Scope of Arbitration Agreement

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.

A new case from the Sixth Circuit addresses whether accountants who are resolving a dispute about payments made under an agreement can also make legal determinations about the same agreement. In a 2-1 decision, the Sixth Circuit held that the scope of the dispute clause is broad enough to allow the accountants to resolve contract interpretation issues, as long as they are “relatively simple” and “closely related to accounting.” Shy v. Navistar Int’l Corp., __ F.3d__, 2015 WL 1383106 (6th Cir. March 27, 2015).

In Shy, Navistar was obligated to make annual contributions to a trust for its retired employees. The amount of the contribution was determined by a formula. If the committee managing the trust disputed the “information or calculation” provided by Navistar to support its contribution, and the parties could not resolve the dispute, the agreement provided that an accounting firm would resolve the dispute with a final and binding decision.

In this instance, the committee disputed how Navistar classified revenue when it was applying the formula. (The dissent states that “the gravamen of the [committee’s] allegations is that Navistar is engaging in a bad faith scheme to negate its substantive contractual duty to contribute a portion of its profits to fund the benefits of its retirees.”) The committee filed suit in federal court over those issues. Navistar responded by moving to compel arbitration, and the district court denied the motion. It found the claims fell within the scope of the arbitration clause, but that Navistar had waived its right to arbitrate.

On appeal, the Sixth Circuit reversed. It found that the claims were arbitrable, and that Navistar had not waived its right to arbitrate.

Why am I writing about accountants determining the application of a financial formula on an arbitration blog? Because contract clauses that allow an appraisal process to determine a value, or an accountant to resolve a financial dispute, are generally deemed arbitration clauses under federal law, even when no derivative of the word “arbitration” appears in the clause. As long as there is an independent adjudicator, substantive standards (like a contract) that apply, an opportunity for both sides to present their case, and a final decision, the process is deemed an arbitration that falls within the FAA.

And, in this decision, the Sixth Circuit found that the bean counters who determine how the formula applies were not limited to just counting beans. Because the contract clause called for the accountants to resolve disputes over “information or calculation,” the court held the language was broad enough to also encompass how Navistar categorized the information, and even “operational practices of Navistar” if those were closely tied to the information provided to the committee. The court did not exclude questions of contract interpretation from the scope of the arbitration, finding no indication the parties intended that limitation and finding the contract disputes at issue were “relatively simple” and “closely related to accounting.”

The dissent complained that the majority took the presumption in favor of arbitration too far. It accused the majority’s holding – that the accountants could determine legal questions that are closely connected to the financial questions –of having “no limiting principle.” “If applied as a general rule, any form of misconduct or bad faith dealing, or any fundamental change in the nature of the relevant business or transaction, could be characterized as an informational dispute…”

I find this an interesting case because many industries commonly use dispute mechanisms in which a specialist of some type is called on to resolve a specific type of dispute. (A panel of doctors determine whether you qualify for disability insurance, for example, or a panel of real estate appraisers determine the value of a property.) However, drafters of these clauses should take note that these clauses will be deemed arbitration clauses, and then the broad presumption of arbitrability will apply to the scope of those clauses. So, if you don’t want your bean counter to have the power to determine whether your beans are legal, these clauses must be written with carefully demarcated boundaries.

Because of the strong federal policy favoring arbitration, and cases providing that any doubt about the scope of an arbitration agreement must be resolved in favor of arbitration, it is uncommon to find a decision holding that the parties’ claims are not within the scope of their arbitration agreement.  But, the Supreme Court of Alabama held exactly that in Porter v. Williamson, __ So.3d__, 2015 WL 403081 (Ala. Jan. 30, 2015).

Porter involves a family drama in which two brothers owned investment companies, hired their nephew to work for them, and then made him a shareholder.  Twenty years later, they terminated the nephew and the litigation ensued.  The nephew claimed: 1)  specific performance of provisions of the shareholders agreement, requiring his uncles to buy his shares; 2) alternatively, rescission of the shareholders agreement; 3) misrepresentation; and 4) conversion.  The shareholder agreement’s arbitration clause said “Except for items of specific performance referred to above, any controversy or claim arising out of, resulting from or relating to this agreement shall be settled by arbitration in Birmingham, Alabama, in accordance with the Commercial Arbitration Rules of the [AAA]….”  The previous paragraph, entitled “specific performance,” allowed controversies “concerning the purchase or sale of” the shares of common stock to be heard in “a court of equity.”

