Litigation vs. Arbitration

The Fifth Circuit un-vacated an arbitration award last week, holding the district court had wrongly concluded that the court was the proper decision-maker on contract formation.  Although courts are presumptively authorized to decide whether an arbitration agreement exists, the Fifth Circuit found the parties altered that presumption by “submitting, briefing, and generally disputing that issue throughout the arbitration proceedings.”  OMG, L.P. v. Heritage Auctions, Inc.,  2015 WL 2151779 (5th Cir. May 8, 2015).  [Or, as I like to think of the case: “OMG!  I gave arb TMI and lost my appeal.  WTF”]

The dispute related to OMG’s claim that it was owed more commissions than the auction house had paid it for firearm sales.  The parties disputed how to interpret the term “merchandise” in the contract. Heritage demanded arbitration.  The two relevant agreements between OMG and Heritage provided for binding arbitration of “any dispute” “in any way related” to the agreements.  In arbitration, the auction house argued there was no meeting of the minds regarding the meaning of “merchandise,” so the contract was unenforceable.  The arbitrator agreed and rescinded the contract.

OMG asked the federal district court to vacate the arbitration award, arguing that the arbitrator exceeded his authority by ruling on the issue of contract formation.  The district court agreed, finding “a court was the proper decision-maker as to contract formation issues in this case, not the arbitrator.”

The Fifth Circuit reversed.  Critically, it found that “by their actions, the parties may agree to arbitrate disputes that they were not otherwise contractually bound to arbitrate.”  It cited Fifth Circuit precedent from 1980 (Piggly Wiggly, I am not kidding with the names here) and from 1994 (Executone Info. Sys.) to support that proposition.  Because the auction house had disputed whether there had been a meeting of the minds throughout the arbitration, and OMG “never contested the arbitrator’s authority to resolve” that issue, “the parties agreed to arbitrate contract formation.”  The court found that OMG could have refused to arbitrate the formation issue.  But it could not “simply [] wait until it receives a decision with which it disagrees before challenging the arbitrator’s authority.”

I find the analysis here very interesting.  The Fifth Circuit chose not to base the arbitrator’s authority to rescind the contract in the parties’ agreement to arbitrate any dispute, or any other language in the (now rescinded) agreement.  Instead, it looked to the parties’ conduct to authorize the award.  And in describing that conduct, it did not use a concept like waiver (OMG could have waived its right to argue the arbitrator exceeded his power by not raising that in the arbitration), but instead described the conduct as forming a separate agreement to arbitrate.  In any case, the public policy behind the decision is very clear and reminds me of the “invited error” doctrine: parties cannot ask the arbitrator to exercise power, or accede to that exercise of power, and later complain that the arbitrator exercised that power.

This is an important issue for advocates in arbitration.  Every issue that is presented to the arbitrator — by either party– should be carefully analyzed to determine whether it is validly within the scope of the parties’ arbitration agreement.  If an issue is outside the scope, and the party wants to preserve an objection to its submission to the arbitrator, it must “forcefully” object (see First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995)).  Otherwise, the party will be deemed to have agreed to arbitrate the issue, and the arbitrator’s decision will be subject to the highly deferential review of the Federal Arbitration Act.

If you won your arbitration, it is vexing to have to spend many thousands more in attorneys’ fees opposing a motion to vacate the arbitration award.  (That is especially true if you signed up for arbitration thinking it was faster and avoided appeals.)  But, can you ask the court to award you the attorneys’ fees you incurred in confirming the arbitration award?  That is a much more complicated question than it should be, and the Sixth Circuit took it on recently in Crossville Medical Oncology, P.C. v. Glenwood Systems, LLC, 2015 WL 1948329 (6th Cir. May 1, 2015).

In Crossville, two businesses had claims against each other in arbitration.  Glenwood won.  The arbitrator awarded Glenwood over $200,000 in damages, plus about $16,000 in attorneys’ fees.  The losing party then challenged the award by arguing the arbitration agreement was invalid.  The federal district court disagreed and confirmed the award.  Glenwood then asked the district court to award it the attorneys’ fees it incurred in confirming the arbitration award.  The district court denied the motion.

