Seems like I’m picking on the gig economy these days.  I really don’t mean to be.  But a former research assistant of mine brought an important, hot-off-the-presses decision to my attention, O’Hanlon v. Uber Techs., Inc., No. 2:19-cv-00675, 2019 BL 434840 (W.D. Pa. Nov. 12, 2019).

The case presents a couple of important Arbitration 101 reminders, including one about equitable estoppel in the context of arbitration.

The plaintiffs brought a class action against Uber, alleging that it violated Title III of the Americans with Disabilities Act because it failed to provide any wheelchair accessible vehicles through its on-demand ridesharing service in Pittsburgh.  There have been a number of related suits against Uber and Lyft recently, which also makes the case noteworthy.  (Hat tip to my former research assistant, Beau RaRa, and the Minnesota Disability Law Center.)

Uber responded by trying to compel arbitration.  The court refused.  The holding is straight-forward enough: the plaintiffs were all folks who had never downloaded the Uber app and had never booked an Uber ride before.  So, they never consented to the arbitration provision.  Cite Volt Info. Sci., Inc. v. Bd. of Tr. of Leland Stanford Junior Univ., 489 U.S. 468 , 478 , 109 S. Ct. 1248 , 103 L. Ed. 2d 488 (1989) (“the FAA does not require parties to arbitrate when they have not agreed to do so”).  Mic Drop.  Boom.  Arbitration 101.  How you like me now, Uber?

What makes the case more interesting from an arbitration law perspective, however, is Uber’s clever, though failed, equitable estoppel argument.  Uber tried to convince the court that the plaintiffs’ claims necessarily “implicated” Uber’s terms of use.

Let’s dig into that argument, as a refresher on equitable estoppel in arbitration.  (Importantly, not all courts are in agreement about how various flavors of equitable estoppel should work in arbitration, but it’s pretty clear that it’s a slightly different doctrine than applies to regular ol’ contracts.) When a plaintiff brings a claim which relies on contract terms against a defendant, the plaintiff may be equitably estopped from denying the effect of the arbitration clause contained in that agreement.  This sort of equitable estoppel is sometimes referred to as the “direct benefits” theory of estoppel.  It “prevents a nonsignatory from knowingly exploiting an agreement containing the arbitration clause.” Graves v. BP Am., Inc., 568 F.3d 221, 223 (5th Cir. 2009). That is, “a nonsignatory cannot sue under an agreement while at the same time avoiding its arbitration clause.” Id.

Importantly, as a closely related case from the Northern District of California last year notes, the doctrine is, well, equitable.  See Namisnak v. Uber Technologies, Inc., 315 F.Supp.3d 1124 (N.D. Cal. 2018).  As the court said, “’[t]he linchpin for equitable estoppel is equity—fairness,’ and ‘the application of the doctrine is fact-specific.’” (citations omitted).

In O’Hanlon, the court didn’t buy Uber’s argument.  Borrowing from Namisnak, the court concluded that the plaintiffs asserted rights created by the ADA, which are not dependent on or bound up with the terms and conditions of Uber’s service.  Essentially, according to the plaintiffs, Uber was refusing to comply with the ADA not breaching the terms of its contract with riders.

I’ll just briefly conclude by pointing out that Uber also advanced a novel standing argument, predicated on pretty much the same idea.  Basically, Uber said that the plaintiffs necessarily embraced the terms of use for their benefit in pursuing standing.  Although none of the plaintiffs were actually Uber customers, they must have been thinking about becoming customers in order to have any injury.  Thus, Uber tried to say, the plaintiffs needed to stand in the shoes of actual customers who would have been bound to Uber’s terms of use, including the arbitration provision.

The court didn’t buy this either.  It cited to “futile gesture” caselaw on standing and concluded that the plaintiffs “deterrence-based injury is actual and cognizable and their own.”

Happy December!  I hope that everyone has had a restful and well-earned holiday weekend break.

There’s a lot of new and exciting stuff happening in the world of arbitration, and I have some catching up to do.  I want to start, though, in an unorthodox place.

