In contrast to the Texas case of last week, the U.S. Court of Appeals for the Third Circuit held, in an employment discrimination and retaliation case, that forty-one plaintiffs who were not signatories to the arbitration agreement were not required to arbitrate. Mendez v. Puerto Rican Int’l Cos., No. 07-4053, (3rd Cir. 2009). The eight signatories plaintiffs, however, were compelled to arbitrate their claims. The court stated that section 3 of the FAA ” was not intended to mandate curtailment of the litigation rights of anyone who has not agreed to arbitrate any of the issues before the court.”

Today, the Texas Supreme Court handed down In re: Labatt Food Service, L.P., __ S.W.3d _ Texas (2009) (Cause No. 07-0419). The opinion resolves the issue of whether nonsignatories to an arbitration agreement should be compelled to arbitrate claims when the decedent’s claims would have to be arbitrated. On a related note, S.B. 222 is currently being considered by the Texas Legislature. The bill deals, in part, with the extension of the Texas Arbitration Act to nonsignatory parties. Special thanks to Jeff Jury for bringing this case to our attention.

On January 30th, 2009, the Second Circuit refused to enforce an arbitration clause contained in American Express Co. merchants’ agreement. In Re: American Express Merchants’ Litigation, No. 06-1871 (2d Cir. 2009). The clause would prevent merchants who accept the card from bringing class-action antitrust claims against American Express. Like the Texas Supreme Court in In re Poly-America, L.P., the Second Circuit cited section 2 of the FAA, which provides that an agreement to arbitrate “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” However, here the court stressed that it did not rely on findings of unconscionability under state law, but instead, it based its holding on vindication of statutoty rights analysis. For further commentary, see ADR Prof Blog, Morrison Foerster, and Marc J. Goldstein.

Despite a strong challenge, court upheld arbitral award. The U.S. District Court for the Southern District of Texas denied a motion to vacate an arbitral award and held that the arbitration panel did not “manifestly disregard” the law. Dealer Computer Services, Inc. v. Hammonasset Ford Lincoln-Mercury, Inc., Case No. 08-1865 (USDC S.D. Tex. Dec. 22, 2008). In 1993, Computer agreed to provide services for Ford’s dealership software system. The contract included, among other things, an arbitration clause and the parties agreed that Michigan’s law would govern the contract. In 2006, a breach of contract dispute arose and Ford filed an arbitration demand. The arbitration panel concluded that Computer had breached the contract and Ford was awarded $297,567.59 in damages, which included attorney fees of $120,327. Computer moved to vacate the award. The district court explained that, under FAA’s section 10(a)(4), a court may vacate an award if the arbitrators exceed their authority or manifestly disregard the law. However, a court “will not vacate an award simply because the arbitrator applied the law incorrectly; rather, the arbitrator must be aware of a governing legal principle and choose to ignore it.” Although Michigan courts would usually not allow attorney’s fees as costs, the court upheld the arbitration panel’s award of attorney fees to Computer and held that the panel did not manifestly disregard the law. See also Reinsurance Focus for recent cases citing the doctrine of Manifest Disregard for the Law.