The Sixth Circuit affirmed the denial of fees.  It analyzed the possibility of recovering fees to confirm an arbitration award by using the following rules/guidelines:

  • “The FAA neither contemplates nor precludes an award of attorneys’ fees.”  So, just like in any other situation, fees are only available if authorized by statute or contract.  In this case, Glenwood only made arguments under its contract.
  • The court may not award fees, even if an arbitration agreement authorizes fees to a prevailing party, if the arbitration agreement has broad language sending all disputes to arbitration.  (Because then, even the dispute over the winner’s fees in confirming the arbitration award must go to an arbitrator.)
  • Similarly, the court may not award fees if the arbitration agreement shows the parties’ intended to grant the power to award fees only to the arbitrator (not a court) .
  • [Another guidepost from the 8th Circuit last year: if the arbitrator didn’t grant the winner its attorneys’ fees during the arbitration, the court is not likely to grant the winner fees incurred in post-arbitration proceedings.]

This is a very useful analysis that should help other courts confronting the issue.  In short, to ask a court for fees on confirmation of the award, a party must be able to show that a statute or contract authorizes the fee recovery, and that that dispute does not fall within the scope of the arbitration clause.

It also offers an important tip for drafters of arbitration clauses.  If you really want to emphasize the binding and final nature of the arbitration by making it onerous for a party to challenge the award, then you may want to consider having a statement along these lines in the arbitration agreement: “In order to discourage any dispute over the confirmation of the resulting arbitration award, the parties agree that the court hearing any challenge to the award may award fees incurred in post-arbitration proceedings to the party who prevailed in the arbitration if and when the award is confirmed.”

Here is my own tip for those litigating this issue: there is room for parties who succeed in getting arbitration awards confirmed (or vacated) to make arguments for attorneys’ fees under the applicable state uniform arbitration act.  The argument goes like this: 1) Even when the FAA applies, state acts may be applicable as a gap-filler; 2) Section 25 of the revised uniform act states that a “court may add reasonable attorney’s fees and other reasonable expenses of litigation incurred” after hearing motions to confirm or vacate arbitration awards; and 3) that is appropriate in my case because my opponent continually thwarted the goal of arbitration to be efficient and final (etc, etc).  Try it and let me know how it works.

In March, the highest courts of Montana, Texas, and Wisconsin all held that, when parties have a valid arbitration agreement, the issue of whether an arbitration demand was timely is presumptively for the arbitrator to decide.  That principle of law has been established under the FAA at least since the Howsam decision in 2002 (and confirmed in BG Group in 2014), but now seems to be firmly taking hold in state courts, even when those courts are interpreting state arbitration acts.

In the Montana case, Montana Public Employees Assoc. v. City of Bozeman, __ P.3d __, 2015 WL 895731 (Mont. March 3, 2015), the City of Bozeman fired a building inspector.  The collective bargaining agreement had a four-step grievance procedure, with time limits, and stated that any grievance not filed within the time limits “shall be deemed permanently withdrawn.”  The inspector only completed three and a half of those steps within the time limits provided in the CBA.  Based on that, the City refused to arbitrate.  The union sued to force the City to arbitrate, and the City asked the court to find the dispute was time-barred.  The Montana Supreme Court noted that it has adopted the distinction between procedural and substantive arbitrability from Howsam (and John Wiley), and that the issue of whether the inspector’s claims were time-barred was a “classic question of procedural arbitrability that is for an arbitrator and not for a court to decide.”

