Litigation vs. Arbitration

In a very narrow decision today, the U.S. Supreme Court found that the Credit Repair Organizations Act (CROA) does not preclude the arbitration of consumer suits alleging violations of that Act.  CompuCredit Corp. v. Greenwood, 565 U.S. ___ (2012).  The 8-1 decision was written by (who else?) Justice Scalia, with a concurring opinion filed by Justice Sotomayor and joined by Justice Kagan, and a dissent from Justice Ginsburg.  Despite the show of solidarity in the holding, the opinions show there may be disagreement at the Court about how clear Congress needs to be to preclude arbitration of particular statutory claims.

In CompuCredit, consumers brought a lawsuit against the issuer of a credit card alleging violations of CROA.  Those consumers argued that the arbitration agreements in their contracts were unenforceable because CROA mandates that any suits to enforce it be heard in a court.  The federal district court and Ninth Circuit sided with the consumers, finding CROA precluded enforcement of the arbitration agreements.

The essential question in the case was whether CROA’s requirement that a consumer be told it has “a right to sue” for violations of the Act was sufficient to override the Federal Arbitration Act’s mandate in favor of enforcing arbitration agreements.  As predicted, the majority of the Supreme Court found the language did not show Congressional intent to preclude arbitration primarily because the “right to sue” language was only in a section of the statute about what disclosures had to be provided to consumers, not a section detailing the rights created by the statute.  The majority also described the phrase “right to sue” as a “colloquial method of communicating to consumers that they have [a] legal right,” but not one that excludes the possibility of arbitration.  

In contrast, Justice Ginsburg’s dissent accused the majority of placing a “sophisticated gloss” on the phrase “right to sue.”  Justice Ginsburg wrote “The right to sue, I would hold, means the right to litigate in court.”

Maybe more important than what the Supreme Court said in CompuCredit  is what the Supreme Court did not say in CompuCredit.  The Supreme Court did not set out a new or higher standard for how clearly Congress must show its intent to override the FAA when it is drafting legislation.  In fact, that seems to be the entire point of the concurring opinion from Justices Sotomayor and Kagan.  The majority held out as a model of “clarity” a statute (7 U.S.C.  §26(n)(2)) that provides “no predispute arbitration agreement shall be valid or enforceable, if the agreement requires arbitration of a dispute arising under this section.”  In her concurring opinion, however, Justice Sotomayor writes “I do not understand the majority opinion to hold that Congress must speak so explicitly in order to convey its intent to preclude arbitration of statutory claims.”  In the dissent, Justice Ginsburg reminds her colleagues that under current precedent Congress “need not employ ‘magic words'” to override the FAA.

Because CompuCredit fails to set forth any new test for finding a Congressional override of the FAA, it will be interesting to see if it has any effect on the current trend of litigating whether arbitration is precluded under particular federal statutes.  It will also be interesting to see if Congress gets the message and begins adding very direct language about whether arbitration is or is not consistent with drafted legislation.

The Second Circuit just held that a federal court has the power to enjoin an ongoing arbitration.  In re Am. Express Fin. Advisors Sec. Litig., ___ F.3d ___, 2011 WL 5222784  (2nd Cir. 2011).  While many litigants would no doubt like a federal court to enjoin their arbitrations — especially when arbitrators refuse to dismiss frivolous claims — application of this case’s holding is limited to a very unique set of facts. 

In the American Express case, a couple filed a FINRA arbitration against Ameriprise, alleging multiple claims relating to Ameriprise’s management of their assets.  Ameriprise notified the arbitrators that the couple was part of a class action that had been settled, and because they had never opted out of the class, they were bound by the settlement agreement’s release of their claims.  The arbitrators did not blink and ordered that the arbitration should proceed full speed ahead. 

Ameriprise then took the unusual step of asking the Southern District of New York, which retained jurisdiction of any disputes over the class action settlement, to enjoin the arbitration.  And the district court took the unusual step of granting that injunction and ordering the couple to dismiss their arbitration claims.

