the Circuit Court for Baltimore City, a petition to compel arbitration and to appoint an arbitrator. The petition also included separate counts concerning the substantive claims for breach of contract and breach of the non-compete provision. On March 9, 2006, Respondent filed both a response to Petitioner’s petition to compel arbitration and his own motion to dismiss the substantive counts for improper venue and as claims subject to mandatory arbitration. Petitioner then filed a response to the motion to dismiss, offering to withdraw the substantive counts if the Circuit Court would compel arbitration in order to resolve the issues. The court dismissed the substantive counts on April 28, 2006, but did not order arbitration. On August 25, 2006, Petitioner filed a motion for summary judgment, urging the Circuit Court for Baltimore City to grant the earlier petition to compel arbitration. Following a bench trial on November 20, 2006 the  judge granted the petition to compel arbitration.

Petitioner submitted the matter to the arbitrator in March of 2008. The arbitrator denied all relief to Petitioner and also denied relief to Respondent, save for an award of $868.00 as reimbursement for certain disability insurance premiums.

Finally, on March 16, 2009, almost a year after the arbitration award was issued, Petitioner filed the instant action in the Circuit Court for Montgomery County. The complaint stated that “[t]he Agreement requires arbitration as a requirement before Plaintiff can pursue a remedy in court . . . [t]he matter went to arbitration, and a decision in favor of the Defendant was rendered in June of 2008. This matter is brought de novo.” Respondent filed a motion to dismiss, arguing that the applicable three-year statute of limitations barred the action because the alleged breaches of contract occurred between 2002 and 2005. Petitioner filed in opposition, contending that, because completion of arbitration was a condition precedent to filing a claim, the statute of limitations had not begun to run until the arbitration decision of June 20, 2008. After a hearing and supplemental briefing by the parties, Judge McGann, of the Circuit Court for Montgomery County dismissed the action with prejudice.

Analysis:
The applicable statute of limitations is encompassed in § 5-101 of the Courts and Judicial Proceedings Article, which states: “[a] civil action at law shall be filed within three years from the date it accrues unless another provision of the Code provides a different period of time within which an action shall be commenced.” In the context of the statute of limitations, “[t]he law is concerned with accrual in the sense of testing whether all of the elements of a cause of action have occurred so that it is complete.” St. Paul Travelers v. Millstone, 412 Md. 424, 432 (2010). In the instant case, although not specifying the particular dates, both parties agree that the alleged breaches of contract occurred more than three years prior to the filing of the complaint in the Circuit Court for Montgomery County.

The cases Petitioner cites in order to assert that the statute of limitations does not begin to run until a plaintiff can “maintain his action to a successful result” all concerned whether the necessary elements of a cause of action had arisen under the facts that were presented. In the instant case, neither party disputes that all of the elements of Petitioner’s breach of contract claims existed, at the very latest, as of the dates upon which the applicable contractual provisions terminated.  Like the situation in Arroyo v. Board of Educ. of Howard County, 381 Md. 646 (2004), while resolution of the legal action must wait until the satisfaction of the condition precedent, the court’s jurisdiction may be maintained and the claim properly stayed prior to that time.

The court could find no applicable exception to § 5-101, or language within the Maryland Uniform Arbitration Act, §§ 3-201 to 3-234, that would toll the statute of limitations in this case. In Philip Morris v. Christensen, the court explicated for the first time two factors that continue to guide  consideration of whether to apply a judicial tolling exception in a particular case. In order for an exception to be applied the court must find that: “there is persuasive authority or persuasive policy considerations supporting the recognition of the tolling exception, and, recognizing the tolling exception is consistent with the generally recognized purposes for the enactment of statutes of limitations.” Philip Morris, 394 Md. at 238 (2006).  While, to be sure, arbitrating parties are on notice of any possible claims against them, thereby guarding them from stale claims, another purpose of the statute of limitations would be threatened by tolling in this situation. The court has repeatedly touted the value of statutes of limitations as not only ensuring fairness between the parties, but also as essential to judicial economy and the pursuit of diligence in litigation. Petitioner’s pursuit of his legal claims was not vigilant.

The full opinion is available in PDF.

College Park Pentecostal Holiness Church v. General Steel Corp. (Maryland U.S.D.C.)

Filed January 19, 2012.
Opinion by Judge Peter Messitte

Held: An arbitration clause in a contract may be unconscionable, and thus unenforceable, if there is stark inequality of bargaining power between the parties and the terms unreasonably favor one side over the other. 