In the Texas case, G.T. Leach Builders, LLC v. Sapphire V.P., __ S.W.3d __, 2015 WL 1288373 (Tex. March 20, 2015), a developer sued three insurance brokers who had allowed its builder’s risk insurance to expire just before a hurricane hit its condominiums (which were still under construction).  Later, the developer added the general contractor and others as third parties.  The general contractor moved to compel arbitration, and the developer responded that the demand was untimely, because the arbitration agreement incorporated a statute of limitation.  The court of appeals ruled that the general contractor’s arbitration demand was untimely, but the Texas Supreme Court reversed.  Citing to BG Group and Howsam, it held that “courts must defer to the arbitrators to determine the meaning and effect of the contractual deadline.”

Addressing the developer’s argument that the limitations question was actually one of substantive (not procedural) arbitrability, the Texas court clarified that it was not substantive because “the parties’ dispute over the meaning and effect of the contractual deadline does not touch upon the issue of whether an enforceable agreement to arbitrate [the developer’s] claims exists.”  (The court conceded that timeliness could turn into a substantive issue of arbitrability if the challenger asserted that the contractual deadline made the agreement unconscionable.)  Therefore, the Texas Court of Appeals erred by deciding whether the dispute was arbitrable.

Similarly, in the case First Weber Group, Inc. v. Synergy Real Estate Group, LLC, __ N.W.2d __, 2015 WL 1292570 (Wis. March 24, 2015), the Wisconsin Supreme Court also held that the timeliness of an arbitration demand was an issue for the arbitrator.  First Weber involved a brokerage firm that filed an arbitration demand against another broker.  The broker refused to arbitrate, and the firm moved a court to compel arbitration.  The trial court found the firm’s demand for arbitration was untimely, because the governing agreement required arbitration to be demanded within 180 days after the transaction closed.  Citing to Howsam, the Wisconsin Supreme Court held that the broker’s “timeliness and estoppel defenses against arbitration are to be determined in the arbitration proceedings, not by a court” under Wisconsin’s arbitration act.  And more broadly, the court adopted the holdings of BG Group and Howsam, so that Wisconsin law now also requires that procedural arbitrability must be decided by an arbitrator, unless the parties agreed otherwise.

Just a few weeks after First Weber, the Seventh Circuit issued an opinion confirming how firmly entrenched this rule is under the FAA.  In an opinion of barely three pages, the court rebuked a district court that ruled on the timeliness of a plaintiff’s arbitrable claims.  Johnson v. Western & Southern Life Ins. Co., 2015 1637847 (7th Cir. Apr. 15, 2015).  In that case, an employee asserted discrimination claims against her employer in federal court and the district court compelled arbitration.  Based on language in the arbitration agreement stating that any arbitration must be commenced within six months of termination, the district court dismissed the claims with prejudice.  The Seventh Circuit called that a “misstep,” because “the district court improperly ruled on a matter that is presumptively reserved for the arbitrator,” citing BG Group and Howsam.  The court wrote:

The Supreme Court has applied this rule consistently, making clear in more recent decisions that federal courts must presume that the parties intended arbitrators to decide whether a party has complied with time limits and other arbitrational prerequisites.

Therefore, the dismissal should have been without prejudice.

These cases should help increase awareness among parties and their counsel that courts can address very limited issues when the parties have a valid arbitration agreement.  Essentially, if the arbitration agreement exists, covers the present dispute, is valid under state law and has not been waived by litigation conduct, every other potential dispositive issue is presumptively for the arbitrator to decide.  (And, even some of those issues can be delegated to the arbitrator, see Rent-A-Center, West.)

Just as I was beginning to worry that arbitration had fallen out of favor at the nation’s highest court… today the Supreme Court announced that it will hear the case of DIRECTV, Inc. v. Imburgia during its October Term, an appeal from a California Court of Appeals.  In DIRECTV, a case pitting Kirkland & Ellis against the aptly named Consumer Watchdog (and other firms), the Court will consider whether parties’ choice of state law to govern enforceability of an arbitration clause can be interpreted as trumping the FAA (and precluding a preemption analysis).

