Arbitration Rules/Procedures

Today’s post continues our series of arbitration refreshers, to combat the Summer Slide.  It was researched and written by Anne Marie Buethe from the University of Iowa Law School.

Despite clear grounds for authority, arbitrators remain wary of hearing and granting dispositive motions.* While arbitrators posit reasons for their reluctance—the risk of vacatur being of primary concern—courts’ consistent affirmance of arbitrators’ summary awards demonstrates that these reasons are overstated. As long as an arbitrator provides parties a fair opportunity to present their case, he or she can grant a dispositive motion without violating the right to a fundamentally fair hearing—the touchstone for whether or not a court will vacate an arbitral award.

Arbitrators have long had the implicit authority to grant dispositive motions. The AAA made that authority explicit for its arbitrators when it amended it rules in 2013. Rule 33 of the AAA Commercial Rules states, “[t]he arbitrator may allow the filing of and make rulings upon a dispositive motion only if the arbitrator determines that the moving party shows that the motion is likely to succeed and dispose of or narrow the issues in the case.” JAMS, FINRA, and CPR rules also allow for summary judgment.

Even before Rule 33, courts assumed arbitrators’ summary disposition authority. In Schlessinger v. Rosenfeld, Meyer & Susman, 40 Cal. App. 4th 1096 (Cal. App. Ct. 1995), for example, the California Court of Appeals upheld an award where the arbitrator decided the primary issues through summary adjudication motions. The court held that arbitrators have the implicit authority to rule on dispositive motions even if, at the time, there was no explicit power. There are at least a dozen cases before 2013 that uphold this implicit authority and affirm summary dispositions.**

Post-2013, courts have not changed their approach. For example, in South City Motors, Inc. v. Automotive Industries Pension Trust Fund, 2018 U.S. Dist. LEXIS 88452 (N.D. Cal. May 25, 2018), the Northern District of California affirmed a summary disposition, citing a long line of precedent in stating that “[t]he purpose of arbitration is to permit parties to agree to a more expedited and less costly means to resolve disputes than litigation in the courts. Summary judgment by an arbitrator is consistent with that purpose.” In NFL Management Council v. NFL Players Association, 820 F.3d 527 (2d Cir. 2016), the Second Circuit affirmed a summary award, emphasizing that judicial review of arbitral awards “is narrowly circumscribed and highly deferential—indeed, among the most deferential in law.” There are cases from a majority of federal circuits affirming arbitrators’ authority to grant dispositive motions.***

In the rare instance where courts have vacated a summary award, there is a common thread—fundamentally unfair proceedings. For example, in International Union, United Mine Workers of America v. Marrowbone Development Company, 232 F.3d 383 (4th Cir. 2000), the claimant highlighted the existence of a material factual dispute—seeking to distinguish the present facts from a prior dispute between the parties, to introduce testimony, and to present pertinent evidence. The arbitrator summarily dismissed the complaint, relying on the facts of the prior dispute between the parties without hearing the claimant’s argument, testimony, or evidence distinguishing the two cases. The Fourth Circuit vacated the arbitrator’s summary award, holding that by refusing to hear evidence material to the case’s resolution, the arbitrator denied the claimant a fair opportunity to present their case.

The handful of outlier cases should not dissuade arbitrators from issuing summary dispositions but should help them determine when to grant a dispositive motion. Some important pointers: (1) the arbitrator must apply the appropriate summary judgment standard; (2) the arbitrator should consider requests for discovery carefully to ensure that they do not deny discovery of material evidence; (3) the arbitrator should only consider motions likely to succeed; (4) the arbitrator should engage in a cost-benefit analysis, weighing the benefits of speed and efficiency with the potential risks for delay and improper denial of a fundamentally fair hearing; and (5) in granting a dispositive motion, an arbitrator may benefit by issuing a written decision detailing their reasoning, taking care to articulate why any unheard evidence or unpermitted discovery was immaterial.****

If arbitrators follow this guidance, they should feel confident in granting dispositive motions. Not only is the concern of vacatur overblown, appropriately granting dispositive motions helps streamline the efficiency and speed of arbitrated disputes by providing fair remedies without unnecessary proceedings.

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* For example, a 2013 survey found that seventy percent of arbitrators granted dispositive motions fewer than five times. Edna Sussman, The Arbitrator Survey—Practices, Preferences and Changes on the Horizon, 26 Am. Rev. Int’l Arb. 517, 523 (2015).

