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When granting a motion to send a lawsuit to arbitration, a federal judge must issue a stay — and not an order of dismissal — if either side requests one, the 3rd U.S. Circuit Court of Appeals has ruled. The ruling in Lloyd v. Hovensa LLC was just one of two significant arbitration decisions handed down Thursday by a three-judge 3rd Circuit panel consisting of U.S. Circuit Judges Richard L. Nygaard, Edward R. Becker and Walter K. Stapleton. In the second case, Parilla v. IAP Worldwide Services VI Inc., the court held that even if several provisions of an arbitration agreement are “unconscionable,” the lower court must consider enforcing it nonetheless if the offensive provisions can be severed from the agreement. Although both decisions stem from appeals out of the U.S. Virgin Islands District Court, they offer significant guidance for all trial judges within the 3rd Circuit on both procedural and substantive issues when analyzing arbitration agreements. Plaintiff Bruno Lloyd worked for 12 years as a boilermaker and pipefitter for various contractors at the HOVENSA refinery in St. Croix. Although the contractors changed over the years, Lloyd was routinely rehired whenever a new contractor took over, according to court papers. But he was laid off in December 2001 when Wyatt Field Services took over the contract and allegedly began filling positions with a predominantly white work force from the continental United States. When Wyatt began hiring Virgin Islands workers, it required them to sign a “dispute resolution agreement” as a condition of having their applications considered. Lloyd applied and signed a DRA, but he was not hired and filed a race discrimination suit. Wyatt then moved to compel arbitration, pursuant to the DRA, and to stay the proceedings. Lloyd responded by opposing arbitration on the grounds that several provisions of the DRA were unconscionable and violated public policy. The trial judge granted Wyatt’s motion to compel arbitration and dismissed the complaint with prejudice, saying it found all of Lloyd’s claims to be arbitrable and that therefore there were no claims for adjudication by the district court. Now the 3rd Circuit has ruled that the trial judge erred in dismissing the case since the Federal Arbitration Act mandates that the judge issue a stay whenever any party requests it. Writing for the court, Senior U.S. Circuit Judge Walter K. Stapleton found that “the plain language of Section 3 [of the FAA] affords a district court no discretion to dismiss a case where one of the parties applies for a stay pending arbitration.” The FAA’s directive that the court “shall” enter a stay, Stapleton said, “simply cannot be read to say that the court shall enter a stay in all cases except those in which all claims are arbitrable and the court finds dismissal to be the preferable approach.” Instead, Stapleton said, “the statute clearly states, without exception, that whenever suit is brought on an arbitrable claim, the court ‘shall’ upon application stay the litigation until arbitration has been concluded.” Stapleton found there was considerable wisdom in Congress’ decision to require a stay order since it allows the trial judge to continue to play a role in the case even during the arbitration process. “The district court has a significant role to play under the FAA even in those instances in which the district court orders the arbitration of all claims,” Stapleton wrote. “Even in those instances, the parties are entitled to seek the court’s assistance during the course of arbitration. For example, the FAA allows arbitrating parties to return to court for resolution of disputes regarding the appointment of an arbitrator or the filling of an arbitrator vacancy. … Similarly, parties may ask the court to compel the attendance of witnesses, or to punish the witnesses for contempt.” And after an arbitration award is rendered, Stapleton noted, a party is entitled to seek relief in the district court in the form of a judgment on the award or an order vacating or modifying the award. By contrast, Stapleton said, if the plaintiff’s case is dismissed rather than stayed, “the parties will have to file a new action each time the court’s assistance is required, with the attendant risk of having their case assigned to a new judge.” With a stay in place, Stapleton said, the process is “expedited” because the parties “may simply return to the same district judge presiding over the plaintiff’s case.” But Stapleton found there was an “even more important reason” for insisting on a stay rather than dismissal — preventing pre-arbitration appeals. “The effect of that stay is twofold: it relieves the party entitled to arbitrate of the burden of continuing to litigate the issue while the arbitration process is on-going, and it entitles that party to proceed immediately to arbitration without the delay that would be occasioned by an appeal of the district court’s order to arbitrate,” Stapleton wrote. Under Section 3 of the FAA, Stapleton said, Congress intended that the party resisting arbitration should be “denied the right to an immediate appeal.” As a result, Stapleton concluded that “the legislative scheme of the FAA thus reflects a policy decision that, if a district court determines that arbitration of a claim is called for, the judicial system’s interference with the arbitral process should