The uncles moved to compel arbitration and the trial court denied it in full.  The Alabama Supreme Court took a more nuanced view, finding that the nephew’s claims 2-4 (rescission, misrepresentation, and conversion) were arbitrable.  But the claims “for specific performance and injunctive relief are not within the scope of the arbitration provision,” because they fell within the agreement’s carve-out for specific performance relating to buying and selling shares.  The court  cited SCOTUS’s Cocchi case for the proposition that “if a dispute presents multiple claims, some arbitrable and some not, the former must be sent to arbitration even if this will lead to piecemeal litigation.”

Interestingly, there is no discussion in this case that the arbitrators should have decided the scope question based on the AAA rules (which give the arbitrator authority to determine his/her own jurisdiction).  Either the uncles did not see that issue, or they chose not to raise it, hoping that the court would find it inefficient to send some, but not all, claims to arbitration, and therefore keep all the claims in court.  Also interesting is the question: what happens next?  Usually court claims are stayed pending arbitration, but in this instance, it is more logical for the court claim to go first, as some of the other claims are pled in the alternative.

Want more state court arbitration news?  Of course you do.  Here are two recent state high court decisions, both pro-arbitration:

  • The Supreme Court of California “un-vacated” an arbitration award against an employee in Richey v. AutoNation, Inc., __ P.3d __, 2015 WL 363177 (Cal. Jan. 29, 2015).  Applying the state’s arbitration act, the Court rejected the idea that the arbitrator had exceeded his power by accepting a defense not available in California. The court noted the arbitrator found other, independent grounds for the result.
  • The Supreme Court of Louisiana affirmed an arbitration award in Mack Energy Co. v. Expert Oil & Gas, LLC, __ So. 3d __, 2015 WL 403209 (La. Jan. 28, 2015) (also applying the state arbitration act).  The losing party had argued that the arbitrator exceeded his power by giving an award outside the scope of the arbitration and by ordering the production of documents during arbitration.  The court disagreed.

 

This week marks the third anniversary of this blog devoted to interpretations of the Federal Arbitration Act.  (Here’s the first post.)  After 155 posts, can there possibly be more to say?  Yes, indeed.  Three new opinions from federal courts of appeals demonstrate how new issues keep “cropping” up in arbitration law each week.

The first case has to do with crop insurance and whether an arbitrator exceeded his power.  In Davis v. Producers Agricultural Ins. Co., __ F.3d__ 2014 WL3844815 (11th Cir. Aug. 6, 2014), the district court vacated the arbitrator’s award and the Eleventh Circuit reversed.  The decision revolved around two legal issues.  One is not likely to come up for many of us (whether the arbitrator exceeded his authority by interpreting an aspect of a crop reinsurance policy that is reserved to the Federal Crop Insurance Corporation; he didn’t because the FCIC had already approved the arbitrator’s interpretation).  But the second is a harsh result that could impact many parties in arbitration.  The applicable AAA rules provided that the arbitrator must issue his opinion within 30 days of closing the proceeding, but the arbitrator did not issue the award until the 33rd day.  The losing party argued that by issuing the award late, the arbitrator had exceeded his power under Section 10, and the award should be vacated.  The Eleventh Circuit relied on a 1969 case from the 5th Circuit to find that the losing party had waived his right to argue timeliness by failing to “object at the expiration of the thirty-day period.”  This strikes me as an unrealistic standard.  What party in their right mind would aggravate an arbitrator who is about to issue an award by complaining that the decision is tardy?  None, unless that party already knew it was going to lose.

The second case is about whether an arbitration clause in a non-compete agreement is broad enough to require arbitration of claims under the Fair Labor Standards Act.  In Sanchez v. Nitro-Lift Technologies, LLC, __ F.3d__, 2014 WL 3882543 (10th Cir. Aug. 8, 2014), employees sued Nitro-Lift for violating the FLSA by not paying overtime wages.  Those employees had each signed a “Confidentiality/Non-Compete Agreement” with an arbitration clause calling for arbitration of “any dispute, difference or unresolved question” between the parties.  The district court denied Nitro-Lift’s motion to compel arbitration, finding that an arbitration clause in a non-compete can only cover issues of competition, not overtime wages.  The Tenth Circuit disagreed, finding that the arbitration clause was as broad as possible and its placement within a non-compete agreement only made it ambiguous whether the arbitration clause was intended to cover broader disputes.  Because federal law requires all ambiguities about scope to be resolved in favor of arbitration, the dispute had to be arbitrated.  The court did, however, remand the issue to the district court to determine whether the fees of arbitration precluded the plaintiffs from effectively vindicating their federal statutory rights.  (Does Nitro-Lift ring a bell?  It could be because of another time the company had its arbitration clause saved by an appellate court.)