** See, e.g., Sherrock Bros., Inc. v. DaimlerChrysler Motors Co., LLC, 260 Fed. App’x 497, 499 (3d. Cir. 2008) (affirming a summary adjudication issued on res judicata and collateral estoppel grounds); Ozormoor v. T-Mobile USA Inc., 2010 WL 3272620, *4 (E.D. Mich. Aug. 19, 2010) (affirming a summary adjudication issued on statute of limitation grounds); Global Int’l Reinsurance Co. Ltd. v. TIG Ins. Co., 2009 WL 161086, *5 (S.D.N.Y. Jan. 21, 2009) (affirming a summary adjudication issued on plain meaning of contract grounds); LaPine v. Kyocera Corp., 2008 WL 2168914, *10 (N.D. Cal. May 23, 2008) (affirming a summary adjudication issued on waiver and estoppel grounds); Hamilton v. Sirius Satellite Radio Inc., 375 F. Supp. 2d 269, 273, 277 (S.D.N.Y. 2005) (affirming a summary adjudication issued on insufficient evidence grounds); Warran v. Thacher, 114 F. Supp. 2d 600, 602 (W.D. Ky. 2000) (affirming a summary adjudication on failure to state a claim grounds); Max Marx Color & Chem. Co. Employees’ Profit Sharing Plan v. Barnes, 37 F. Supp. 2d 248, 255 (S.D.N.Y. 1999) (affirming a summary adjudication issued on standing and preemption grounds); Intercarbon Bermuda, Ltd. v. Caltex Trading and Transp. Corp., 146 F.R.D. 64 (S.D.N.Y. 1993) (affirming a summary adjudication issued without holding in-person evidentiary hearings); Atreus Cmtys. Grp. of Ariz. v. Stardust Dev., Inc., 229 Ariz. 503, 508 (Ct. App. Ariz. May 1, 2012) (affirming a summary adjudication even though the parties’ arbitration agreement did not expressly allow for such authority); Pegasus Constr. Corp. v. Turner Constr. Co., 84 Wash.App. 744, 750 (Ct. App. Wash. 1997) (affirming a summary adjudication issued on failure to comply with contractual obligations grounds); Goldman Sachs & Co. v. Patel QDS: 224S164, 222 N.Y.L.J. 35 (S. Ct., N.Y. Cty. 1999) (affirming a summary adjudication issued on employment at will grounds).

*** See, e.g., NFL Mgmt. Council v. NFL Players Ass’n, 820 F.3d 527, 547–48 (2d Cir. 2016) (affirming a summary adjudication issued for failure to state a claim); Samaan v. Gen. Dynamics Land Sys., 835 F.3d 593, 603–05 (6th Cir. 2016) (affirming summary adjudication issued without an evidentiary hearing); South City Motors, Inc. v. Auto. Indus. Pension Trust Fund, 2018 U.S. Dist. LEXIS 88452, *8 (N.D. Cal. May 25, 2018) (affirming a summary adjudication issued without full evidentiary hearing); McGee v. Armstrong, 2017 U.S. Dist. LEXIS 129734, *10 (N.D. Ohio Aug. 15, 2017) (affirming a summary adjudication issued on all claims); Weirton Med. Ctr. v. Comm. Health Sys., 2017 LEXIS 203725, *13–14  (N.D. W. Va. Dec. 12, 2017) (upholding a summary award even though the parties’ arbitration agreement did not expressly allow for such authority); Balberdi v. FedEx Ground Package Sys., 209 F. Supp. 3d 1160, 1162, 1168 (D. Haw. 2016) (affirming a summary adjudication issued on statute of limitations grounds); Kuznesoff v. Finish Line, Inc., 2015 U.S. Dist. LEXIS 71388, *4, *11 (M.D. Penn. June 3, 2015) (affirming a summary adjudication issued on statute of limitation and failure to state a claim grounds); Tucker v. Ernst & Young LLP, 159 So. 3d 1263, 1285 (Ala. 2014) (affirming a summary adjudication issued on all claims).

**** See Edna Sussman & Solomon Ebere, Reflections on the Use of Dispositive Motions in Arbitration, 4 N.Y. Disp. Resol. Law., 28, 30 (2011).

A per curiam opinion from the 8th Circuit last week highlights that even if an arbitration goes off the rails, the only remedy is vacating (or confirming) the award.  The parties cannot recover from the administrator of the arbitration.

In Owens v. American Arbitration Association, Inc., 2016 WL 6818858 (8th Cir. Nov. 18, 2016), a terminated CEO filed for arbitration against his former company.  The AAA administrated the arbitration and a three member panel was chosen.  One of the arbitrators disclosed that he had been consulted in a different matter handled by the same firms that were representing the CEO and the company.  No party objected to that arbitrator’s continued involvement or asked follow up questions.

