Scope of Arbitration Agreement

Despite how often I talk about whack-a-mole and the tug-of-war between the state courts and SCOTUS on arbitration, the truth is that the majority of state supreme courts follow SCOTUS’s arbitration precedent (whether holding their noses or not, we don’t know). Recent weeks have given us multiple of those pro-arbitration state court decisions to highlight – from Alabama, Rhode Island, Texas, and West Virginia.  Yes, that West Virginia.

In STV One Nineteen Senior Living, LLC v. Boyd, 2018 WL 914992 (Alabama Feb. 16, 2018), the Supreme Court of Alabama enforced the arbitration agreement in the admission documents of an assisted living facility.  The trial court had denied the facility’s motion to compel arbitration without explanation.  On appeal, the supreme court found the language of the arbitration agreement, which required arbitration of “any controversy or claim arising out of or relating to” the parties’ agreement, was broad enough to cover the tort claims asserted.

In Disano v. Argonaut Ins. Co., 2018 WL 1076522 (R.I. Feb. 28, 2018), the Supreme Court of Rhode Island refused to vacate an arbitration award.  Although the losing party argued that the panel of arbitrators had miscalculated damages, the supreme court applied a very deferential standard of review and noted that even if the arbitrators’ math skills were lacking, that “does not rise to the level necessary to vacate such an award.”

In Henry v. Cash Biz, 2018 WL 1022838 (Tex. Feb. 23, 2018), the Supreme Court of Texas found that a pay day lender did not waive its right to arbitrate by alerting the district attorney’s office to the borrowers’ conduct (issuing checks that were returned for insufficient funds).  The trial court had denied the lender’s motion to compel arbitration, the court of appeals had reversed, and the supreme court affirmed the intermediate appellate court.  It found: 1) that the borrowers’ claims of malicious prosecution were within the scope of the arbitration clause; and 2) that the lender’s status as the complainant in the criminal charge was not sufficient to prove that it “substantially invoked the judicial process.”  [Recall that Mississippi’s high court reached the opposite result in a very similar case just a few months ago.]

In another waiver case, the Supreme Court of Appeals of West Virginia held that a party’s “pre-litigation conduct” did not waive its right to arbitrate. In Chevron U.S.A. v. Bonar, 2018 WL 871567 (W. Va. Feb. 14, 2018), the trial court had denied Chevron’s motion to compel arbitration.  It found that Chevron’s decision to take actions consistent with its interpretation of the parties’ agreement had waived the right to arbitrate, because Chevron had “unilaterally decided” the questions instead of posing them to an arbitrator.  On appeal, the supreme court found “such a result simply is unreasonable” and “absurd.”  Therefore, it reversed with instruction for the trial court to issue an order compelling arbitration.

Just two days later, the Supreme Court of Appeals of West Virginia enforced the arbitration agreement in a contract of adhesion, again reversing the decision of a trial court. In Hampden Coal, LLC v. Varney, 2018 WL 944159 (W. Va. Feb. 16, 2018), an employee sued his employer and the employer moved to compel arbitration.  In response, the employee argued the arbitration clause was unenforceable.  On appeal, the supreme court clarified that it applies “the same legal standards to our review of all arbitration agreements,” and not a special standard if they involve employees or consumers.  It then found that the mutual agreement to arbitrate was sufficient consideration for the arbitration clause and that the arbitration clause was not unconscionable.

In a fitting ending to a post about high courts,  our nation’s highest court has agreed to decide a new arbitration case.  The case, New Prime Inc. v . Oliveiracomes from the 1st Circuit and raises two questions: whether a court or arbitrator should decide if an exemption to the FAA applies; and whether the FAA’s exemption (in Section 1) includes independent contractors.

What happens when state courts disagree with SCOTUS’s interpretation of the Federal Arbitration Act?  They resist, and they have a thousand different ways of doing so.  The Mississippi Supreme Court demonstrated one way to resist recently in Pedigo v. Robertson, Rent-A-Center, Inc., 2017 WL 4838243 (Miss. Oct. 26, 2017). (I neglected to mention the state appellate courts as important actors in last week’s post about what we may see now that the CFPB rule is dead.)

