Validity of Arbitration Agreement

Every time I think the spate of state supreme court opinions about nursing home arbitration surely must be over, another one comes out to prove me wrong.  Last week, it was one from Alabama, finding an arbitration agreement was never formed, because the resident lacked capacity and the daughter who signed on his behalf lacked power of attorney.

In Stephan v. Millennium Nursing & Rehab Ctr., 2018 WL 4846501 (Ala. Oct. 5, 2018), the decedent’s estate sued the nursing home for wrongful death.  The nursing home moved to compel arbitration.  The trial court granted the motion to compel, and the Supreme Court of Alabama reversed.

The decedent’s daughter had signed the admission paperwork in a space provided for “signature of family member responsible for patient.”  She did not have power of attorney or any other legal authority to contract in his name.  (She also happened to be personal representative of his estate.)  In reviewing the record, the court found decedent was incapable of entering into a contract on the date of the admission documents due to his dementia.  In addition, the decedent could not have understood the effect of allowing his daughter to agree to arbitrate, so she lacked apparent authority.  Furthermore, the daughter was not personally bound to the arbitration clause, and thereby precluded from suing as personal representative, because she signed in her capacity as her father’s relative, not in her own capacity.   Therefore, the arbitration agreement never existed and could not be enforced.

One justice dissented, arguing that the daughter essentially fraudulently induced the nursing home to contract.

Here’s the key question: Is this ruling preempted by the FAA, or does it otherwise run afoul of Kindred?  I don’t think so.  Kindred involved an actual power of attorney document.  This case seems to rest on principles that most states would agree with, and would apply generally to contracts of other types.  SCOTUS is also unlikely to be interested in this case since Alabama has generally been following federal precepts about arbitration.

I would understand if not every state supreme court got the memo from last year’s SCOTUS decision on FAA preemption, Kindred, which reminded state courts that the FAA prevents state courts from imposing additional requirements on arbitration agreements that are not required for other types of contracts.  But Kentucky definitely got the memo.  The memo was addressed to Kentucky. Yet, last week the Supreme Court of Kentucky released a new decision that continues to convey hostility to arbitration and SCOTUS’s decisions interpreting the FAA.

The legal issue in Northern Ky. Area Development District v. Snyder, 2018 WL 4628143 (Ky. Sept. 27, 2018) is straightforward: Does the FAA preempt a Kentucky statute that prohibits employers from conditioning employment on an employee’s agreement to arbitrate claims.  The statute prohibits an employer from requiring an employee to “waive, arbitrate, or otherwise diminish any existing or future claim, right, or benefit to which the employee or person seeking employment would otherwise be entitled.”  In this case, the plaintiff was required to sign an arbitration agreement in order to work for the governmental entity.  When she sued over her termination, the employer moved to compel arbitration.

The trial court refused to compel arbitration.  Then the court of appeals affirmed, finding that the employer never had authority to enter into the arbitration in the first place (due to the statute), so the arbitration agreement did not technically exist.  (Too cute by half.  Plus, Justice Kagan specifically said that formation issues could also be preempted.)

The Kentucky Supreme Court affirmed.  It also concluded that the employer, a state agency, was covered by the anti-arbitration statute.  And therefore, when it conditioned employment on an agreement to arbitrate, in violation of the statute, its action was “ultra vires,” and the resulting arbitration agreement was void.  (See parenthetical above.)

The court went on to find the anti-arbitration statute at issue was not preempted by the FAA.  The decision states with an apparently straight face that the statute “does not actually attack, single out, or specifically discriminate against arbitration agreements” and did not “evidenc[e] hostility to arbitration”.  The statute “simply prevents [the employer] from conditioning employment” on the arbitration agreement. Furthermore, it notes that the statute does not just preclude arbitration agreements, but also any agreement that waives or limits an employee’s rights.

