In a beautifully written opinion, the Tenth Circuit examined an under-used aspect of the Federal Arbitration Act this week: having a jury or court trial. Usually disputes about arbitrability can be determined on a motion akin to summary judgment, but the FAA states in Section Four: “If the making of the arbitration agreement or the failure, neglect, or refusal to perform the same be in issue, the court shall proceed summarily to the trial thereof.”  The Tenth Circuit held that’s what needs to happen in Howard v. Ferrellgas Partners, L.P., __ F.3d__2014 WL 1363963 (10th Cir. April 8, 2014).

Ferrellgas involves a class of propane customers who sued Ferrellgas for alleged overcharges.  Ferrellgas moved to compel individual arbitration.  The named plaintiff responded that he had no arbitration agreement with Ferrellgas because the parties reached a complete oral contract in their initial phone call that covered all subsequent orders, and negated the subsequent form contract sent by the company.  In response to open questions of fact raised on the motion, the district court allowed discovery and another set of motions.  When that second round of motions did not resolve the factual dispute, the court invited more discovery and a third round of motions.  Finally, the district court found that material disputes of fact remained and denied the motion to compel arbitration.

The Tenth Circuit reversed.  It found the district court erred in two respects.  First, the district court erred by allowing “death by discovery” on the issue of whether an arbitration agreement existed instead of calling for the “summary trial” envisioned in the FAA.  The court said that when “a quick look at the case suggests material disputes of fact do exist on the question whether the parties agreed to arbitrate, round after round of discovery and motions practice isn’t the answer.  Parties should not have to endure years of waiting… merely to learn where their dispute will be heard.”  (Another good line: “We appreciate both sides’ evident frustration at how long this case has lingered at the transom without having entered either the door into arbitration or litigation.”)

The Tenth Circuit also found the district court erred in denying the motion to compel arbitration after concluding that material disputes of fact remained.  It explained: “That’s like mixing apples and oranges, like saying someone who fails to win a summary judgment motion must necessarily lose after trial.”  Therefore, the court remanded the case for the summary trial called for in the FAA.

Of course, the Tenth Circuit had a relatively easy target in this particular instance.  Not many district court judges would allow three rounds of motions and multiple rounds of discovery on the issue of arbitrability.  But, it may be less clear in the future where the line is between allowing reasonable discovery on arbitrability and “death by discovery.”  Should judges allow just one round of discovery and say any factual disputes after that point will be decided by trial?  The Tenth Circuit does not try to set forth any rules about when exactly to push parties over the transom, if you will.


** P.s.:  SCOTUS denied cert in Walia v. Dewan on Monday.  The circuit split over manifest disregard will continue.

The Sixth Circuit recently answered a question I get asked regularly: does an arbitration clause survive the termination of the contract containing it?  I usually say yes, and thankfully the Sixth Circuit backed me up.

In Huffman v. The Hilltop Cos., LLC, __ F.3d __, 2014 WL 1243795 (6th Cir. March 27, 2014), a class of employees alleged FLSA violations by their employer.  Each of their employment agreements had an arbitration clause and a “survival clause” which listed a few of the contractual clauses that survive termination of the agreement.  But the survival clause did not mention the arbitration clause.  The employees attacked the enforceability of the arbitration clauses with an onslaught of latin phrases (“expressio unius est exclusion alterius!” and “contra proferentem!”) intended to convey the idea that if the employer had wanted the arbitration clause to survive, it would have listed it in the survival clause.  The district court agreed and denied the employer’s motion to compel arbitration.

The Sixth Circuit reversed.  It reached way back to a 1991 SCOTUS decision, Litton v. NLRB, 501 U.S. 190 (1991), which “recognized a ‘presumption in favor of postexpiration arbitration of matters unless negated expressly or by clear implication [for] matters and disputes arising out of the …contract.'”  In this case, because the survival clause was silent about arbitration as well as about other clauses that would logically survive the contract’s termination (like the severability clause and integration clause), the court found that silence was not enough to expressly negate the survival of the arbitration clause.

After finding the dispute was arbitrable, the Sixth Circuit applied its recent precedent allocating decisions about whether to allow classwide arbitration to courts.  The court found class arbitration was not authorized because the arbitration agreement did not say anything about classwide arbitration, and it ordered plaintiffs to proceed individually in arbitration.