Finally, the third case for today is about non-signatories.  In Griswold v. Coventry First LLC, __ F.3d__, 2014 WL3892995 (3d Cir. Aug. 11, 2014), Mr. Griswold bought a large life insurance policy on himself. He set up a trust to own the policy and set up Griswold LLP as the beneficiary of the trust.  About two years after purchasing the policy, Mr. Griswold used a broker to sell the policy to Coventry.  That purchase agreement between the trust and Coventry had an arbitration clause.  After disbursing the funds, Griswold LLP dissolved.  Later, Mr. Griswold sued Coventry alleging that it colluded with the broker to be the sole bidder on his policy (getting it cheap).  Coventry moved to compel arbitration, but the district court denied its motion because Mr. Griswold was not a signatory to the purchase agreement.  The Third Circuit agreed. It found that equitable estoppel did not apply to bind Mr. Griswold to the arbitration agreement in the purchase agreement because his complaint did not mention or rely on the purchase agreement.  In fact, the fraud and collusion he alleged took place before the purchase agreement was executed.  That result was particularly important in this case, because Mr. Griswold wanted to proceed as a class action, which was unavailable in arbitration.

I look forward to another year of analyzing the evolving jurisprudence under the FAA!  Thanks for joining me on the journey.

 

In recent weeks, four federal and state appellate courts have vacated district court decisions that denied motions to compel arbitration.  The courts seem to be saying to defendants with arbitration agreements: don’t worry if you lose in the trial court, we will be your Tim Howard and save you from the gaping jaws of litigation.  (I have watched *a lot* of World Cup soccer in recent weeks, folks.  That is partly to blame for the huge stack of arbitration cases waiting for me to write about them.  Well, that and the fact that judges all over the nation appear to be churning out opinions at record speed before their law clerks turn into pumpkins in August.)

These are not just run of the mill reversals, either.  One dealt with an issue of first impression and another with a wholesale gutting of twenty years of case law.

In Al Rushaid v. Nat’l Oilwell Varco, Inc., __ F.3d__, 2014 WL 2971701 (5th Cir. July 2, 2014), the plaintiff filed suit against six defendants in August 2011, but could not serve one of them, NOV Norway, until August of 2012, after the other parties had engaged in significant discovery.  NOV Norway moved to compel arbitration within three months of being served the complaint.  The district court denied the motion because a) it found the price quote did not effectively incorporate the terms containing the arbitration agreement, and b) it found NOV Norway waived its right to arbitrate by invoking the judicial process.  On appeal, the Fifth Circuit reversed on both those grounds.  It found the plain language of the price quote did incorporate a general terms and conditions document with an arbitration agreement.  And, as a matter of first impression, it found that even though all the defendants were jointly owned and controlled and represented by the same counsel, the litigation activity of its codefendants could not be imputed to NOV Norway for the purpose of determining waiver.  (The court said the outcome would change if there were a basis to pierce the defendants’ corporate veil or an alter ego situation.)

Dean v. Heritage Healthcare of Ridgeway, LLC, __S.E.2d__, 2014 WL 2771300 (S.C. June 18, 2014), involved wrongful death claims against a nursing home, and the relevant arbitration agreement said that “any arbitration proceeding that takes place under this [] Agreement shall follow the rules of the [AAA]”.  However, the AAA stopped accepting personal injury disputes based on pre-injury arbitration agreements in 2003.  The nursing home moved to compel arbitration and the trial court denied the motion.  It found that the language about the AAA rules meant that the dispute should be heard by the AAA and since the AAA was not available, the arbitration agreement was invalid.  The Supreme Court of South Carolina reversed.  But before the supremes could get to the merits, they had to overrule their own 1993 decision, which held that nursing home contracts did not involve interstate commerce.  After reviewing the intervening cases from SCOTUS, the court found the nursing home agreement does involve interstate commerce and is governed by the FAA.  On the merits, the court found that the availability of the AAA to administer the arbitration was not a material term and instead the parties’ agreement simply calls for the arbitration to be governed by the AAA rules, regardless of what entity administers the proceeding.