BUT HERE’S THE PROBLEM.  Kentucky’s reasoning only makes sense if we agree that arbitration is a limitation or a diminishment of the employee’s rights.  If, instead, you assume that arbitration is simply an alternative forum for resolving the employee’s full set of rights, the logic falls apart.  But, will SCOTUS really want to hear another Kentucky decision?  Kentucky is betting that it won’t.  Maybe this should not surprise anyone; Kentucky did not exactly bend to SCOTUS’s will when Kindred was remanded.  And btw, the nursing home is seeking certiorari from the remand decision, and SCOTUS just relisted it, meaning it still has a chance. (For good measure, Kentucky’s high court issued a decision compelling arbitration on the same day, overruling an objection that the arbitration clause was not fully mutual.  Grimes v. GHSW Enterprises, 2018 WL 4628160 (Ky. Sept. 27, 2018).)

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Speaking of SCOTUS, Monday it denied cert in at least four arbitration cases.  Two were companion cases (from Cal. and Neb.) that sought guidance on what types of challenges can invalidate a delegation clause.  (My blog post here, SCOTUSblog here and here.)  Another presented issues regarding binding non-signatories to arbitration through equitable estoppel. The fourth involved a question of whether an employer waived its right to arbitration (Cash Biz).  (My post here, filings here.)

And – this morning, SCOTUS hears arguments in New Prime, addressing the exemption in FAA Section One.

[Thanks to @PerryCooper for alerting me to a few of these cert denials.]

The First Circuit just faced a fascinating formation issue: if a customer cannot see what she is signing, and no employee reads it to her or ensures she knows there are legal terms, is there a contract?  With Justice Souter sitting by designation on the panel, the court answered “no,” and thereby kept a class action in the courts. National Federation of the Blind v. The Container Store, Inc., 2018 WL 4378174 (1st Cir. Sept. 14, 2018).

The Container Store case involves blind plaintiffs who allege the retailer violated discrimination laws by failing to use tactile keypads on its point-of-sale (POS) devices.  In response, the retailer moved to compel individual arbitration for the plaintiffs who had enrolled in a loyalty program (which has an arbitration agreement and class action waiver).  The customers who enrolled in the loyalty program in a store alleged that they enrolled with the assistance of a sales associate, and were never presented with the terms and conditions of the program, including the arbitration provision.   In response, the retailer presented excerpts from a training manual, which instructed employees to give blind plaintiffs the opportunity to review the terms on the POS device.  Critically, the retailer did not have evidence that the employee who helped sign up the named plaintiffs had in fact read the terms and conditions to those plaintiffs or otherwise made them aware that there were any terms and conditions.  Therefore, the district court found no agreement to arbitrate was formed between the Container Store and those plaintiffs, and denied the motion to compel arbitration.

On appeal, the First Circuit affirmed.  It first disagreed with the Container Store’s argument that this dispute was one about the validity of the loyalty agreement as a whole, such that it must be heard by an arbitrator.  Instead, it concluded that this was a fundamental dispute about the formation of the arbitration agreement, which was properly addressed by the court.  (The First Circuit even got punny:  “We reject the Container Store’s attempt to re-package Plaintiffs’ arguments as one regarding validity…”)

It then got into the guts of the argument.  It affirmed the critical findings of the district court: “it is undisputed that the in-store plaintiffs had no way of accessing the terms of the loyalty program, including the arbitration agreement”; and “No store clerk actually informed them that an arbitration agreement existed as a condition of entering the loyalty program.”  Therefore, even though “inability to read” is not generally a defense to contract formation, the court found no arbitration agreement was ever formed with these plaintiffs.  Unlike other situations where plaintiffs who could not read knew or should have known that they were signing documents that implicated legal rights, in this case the court found “zero hint” that the loyalty program involved terms and conditions.

Finally, with respect to a class of plaintiffs who had signed up for the loyalty program online, and thereby did have notice of the terms and conditions, the court still denied the motion to arbitrate.  It found the arbitration agreement was illusory and therefore unenforceable under Texas law.  The court found language in the arbitration agreement gave the Container Store “the right to alter the terms of the loyalty program, including the arbitration provision, ‘at any time'” and the change would have retroactive effect, affecting even parties who had already invoked arbitration.

