With hundreds of thousands of containers facing huge delays at West Coast ports in recent months and many companies incurring huge bills for demurrage and detention, a recent 9th Circuit Court of Appeals decision is of interest, even if the court has marked it “Not for Publication” and not precedent. (Elite Logistics Corp. v. Hanjin Shipping Co. Ltd. 9th Circuit. No. 12-56238. Sept. 19, 2014.)
The dispute at issue in the case was between Elite, which performed inland trucking, and Hanjin Shipping. (Also see the “Unconscionable?” in the March 2012 issue of American Shipper, p. 44.)
When truckers do not pick up loaded containers within the agreed upon time, equipment providers such as Hanjin charge truckers demurrage fees for late pick-up. Similarly, when trucking companies do not return empty containers on time, carriers such as Hanjin charge per diem fees for late drop-off.
Carriers contract with truckers such as Elite who are signatories to the Uniform Intermodal Interchange and Facilities Access Agreement, which was drafted by the Intermodal Association of North America.
The agreement contains an arbitration provision that sets forth default procedures for resolving disputes having to do with per diem or maintenance and repair invoices. Invoiced parties must provide written notification of disputed charges within 30 days of receiving an invoice. If they fail to do so, they may not seek arbitration or assert any other defense against the invoice, and must pay the charges immediately.
In 2011, Elite filed a class action lawsuit in U.S. District Court for the Central District of California alleging that Hanjin unlawfully levied late pick-up and drop-off fees on weekends and holidays in violation of the California Business and Professions Code § 22928.
Hanjin moved to compel Elite to arbitrate its claims under the agreement.
The district court in a 2012 order denied a motion by Hanjin to compel arbitration.
In a 2-1 “memorandum” issued last year, the 9th Circuit affirmed the district court in holding that Hanjin could not compel Elite Logistics to arbitrate. (Elite Logistics Corp. v. Hanjin Shipping Co. Ltd. 9th Circuit. No. 12-56238. Sept. 19, 2014.)
The majority of the 9th Circuit agreed with the district court that the arbitration agreement was “unconscionable” and the motion to compel arbitration should be denied.
Under the Federal Arbitration Act a written agreement that a dispute shall be settled by arbitration is “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”
In California a contract clause is “unconscionable,” if it is both procedurally and substantively unconscionable and the 9th Circuit said the district court did not err in holding that was true in this instance.
The lower court found the arbitration agreement was procedurally unconscionable because the record supported the conclusion that Elite “did not take part in any contract negotiations and had no choice but to sign the agreement if it wished to conduct business as an intermodal carrier.” Elite was faced with a “take it or leave it” proposition or “contract of adhesion.”
Furthermore it found the agreement substantively unreasonable because arbitration agreements “must contain at least a modicum of bilaterality.” Here the invoiced party had to provide written notice of its dispute within 30 days, far less than California’s four-year statute of limitations. After receiving a response from the invoicing party, the invoiced party has 15 days to pay or seek arbitration. And if the invoiced party proceeds to arbitration, it must submit all of its arguments to the arbitration panel first. And the arbitration panel does not have the authority to enjoin wrongful conduct.
The Federal Arbitration Act reflects a liberal federal policy favoring arbitration, but the 9th Circuit said it “does not preempt California’s procedural unconscionability rules.”
In a dissent, Judge Milan Dale Smith Jr. said the majority failed to acknowledge that the U.S. Supreme Court in AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011) “preempts certain state law contract defenses that have a disproportionate effect on arbitration clauses” and “clarified that an arbitration clause is not procedurally unconscionable merely because it appears in a contract of adhesion.”
Smith referenced a 2013 California Supreme Court decision, Sonic-Calabasas A. Inc. v. Moreno, 311 P3d 184 (Cal.2013), which he said meant the courts have to engage in a fact-intensive inquiry and requires the party asserting that an arbitration clause is void “bears the burden of proving the clause is unenforceable.”
Smith said in his view “the district court did not have enough facts before it” to engage in the required analysis. He wanted to remand the case to the district court to develop the record.
This decision has attracted the attention of several commentators, including Keith Heard of Burke & Parsons, who wrote in the Arbitrator newsletter of the Society of Marine Arbitrators, “It seems odd that the 9th Circuit would treat such an important case in a rather peremptory manner” and noted the Federal Rules of Appellate Procedure allow the citation of “opinions, orders, judgments or other written dispositions” regardless of whether they have been labeled not for publication as this one was.
Heard even suggested the issue was interesting enough that if a writ of certiorari was filed the Supreme Court might hear the case and reverse it. However, no appeal to the high court was made.
Steve Block, an attorney at Foster Pepper, wrote in his firm’s The Intermodal Lead newsletter that “Especially if other jurisdictions embrace the 9th Circuit’s logic, this decision could render contracting a more complex process.
“There might have to be more specific negotiation of terms that could be at the heart of a dispute, as well as of arbitration clauses themselves. It could also give industry players an option to litigate despite previous arbitration agreements when they feel they could do better in court,” he said.
“The cottage arbitration industry could be impacted, and the demand on judges to hear more transportation and logistics cases could heighten. Still, in a complex industry such as ours, arbitration should remain a consideration for all concerned,” Block said.
This column was published in the February 2015 issue of American Shipper.
