Appeal by Defendants from a judgment entered in the United States District Court for the Eastern District of New York (Nina Gershon, Judge), denying their motion to dismiss or, in the alternative, to stay the district court action and compel arbitration. On appeal, we VACATE the district court's judgment, concluding that the arbitration agreement in this case was neither unconscionable nor unenforceable as a matter of law.
The case is REMANDED for the district court to consider Plaintiff's remaining contractual defenses.
The opinion of the court was delivered by: John M. Walker, Jr., Circuit Judge
Argued: November 24, 2008
Before WINTER, WALKER, and CALABRESI, Circuit Judges.
Judge Calabresi dissents in a separate opinion.
Plaintiff-Appellee Frederick J. Harrington, Jr., ("Harrington") filed this action in the United States District Court for the Eastern District of New York (Nina Gershon, Judge), against Defendants-Appellants Atlantic Sounding Co., Inc., Weeks Marine, Inc. (Atlantic Sounding's corporate parent), and the vessel MV CANDACE (collectively, "Defendants") pursuant to the Jones Act, 46 U.S.C. § 688, seeking recovery for injuries sustained while he was employed as a seaman on the CANDACE. Defendants sought to dismiss the complaint or, in the alternative, to compel arbitration and to stay the district court action, pursuant to a post-injury arbitration agreement between the parties. Harrington opposed Defendants' motion, arguing that the arbitration agreement, which he signed in return for cash advances against his claim, was unenforceable as the result of intoxication and lack of mental capacity, and because the agreement was unconscionable.
After an evidentiary hearing, the district court determined that the arbitration agreement was unenforceable under New Jersey law due to substantive and procedural unconscionability, and did not address the claims of intoxication and lack of mental capacity. On appeal, Harrington resists arbitration on the basis that the arbitration agreement is unenforceable as a matter of law under § 6 of the Federal Employer's Liability Act ("FELA"), 45 U.S.C. § 56, and alternatively, that the unconscionability finding below was correct under New Jersey law.
We find that FELA § 6 does not apply to seamen's arbitration agreements, and thus the arbitration agreement is not unenforceable as a matter of law, and that the district court's finding that the arbitration agreement was unenforceable due to unconscionability was erroneous. Therefore, we vacate the district court's decision and remand to the district court for consideration of Harrington's remaining contractual defenses.
After more than two years with Weeks Marine as an Able Bodied Seaman, Harrington suffered a back injury in April 2005 while working aboard the CANDACE, a vessel owned and operated by Weeks Marine. Shortly thereafter, Harrington left the CANDACE to live with his father in Massachusetts and began receiving maintenance payments of twenty dollars per day from Weeks Marine. Weeks Marine also paid all medical expenses resulting from Harrington's back injury.
In Massachusetts, Harrington's doctor prescribed painkillers and cortisone shots to help him cope with his injury. At the evidentiary hearing held on the instant motion, Harrington testified that the medications interfered with his concentration and made him drowsy. He also testified that during this time he was drinking upwards of a half-gallon of vodka every two or three days. He added that he has a history of alcohol abuse for which he has undergone substance abuse treatment on several occasions, most recently in March 2006. Thereafter, Harrington was diagnosed with herniated discs and was told by his doctor that he required lumbar surgery. In early July 2005, he called Weeks Marine to request additional financial support for his injury and upcoming surgery. In response, on July 11, 2005, Harrington received a "Claim Arbitration Agreement" (the "Agreement") from Defendants in the mail. Defendants prepared and signed the Agreement in New
Jersey, the location of their principal place of business, and sent it to Harrington for his signature at his father's house in Massachusetts.
The Agreement included the following language (with "You" referring to Defendants and "I" referring to Harrington): Although You are obligated to pay maintenance and cure, You are not currently responsible or liable for any other damages under general maritime law, the Jones Act or any other applicable law. Nonetheless, You are prepared to make voluntary advances against settlement of any claim that could arise out of the personal injury/illness claim I have made . . . , provided I agree to arbitrate any such claim under the American Arbitration Association (AAA) Rules . . . . The decision of the arbitrators shall be final and binding on the parties and any United States District Court shall have the jurisdiction to enforce this agreement, to enter judgment on the award and to grant any remedy provided by law in respect of the arbitration proceedings.