This case reminds me of the First Circuit’s big decision in Uber  in June, when the court found that the arbitration agreement in Uber’s terms also was not conspicuous enough to be binding.  In other words, this issue is not limited to individuals who have disabilities, but gets at the fundamental question of how much information do consumers need to validly form a contract.

This case also makes me smile because guess which firm represented the Container Store?  Sheppard Mullin, the same firm that was not able to enforce its own arbitration agreement with its client in the last post.   Rough arbitration month for those attorneys.

 

In today’s post I recount an epic battle between the Rules of Professional Conduct (tagline: saving clients from unscrupulous lawyers for over 100 years!) and the Uniform Arbitration Act (tagline: saving arbitration from hostile judges for 60 years!) in the Supreme Court of California.  Spoiler alert: the Rules of Professional Conduct win.

The story in Sheppard, Mullin, Richter & Hampton, LLP v. J-M Manufacturing Co., 2018 WL 4137103 (Cal. Aug. 30, 2018), begins with a “large law firm” [ed: with too many names] taking over the defense of J-M in a qui tam action in federal court in March of 2010.  The problem was that one of the public entities that had been identified as a real party in interest in the qui tam case was also a client of the firm (for employment matters).  Because both clients had signed engagement letters with general language waiving potential conflicts, the firm concluded it could take on the qui tam action.

The SMRH firm defended J-M for just one year before its employment client moved to disqualify it.  In that time, the firm had put in 10,000 hours defending J-M, and was still owed over one million dollars in fees.  The district court disqualified the firm based on the firm’s failure to adequately inform the employment client and J-M of the adversity before obtaining waivers, as required by the Rules of Professional Conduct.

At that point, the law firm sought its million dollars of unpaid fees from J-M in a state court action, and J-M in turn sought disgorgement of the two million dollars it had already paid.  The law firm successfully moved to compel arbitration, with the trial court dismissing J-M’s argument that the conflict of interest made the whole contract illegal and unenforceable. (And, the Court of Appeals refused a discretionary review which could have avoided the wasted fees of the arbitration.)

A panel of arbitrators awarded the law firm more than $1.3 million.  The parties were then back in state court with cross-motions to confirm and vacate the award.  The trial court confirmed the award.  However, the Court of Appeal reversed.

On appeal, the Supreme Court of California agreed that the arbitration award must be vacated.  It rested its decision on precedent from 1949, noting that “an agreement to arbitrate is invalid and unenforceable if it is made as part of a contract that is invalid and unenforceable because it violates public policy.”  In this case, the court found that the Rules of Professional Conduct were an expression of public policy, such that a violation of those rules could render an arbitration agreement void.  And it also found that the firm’s failure to give both of its clients notice of the actual adversity, and obtain informed consent of the representation, was a violation that tainted the entire contract and made it illegal.  (For you ethics geeks, the rule violated was 3-310(C)(3).)

Because the contract between the law firm and J-M was unenforceable, the court found the firm was “not entitled to the benefit of the arbitrators’ decision” and the parties could resume “where they were before the case took its unwarranted detour to arbitration.”  (Not sure why the court refused to say it was vacating the arbitration award.)  But, don’t shed too many tears for the lawyers.  The law firm will be able to argue in the trial court regarding whether it is entitled to any of its fees under the equitable doctrine of quantum meruit.  (Two judges dissented from that last part, finding that the ethical conflict should prevent the firm from recovering at all.)

I leave it to other blogs to discuss the ethical issues for lawyers present here, and to therapists and firm counsel to address the rising panic that lawyers may feel when reading this opinion.  For my purpose, this case is further demonstration that the type of arbitration agreement that is most susceptible to arguments of invalidity is the one between an attorney and client.  (Recall the recent decision in Maine.)  It is also interesting in that it does not discuss whether J-M “waived” its objection to arbitrability at all by participating in the arbitration, indeed there is no discussion of whether or how often J-M raised its objection during the arbitration.  That is a sharp contrast to the rule cited by the 9th Circuit in the Asarco decision (summarized last post), and an example of how inconsistent the rules are regarding waiver.