In Pedigo, the plaintiff entered into a Rental Purchase Agreement (RPA) from Rent-A-Center.  (Yes.  The same Rent-A-Center of delegation clause fame.)  Within about four months, he stopped making payments.  At that point, Rent-A-Center found out that plaintiff had sold the television to a pawn shop shortly after purchasing it.  Rent-A-Center then filed a complaint with the police, and the plaintiff was arrested and incarcerated.

After the plaintiff was released from jail, he filed a civil action against Rent-A-Center, alleging the police report was false.  Rent-A-Center moved to compel arbitration.  The trial court judge compelled arbitration.

On appeal, the high court found that plaintiff’s claims of malicious prosecution were outside the scope of the parties’ arbitration agreement.  The RPA itself prohibited the sale or pawning of the leased goods.  The arbitration agreement in the RPA stated that covered claims “shall be interpreted as broadly as the law allows and mean[] any dispute or controversy between you and RAC….based on any legal theory…”  The only claims not covered were those for injunctive or declaratory relief, or those seeking less than $5,000 in damages.  However, because “the agreement fails to contemplate that a lessor/signatory might pawn collateral and subsequently be indicted and jailed” the court did not require the plaintiff to arbitrate his claims.

Why do I call this “resistance”?  Because there are many cases saying that as part of the federal policy favoring arbitration, courts presume that claims are within the scope of a valid arbitration agreement.  The coin is weighted towards “heads.”  And here, the agreement explicitly prohibited pawning the TV, and the arbitration clause was about as broad as it could be.  Yet the court refused to compel arbitration.  The implication of this court ruling seems to be that if a specific claim is not enumerated in an arbitration clause in Mississippi (to show it was contemplated), the claim is not arbitrable.  And that just does not fit within the federal precedent.

You know what state is not currently resisting?  Missouri.  The Supreme Court of Missouri faithfully followed the instructions SCOTUS gave in Rent-A-Center, and enforced a delegation clause over the votes of two dissenting justices.  In Pinkerton v. Fahnestock, 2017 WL 4930289 (Mo. Oct. 31, 2017), the Missouri high court found that the parties’ incorporation of the AAA rules was a clear and unequivocal delegation clause.  It also found that the great majority of the plaintiff’s challenges were not specific to the delegation provision (they applied to the arbitration agreement as a whole) and so could not be considered; the only specific challenge was plaintiff’s argument that it is unconscionable to delegate arbitrability to “a person with a direct financial interest in the outcome.”  The court dismissed that out of hand, citing Rent-A-Center.  Because the plaintiff had made no successful challenge to the delegation clause, the Missouri high court enforced it, sending the issue of the arbitration agreement’s validity to the arbitrator.

The “Summer of Arbitration” draws to a close tomorrow, if you can believe it.  (On the first day of fall, it is supposed to be 91 degrees in Minnesota.  Yikes.)  But before I close that chapter, let’s take a look at a theme that emerged in these last weeks: non-signatories losing their attempts to compel arbitration (see last post).

In one case, Google’s self-driving car project, Waymo, sued Uber (and others) for misappropriating trade secrets.  Waymo LLC v. Uber Technologies, Inc., 2017 WL 4018404 (Fed. Cir. Sept. 13, 2017).  Although no defendant had an arbitration agreement with Waymo, they moved to compel arbitration based on an arbitration agreement between Waymo and its former employee.   (The employee allegedly brought the secrets to Uber after downloading 14,000 Waymo files.  That is a lot of thumb drives.)  Defendants argued that equitable estoppel applied to compel arbitration, because the source of the claims was the employee’s breach of his employment agreement.  However, the district court  and appellate court found the complaint did not allege any breach of the employment agreement, and did not rely on or use the terms of the employment agreement as the foundation of its claims.  Therefore, Waymo did not have to abide by the terms of the arbitration clause in the employment agreement.

Non-signatories got the same result in White v. Sunoco, Inc., 2017 WL 3864616 (3d Cir. Sept. 5, 2017).  In that case, a putative class of plaintiffs sued Sunoco, alleging fraud and misrepresentations induced them to get a Sunoco Rewards Card from Citibank.  The plaintiffs alleged they were promised rewards like a five cent/gallon discount on gas purchases, but they did not receive the rewards.  Sunoco moved to compel arbitration based on the credit card agreement between the plaintiffs and Citibank.  The district court denied the motion and the Third Circuit affirmed.  Critically, it found that neither of the situations were present that support applying equitable estoppel: concerted conduct between the Sunoco and Citibank; or plaintiff’s reliance on the credit card agreement.  However, the dissenting judge found that the promotional materials should be considered an integrated agreement with the credit card, such that Sunoco was a party to the deal.