The panel issued an initial award of over $3 million to the former CEO.  At that point, the company moved to remove the arbitrator who had made the disclosure, alleging the disclosure was incomplete.  The AAA did not have a rule or published procedure for addressing the removal of an arbitrator.  It allowed the CEO to respond, but did not inform any of the arbitrators that a motion had been made or allow the arbitrator whose disclosure was at issue to respond.  The AAA eventually removed the arbitrator who made the disclosure, and the remaining two arbitrators issued a final award in favor of the CEO.

The company moved to vacate the award, and a state court trial judge granted the motion.  At that point, the CEO sued the AAA in Minnesota state court for “breach of contract, unjust enrichment, [and] tortious interference with contract.”  The AAA removed the case to federal court, and the federal district court dismissed the claims based on arbitral immunity.

On appeal, the 8th Circuit made quick work of this messy case.  It first recognized that arbitrators, like judges, have immunity.  And, that immunity can extend to “organizations that sponsor arbitrations” and all of the acts within the arbitral process.  Second, it cited a previous case in which the 8th Circuit concluded that “arbitral immunity bars claims against a sponsoring organization based on the appointment of a biased arbitrator.”  (Even if the organization failed to follow its own rules in appointing the arbitrator.)  Third, it extended that rule, concluding that the removal of arbitrators is also protected by arbitral immunity.

p.s. In honor of the all-Minnesota nature of this case, I give you a photo I took of the prize-winning giant pumpkins at the Minnesota State Fair.  Happy Thanksgiving!

The 9th Circuit recently allowed a claimant to proceed in court after her arbitration had been terminated due to her  failure to pay half the arbitration fees. Tillman v. Tillman, __ F.3d __, 2016 WL 3343785 (9th Cir. June 15, 2016).

The case involved a client’s malpractice claim against her lawyers, which was stayed by the federal court after the lawyers compelled it into arbitration. At some point in arbitration, the client was unable to pay the $18,562.50 the AAA required to continue with the claim.  The law firm refused to pay the client’s share of the fees, and the arbitrator terminated the arbitration as a result of nonpayment.

The law firm then asked the federal court to lift its stay and dismiss the malpractice complaint for failure to prosecute. The court reviewed evidence and confirmed the client was unable to pay the AAA fee, but dismissed her case.

On appeal, the Ninth Circuit first focused its attention on the text of Section 3 of the FAA. Section 3 requires courts to stay court proceedings “until such arbitration has been had in accordance with the terms of the agreement.”  It found that the client’s arbitration “ha[d] been had in accordance with the terms of the agreement”, as the AAA rules allowed the arbitrator to terminate the proceeding for nonpayment.  So, lifting the stay was appropriate.

However, the Ninth Circuit found the district court erred when it dismissed the client’s claim. It found nothing in the FAA or binding precedent that required dismissal of the litigation.  Therefore, it enforced a district court’s usual obligation to decide cases properly before it.

The court was not blind to the potential policy ramifications of its decision, though.  It commented:

“Our decision that Tillman’s case may proceed does not mean that parties may refuse to arbitrate by choosing not to pay for arbitration.  If Tillman had refused to pay for arbitration despite having the capacity to do so, the district court probably could still have sought to compel arbitration under [Section 4 of the FAA].”

So, poor litigants may avoid arbitration by failing to pay the arbitration fees, but wealthy litigants cannot? That seems to be the outcome here (and last year in the 10th Cir. ).  Any respondent in arbitration who wants to avoid this odd result should agree to pay both parties’ fees, and then ask the arbitrator(s) to take that into account in the resulting award.

Lots of interesting arbitration law has been made already in 2016, so here is a roundup from the first four weeks of the year. As a teaser, courts have breathed life into the effective vindication doctrine, found arbitrators cannot determine the availability of class actions, and found state laws not preempted.  More surprisingly, state courts are following SCOTUS’s interpretations of the FAA.

Effective Vindication Lives On

Although I thought Italian Colors was an “effective elimination” of the effective vindication doctrine, the Tenth Circuit affirmed its use as a defense to a motion to compel arbitration this month in Nesbitt v. FCNH, Inc., 2016 WL 53816 (10th Cir. Jan. 5, 2016).  [Side note to WestLaw: can there really have been 53,816 cases by January 5th of the year??  Or do I misunderstand the numbering system?]  In that case, class action plaintiffs in a Fair Labor Standards Act case defeated a motion to compel individual arbitrations by asserting that under the AAA Commercial Rules, each plaintiff would have to pay between $2,300 and $12,500 in arbitrator fees and could not recover attorneys’ fees.  The appellate court affirmed.

