Arbitration Rules/Procedures

The Third Circuit ruled last week that Delaware’s Chancery Court could not offer its judges’ services as neutral arbitrators in its courtrooms, unless those arbitrations were open to the public.

In 2009, the Delaware courts decided to provide arbitration.  The state amended its laws to create an arbitration process that was only open to disputes worth more than a million dollars with at least one party being a business incorporated in Delaware (and no party being a consumer).  The parties did not need to have a pre-dispute arbitration agreement.  As long as they both consented, they could file their arbitration in the Delaware courts for a$12,000 initial fee and have the Chancellor select a Chancery Court judge to hear the arbitration in the Delaware courthouse (for another $6,000/day).  However, “the statute and rules governing Delaware’s proceedings bar public access.”  Only parties and their representatives could attend the proceedings.

In Delaware Coalition for Open Government, Inc. v. Strine, __ F.3d __, 2013 WL 5737309 (3d Cir. Oct. 23, 2013), the Third Circuit found that it violates the First Amendment to bar the public from Delaware business arbitrations.  Applying the “experience and logic” test (sounds like the kind of test courts should always apply!), the Court found “[w]hen we properly account for the type of proceeding that Delaware has instituted — a binding arbitration before a judge that takes place in a courtroom…the right of access to government-sponsored is deeply rooted in the way the judiciary functions in a democratic society.”  Further, the court noted that public access would be beneficial for stockholders, ensure transparency of the process, and discourage perjury.  For all those reasons, the Third Circuit found a right of public access to state-sponsored arbitrations in Delaware.

I haven’t heard of other states trying to compete with the AAA, so this decision does not have broader implications, but it is worth pondering whether the same benefits of public access the Third Circuit noted in this case also apply to private arbitrations.


Now for some brief updates on recent topics:

  • The Minnesota Supreme Court granted review of this case, in which the Minnesota Court of Appeals confirmed an arbitration award involving a significant sanction against a party who was accused of manufacturing evidence.
  • The defense of illusoriness is still on the upswing.  Last week the Fifth Circuit affirmed a district court’s refusal to compel arbitration based on a finding that the agreement was illusory under Texas law.  Scudiero v. Radio One of Texas II, 2013 WL 5755484 (5th Cir. Oct. 24, 2013).
  • In case anyone thought Sutter was limited to deference for arbitrators who find arbitration agreements allow for class actions, the Eleventh Circuit clarified the same deference applies to arbitrator decisions to allow collective actions as well.  DirecTV v. Arndt, 2013 WL 5718384 (11th Cir. Oct. 22, 2013).
  • A thoughtful reader drew my attention to a case the U.S. Supreme Court will hear on November 13: Unite HERE Local 355 v. MulhallThe central question in the case is one of labor law, not arbitration, but the labor law questions were interpreted by arbitrators under the parties’ agreement, and the National Academy of Arbitrators has weighed in to support the use of “pre-recognitional governance systems” including arbitration.


On October 1, new Commercial Arbitration Rules became effective at the American Arbitration Association (AAA).  These rules are likely to apply to all commercial arbitrations filed on and after October 1 (unless an arbitration agreement specifically provides for old rules).  The AAA posted its own summary of the changes.  Four of the most notable include:

  • Greater specificity about allowable discovery, as well as clear authority for arbitrators to enforce discovery orders or sanction those who do not comply;
  • Specific authority for arbitrators to hear dispositive motions if “the moving party has shown that the motion is likely to succeed and dispose of or narrow the issues in the case”;
  • Authority for parties to seek emergency relief (even without having provided for it separately in the arbitration agreement) from an emergency arbitrator within specific timelines; and
  • The parties and their counsel now have a separate duty to disclose “any circumstance likely to give rise to justifiable doubt as to the arbitrator’s impartiality or independence” including past dealings with the parties and their representatives.

In my view, these are all very positive changes.