The case started in 2008 as a putative class action asserting false advertising and violation of California statutes based on DIRECTV’s allegedly improper charge of early termination fees.  In May of 2011, just after Concepcion was decided, and after a class had been certified on at least one theory, the defendant moved to stay the action and compel individual arbitration.  (Before that, it decided such a motion would be futile under California precedent.)  The district court denied the motion and the appellate court confirmed that result.

The key provisions from the agreement are these:

“Neither you nor we shall be entitled to join or consolidate claims in arbitration by or against other individuals or entities, or arbitrate any claim as a representative member of a class or in a private attorney general capacity. Accordingly, you and we agree that the JAMS Class Action Procedures do not apply to our arbitration. If, however, the law of your state would find this agreement to dispense with class arbitration procedures unenforceable, then this entire Section 9 is unenforceable.”


“The interpretation and enforcement of this Agreement shall be governed by the rules and regulations of the Federal Communications Commission, other applicable federal laws, and the laws of the state and local area where Service is provided to you. This Agreement is subject to modification if required by such laws. Notwithstanding the foregoing, Section 9 shall be governed by the Federal Arbitration Act.”

The California Court of Appeals used California contract law to interpret the phrase “if . . . the law of your state would find this agreement . . . unenforceable” as meaning ““the law of your state without considering the preemptive effect, if any, of the FAA.”  Therefore, it held that because the “class action waiver is unenforceable under California law, so the entire arbitration agreement is unenforceable.”  The opinion acknowledged, but disregarded, Ninth Circuit precedent interpreting the same provision and reaching the opposite result.

The question that was presented to SCOTUS for consideration is this:

Whether the California Court of Appeal erred by holding, in direct conflict with the Ninth Circuit, that a reference to state law in an arbitration agreement governed by the Federal Arbitration Act requires the application of state law preempted by the Federal Arbitration Act.

I expect that this decision will clear up some of the confusion that exists about what kind of contract language is required to choose operation of state arbitration law, as opposed to merely which state’s law will govern interpretation of the arbitration agreement, and whether it is ever possible to completely contract around the FAA.

In other SCOTUS news, the Court denied cert in the Opalinski case, that presented the issue of whether the availability of class arbitration is a gateway issue of arbitrability that courts should presumptively decide.  (I heard about that denial from SCOTUS guru @lylden himself at a dinner in Saint Paul!  It’s like hearing who will be kicked off SYTYCD directly from Cat Deeley …)

What’s one way to derail a potentially large collective action about Fair Labor Standards Act violations?  To implement a new arbitration policy within days, thereby ensuring that your current employees cannot join the court case.  At least, that was the successful tactic used by a Chicago restaurant recently.

In Conners v. Gusano’s Chicago Style Pizzeria, __ F.3d __, 2015 WL 1003860 (8th Cir. Mar. 9, 2015), a former server alleged the restaurant where she had worked violated the FLSA.  She planned to represent other current and former servers at the restaurant.  However, a month later, the restaurant rolled out a new arbitration agreement for employees (but gave them the option of opting out as well, and explicitly explained that the agreement prevented the employee from joining the Conners action).  The plaintiffs (the original woman and other former servers who had already opted in), asked the court to enjoin the restaurant from using its new arbitration agreement to reduce the number of potential plaintiffs.  The district court granted the plaintiffs’ motion “to prevent a chilling effect on future collection actions under the [FLSA],” and enjoined the restaurant from enforcing the arbitration agreement against anyone who wanted to become a plaintiff in the action.

The Eighth Circuit reversed.  It found that the plaintiffs “lacked standing to challenge the current employees’ arbitration agreement,” which deprived the district court of jurisdiction to enjoin enforcement of the new arbitration agreement.  Critically, the court did not buy the argument that the new arbitration agreement caused plaintiffs to suffer a “concrete and particularized injury” in the form of an increased pro rata share of litigation expenses.  The court faulted plaintiffs for failing to provide any evidence that the current employees were going to join the lawsuit, even without an arbitration agreement.  It noted that at the time the motion was filed, no current employees had joined the collective action, and the plaintiffs’ counsel could offer nothing other than “a hopeful guess” that current employees would eventually join the cause.