In the past year, if I wrote about “FLSA” and “arbitration” in the same post, it likely meant that another federal court had found employers can include class action waivers in their employment contracts without violating the Fair Labor Standards Act.  Today, however, is different.  The Eleventh Circuit last week found that it was the FLSA that gave the district court sufficient “managerial responsibility” over workers’ collective actions to override an employer’s coercive, post-lawsuit rollout of a new arbitration agreement.  Billingsley v. Citi Trends, Inc., 2014 1199501 (11th Cir. March 25, 2014).

The collective action is made up of store managers at a clothing retailer, who allege the retailer systematically failed to compensate them for overtime.    The putative class action was filed in February of 2012.  By June of 2012 there was a preliminary scheduling order.  Under Eleventh Circuit precedent, the plaintiff would start the process of notifying similarly-situated store managers 60 days after the scheduling order.  In response, the retailer asked for extensions and then presented the court with new arbitration agreements executed by “several dozen” store managers.  The store argued that these managers were now subject to arbitration and unable to join the court action.  The plaintiffs objected and requested “corrective actions” (i.e., sanctions).

After a two-day evidentiary hearing, the district court in Alabama made its findings and conclusions.  It found that after the scheduling order in the case came out, the retailer got busy instituting a new ADR policy.  The new policy called for binding arbitration that could only proceed on an individual basis.  And, instead of being handed out in a group setting like the retailer’s usual handbook changes, the new policy was delivered individually to store managers in small rooms at the back of the store, “the same places where the store interrogated or investigated its employees.”  H.R. representatives asked the store managers to sign the new arbitration agreement along with a fill-in-the-blank declaration about their job duties.  The store managers testified they understood they would be fired if they did not consent.

The district court found the timing of the rollout “was calculated to reduce or eliminate the number of collective action opt-in Plaintiffs in this case” and was designed to be “intimidating and coercive.”  Therefore, and in response to the retailer’s motion to compel arbitration against the managers who signed the new arbitration agreements, the district court concluded the arbitration agreements were unconscionable and unenforceable.  Furthermore, the district court exercised its managerial responsibility to oversee collective actions under the FLSA and refused to enforce the arbitration agreements for that second, independent basis.

The Eleventh Circuit affirmed.  Interestingly, it did not analyze whether the new arbitration agreements were unconscionable.  Instead, the opinion consists entirely of the appellate court applying the “abuse of discretion” standard to the district court’s use of its “managerial responsibility” under the FLSA.  The opinion described a district court’s responsibility for overseeing FLSA actions broadly — including governing the conduct of the counsel and parties in order to avoid confusion and unfairness (especially ex parte contact with potential class members), as well as ensuring an orderly process.  Given that expansive authority, the court concluded the district court did not abuse its discretion in determining the retailer’s conduct “undermined the court’s authority to manage the collective action” and therefore putative plaintiffs could join the lawsuit notwithstanding their signature on the new arbitration agreements.

Not many employers will attempt to rollout a new ADR policy in a “blitzkrieg fashion” like this retailer.  So, what’s the significance of this case?  It shows that in the current era of the strong federal policy in favor of arbitration, courts who believe arbitration agreements are unenforceable are searching for some basis other than the usual state law contract defenses.  That is because those contract defenses could be preempted by the Federal Arbitration Act and the allowable bases for “substantive unconscionability” narrow each year.  This case essentially re-frames the case from one about enforcing arbitration agreements to one about whether district courts have the ability to manage their cases and not get manipulated.  I believe the Eleventh Circuit saw that as less likely to be reviewed and reversed.