end unless and until there is a final award.” THE ‘PARILLA’ CASE In Parilla v. IAP Worldwide Services VI Inc., U.S. Circuit Judge Raymond L. Finch of the Virgin Islands District Court denied a motion to compel arbitration on the grounds that the agreement contained several unconscionable provisions and was therefore unenforceable. Finch concluded that since the unconscionable terms “permeated” the arbitration provisions, they could not be severed from the remainder of the arbitration provisions. Now the 3rd Circuit has ruled that while Finch was correct in rejecting some of the provisions as unconscionable, he was wrong about others. He was also too quick to dismiss the motion to compel arbitration since case law mandates that the trial judge consider whether the offensive provisions may be severed to allow for a fair arbitration of the claims. In the suit, plaintiff Virgen Parilla filed a Title VII claim and later opposed IAP’s motion to compel arbitration, arguing that the agreement was unconscionable since it required complaining employees to make their claims within 30 days, imposed confidentiality provisions not applicable in court and contained confidentiality provisions. She also complained that the arbitration agreement improperly held that all claims be resolved through arbitration rather than before an administrative agency; and that no potential arbitrator may reside in the U.S. Virgin Islands or Puerto Rico. Finally, she complained that the agreement included a “loser pays” provision under which the employee could be ordered to reimburse IAP for the arbitrator’s fees and expenses if so directed by the arbitrator. Now the 3rd Circuit has ruled that Parilla was correct in arguing that several of the provisions are unconscionable. Stapleton said the 3rd Circuit was previously confronted with a nearly identical 30-day notice provision and held that it “is clearly unreasonable and unduly favorable to [the employer].” Likewise, Stapleton found that, under 3rd Circuit law, the provision requiring each party to “bear its own costs and expenses, including attorney’s fees” is “substantively unconscionable” since it conflicts with both Parilla’s Title VII claim and her claims under Virgin Islands law. But Stapleton found that Finch erred in holding that the confidentiality provisions in the agreement are unconscionable. “The unconscionability doctrine seeks to prevent substantial unfairness between contracting parties having grossly unequal bargaining power,” Stapleton wrote. “The district court did not and could not, we believe, identify any such unfairness as between Parilla and [IAP] resulting from the confidentiality provisions which the district court refused to enforce. Each side has the same rights and restraints under those provisions and there is nothing inherent in confidentiality itself that favors or burdens one party vis-a-vis the other in the dispute resolution process,” Stapleton wrote. Stapleton found that confidentiality of the arbitration proceedings “will not impede or burden in any way Parilla’s ability to obtain any relief to which she may be entitled.” As a result, he said, “we do not perceive the potential for confidentiality in arbitrations as posing a substantial threat to employees’ future ability to prove a case under these statutes.” On the “loser pays” provision, Stapleton found that the trial court must hold a hearing to determine whether it is truly unconscionable. On remand, Stapleton said, Finch must determine “whether the reasonably anticipatable fees and expenses of the arbitrator and Parilla’s financial circumstances are such that the prospect of her having to pay them in the event she loses unduly burdens her right to seek relief.” Offering some guidance on that point, Stapleton outlined Parilla’s burden at such a hearing. “The prospect that the employee may have to pay the entire amount of the arbitrator’s fees and expenses may serve to chill her willingness to bring a claim,” Stapleton wrote. But he also said “we see no reason to suspect that providing the arbitrator with some discretion to direct whether such fees will ultimately be incurred would have a determinative effect on the employee’s calculus in deciding whether to seek arbitration.” As a result, he said, Parilla’s burden is to show that, due to her inability to pay the anticipated arbitral costs, the “loser pays” provision “is just as unreasonably favorable to [IAP] as would be a ‘fee splitting’ provision.” Turning to the question of severability, Stapleton found that Finch was too quick to reject the entire arbitration agreement. Such an analysis, Stapleton said, is not one of simple math, but an effort to determine whether the employer had a good faith interest in seeking the agreement and whether a valid arbitration agreement can be preserved once the offensive provisions are deleted. “The existence of multiple unconscionable provisions will not always evidence ‘serious moral turpitude’ or serious misconduct, precluding enforcement of the agreement to arbitrate,” Stapleton wrote. “That will depend on whether the number of such provisions and the degree of unfairness support the inference that the employer was not seeking a bona fide mechanism for dispute resolution, but rather sought to impose a scheme that it knew or should have known would provide it with an impermissible advantage.”

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