In Whyte v. Bockino, No. 2017-0024 (August 29, 2018), the Supreme Court of the United States Virgin Islands held that the Federal Arbitration Act (FAA) applies to contracts in the Virgin Islands and concluded that the claims of a former employee were arbitrable.
Background
In 2013, Barry Whyte and World Fresh Market, LLC, doing business as Pueblo Supermarket, entered into an employment contract that included an arbitration clause. Whyte held managerial positions at two Pueblo locations until Pueblo terminated his employment in 2014. Whyte filed a complaint in the Superior Court of the Virgin Islands against Pueblo and its representatives, alleging “tortious interference, defamation, wrongful termination, and breach of the contractual duty of good faith and fair dealing.” More than a year later, Pueblo filed a motion to stay the case pending arbitration and to compel arbitration pursuant to sections three and four of the FAA. Concluding that the arbitration agreement was enforceable and that Pueblo did not waive its right to arbitration, the Superior Court of the Virgin Islands granted Pueblo’s motion to compel arbitration. Rather than stay the case pending arbitration, the superior court dismissed the case as moot.
In the appeal to the Virgin Islands Supreme Court that followed, Whyte argued (1) the FAA did not apply to the employment contract because the Commerce Clause does not apply to contracts in the Virgin Islands, (2) the arbitration clause had expired, (3) the right to arbitration is an affirmative defense that a party must raise in its answer or pre-answer motion, and (4) Pueblo waived its right to compel arbitration under the FAA.
The Virgin Islands Supreme Court Decision
The Virgin Islands Supreme Court affirmed the superior court’s decision. Addressing Whyte’s threshold argument that the FAA does not apply to contracts in the Virgin Islands, the court concluded that although the legislative history that the Supreme Court of the United States has relied upon to conclude that the FAA applies to states does not specify whether the Act applies to contracts in the Virgin Islands through the Commerce Clause, Congress may regulate the Virgin Islands utilizing the Territorial Clause. As a result, the FAA, which defines commerce to include “commerce . . . in any Territory of the United States or in the District of Columbia,” represented a valid exercise of congressional authority with respect to the Virgin Islands. Acknowledging that it previously had questioned, in dicta, “whether there was an interstate nexus between Virgin Islands residents and Virgin Islands corporations,” the court concluded that for purposes of the FAA, the burden of showing an interstate nexus was relatively low, and it was met in this case because the employment contract required Whyte to send notices to a Chicago address and because he had managerial control over goods that arrived in the Virgin Islands via a container ship.
Though the employment contract in question expired one month before the termination decision giving rise to his lawsuit occurred, the Virgin Islands Supreme Court agreed with the superior court’s determination that Whyte was nevertheless obligated to arbitrate his claims because the parties demonstrated an intention to continue the employment contract beyond the stated expiration date. The court noted that Whyte continued to receive the same salary throughout the duration of his employment, and importantly, that the contract contained a survival clause that stated that Whyte would remain bound by the arbitration agreement even after any termination of his employment.
The court also examined and rejected each of Whyte’s litigation-related challenges. Noting that both the Federal Rules of Civil Procedure and the Virgin Islands Rules of Civil Procedure identify “arbitration and award” as an affirmative defense that must be stated, the court concluded that this defense is applicable only when the claim already has been resolved by an award in arbitration. The Virgin Islands Supreme Court held that a defendant is not required to raise the right to arbitration in an answer or pre-answer motion if arbitration has not yet occurred.
Lastly, the court found Pueblo did not waive its right to arbitration. Although Pueblo had answered the complaint, served initial disclosures, and conferred to formulate a discovery plan and proposed scheduling order, and although Whyte prevailed on a motion to compel after Pueblo failed to respond to interrogatories, the court held that these circumstances did not establish the requisite, meaningful prejudice that was required to overcome the strong preference to enforce arbitration agreements embodied in the FAA.
Key Takeaways
Employers that utilize arbitration agreements often face challenges when seeking to enforce those agreements in the U.S. Virgin Islands. This decision eliminates several of the often-cited roadblocks.
Importantly, the court now has held that the FAA is applicable to contracts in the Virgin Islands. The ruling establishes that an interstate nexus will likely be found to exist even when the agreement does not have a substantial effect on interstate commerce. Indeed, even a requirement to transmit notices outside the territory likely creates a sufficient nexus. That finding yields greater certainty for employers that currently utilize or may elect in the future to utilize arbitration agreements in the employment context, including with employees whose daily activities might be argued to have a limited relationship to interstate commerce.
The Virgin Islands Supreme Court’s determination that the existence of an arbitration agreement need not be raised in an answer or a pre-answer motion also provides useful guidance for practitioners. Additionally, although the court’s decision confirms that a finding of waiver might be appropriate after active and prolonged discovery or litigation on the merits, waiver of an arbitration clause will likely not be inferred by the mere circumstance of some participation in litigation.