Speaking of rules, two recent courts compelled arbitration when the arbitration agreement provided for administration by the defunct NAF.  (Previous posts on that topic here and here.)  The definite trend now is to enforce arbitration agreements calling for administration by the NAF, albeit with some procedural “fixes” to the agreement.

In one case, the Seventh Circuit compelled arbitration even though the parties’ loan agreement provided for “binding arbitration by one arbitrator by and under the Code of Procedure of the National Arbitration Forum [NAF]” and the NAF had not accepted consumer cases since July of 2009.  Green v. U.S. Cash Advance Illinois, LLC, __ F.3d ___, 2013 WL 3880219 (7th Cir. July 30, 2013).  (Curiously, the agreement was signed in 2012, so there was plenty of time to revise it after the NAF stopped taking cases.)  The district court had refused to compel arbitration, finding the NAF was an “integral part of the agreement” and without it the arbitration agreement was void.  Noting a circuit split in which the 3d and 11th Circuits have compelled arbitration, despite selection of the NAF, while the 5th Circuit has declared agreements calling for the NAF unenforceable, the 7th Circuit sided with those compelling arbitration.  The decision engaged in a lengthy analysis suggesting that the line of cases finding one aspect of an arbitration clause “integral” contradicts Section 5 of the FAA and does not come from a general state law principle allowable under Section 2.  The Green decision has a dissent from Judge Hamilton, largely relying on the fact that the NAF Code itself “provides for arbitration by the Forum or by nobody.  Since the Forum made itself unavailable, that should mean arbitration by nobody.”

In a less contentious case, the Sixth Circuit also enforced an arbitration clause that referenced the NAF.  In that arbitration clause, however, the drafters had inserted a Plan B: “The National Arbitration Forum will be the Administrator unless…” the lender chose the AAA under certain circumstances.  The court concluded that even though the NAF was the preferred forum, that language could be excised pursuant to the note’s severability clause, which left the language authorizing arbitration before the AAA.   Smith v., Inc., 2013 WL 4406999 (6th Cir. Aug. 16, 2013).

In two decisions this week, courts consider whether arbitration awards can be vacated based on arbitrators’ decisions to exclude evidence.  In both cases, the courts affirm an arbitrator’s authority to make reasonable evidentiary decisions — excluding hearsay and denying tardy subpoena requests — as long as those decisions do not deny a party a fair hearing.

In LJL 33rd Street Assocs. LLC v Pitcairn Props. Inc., __ F.3d __, 2013 WL 3927615 (2d Cir. July 31, 2013), a dispute over the valuation of a luxury high-rise in NYC, the arbitrator excluded four exhibits.  All four contained valuations by entities or individuals who were not called as witnesses in the hearing.  The federal district court then vacated the arbitrator’s determination of value under Section 10(a)(3) of the FAA.  It reasoned that, while the exhibits were hearsay, they should have been admitted and the objections should have gone to their evidentiary weight.

The Second Circuit reversed the vacatur with instructions to confirm the award.  It noted that Section 10(a)(3) of the Federal Arbitration Act only allows vacatur of an award if arbitrators are “guilty of misconduct” in “refusing to hear evidence pertinent and material to the controversy.”  To violate that standard, excluded evidence must impair the “fundamental fairness” of the proceeding.  The court found this arbitration proceeding was fundamentally fair for two reasons.  First, there was nothing preventing the complaining party from bringing live witnesses to authenticate the documents.  And second, if the exhibits had been allowed, the other side would have been prejudiced by its inability to cross-examine the authors of those valuations.

In Doral Financial Corp. v. Garcia-Velez, __ F.3d __, 2013 WL 3927685 (1st Cir. July 31, 2013), the issue was the arbitrators’ decision not to issue subpoenas to a third party.  In that employment dispute, the employer did not seek any subpoenas (or document requests) before the deadline in the scheduling order.  Then, after the arbitration hearing had begun (but was on a recess), the employer requested the arbitrators issue subpoenas for documents and hearing testimony from a third party.  The arbitrators denied the request as untimely, and later awarded the employee almost $2.5 million.