SCOTUS announced today that it would not review the Third Circuit’s decision in Strine v. Delaware Coalition for Open Government, Inc, holding 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.  Therefore, that decision is final and Delaware will now have to decide whether it wants to stop offering arbitrations by its state court judges, or whether it will proceed with the arbitrations in public.  The amici curiae supporting a review of the decision (and thereby supporting keeping the arbitrations secret) included expected groups like the Chamber of Commerce and Business Roundtable, along with groups that don’t appear as often as amici like NASDAQ and NYSE (offering their FINRA arbitration experience), and a group called TechNet, made up of the CEOs of “leading technology companies.”  Oh well.  If those entities really want private arbitration, I am sure JAMS or the AAA will be happy to offer their services…

In other arbitration news, the Eleventh Circuit just became the fifth federal circuit court to reject the NLRB’s interpretation of whether federal labor laws prohibit class action waivers in arbitration clauses.  In Walthour v. Chipio Windshield Repair, LLC, __ F.3d__, 2014 WL 1099286 (11th Cir. March 21, 2014), employees brought a putative class action alleging their employer violated the Fair Labor Standards Act (FLSA).  The employees had entered into arbitration agreements with the employer stating “employee and employer are each giving up his/her/its right… to participate in a class action . . . Employee and employer agree that each may bring claims against the other only in his/her/its individual capacity and not as a plaintiff or class member in any purported class or representative proceeding.”  (I love that the clause also gives up the employer’s right to bring class actions against the employee.  As if that were possible.)  In response, the employer moved to compel individual arbitration.  The district court granted the motion and the Eleventh Circuit affirmed.

The plaintiffs argued that the arbitration agreement was unenforceable because the FLSA makes collective action a substantive right and overrides the FAA mandate to enforce arbitration clauses.  The Eleventh Circuit noted that the Second, Eighth, Fifth, and Fourth Circuits have already rejected that argument.  The court reasoned that under Supreme Court precedent, the text of the FLSA itself would have to clearly indicate that Congress intended that statute to override the FAA.  However, the language of the FLSA did not have any such clear indication, and neither did the legislative history.  Most interesting to me, though, is what was missing from the analysis– any mention of the NLRB’s analysis to the contrary.

California is the Judd Nelson of The Preemption Club.  (Or the John Bender, if you prefer using character names.)  The Supreme Court has sent the California courts to preemption detention for ignoring the Federal Arbitration Act in blockbuster, groundbreaking cases (see Concepcion).  But California cannot help itself.  It keeps coming up with novel arguments to avoid arbitration.  And in doing so, it keeps inviting reversal.  Of course, other states get sent to The Preemption Club (West Virginia and Oklahoma, for example), just not with the same panache.

Just last week, the Supreme Court reversed a decision of the California Court of Appeals and remanded it for reconsideration in light of AmEx. In CarMax Auto Superstores California, LLC v. Fowler, a putative class of CarMax employees alleged CarMax violated California labor laws.  The parties engaged in discovery and motion practice for over a year and then stayed the case.  Two years into the stay period, in June of 2011, CarMax moved to compel the plaintiffs to individually arbitrate their claims, in accordance with the terms of their employment agreement.  The plaintiffs opposed the motion, arguing that CarMax had waived its right to arbitrate and that the arbitration agreement was unconscionable.  Plaintiffs also relied on California’s Gentry rule, which provides that class-action waivers in employment arbitration agreements are invalid if “a class arbitration is likely to be a significantly more effective practical means of vindicating the rights of the affected employees than individual litigation or arbitration.”

The district court sided with CarMax but in March of 2013 the California Court of Appeals reversed.  It did not rest its decision on an uncontroversial issue like waiver, however.  (It gave CarMax a break for not moving to compel arbitration before Concepcion, as the motion would have likely been futile under California law, and it also said that the discovery and dispositive motion proceedings could have taken place in arbitration so there was no prejudice.)  The court also did not rest its decision on the alleged illusoriness of the arbitration agreement, because California law does not find agreements illusory, even if they can be modified without advance notice.  Instead, the court went with the riskiest possible basis for its decision: finding that Gentry was not preempted under the Concepcion analysis.  After the California Supreme Court refused to review the decision, CarMax took the issue up to the Supreme Court.

The Supreme Court made short work of the matter.  Just three days after considering the certiorari petition in conference, the Supreme Court granted cert, reversed the Court of Appeals, and remanded the case for reconsideration in light of AmExAmEx is the decision that, in June of 2013, seriously weakened the “effective vindication of statutory rights” line of cases.  So, what will the Court of Appeals do now?  I don’t see much room for fitting the case into what is left of the “effective vindication” doctrine, because that only applies to federal statutory rights and CarMax appears based on state statutory rights.  So if California really wants these CarMax employees to continue as a class, it either has to reverse itself on waiver, or come up with a different basis for finding the arbitration agreement unenforceable.  And in doing so, it will effectively say “Eat… My… Shorts” to SCOTUS.