In a Texas case, the defendant’s motion to compel arbitration was denied after the trial court found the arbitration agreement was unconscionable because it limited the plaintiffs’ statutory remedies and had a unilateral attorneys fees provision.  While the court of appeals affirmed that result, the Supreme Court of Texas reversed.  Venture Cotton Cooperative v. Freeman, __S.W.3d__, 2014 WL 2619535 (Tex. June 13, 2014).  Importantly, the court held that the agreement’s waiver of aspects of state law was invalid, but that was insufficient to invalidate the entire arbitration agreement.  Instead, it found the “objectionable limitation on the farmers’ statutory rights” should have been severed.  (And the attorneys’ fees provision also was insufficient to invalidate the arbitration agreement.)

Finally, the Third Circuit also just vacated a district court’s decision to deny a motion to compel arbitration in Ross Dress for Less, Inc. v. VIWY, L.P., 2014 WL 2937031 (3d Cir. July 1, 2014).  In that dispute over lease payments, the lease provided (confusingly) that disputes worth less than $50,000 should be arbitrated and those worth more than $50,000 can be litigated or arbitrated at the option of either party.  However, if the tenant withheld rent and the landlord disagreed, the dispute must be determined by an arbitrator.  In this case, their were claims relating to tenant withholding along with other claims worth more than $50,000 and the parties disagreed as to whether they had to arbitrate.  The district court found that the claims were outside the scope of the arbitration clause.  But the Third Circuit looked at the “conflicting lease provisions” and relied heavily on the federal presumption in favor of arbitrability to hold that all issues in the case must be arbitrated.

The primary lesson that can be drawn from these four cases is this: if you have a colorable argument for compelling arbitration, don’t give up if you lose at the trial court level.

Because courts apply a presumption of arbitrability when they analyze whether particular claims fall within the scope of an arbitration clause, and arbitration clauses are generally drafted very broadly, I don’t usually get to write about courts finding that a dispute falls outside the scope of arbitrable claims.  But this week, both the Second and Third Circuits issued decisions holding that defendants could not compel arbitration because the plaintiffs’ claims fell outside the arbitration clause.

In Allstate Ins. Co. v. Mun, 2014 WL 1776007 (2d Cir. May 6, 2014), Allstate alleged that two New York providers had engaged in insurance fraud.  Allstate had already paid the providers for their services, and sought to recover those payments.  After Allstate sued, the providers moved to compel arbitration.  The district court denied the motion and the Second Circuit affirmed that decision.  Both courts found that the arbitration provision, although “appear[ing] quite broad,” only applied to disputes over claims for first-party benefits (i.e. the providers’ initial request for payment).  The courts reached that conclusion in part because of its interpretation of aspects of New York’s no-fault insurance statutes, which had been interpreted to require arbitration only of first party claims..

In CardioNet, Inc. v. Cigna Health Corp., 2014 WL 1778149 (3d Cir. May 6, 2014), medical device providers sued CIGNA for its decision not to pay for services related to those devices (after it had covered such services for four years).  The device company had brought two types of claims: 1) direct tort claims relating to a letter that CIGNA sent to doctors calling the devices experimental and unproven; and 2) derivative claims on behalf of individual insureds under ERISA.  CIGNA moved to compel arbitration.  The district court granted the motion, but the appellate court vacated that decision, finding both categories of claims fell outside the scope of the parties’ arbitration agreement.

The Third Circuit found the direct claims about the letter to doctors were not arbitrable.  The parties’ contract provided for arbitration of disputes “regarding the performance or interpretation of the Agreement,” and the court found that “whether CIGNA performed its obligations under the Agreement has no bearing on whether it harmed the [device company] by providing physicians with misleading information” about their services.