The Second Circuit affirmed much of the trial court’s decision.  The court framed the dispute between the parties as one of arbitrability, and therefore appropriate for the court (not an arbitrator) to decide.  That was because “the Class Settlement revoked Ameriprise’s consent to arbitrate certain claims. The question therefore is not whether those claims had been settled, thus precluding arbitration, but whether there was a surviving agreement, following the settlement, to arbitrate those claims at all.”  Furthermore, the Second Circuit placed emphasis on the fact that the trial court had specifically retained jurisdiction over all matters relating to the Class Settlement.  

Interestingly, neither party had briefed or argued the court’s power to enjoin an arbitration, a power that  the FAA does not specifically grant to federal courts.  Having considered the issue sua sponte, the Second Circuit concluded that the district court possessed “the authority to order the cessation of an arbitration by parties within its jurisdiction where such authority is necessary in order for a court to enforce the terms of the parties’ own agreement.”  

Can this decision be used by parties in future arbitrations who may be frustrated by an arbitration panel’s refusal to dismiss claims that are time-barred or otherwise subject to a strong legal defense?  Probably only if the legal defense can be said to call into question the validity of the agreement to arbitrate.  And even then I imagine courts would be skittish.   


Despite the Supreme Court’s best efforts, some myths of arbitration law just will not die.  In yesterday’s per curiam decision of the Supreme Court, the Justices tried to put a stake through the heart of a common myth: that a party may successfully avoid a motion to compel arbitration by arguing that not all claims and/or not all parties fall within the scope of the arbitration agreement.  KPMG LLP v. Cocchi, __ U.S. __, 2011 WL 5299457 (Nov. 7, 2011).  Surely you have seen this in your cases, the non-moving party usually invokes the phrase “piecemeal litigation,” i.e. “if I am forced to arbitrate, it will result in expensive and duplicative piecemeal litigation.”  SCOTUS is tired of this argument.

 In Cocchi, 19 investors in what turned out to be a Ponzi scheme brought four claims against the auditor, KPMG, in state court in Florida.  (Florida is the same state whose refusal to compel arbitration got smacked down in 2006’s Buckeye Check Cashing v. Cardegna decision.)  KPMG moved to compel arbitration based on provisions of its contract with its client, the alleged Ponzi schemer.  The contract stated that “[a]ny dispute or claim arising out of or relating to … the services provided [by KPMG] … (including any dispute or claim involving any person or entity for whose benefit the services in question are or were provided) shall be resolved” either by mediation or arbitration.

The Florida trial court and appellate court denied KPMG’s motion to compel arbitration.  Because KPMG was relying on its contract with the Ponzi schemer, and had not contracted with the investors, the Florida courts noted that the arbitration provisions could only be enforced if the claims were “derivative.”  After analyzing two of the four claims and finding that they were direct, the Florida courts denied the motion to compel arbitration. 

The Supreme Court vacated the Florida appellate decision and remanded the case for consideration of all four claims.  If any of those claims are derivative, the Court directed, the investors must be compelled to arbitrate the derivative claim(s) against KPMG.  It took the occasion to remind us all that: “when a complaint contains both arbitrable and nonarbitrable claims, the Act requires courts to ‘compel arbitration of pendent arbitrable claims when one of the parties files a motion to compel, even where the result would be the possibly inefficient maintenance of separate proceedings in different forums.'”


Two recent decisions illustrate how individuals that did not sign a contract can be bound by that contract’s arbitration provisions. 

In the first, Blaustein v. Huete, 2011 WL 5103759 (5th Cir. Oct. 26, 2011), an individual member of an LLC, Huete, argued he should not be bound by the arbitration clause between the LLC and its attorneys.  Huete was suing the attorneys for legal malpractice and negligence, stemming from an allegedly botched patent application.  However, the law firm’s agreement with the LLC, which Huete had signed on behalf of the LLC, called for arbitration.  The law firm moved to compel arbitration.  The Fifth Circuit held that while Huete was not directly bound by the agreement (he only signed in his representative capacity), he was bound under the doctrine of “direct benefits estoppel.”  (Couldn’t anyone come up with a better name for that theory?  It doesn’t exactly roll off the tongue.) 