Again in In Re Henson, 2017 WL 3862458 (9th Cir. Sept. 5, 2017), the non-signatory was unable to compel arbitration.  Verizon customers brought a claim against a “middle man” for internet advertisements; that middle man had contracted with Verizon to collect data from users’ mobile devices and then deliver targeted advertisements to them.  The middle man moved to compel arbitration based on the customers’ arbitration agreement with Verizon.  The district court granted the motion based on equitable estoppel, and the plaintiff asked the court of appeals for a writ of mandamus to vacate the order.  The Ninth Circuit found the relevant factors weighed “heavily in favor” of granting the writ.  The key factors in favor of vacating the order compelling arbitration were: the fact that the plaintiff could not arbitrate in a representative or class capacity; the district court erred in finding equitable estoppel because the claims against the middle man did not rely on terms from Verizon’s customer agreement, and there were no allegations of collusion.

So, is equitable estoppel losing favor with the courts, or are defendants just trying to use it in situations where it doesn’t belong?

In two recent decisions, the Alabama Supreme Court made clear that if an arbitration clause specifies it only applies to disputes between the two parties who sign the clause, that will be strictly enforced.  No third party can enforce the arbitration agreement.

In Nissan N. Am. v. Scott, 2017 WL 3446129 (Ala. Aug. 11, 2017), a customer brought suit in court against Nissan and its dealership, after her car (a “Juke” in case you are curious) spontaneously caught fire. The purchase agreement between the customer and dealership stated, in part, that “all claims, demands, disputes . . . between them arising from…the sale” shall be settled by binding arbitration. The dealership moved to compel arbitration. The customer did not dispute her obligation to arbitrate with the dealership, but said she didn’t want to proceed in arbitration with the dealership and also in court against Nissan (a position she shifted on appeal). So, the trial court sent the whole thing to arbitration.

Unlike in the Toyota case a few years ago (a putative class action), Nissan objected to going to arbitration and appealed. The Alabama Supreme Court noted that “judicial economy . . . is not a proper basis for compelling arbitration against a nonsignatory.” Furthermore, it found the scope of the arbitration clause was limited to disputes between the dealership and the customer.

Curiously, the Alabama Supreme Court resolved a very similar case just a week before adjudicating the Juke. In Daphne Automotive, LLC v. Eastern Shore Neurology Clinic, Inc., 2017 WL 3446127 (Ala. Aug. 11, 2017), an employer sued a car dealership after the title to a car it purchased for use by an employee got bungled. In short, title was supposed to be in the employee’s name, but listing the employer as lienholder. The dealership neglected to list the employer as the lienholder.  The purchase agreement for the car was signed by the employee and provided for arbitration of disputes between the employee and the dealership.

No one would have even noticed that mistake if the employee had not gotten fired and refused to return the car. (And then the Sheriff’s office attempted to arrest the boss. Drama!) At that point, the truth came tumbling out and the employer sued the dealership. The dealership moved to compel arbitration and the trial court denied the motion. On appeal, the court found it did not need to address whether the employer was a third-party beneficiary (and therefore could enforce the arbitration clause) or even whether the doctrine of equitable estoppel applied to force arbitration. Instead, the court found the scope of the arbitration agreements themselves were “limited to disputes that arise ‘between them,’ i.e. the ‘buyer/lessor’ [employee] and the ‘dealer[ship]’”. “Stated differently, the language employed in the arbitration agreements is not broad enough to compass the plaintiffs who are nonsignatories to those agreements.”

This is an important drafting lesson.  If the arbitration clause is being placed in a consumer contract, and the consumer is likely to sue related parties, it is worth thinking about whether to broaden the scope of the arbitration clause to include those claims as well.

If you are a party that wants courts to rigidly enforce delegation clauses – sending questions about even the validity of the agreement to arbitration – then you will appreciate a new decision from the Tenth Circuit. In Belnap v. Iasis Healthcare, __ F.3d __, 2017 WL 56277 (10th Cir. Jan. 5, 2017), the court refused to do even a spot check of whether defendant’s claims of arbitrability were accurate and enforced the parties’ delegation clause.