The Third Circuit also found that the derivative claims were outside the scope of the Agreement’s arbitration provision.  The district court had enforced the arbitration agreement because it felt to do otherwise would allow the device company to “nullify their agreement to arbitrate these claims for payment by becoming assignees of the Plan Participants’ claims.”  The Third Circuit disagreed for two reasons.  First, it found that the underlying claims did not concern the “performance or interpretation of the Agreement” and therefore the claims would not have been arbitrable even if the device company brought them directly.  Second, it found that as an assignee, the device company was in the same legal position as the plan participants, and therefore should be treated as a non-signatory even if the claims fell within the arbitration clause.  “Just as the burden of arbitration must travel with a claim, so too, must the right to litigate.”

These decisions may be part of a new direction in arbitration case law.  Courts are only authorized to decide three things: whether the parties formed an arbitration agreement; whether that agreement is valid under state and federal law; and whether the instant dispute falls within the scope of that arbitration agreement.  But SCOTUS continues to narrow (via Buckeye Check Cashing, Concepcion, Italian Colors, etc) — or should I say knock out — the potential bases for finding an arbitration agreement invalid.  It is then a very logical reaction for parties, counsel, and courts who want to get around arbitration agreements to focus on the other two categories of arguments — formation and scope.  Indeed there have been many state cases recently finding the parties never formed an arbitration agreement (often based on lack of authority).  And these two cases may be leading the way on scope.  (I note that the Third Circuit raised concerns about the “policy implications” of forcing the participants’ claims into arbitration…)

A new opinion from the Eleventh Circuit highlights an issue that can be confusing to those encountering FAA case law for the first time: when does the federal presumption of arbitrability apply?  The answer is the presumption only applies to whether the scope of an arbitration agreement is broad enough to encompass the parties’ dispute, not whether a valid arbitration agreement exists between the parties.

In Dasher v. RBC Bank (USA), __ F.3d __, 2014 WL 504704 (11th Cir. Feb. 10, 2014), the class action plaintiffs allege a bank charged excessive overdraft fees in breach of their account agreement.  While the parties were conducting discovery related to the bank’s motion to compel arbitration, the bank was acquired by another bank, who issued new account agreements to all the customers (including the named plaintiff).  The new account agreement had no agreement to arbitrate disputes; the old account agreement did.  A dispute then arose as to which account agreement controlled.

The defendant bank argued that the FAA’s presumption in favor of arbitrability should apply to find the parties still had an arbitration agreement.  The Eleventh Circuit set it straight, noting that in Granite Rock SCOTUS said courts may apply “the presumption of arbitrability only where a validly formed and enforceable arbitration agreement is ambiguous about whether it covers the dispute at hand.”  It also cited the Second Circuit which has explicitly recognized that “the presumption does not apply to disputes concerning whether an agreement to arbitrate has been made.”  In this case, because the dispute centered on whether the parties had an arbitration agreement at all, the FAA did not provide a presumption in favor of arbitrability.  (For a classic case in which the presumption operates to find a dispute falls within the scope of an arbitration agreement, despite a “lack of clarity” in the agreement, see Pureworks, Inc. v. Unique Software Solutions, Inc., 2014 WL 211831 (6th Cir. 2014).)

The Eleventh Circuit ended up finding there was no valid arbitration agreement between the Dasher plaintiffs and the bank.  The account agreements had language showing that the new agreement completely superseded the old agreement, therefore the court concluded that the absence of any arbitration clause in the new agreement was controlling.  Furthermore, even though the alleged excessive charges took place while the old agreement was effective, the court found the new agreement controlled the dispute resolution.  That was because the amendment clause stated that the “most current version” of the account agreement “will at all times govern,” which the court interpreted to mean that the parties intended the new agreement to apply retroactively.  In my view, this is a curious result, which places a great deal of reliance on very few words in the contract, and may show that the Eleventh Circuit was working hard to avoid the plaintiffs’ backup argument: that the arbitration agreement was invalid because it deterred him from vindicating his rights, an argument that is likely not supportable after Concepcion and AmEx.

In the Hall Street decision in 2008, SCOTUS held that parties could not contractually enlarge Section 10 of the Federal Arbitration Act by agreeing that a court could vacate the arbitration award for reasons not found in that section.  This week, the Ninth Circuit held that parties also cannot contractually restrict Section 10 by providing for “binding, non-appealable arbitration.”  In
re Wal-Mart Wage and Hour Employment Practices Litig., __ F.3d __, 2013 WL 6605350 (9th Cir. Dec. 17, 2013).