In short, the court concluded that “one must resort to pure speculation to conclude the former employees’ portion of the litigation costs is any greater than it would have been absent the agreement.  This does not satisfy Article III.”

The problem with this decision is that it feels impractical to expect plaintiffs, whose lawsuit is just a few weeks old, to already have evidence available of what classes of employees will opt in to the collective action.  In short, if other circuits adopt this approach, this tactic could be an effective way to reduce the size of new class or collective actions whose representative is a former employee.

In my last post, I shared some of the highlights from the first half of the new CFPB Arbitration Study.  This post covers the second half of the report, with juicy information gleaned from CFPB’s analysis of almost 2,000 actual consumer arbitrations and its comparison of those results to actual consumer court actions.

Arbitration Outcomes

The AAA gave the CFPB access to information about 1850 total disputes filed with it in 2010, 2011, and 2012 relating to credit cards, checking accounts, payday loans, (GPR) prepaid cards, student loans, and auto loans.  The average claim made by a consumer was $27,000, and the average claim made by the financial institution was $16,011 (debt collection).  The bulk of the claims related to credit cards, with auto loans and students loans following a distant second and third.  Arbitration was usually completed within 5-8 months. Of the disputes resolved by arbitrators, 74% were resolved by an arbitrator who also was appointed on at least one other consumer arbitration in the sample set.

32% of the consumer arbitrations filed in 2010 and 2011 were resolved on the merits.  (The rest either settled or ended in another fashion.)  Of the 158 cases in which the consumer had an affirmative claim, arbitrators provided consumers with relief in 20% of them, with an average award around $5,400.  “When consumers were provided relief on their claims, consumers won an average of 57 cents for every dollar they claimed.”  In contrast, of the 244 affirmative claims by companies that resulted in an award, arbitrators provided the companies relief in 93% of those disputes, with an average award of $12,500 (“companies won 98 cents for every dollar claimed” in the cases where companied were provided relief).  (That could be read as indicating bias.  But, it could also mean that an unpaid debt is inherently easier to prove than a FDCPA (or other consumer) claim.)

If you’ve ever wondered how often the AAA appoints a new arbitrator after receiving a “factual objection” to the arbitrator’s service, the CFPB found that happened in response to 68% of objections in these consumer arbitrations.

With respect to attorneys’ fees, consumers who were represented and took their claims all the way to an award received fees in 14% of those cases, with an average fee award of $8,148.  Companies also received attorneys’ fees in 14% of disputes resolved by the arbitrators, with an average award of $3,387.

Litigation Outcomes

Individual Federal Court Claims 2010-2012

If there were about 2,000 individual consumer arbitrations filed in these six areas in three years, how many individual federal actions were filed?  3,462 — and 2,621 of those related to credit cards.  A whopping 87% of the individual actions asserted FDCPA claims.  And 93% of the individual plaintiffs requested a jury.  The individual federal cases were concluded in an average of 171 days.

Of those individual claims that were resolved within the study period, 48% resolved by settlement, 3.7% were dismissed on a dispositive motion, 6.8% resulted in a judgment in favor of the consumer (another 41% of cases may have settled, but the docket did not clearly indicate).  Most of the cases that the consumer won were by default (78 of 82).  The average amount awarded the consumer was $13,131.  (The CFPB could not calculate the ratio of damages to claim, because unlike arbitration demands, complaints generally have generic statements about their damages like “more than 75,000.”)

Class Actions in State and Federal Court 2010-2012

In addition to the individual cases, CFPB found 470 putative class actions filed in federal court (and another 92 filed in state courts with searchable electronic records — OR, UT, OK, and NY, plus individual counties in IL, TX, FL, and CA).  Juries were requested in 80% of the class actions.  Almost half of those cases related to credit cards.  And the majority of the claims were federal or state statutory claims (FDCPA, TCPA, TILA, Deceptive Trade Practice, etc.)  The median time to close a federal class action was around 215 days (though MDL classes took around 600 days).  Class actions in state court took longer than federal court — about 400 days on average.