We rarely write about early litigation actions on this blog, but there’s something very interesting happening in California.  A law firm there has taken action to protect its effort to engage in mass individual arbitrations on behalf of a large group of clients.  In two different actions – one in the California Superior Court (Boyd v. DoorDash, Inc., Case No. CPF-19-516930) and one in the federal court for the Northern District of California (Abernathy v. DoorDash, Inc., CASE NO. 3:19-cv-07545-WHA) – several thousand DoorDash couriers are seeking TROs to prevent DoorDash from changing the terms of its arbitration agreement with each of them.

Substantively, the courier’s claims look familiar.  They echo a torrent of similar claims asserted by gig-economy workers recently.  The couriers argue that they have been misclassified as independent contractors when, in fact, they are employees.  Whatever one makes of the merits, DoorDash makes its “Dashers” agree to a broadly worded arbitration agreement that covers such claims and excludes class proceedings.  The original version of this arbitration agreement required arbitration pursuant to the AAA’s Commercial Arbitration Rules.

The Dashers’ law firm decided to embrace the arbitration agreement and initiate, cookie-cutter style, thousands of individual arbitrations against DoorDash.  In the federal case, pursuant to the applicable AAA fee schedule, DoorDash was accordingly billed approximately $11 million for initial up-front administrative fees.

Viewing this situation as a “shakedown” (this is what it called the situation in its brief opposing the TRO in federal court), DoorDash refused to pay.  It argued that the filings were deficient, although the AAA determined that the claimants had satisfied the minimum filing requirements.  Ultimately, because the fees were not paid, the AAA administratively dismissed the Dashers’ claims on November 8, 2019.

On November 9, DoorDash revised its arbitration agreement, changing providers from the AAA to the CPR. (The CPR has much lower administrative filing fees and has instigated a new process for dealing with these sorts of “mass” individual arbitrations.  See https://www.cpradr.org/dispute-resolution-services/employment-related-mass-claims-documents/emp-mass-claims-protocol.)  Any Dashers logging into their app to accept deliveries after November 9 consented to the new agreement, including any of the Dashers who had attempted to initiate arbitration before the AAA but who had their claims administratively dismissed.

The hearings on the TROs have taken place, though the courts have not yet ruled.

This situation raises at least three important issues.  First, how viable is the Dashers’ clever end-run around class action waivers?  DoorDash, not surprisingly, dislikes the tactic.  It asserts that these sorts of “mass” individual arbitrations have “wreaked havoc on the arbitration system.”  But that’s far from clear to me.  Each arbitration remains individual, even if it’s essentially a clone.  In the first ArbitrationNation Bookworm entry, I recommended an article by Andrea Cann Chandrasekher and David Horton,  Arbitration Nation: Data from Four Providers.  In that article, the authors specifically suggest that this sort of mass individual arbitration approach could be ameliorating some of the perceived shortcomings of arbitration in the consumer, employee, and patient contexts.

Second, when a party agrees to arbitrate with a particular institution, can that party effectively avoid arbitration by failing to pay the required administrative fees?  I know, I know.  This is something of an over-simplification, as DoorDash tries to thread a more precise needle here.  It says that the filing requirements weren’t satisfied so the arbitrations weren’t technically initiated.  But that seems like a tough argument to stomach, given that the AAA concluded the minimal filing requirements were satisfied.  Moreover, that seems like the sort of substantive argument that should be heard by the arbitrator.  (I wrote about a similar issue in an Eleventh Circuit decision —   Freeman v. SmartPay Leasing, LLC, 771 Fed.Appx. 926 (11th Cir. 2019) – a few months ago.)

Finally, can a corporate party change the terms of its arbitration agreement after arbitrations have been initiated under the old agreement?  The answer seems pretty clear-cut – no – but this DoorDash situation makes things complicated.  The initial arbitrations were administratively dismissed.  Even if DoorDash was wrong not to pay the filing fee, what’s the right remedy at this stage?  Does DoorDash have to remain bound to its original arbitration agreement?

I’ll keep a close eye on these cases and provide an update as soon as there’s a decision.