The dispute in In re Wal-Mart was among the successful counsel for plaintiffs in an employment suit.  The attorneys had been awarded $28 million in attorneys’ fees, but could not agree on how to divvy it up among the various firms who had handled the case.  They had an agreement calling for “binding, non-appealable arbitration” and they arbitrated their fee dispute.

After the arbitrator issued an award splitting up fees, one group of attorneys was unhappy and moved to vacate the award.  The district court confirmed the award and the unhappy attorneys appealed.

On appeal, the happy attorneys argued that the Ninth Circuit lacked jurisdiction to hear the dispute, because the parties had contractually agreed that the arbitration would not be appealable.  The Ninth Circuit disagreed for two reasons.  First, using an analysis similar to Hall Street, the court found the statutory language in the FAA “carries no hint of flexibility.”  And second, allowing parties to opt out of Section 10 review “would also frustrate Congress’s attempt to ensure a minimum level of due process for parties to an arbitration.”

This decision is important in that it protects consumers and other parties without negotiating power from arbitration agreements that write out even the minimal appeal bases in Section 10.  However, it also runs counter to SCOTUS’s oft-repeated point that the purpose of the FAA is to enforce arbitration agreements.  If that is true, why not also enforce an agreement that the award is final and not appealable?  Thoughts to ponder over some egg nog…

Now that we know the Supreme Court is not going to be addressing non-signatories’ ability to compel arbitration this term (at least not in the Toyota case), we can take a moment to look at what lower courts are doing with that issue.   In short, the trend is for courts to clarify that it is very difficult for defendants who do not have an arbitration agreement with the plaintiff (non-signatories) to use equitable estoppel to compel arbitration of the plaintiff’s claims based on the plaintiff’s arbitration agreement with another party.

In Rajagopalan v. NoteWorld, LLC, 718 F.3d 844 (9th Cir. 2013), an engineer who could not repay his school loans signed up with a company offering debt solutions.  His contract with the debt solutions company contained an arbitration clause.  When the debt solutions did not materialize, the engineer sued a third party, NoteWorld, which had withdrawn money from his bank account as part of the debt solution program and refused to refund it.  NoteWorld had no agreement to arbitrate with the engineer, but sought to compel arbitration anyway, relying in part on equitable estoppel.  With respect to the equitable estoppel doctrine, the Ninth Circuit made clear that there is a nearly insurmountable burden for a non-signatory defendant to meet to compel arbitration.  “We have never previously allowed a non-signatory defendant to invoke equitable estoppel against a signatory plaintiff, and we decline to expand the doctrine here.”

Later this summer, the Ninth Circuit tackled the topic again in Murphy v. DirecTV, Inc., 724 F.3d 1218 (9th Cir. 2013).  In that case, customers alleged that Best Buy and DirecTV worked together to defraud and mislead DirecTV purchasers.  Only DirecTV had an arbitration agreement with the consumers and it precluded class actions.  Yet, Best Buy moved to compel arbitration and the district court granted the motion, finding that equitable estoppel compelled that result.  The Ninth Circuit reversed.  It found that neither of the two tests for equitable estoppel had been met.  First, the plaintiffs’ claims against Best Buy did not rely on the substance of their agreement with DirecTV, since the claims focused on the methods of selling the product.  And second, the alleged concerted action between the signatory (DirecTV) and nonsignatory (Best Buy) was not “intimately connected with the obligations of the underlying agreement.”

These two Ninth Circuit decisions are in addition to the four decisions from the Fifth and Eighth Circuits denying non-signatories the right to compel arbitration (discussed in previous posts) and the Ninth Circuit’s Toyota decision in February, finding Toyota could not rely on the arbitration clause in the agreement between the car buyers and the car dealerships.

The federal courts are not the only ones addressing this issue.  A Texas Court of Appeals recently rejected a defendant’s attempts to use equitable estoppel to compel arbitration in VSR Fin. Servs., Inc. v. McLendon, __ S.W.3d __, 2013 WL 4083853 (Tex. Ct. App. Aug. 14, 2013).  And in August, the New Jersey Supreme Court significantly increased the burden for a non-signatory seeking to compel arbitration by demanding a showing of detrimental reliance.  In Hirsch v. Amper Fin. Servs., 71 A.3d 849 (N.J. 2013), New Jersey’s highest court found it was not enough to show a plaintiff’s claims were intertwined with the contract containing an arbitration clause, “the doctrine of equitable estoppel does not apply absent proof that a party detrimentally rel[ied] on another party’s conduct.”  Because the non-signatories had no proof that they knew of the arbitration clause between plaintiffs and the signatory, let alone relied on benefiting from it, they could not compel arbitration.