The employer moved to vacate the award under Section 10(a)(3), arguing that the denial of its subpoena request deprived it of a fair hearing.  Both the district court and appellate court refused to vacate the award.  With colorful language reminiscent of earlier arbitration decisions, the First Circuit described the employer as “cling[ing] like a limpet in the heaviest sea to the ‘fair hearing’ requirement subsumed in [Section] 10(a)(3).”  The limpet’s ride was cut short by the fact that the employer had received both adequate notice of the schedule for requesting discovery and the opportunity to present relevant evidence and arguments (as well as continuances when requested).  The court also noted that the employer had nothing but a hunch that the documents and testimony it sought woudl have yielded relevant information, declaring “[w]e cannot vacate an arbitral award based on sheer speculation alone.”  [In confirming the arbitrator’s grant of pre-award interest, the court closed its discussion with “To say more on this front would be to carry coals to Newcastle.”  What does that even mean??!]

*If you find this blawg useful or interesting–and definitely if the posts have helped you brief an arbitration issue or draft an arbitration agreement–please consider nominating it for the ABA Journal’s list of the top 100 Blawgs!  ArbitrationNation would be honored to be listed for a second year.

In a new case that reminds federal judges everywhere to sing “I’ve got the power!” like C&C Music Factory, the Fifth Circuit reiterates that federal courts can stay related state court actions if necessary to “protect or effectuate” an order compelling arbitration.  American Family Life Assurance Co. of Columbus v. Biles, __ F.3d __, 2013 WL 1809766 (5th Cir. April 30, 2013).

The underlying facts of the case highlight a tragically dysfunctional family.  An adult homosexual man named his partner as a beneficiary of his life insurance, but when the insurer in fact distributed money to the decedent’s life partner, the decedent’s mother and siblings sued the partner, the insurer, and the insurance agent in state court, alleging that they all conspired to fraudulently obtain life insurance “with the intent to end the decedent’s life and collect the policy’s death benefits.”

The insurance policy had an arbitration clause, but the angry family members refused to arbitrate.  That led the insurer, Aflac, to file a federal court action to compel arbitration.  After multiple motions and expert affidavits about whether the decedent’s signature on the policy was a forgery, the district court compelled arbitration and enjoined the angry family from continuing their state court action.  The angry family appealed on multiple grounds.

The Fifth Circuit affirmed the district court.  With respect to the federal court’s ability to effectively shut down the state court action, the court said two things.  First, there was no reason for the federal court to abstain under the Colorado River doctrine, largely because the two cases were not “parallel” and no exceptional circumstances were present that favored abstention.  Second, the court rejected the idea that the result violated the Anti-Injunction Act, which generally prohibits federal courts from staying proceedings in state court.  The Fifth Circuit found that the district court’s injunction against the state court proceeding fell within a recognized exception to the Anti-Injunction Act, for injunctions necessary to “protect or effectuate [] order[s] compelling arbitration.”

This post is dedicated to a perennial favorite topic: subpoenas for documents in arbitration.  Why this topic and not something hot off the presses?  Because SCOTUS has not yet accepted or denied the cert petition in Sutter, and no cases have come out recently that meet my high standards for discussion on this blog (is it about arbitration?  does it lend itself to a fun title?  at least a fun photo?).

If the arbitration involves interstate commerce, the Federal Arbitration Act governs the issuance of subpoenas.  Section 7 authorizes an arbitrator to “summon in writing any person to attend before them or any of them as a witness and in a proper case to bring with him or them any book, record, document, or paper which may be deemed material as evidence in the case.”  9 U.S.C. § 7.  The section also specifies that if the recipient of the subpoena does not cooperate, the issuing party must bring a motion in the federal district court in “the district in which such arbitrators, or a majority of them, are sitting.”  (If your arbitration does not involve interstate commerce, then the applicable state arbitration act will govern the availability of subpoenas.)