Belnap involved a surgeon suing a medical center, its parent company, four doctors on its Medical Executive Committee, and its “risk manager,” for notifying data banks that he had been suspended, but not notifying all relevant organizations when it later vacated his suspension.  The surgeon’s agreement with the medical center had a dispute resolution clause that called for first mediation and then arbitration “administered by JAMS and conducted in accordance with its” rules.  Relying on that agreement, all defendants moved to compel arbitration.  The district court found the medical center could compel arbitration of one of the seven claims, but that the other six were outside the scope of the arbitration clause.  The district court rejected the non-signatories’ attempt to compel arbitration and rejected the argument that the parties had delegated questions of scope to the arbitrator.

On appeal, the Tenth Circuit began its analysis, as it should, with the question of who should decide whether the claims are arbitrable. On that question, it found that by incorporating the JAMS Rules into the agreement, the surgeon and the medical center had shown a clear and unmistakable intent to delegate questions of arbitrability to an arbitrator.  It also took exception to the fact that “some courts have suggested that the Tenth Circuit is the only federal appellate court that has deviated from this consensus.” (The consensus being that referencing arbitral rules which delegate arbitrability to an arbitrator is clear and unmistakable agreement to alter the default rule that courts decide those issues.)  It clarified a 1998 decision that had led other courts to that conclusion, thereby appearing to mend any alleged circuit split on that issue.

After finding the arbitrator should decide arguments about scope, however, the 10th Circuit still had to address another of the surgeon’s arguments supporting the court’s review.  The surgeon asked the 10th Circuit to “adopt the ‘wholly groundless’ approach of the Fifth, Sixth, and Federal Circuits.”    That approach allows a district court, after finding the parties delegated arbitrability, to conduct a smell test of sorts: whether the assertion of arbitrability is “wholly groundless.”  The idea is, let’s not let parties with delegation clauses go around enforcing them willy nilly, even in instances where there is no legitimate basis for the claim to be arbitrated.  That would force the plaintiffs to waste time and resources going to arbitration, just to be sent back to court again (we hope).

However, the 10th Circuit “decline[d] to adopt the ‘wholly groundless’ approach.”  It found it is in tension with the inflexible language of SCOTUS’s decisions.  It also cited multiple cases from other federal circuits that require enforcement of a delegation clause, but in fairness it appears that the “wholly groundless” approach was not presented to those appellate courts.  Therefore, there is now a split among the federal circuits regarding whether a court can at least spot-check a defendant’s claim of arbitrability before enforcing a delegation clause.

Finally, to end its arbitrability tome, the Tenth Circuit addressed whether the defendants who were not parties to the arbitration clause could also compel arbitration of the surgeon’s claims because they are “principals and agents” of the medical center. The court found against the non-signatories, finding Utah law did not support binding a parent company to an arbitration clause signed by its subsidiary, and that Utah law also did not support the individuals’ ability to compel arbitration.

Just three weeks into the year and already my pile of arbitration cases is a skyscraper! So, I will cover a lot of ground in this update.

First, the headline. Kimberly, Kourtney, and Khloe Kardashian moved to compel arbitration, although they were not signatories to the arbitration agreement.  Kroma Makeup EU v. Boldface Licensing + Branding, 2017 WL 192690 (11th Cir. Jan. 18, 2017).  Despite their celebrity status, they lost in both the Florida district court and the 11th Circuit.  The problem was that the claims they wanted to arbitrate were not within the scope of the arbitration clause, because the clause was limited to “disputes arising between [the Parties]” and they were not parties.  The court had a lot of fun with the fact that the dispute was over makeup companies, writing:

“Like makeup, Florida’s doctrine of equitable estoppel can only cover so much.  It does not provide a non-signatory with a scalpel to re-sculpt what appears on the face of a contract.”

(A defendant was also unable to compel arbitration of a non-signatory class of plaintiffs in Jones v. Singing River Health Services Foundation v. KPMG, 2017 WL 65384 (5th Cir. Jan. 5, 2017).  There, the court found the plaintiff did not rely on the contract to make their claims.)