Note: In this case, the court applied Colorado law pursuant to the terms of the contract (which is substantively similar to Maryland law).

Facts: This case arises from a contract dispute between a church and a building supplies company.  The church was located in Maryland; supplier was located in Colorado.  The church was presented with a contract and told they had one day to sign because a pricing special would no longer be available.  The church signed the contract with supplier which included an arbitration clause.  The arbitration clause provided 1) that any arbitration hearing shall be held in Denver, 2) any challenge that relates to whether claims are arbitrable shall obligate the challenging party to pay the attorney's fees and costs of defense to the non-challenging party, and 3) the party initiating arbitration shall advance all costs thereof. 

The church filed a breach of contract claim.  The supplier filed a motion to dismiss and sought to enforce the venue clause, thus forcing the church into arbitrating the matter in Colorado.  The church claimed that portions of the arbitration clause were unconscionable, specifically the venue and cost allocation provisions. 

Analysis: Under Colorado law, unconscionability requires an overreaching on the part of one party (i.e. inequality of bargaining power or an absence of meaningful choice by the second party) and contract terms which unreasonably favor the first party.  Factors relevant to an unconscionability analysis include:

"[A] standardized agreement executed by the parties of unequal bargaining strength; lack of opportunity to read or become familiar with the document before signing it; use of fine print in the portion of the contract containing the provision; absence of evidence that the provision was commercially reasonable or should reasonably have been anticipated; the terms of the contract, including substantive unfairness; the relationship of the parties, including factors of assent, unfair surprise and notice; and all the circumstances surrounding the formation of the contract, including its commercial setting, purpose and effect." quoting Davis v. M.L.G. Corp., 712 P.2d 985, 991 (Colo. 1986).

The Maryland case law governing unconscionability is similar to the Colorado law.  In Walther v. Sovereign Bank, the Maryland Court of Appeals held that unconscionability requires both a procedural and substantive unfairness.  386 Md. 412 (2005).   Procedural unfairness is evident by one party's lack of meaningful choice or unfair bargaining power.  Substantive unfairness is evident by contractual terms that unreasonably favor the other party.  Id. 

In this case, the court, following Colorado law, found that the church was in an unfair bargaining position because the church representative who reviewed and signed the contract did not have business acumen or benefit of counsel.  The court also found that the pressure to sign within one day added to the lack of meaningful choice.  The court also found the terms of the arbitration clause unreasonably favored the supplier because of the economic hardships the church would incur by arbitrating in Colorado rather than in Maryland.  The court also found the provision requiring the church to pay up front all costs of the arbitration and attorney's fees for the supplier was extremely unfair. 

The full opinion is available in PDF. 

Dickerson v. Longoria, et al. (Ct. of Appeals)

Filed: May 24, 2010

Opinion by Judge Clayton Green, Jr.

Held: Under general agency principles, agent did not have the requisite authority to bind principal to arbitration agreement. Trial court reversed.

Facts: Estate filed medical malpractice claim against nursing home. The nursing home sought to compel the estate to arbitrate the medical malpractice claim based on an arbitration agreement that was signed by the decedent’s agent when the decedent was admitted to the facility. The estate argued that it was not bound by the arbitration agreement. The circuit court found that the decedent not only knew that his agent acted on his behalf, but more importantly, he expected the agent to act for him and acquiesced to the agent’s decisions. Accordingly, the circuit court held that the agent signed the arbitration agreement while acting as decedent’s agent and the estate was therefore bound by the arbitration agreement.

Analysis: The Court held that Decedent’s agent did not have actual or apparent authority to bind the estate to the arbitration agreement. The agent was given authority to make healthcare and financial decisions on the decedent’s behalf. The decision to sign the arbitration agreement was not such a decision; instead, it was primarily a decision to waive the decedent’s right of access to the courts and his right to a trial by jury. The decision to sign a free-standing arbitration agreement is not a health care decision if the patient may receive health care without signing the arbitration agreement. In such a case, as here, the decision primarily concerns the legal rights of the patient with respect to resolving legal claims. The arbitration agreement explicitly stated that “the execution of this arbitration agreement is not a precondition to the furnishing of services to the Resident of the facility.” Accordingly, the agent’s decision to sign the arbitration agreement was not a health care decision and was therefore outside the scope of her actual authority. Further, there was no evidence of apparent authority conferred upon the agent as the decedent was not aware of the arbitration agreement when he was admitted to the facility.

In addition to general agency principles, the estate was not bound by the arbitration agreement as a third-party beneficiary, nor under the theories of equitable estoppel and unclean hands.