The language of Section 7 has led to a circuit split on whether the FAA authorizes document discovery from third parties.  The plain text of the statute suggests that documents are only available if they are in the possession of a third-party witness who is testifying during the arbitration hearing (but not available in advance of the hearing without a testifying witness).  And, indeed, that is the interpretation that both the Second and Third Circuits have offered in recent years.  E.g., Life Receivables Trust v. Syndicate 102 of Lloyd’s of London, 549 F.3d 210 (2nd Cir. 2008); Hay Group, Inc. v. E.B.S. Acquisition Corp., 360 F.3d 404 (3d Cir.2004).   The Second Circuit characterized its decision as part of an “emerging rule” and a “growing consensus,” probably due in part to the fact that Justice Alito wrote the Hay Group opinion before joining the Supreme Court.

The only strong opposition comes from a  twelve year old decision from the Eighth Circuit, finding that if an arbitrator has the power to order a third-party to bring documents to a hearing, it must also have the power to order that the documents be produced in advance.  In re Arbitration Between Sec. Life Ins. Co. of Am., 228 F.3d 865, 870-71 (8th Cir.2000).  The Fourth Circuit struck out a middle ground, without the benefit of any of the previously-cited decisions, noting that arbitrators have the power to order third parties to produce documents in advance of the hearing only in cases of special need.  COMSAT Corp. v. Nat’l Sci. Found., 190 F.3d 269, 275 (4th Cir.1999).

Of course, parties have found creative ways around the rule against pre-hearing discovery from third parties.  For example, arbitrators have conducted mini-hearings, in advance of the full hearing on the merits, for the sole purpose of hearing testimony and/or receiving documents from a third party.  See Alliance Healthcare Services, Inc. v. Argonaut Private Equity, LLC, 804 F. Supp. 2d 808 (N.D. Ill. 2011).   In addition, the rules of the forum may authorize third-party discovery before a hearing (FINRA does, for example).

Assuming the arbitrator has the power to subpoena a third party for documents in advance of the hearing, are there any limits on who those third parties can be?  In particular, can they be outside the state where the arbitration will occur, or more than 100 miles from the hearing site (the limitations in FRCP 45)?  Again, courts are split on whether the geographic limitations of Rule 45 apply in the arbitration context.  A number of courts find the limits do not apply.  E.g., In re Arbitration Between Sec. Life Ins. Co. of Am., 228 F.3d 865, 870-71 (8th Cir.2000); Festus & Helen Stacy Fdn. v. Merrill Lynch, 432 F. Supp. 2d 1375, 1378 (N.D. Ga. 2006).  Other courts hold that the geographic limitations apply equally to arbitration and court subpoenas.  E.g., Legion Ins. Co. v. John Hancock Mutual Life Insurance Co., 2002 WL 537652, at *27–28 (3d Cir. April 11, 2002).   Finally, other courts get around the perceived unfairness of arbitration subpoenas being limited to third parties in a certain geographic radius by using FRCP 45(a)(3)(B) as a gap-filler of sorts, allowing for the issuance of third-party subpoenas outside the federal district where the arbitration hearing will proceed.  See Ferry Holding Corp. v. GIS Marine, LLC, 2012 WL 88196 (E.D. Mo. 2012).

In short, subpoenaing documents from third parties is an area where the law is in flux, so you want to reserve your requests for third parties whose documents are critical and merit the expense of fighting over whether they should be produced. The issuing party must check the precedent in the federal district where the arbitration hearing will take place to see if pre-hearing document discovery is allowed and whether it is restricted to the geographic limits of Rule 45.  If courts in the relevant district have limited the reach of subpoenas for documents, you will need to get creative to get your discovery.  For those who want to object to a subpoena for documents from an arbitrator, you can bring to bear all the usual objections under Rule 45, as well as the unique arbitration-related objections that document discovery from third parties is not available in arbitration.

I see more and more arbitration agreements that contain their own limitations period (the timeline for bringing a dispute in arbitration).  Are all of those necessarily enforceable?  No. 