Almost a year ago, the Second Circuit praised the clean, readable design of Uber’s app.   Because the reference to Uber’s terms of service was not cluttered and hyperlinked to the actual terms, the Second Circuit held Uber could enforce its arbitration agreement and the class action waiver within it.  But, just last week, the First Circuit disagreed.  In Cullinane v. Uber Technologies, Inc., 2018 WL 3099388 (1st Cir. June 25, 2018), it refused to enforce an arbitration clause in Uber’s terms of service and allowed a putative class action to proceed.  The First Circuit found customers were not reasonably notified of Uber’s terms and conditions, because the hyperlink to those terms was not conspicuous.

The Cullinane opinion was applying Massachusetts law on contract formation.  Massachusetts has not specifically addressed online agreements (or smart phone apps), but in analogous contexts has held that forum selection clauses should be enforced if they are “reasonably communicated and accepted.”  In particular, there must be “reasonably conspicuous notice of the existence of contract terms and unambiguous manifestation of assent.”  The Meyer opinion was applying California law on contract formation.  But the test was identical, because both states had borrowed it from a Second Circuit decision about Netscape.  So, the state law at issue does not explain the different outcome.

The one thing that might explain the different outcome is that the two federal appellate courts appear to have analyzed slightly different versions of Uber’s app.  In Cullinane, the lead plaintiffs had signed up between Dec. 31, 2012 and January 10, 2014.  (The court reproduced the actual screen shots early in its opinion.)  In Meyer, the lead plaintiff had signed up in October, 2014, and Uber had altered the design of its sign-up screens.  (There, the screen shot is an addendum to its opinion.)  For example, the background was now white in late 2014, instead of black, and the “Terms of Service & Privacy Policy” were in teal, instead of white text.

And, those are some of the aspects of the design that the First Circuit pointed to as critical.  It noted that hyperlinked terms are usually in blue text and underlined, but that the Cullinane plaintiffs’ were faced with hyperlinked “Terms of Service” that were not blue or underlined.  Instead, they were in white text in a gray box, no different than other non-hyperlinked text like “scan your card” on the same screen.   In addition, the First Circuit found the text stating “by creating an Uber account you agree to the [Terms]” was insufficiently conspicuous for similar reasons.  For those reasons, the Cullinane opinion found “the Plaintiffs were not reasonably notified of the terms of the Agreement, they did not provide their unambiguous assent to those terms.”

This is another example of how unsettled some aspects of arbitration law are (and maybe consumer contracting in general).  In Meyer, the district court had denied Uber’s motion to compel arbitration, and the appellate court reversed, granting the motion to compel arbitration.  And in Cullinane, the district court had granted Uber’s motion to compel arbitration, and the appellate court reversed, denying the motion to compel arbitration.  Those four courts were applying the exact same legal standard of conspicuousness, and reached opposite conclusions in the span of less than a year.

The lesson here is two-fold.  First, there is no clear standard for when terms on a website (or on a receipt, or in a box) are sufficiently conspicuous, so judges are left to their own devices (pun intended) to answer that question.  Second, unless an on-line provider wants judges — who are likely untrained in the psychology of consumer design related to five inch screens (and may not even have any apps) — to keep on getting to whatever result they please, the only solution is to require a consumer to actually click “I agree” after viewing a screen of the terms and conditions.  Unless, of course, SCOTUS grants certiorari of this new “circuit split” and issues guidance…

 

I am a true arbitration nerd.  But, when SCOTUS takes a THIRD arbitration case for its upcoming term, I wonder if the Justices are more obsessed with arbitration than I am.  (Reminder of the other two here.)  If they hear about the same total number of cases as this year (69), arbitration will make up more than 4% of their docket.  Now, 4% isn’t huge.  For reference, intellectual property cases made up less than 4% of cases filed in federal district courts last year, and there were three I.P. cases decided by SCOTUS (two on inter partes review and the WesternGeco case).  At least I.P. cases have a category in the annual judiciary report, though.  That’s more than arbitration can say.  And still, it has three cases before the Supremes.