I don’t mean to be imprecise, but I think that the Eleventh Circuit may have recently issued the most luddite opinion I’ve seen in a good long while.  See Managed Care Advisory Group, LLC v. CIGNA Healthcare, Inc., 2019 WL 4464301 (11th Cir. Sept. 18, 2019).  According to the court, Section 7 of the FAA, which allows arbitrators to subpoena non-parties and their documents, must be interpreted narrowly.  And when I say narrowly, the Eleventh Circuit isn’t joking around.

Arbitrators can only require summonsed non-parties to appear in the physical presence of the arbitrator.  This means literal physical presence; none of this video conference nonsense.  Additionally, Section 7 prohibits any pre-hearing discovery, which means that documents from non-parties can only be obtained when they physically show up to a hearing.

The underlying dispute isn’t particularly important, but briefly, just for context, it involved arbitration over a settlement agreement.  Essentially, a class of medical providers had sued managed care insurance companies, alleging that the insurers improperly processed and rejected certain physicians’ claims for payment.  A big kerfuffle ensued.  Ultimately, the case settled.  Sometime after the settlement, a group acting on behalf of the class members submitted to an arbitration agreement with one of the insurers.  They were trying to resolve a dispute over a portion of the settlement funds.  Eventually, during the course of an arbitration, the arbitrator summonsed several non-parties to appear for a live hearing and video conference and to bring certain documents along with them.  The non-parties objected to the summonses.

After dealing with some preliminaries – jurisdiction, the nationwide service of arbitral summonses, and the correct court to enforce arbitral summonses – the court gets to the big bang.  It starts by quoting Section 7, which allows an arbitrator to “summon in writing any person to attend before them . . . as a witness and in a proper case to bring with him . . . any book, record, document, or paper which may be deemed material as evidence in the case.”  The text laid out, the Eleventh Circuit turns to a plain-meaning and quaintly originalist reading.

The court observes that “Congress passed Section 7 in 1925, so we must ascertain the meaning of ‘attendance’ and ‘before’ in Section 7’s grant of authority . . . in the same manner provided by law for securing the attendance of witnesses . . . in the courts of the United States” as of 1925.  Since there was none of this new-fangled video conference rubbish in 1925, Section 7 of the FAA doesn’t include technological means of having witnesses “attend” the hearing.  In short, “Section 7 does not authorize district courts to compel witnesses to appear in locations outside the physical presence of the arbitrator. . . .”

Moreover, a simple reading of Section 7, according to the Eleventh Circuit, only allows arbitrators to compel non-parties to come to a hearing with documents.  It doesn’t allow arbitrators to compel non-parties to produce documents before such a hearing.  “Thus, the FAA implicitly withholds the power to compel documents from non-parties without summoning the non-party to testify.”  And, even if the non-party is summoned to testify, the FAA does not allow “pre-hearing” discovery.

It’s worth noting that the Eleventh Circuit aligns itself with the Second, Third, Fourth, and Ninth Circuits.  But the Eleventh Circuit is a bit cheeky.  It insinuates that these other circuits agree with both prongs of its holding: (1) arbitrators can only compel non-parties to attending in-person, physical hearings in the same room as the arbitrator; and (2) the FAA does not permit pre-hearing discovery from non-parties.  In fact, these other circuits seem to only endorse, at least expressly, the second point.  (Then-judge Alito writing for the Third Circuit did say that Section 7 “unambiguously restricts an arbitrator’s subpoena power to situations in which the non-party has been called to appear in the physical presence of the arbitrator and to hand over the documents at that time.”  But the Third Circuit was not faced with non-parties being summoned to a video conference.)

The Eighth Circuit appears to be the outlier with respect to this second point, reasoning that, well, times have changed and efficiency interests suggest that arbitrators should have the authority to require pre-hearing production of evidence from non-parties.

With respect to the Eleventh Circuit’s first holding, I’m not aware of any other decisions to say that arbitrators and non-parties have to be in the same physical space.  I confess, that feels unnecessarily technophobic to me.  The Eleventh Circuit says that the second holding – arbitrators cannot compel pre-hearing discovery from non-parties – compels the first – arbitrators and non-parties need to be in the same room.  Otherwise, how would the arbitrators get any documents that non-parties bring with them?  But Really?  I teach students regularly who are not in the same physical room as me.  And I can easily share, electronically, documents or other information with them in real time.