In Order of United Commercial Travelers of America v. Wolfe, 331 U.S. 586 (1947), the Supreme Court held that contracts may shorten the statute of limitations so long as the period is reasonable. (This blog has previously addressed who hears the limitations argument — courts or arbitrators.)  However, there are very few hard-and-fast guidelines that courts offer on what amount of time is reasonable in the arbitration context.  Periods as short as ninety days have been found reasonable, while periods as long as two years have been found unreasonable.  See, e.g., Letourneau v. FedEx Ground Package Sys., Inc., No. Civ. 03-530-B, 2004 WL 758231, at *1 (D.N.H. Apr. 7, 2004) (upholding ninety-day limitations period); McKee v. AT&T Corp., 191 P.3d 845, 859-60 (Wash. 2008) (invalidating two-year limitations period). 

In determining reasonableness, courts look at the unique facts of each case and the relevant policy considerations.  Here are three factors that will make it less likely for a court to uphold the contract’s limitation period:

  • Unequal bargaining power. Often in the employer-employee context, the court views the employee as the party with weaker bargaining power, less access to counsel and fewer financial resources. For those reasons, whether the limitations period is thirty days or six months, courts are hesitant to enforce these periods when the arbitration agreement is signed on a non-negotiable basis. E.g., Plaskett v. Bechtel Int’l, Inc., 243 F. Supp. 2d 334, 341 (D.V.I. 2003); Openshaw v. FedEx Ground Package Sys., Inc., 731 F. Supp. 2d 987, 992-94 (C.D. Cal. 2010).  On the other hand, in non-employment contexts, such as purchase of property, courts are more likely to find that equal bargaining power existed. E.g., Freeman v. Skogen, No. C5-93-348, 1993 WL 318927 (Minn. Ct. App. Aug. 24, 1993);
  • Precluding recovery under federal law.  In Davis v. O’Melveny & Myers, 485 F.3d 1066 (9th Cir. 2001), for example, the court invalidated a one-year limitations period because it precluded the plaintiff from recovering for continuing violations under the Fair Labor Standards Act, which permits recovery of damages for a two- or three-year period depending on the type of violation; and
  • Lack of mutuality.  Courts are more apt to wipe out provisions that shorten the statute of limitations for one party but allow the other party more time to bring their claims. E.g., Pokorny v. Quixtar, Inc. 601 F.3d 987 (9th Cir. 2010).

The biggest mistake counsel can make, however, when fighting a short limitation period in the arbitration agreement is to not provide justification for the provision’s unreasonableness. The plaintiff in Letourneau v. FedEx Ground Package Sys., Inc., No. Civ. 03-530-B, 2004 WL 758231 (D.N.H. Apr. 7, 2004) was stuck with a ninety-day limitations period for failing to articulate why ninety days was unreasonable under the circumstances of his case.

In a dispute over how faithful a court must be to the parties’ arbitration agreement when it is asked to resolve an impasse in arbitrator selection under Section 5 of the FAA, the Fifth Circuit decided the court must give effect to the letter of the agreement, even if that defies its spirit.

In BP Exploration Libya Ltd. v. ExxonMobil Libya Ltd., __ F.3d __, 2012 WL 3065317 (5th Cir. 2012), the parties’ contract provided for three arbitrators to decide any disputes.  Each party would appoint one arbitrator, and those two party-appointed arbitrators would choose the third.  However, a dispute arose between three parties (all of whom were bound by the arbitrator selection process).  The parties could not resolve their dispute over how to select arbitrators.  If they each appointed one arbitrator, there would be no neutral arbitrator.  But the two responding parties would not agree on a “joint” second arbitrator.  Their dispute came before a federal district court in Houston, with two parties claiming there was a “lapse in the naming of an arbitrator” that authorized the court to appoint an arbitrator under Section 5 of the FAA.