After three federal circuits had already refused to defer to the NLRB’s decision in D.R. Horton, it is not surprising that the Fifth Circuit yesterday overruled the NLRB’s critical holding: that precluding class arbitrations is a violation of federal labor law.  D.R. Horton, Inc. v. Nat’l Labor Relations Bd., __ F.3d __, 2013 WL 6231617 (5th Cir. Dec. 4, 2013).

D.R. Horton builds homes in many states.  Starting in 2006, its employees had to sign a Mutual Arbitration Agreement.  The MAA called for binding arbitration of disputes and provided that “the arbitrator [would] not have the authority to consolidate the claims of other employees” or “the authority to fashion a proceeding as a class or collective action.”  In 2008, a class of superintendents tried to bring a class arbitration related to allegations that the builder violated the Fair Labor Standards Act.  Horton insisted that the employees could only arbitrate on an individual basis.  In response, the lead plaintiff filed an unfair labor practice charge.

In 2012, the NLRB found that the MAA violated labor law by requiring employees to waive their right to joint, class or collective employment actions.  On a petition for review, the Fifth Circuit reversed that decision.  Because the NLRB is entitled to deference in its interpretation of the labor laws, the Fifth Circuit largely accepted the Board’s analysis that requiring employees to refrain from collective and class actions violates Sections 7 and 8(a)(1) of the NLRA, because it impedes employees ability to enage in concerted activity, i.e. class claims.  (Not without some digs, though.  Like this one: “no court decision prior to [this one] had held that the Section 7 right…prohibited class action waivers.”)  However, the court found the NLRB had not given sufficient weight to the FAA in its analysis and “[c]aselaw under the FAA points us in a different direction than the course taken by the Board.”

The court analyzed the two potential bases for finding an arbitration agreement is invalid under the FAA.  First, it looked at whether the savings clause in Section 2 of the FAA (arbitration agreements are enforceable “save upon such grounds as exist at law” for revocation) provides authority to invalidate the MAA based on the NLRA.  (Holy acronyms!)  The court concluded that the “Board’s rule does not fit within the FAA’s savings clause” under the same reasoning set forth in Concepcion.  In short, “[r]equiring a class mechanism is an actual impediment to arbitration and violates the FAA.”

Second, the court looked at whether Congress intended the NRLA to override the FAA.  Nothing explicit in the text of the NLRA shows that intent and the court found nothing in the legislative history showing that intent.  Therefore, it looked to whether there was an “inherent conflict between the FAA and the NLRA’s purpose.”  The court found no inherent conflict, largely because courts have allowed arbitration of NLRA claims generally, and courts have specifically found that arbitration agreements cannot be voided based on inequality in bargaining power.  In its final paragraph on this issue, the court said it is “loath to create a circuit split.  Every one of our sister circuits to consider the issue has either suggested or expressly stated that they would not defer to the NLRB’s rationale, and held arbitration agreements containing class waviers enforceable.”

On a different issue, however, the court upheld the NLRB’s decision.  It found that the MAA improperly gave the impression that an employee was waiving his or her administrative rights.  (The agreement included the employee’s waiver of “the right to file a lawsuit or other civil proceeding relating to Employee’s employment with [Horton].”)  Therefore, the court held the Board properly forced the builder to change that language in its MAA.

A few months ago, you would have reasonably thought that West Virginia was one of the most anti-arbitration states in the country.  There was not an unconscionability argument that the state didn’t seem to buy with respect to arbitration clauses.  (Recall its arbitration feud with SCOTUS in 2012?)  But, this month, West Virginia’s highest court issued two decisions enforcing arbitration agreements, suggesting it has had a change of heart.

In the first opinion, New v. Gamestop, __S.E.2d__, 2013 WL 5976104 (W. Va. Nov. 6, 2013), the court found an employee handbook was sufficient to create an arbitration agreement between the employee and employer and that the arbitration agreement was enforceable.  The primary argument from the employee was that the agreement was unconscionable because the employer could change it at any time.  (Didn’t I tell you the illusory argument is hot this year?!)