Enough stats, what is this case?  It is Henry Schein Inc. v. Archer and White Sales Inc., in which SCOTUS is going to resolve the circuit split over the “wholly groundless” doctrine.  Given how the NLRB decision just came out, I don’t think I’m stepping too far out on a limb if I predict: “wholly groundless” will be grounded.  (Maybe even “grounded wholly?”  Seriously, there has got to be some good word play possible, but I am too tired from watching the World Cup to develop it.)  Put simply, that doctrine will not stand in the way of any future delegation clauses.

(Thanks to Mark Kantor for being the first to tell me certiorari was granted in this case.)

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Switching gears, there are three new decisions from state high courts on the arbitrability of claims against nursing homes.  Two enforce the arbitration clauses, and one decidedly does not.

Nebraska and Colorado issued the pro-arbitration decisions, in both cases reversing a trial court’s refusal to enforce arbitration agreements.  In Colorow Health Care, LLC v. Fischer, 2018 WL 2771051 (Colo. June 11, 2018), the district court denied the nursing home’s motion to compel arbitration because it was not in bold text, as required by a state statute.  Without any discussion of the FAA (which would have been a much easier ground for reversal), the Colorado Supreme Court found that the statute only requires substantial compliance, and the defendant had substantially complied (by including the right language, in a larger font size than required, just not in bold). In Heineman v. Evangelical Lutheran Good Samaritan Society, 300 Neb. 187 (June 8, 2018), the district court had found the arbitration agreement lacked mutuality, violated the state arbitration statute, and violated public policy (because of the CMS rule on arbitration).  On appeal, the Supreme Court of Nebraska found mutuality, found the FAA applied and preempted the state arbitration statute, and noted that the CMS rule had been enjoined.

A week later, though, Nebraska rejected arbitrability in a different case against a nursing home.  In Cullinane v. Beverly Enterprises-Nebraska, Inc., 300 Neb. 210 (June 15, 2018), the issue was whether the arbitration agreement signed by the deceased’s husband was enforceable.  He admitted he signed all the admission documents, but stated in an affidavit that he understood he had to agree to arbitrate for his wife to be admitted to the facility.  He also stated that he did not understood he was waiving his wife’s right to a jury trial, and would not have signed if he had known that and that arbitration was optional.  Applying the FAA and state contract law, the Nebraska Supreme Court found the district court was not “clearly wrong” when it found the husband was fraudulently induced to executing the arbitration agreement for his wife.  Critically, the facility had not introduced any affidavit contradicting the alleged statements made at the time of admission.

I have been making my way through the rest of the May arbitration cases (the photo shows how high my stack got), and one thing that stands out is this: I was right.  Delegation clauses remain a hot topic in arbitration law.

Three recent cases demonstrate the power of having a delegation clause in an arbitration agreement.

The Fifth Circuit enforced a delegation clause in Edwards v. DoorDash, 2018 WL 1954090 (5th Cir. Apr. 25, 2018), a case involving a putative FLSA class action brought by “Dashers.”  Not to be confused with reindeers who pull Santa’s sleigh, these Dashers  deliver restaurant food to people’s homes.  And they all signed an Independent Contractor Agreement with an arbitration agreement.  That agreement called for AAA rules and waived class and collective actions.  In response to the filing of the class action, DoorDash successfully moved to compel individual arbitration. On appeal, the class representative argued the arbitration agreement was unconscionable.  But once the Fifth Circuit was satisfied that the independent contractor agreement was validly formed, it found the incorporation of AAA rules was a valid delegation clause that the plaintiffs had failed to challenge.  The case was sent to arbitration.