SCOTUS. On January 13, the U.S. Supreme Court agreed to wade into the issue of whether class arbitration waivers are a violation of the federal labor laws.  The National Labor Relations Board (under the Obama Administration) has repeatedly found that they are, but a split developed among the federal courts on whether the NLRB was correct.  ( You can read more about the three cases in which cert was granted at Scotusblog.  And, yes, normally SCOTUS action on arbitration would be my headline, but I couldn’t pass up a chance to see if the Kardashians led to more blog traffic…)

California’s exception that could swallow the rule. In Prima Paint, a 1967 case, SCOTUS found that a plaintiff’s claim that a contract was induced by fraud must be sent to arbitration if that contract has an arbitration clause, as long as there is no argument that that the arbitration clause itself was induced by fraud.  But this week the 9th Circuit affirmed a finding that, under California law, there was “fraud in the inception” of a contract, making it void and the arbitration provision unenforceable.  DKS, Inc. v. Corporate Business Solutions, Inc., 2017 167475 (9th Cir. Jan. 17, 2017).  If I were a plaintiff, I might just try variations on the theme, maybe a claim of “misrepresentation in the inducement”?

Florida voids arbitration agreement as against public policy.  Without any consideration of federal preemption (maybe the parties didn’t raise it?), the Supreme Court of Florida held that the arbitration agreement in a patient’s contract with her clinic was “void as against public policy” because it excluded required provisions of a Florida statute (the Medical Malpractice Act).  Hernandez v. Crespo, 2016 WL 7406537 (Fl. Dec. 22, 2016).  In particular, the court found the contract’s arbitration clause was less favorable to the patient than the statute would have been in six ways.

Alaska says suing to collect debt does not waive the right to compel arbitration in later statutory case.  Banks had litigated debt-collection actions with credit card holders and gotten default judgments.  Later, the card holders filed statutory claims against those banks and the banks moved to compel arbitration.  Applying federal waiver law, Alaska’s Supreme Court found the banks had not waived their right to arbitrate by litigating the debts.  Hudson v. Citibank, 2016 WL 7321567 (Alaska Dec. 16, 2016).

Alabama says “ripeness” is a question for the arbitrator.  In the context of litigation over a claim of indemnification that was made before the claimant had been determined liable, the Alabama Supreme Court found that the defendant’s defense of “ripeness” had to be determined in arbitration, not in court.  “As we have held that the subject matter of the dispute is clearly within the arbitration provision, any ripeness issue must be resolved by the arbitrator, not by this Court.”  FMR Corp. v. Howard, 2017 WL 127991 (Alabama Jan. 13, 2017).

As a teaser, the Tenth Circuit also issued a blockbuster opinion recently, but it deserves its own (future) post…

While regular people count down the days to summer blockbusters that come in the form of high-paid actors fighting aliens or robots, I prefer my summer blockbusters in the form of arbitration opinions that have been months in the making (maybe finally released because the clerks are about to turn over?). Today, I report on three of these arbitration blockbusters, all from state high courts.

Blockbuster 1: New Hampshire Rejects Application of FAA.

In the most ambitious of the three decisions, the New Hampshire Supreme Court found that the FAA’s sections regarding confirming and vacating awards do not apply in state courts.  Finn v. Ballentine Partners, LLC, __ A.3d __, 2016 WL 3268852 (NH June 14, 2016) (an opinion that took five months to produce).  In that case, a company ousted one of its founders, and she instituted an arbitration challenging her termination.  She was awarded about $6.5 million.  After the company engaged in some major restructuring, which resulted in lots of cash, the ousted founder started a new arbitration.  Although the company argued her claims were barred by res judicata, the second arbitration went all the way through hearing and she was awarded another $600,000.

The New Hampshire Supreme Court refused to confirm the award.   Because the FAA allowed no avenue for vacating the award, the court based its decision on a state statute allowing courts to vacate an award for “plain mistake.”  The founder had argued that the state statute was preempted by the FAA.  The court responded that “we conclude that §§ 9-11 of the FAA apply only to arbitration review proceedings commenced in federal court.”  WAIT, WHAT?? (Truly, this stuff is what keeps me blogging.  There is never a dull moment with state courts and arbitration law.)*  The court essentially found that since most of the state court cases that have ended up at SCOTUS were about enforcing arbitration agreements in the first place, enforcing arbitration agreements is the limit of the FAA’s application in state courts.  (“Preemption… is at its apex when parties cannot get to arbitration…  In contrast, state rules . . . without the potential consequence of invalidating an arbitration agreement are not preempted.”)  Having gotten that pesky FAA out of the way, the court easily found that the failure to apply res judicata as the court interprets it was a “plain mistake” and reversible error.