I don’t mean to be cheeky myself, but this all seems silly.  And radically inefficient.  And to miss the point of much modern discovery, in a world where “documents” are often anything but paper.  Taken to its extreme, the Eleventh Circuit’s decision could mean that arbitrators lack the power to compel non-parties to produce any form of ESI (“electronically stored information”), at least to the extent that the non-parties couldn’t “bring it with them” to the hearing.

This decision is radically anti-arbitration.  To be sure, the notion that non-parties cannot be compelled to produce pre-hearing discovery isn’t entirely new, though it too seems anti-arbitration.  But this appended requirement of physical presence at a hearing . . . I’m flummoxed.

Hat tip to Erika Birg, a partner at Nelson Mullins in Atlanta, for highlighting this important case for me.

For the next installment of the Bookworm, I’m recommending a very recent article by Professor Jean Sternlight: Mandatory Arbitration Stymies Progress Towards Justice in Employment Law: Where To, #MeToo?.

For anyone who isn’t already familiar with her work, Professor Sternlight has been at the forefront of thinking about adhesive arbitration for at least two decades.  Her  articles are at the bedrock of any critical appraisal of consumer, employee, and patient arbitration.  Her 1996 piece, Panacea or Corporate Tool – Debunking the Supreme Court’s Preference for Binding Arbitration, defined, in many ways, the terms of the debate that’s been raging ever since.  And her 2005 article, Creeping Mandatory Arbitration: Is it Just? constitutes, in my mind, one of the most cogent criticisms of so-called “mandatory arbitration” that has been written.

I don’t always agree with Professor Sternlight.  But it’s impossible not to respect the quality of her thinking and the passion of her arguments.

Mandaotry Arbitration Stymies Progress continues her important and thoughtful work.  In her own words, here’s a summary:

If companies can continue to use mandatory arbitration to eradicate access to court, where judges are potentially influenced by social movements, social movements will no longer be able to assist the overall progressive trend of our jurisprudence. . . . [T]he current and powerful #MeToo movement offers a perfect, albeit depressing, case study.  While the #MeToo movement has already exposed many sordid high-profile incidents of alleged harassment, sparked substantial outrage in traditional and social media, and become a talking point in public events and workplaces throughout the country, for the most part this outrage has not yet trickled down to protect ordinary women (and men) in ordinary workplaces. To the contrary, the law of sexual harassment still has a long way to go to catch up with the sentiments being expressed in the #MeToo movement. In the past, one might have expected that the new cultural attitudes surrounding sexual harassment might lead courts to rethink some of their prior restrictive decisions on sexual harassment. However, to the extent that employers are using mandatory arbitration to keep employment disputes out of court, even as powerful a social force as the #MeToo movement may not produce the progressive legal changes one might otherwise have expected. What is true of the #MeToo movement is true of other existing and potential forces for social change as well, such as social movements that might advocate for greater diversity, privacy, or income equality. To the extent companies are permitted to use arbitration to eliminate access to courts, they prevent our law from evolving to become more just.

Four weeks ago, the boundary between public enforcement and private dispute resolution became more blurred.  On September 4, the Justice Department announced that it had agreed to binding arbitration on the key issue in a current merger case—the market definition.

The enforcement action is garden variety.  It challenges Novelis Inc.’s proposed acquisition of Aleris Corporation.  According to the DOJ, the transaction would combine two of only four North American producers of aluminum auto body sheet, which automakers use to produce aluminum parts for automobiles.

But the use of arbitration by the DOJ constitutes a novel use of the Antitrust Division’s authority under the Administrative Dispute Resolution Act of 1996, 5 U.S.C. § 571 et seq.  Although the option has theoretically existed for 23 years, the DOJ has never used it before.