The lesson here for potential plaintiffs is that it is possible to avoid an arbitration agreement (especially one precluding class actions) if you can make your claims against a non-signatory.  And the lesson for potential defendants is you should consider asking some of your business partners to include you as a third-party beneficiary in their contracts with consumers.

After reading more than 40 decisions about arbitration from state high courts, issued just in the past eight months, I have two bits of wisdom to share.  First, that is not the best way to spend your summer vacation, even for a devoted arbitration nerd.  And second, there are arbitration issues percolating in state courts that counsel practicing in this area should be aware of.  In particular, state courts are: 1) working hard to avoid having the FAA preempt their developed defenses to arbitration clauses; and 2) confronting a lot of issues relating to whether there is an agreement to arbitrate at all (especially authority issues in nursing home settings).

PREEMPTION

A big category of cases relate to preemption.  Most of these cases involve state courts trying to explain how application of state law is not preempted by federal law under Concepcion.  (One case that falls under this heading, Feeney, has already been reversed.)

The Supreme Court of Washington, in particular, spilled a lot of ink explaining why Concepcion did not bar it from reaching various results.  For example, it held that an arbitration clause requiring that the demand be made within 30 days, the hearing take place in California, and the prevailing party recover attorneys fees was unconscionable.  Gandee v. LDL Freedom Enterprises, Inc., 293 P.3d 1197 (Wash. 2013).  It found Concepcion did not preclude that result.  Washington also concluded that Concepcion did not preclude it from enforcing a state statute prohibiting insurance contracts from calling for arbitration (it held FAA preemption was essentially preempted by the McCarran-Ferguson Act).  State v. James River Ins. Co., 292 P.3d 118 (Wash. 2013).  Finally, Washington refused to vacate an arbitration award in favor of Subway franchisees based on the franchisor’s argument that its arbitration agreement called for arbitration in Connecticut, but the Washington court compelled arbitration in Washington.  Saleemi v. Doctor’s Assocs., Inc., 292 P.3d 108 (Wash. 2013).  While rejecting the franchisor’s preemption arguments, the court said (pre Amex) “[w]hether Concepcion reaches beyond class arbitraiton procedures is subject to debate.”  Id.

Montana found that Concepcion did not prevent it from declaring the arbitration agreement in a payday loan unconscionable.  Kelker v. Geneva-Roth Ventures, Inc., 303 P.3d 777 (Mont. 2013).  The Supreme Court of Montana applied a Montana rule invalidating adhesion contracts if they are not within the weaker party’s “reasonable expectations” or are otherwise oppressive.  In applying the rule, it focused on the facts that the arbitration clause was not conspicuous, the plaintiff did not understand it, the plaintiff was less sophisticated than the lender, and the clause was vague.  Two justices dissented, noting that Montana has only applied the rule to evaluate arbitration clauses and therefore it is preempted under the Concepcion reasoning.  Those two justices got the last laugh — the Ninth Circuit in July found that Montana’s rule is preempted under Concepcion.

In another case involving a payday lender, the Supreme Court of Florida concluded the lower court’s ruling was preempted.  McKenzie Check Advance of Florida, LLC v. Betts, 112 So. 3d 1176  (Fla. 2013).  In that case, the trial court found the arbitration clause was void as against public policy because it would prevent consumers from vindicating their state statutory rights.  The high court, however, found that Concepcion prevented Florida from adopting its own state-law version of the Green Tree rule at issue in Amex (which only applies to federal statutes, and has now been decimated in any case). 

Finally, addressing both nursing home arbitration and preemption, New Mexico held that the party alleging an arbitration agreement is unconscionable bears the burden of proving that unconscionablility, even when the other party is a nursing home accused of negligent care.  Strausberg v. Laurel Healthcare Providers, LLC, __ P.3d __, 2013 WL 3226753 (N.M. 2013).  The court noted that to adopt the opposite rule would be preempted by the FAA.

