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Tuesday, May 11, 2010

Second Circuit Upholds Arbitration Agreement Against Unconscionability Challenge

2nd Cir.Last month was arbitration month here on the blog, but we just can't help ourselves.  On April 16th, the Second Circuit issued its opinion in Harrington v. Atlantic Sounding Inc., intervening in a pitched battle between the Federal Arbitration Act, the FAA, and protections afforded injured seamen currently codified in the Jones Act and the Federal Employer's Liability Act, or FELA.  

Plaintiff Harrington had been employed by Weeks Marine for two years before suffering a back injury in April 2005. Harrington left Weeks' employ, but Weeks paid for his medical expenses and made maintenance payments of $20/day.  Harrington's doctor prescribed painkillers, which Harrington supplemented, presumably without prescription, by drinking a half-gallon of vodka every two or three days.  Despite this therapy, Harrington required surgery to repair a herniated disk.  Harrington sought additional support from Weeks and received a "Claim Arbitration Agreement," CAA.  Under the CAA, Weeks agreed to advance Harrington 60% of his gross earnings until Harrington was again fit for duty.  In return, Weeks agreed to arbitrate any claim he might have against Weeks.  After undergoing surgery, Harrington signed the CAA and had it notarized.  He told the notary that he knew what he was signing, but he would later claim that he did so under the influence of painkillers and alcohol.  The notary's testimony on this subject was confused: the notary testified that Harrington was not impaired but was in pain and spoke incoherently on the rare occasions he chose to do so.

In December, Harrington was still unable to work, and he sought continued assistance from Weeks.  Weeks agreed to continue support through January 2006 but required that Harrington sign an Addendum to the CAA.  Harrington did so, and brought it to the same notary.  Harrington testified that he was at that time drinking two quarts of vodka and six beers a day.  Harrington was terminated at the end of January, and he brought suit in June 2006.  Weeks moved to dismiss the complaint or to compel arbitration.  The District Court denied the motion, finding the arbitration agreement both procedurally and substantively unconscionable.  It was procedurally unconscionable because Weeks asked Harrington to sign the CAA when he was in pain and under the influence.  It was substantively unconscionable because it forced Harrington to agree to Weeks' claims that it had no liability for his injury.

On appeal, Harrington argued that the CAA was invalid because it was inconsistent with provisions of FELA incorporated in the Jones Act and guaranteeing certain forum-selection rights of seamen.  The Second Circuit rejected that argument, noting that the FAA applies in the maritime context and reflects a federal policy in favor of arbitration.  The provision of FELA on which Harrington sought to rely is not about arbitration at all and was adopted in 1910, thus predating the FAA and the rise of employment arbitration.  The purpose of FELA was to provide that a seaman could bring a claim in a convenient forum and not to preclude arbitration. 

The Second Circuit also rejected the District Court's conclusion that the CAA was unconscionable.  First, the court noted that the District Court found the CAA substantively unconscionable based on one misleading provision, but the Second Circuit found that misleading language in an agreement goes to procedural, not substantive unconscionability, unless as a result of its operation the provision "shocks the conscience."  The Second Circuit was not shocked.  The provision said that Weeks was not "currently responsible or liable for any other damages under general maritime law, the Jones Act or any other applicable law."  That, the court said, is arguably simply a statement of fact, since liability had yet been adjudicated.  Applying New Jersey law, the court concluded that the CAA could not be unconscionable without a showing of substantive unconscionability.

The Second Circuit vacated the District Court's judgment and remanded the case for further proceedings relating to Harrington's incapacity defenses to the enforceability of the CAA and the question of Harrington's potential ratification of the agreement by having received its benefits.  

3calabresi  Judge Calabresi (pictured) dissented.  He argued that the majority's decision did not "take adequate account of the historic importance and purpose of both the Jones Act and FELA, and of their unique protections for specific categories of workers, such as seamen. . . ."  Judge Calebresi recounts the special circumstances that motivated Congress to provide special protections to seamen, including the right to choose unilaterally between a bench and a jury trial.  He reads FELA Section 5 as protecting a seaman's "right to bring his claim in any forum that was made eligible to him by statute."  Because the CAA deprived Harrington of that right, it was invalid under the Jones Act and FELA.  Judge Calebresi would not permit the policy in favor of arbitration to trump the worker-protection values underlying FELA and the Jones Act.

Judge Calabresi would not have reached the unconscionability issue, since he would have invalidated the CAA on statutory grounds.  However, had he reached it, he would have agreed with the District Court that the CAA was unconscionable based on his different understanding of New Jersey's "sliding scale" approach to unconscionability.

[Jeremy Telman]

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