The estate could not be a third-party beneficiary to the arbitration agreement because, for the reasons cited above, the agreement was never actually formed. And, even if there was an enforceable arbitration agreement, a third-party beneficiary is bound only to the extent that it seeks to enforce the agreement. Here, the estate was suing for medical malpractice, which was separate and apart from any rights that would have been granted by the arbitration agreement.

The theories of equitable estoppel and unclean hands are equally inapplicable. The nursing home could not articulate any way in which it changed its position for the worse based upon the agent’s assertion that she was acting on the decedent’s behalf when she signed the arbitration agreement. Further, the nursing home did not assert any improper conduct by the agent.

The full opinion is available in PDF.

Penson Financial Services, Inc. v. Holland (Maryland U.S.D.C.)

Filed: February 18, 2010

Opinion by Judge Catherine C. Blake

Held: Objections to the qualifications of arbitrators or the procedure of an arbitration hearing must be raised prior to or during the arbitration hearing or are deemed to have been waived.

Facts and Analysis: Aaron Holland set up a customer account with Penson Financial Services, Inc. in 2007 by signing a Combined Customer Account Agreement. The Combined Customer Account Agreement contained several provisions in large type that provided that the parties were agreeing to a pre-dispute arbitration clause by signing the agreement and explained that all parties to the agreement were waiving their right to a court trial and to have a jury trial.

When a dispute arose regarding Holland's failure to pay a debit balance in his account with Penson, the parties proceeded to have a hearing before three arbitrators in Baltimore, Maryland. In the arbitration hearing, Penson sought $214,661.10 in compensatory damages as well as interest, attorneys' fees, and costs. After the final arbitration hearing on September 30, 2009, Penson was awarded the full amount of compensatory damages sought, but did not receive the requested interest, attorneys' fees or costs.

When, on November 12, 2009, Penson filed an application to confirm the arbitration award, Holland served a Statement of Answer on Penson's counsel, which was later submitted to the Court, requesting the denial of the arbitration award based on (i) the alleged mental competency of one of the arbitrators, (ii) the replacement of one of the arbitrators a day before the hearing without giving him an option to choose the replacement and (iii) Holland's preference for a jury trial.

In addressing Holland's opposition, the Court found that Holland had waived his objection to the arbitration award by not raising his arguments prior to or during the arbitration hearing. The Court also found that the qualifications of the arbitrator whose competency was questioned by Holland and the replacement of an arbitrator a day before the hearing were all in accordance with the Federal Arbitration Act and the arbitration rules established by the Financial Industry Regulatory Authority. With regard to Holland's preference for a jury trial, the Court found that Holland had waived his right to a jury trial by signing the Combined Customer Account Agreement.

The full opinion is available in PDF. The opinion has not been recommended for publication.

Verizon Corporate Services Corp. v. Communications Workers of America, AFL-CIO (4th Cir.)

Filed: January 25, 2010
Per curiam opinion

Held: Affirming the district court’s setting aside of an arbitration award in which the arbitrator ignored critical language in an applicable collective bargaining agreement (CBA), the Court held that courts are bound to set aside awards when an arbitrator exceeds the scope of his authority and the express provisions in the parties' agreement.

Facts: Verizon and a union disputed whether a local letter agreement was superseded by a renegotiation of the parties' CBA. The dispute, which concerned what level of employees would perform certain tasks, was submitted to arbitration. The arbitrator found that the letter agreement was not superseded by the new CBA by virtue of a provision which stated that all local agreements that were valid and enforceable under the previous CBA would continue in effect for the life of the new CBA. Ignoring a negotiated letter agreement that was incorporated into the new CBA and that expressly addressed the issue, the arbitrator ruled in favor of the union.

Analysis: The governing documents were not disputed. As such, the arbitrator was bound to consider and apply the relevant contractual provisions defining the duties of the employees. Under the renegotiated CBA, and a letter agreement that was specifically incorporated into the new CBA, the parties explicitly agreed concerning assignment of the tasks. In the arbitrator’s decision, he did not acknowledge the existence of that agreement. The Court set aside the arbritrator’s award and concluded that the award was beyond the scope of the arbitrator’s authority because he “ignored” “critical language in a Collective Bargaining Agreement” and “introduce[d] some of his own brand of industrial justice.”

The full opinion is available in PDF.

Freedman v. Comcast Corporation (Ct. of Special Appeals)

Filed: January 28, 2010.
Opinion by Judge J. Matricciani.