Most class cases settled — either by non-class settlement (CFPB estimates 60%) or a class settlement approved by the court (12%).  Another 10% of cases ended when the defendant won a dispositive motion.  Consumers obtained a judgment in their favor in only 1.8% of class cases, usually through default judgment.  No class action in the sample went to trial.

In 94 of those putative class actions, companies moved to compel arbitration, and courts granted the motion half of the time. In the 46 classes that were compelled to arbitration, CFPB was able to identify only 12 that subsequently demanded arbitration, two of which filed as putative classes in arbitration.  Similarly, for the six individual cases that were compelled to arbitration, CFPB found only one that subsequently went to arbitration.

Small Claims Court

In an effort to see if consumers are taking advantage of their arbitration carve-outs allowing claims to proceed in small claims court, CFPB searched for filings in jurisdictions where those records are accessible.  It found that credit card issuers are filing many debt collection matters in small claims court, but very few consumers are filing affirmative claims.  For example, there were 7,905 credit card debt collection cases in Harris County, Texas alone, but 870 small claims court cases filed by consumers across 31 jurisdictions combined.

Class Action Settlements 2008-2012

 To determine the benefit of class litigation, CFPB analyzed consumer financial class action settlements that took place from 2008-2012.  The 419 settlements in that time period involved more than 350 million class members (not necessarily 350M unique people) and resulted in $2.7 billion in total relief.  For the 105 settlements where a determination was possible, the average claims rate was 21% (i.e. the plaintiffs recovered 21% of the dollars they sought).  On average, it took the classes 690 days to get to a settlement.

Which Comes First — Private or Public Action?

The report presents findings about whether public enforcement of consumer protection statutes usually comes before or after similar class actions filed by private citizens.  It found that where there are overlapping actions, “public enforcement activity was preceded by private activity 71% of the time.  In contrast, private class action complaints were preceded by public enforcement activity 36% of the time.”  So, don’t knock the creativity of the plaintiffs’ bar.

Does Arbitration Lead To Cheaper Products?

The final section of the report analyzes whether arbitration agreements in financial products leads to lower prices for consumers.  After acknowledging that it is difficult to test that assertion on a broad level, the report looked at one example to test the cause and effect.  In that example, a number of credit cards agreed to remove their arbitration clauses for three and a half years as a result of a settlement.  The CFPB found no statistically significant evidence that those companies raised their prices more or differently from comparable companies with no change in ADR.

What Have We Learned?

My brain is a little fried from all the numbers and graphs and words, but here are some initial reactions from the information in the report:

  • Individual consumer actions settle more often in court than in arbitration.  Put differently, more cases get heard on the merits in arbitration.  (32% of cases are resolved on merits in arbitration, compared to about 10% in court.);
  • Arbitrators are repeat players, just like financial institutions, and plaintiffs’ lawyers;
  • Arbitration is not necessarily faster than litigation (comparing individual arbitrations to individual federal litigation);
  • Parties who don’t show up will lose — both in arbitration and in court (the volume of defaults surprised me);
  • Courts grant more damages to consumers than arbitrators do;
  • A large percent of plaintiffs will not bother prosecuting their claims if they have to go to arbitration (instead of remaining in court); and
  • Eliminating class actions can be a huge financial benefit to the financial institutions.  Whether you think that is also a benefit to the economy overall or not likely depends on your politics.

Watch this space for news on what the CFPB recommends going forward.


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.

We all know that the doctrines of issue preclusion (collateral estoppel) and claim preclusion (res judicata) apply with equal force to both arbitration awards and court orders.  But, if your adversary brings new claims that you believe have already been determined in arbitration, where do you go to shut down those new claims — court or arbitration?  A recent decision from the Second Circuit clarifies that arguments about issue or claim preclusion should generally be made in arbitration.  Citigroup, Inc. v. Abu Dhabi Investment Authority, __ F.3d__, 2015 WL 161745 (2d Cir. Jan. 14, 2015).