Incorporation of AAA Rules Can “Unmistakably” Delegate Some Gateway Issues, But Maybe Not the Availability of Class Actions

The Third Circuit drew what seems to me a questionable distinction between parties’ ability to delegate some substantive issues of arbitrability from others. Despite acknowledging that federal courts of appeals have universally found that when parties agree to be bound by the AAA rules, they delegate substantive arbitrability to arbitrators, the Third Circuit found that does not extend to the availability of class arbitration. Chesapeake Appalachia, LLC v. Scout Petroleum, LLC, 2016 WL 53806 (3d Cir. Jan. 5, 2015).  Recall that in general, courts are presumed to have authority to determine whether an arbitration exists, whether it is valid, and whether it covers the scope of the parties’ dispute.  But, under First Options of Chicago, a SCOTUS opinion, parties can delegate even those issues to arbitrators as long as their intent to do so is “clear and unmistakable.”  In Chesapeake Appalachia, the court repeats its pronouncement from Opalinski that the “availability of classwide arbitration” is one of those substantive questions of arbitrability that courts presumptively decide, unless parties clearly and unmistakably state otherwise.  And then it further protects courts’ ability to make that determination by holding that the parties’ incorporation of AAA rules, which explicitly allow arbitrators to determine their own jurisdiction and contain supplementary rules about class arbitration, is not sufficient to delegate the availability of classwide arbitration to arbitrators.  Drawing on statements from Sutter, the court leaned on the “great” procedural differences between bilateral and class-action arbitration to support its distinction.

Waiver of the Right to Arbitrate is an Issue Presumptively for Courts

Maybe Bryan Garner can come up with a new term for “waiving” the right to arbitrate, so that it is not the same verb as waiving the substantive claim being arbitrated. If so, that would alleviate the problem that the Supreme Court of Nevada addressed in Principal Investments, Inc. v. Harrison, 2016 WL 166011 (Nev. Jan. 14, 2016).  That court wrestled with the issue of whether a court or an arbitrator should decide if a party has waived its right to arbitrate by participating in litigation.  In other words, is that type of waiver a substantive question of arbitrability (like whether there is a valid arbitration agreement) that is presumptively for courts, or a procedural question of arbitrability that is presumptively for arbitrators?  Adding to the confusion is language from Howsam and BG Group characterizing “waiver” as an issue presumptively for arbitrators.  After canvassing other courts and finding the majority have concluded that waiver-by-litigation is presumptively for courts, the Nevada Supreme Court followed the herd.

Missouri Enforces Prima Paint’s Severability Doctrine

As I have picked on Missouri for bucking federal arbitration law, I owe it to the Show-Me State to point out that it recently (but reluctantly) followed federal precedent on severability. In Ellis v. JF Enterprises, LLC, 2016 143281 (Mo. Jan. 12, 2016), the Supreme Court of Missouri recognized that under federal precedent, a plaintiff cannot avoid an arbitration agreement by asserting the contract as a whole is void, it must point to a deficiency with the arbitration clause specifically.  As a result, the court held that “no matter what logic or fairness” undergirded the plaintiff’s argument that her auto sale was invalid, she had to arbitrate that claim.

Kentucky’s Precedent on Wrongful Death Actions is not Preempted by FAA

In Richmond Health Facilities v. Nichols, 2016 WL 192004 (6th Cir. Jan. 15, 2016), the Sixth Circuit analyzed Kentucky’s state law rule, which holds that wrongful-death claims belong only to beneficiaries, and therefore any arbitration agreement signed by a decedent cannot bind a beneficiary bringing a wrongful death claim.  The Sixth Circuit found that state law rule does not stand as an obstacle to the FAA, because it does not categorically prohibit arbitration of wrongful death claims, so was not preempted.

Lots of Action on Attorneys’ Fees

The Supreme Court of Utah held that an arbitrator cannot award attorneys’ fees incurred in confirming the arbitration award, under the Uniform Arbitration Act. Westgate Resorts, Ltd. V. Adel, 2016 WL 67717 (Utah Jan. 5, 2016).

Massachusetts’ highest court also found an arbitrator is not authorized to award attorneys’ fees due to one party’s assertion of frivolous defenses (unless the parties specifically granted the arbitrator that authority). Beacon Towers Condominium Trust v. Alex, 2015 WL 9646024 (Mass. January 7, 2016).

Similarly, the Second Circuit held that a federal district court erred in awarding attorneys’ fees and costs to the party that successfully confirmed its arbitration award. Zurich Am. Ins. Co. v. Team Tankers (2d Cir. Jan. 28, 2016).  As part of its contractual analysis, the court repeated that parties may not contract around Section Ten of the FAA.  In other words, it would not read the parties’ contract as precluding an attempt to vacate the award.

PHEW. I have now alleviated the guilt that has been weighing on me for not blogging about these cases yet.  Hope February brings a more reasonable stream of opinions!

Recent decisions from the 3d and 11th Circuits drive home this point: an arbitration award is final and should not be revisited.

