Category: Federal Courts

Texas Arbitration Provision Sounds Death Knell For Illinois Salesman’s Suit Against Former Employer – IL ND

(“Isn’t that remarkable…..”)

The Plaintiff in Brne v. Inspired eLearning, 2017 WL 4263995, worked in sales for the corporate publisher defendant.  His employment contract called for arbitration in San Antonio, Texas.

When defendant failed to pay plaintiff his earned commissions, plaintiff sued in Federal court in his home state of Illinois under the Illinois Wage Payment and Collection Act, 820 ILCS 115/1 (“IWPCA”). Defendant moved for venue-based dismissal under Rule 12(b)(3)

The Illinois Northern District granted defendant’s motion and required the plaintiff to arbitrate in Texas.  A Rule 12(b)(3) motion is the proper vehicle to dismiss a case filed in the wrong venue. Once a defendant challenges the plaintiff’s venue choice, the burden shifts to the plaintiff to establish it filed in the proper district.  When plaintiff’s chosen venue is improper, the Court “shall dismiss [the case], or if it be in the interest of justice, transfer such case to any district or division in which it could have been brought.” 28 U.S.C. § 1406(a).

Upholding the Texas arbitration clause, the Illinois Federal court noted the liberal federal policy favoring arbitration agreements except when to do so would violate general contract enforceability rules (e.g. when arbitration agreement is the product of fraud, coercion, duress, etc.)

The Court then turned to plaintiff’s argument that the arbitration agreement was substantively unconscionable.  An agreement is substantively unconscionable where it is so one-sided, it “shocks the conscience” for a court to enforce the terms.

The plaintiff claimed the arbitration agreement’s cost-sharing provision and absence of fee-shifting rendered it substantively unconscionable.

Cost Sharing Provision

Under Texas and Illinois law, a party seeking to invalidate an arbitration agreement on the ground that arbitration is prohibitively expensive must provide individualized evidence to show it will likely be saddled with excessive costs during the course of the arbitration and is financially incapable of meeting those costs.  The fact that sharing arbitration costs might cut in to a plaintiff’s recovery isn’t enough: without specific evidence that clearly demonstrates arbitration is cost-prohibitive, a court will not strike down an arbitration cost-sharing provision as substantively unconscionable.  Since plaintiff failed to offer competent evidence that he was unable to shoulder half of the arbitration costs, his substantive unconscionability argument failed

Fee-Shifting Waiver

The plaintiff’s fee-shifting waiver argument fared better.  Plaintiff asserted  then argued that the arbitration agreement’s provision that each side pays their own fees deprived Plaintiff of his rights under the IWPCA (see above) which, among other things, allows a successful plaintiff to recover her attorneys’ fees. 820 ILCS 115/14.

The Court noted that contractual provisions against fee-shifting are not per se unconscionable and that the party challenging such a term must demonstrate concrete economic harm if it has to pay its own lawyer fees.  The court also noted that both Illinois and Texas courts look favorably on arbitration and that arbitration fee-shifting waivers are unconscionable only when they contradict a statute’s mandatory fee-shifting rights and the statute is central to the arbitrated dispute.

The court analogized the IWPCA to other states’ fee-shifting statutes and found the IWPCA’s attorneys’ fees section integral to the statute’s aim of protecting workers from getting stiffed by their employers.  The court then observed that IWPCA’s attorney’s fees provision encouraged non-breaching employees to pursue their rights against employers.  In view of the importance of the IWPCA’s attorneys’ fees provision, the Court ruled that the arbitration clause’s fee-shifting waiver clashed materially with the IWPCA and was substantively unconscionable.

However, since the arbitration agreement contained a severability clause (i.e. any provisions that were void, could be excised from the arbitration contract), the Court severed the fee-shifting waiver term and enforced the balance of the arbitration agreement.  As a result, plaintiff must still arbitrate against his ex-employer in Texas (and cannot litigate in Illinois).

Afterwords:

This case lies at the confluence of freedom of contract, the strong judicial policy favoring arbitration and when an arbitration clause conflicts with statutory fee-shifting language.  The court nullified the arbitration provision requiring each side to pay its own fees since that term clashed directly with opposing language in the Illinois Wage Payment and Collection Act.  Still, the court enforced the parties’ arbitration agreement – minus the fee provision.

The case also provides a useful synopsis of venue-based motions to dismiss in Federal court.

 

 

 

 

7th Circuit Takes Archaic Hearsay Exceptions to Judicial Woodshed

Decrying them as flawed “folk psychology” with dubious philosophical underpinnings, the Seventh Circuit recently took two venerable hearsay exceptions to task in the course of affirming a felon’s conviction on a Federal weapons charge.

In U.S. v. Boyce (here), the Court affirmed the trial court’s admission of a 911 call recording and transcript into evidence over defendant’s hearsay objections under the present sense impression and excited utterance exceptions.

Defendant’s girlfriend called 911 and said that the defendant was beating her and “going crazy for no reason”.  During the call, she also related how she had just run to a neighbor’s house and that the defendant had a gun. 

When the caller refused to testify against the defendant at trial, the prosecution published the call’s recording and transcript to the jury over defendant’s objection.  Defendant appealed.

The Seventh Circuit affirmed the conviction on the basis that the 911 call satisfied both the present sense impression and excited utterance hearsay exceptions, codified in FRE 803(1) and (2) respectively. 

Yet it still spent much of the opinion questioning the continued validity of the two “spontaneity” hearsay exceptions.   

Present Sense Impression

FRE 803(1) – the present sense impression – provides that an out-of-court statement describing or explaining an event while it’s happening or immediately after the declarant perceives it, is not hearsay. 