In Citigroup, the parties’ investment agreement provided that “any dispute that arises out of or relates to” the agreement will be decided in AAA arbitration.  The Abu Dhabi Investment Authority (ADIA) asserted claims against Citigroup in arbitration, and after a full hearing, the panel ruled in favor of Citigroup.  ADIA moved to vacate the award, but the Southern District of New York found no “manifest disregard” and confirmed the award.  At that point, ADIA did two things.  It appealed the confirmation to the Second Circuit and served Citigroup with a new arbitration demand, asserting some of the same claims it asserted in the first arbitration.  (Gutsy move.)

At that point, Citigroup started a new federal action, seeking to enjoin the second arbitration under the All Writs Act (or the Declaratory Judgment Act).  ADIA moved to dismiss the complaint and compel arbitration.  The district court compelled arbitration.

The Second Circuit affirmed, but after some soul-searching.  It had to weigh the FAA’s policy favoring arbitration on the one hand, against its concern for “the integrity of federal judgments.”  It also had to address its own 2011 ruling , which enjoined a pending arbitration because the claims had been settled and the settlement implementation remained under the district court’s exclusive authority.

In the end, the Second Circuit appears to have concluded that agreeing to enjoin arbitrations in situations like this would be opening a Pandora’s Box.  “The FAA’s policy favoring arbitration and our precedents interpreting that policy indicate that it is the arbitrators, not the federal courts, who ordinarily should determine the claim-preclusive effect of a federal judgment that confirms an arbitration award.”  The court distinguished its 2011 ruling by noting that in Citigroup, the district court did not retain any jurisdiction over the judgment confirming the arbitration award.  It will be for a new AAA panel to determine whether ADIA’s claims are precluded by the previous arbitration award.

Did you know that 87% of experienced arbitrators report *always* trying to follow applicable law in rendering an award?  That will come as a surprise to many critics who like to complain that arbitrators do not adhere to established law.

The statistic comes from a survey that Prof. Thomas Stipanowich of Pepperdine University School of Law conducted recently.  He obtained responses from 134 highly experienced arbitrators –most of them had arbitrated more than 100 disputes in their career — to a range of questions.  And the results dispel some myths about arbitration.

Here’s another myth-buster: less than 1% of these arbitrators refuse to rule on motions for summary judgment.  Instead, about 70% of these arbitrators say they “readily” rule on dispositive motions.

A less surprising statistic is this one: 91% of responding arbitrators “usually” or “always” work with counsel to limit discovery, and 94% “usually” or “always” encourage the parties to limit the scope of discovery.  Here’s another non-shocker: 75% of these arbitrators generally “receive virtually all non-privileged evidence and discourage traditional objections (hearsay, foundation, etc.).”  Experienced arbitrators are proactive case managers in other ways as well, with the great majority requiring parties to submit a core collection of joint exhibits for the hearing, limiting duplicative testimony, and telling counsel when a point has been understood and “they can move on.”  (That is always an awkward moment.)

So, if there is a lull in conversation this Thanksgiving, you can shake things up by asking: “Did you know that most people choose to serve as arbitrators because they see it as a form of public service and a logical extension of their professional practice?”  I am sure that will receive just as welcome a reception as my recent query at a dinner party: “Tell me, what is your preferred method of judicial selection?”  [My husband won’t let me live that one down.]


Other interesting arbitration news and notes.

The DC Circuit ruled last week that FOIA does not require the Securities and Exchange Commission to turn over documents it collected while examining FINRA’s arbitration program.  Public Investors Arbitration Bar Assoc. v. SEC, __ F.3d __, 2014 WL 5904725 (D.C. Cir. Nov. 14, 2014).  An organization of lawyers who represent individual investors in FINRA disputes had requested those records.