Blockbuster 2: Michigan Allows Law Firm To Compel Arbitration Of Suit Against Its Principals

Michigan’s decision has more interesting facts but less of a jaw-dropping result.   In Altobell v. Hartmann, __ N.W.2d__, 2015 WL 3247615 (Mich. June 13, 2016), a principal in a law firm had gotten the chance to be an assistant football coach at the University of Alabama.  (What attorney has a second act as a football coach?  I imagine him giving his clients half-time type pep talks during trial: “Clear eyes.  Full hearts.  Can’t lose!”)   He got the impression that his firm would allow him to keep his ownership interest for a year, but the firm audibled and declared the coach had withdrawn from the partnership.  No law firm money was coming his way.

The coach then sued seven principals of the law firm in court, and the firm moved to compel arbitration.  Although the lower courts had found that naming individual defendants was sufficient to avoid his arbitration agreement with the firm, the Michigan Supreme Court sided with common sense. The arbitration agreement called for binding arbitration of any dispute “between the Firm…and any current or former Principal.”  The court found it “must consider the concept of agency” in interpreting whether the firm was meant to include the individuals who makes its decisions.  Therefore, the court found claims against the individual defendants were arbitrable, and the coach’s claims were also within the scope of the arbitration agreement.

Blockbuster 3: Kentucky Finds CPA Determination Is Not “Arbitration”

Kentucky waded into the muddy issue of defining arbitration in The Kentucky Shakespeare Festival, Inc. v. Dunaway, __ S.W.3d__, 2016 WL 3371085 (Ky. June 16, 2016).  In that case, a theater fired its director but agreed to pay his bonus for 2013.  The agreement noted that “the parties agree to abide by the determination of the … certified public accountants…in case of a dispute as to the true amount of the net profits, and each party agrees to accept such determination as final.”  After the CPAs concluded the director was entitled to no bonus, the director filed suit.  A year later, the theater filed for summary judgment, arguing the CPA determination was a binding arbitration award.  The district court denied the motion and the intermediate appellate court agreed.

The Kentucky Supreme Court affirmed for two reasons. First, it found even if the language was binding, it related only to “net profits” not to the director’s bonus.  But more interestingly, it rejected the concept that this was an arbitration clause, as it “makes no express reference to arbitration”, did not allow for “fundamental components of due process” like presenting evidence and cross-examining witnesses, and the agreement had a general venue provision selecting Kentucky state court.

Speaking of defining arbitration, watch for an upcoming post about how courts around the country are trying to put some parameters on what is and is not an arbitration. 


*Would love to hear from any academic types who have looked into this argument. What about these statements from SCOTUS, not limited to Sections 2-4 of the FAA??

  • “State and federal courts must enforce the Federal Arbitration Act (FAA), 9 U.S.C. § 1 et seq., with respect to all arbitration agreements covered by that statute.” Marmet Health Care Ctr., Inc. v. Brown, 132 S. Ct. 1201, 1202, 182 L. Ed. 2d 42 (2012).
  • “It is well settled that ‘the substantive law the Act created [is] applicable in state and federal courts.’” Nitro-Lift Technologies, LLC v. Howard, 133 S.Ct. 500, 503 (2012).

What are the defining characteristics of an arbitration agreement? The dissent in a new 9th Circuit case took on that vexing issue, while the majority sidestepped it altogether while refusing to compel arbitration.

In Boardman v. Pacific Seafood Group, __ F.3d __, 2016 WL 1743350 (9th Cir. May 3, 2016), a group of fishermen brought antitrust claims against seafood processors in 2010.  They settled in 2012, and Paragraph 3(a) of the settlement agreement provided:

In the event that [] Pacific Seafood and Ocean Gold intend to enter into any new agreement that requires Pacific Seafood Group to act as the exclusive marketer of any seafood product produced by Ocean Gold Seafoods, [defendants] shall first give 60 days’ notice to class counsel and…an opportunity to object to the agreement. In the event of an objection to the new contractual arrangement, Judge Hogan shall determine whether the proposed new agreement…may be approved.