In Robinson v. Littlefield, 2015 WL 5520017 (3d Cir. Sept. 17, 2015), the parties arbitrated their dispute over the quality of a new RV.  The arbitrator ruled for the RV buyers, awarding them about $85,000.  The seller made an untimely motion with the AAA to modify or correct the award, and the arbitrator ignored it.

After the buyers entered their judgment in state court, the seller removed to federal court and moved to strike the judgment as not final (because the motion to modify had not been ruled upon).  The district court asked the arbitrator to indicate whether the case was active, and the arbitrator clarified that he would not amend the previous award and it remained in full effect.   The district court concluded that the arbitration award was not final until the arbitrator responded to the court, and so struck the entry of judgment.  The Third Circuit un-vacated the arbitration award in no time, noting that arbitration awards are final when it is clear the arbitrator intends the award to be a complete determination of all submitted claims (including damages).  In this case, the final award was the award for $85,000, and the motion to modify it “does nothing to change that conclusion.”

In IBEW, Local Union 824 v. Verizon Florida, 2015 WL 5827517 (11th Cir. Oct. 7, 2015), the court found the arbitrator exceeded his power by issuing a substituted award in a labor arbitration.  The arbitrator had issued the original award, interpreting a clause in the parties CBA and applying it to particular employees.  Two days later, the union asked the arbitrator to clarify the award (saying that applying the arbitrator’s rationale, more employees should have benefitted).  In response, the company asked for a reconsideration of the entire award, asserting that a significant topic of the award had not been properly before the arbitrator.  The arbitrator agreed with the company and issued a substituted award, eliminating the topic in question.

The union then sought to confirm the original award and vacated the substituted award.  The district court ruled in favor of the union and the appellate court affirmed.  It analyzed the union’s grievance and found it was broad enough to encompass all the issues addressed in the original award.  “Where — as here–the parties refuse to stipulate to the issues at arbitration, the arbitrator is ’empowered’ to frame and decide all the issues in the grievance as he sees them.”

Furthermore, the 11th Circuit concluded the arbitrator lacked authority to revisit his original award.  Importantly, the court noted that the governing AAA rules preclude an arbitrator from “redetermin[ing] the merits of any claim already decided.”  The hardest issue for the court was the company’s argument that the union had “open[ed] the door” to a full reconsideration by asking for a clarification.  The court agreed that contracting parties can authorize an arbitrator to reconsider his decision by mutual agreement, but said the parties did not mutually consent in this case, because the union sought much narrower relief than that sought by the company.  The arbitrator’s original award stands.

The lesson from these cases?  The parties should not seek reconsideration of the merits of a final award, and arbitrators should not grant a reconsideration of the merits.  Final means final.

Today’s post is a good one for all those defendants/ respondents who are convinced that they have a slam-dunk case and want to recover their attorneys’ fees.  Because while these particular respondents were not successful, they paved a path that may lead others to collect attorneys’ fees after defeating claims in arbitration.

The case involved an owner’s negligence claims against an architect arising out of a condominium project.  WPH Architecture, Inc. v. Vegas VP, __ P.3d __, 2015 WL 6750051 (Nev. Nov. 5, 2015).  “Prior to arbitration”, the architect made offers of judgment under Nevada’s Rule 68 (and a related statute).  That rule allows a defendant to offer to accept judgment against it in a certain amount, and provides that if the plaintiff does not “obtain a more favorable judgment,” the plaintiff “shall pay” the defendant’s costs, interest, “and reasonable attorney’s fees, if any be allowed” from the date of the offer.   (An appropriate betting mechanism for litigation over this Las Vegas condo project…)  The owner rejected the offers and then lost at arbitration.  However, when the architect filed a motion to recover its costs, fees, and interest under Rule 68, the arbitrators denied the motion, noting that there was no express authority finding offers of judgment are available in arbitration.

The architect then asked the courts to modify the arbitration award to include its attorneys’ fees, costs and interest, arguing that the arbitrators had “manifestly disregarded the law” in refusing to follow Rule 68 and Nev. Statute 17.115.  The court went through the following analysis:

  • The parties’ contract called for the AAA’s Construction Arbitration Rules to govern the arbitration, but Nevada law to govern the contract.  Applying Mastrobuono, the court held “that the arbitration was substantively governed by Nevada law and procedurally governed by the AAA rules.”
  • The court held that Rule 68 and the similar Nevada statutes “are substantive laws that apply to the arbitration proceedings in the current case.”
  • However, because those rules and statutes do not reference arbitration or arbitrators, they “do not require an arbitrator to award attorney fees or costs.”  (The court noted that California’s offer of judgment statutes explicitly applies to court and arbitration proceedings.)  “Furthermore, no Nevada caselaw exists holding that those statutes apply to arbitration proceedings.”
  • Therefore, because the rules and statutes did not explicitly apply to arbitration, and no case law had reached that issue, the architect “failed to demonstrate that the arbitrator manifestly disregarded Nevada law.”