The district court fashioned a solution:  each of the three parties should appoint their own arbitrator, and those three appointed arbitrators then would unanimously select two neutral arbitrators.  In other words, there would be five arbitrators hearing the dispute.  While that seems like an appropriate, Solomonic solution, the party who originally initiated the arbitration appealed the court’s decision.  It argued that the district court erred in ordering a five-member panel when the parties’ agreement explicitly provided for three arbitrators.

The Fifth Circuit agreed with the appellant and reversed the district court’s decision.  The appeals court confirmed that this situation was the type of “lapse” that authorizes court intercession under Section 5, but held that “where the parties’ agreement provides for three arbitrators, such as here, the district court is limited under Section 5 to appointment of three arbitrators.”  In support of its decision, the court pointed to the FAA’s deference to the parties’ agreement, the FAA’s model of “circumscribed judicial involvement in the arbitral process,” and the fact that arbitration awards have been vacated when arbitrators were not selected according to the method chosen in the contract.

So, how did the Fifth Circuit resolve the problem?  It required the two respondents to jointly appoint a second arbitrator, but if they could not agree, the district court could appoint the second arbitrator.  That second arbitrator would then work with the claimant’s arbitrator to select a neutral third arbitrator to fill out the three-person panel.  And, if the parties don’t like that result, the Fifth Circuit pointed out that “nothing in this opinion prohibits the parties from reaching an agreement between or among themselves upon which they can agree for the appointment of arbitrators to hear this dispute.”

This is not an unusual circumstance.  Multi-party disputes frequently arise under an arbitration agreement whose method of arbitrator selection appears to contemplate only two parties.  Drafters should consider providing for a separate selection process in the case of multi-party disputes.

It must be near the end of the clerk year, because courts are going gangbusters issuing opinions.  Today, a roundup of three arbitration decisions from Southern states.  Notably, Louisiana makes it tough for lawyers to enforce arbitration agreements with their clients.

After prominently noting that the lower court rulings were “eminently reasonable, logical and just,” the West Virginia Supreme Court of Appeals said they were “directly contrary to the” federal interpretation of the FAA, because they denied a motion to compel arbitration on grounds that it would result in inefficient and piecemeal litigation.  Johnson Controls v. Tucker,  __ S.E.2d __, 2012 WL 2226342 (W. Va. June 13, 2012).  In that construction dispute, seven defendants were answering claims that an HVAC system was improperly designed, constructed, and/or maintained.  But only three defendants had an arbitration clause with the plaintiff, and those three moved to compel arbitration.  The plaintiff opposed the motion, arguing that to force it into piecemeal litigation made the arbitration clauses unconscionable.  After finding that federal law precluded that argument, the court also found none of the agreements were unconscionable under the plaintiff’s other arguments.

The high court in Alabama also reversed a lower court’s denial of a motion to compel arbitration in Auto Owners Insurance, Inc. v. Blackmon Insurance Agency, Inc., __ So. 3d. __, 2012 WL 2477927 (Ala. June 29, 2012).  In that case between an insurance agent and the insurance company, the issue was whether the parties’ claims fell within the scope of their arbitration agreement.  That issue was made more complicated by the fact that the parties had executed three agreements between 1995 and 2010, only two of which had arbitration agreements.  While the lower court had denied the motion to compel arbitration, the Supreme Court of Alabama reversed that decision.  Its analysis rested on the fact that the parties’ first agreement, in 1995, had an arbitration agreement that incorporated the AAA rules, and those rules give the arbitrator the authority to determine whether the parties’ dispute is within the scope of the original arbitration agreement.

The Supreme Court of Louisiana had to decide whether arbitration agreements between lawyers and clients are enforceable in Hodges v. Reasonover, __ So. 3d __, 2012 WL 2529403 (La. July 2, 2012).  (Yes, Reasonover is the lawyer’s name.  Does Reasonover over-reason?  Read on…)  The retainer agreement called for arbitration by the AAA, and when the clients sued the lawyer for malpractice, the lawyer moved to compel arbitration.  The Louisiana court agreed with the ABA’s Formal Ethics Opinion 02-045 that  a binding arbitration clause between an attorney and client is not per se unenforceable.  However, it went on to find this particular clause unenforceable based on the lawyer’s failure to adequately disclose to the client at least the following seven aspects of the arbitration agreement: it waived their right to a jury trial, waived their right to appeal, waived their broad discovery rights, subjected them to higher upfront costs, it covered particular types of claims, it did not prevent the client from making a “disciplinary complaint”, and the client had the right to seek independent counsel before signing the agreement.