In another Fifth Circuit case, Arnold v. HomeAway, Inc., 2018 WL 2222661 (5th Cir. May 15, 2018), incorporation of AAA rules also served as the parties’ delegation clause.  In that case, consumers filed putative class action complaints against a company that facilitates short-term vacation rentals.  HomeAway argued that its 2016 terms and conditions applied, which contained an arbitration clause providing that arbitration would be governed by AAA rules and that awards would be “on an individual basis.”  The consumers argued that the 2015 terms and conditions applied, which lacked an arbitration agreement (and that any subsequent modification was invalid).  The district court denied the motion to compel arbitration, finding the arbitration agreement illusory.

On appeal, the Fifth Circuit faulted the district court for ignoring the delegation clause in the terms and conditions.  It found the incorporation of AAA rules was a clear and unmistakable delegation of questions relating to the validity of the arbitration agreement to an arbitrator.  Because the plaintiffs’ challenge to the arbitration agreement was not specific to the delegation clause, arbitration must be compelled.

Not far away, in the Supreme Court of Alabama, another delegation clause was enforced.  Eickhoff Corp. v. Warrior Met Coal, LLC, 2018 WL 2075985 (Alabama May 4, 2018), did not involve a putative class action, but something just as sexy: five agreements between the parties, only two of which had arbitration clauses (both calling for AAA rules).  When one party filed in court, the other moved to compel arbitration.  The party opposing arbitration claimed that its court claims were based on the three contracts without arbitration clauses and the trial court agreed.  The Supreme Court reversed, finding that the incorporation of AAA Rules was an enforceable delegation clause, delegating questions of scope to an arbitrator, and it should have resulted in an order compelling arbitration.

The last post focused on three recent state appellate court decisions that refused to compel arbitration or vacated an award, and this follow-up post focuses on seven recent cases that are friendly to arbitration.

My favorite is from Montana.  Although none of its arbitration decisions have been addressed by SCOTUS, Montana decided to preempt any federal preemption issues by adjusting its stance on unconscionability.  (It waited five years after the 9th Circuit put it on notice, though.)  Lenz v. FSC Sec. Corp., 2018 WL 1603927 (Mont. April 3, 2018), involves claims by investors against investment advisors over “substantial losses.”  The defendants moved to compel arbitration and the district court granted the motion.  On appeal, the Montana Supreme Court affirmed.  In its decision, it took the opportunity to clarify that the previous test it had used to determine unconscionability was improper, because it mixed unconscionability analysis with the reasonable expectations doctrine from the insurance context.  (Read this mea culpa: “We have continued to perpetuate confusion by inaccurately referencing [bad tests for unconscionability] …Even more problematic in particular regard to arbitration agreements, we have failed to recognize the manifest incompatibility of the insurance-specific reasonable expectations doctrine as a generally applicable contract principle.”)  I read that as “we do not want to be reversed by the U.S. Supreme Court.”

The others can be reviewed more quickly:

  • Substantive unconscionability cannot be established by showing only that the arbitration agreement is broad in scope.  SCI Alabama Funeral Servs. v. Hinton, 2018 WL 1559795 (Ala. March 30, 2018) [I’m a bit surprised that needed clarifying];
  • The Federal Arbitration Act applies to arbitration agreements within a common interest community’s covenants (and preempts conflicting state law).  In U.S. Home Corp. v. The Michael Ballesteros Trust, 2018 WL 1755536 (Nev. April 12, 2018), 12 homeowners argued that the FAA did not apply to the arbitration agreement in their covenants because land is traditionally a local concern.  The court found that the covenants’ larger purpose was to facilitate the creation of a community of multiple homes, and multiple out-of-state business contributed to construction of the homes.  Therefore, the FAA controlled and preempted Nevada rules requiring the same procedures as in court and requiring arbitration agreements to be more conspicuous than other text in a contract;
  • Non-signatories may compel arbitration if the plaintiff’s claims are based on facts that are “intertwined” with arbitrable claims.  Melendez v. Horning, 2018 WL 1191150 (N.D. March 8, 2018) (reversing district court order denying motion to compel arbitration);
  • Scope of arbitration agreement broad enough to encompass claims against related entity.  Bridgestone Americas Tire Operations v. Adams, 2018 WL 1355966 (Ala. March 16, 2018), concluded that where the employee’s arbitration agreement was with the “Company,” which was defined to include affiliate and related companies, the employee’s suit against a related company was arbitrable;
  • Arbitrator did not manifestly disregard contractual language in construction contract.  In ABC Building Corp. v. Ropolo Family, 2018 WL 1309761 (R.I. Mar. 14, 2018), the owner tried to vacate an arbitration award in favor of the general contractor.  It relied on contract language requiring submission of payroll records with payment applications in order to argue that the contractor could not receive additional compensation for labor without having provided that contemporaneous documentation.  However, the arbitrator considered that provision of the contract in his decision-making (and the owner had never complained), so vacatur was inappropriate (one judge dissented);
  • Delegation clause must be enforced if not specifically challenged.  Family Dollar Stores of W. Va. v. Tolliver, 2018 WL 1074947 (Feb. 27, 2018).  I know, it’s a stretch to call this one a spring decision.  But, it’s snowing in Minnesota on April 14th, so my seasons are totally confused.  That’s why we call it “Minnesnowta.”