Going forward, of course, the analysis will be different.  Thanks to this case, there now is binding case law in Nevada that Rule 68 is a substantive law that applies in arbitration.  This gives anyone whose contract is governed by Nevada law new potential leverage in defending against arbitrable claims.  If you make an early offer of judgment on a winning claim, you have the ability to later tax your costs and interest against your opponent (and a statutory basis to seek fees).  Because many states have a similar offer of judgment statute, and the analysis that the rule is substantive is based on federal cases, this same analysis should be available in many jurisdictions.

Some arbitration topics just never die.  This post strings together new cases on three of those topics: 1) whether arbitration agreements that call for the now-defunct National Arbitration Forum (NAF) are enforceable; 2) formation fights in nursing home agreements; and 3) the continuing fight between the NLRB and the courts over class action waivers in employment agreements .

In a 3-2 decision, the Supreme Court of Pennsylvania refused to enforce an arbitration agreement that called for administration by the NAF.  Wert v. Manorcare of Carlisle PA, 2015 WL 6499141 (Pa. October 27, 2015).  In the context of a wrongful death claim against a nursing home, the parties disputed the enforceability of an arbitration agreement in the admission paperwork.  Pennsylvania’s highest court adopted a 2010 decision from its intermediate appellate court finding that the incorporation of the National Arbitration Forum Code was an essential term, such that if the NAF was unavailable, the entire arbitration agreement was unenforceable. The court found the subjective intent of the Appellee (who admitted she did not read the agreement) was irrelevant.  Relying on its analysis of the NAF rules, the court found “the provision integral and non-severable.”  For good measure, the court also noted that its result was not preempted by federal law because it was “based on settled Pennsylvania contract law principles that stand independent of arbitration.”  State courts, as well as federal courts, are now split on how to handle arbitration clauses incorporating NAF rules.

In another nursing home case, the Alabama Supreme Court found an arbitration agreement was not validly formed because the person who signed it did not have proper authority.  Diversicare Leasing Corp v. Hubbard, 2015 WL 5725116 (Ala. Sept. 30, 2015), involved a mother’s claim about the wrongful death of her son in a long-term care facility. When the adult son, whose mental capacity had not progressed beyond that of a toddler, was admitted, his mother signed the admission agreement as the “responsible party” and “resident’s representative.”  After she brought suit, the nursing home moved to compel arbitration.  However, the Alabama trial and appellate courts found that no valid arbitration agreement had been formed.  Critically, the son had never been mentally competent to authorize his mother to act on his behalf, and she had never been given his power of attorney, or health care decision-making rights, or been appointed his legal guardian after his 18th birthday.  Therefore, the mother’s signature did not bind the son.  The Alabama decision is in line with other state court decisions that have strictly interpreted the legal authority of relatives who sign arbitration agreements in nursing home contracts.

Finally, the third case taught me a new legal doctrine: nonacquiescence.  And who is not acquiescing to federal authority?  Well, the NLRB, at least according to the 5th Circuit.  In its D.R. Horton decision in 2013, the Fifth Circuit had rejected the NLRB’s analysis that federal labor laws override the FAA and preclude class action waivers.  Despite D.R. Horton, the NLRB applied its same analysis in Murphy Oil, just ten months later.  On review, the Fifth Circuit forcefully reaffirmed its earlier holding.  Murphy Oil USA v. NLRB, 2015 WL 6457613 (5th Cir. Oct. 26, 2015).  However, the court was not willing to hold the NLRB in contempt or otherwise penalize the Board. Because the Board only has to acquiesce to circuit court rulings when a case will be reviewed by that same circuit, and the Murphy Oil case could have been reviewed in multiple circuits, the court noted “[w]e do not celebrate the Board’s failure to follow our D.R. Horton reasoning, but neither do we condemn its nonacquiescence.”

Usually, when faced with a respondent who refuses to pay its share of the arbitration fees, a claimant simply pays both sides’ fees, so that the arbitration can proceed.  A new case out of the Tenth Circuit answers the question: what happens if it does not pay both sides’ fees?  Pre-Paid Legal Services, Inc. v. Cahill, __ F.3d__, 2015 WL 3372136 (10th Cir. May 26, 2015).  Somewhat surprisingly, the answer is that the claimant can choose to litigate its case in court, where there are no fees.