DOJ Antitrust Chief Makan Delrahim suggested, during a speech at George Washington University Law School’s annual Antitrust Salon, that this case “could prove to be a model for future enforcement actions, where appropriate, to bring greater certainty for merging parties and to preserve taxpayer resources while staying true to our enforcement mission.”

He went on to justify the experiment on both efficiency and accuracy grounds.  He noted that antitrust enforcers must be “more attuned to ensuring an efficient process for resolving merger and conduct investigations and, when necessary, litigations.”  He cautioned, however, that “efficiency should not come at the expense of achieving the right result.  Rather, we always should be open to process improvements that can result in economically sound outcomes that are achieved in a more efficient manner.”

If you’re a regular reader of the blog, you know of my abiding belief in the many virtues of arbitration.  Even in the tricky context of adhesive contracts with consumers, employees, and patients, I’m not persuaded that arbitration always poses the grave concerns that some suggest.  But this decision by the DOJ puts even me on high alert.

I’ll refrain from too much commentary, but suffice it to say that arbitration’s virtues extend to resolution of particular disputes.  Arbitration can get the job done at a low cost and in an effective way.  Arbitration, however, does little (and maybe nothing) to promote social policy objectives outside of dispute resolution.  Regulatory enforcement actions, while civil in nature, seem to me to be intended to serve additional public purposes beyond mere resolution of a particular dispute.

This isn’t a simple issue, and I appreciate the DOJ’s desire to streamline a part of antitrust enforcement actions that has proven daunting to generalist judges and lay juries.  Still, the idea that a critical component of enforcement actions could be shuffled off for resolution in private or, at least, outside of the standard public system, gives me pause.

The Third Circuit welcomed us to the fall arbitration season with an important decision for the gig economy, Singh v. Uber Techs. Inc., 2019 WL 4282185 (3d Cir. Sept. 11, 2019).  Relying on the key logic of SCOTUS’s January ruling in New Prime, Inc. v. Oliveira, the Third Circuit concluded that Uber drivers may qualify FAA § 1’s exemption for “any other class of workers engaged in foreign or interstate commerce.”  I say “may qualify” because the Third Circuit technically remanded the case.

This is an important one, so it’s worth thinking through it carefully.  There at least three key takeaways from the case: (1) workers may qualify for the § 1 exemption if they belong to a class of workers moving passengers or goods in interstate commerce; (2) the determination of whether workers fall within such a class hinges on consideration of a non-exclusive list of factors; and (3) lower courts can and should demand discovery necessary to make this factor-based determination.

Exciting stuff!  Let’s dive in!

The facts are simple: a New Jersey Uber driver brought a putative class action in state court.  He alleged that Uber misclassified drivers as independent contractors rather than employees.  That deprived the drivers of over overtime pay and it forced them to incur business expenses that Uber should have paid.  Uber removed the case.  Then it sought to compel arbitration on an individual basis.  The employee resisted on a number of grounds, including that the contract with Uber fell within the exemption of FAA § 1.  The district court, however, decided that the employee did not qualify for the exemption.  It reasoned that the exemption only applies to workers who transport goods, not passengers.  The district court then rejected the employee’s other objections and sent the case to arbitration.

That sets the stage for the first of the three big takeaways: according to the Third Circuit, the FAA § 1 exemption “may extend to a class of transportation workers who transport passengers, so long as they are engaged in interstate commerce or in work so closely related thereto as to be in practical effect part of it.”  This is huge.  Uber argued vigorously that the exemption should be narrowly construed to apply only to transportation workers moving goods.  Some dicta would seem to have supported that proposition.  But the Third Circuit roundly rejected it.

That, in turn, raised the second big takeaway: the lower court needs to evaluate various factors to determine if particular employees belong to a class of employees engaged in interstate commerce.  Notice the phrasing here.  The question isn’t whether the particular workers were engaged in interstate commerce.  It’s whether the particular workers belong to a class of workers who are engaged in interstate commerce.

Both the employee and Uber argued that the question could be resolved based on the existing record.  The employee argued that the court should look at the contract between the parties.  That contract implicitly contemplated a relationship with drivers from all fifty states and thus encompassed interstate travel.  Uber countered that the court should look only to its lived experience – Uber drivers inherently serve a local market, even if they occasionally might cross a state line here or there.