Under the Agreement, in exchange for Harrington's undertaking to arbitrate his claims, Defendants "agree[d] to advance sixty percent (60%) of the gross wages [Harrington] would have otherwise earned based upon [his] earnings history . . . as an advance against settlement until [Harrington was] declared fit for duty, and/or at maximum medical improvement, and/or October 10, 2005, whichever occurs first." The Agreement further "credited [the advance] against any settlement [Harrington] might eventually reach with [Defendants] or against any future arbitration award [he] might receive." Pursuant to the Agreement, Defendants also agreed to advance "up to $750.00 and any deposit for compensation of the arbitrators . . . , subject to subsequent allocation."
A cover letter accompanying the Agreement explained: Our company recognizes the value in its long term employees and the hardship that can be associated with a dramatic income decrease during a period of incapacity. Although we are under no legal obligation to advance funds in this type of situation, our towing division has approved such voluntary payment in your case, so long as you are willing to agree to arbitrate any disputes that might arise from this claim.
According to Harrington's affidavit, he was told by Defendants that they "wanted to help [him] out because of [his] situation," and that the payments made under the Agreement would constitute "an advance against any claim [he] may bring." Pl. Decl. ¶ 9. Harrington also alleges that Defendants "did not tell [him] that [he] was giving up any rights" by signing the Agreement. Pl. Decl. ¶ 9.
On July 18, 2005, Harrington underwent lumbar surgery, and was released from the hospital the next day. On July 23, 2005, Harrington went to a local bank with his father to sign the Agreement and have it notarized. Harrington was still taking painkillers and drinking heavily during his recovery from surgery, and he testified to being in "tough shape" on July 23 because he "was taking medication and . . . had a couple of drinks that day."
The notary read aloud the Agreement's acknowledgment section, which stated, "[o]ther than the promises contained in this agreement, I have been given no other promises to induce me to sign this Claim Arbitration Agreement. I have not been coerced in any way into signing this agreement. I have signed this agreement knowingly and willingly." The notary asked Harrington if he understood what he was signing before she notarized the Agreement. Harrington answered that he did and signed the Agreement. The notary testified that Harrington did not appear to be drunk when he signed the Agreement, and that she would not have notarized the Agreement if he appeared intoxicated or in any way impaired. The notary testified, however, that Harrington appeared to be in pain and had to be assisted by his father when sitting down and standing up and that Harrington "appeared disheveled and unke[m]pt," Harrington v. Atl. Sounding Co., No. 06-cv-2900(ng) (vvp), 2007 WL 2693529, at *2 (E.D.N.Y. Sept. 11, 2007), whenever the notary saw him at the bank and was incoherent whenever he spoke, which was not often.
Pursuant to the Agreement, Defendants sent support checks to Harrington, which Harrington's father cashed for him, ending with the last payment on October 10, 2005. Because he was still unable to work, Harrington contacted Weeks Marine to request continued payment of sixty percent of his wages until he was fit to return to work. In response, on December 2, 2005, Weeks Marine sent him the Addendum Claim Arbitration Agreement (the "Addendum"). The Addendum amended the Agreement by extending the partial payment of Harrington's wages until January 10, 2006 and specified that, apart from this amendment, "the prior Claim Arbitration Agreement, executed on July 23, 2005, remain[ed] in full force and effect." The Addendum, like the Agreement, also stated: "I have been given no other promises to induce me to sign this Addendum thereto. I have not been coerced in any way into signing this Addendum agreement. I have signed this Addendum agreement knowingly and willingly."
On December 8, 2005, Harrington, who testified that he was drinking two quarts of vodka and six beers every day at the time he received the Addendum, brought the Addendum to the same notary he had used to execute the Claims Arbitration Agreement.