The exception is premised on the notion that the “substantial contemporaneity” of event and statement nullifies a likelihood of conscious fabrication (e.g. the speaker doesn’t have enough time to lie).

The present sense impression elements are (1) a statement that describes an event or condition with no calculated narration; (2) the speaker personally perceives the event or condition described, and (3) the statement must be made while the speaker is perceiving the event or condition, or immediately thereafter. 

The Court found it difficult to take the rationale underlying the present sense impression exception “entirely seriously” since “people are entirely capable of spontaneous lies.”  The Court bolstered its skepticism by citing to a psychological study that shows it takes less than a second for someone to fashion an impromptu lie.

Excited Utterance

The excited utterance hearsay exception is broader than the present sense impression and applies where (1) a startling event occurs, (2) the declarant makes the statement under the fresh stress of a startling event, and (3) the declarant’s statement relates to the starting event.  

It’s bottomed on the notion that a startling event will prevent a speaker from deliberation or “self-interested reflection” and likely produce an utterance free from calculation or fabrication.

 But the modern trend in psychology, according to the Court, was to recognize that while a stressor may minimize a speaker’s opportunity for reflective self-interest, it’s just as likely (if not more) that the startling event will distort the speaker’s observation and judgment.

Judge Posner’s concurrence goes even further.  He labels the hearsay rule archaic and too complex and also castigates the two “spontaneity exceptions” (present sense impression and excited utterance) as lacking sound science and psychology. 

He views the exceptions as outmoded relics of a prior era that no longer hold water in 21st century culture – especially in light of ongoing developments in cognitive psychology.  Judge Posner believes the 911 call should have come into evidence under FRE 807’s “residual” hearsay exception – a rule he would like to see swallow up FRE 801-806. 

The residual hearsay rule would allow into evidence out-of-court statements that have a sufficient degree of trustworthiness and reliability and that are dispositive of a case’s outcome.

Take-away: Boyce is interesting for its discussion and critique of the data and belief systems underlying the present sense impression and excited utterance hearsay exceptions.  Clearly, time-honored (but not tested) rationales for the rules are suspect. 

The reason: most lies are spontaneous and actually outnumber planned lies (this according to studies cited by the Court).  It will be interesting to see if and when the present sense impression and excited utterance exceptions are either updated or excised completely from Federal and state court trials.

Bank Escapes Liability Where It Accepts Two-Party Check With Only One Indorsement – IL ND

BBCN Bank v. Sterling Fire Restoration, Ltd., 2016 WL 691784 homes in on the required showing to win a motion for judgment on the pleadings in Federal court, the scope of a general release, and the UCC section governing joint payee or “two-party” checks.

The plaintiff, an assignee of a fire restorer’s claim who did some repair work on a commercial structure, sued two banks for paying out on a two-party check (the “Check”) where only one payee indorsed it. The Assignor was a payee on the Check but never indorsed it.

The banks moved for summary judgment on the ground that the assignor previously released its claims to the Check proceeds in an earlier lawsuit and filed a third-party suit against the assignor for indemnification.  The assignor moved for judgment on the pleadings on the banks’ third-party action.

Result: Bank defendants’ motions for summary judgment granted; Assignor’s judgment on the pleadings motion (on the banks’ third-party indemnification claims) denied.

Rules/Reasons:

FRCP 12(c) governs motions for judgment on the pleadings.  A party can move for judgment on the pleadings after the complaint and answer have been filed.  When deciding a motion for judgment on the pleadings, the Court considers only the contents of the filed pleadings – including the complaint, answer, and complaint exhibits.  Like a summary judgment motion, a motion for judgment on the pleadings should be granted only if there are no genuine issues of material fact to be resolved at trial.

FRCP 56 governs summary judgment motions.  A party opposing a summary judgment must “pierce” (go beyond) the pleadings and point to evidence in the record (depositions, discovery responses, etc.) that creates a genuine factual dispute that must be decided after a trial on the merits.

UCC section 3-110 applies to checks with multiple payees.  It provides that if an instrument is jointly payable to 2 or more persons (not “alternatively”), it can only be negotiated, discharged or enforced by all of the payees.  810 ILCS 5/3-110(d).

Here, since both payees did not sign the Check, the banks plainly violated section 3-110 by accepting and paying it.  The Check was payable to two parties and only one signed it.

The banks still escaped liability though since the assigning restoration company previously released its claims to the Check proceeds.  In Illinois, a general release bars all claims a signing party (the releasor) has actual knowledge of or that he could have discovered upon reasonable inquiry.

Here, the assignor’s prior release of the bank defendants was binding on the plaintiff since an assignee cannot acquire greater rights to something than its assignor has.  And since the plaintiff’s claim against the banks was previously released by plaintiff’s assignor, plaintiff’s lawsuit against the banks were barred.

The Assignor’s motion for judgment on the pleadings on the banks’ third-party claims was denied due to factual disputes.  Since the court could not tell whether or not the assignor misrepresented to the plaintiff whether it had assigned its claim by looking only at the banks’ third-party complaint and the assignor’s answer, there were disputed facts that could only be decided after a trial.

Take-aways:

  • Motions for judgment on the pleadings and summary judgment motions will be denied if there is a genuine factual dispute for trial;
  • A summary judgment opponent (respondent) must produce evidence (not simply allegations in pleadings) to show that there are disputed facts that can only be decided on a full trial on the merits;
  • The right remedy for a UCC 3-110 violation is a conversion action under UCC section 3-420;
  • In sophisticated commercial transactions, a broadly-worded release will be enforced as written.