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Legal Intelligencer: Beyond the Courts: The Potential Future of Arbitration

In the January 23, 2020 edition of The Legal Intelligencer Edward T. Kang, managing member of KHF wrote “Beyond the Courts: The Potential Future of Arbitration

This recent decision has implications for how practitioners understand the court system and arbitration system to usually work, as well as raising already-existent questions about the fairness of arbitration clauses and its applicability for various types of claims.

In a recent decision from the U.S. Court of Appeals for the Third Circuit, we saw a rare event—the court affirmed the district court’s decision to vacate an arbitration award in Monongahela Valley Hospital v. United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union, AFL-CIO, CLC, ___F.3d___ (3d Cir. Dec. 30, 2019). This case exemplified one of the rare situations in which the courts have decided to exercise authority and “correct” arbitration awards that have appeared to be blatantly unfair, which could arise from a variety of reasons. This recent decision has implications for how practitioners understand the court system and arbitration system to usually work, as well as raising already-existent questions about the fairness of arbitration clauses and its applicability for various types of claims.

Monongahela Valley Hospital involved a dispute between the hospital and one of its “bargaining unit” employees who are members of the union under a collective bargaining agreement (CBA). About half of the employees of the hospital are supervisors who are not bargaining unit employees. The CBA governed the relationship between the hospital and the bargaining unit employees. The grievances centered around the hospital’s denial of a unit bargaining employee’s request for vacation due to a non-unit bargaining employee’s request for the same time off. The hospital denied the unit bargaining employee’s request because her supervisor, a nonbargaining unit employee, had requested the same week off and both could not be away at the same time. Using its authority to have the “final” say in the matter, the hospital denied the bargaining unit employee’s request.

The employee brought the grievances to the union, arguing that, under the CBA, the union employees were supposed to be given priority over nonunion employees in scheduling days off, if there were overlapping conflicts. Their dispute ultimately led to arbitration. The arbitrator sustained the grievance, ruling that, “notwithstanding the hospital’s reservation of exclusive rights contained in the CBA relating to the final say in scheduling vacations,” the CBA precluded the hospital from denying senior bargaining unit employees “when there is no operating need.” The phrase “operating need” is not found anywhere in the CBA. Rather, the phrase was inserted by the arbitrator in supporting his decision in favor of the union.

After the arbitrator sustained the union’s grievance and ruled in favor of the union, the hospital filed a complaint with the U.S. District Court for the Western District of Pennsylvania, arguing that the arbitrator disregarded the language of the CBA. More details about the history of the case can be read here in the Third Circuit’s opinion.

Ultimately, both the district court and the Third Circuit agreed with the hospital and concluded that the arbitrator had exceeded the scope of his authority through his selective weighing of language present in the arbitration agreement. The conclusion was based on the arbitrator’s decision to use the language regarding “operating need” restrictions—which justified his award for the union but had no real basis in the language of the CBA. The union had been awarded because of the arbitrator’s interpretation of a “so far as possible” clause to mean the hospital should heavily consider union employee’s preferences before allocating location time. Yet, his interpretation of this clause, according to the court, completely disregarded the language that followed it. That “so far as possible” clause could not “hold hostage” the words which gave the hospital “final,” “exclusive” and “unilateral” rights to schedule vacation days, no matter the union status of the employees involved.

Using the words of the famous 1960 United Steelworkers v. Enterprise Wheel & Car U.S. Supreme Court decision, the Third Circuit stated that the arbitrator was not free to dispense “his own brand of industrial justice” through interpreting the agreement in this manner. The court held that the arbitrator exceeded the scope of his authority when he injected the phrase “operating need” restriction into the CBA. The court noted its decision was unusual in that courts typically give a heavy degree of deference to arbitrators.

Indeed, Monongahela Valley Hospital seems like a departure from the recent trend of courts broadening the applicability of arbitration clauses and authority of arbitrators. In last year’s Henry Schein v. Archer & White Sales, 139 S.Ct. 524 (2019), for instance, the court eliminated the “wholly groundless” exception in regard to arbitrability, stating in its unanimous opinion that it was inconsistent with both the Federal Arbitration Act and court precedent. If the parties involved have an agreement that gives the arbitrator authority to decide upon the arbitrability question, a court cannot override that agreement. In other words, it is the arbitrator, not the court, who decides the arbitrability question as long as the arbitration clause provides for it no matter how that seems unfair. In the opinion delivered by Justice Brett Kavanaugh, the court concluded that it is “not at liberty to rewrite the statute passed by Congress and signed by the president,” and that the courts “must respect the parties’ decision as embodied” in their contracts.

The decisions in Epic Systems v. Lewis, 138 S.Ct. 1612 (2018), and Lamps Plus v. Varela, 139 S.Ct. 1407 (2019), also followed the trend of favoring arbitration and limiting judicial review. In Epic Systems (a case concerning the class arbitrability of Fair Labor Standards Act claims), the majority held that the arbitration clause in question did not allow for classwide arbitration and could not be overruled by the courts. Similarly, in Lamps Plus, the majority held that the arbitration agreement did not allow for classwide arbitration, and the courts could not “compel” such. In both of these cases, four justices issued strongly worded dissenting opinions. In Lamps Plus, in particular, the four justices who dissented, each wrote his or her own opinion, showing their strong feelings against the pro-arbitration trend.

Against this background, Monongahela Valley Hospital seems remarkable. Although the decision did not relate to the arbitrability question or similar arbitration scope or breadth question, the case represents a rare situation where the court held the arbitrator exceeded the authority. The Third Circuit and the district court seemed they were sensitive to some harsh criticisms made toward arbitration. For instance, major publications like The New York Times have recently written articles such as “In Arbitration, a ‘Privatization of the Justice System’” that have painted the consequences of arbitration clauses in a harsh light, considering the extreme events that have transpired due to their existence. Other even criticized arbitrators who seem to be in the pocket of the major companies involved in proceedings.

In response to these concerns over arbitration, the House of Representatives passed the Forced Arbitration Injustice Repeal Act (the FAIR ACT) in September 2019. This legislation is meant to prohibit both the forced arbitration of “future employment, consumer, antitrust, or civil rights disputes” and “agreements and practices that interfere with the right of individuals, workers, and small businesses to participate in a joint, class, or collective action related to an employment, consumer, antitrust or civil rights dispute.” See H.R. 1423—Forced Arbitration Injustice Repeal Act for full details on the proposed bill. It has been received in the Senate but not voted on yet. If this legislation were to pass, it would have great implications for many companies, as the presence of forced arbitration clauses in contracts has grown in recent years. Clauses that limit potential disputes to arbitration-only are found in everything from consumer contracts with credit card companies to agreements with healthcare providers.

What Is the Future of Arbitration?

There is no doubt the recent Supreme Court decisions show a strong trend toward favoring arbitration and its applicability. On the other hand, the House of Representatives and certain consumer advocate groups are trying to limit the scope and applicability of arbitration. Until the law changes and the FAIR ACT (or similar) passes, it appears the trend favoring arbitration and its applicability will continue. Until that happens, a case like Monongahela Valley Hospital will likely remain a “rare situation.”

 

Edward T. Kang is the managing member of Kang Haggerty & Fetbroyt. He devotes the majority of his practice to business litigation and other litigation involving business entities. Contact him at ekang@khflaw.com.

Reprinted with permission from the January 23, 2020 edition of “The Legal Intelligencer” © 2020 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or reprints@alm.com.

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