The notary again read the acknowledgment aloud and asked Harrington if he understood what he was signing. Harrington again answered that he did and signed the Addendum. The notary testified that Harrington appeared to be in the same condition on December 8 as on July 23, and that she did not believe him to be intoxicated or impaired, while conceding that she is "not around those type of people," so she "couldn't judge" whether Harrington was intoxicated or impaired. Dep. Tr. 27:9-10, Jan. 29, 2007. The notary testified, however, that Harrington "appeared to be in pain" every time she saw him. Dep. Tr. 28:4.
Defendants terminated Harrington's employment effective January 27, 2006. In June 2006, Harrington filed the instant action. Defendants moved to dismiss the complaint, or in the alternative, stay the action and compel arbitration pursuant to the Agreement (as amended by the Addendum). In July 2007, the district court held an evidentiary hearing to determine the validity of the Agreement, and two months later, finding the Agreement invalid, denied Defendants' motion in its entirety. Harrington, 2007 WL 2693529, at *6.
The district court assumed that, under § 2 of the Federal Arbitration Act ("FAA"), 9 U.S.C. § 2, Harrington bore the burden of establishing a basis for not enforcing the Agreement.
After observing that, under the FAA, "questions of contractual validity . . . of the underlying arbitration agreement must be resolved first, as a matter of state law, before compelling arbitration pursuant to the FAA," Harrington, 2007 WL 2693529, at *3 (quoting Cap Gemini Ernst & Young, U.S., L.L.C. v. Nackel, 346 F.3d 360, 365 (2d Cir. 2003) (per curiam)) (internal quotation marks omitted) (alteration in original), the district court chose to apply New Jersey law (where Weeks had its principal place of business) instead of Massachusetts law (where Harrington resided) because New Jersey had "the most significant relationship to the arbitration agreements and the employment relationship between the parties," while at the same time noting that "the principles of contract law are fundamentally the same in both states and . . . the application of either state's law would yield the same result." Id.
The district court then found the Agreement both procedurally and substantively "unconscionable and therefore unenforceable" under New Jersey law, citing, inter alia, Sitogum Holdings, Inc. v. Ropes, 800 A.2d 915, 921 (N.J. Super. Ct. Ch. Div. 2002) (noting that "[m]ost [New Jersey] courts have looked for a sufficient showing of both [procedural and substantive unconscionability] in finding a contract unconscionable").
Harrington, 2007 WL 2693529, at *4. The district court found that the facts of this case satisfied New Jersey's "sliding scale" approach to unconscionability, under which "a claim of unconscionability can succeed when one form of it, either procedural or substantive, is greatly exceeded, while the other form is only marginally exceeded." Id.
In finding procedural unconscionability, the district court placed "particular significance" on the timing of the original Agreement. Id. The district court noted that Defendants sent Harrington the Agreement three months after his injury, and shortly before he was scheduled to undergo major surgery with "a lengthy recovery." Id. The district court found that Harrington had an "impaired . . . ability to understand the nature and consequences of the document he was signing," that the notary "had doubts about [Harrington's] condition," and that
"[D]efendants were aware of his heavily medicated state" and his financial vulnerability. Id. The district court noted that Harrington did not have an attorney, nor was he advised to seek representation when he signed the Agreement, and that the Agreement "fails to set forth the terms in such a way that an average person would understand its substance." Id. at *5. The district court concluded that "all of the facts demonstrate that [Harrington] was in a substantially weaker bargaining position than [Defendants]," and that the Agreement was therefore procedurally unconscionable. Id.
With respect to substantive unconscionability, the district court found "startling" the provision in the Claims Arbitration Agreement (incorporated by reference into the Addendum) that provided that Defendants "are not currently responsible or liable for any other damages under general maritime law, the Jones Act or any other applicable law." Id. The district court concluded that [s]uch misleading contractual language, especially when reviewed by a layperson without the benefit of legal counsel, creates the false impression that defendants are not subject to liability for any damages; if that is the case, then plaintiff, by signing the Agreement, is giving up ...