This high bar for disclosure was based on the attorney’s duty of candor and duty of loyalty, which the court found obligate a Louisiana lawyer to explain all consequences of agreeing to arbitrate.  Hodges cites no authority for that aspect of its opinion outside Louisiana state law, meaning it may be vulnerable to a Concepcion challenge.


**ARBITRATION NATION IS ALMOST ONE YEAR OLD!  Help me celebrate by following my arbitration news on Twitter (@KramerLiz) and/ or subscribing to this blog (via the button on the right).  It’s the Summer Lovin’ campaign!  **

With less colorful language than its last arbitration opinion, the First Circuit sided with the Second and Third Circuits in limiting the application of the 2010 Stolt-Nielsen decision on the availability of class arbitration.  Fantastic Sams Franchise Corp. v. FSRO Assoc. Ltd., __ F.3d __, 2012 WL 2402560 (1st Cir. June 27, 2012). Decisions from these three circuits suggest that as long as the party seeking a class action can show it did not stipulate that the agreement was “silent” on the availability of class arbitration, the courts (or the arbitrator) will consider arguments based on contractual interpretation and the parties’ actions to find the parties’ intent.

In Fantastic Sams, a coalition of 35 franchisees demanded arbitration against the franchisor for common violations of their agreements and statutes.  Twenty five of the agreements had arbitration clauses that prohibited class arbitration.  Ten agreements did not expressly prohibit class arbitration, and broadly provided for arbitration of “any controversy or claim arising out of or relating in any way to this Agreement.”  The franchisor brought a petition in federal court to compel the coalition members to arbitrate individually, relying on Stolt-Nielsen. 

The 25 franchisees whose contracts prohibited class arbitration were compelled to arbitrate individually.  But the remaining ten were not.  The First Circuit concluded that Stolt-Nielsen was not as broad as the franchisor argued: “We thus reject the very different precept, on which [the franchisor’s] argument depends, that there must be express contractual language evincing the parties’ intent to permit class or collective arbitration.  Stolt-Nielsen imposes no such constraint on arbitration agreements.”  The court focused on the fact that the Stolt-Nielsen parties had stipulated that their agreement was “silent” on class arbitration, whereas in this case it was possible the arbitrator could find evidence that the parties did intend to allow class or collective arbitrations.  The First Circuit noted its agreement with the Second and Third Circuit decisions on this point, but did not address the recent Fifth Circuit decision coming out in favor of the franchisor’s argument.

Furthermore, the First Circuit noted that Stolt-Nielsen did not clearly apply because this coalition of franchisees was not a “class action” and did not have the same issues that SCOTUS noted with class arbitrations.  (No absent parties, no certifying a class or providing public notice, etc.)

Finally, the court found that the question of whether the remaining ten franchisees could proceed in a collective arbitration was a decision for the arbitrator, because it characterized that question as a “procedural” one and because the agreements incorporated the AAA Rules, which delegate jurisdictional questions to the arbitrator. 

At least one lesson from these cases is: never stipulate your arbitration agreement is silent regarding the availability of class actions!  Give the courts some reason to distinguish your facts from the unusual facts in Stolt-Nielsen, if you want any chance of arbitrating as a class.

**ARBITRATION NATION IS ALMOST ONE YEAR OLD!  Help me celebrate by following my arbitration news on Twitter (@KramerLiz) and/ or subscribing to this blog (via the button on the right).  It’s the Summer Lovin’ campaign!  **

To date, courts have largely limited the impact of the Rent-A-Center decision to arbitration agreements with explicit delegation clauses. But, what if Rent-A-Center applied to every single arbitration agreement that mentioned the AAA rules?  That is a very real possibility, and one which would send almost all arbitrability disputes to arbitrators.