The concept of direct benefits estoppel is this: if the non-signatory used the contract to its benefit, it can’t later turn its back on the contract’s arbitration clause.  In particular, at least the Third and Fifth Circuits say that if a non-signatory has either 1) knowingly obtained direct benefits from the contract or 2) sought to enforce the contract, the non-signatory is bound by an arbitration clause in the contract.  In this case, the Court found Huete had obtained benefits from the agreement with the attorneys as a member of the LLC (research, drafting, filing, advice), and noted that Huete’s claims were related to the attorney-client relationship which was formed by the agreement between the firm and the LLC.  The law firm was successful in compelling Huete to arbitration.

In the second case, Lemon Drop Properties, LLC v. Pass Marianne, LLC, ___ So.3d ___, 2011 WL 5027140 (Oct. 20, 2011), the Supreme Court of Mississippi allowed a non-signatory to compel arbitration.  In that case, a condo buyer sued the developer and contractor alleging defective construction.    Although there was an arbitration agreement in the agreement between the buyer and developer, the developer waived its right to arbitrate by participating in the court case for “two-hundred-and-fifty-two (252) days,” without  invoking the arbitration provision.  The non-signatory issue arose after the buyer amended its complaint to name the real estate agent as a defendant.  The real estate agent argued that it was entitled to enforce the arbitration agreement in the developer’s agreement, as an agent of the developer.  The court easily agreed, but then had to address whether the developer’s waiver of its right to arbitrate was imputed to the real estate agent.  Citing recent decisions from a Texas state court and a California federal court, the Mississippi Supreme Court held that a “principal’s waiver of its right to arbitrate [does] not operate as a waiver of the agent’s right to arbitrate under the same agreement.”  Two Justices dissented from the portion of the opinion.

These cases serve as a good reminder that employees and agents are frequently bound by the same arbitration agreements that bind their employers and principals (but not necessarily by any waivers by those employers or principals).

Minnesota Senator Al Franken, among others, responded to the Supreme Court’s Concepcion decision  by introducing a bill called the Arbitration Fairness Act of 2011 (S.987, also in the House as H.R. 1873) last May, which would legislatively nullify arbitration provisions in various types of agreements.  The Senate Judiciary Committee heard two hours of testimony on the bill last Thursday (Oct. 13), from speakers including Minnesota’s Attorney General (in support of the legislation), a representative of the Chamber of Commerce (opposing the legislation), an emergency room doctor (who supports the legislation and told the committee of her bad experience arbitrating a discrimination claim), a member of the non-profit Public Justice (in favor of the legislation) and a law professor (also opposing the legislation).  The remarks of each speaker are available here.

Senator Franken opened the hearing with this comment: “Personally, I’m troubled that our private arbitration system is, at least in part, eclipsing the United States Supreme Court, the highest court in the land. Perhaps today’s hearing can help us determine whether there is a sound middle ground -one where we use arbitration to the fullest fair extent, but allow our Supreme Court to fulfill its role as the true final arbiter.”

If passed, the Arbitration Fairness Act would invalidate any contractual arbitration clause that requires arbitration of an employment dispute (other than those with labor unions), consumer dispute, a claim involving constitutional rights, or a statutory discrimination claim.  The bill specifies that any dispute over whether the Arbitration Fairness Act applied would be decided by a court, even if the litigant did not raise a challenge to the arbitration provision itself (contrary to the Prima Paint decision and its progeny).   The Senate Judiciary Committee will continue to take some testimony and comments about the Act until October 20, and then the Chair will decide whether the Act will go any further.