[Hogan was a federal judge in the District of Oregon until 2012.] Pause for a moment. Does that look like an arbitration agreement to you? It never says “arbitrate,” there is no third party administering the dispute, no indication what rules would govern any arbitration, and the decision maker is a federal judge.  But, it also does not require the plaintiffs to institute a new action, and it provides for a swift resolution…

In any case, fast forward to December of 2014, when Pacific Seafood tells the fishermen that it plans to acquire Ocean Gold. The plaintiffs object, but instead of using Judge Hogan to resolve it (who had retired by then), they started a new antitrust action, alleging monopolization and violation of the settlement agreement.  In response, the defendants move to compel arbitration.  The district court denies the motion, saying that the dispute is outside the scope of the arbitration agreement.

The Ninth Circuit affirmed that decision, finding that the fishermen’s new claims were not encompassed by the language about using Judge Hogan to resolve objections. In particular, the court found that the purchase and sale agreements between the processors do not deal with the marketing of Ocean Gold’s products, and do not require that Pacific Seafood act as the exclusive marketer of Ocean Gold’s products.  (Even though Pacific Seafood would own Ocean’ Gold.)

In the words of the majority, “it need not decide whether Paragraph 3(a) of the [settlement] constitutes a valid agreement to arbitrate because we conclude that Plaintiff’s claims are not encompassed by Paragraph 3(a)’s plain language.”

The dissent, however, found that Paragraph 3(a) was an arbitration agreement, and the Plaintiff’s claims fell within it.  The dissent defined arbitration as an agreement: 1) to submit a dispute for decision by a third party; and 2) not to pursue litigation until that third-party process is complete. In this case, the dissent found that because the parties agree to submit disputes to a third party (the judge), and did not allow litigation before the judge made a decision, it “should properly be considered as an arbitration agreement.”  The dissent was unmoved by the lack of the word “arbitrate” and plaintiffs’ arguments that federal judges are precluded from serving as arbitrators.

I have written before about “accidental arbitration” clauses. This case is a reminder that anytime drafters provide for a third party to decide a dispute, that clause may be construed as an arbitration clause, and carry with it all the trappings of the Federal Arbitration Act.

On Monday of this week, after stringing the parties along for five months, SCOTUS denied cert  in a case involving the intersection between arbitration and franchise regulation.  The petition was filed in November of 2015, and after the respondent initially declined to respond, the Court specifically requested a response, and conferenced the case twice, before denying the petition.   This could be an indication that, without Scalia, the Court is less interested in arbitration issues, or at least less interested in those that will not garner five of the current eight votes.

The case is Chorley Enterprises Inc. v. Dickey’s Barbecue Restaurants, Inc., 807 F.3d 553 (4th Cir. 2015).  [I admit that I did not blog about it when it initially came out last summer because it was complicated and messy and I was feeling lazy.  But, today, I came up with a few Prince tie-ins, so I am taking it on.]  Franchisees of the barbecue chain alleged the franchisor misrepresented costs and profits, and the franchisor alleged the franchisees were in breach for poor operation of the restaurants.  The franchisor also demanded that the claims be arbitrated.

The problem is that the franchise agreement called for both arbitration and litigation in court.  First there was an “Arbitration Clause” requiring arbitration of all claims related to the franchise agreement.  Then, in a “Maryland Clause” required by the state of Maryland, the agreement said the franchisees retained their right to file a lawsuit under the Maryland Franchise Law in court.  (Maryland franchise regulations make it illegal for a franchisor to require a franchisee to waive the franchisee’s right to file a court lawsuit under the franchise statutes.)  The Fourth Circuit essentially enforced both provisions, by allowing the franchisees’ claims under the franchise statutes to proceed in court, while directing the franchisor’s contractual claims to proceed in arbitration.

In reaching its Solomonic decision, the court rejected arguments from both sides.  It rejected the franchisees’ argument that the Maryland Clause completed trumped the Arbitration Clause, reasoning that the Maryland Clause only applies to claims under the franchise statutes, and finding that the franchisees could still raise affirmative defenses based on the franchise statutes in the arbitration.  It reminded the parties that SCOTUS is just fine with piecemeal litigation, when it conforms with the parties’ contracts.