The court rejected both arguments.  The contract between the parties is one source of evidence about whether the workers belong to a class of workers engaged in interstate commerce.  But it’s not dispositive.  Similarly, the local nature of much of the work might be a factor, but it’s hardly the only factor.  Instead, the court instructed the lower court, on remand, to consider “various factors” including but not limited to “the contents of the parties’ agreement(s), information regarding the industry in which the class of workers is engaged, information regarding the work performed by those workers, and various texts—i.e., other laws, dictionaries, and documents—that discuss the parties and the work.”

And that brings us to the third big takeaway, which, in some respects, seems perhaps the most general and significant: the court’s instruction about what procedural framework governs a motion to compel, Fed. R. Civ. P. 12(b)(6) (motion to dismiss) or 56 (summary judgment).  The Third Circuit doubled down on an approach that it laid out in Guidotti v. Legal Helpers Debt Resolution, L.L.C., 716 F.3d 764 (3d Cir. 2013).  That approach uses a motion to dismiss standard for a motion to compel if the existence of a valid agreement to arbitrate between the parties is apparent from the face of the complaint or incorporated documents.  On the other hand, if the complaint and its supporting documents are unclear” as to whether the parties agreed to arbitrate, “or if the plaintiff has responded to a motion to compel arbitration with additional facts sufficient to place the agreement” in dispute, a “restricted inquiry into factual issues [is] necessary . . . .”

In this case, the court concluded that the complaint and supporting documents were unclear about whether the driver belonged to class of workers engaged in interstate commerce.  Accordingly, the court ordered the district court, on remand, to “permit discovery on the question before entertaining further briefing.”

On one hand, this third takeaway threatens, if read for all it’s worth, to authorize the same sort of “smell test” that SCOTUS unanimously rejected earlier this year in Henry Schein, Inc. v. Archer & White Sales, Inc.  Remember, there the Court put to rest the “wholly groundless” doctrine, which some circuits had used to do an end-run around a delegation clause.  Taken at face value, this Guidotti approach could do much the same thing by giving courts the opportunity to second guess the validity of an arbitration agreement.

On the other hand, in this particular case, the Third Circuit probably got things right.  Although the Uber agreement contains a delegation clause, as SCOTUS made clear in New Prime, such a delegation clause only kicks in once a court concludes that an arbitration agreement subject to the FAA exists.  In other words, a court must first determine if the contract falls within the  § 1 exemption.

All that said, the combination of the second and third takeaways from this case make things very messy, at least for a while, for the gig economy.  Until the dust settles, parties may wind up spending a lot of time litigating whether the FAA even applies.

On March 9 and 10, 2020, the ABA Section of Dispute Resolution is bringing 20 or more of the leading arbitrators and arbitration advocates in the country to Phoenix, AZ to teach at its 13th Annual Arbitration Institute.

There are at least five good reasons to think about attending, if you can:

(1) It’s being taught by some of the top arbitration practitioners in the country.

(2) It will teach new arbitrators the skills needed to become good arbitrators and experienced arbitrators will learn how to become great arbitrators.

(3) It will teach new arbitration advocates how to become good advocates and experienced advocates how to become great ones.

(4) It’s being held in Phoenix in March!! At least for those of us in the frigid midwest, that warm weather is a tremendous lure.  Plus, spring training!

(5) It includes small group sessions with successful arbitrators on how to market and increase your arbitration business.

If you’re interested, you can find details here: http://ambar.org/arb2020.

I’m adding something new to our Blog experience, the ArbitrationNation Bookworm.  Basically, once or twice a month, I’ll provide a brief overview of an article or book that readers of the Blog might find interesting.  I’m also going to add a sidebar that includes other stuff that we’re reading related to arbitration.

For the inaugural post, I’m recommending an article from early 2019, Arbitration Nation: Data from Four Providers, by Andrea Cann Chandrasekher and David Horton.  (Neither Liz nor I had any involvement in writing the article, despite its title, but the authors did secure permission from Liz to use the Arbitration Nation name.)