Held:

1. Defendant's (a) filing of a motion for summary judgment that sought a judicial determination on the merits of the action, (b) request for the court to instruct the arbitrator to hear plaintiff's claims on an individual basis, and (c) attempt to remove to federal court did not constitute a waiver of defendant's right to compel arbitration of claim.

2. The presence of a meaningful choice to enter into an arbitration provision precludes the need for a court to analyze whether an arbitration provision is a contract of adhesion in order to determine whether the provision is procedurally unconscionable.

Facts: Plaintiff claimed defendant violated the 1997 Maryland Wiretapping and Electronic Surveillance Act, alleging the various phone calls he made were recorded without warning. After several pleadings, the Circuit Court denied defendant's motion to dismiss but granted its motion to compel arbitration. Plaintiff appealed the Circuit Court's decision to compel arbitration.

On appeal, plaintiff challenged the validity of the arbitration provision, arguing waiver and unconscionability, among other theories. The Court of Special Appeals denied the appeal after construing the plain terms of the arbitration provision.

Analysis:

1. Waiver.

The plaintiff contended the defendant waived its right to arbitration because defendant (a) filed an alternative motion for summary judgment in conjunction with one of its motions to dismiss, (b) requested the court instruct the arbitrator to hear plaintiff's claim on only an individual basis, and (c) sought to remove the case to federal court.

The Court recited prior cases regarding waiver, stating "the intention to waive must be clearly established and will not be inferred from equivocal acts or language . . . Thus, waiver is a question of intent that ordinarily turns on the factual circumstances of each case."

The Court found plaintiff relied "on a misstatement of federal case law" to argue that a party filing a motion for summary judgment, which seeks judicial determination on the merits of the action, has waived the right to arbitration. Rather, the Court noted that a motion for summary judgment could waive arbitration if it approached a "voluminously documented defense." Here, defendant's motion to dismiss relied on a single document outside the pleadings, a Maryland Public Service Commission certificate, to argue defendant was exempted by the statute that gave rise to plaintiff's claims. As the motion was limited to a procedural flaw, the Court did not find an effective waiver.

The Court found one of defendant's motions, which argued plaintiff was barred from arbitrating his claims on a class basis, was not a waiver. Instead, the motion was a reaffirmation of its intent to arbitrate and merely protected a right defendant believed it possessed.

Lastly, defendant's attempt to remove to federal court did not waive the right to arbitrate because defendant argued in federal court that the court's jurisdiction was limited rather than lacking entirely.

2. Unconscionability.

The plaintiff contended the arbitration provision was (a) procedurally unconscionable because it was a contract of adhesion and (b) substantively unconscionable because it (i) required the arbitrator decide the "validity, enforceability and scope" of the provision, (ii) required the arbitrator to apply the rules of the provision if they were to conflict with the arbitrator's rules, (iii) required the arbitrator to enforce the provision as written, (iv) required the plaintiff to reimburse defendant if defendant overturns an award greater than $75,000, (v) only allowed limited discovery, and (vi) is enforceable only if the class action waiver clause is also enforceable.

Both procedural and substantive unconscionability must be present for a court to invalidate a contract provision as unconscionable. In making its determination on procedural unconscionability, the Court declined to analyze the bargaining power among the parties in order to determine whether the arbitration provision was a contract of adhesion because plaintiff had a "meaningful choice." Here, both the notice plaintiff received and the opt-out provision contained in the notice were clear, conspicuous, and, regarding the opt-out provision, convenient.

Although not necessary, the Court thought it was prudent to address plaintiff's substantive unconscionabilty arguments as well, finding that none of the provision's features were unconscionable individually or in their entirety.

This opinion is available in PDF.

Onconome, Inc. v. University of Pittsburgh (Cir. Ct. Balto. City)

Filed July 21, 2009.
Opinion by Judge Evelyn Omega Cannon.

Held: An arbitration clause in a licensing agreement but not in a related agreement between the same parties will cover claims based on the related agreement so long as the claims "touch matters" covered by the clause. Further, an arbitration clause binds a non-signatory of an agreement if he or she is a transaction participant that is closely related to the dispute.

Facts: The parties entered into a series of three agreements concerning the development and marketing of a medical treatment. Two agreements did not contain an arbitration clause. The plaintiff filed suit for breach of one of those agreements, and the defendants moved to dismiss, invoking the right to arbitrate. The Court referred to the substance of the complaint and determined that the allegations "touched matters" covered by the agreement containing the arbitration clause. Accordingly, the plaintiff was required to arbitrate.

The full opinion is available in PDF.