 

The focus today is recent state appellate court decisions on arbitration. Because there are an awful lot of them, I am going to divide them roughly into those that are pro arbitration, and those that are hostile to arbitration.  This post focuses on the three relatively hostile cases (with the friendly cases coming in a sequel), on issues of scope, delegation clause, and vacatur.

In Keyes v. Dollar General Corp., 2018 WL 1755266 (Miss. April 12, 2018),  the Mississippi Supreme Court wrestled with whether claims of “malicious prosecution” are within the scope of an arbitration agreement.  Just as it did a few months ago, the court concluded those claims are not within the scope of the arbitration agreement.  Even though in Keyes, the employee’s arbitration agreement provided for arbitration of all disputes “arising out of your employment…or termination of employment” and the employee was accused of stealing a gift card, which led to a criminal complaint.  The court noted that there was no evidence the employee “contemplated” this situation and that the employer could have specifically included claims of malicious prosecution, false imprisonment, etc. in the arbitration agreement.  [Can you imagine if we all had to list every possible claim for it to be covered by an arbitration agreement?  So.  Many.  Pages.]  On a similar issue, Texas reached the opposite result.

In Citizens of Humanity, LLC v. Applied Underwriters Captive Risk Assurance Co., Inc., 299 Neb. 545 (April 6, 2018), the Nebraska Supreme Court refused to enforce the delegation clause in the parties’ agreement.  [Yes, *that* Citizens of Humanity, of fancy jean fame.]  Just as in a similar 4th Circuit case, the party wanting to avoid arbitration alleged an anti-arbitration insurance statute precluded enforcement of the arbitration agreement (under the dreaded McCarran-Ferguson doctrine, which for a long time I refused to even acknowledge on this blog for fear of getting sucked into the morass).  The party seeking to arbitrate argued that the parties’ delegation clause assigned the issue of the anti-arbitration statute to the arbitrator, and that there had been no specific challenge to the delegation clause as required by Rent-A-Center. The Nebraska Supreme Court found the challenge was sufficiently specific in this case because the amended complaint mentioned the anti-arbitration statute and sought a declaration that the arbitration agreement was invalid, and because the challenger said during its hearing that its challenge included the delegation of arbitrability.  [Well, if you uttered the magic words at oral argument, then I guess that’s good enough…]  The court went on to find the delegation clause invalid and remanded the remaining arbitrability issues to the district court.

[The Third Circuit also found that a plaintiff had asserted a sufficiently specific challenge to a delegation clause in MacDonald v. Cashcall, Inc., 2018 WL 1056942 (Feb. 27, 2018).  But there, the complaint alleged that “any provision requirement that the enforceability of the arbitration procedure must be decided through arbitration is [] illusory and unenforceable.”  And the plaintiff’s brief at least stated that the delegation clause had the same defect as the arbitration provision.]