 A similar bill was introduced in 2009 (Arbitration Fairness Act of 2009) in the U.S. House and Senate.  The 2009 bill was slightly different than the 2011 legislation: instead of invalidating arbitration clauses covering constitutional or discrimination claims, the 2009 version invalidated arbitration agreements in franchise disputes.  However, despite its 126 co-sponsors in the House and Senate, and the more liberal composition of the Congress at that time, the Arbitration Fairness Act of 2009 did not gain any traction and never made it out of its respective committees.  Unless there is significant public reaction to the Concepcion v. AT&T Mobility decision that persuades Congress to make this bill a priority for both parties, the Arbitration Fairness Act of 2011 is also unlikely to be passed.  But it may continue to raise legislative awareness of the policy issues raised by the U.S. Supreme Court’s recent rulings on arbitration.

Since the last post dealt with legislative overrides of arbitration agreements, this one will expand on that theme with a preview of an upcoming Supreme Court case.  In CompuCredit Corp. v. Greenwood, to be heard on October 11, the Supreme Court will decide whether Congress intended to prohibit arbitration of claims brought under a statute that regulates companies who offer to improve a consumer’s credit rating.

In this case, consumers brought claims under the Credit Repair Organizations Act against the marketer of a credit card that advertised its ability to “rebuild poor credit.”   Although the credit card contract had arbitration provisions, the federal district court denied the defendant’s motion to compel arbitration and the Ninth Circuit Court of Appeals affirmed.  Both courts concluded that the language of the CROA showed Congress intended to prohibit arbitration of those claims.  The Ninth Circuit opinion opened colorfully with a Lewis Carroll quote:

This appeal presents the question, inter alia, as to whether the word “sue,” as used in the Credit Repair Organization Act (“CROA”), means “arbitrate.” Or, perhaps the question is, as Alice put it: “whether you can make words mean so many different things?” We conclude that Congress meant what it said in using the term “sue,” and that it did not mean “arbitrate.”  

615 F.3d 1204 (9th Cir. 2010). 

At issue is how specific Congress must be in order to preclude arbitration of specific statutory claims.  In this case, the question comes down to whether or not three provisions of the CROA show Congress intended to allow claims under the statute to proceed exclusively in court.  In the first provision, the statute mandates that credit repair companies advise consumers that “You have a right to sue a credit repair organization that violates the Credit Repair Organization Act.”  Second, the statute authorizes civil suits: “Any person who fails to comply with any provision of [the CROA] with respect to any other person shall be liable to such person” for damages.  Third, the statute nullifies any contractual waiver of its protections: “Any waiver by any consumer of any protection provided by or any right of the consumer under” the CROA “shall be treated as void.”  The consumers successfully argued that the arbitration provision was a “waiver” of their “right to sue” under the statute, and therefore void.

The appellant has some good things going for it: Why would the Supreme Court accept this case if not to reverse?  And, to quote the appellant’s brief: “The FAA’s presumption favoring arbitration is so strong that, in the past 25 years, this Court has not once denied enforcement of an agreement to arbitrate a federal statutory claim.” On the other hand, to rule for the appellant, the Court would have to find the plain meaning of a “right to sue” encompasses both arbitration and filing a lawsuit in court.  That seems a bit like President Clinton arguing about the meaning of the word “is.”  Still, I would put my money on a reversal.

Here are other interesting discussions of the case and the third parties who are weighing in:

Last week the Eleventh Circuit interpreted the scope of the arbitration agreement within a plaintiff’s employment contract to exclude civil claims stemming from her sexual assault by fellow employees.  In doing so, the court may have signaled a discomfort with sending civil claims based on criminal conduct to arbitration. 

In Doe v. Princess Cruise Lines, Ltd., 2011 WL 4425288 (11th Cir. Sep. 23, 2011), the court held that the agreement to arbitrate “any and all disputes, claims or controversies whatsoever . . . relating to or in any way arising out of or connected with the Crew Agreement, these terms, or services performed for the [cruise ship]” was not broad enough to encompass an employee’s claims of false imprisonment, intentional infliction of emotional distress, spoliation of evidence, and invasion of privacy relating to her sexual assault. 