The arbitration agreement provided that “GameStop may from time to time modify or discontinue [its dispute resolution program] by giving covered employees thirty (30) calendar days notice…any such modification…shall be applied prospectively only.”  The court found that the 30-day notice requirement, and the fact that existing disputes would proceed under the terms existing when they were submitted, meant the agreement was not unconscionable

In the second opinion, Ocwen Loan Serv. v. Webster, __S.E.2d__, 2013 WL 6050723 (W. Va. Nov. 13, 2013), the court reversed a circuit court’s denial of a motion to compel individual arbitration.  The lower court had concluded the Dodd-Frank Act prevented arbitration of claims by mortgagees and that the arbitration agreement was unconscionable.

On appeal, West Virginia’s highest court made short work of the Dodd-Frank argument.  (One part of Dodd-Frank provides that residential mortgage loans may not require arbitration.  15 USC § 1639c(e)(1).)  It noted that the named plaintiffs’ mortgage was executed in 2006 while the Dodd-Frank Act was not effective until 2010 and was not retroactive.

With respect to procedural unconscionability, the plaintiffs argued their relative lack of sophistication and lack of counsel.  The court disagreed, finding that presence of counsel is not dispositive and because of language in all caps in the agreement providing “THIS IS A VOLUNTARY ARBITRATION AGREEMENT.  IF YOU DECLINE TO SIGN THIS ARBITRATION AGREEMENT, LENDER WILL NOT REFUSE TO COMPLETE THE LOAN TRANSACTION.”

The plaintiffs argued the arbitration agreement was substantively unconscionable because it waived class actions, restricted attorneys’ fees, lacked mutualty, and limited discovery.  After block quoting ad nauseum from AmEx (reading these opinions, I started to wonder if the members of this court get paid per block-quoted word…), the court concluded that the class waiver did not make the agreement unconscionable.  The court also found that the requirement that each party pay its own attorneys fees, and the lender’s carveout of its foreclosure right (and a few others) from the scope of the arbitration, did not render the agreement unconscionable.  Finally, the agreement’s statement that “discovery in the arbitration proceedings may be limited by the rules” of the provider also did not make the agreement unconscionable.

I am not convinced that West Virginia is a bellwether and other reliably anti-arbitration states may be following suit.  But this is still an interesting shift.

Just four months ago, SCOTUS suggested (but did not hold) that the decision to allow class arbitrations might be a “gateway” issue of arbitrability that defaults to courts.  This week, the Sixth Circuit was the first to take the bait and declare the availability of class actions a gateway question that a court decides unless the parties clearly assign the question to the arbitrator.

In Reed Elsevier, Inc. v. Crockett, __ F.3d __, 2013 5911219 (6th Cir. Nov. 5, 2013), a lawyer filed an arbitration demand with the AAA against LexisNexis on behalf of himself, a putative class of law firms, and a putative class of law firm clients.  The lawyer alleged that LexisNexis misrepresented its subscription services and sought damages of over $500 million.  In response, LexisNexis brought a declaratory judgment action in federal court, asking the court to find that the arbitration clause did not authorize class arbitration.  The clause itself said nothing explicit about the availability of class arbitration — it did not preclude or allow class actions.  It provided that “any controversy, claim or counterclaim…arising out of or in connection with this Order…will be resolved by binding arbitration…”

The district court granted summary judgment in favor of LexisNexis and the Sixth Circuit affirmed.  The critical analysis related to whether the courts even had the power to decide whether the arbitration clause authorized class actions.  The court started by dividing questions of arbitrability into “gateway disputes” and “subsidiary questions.”  (I have never heard the latter group called subsidiary questions, have you?  I have heard of substantive v. procedural, and gateway v. other, but not this new paradigm.)  It recited the two universally recognized gateway issues — whether a valid arbitration agreement exists and whether it applies to the controversy at hand.  Those two questions are reserved for judges, unless the parties have “clearly and unmistakably” given the arbitrator the power to decide them.  On the other hand, it defined the “subsidiary” questions as those that bear on the dispute’s final disposition, including waiver, delay, and any failure to satisfy a condition precedent.  It characterized the subsidiary questions (unfairly) as “mere details.”