The ­Rent-A-Center decision used “delegation clause” to mean any aspect of an arbitration agreement that authorizes an arbitrator to decide questions about the validity of the arbitration agreement.  Rent-A-Center held that unless a party could allege a fatal flaw in the delegation clause itself, the arbitrator should decide the arbitrability question.  Courts have applied that ruling to explicit delegation clauses like this one: “Any issue concerning … the formation, applicability, interpretation or enforceability of [the arbitration agreement] . . . will be resolved by the arbitrators.”  Rai v. Ernst & Young, LLP, 2010 WL 3518056, at *1 (E.D.Mich. Sept. 8, 2010).  However, not many courts have yet had to struggle with what really constitutes a delegation clause?  Must it be so explicit?

In the 20 years before Rent-A-Center, many federal circuits reached a related decision: that an adoption of the AAA rules clearly and unmistakably demonstrates the intent of the parties to delegate the question of arbitrability to the arbitrator.  That is because the various AAA rules themselves state that the arbitrator has the power to rule on any questions of arbitrability ( the same rule should hold for any forum whose rules delegate that same power).  At least the First, Second, Eighth, Ninth, Eleventh, and Federal Circuits agree in that holding (with only the Third and Tenth Circuits disagreeing).  SCOTUS has never addressed whether adopting the AAA rules clearly and unmistakably delegates arbitrability to the arbitrator. (See case cites at end.)

The question is – how long will it take for these two lines of cases to meld into an airtight zipper that excludes 99% of arbitrability challenges from courts?   Here is how the argument would go: 1) the arbitration agreement at issue calls for application of AAA rules; 2)  federal courts have concluded that the adoption of AAA rules is an unmistakable delegation of arbitrability to the arbitrator; 3) therefore, the sentence mentioning the AAA rules is a “delegation clause”; and 4) Rent-A-Center applies, such that the anti-arbitration party must specifically challenge that delegation clause in order to have the court hear the challenge.

Of course, it may be just that sort of result  — a nearly wholesale denial of the court venue to litigants who challenge their larger arbitration agreement — that will create a five-Justice majority in favor of a less harsh severability doctrine.



Cases holding that the parties’ agreement to arbitrate under AAA rules constitutes a clear and unmistakable delegation of arbitrability to the arbitrator:  Fadal Machining Centers, L.L.C. v. Compumachine, Inc., 2011 W.L. 6254979, *2 (9th Cir. 2011); Fallo v. High-Tech Institute, 559 F.3d 874, 878 (8th Cir. 2009); Terminix Intern. Co., L.P. v. Palmer Ranch Ltd. Partnership, 432 F.3d 1327, 1332 (11th Cir. 2005); Contec Corp. v. Remote Solution, Co., Ltd., 398 F.3d 205, 208 (2d Cir. 2005); Qualcomm Inc. v. Nokia Corp., 466 F.3d 1366, 1372-73 (Fed. Cir. 2001); Apollo Computer, Inc. v. Berg, 886 F.2d 469, 473 (1st Cir. 1989) (relating to ICC, not AAA rules).

Two Circuits have declined to follow the majority.   In Quilloin v. Tenet Health System Philadelphia, Inc., 673 F.3d 221, 225-26, 230 (3d Cir. 2012), the Third Circuit held that the parties “did not agree to arbitrate the issue of arbitrability,” despite agreeing to abide by the procedural arbitration rules of the AAA in their arbitration agreement.  Similarly, in Riley Mfg. Co., Inc. v. Anchor Glass Container Corp., 157 F.3d 775, 780 (10th Cir. 1998), the court held that, although the arbitration agreement in question required submitting to the rules of the AAA, the court could properly resolve the issue of arbitrability.