This article analyzes a huge data set on consumer, employee, and patient arbitration – 40,775 arbitrations filed between 2010 and 2016 and administered for four major institutions. I won’t spoil all the fun of reviewing the findings, but the authors conclude that three points emerge:

First, arbitration has the capacity to facilitate access to justice. Cases move quickly through the system, and corporations pick up most of the tab. Second, arbitration is not currently living up to this potential. Although businesses are correct that more individuals are arbitrating after Concepcion, this uptick has been modest. Moreover, companies are wrong about who is bringing those claims. Plaintiffs’ lawyers—not self- represented consumers, employees, or medical patients—have been taking advantage of arbitration’s speed and relative affordability. In fact, some attorneys have tried to create a simulacrum of the class action by initiating dozens or even hundreds of two-party arbitrations against the same defendant. Third, concern that arbitration favors repeat-playing corporations is well founded. Indeed, businesses that arbitrate often in an institution perform particularly well within that institution. Nevertheless, this is just one-half of the repeat-player story. Arbitration favors repeat players on both sides. In a variety of different settings, serially arbitrating plaintiffs’ law firms also fare particularly well.

For anyone thinking about the many sticky issues around consumer, employment, or patient arbitration clauses, this article warrants a close look.

Delegation provisions are a hot topic this year!  This week, we’re going to look at two more circuit court decisions centering on delegations and finding ways around them.

Just to set the stage, though, I’ve got to put a little egg on my own face.  To quote myself from back in June: “it’s almost impossible to imagine ‘an additional ground or basis’ for invalidating a delegation clause.  The target that a party wanting to avoid a delegation clause must hit is so small that it’s virtually invisible.”  Weeelllll . . . . Turns out that I might have been overstating things just a smidge.

Part of the reason that I said what I did was because of the unanimous decision by SCOTUS in Henry Schein, Inc. v. Archer & White Sales, Inc., 139 S. Ct. 524 (2019).  You’ll recall that Henry Schein sounded a death knell for the wholly groundless doctrine.  The wholly groundless doctrine was basically a smell test for arbitrability.  It gave courts the right to police at least the most questionable arbitration agreements despite the existence of a delegation provision.  A unanimous Supreme Court, however, reversed the Fifth Circuit and concluded that when the parties’ contract delegates arbitrability to an arbitrator, a court may not override the contract, even if the court thinks that the arbitrability claim is wholly groundless.

Still, SCOTUS “express[ed] no view about whether the [particular] contract at issue in th[e] case in fact delegated the arbitrability question to an arbitrator.”  Accordingly, the Court remanded the case to the Fifth Circuit.

Last week, the Fifth Circuit doubled down on its original conclusion.  It held that the contract at issue did not assign arbitrability to the arbitrator.  See Archer and White Sales, Inc. v. Henry Schein, Inc., 2019 WL 3812352 (5th Cir. Aug. 14, 2019).  Everybody agreed that the arbitration agreement was valid.  Moreover, everybody agreed that there was a valid delegation clause (through the AAA rules – Rule 7(a)).  One might have reasonably thought that this should end the matter.  But the claimant sought, at least partially, injunctive relief, and the arbitration clause carved out “actions seeking injunctive relief.”  Given the syntax of the clause, the Fifth Circuit determined that the delegation provision did not “clearly and unmistakably” assign arbitrability to the arbitrator.

A few weeks earlier, the Eighth Circuit also wrestled with a delegation clause and found that it didn’t mandate that arbitrability go to an arbitrator.  In Shockley v. PrimeLending, 929 F.3d 1012, 1015 (8th Cir. 2019), the court addressed the enforceability of an arbitration agreement and delegation provision in an employee handbook.

The handbook was available to employees on a computer network.  The employee accessed the handbook a couple of times, and the system logged an acknowledgement of her review.  The employee, however, testified that she did not recall reviewing the handbook and there was no other evidence to suggest that she ever opened or examined the handbook’s full text.