The NLRB won’t go down without a fight on its controversial D.R. Horton ruling, which held that federal labor laws do not allow employers to force employees to give up class actions in arbitration.  In a late October opinion it wrote “we have carefully considered, and fully addressed, the views of both the Federal appellate courts that have rejected D.R. Horton and the views of our dissenting colleagues.  We have no illusions that our decision today will be the last word on the subject, but we believe that D.R. Horton was correctly decided, and we adhere to it.”

Finally, as of this month, the College of Commercial Arbitrators has its first female President, Deborah Rothman.  Cheers!

This week the Supreme Court of California held that the FAA preempts California’s 2007 Gentry ruling, one that protected employees from nearly all class action waivers in arbitration agreements.  Iskanian v. CLS Transp. Los Angeles, LLC, __ P.3d__, 2014 WL 2808963 (Cal. June 23, 2014).  However, asserting its Californian-ness, the court found an clever way of ruling that arbitration agreements in employment contracts may still not waive a particular type of joint action: representative actions brought under California’s Private Attorneys General Act.

The decision reads like a Greatest Hits of Arbitration Law – 2014 edition.  It touches on almost every hot issue in arbitration law in recent years: Concepcion and FAA preemption; vindication of statutory rights; waiver of the right to arbitrate; and the fight over whether federal labor laws can trump the Federal Arbitration Act (the D.R. Horton issue).  (Are the 14 different groups of amici in the case to blame for the plethora of issues?!  Or is that what drew them there??)  The holdings on those issues track what courts around the country have done:

  • California found that “[u]nder the logic of Concepcion, the FAA preempts Gentry’s rule against employment class waivers.  (Gentry made it possible to invalidate a class action waiver if class arbitration will be “a significantly more effective practical means of vindicating the rights of the affected employees than individual litigation or arbitration.”)
  • California agreed with other federal courts that Sections 7 and 8 of the National Labor Relations Act do not override the FAA’s mandate to enforce arbitration agreements, even those agreements with class action waivers.
  • California recognized that a party who gives up on compelling arbitration in light of a precedential decision that makes enforcing the arbitration clause futile (in this case, Gentry), does not thereby waive its right to arbitrate.

But on one issue, the Iskanian decision ventured into uncharted territory.  The issue was what the court should do with the employee’s claim, in a representative capacity, under California’s Private Attorneys General Act for Labor Code violations by his employer.  The arbitration agreement stated “that class action and representative action procedures shall not be asserted” in arbitration.  The court found that an employee’s right to bring a PAGA representative action is not waivable under California law.  That holding was grounded in two California statutes that prohibit parties from using their contract to avoid responsibility for violations of statutes.  While the employer argued that the employee could bring his PAGA claim on an individual basis, the court found that would frustrate the objective of the act: “to punish and deter employer practices that violate the rights of numerous employees.”

The court then had to analyze whether its new holding (that the ability to bring a PAGA claim on a representative basis cannot be waived) was preempted by the FAA.  It held it was not.  The court found that the PAGA claims fall outside the ambit of the FAA, because the FAA is concerned with disputes between private parties, while PAGA actions are really state enforcement proceedings against an employer.  The court found support for its holding in the legislative history of the FAA, and especially the lack of any mention of qui tam actions becoming arbitrable as a result of the legislation.  The court also noted that enforcement of wage and hour laws are well within the state’s historic police powers.

“Simply put, a PAGA claim lies outside the FAA’s coverage  because it is not a dispute between an employer and an employee arising out of their contractual relationship.  It is a dispute between an employer and the state, which alleges directly or through its agents…that the employer has violated the Labor Code.”

This is the first time I have seen a state court find that their arbitration case law is not preempted because the FAA did not even apply to it.  The distinction that California draws makes logical sense.  But I can’t imagine SCOTUS ignoring California’s attempt to define some of its arbitration precedent as outside the scope of the FAA.  I predict this case will end up on SCOTUS’ docket.