The Fourth Circuit also rejected the franchisor’s argument that the Maryland Clause was forced on it by state law in Maryland, and therefore the clause is preempted by the FAA.  Its harsh assessment of the franchisor’s options follows:

Dickey’s was not forced to do anything…It could have simply declined to do business in Maryland.  Or…it could have filed a declaratory action challenging the [state’s] position before including the Maryland Clause in its agreements.

This is a fascinating issue.  Can state agencies that regulate franchisors preclude arbitration of franchise claims?  Wouldn’t that be exactly the kind of state law that stands as an obstacle to the goals of the FAA and is therefore preempted under ConcepcionI look forward to another franchisor setting up a stronger record of state insistence on the arbitration waiver and taking another run at a preemption argument.


I’m sure Dickey’s serves ribs, unlike Prince (“ I don’t serve ribs / You better be happy that dress is still on/
I heard the rip when you sat down”).  And before I was known for being an arbitration geek, I was known for being a Prince geek.  As we are all mourning today in Minneapolis, I used some “purple” in today’s title and image.  If you want a recommendation for a great song that is outside the usual Prince play list, try “How Come U Don’t Call Me Anymore?”

Three federal appellate courts recently affirmed lower courts’ refusal to compel arbitration.  These cases show that the federal policy favoring arbitration is not absolute – the parties must have agreed to arbitrate the claims at issue and the defendant cannot have waived its right to arbitrate by engaging in significant discovery and motion practice.

In Lloyd v. J.P. Morgan Chase & Co., __ F.3d __, 2015 WL 3937978 (2d Cir. June 29, 2015), the issue was whether putative class and collective actions by former financial advisors could proceed in court.  The employment agreements call for arbitration of “any claim or controversy … required to be arbitrated by the FINRA Rules … no claims shall be arbitrated on a  … collective or class-wide basis.”  The current FINRA Rules prohibit arbitration of any class or collective claims.  The employer moved to compel arbitration and the district court denied the motion, finding that plaintiffs’ class and collective action claims fall outside the scope of the arbitration clause.  The Second Circuit affirmed.  It engaged in a grammatical analysis of the arbitration clause (rejecting the employer’s argument about the “rule of the last antecedent”) and found that the phrase “required to be arbitrated by the FINRA Rules” modifies “claim or controversy.”  Therefore, because the current FINRA Rules did not require arbitration of class or collective actions, the claims could proceed in federal court.

In another case about whether the parties really intended to arbitrate their claims, the Eighth Circuit found that the plaintiff never accepted the terms of the contract containing the arbitration agreement, despite starting to perform under that contract.  LoRoad, LLC v. Global Expedition Vehicles, LLC, __ F.3d __, 2015 WL 3449847 (8th Cir. June 1, 2015).  The plaintiff and defendant had exchanged multiple revisions of the contract, until finally the defendant sent a version that plaintiff appeared to accept by wiring a deposit on the funds due under the contract and faxing the contract back with the signature of an (unauthorized) principal and “minor handwriting notations and changes.”  Later, however, plaintiff asserted “unfinished business” and threatened to rescind the contract, and the defendant suggested revising the contract.  Applying UCC and Missouri law, the Eighth Circuit found the plaintiff never accepted the contract.  Furthermore, even though every version of the agreement contained the same arbitration provision, the Eighth Circuit found “there was an enforceable agreement to arbitrate if, and only if, [plaintiff] proved there was a final, enforceable [contract].”  (Plaintiff had filed suit to compel arbitration.)

Finally, in a class action antitrust case, In re Cox Enterprises, Inc. Settop Cable Television Box Antitrust Litig., ___ F.3d __, 2015 WL 3875726 (10th Cir. June 24, 2015), the defendant’s motion to compel arbitration was denied because the court found the defendant waived its right to compel.  The appellate court found that the defendant waived its right by waiting until two years into the litigation – after moving to dismiss the claim, engaging in “extensive pretrial discovery,” and opposing class certification.  In particular, the district court was offended that the defendant’s failure to inform the court of the arbitration agreement until after class certification had wasted significant court resources and suggested an attempt at “multiple bites at the apple” and to “play heads I win, tails you lose.”