The Sixth Circuit then had to decide whether class arbitration falls into the “gateway” or “subsidiary” camp.  It acknowledged that the Supreme Court has not held that the availability of class arbitration is a gateway issue to be reserved for the courts, but instead has hinted strongly in recent years that this issue belongs in the courts.  Those hints began with Stolt-Nielsen, continued in Concepcion, and grew louder in Sutter this summer.  Therefore, even though a plurality of the Supreme Court concluded in Bazzle that classwide arbitration is a question for arbitrators, the Sixth Circuit held this week that it is a gateway question that is presumptively for judges.  Furthermore, in this case the parties had not clearly and explicitly authorized arbitrators to determine the availability of class action, so the default rule governed.

Once the court gave itself permission to decide the issue, it quickly found the parties’ arbitration agreement did not allow a class action.  “The principal reason to conclude that this arbitration clause does not authorize classwide arbitration is that the clause nowhere mentions it.”  The court also noted that the agreement provided for arbitration of claims arising out of “this Order,” suggesting the arbitration was limited to the two parties to that agreement.  Finally, applying AmEx, the court found the arbitration was not unconscionable, even if it “favors LexisNexis at every turn.”

This is a significant decision.  It allows parties who want a court to decide whether class arbitration is available to cite to a published opinion from a federal appellate court, instead of just hints and whispers from the Supreme Court.  It also suggests that at least the Sixth Circuit will require fairly specific language in an arbitration agreement to support the parties’ intent to allow class arbitration.

No haunted house can scare general counsel as much as an opinion invalidating their company’s arbitration clause and thereby allowing a class action to proceed.  So, here is a Halloween tale for all to keep in mind.

Ralphs Grocery Company hired Zenia Chavarria to work in the deli of one of its grocery stores.  Ms. Chavarria’s employment application agreed that she would be bound by Ralphs’ arbitration policy, but Ralphs did not send her that arbitration policy until three weeks after she signed her application.  The arbitration policy included the following:

  • a prohibition on using AAA or JAMS to administer the arbitration;
  • a requirement that a single arbitrator decide the dispute, and the arbitrator must be a retired state or federal judge;
  • a method of selecting the arbitrator that ensured that, unless the parties agreed on the arbitrator, the arbitrator would be chosen by the party who did not demand arbitration;
  • a provision that each party must pay half of the arbitrator’s total expected fees at the outset of the proceeding; and
  • a provision allowing Ralphs to unilaterally modify the arbitration policy without notice.

After her employment terminated, Ms. Chavarria brought a putative class action against Ralphs.  In response, Ralphs moved to compel arbitration of her individual claims.  The district court denied the motion, finding the arbitration agreement was unconscionable and unenforceable under California law.  The Ninth Circuit affirmed that result in Chavarria v. Ralphs Grocery Co., __ F.3d__, 2013 WL 5779332 (9th Cir. Oct. 28, 2013).

The court found the arbitration agreement was procedurally unconscionable because Chavarria had to accept it in order to be employed and because she was not given the policy until three weeks after she was forced to accept it.  The court found the arbitration agreement was substantively unconscionable (i.e., so one-sided that it “shocks the conscience”) because: Ralphs would always get to choose the arbitrator in any dispute initiated by an employee; the employee must pay half of the arbitrator’s fees at the beginning of the process (fees that would run between $3,000 -$7,000 per day); and Ralphs could modify the arbitration policy without any notice.

The Ninth Circuit also concluded that California’s procedural unconscionability rules are not preempted, because they do not disproportionately affect arbitration agreements.  With respect to substantive unconscionability, the court found that its holding fell within the newly narrowed “effective vindication” doctrine that SCOTUS set forth in AmExIn particular, because Ralphs arbitration policy made it prohibitively expensive to file an arbitration against Ralphs (not just prove a case against Ralphs), it “effectively foreclose[d] pursuit of the claim.”

Finally, the Ninth Circuit made a plea in favor of allowing states to define some arbitration agreements as unconscionable:

“If state law could not require some level of fairness in an arbitration agreement, there would be nothing to stop an employer from imposing an arbitration clause that, for example, made its own president the arbitrator of all claims brought by its employees.  Federal law favoring arbitration is not a license to tilt the arbitration process in favor of the party with more bargaining power.”

What is the lesson for arbitration clause drafters everywhere? Do not overreach.

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.