AUTHORITY

Really, the heading for this could be “Nursing Home Arbitration Litigation,” because in 2013 there have already been five separate opinions from state high courts relating to when wrongful death or negligence claims against nursing homes have to be arbitrated.  In general, the issue is: did the relative who signed documents for the nursing home resident have the resident’s authority to sign on his or her behalf?  Without proof of authority, state courts have concluded that there is no valid arbitration agreement in the nursing home admission documents.  E.g., SSC Montgomery Cedar Crest Ooperating Co. v. Bolding, __ So. 3d__, 2013 WL 1173975 (Ala. 2013); Courtyard Gardens Health & Rehab., LLC v. Quarles, __ S.W.3d __, 2013 WL 2361051 (Ark. 2013); GGNSC Batesville, LLC v. Johnson,  109 So. 3d 562 (Miss. 2013); State v. King, 740 S.E.2d 66 (W. Va. 2013).  However, if the resident dies, his or her estate and heirs are bound by an arbitration agreement the resident actually signed.  Laizure v. Avante at Leesburg, Inc., 109 So. 3d 752 (Fla. 2013).

NON-SIGNATORIES

Another issue that comes up regularly in both state and federal courts is when arbitration can be enforced by or against non-signatories.  On that topic, the Supreme Court of New Jersey found that the lower courts had erred by allowing a non-signatory to compel arbitration.  Hirsch v. Amper Fin. Servs., LLC, __ A.3d __, 2013 WL 4005282 (N.J. 2013).  The court disliked the way the lower courts had applied the equitable estoppel doctrine.  “Equitable estoppel is more properly viewed as a shield to prevent injustice rather than a sword to compel arbitration.”  Id. at *1.   Even when the parties and claims are intertwined, New Jersey will not compel arbitration without proof of detrimental reliance.

DID THE PARTIES INTEND ARBITRATION TO BE PART OF THE AGREEMENT?

The Supreme Court of Iowa recently concluded that an agreement to arbitrate existed, even though all negotiations of the contract were oral and did not mention arbitration.  Bartlett Grain Co. v. Sheeder, 829 N.W.2d 18 (Iowa 2013).  Over the course of several phone calls, Sheeder agreed to sell corn to Bartlett at particular prices on certain dates.  Bartlett then sent Sheeder confirmation forms to sign, which provided for arbitration under the National Grain Feed Association arbitration rules.  The court relied largely on the UCC to reject Sheeder’s argument that he was not bound by the arbitration term in the confirmations.

THE ARBITRATION CLAUSE IS UNENFORCEABLE

An interesting New Mexico case found an arbitration agreement was illusory.  Much like a 2012 Fifth Circuit case applying Texas law, the New Mexico Supreme Court found the employer’s promise to arbitrate was illusory because the employer could amend or terminate its Dispute Resolution Program at any time, even after the employee’s claim accrued.  Flemma v. Halliburton Energy Servs., Inc., 303 P.3d 814 (N.M. 2013).

In addition, the Gandee decision from Washington and Kelker decision from Montana (discussed in the preemption section above) both found arbitration agreements unconscionable in consumer settings.

APPEALS

One area where state courts seem to be completely in line with the federal courts is in enforcing the limited bases for appealing arbitration awards.  So far this year, for example, Mississippi declared that “manifest disregard of the law” is not a valid basis for vacating arbitration awards under Mississippi’s arbitration act.  Robinson v. Henne, 115 So. 3d. 797 (Miss. 2013); but see C-Sculptures, LLC v. Brown, __ S.E.2d __, 2013 WL 1898379 (S.C. 2013) (applying the state uniform arbitration act, not the FAA, and vacating an award based on the arbitrator’s “manifest disregard” of state law).

New Mexico held that an employee who did not raise any objection about the scope of his arbitration proceedings with the arbitrator had waived any right to later argue that he reserved some claims for litigation.  Horne v. Los Alamos Nat’l Security, LLC, 296 P.3d 478 (N.M. 2013).  That decision is in accord with the recent decisions of the Minnesota Court of Appeals finding that parties must raise objections with arbitrators or else they are waived.

**Why this doozy of a blog post?  Because ArbitrationNation just celebrated its second birthday!  Nothing else quite says “thanks for sticking with me” like 1250 dense words… **