Pre-Paid Legal Services sued its former employee for allegedly taking its trade secrets to a new employer.  Pre-Paid brought that suit in state court.  The employee removed to federal court and moved to stay the case pending arbitration.  The district court agreed.  The day after the district court’s order, Pre-Paid started a AAA arbitration against the ex-employee.  Pre-Paid paid its share of the arbitration fees, but the ex-employee never paid its share.  “Pre-Paid declined to pay [the employee’s] share of the fees.”  (Maybe it wanted to be a test case??)  After many warnings, the AAA terminated the arbitration for non-payment of fees.  Because the employee refused to pay its share of the fees, and Pre-Paid would not pay its share either, Pre-Paid’s claims were never heard on the merits in arbitration.

So, Pre-Paid went back to federal court, asking the district court to lift the stay and allow litigation to proceed.  The ex-employee opposed the motion based on Section 3 of the FAA.  He argued that the language of Section 3 only allows a stay to be lifted after an arbitration is heard on the merits.  The statute says that if suit is brought on an arbitrable issue, the court:

shall on application of one of the parties stay the trial of the action 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.

Both the district court and the Tenth Circuit disagreed with the ex-employee.  They refused to allow him to create a loophole whereby a defendant/respondent could avoid ever getting to the merits of a claim against him by simply refusing to pay his share of arbitration fees.

The Tenth Circuit analyzed two key phrases in the statutory language quoted above.  First, it found that “arbitration has been had in accordance with the terms of the agreement” does not necessarily mean a full hearing on the merits.  Instead, where the parties incorporate the rules of the AAA in their arbitration agreement, and those rules allow the AAA to terminate an arbitration for non-payment, even a terminated arbitration did happen “in accordance with the terms of the agreement.”

Second, the Tenth Circuit identified an alternative basis for lifting the stay: the ex-employee was “in default in proceeding” with the arbitration.  The ex-employee’s failure to pay constituted a default under Section 3, especially since he made no attempt to show he was unable to pay or ask the arbitrators for any relief from the payment obligation.

What is the result of this decision?  Pre-Paid will “resume with litigation” in the federal district court, almost three years after it initially filed its court case against the ex-employee.  What else?  Defendants everywhere are on notice that non-payment is not a “get out of litigation free” card.

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Another interesting tidbit: Judge Posner, writing for a panel of the Seventh Circuit, recently expressed his displeasure with the “strong federal policy” in favor of arbitration.  “It’s not clear that arbitration, which can be expensive because of the high fees charged by some arbitrators and which fails to create precedents to guide the resolution of future disputes, should be preferred to litigation.”  Andermann v. Sprint Spectrum L.P., No. 14-3478 (7th Cir. May 11, 2015).

Let’s say your arbitration agreement calls for arbitration administered by JAMS under JAMS rules, but the arbitrator is independent and applies AAA rules, over one party’s objection.  A new decision from the Fifth Circuit says that is enough to vacate the resulting award.

In Poolre Insurance Corp. v. Organizational Strategies, Inc., __ F.3d__, 2015 WL 1566633 (5th Cir. April 7, 2015), there was a dispute between a self-insured company, the consultants that set up its insurance program (Capstone), and its reinsurer.  The arbitration agreement between the company and Capstone called for arbitration under the Commercial Arbitration Rules of the AAA, with venue in Delaware.  The arbitration agreement between the company and the reinsurer, on the other hand, called for arbitration by the International Chamber of Commerce (ICC), in Anguilla, with the arbitrator chosen by “the Anguilla [] Director of Insurance.” (Anguilla is in the British West Indies.  Why don’t I ever get to arbitrate somewhere exotic?  Maybe that’s the reward for being a reinsurance lawyer…)

Capstone started arbitration with the company at “Conflict Resolution Systems, PLLC” (CRS) in Houston, and Dion Ramos was named the arbitrator.  When the reinsurer inquired whether the Anguilla Director of Insurance could select the arbitrator, as required in the reinsurance contract, an Anguillan official explained that “no such official existed.”  (Sounds reminiscent of these cases...)  However, the Anguillan official designated CRS to select an independent arbitrator and administer the proceedings.  The company objected to the arbitrator’s authority, and the reinsurer intervened to request an arbitrator based in Anguilla.  Ramos found he had jurisdiction over all parties, and found the reinsurer waived its right to arbitrate in Anguilla by intervening.  The company continued to object, arguing that the arbitrator did not have the power to apply AAA rules to the reinsurance dispute.

Ramos found the reinsurer was properly joined in the arbitration.  On the merits, Ramos found the company breached its contracts with Capstone and the reinsurer and granted attorneys’ fees and expenses to Capstone and the reinsurer of about a half a million dollars.  Ramos denied all the company’s claims.

The reinsurer and Capstone moved to confirm the award and the company moved to vacate.  The Texas district court found Ramos exceeded his authority by exercising jurisdiction over the reinsurer and applying AAA rules to the reinsurance dispute. Because the inclusion of the reinsurer “tainted the entire process,” the district court vacated the award.