The plaintiff employee, a server on a cruise ship, had been drugged and sexually assaulted by other employees, and she alleged the cruise ship had repeatedly refused to let her off the ship for medical care, had humiliated her publicly, and had destroyed evidence of the crimes against her.  She brought ten claims against her employer, and the employer moved to compel arbitration.  The Florida district court found all ten claims fell outside the scope of the parties’ arbitration agreement and denied the employer’s motion to compel arbitration. 

The Eleventh Circuit disagreed, in part.  It held that five of the plaintiff’s claims fell within the scope of the arbitration agreement, because they “ar[o]se directly from her undisputed status as a ‘seaman,'” and therefore were sufficiently “related to” her employment as a “seaman.”  Those five claims were based on federal statutes that apply only to “seamen” or on common law rules that apply only to seamen. 

However, the Eleventh Circuit found the remaining five claims in the plaintiff’s complaint were outside the scope of the arbitration agreement.  In analyzing whether the claims of false imprisonment, intentional infliction of emotional distress, spoliation, etc., were related to or connected with her employment, the court repeatedly looked at whether those same claims could be brought be a non-employee.  It reasoned that the “cruise line could have engaged in that tortious conduct even in the absence of any contractual or employment relationship with” the plaintiff.”  Similarly “a passenger could have brought these same five claims against the cruise line based on virtually the same alleged facts.” 

There are at least two interesting points about this decision.  The first is a drafting point: if parties intend to arbitrate disputes like this one, the arbitration agreement needs to be broader.  Similarly, if a plaintiff wants to avoid arbitration under an employment contract, it may not want to assert claims that depend on its status as an employee.

A second point relates to this court’s apparent discomfort with sending these claims to arbitration.  The court acknowledged it could find only one case on point (Jones v. Halliburton, 583 F.3d 228 (5th Cir. 2009), which found similar claims fell outside the scope of the arbitration agreement in an employment contract).  Despite the paucity of authority, and despite language in the arbitration agreement that could have been interpreted to cover all the plaintiff’s claims, the Eleventh Circuit decided, without dissent, that the plaintiff did not have to arbitate all her claims. 

Reading between the lines, the court may have been concerned about whether proper justice could be done in arbitration.  The court was obviously disturbed by the facts in the case–the opinion describes the allegations at length, and goes out of its way to point out the disconnect between the employer’s public statements regarding how it values its employees and the employer’s alleged behavior toward the plaintiff.  The court may have been motivated, in part, by its desire to ensure that the defendant’s actions remained public and that the plaintiff’s claims be heard by a decision-maker who is arguably more accustomed than an arbitrator to dealing with claims of violence and criminal conduct.  

This case may be part of a growing trend to keep entire categories of claims (negligence in nursing homes, sexual assault, Magnuson-Moss warranty claims) out of arbitration altogether, based on public policy concerns.

A recent decision from the Western District of Oklahoma reminds all litigators that you may be able to get preliminary injunctive relief from the courts, despite having a valid arbitration agreement.  Although this seems to fly in the face of the courts’ general arbitration refrain (stolen from M.C. Hammer: “[We] Can’t Touch This”), courts rationalize their decision by noting that they must preserve the status quo so that the arbitration hearing may be meaningful.

 In Wells Fargo Bank v. Maynahonah, 2011 WL 3876519 (W.D.Okla. Sept. 2, 2011), the district court granted first a TRO and then a preliminary injunction, prohibiting decision-making bodies of the Apache Tribe of Oklahoma from “proceeding with any hearing, issuing any order, making any determination, or taking any official action” with respect to issues that Wells Fargo claimed were arbitrable.  While the Tribe did not challenge the validity of the arbitration agreements at issue, it had taken various actions that seriously undermined those arbitration agreements, and it planned to adjudicate issues in tribal administrative proceedings that fell within the scope of the arbitration agreement.  The Court analyzed the usual factors for injunctive relief and found: Wells Fargo had demonstrated the risk of irreparable harm (through the potential loss of its right to arbitrate and the resources it would have to spend in the tribal adjudication); the balance of interests favored Wells Fargo because of the strong federal policy favoring arbitration; the public interest favored “safeguarding an arbitration agreement made by the Tribe”; and Wells Fargo was likely to succeed in showing that the Tribe was proceeding improperly.