When the employee filed a lawsuit in federal court for violations of the FSLA, the employer sought to compel arbitration.  The employee resisted on the ground that she had never assented to the arbitration agreement or the delegation provision.  The district court agreed, and the Eighth Circuit affirmed.

Essentially, the Eighth Circuit reasoned that, even if the employer had made an offer to the employee, the employee never accepted it.  Merely continuing to work does not manifest the necessary assent to the terms of arbitration.  At best, the employee “acknowledged the existence of the delegation clause. . . . [but the court said it] was aware of no legal authority holding that an employee’s general knowledge or awareness of the existence of a contract constitutes the positive and unambiguous unequivocal acceptance required” to form a contract.

I’m unpersuaded by either case. But both suggest that courts remain more willing to scrutinize delegation provisions than I’ve previously indicated on this Blog.

I can’t believe we’re more than a week into August!  I don’t know about you, but I feel like I’m going to have to say goodbye to summer too soon.   I love fall, so maybe that’s not so bad?

Anyway, speaking of farewells, this week we get a back-to-the-basics refresher from the Eleventh Circuit on waving bye-bye to the right to arbitrate.  Although the particulars involved a consumer arbitration agreement, the key reasoning applies more broadly to all arbitrations.

In Freeman v. SmartPay Leasing, LLC, 771 Fed.Appx. 926 (11th Cir. 2019), SmartPay and Freeman entered into an agreement providing that the party initiating arbitration could choose either the AAA or JAMS rules and administrative services.

Freeman had a beef with SmartPay.  So, she sued SmartPay in federal district court. Shortly thereafter, the parties filed a joint motion to stay and to refer the dispute to binding arbitration. Freeman selected JAMS as the arbitration forum, she filled out the required form, and she paid a $250 initial filing fee.

This is where things went off the rails. SmartPay alleged that there were important procedural differences between the parties’ arbitration agreement and the JAMS rules. The details aren’t overly important, but the gist is that SmartPay argued those differences meant that this wasn’t truly a “consumer arbitration” under JAMS rules. (Basically, SmartPay didn’t want to have to pay all of the costs of the arbitration, other than the initial $250 that Freeman paid.)

JAMS didn’t buy it. It said that it wouldn’t administer the “consumer arbitration” unless and until SmartPay finished paying $950 in filing fees and waived any provisions in the parties’ agreement contrary to JAMS’s Consumer Minimum Standards. SmartPay stood firm by its position that this wasn’t a “consumer arbitration.” So it refused to pay the balance of the filing fee. It ultimately took the position that if JAMS wouldn’t administer the arbitration the case would have to be dismissed and refiled with the AAA.

JAMS did dismiss, but Freeman opted not to refile with the AAA. Instead, she went back to the district court and asked that the stay be lifted. She argued that SmartPay had waived its right to demand arbitration by refusing to pay the remaining initial filing fee. The district court agreed.

On appeal, the Eleventh Circuit noted that under FAA § 3, a district court should stay the litigation “until such arbitration has been had in accordance with the terms of the agreement, providing the applicant for the stay is not in default in proceeding with such arbitration.” Default includes waiver. Waiver, in turn, hinges on whether a party has acted inconsistently with the right to arbitrate and that inconsistent behavior has prejudiced the other party.

The Eleventh Circuit agreed that SmartPay had waived its rights by failing to pay the filing fee. In so doing, it said the issue of whether the alleged conflicts between the arbitration agreement and the JAMS rules could be reconciled was one for the arbitrator. By refusing to pay the balance of the initial filing fee, SmartPay acted inconsistently with its right to demand arbitration. In turn, that prejudiced Freeman because it precluded her from seeking relief through her chosen arbitral forum.

I’m sympathetic to SmartPay in one sense: JAMS seemingly required SmartPay to waive its procedural arguments before it even got into arbitration. That’s problematic. But the lesson of the case is that arbitral institutions aren’t arbitrators. SmartPay could have and should have made its procedural arguments to the arbitrator. It agreed to JAMS as a forum. Once it did, couldn’t escape that forum on the grounds that the forum was applying arguably the wrong rules. That should have been taken up with the arbitrator herself.