On appeal, the Fifth Circuit affirmed the district court’s decision to vacate the award.  The court noted that arbitration awards may be vacated when arbitrators “exceed[] the express limitations” of the contractual mandate, or act contrary to express contractual provisions.  Here, the Fifth Circuit found two separate bases for vacating the award.  First, the arbitrator-selection mechanism in the reinsurance contracts was not followed.  (In a footnote, the court acknowledged that the selection mechanism provided in the contract was not actually available, since there was no official with that title, but that the parties could have come to the court under Section 5 of the FAA and asked the court to appoint an arbitrator.)  Second, Ramos “acted contrary” to the requirement that the reinsurance disputes be arbitrated by the ICC under ICC rules.  The court found that was a “forum selection clause integral to the agreement” and therefore the arbitrator exceeded his power by applying AAA rules.  (Interestingly, the Fifth Circuit did not analyze the third basis that the district court used to support vacatur: the arbitrator’s decision to join all the parties to a single arbitration, although the company had not consented to consolidation.)

What are the lessons here for parties?  Here are at least two.  First, do not try to consolidate arbitrations that call for different administrators or different rules unless all parties agree.  And second, if you are going to specify an unusual arbitrator-selection process, make sure to put a “Plan B” in the contract.

Two other bits of arbitration news:

First, SCOTUS denied cert in one of the cases that refused to enforce an arbitration clause calling for arbitration before a Native American tribe.

Second, Delaware’s Rapid Arbitration Act officially became a law on April 3 and will go into effect in May.  Will Delaware businesses see the promise of speedy dispute resolution (max resolution time is 180 days by law) as enough of a benefit to give it a try? We may never know, as the process will be confidential…

The Consumer Financial Protection Bureau released an “Arbitration Study” exceeding 700 pages to Congress this week.  You have likely heard the headlines – most commentators assume that the CFPB will use the study to support an effort to restrict or regulate the use of “pre-dispute” arbitration in financial transactions.  But, let’s not get ahead of ourselves.  The study itself is worth digging into; the CFPB was able to access lots of information that us regular folks cannot.  Indeed, one complaint about arbitration is that it happens inside a black box, out of reach of statistical analysis or scholarly study, and precluding development of legal precedent. Here’s part one of my peek inside that black box, courtesy of the CFPB.

What the Cool Kids Are Putting in Their Arbitration Clauses

About a year ago, CFPB published its findings on the frequency of arbitration agreements in financial agreements.  This report does not add much in that area.  But, it has new information on the features of arbitration clauses that are prevalent in contracts in the industries studied (credit cards, checking accounts, general purpose reloadable prepaid accounts, private student loans, payday loans, and mobile wireless third-party billing).

  • Would you guess that 50% of payday loan agreements and 83% of private student loan agreements allowed their customers to opt out of arbitration? I was surprised. More than a quarter of credit cards and checking account agreements did also.
  • A majority of all types of financial agreements carved out small claims from their arbitration agreements.
  • The AAA is king. It is listed as either the sole provider or an arbitral option in about 9 out of 10 financial agreements (other than student loans). By comparison, JAMS is an option for about half of the agreements (but only 14% of mobile).
  • Roughly 9 of 10 arbitration clauses in these industries preclude class actions in arbitration. Most also stated that if the class waiver is unenforceable, the entire arbitration clause is unenforceable as well. (CFPB calls it the “anti-severability provision.”)
  • What are financial institutions not putting in the agreement? They are not shortening statutes of limitations often, they are not limiting damages very often, they are not authorizing the arbitrator to award attorneys’ fees to the prevailing party often, and they are generally not addressing confidentiality.

What the Public Understands About those Arbitration Clauses

The CFPB surveyed 1007 people about their dispute rights with respect to their credit cards, and found they know *nothing.*  And this should surprise no one.  (I am not pointing fingers.  If you asked me whether I could sue one of my credit card issuers in court, I would not know either.)  The study explains partly why that is: dispute resolution clauses do not factor into a consumer’s choice of credit card.  When all 1007 people were asked what features they considered in acquiring their credit cards, literally no one mentioned the ADR clause.

The 1007 people were asked what credit cards they had, and whether they could sue the company if there was a dispute.  The people who thought they could sue their credit card issuer in court were wrong 80% of the time.

The most surprising thing about the survey results to me were just how passive people are about disputes.  When confronted with a hypothetical example of a credit card refusing to correct a billing mistake, most people would cancel their cards and take no further action. Only 2% of people would consider going to court or talking to an attorney.

In the next post (part two), I will highlight statistics and findings from the CFPB’s comparison of how consumer disputes are resolved in arbitration and how they are resolved in court.