AAA Teaches Disgruntled Arbitration Claimant How To Litigate Like A Boss

One might think that a non-profit like the American Arbitration Association (AAA), which spends the vast majority of its time administering arbitrations, might not know too much about litigation. But the Fifth Circuit’s April 7, 2020 decision (available here) in Texas Brine Company v. American Arbitration Association, Inc. shows otherwise. There, the AAA gave the plaintiff, a disgruntled claimant in one of AAA’s arbitrations, a quick one-two punch in the form of “snap” removal to federal court followed by a case-dispositive motion to dismiss premised on the Federal Arbitration Act providing the exclusive remedy in cases involving vacaturs of arbitration awards.

In the case, Texas Brine Company was a claimant in an arbitration administered by the AAA. Texas Brine claimed that two of the arbitrators on its panel hid conflicts of interests, and a Louisiana state court vacated the arbitral award. Not satisfied by this victory, and like a true American, Texas Brine then filed suit in Louisiana state court against the AAA (an out-of-state defendant) and the two arbitrators (in-state defendants). The AAA was served with process before the in-state defendants were, and the AAA immediately removed the case to federal court—removal that would not have been possible had either of the in-state defendant been served before the AAA. The federal district court refused to remand the case, and instead entered judgment on the pleadings, dismissing Texas Brine’s claims with prejudice. Texas Brine appealed to the Fifth Circuit Court of Appeals.

In the arbitration, Texas Brine learned that one of the arbitrators was representing a corporation in a dispute in which Texas Brine’s counsel was the opposing counsel. And a second arbitrator began representing the first arbitrator in a related legal-malpractice action. Neither arbitrator disclosed these potential conflicts in the arbitration. Texas Brine moved the AAA to remove both arbitrators, but the AAA’s Administrative Review Council summarily denied the motions. A few weeks later, the AAA removed the second arbitrator due to an offensive comment made to Texas Brine’s counsel. Texas Brine then re-urged removal of the second arbitrator. A day later, both the second and the third arbitrator resigned.

Texas Brine then filed a motion in Louisiana state court to vacate the panel’s awards, and the state court vacated all of the arbitral panel’s rulings on contested issues. Neither party appealed the vacatur. The AAA continued the process of appointing a replacement panel.

In 2018, Texas Brine filed the current suit against the AAA, and the two arbitrators, in Louisiana state court. Texas Brine requested over $12 million in damages and equitable relief, alleging that “the defendants engaged in intentional and wrongful fraudulent conduct in connection with the arbitration proceedings.” Before the Louisiana-resident defendants had been served, the AAA remove the case to federal court. The AAA and the Louisiana-resident arbitrators then moved to dismiss under Rule 12(c) of the Federal Rules. Texas Brine moved to remand given the presence of the in-state defendants. The district court denied the motion to remand in view of “snap removal” and granted the defendants’ Rule 12(c) motion, thus dismissing Texas Brine’s claims with prejudice. Texas Brine appealed from the denial of remand and from the final judgment. The Fifth Circuit affirmed the district court’s decisions.

Snap Removal. In general, a defendant may remove a state court civil case to the federal district court where the case could have been brought. See 28 U.S.C. § 1441(a). This right, in diversity cases, is tempered by the forum-defendant rule. That rule provides that:

A civil action otherwise removable solely on the basis of the jurisdiction under [28 U.S.C. § 1332(a)] may not be removed if any of the parties in interest properly joined and served as defendants is a citizen of the State in which such action is brought.

The question at issue in the case was thus whether the forum-defendant rule prohibited a non-forum defendant (here, the AAA) from removing the case when a not-yet-served defendant is a citizen of the forum state.

The Fifth Circuit remarked:

By Section 1441(b)(2)’s terms, this case would not have been removable had the forum defendants been “properly joined and served” at the time of removal. [The forum-resident arbitrator defendants] had not been served, though. When the AAA filed its notice of removal, the case was “otherwise removable”—as required by Section 1441(b) — because the district court has original jurisdiction of a case initially filed in Louisiana state court in which the parties are diverse. The forum-defendant rule’s procedural barrier to removal was irrelevant because the only defendant “properly joined and served,” the AAA, was not a citizen of Louisiana, the forum state. . . .

By its text, then, Section 1441(b)(2) is inapplicable until a home-state defendant has been served in accordance with state law; until then, a state court lawsuit is removable under Section 1441(a) so long as a federal district court can assume jurisdiction over the action.

(citations and quotations omitted).

The Fifth Circuit ultimately found that “snap” removal applied: “A non-forum defendant may remove an otherwise removable case even when a named defendant who has yet to be ‘properly joined and served’ is a citizen of the forum state.”

 FAA’s Exclusive Remedy. The Fifth Circuit next turned its attention to whether Texas Brine’s claims were appropriately dismissed in view of the Federal Arbitration Act’s exclusive remedy for complaints of bias or a corrupt arbitrator’s conduct. The Fifth Circuit ultimately found: “Congress identified some potential problems that may arise in arbitration in Section 10 of the FAA and provided a limited remedy. The relief, purported harm, and alleged wrongdoing here show that Texas Brine’s claims, at heart, are in fact an unauthorized collateral attack on the arbitration. The district court was correct to dismiss the challenge.” As such, the Fifth Circuit upheld the district court’s dismissal of Texas Brine’s claims with prejudice.

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