Last but not least, the Minnesota Court of Appeals issued a decision vacating an arbitration award for violating public policy. In City of Richfield v. Law Enforcement Labor Servs., Inc., 2018 WL 1701916 (Minn. Ct. App. April 9, 2018), the city terminated a police officer following his improper use of force in a traffic stop and failure to self-report that force.  The officer challenged his discharge in arbitration, and the arbitrator found the use of force was not excessive and that the failure to report it was not malicious, and ordered the city to reinstate him.  The city appealed the award.  The district court refused to vacate the award, but the appellate court found vacatur appropriate under the public-policy exception.  The court looked to the officer’s previous failures to report his use of force and found “the interest of the public must be given precedence over the arbitration award.”  The court noted its decision is rare and unusual, but that it did “not take this action lightly.”

A new Seventh Circuit case answers the age-old question: if a fourteen-year-old swipes her mom’s credit card to complete a smoothie purchase at the mall, is she bound to the credit card agreement?

The case, A.D. v. Credit One Bank, N.A., __ F.3d __, 2018 WL 1414907 (Mar. 22. 2018), addressed whether the lead plaintiff in a putative TCPA class action was bound to an arbitration agreement.  The lead plaintiff was a teenager when the case was filed, and she alleged that the defendant bank called her cell phone multiple times to collect on her mother’s credit card debt.  (A practice which is precluded by the Telephone Consumer Protection Act (TCPA).)  During the course of discovery, the defendant bank realized that it had linked the teenager’s cell phone number to the mother’s credit card account when the mother used the teen’s cell phone to call the defendant.   It also discovered that the teenager had completed a few smoothie purchases at the mall using her mother’s credit card.  The defendant bank then made a motion to compel arbitration  (and to deny class certification) based on the arbitration agreement in the mother’s cardholder agreement.  The district court granted the motion, but the Seventh Circuit reversed.

On appeal, the Seventh Circuit tried to clear up any ambiguity in its previous treatment of cases regarding non-signatories.  It established two analytical steps needed to resolve the arbitrability question: whether the daughter is directly bound by the arbitration agreement; and if not, whether any of the arguments for binding non-signatories apply.

With respect to whether the daughter was bound by the plain language of the arbitration agreement, the Court had no trouble concluding she was not.   The arbitration agreement specifically applied to claims made by authorized users of the account.  The district court had relied on one sentence in the paragraph defining “Authorized Users” of the card: “If you allow someone to use your Account, that person will be an Authorized User.”  That, plus the fact that the mother had ordered smoothies, but then sent her daughter up to the counter to swipe the credit card when the smoothies were ready, led the district court to conclude the daughter was an “authorized user” bound by the cardholder agreement.  The appellate court, however, noted that the full definition of Authorized User required multiple steps for someone to qualify, none of which had been completed for the teenage plaintiff.  Furthermore, the cardholder agreement limited authorized users to people over fifteen, and the relevant state law also did not allow fourteen-year-olds to enter into binding contracts.    Therefore, the Seventh Circuit found the “terms of the cardholder agreement do not bind” the teenage plaintiff.

With respect to the second analytical step, the Court found the principles of equitable estoppel (which can bind non-signatories to arbitration agreement) did not bind the daughter to the cardholder agreement.  Critically, equitable estoppel requires the bank to prove that the teenage daughter received a “direct benefit” from the cardholder agreement.  In this case, the bank’s whole argument hinged on the smoothie.  [I wonder if there was testimony about how much it cost, and how delicious it was!  Did it have vitamin boosters?!]  And the Court was not impressed.  It reasoned:

“any ‘benefit’ that [daughter] received with respect to the credit card was limited to following her mother’s directions to pick up the smoothies that her mother had ordered previously. . . Her mother, [] benefited from the agreement, which allowed her, not [the daughter] to buy the smoothies.”

The Court also concluded that the class action claims did not seek benefits under the cardholder agreement, which would have been a separate basis for estoppel.

As a result, the Seventh Circuit reversed the decision to grant the motion to compel arbitration and directed the district court to reconsider its denial of the class certification as well.