If you have a valid arbitration agreement in your case, but need emergency relief, a two-step analysis is required to determine whether that relief is available from the courts. 

1.         Step One: Analyze The Language of the Arbitration Provision.

            If the arbitration agreement carves out requests for injunctive relief from the scope of arbitrable controversies, you have a strong basis to seek court relief.  Even a carve-out, however, does not necessarily guarantee success with the courts if there are disputes about the scope or applicability of the carve out. 

            Note that your arbitration agreement may also provide for emergency relief from the arbitrator.  If your arbitration agreement calls for administration with the AAA, check to see if that agreement incorporates the AAA rules for emergency protection.  (Those rules are titled “O-1” through “O-8”.)  If those rules are incorporated, they provide for temporary restraining orders and preliminary injunctions using procedures very similar to those applicable in state and federal courts.  However, the AAA may not react as quickly to a claimant’s request for emergency relief as a court is able to react.  (The AAA first has to appoint a case administrator and an emergency arbitrator, for example, and will not act until all fees are paid.)

2.         Step Two: Analyze the Governing Case Law.

            If your arbitration agreement does not explicitly provide for any special emergency procedures, or you think those emergency procedures still may be too slow, the next step is to see whether the case law in your federal circuit still allows you to seek relief in court.  While the FAA does not specifically address whether courts have authority to issue injunctions, most federal circuits are willing to grant emergency relief for the limited purpose of maintaining the status quo for the arbitrator, as long as the usual tests for injunctive relief are met.  E.g., Performance Unlimited, Inc., v. Questar Publishers, inc., 52 F.3d 1373, 1380 (6th Cir. 1995); Merrill Lynch, Pierce, Fenner & Smith v. Salvano, 999 F.2d 211, 214 (7th Cir. 1993); Ortho Pharmaceutical Corp. v. Amgen, Inc., 882 F.2d 806, 812 (3d Cir. 1989); Teradyne, Inc. v. Mostek Corp., 797 F.2d 43, 47 (1st Cir. 1986); Jameson v. Pine Hill Development, LLC, No. 07-0111, 2007 WL 623807, at *2 (S.D. Ala. Feb. 23, 2007) (citing decisions on both sides of issue).

            However, other federal circuits require evidence that the parties intended to give the courts authority to grant temporary relief.  The governing rules the parties selected for their arbitration can be sufficient evidence of the parties’ intent.  For example, in Toyo Tire Holdings of Ams. Inc. v. Continental Tire N. Am., Inc., 609 F.3d 975, 980 (9th Cir. 2010), the Ninth Circuit clarified that a court may grant injunctive relief when the governing arbitration rules provide for such relief and it is necessary to preserve the status quo pending the arbitration hearing.

A party with an arbitration agreement can waive its right to arbitrate by acting inconsistently with that right, usually by “invoking the litigation machinery” before demanding arbitration.  However, the federal circuits are split over whether a party asserting a waiver of arbitration must also show it was prejudiced by the other party’s use of that litigation machinery.  The Eighth Circuit generally sides with the circuits that require a showing of prejudice, but carved out an exception for the construction industry in a new case, Erdman Co. v. Phoenix Land & Acquisition, ___ F.3d ___, 2011 WL 3568929 (8th Cir. Aug. 16, 2011).

Reasoning that construction contracts tend to be standardized and “efficient resolution is of great importance” to parties in construction disputes, the court found “it makes little sense to litigate endlessly over the details of prejudice.”  Instead, it held, the “federal policy favoring arbitration does not require a showing of prejudice in this situation, unlike many others.” 

Arguments may now proceed about whether this lower bar for proving waiver should apply:

  • only to the specific facts of this case–where the same party who drafted the contract with the arbitration agreement was the one who chose to file its complaint in court, then made a subsequent motion and participated in a Rule 26(f) conference without ever mentioning a right to arbitration; or
  • to all construction cases; or
  • to all industries where contracts are standardized and efficient resolution is important, which could be almost every industry.