Validity of Arbitration Agreement

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.

 

Sometimes current events provide an occasion perfect storm to educate about arbitration basics. This is one of those occasions.

Here are questions that friends and colleagues  storming mad people have asked me in the past day or so, with my best answers:

  • Does an arbitration agreement have to be signed by both parties to be enforceable (i.e. ride out the storm)?
    • The Federal Arbitration Act provides that an arbitration agreement must be “written,” but it does not also say it must be signed by all parties.  Whether a signature is required, along with all answers about the enforceability of arbitration agreements, depends on state contract law. In general, a contract requires an offer, acceptance, and consideration. And in most states, “acceptance” of an offer can take many forms. (See, for example,  this case (about Macy’s) finding a valid agreement without one party’s signature , but these cases finding no valid agreement where a signature was missing.)
  • Do arbitrators have authority to issue temporary or ex parte injunctions?
    • It depends. Arbitrators derive their authority from the parties’ arbitration agreement. If that arbitration agreement expressly grants the power to issue emergency, temporary, or ex parte injunctions, or if the arbitration agreement incorporates rules of an administrator (like the AAA) and those rules grant the power to issue those types of injunctions, then the arbitrator has power to enjoin the parties on an emergency or temporary basis (but only the parties, otherwise non-parties will kick up a storm and vacate the award).
  • How are injunctions from arbitrators enforced?
    • Within the arbitration proceeding, a party may seek sanctions from the arbitrator if the arbitrator’s temporary injunction is violated. Those sanctions can include anything authorized by the applicable rules. (Remember in this case, when the sanction was over $600 million?  Oh, that created a sh*tstorm.) Outside the arbitration proceeding, the party wanting to enforce the injunction (whether temporary or permanent) must first obtain a final arbitration award, and then have that award confirmed in federal court. (Remember, only “final” awards can be confirmed under the Federal Arbitration Act.) After that final award is confirmed in court, it is a judgment that can be enforced like any other court judgment.
    • However, when the winning party asks a court to confirm an award, the losing party often moves to vacate the arbitration award.  And the absence of a valid arbitration agreement is a solid basis to vacate the award.  For example, the Revised Uniform Arbitration Act authorizes vacatur if: “there was no agreement to arbitrate, unless the person participated in
      the arbitration proceeding without raising the objection.”

**Thanks for all the nudges about writing this post.  You convinced me that my desire to offer context to the news should trump my desire to storm off and pretend it is not happening.

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.

A recent decision from the 10th Circuit shows there is a whole new way to invalidate an arbitration agreement.  In Citizen Potawatomi Nation v. Oklahoma, 2018 WL 718606 (10th Cir. Feb. 6, 2018), the court found the arbitration agreement unenforceable because the parties provided for de novo review of any arbitration award in federal court, which is prohibited under the Hall Street decision from SCOTUS in 2008.

The agreement at issue was a Tribal-State gaming compact between the Citizen Potawatomi Nation and the State of Oklahoma.  The Compact had a dispute resolution procedure providing for arbitration under AAA rules.  But it also stated that “notwithstanding any provision of law, either party to the Compact may bring an action against the other in a federal district court for the de novo review of any arbitration award …”

The parties then had a dispute over liquor licensing and taxes, which was heard in arbitration.  The Potawatomi Nation moved to confirm the award in federal court, and argued for narrow review under FAA Section 10.  Oklahoma moved to vacate the award,  seeking de novo review of the dispute under the Compact.  The district court applied the narrow review in Section 10 and confirmed the award.

On appeal, the 10th Circuit upended the entire arbitration agreement.  It noted that the 2008 Hall Street decision makes clear that parties cannot alter the standard of review in Section 10.  It also found that the provision for de novo review could not just be severed, because it was material to the parties’ decision to choose arbitration, as evidenced by a review of the Compact as a whole.  As a result, the court found the arbitration agreement as a whole unenforceable.

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If you are an arbitrator, litigator or in-house counsel ready to advance your knowledge and skills in arbitration, join me at the ABA’s 11th Annual Arbitration Training Institute this May!  I will present on Trends in Arbitration Law (plus, it is in Miami….)

 

In today’s post, we pick up where the 4th Circuit left off a few weeks ago — with federal circuit courts finding ways to avoid enforcing arbitration agreements that are obtained years after litigation has commenced.

In Dasher v. RBC Bank (USA), __ F3d. ___, 2018 WL 832855 (11th Cir. Feb. 13, 2018), the plaintiffs alleged the bank had processed debit card transactions in such a way that it would increase overdraft charges.  Although the date is not listed, the case appears to have begun in 2009.  During the course of the litigation, the first bank was acquired by another bank (“new bank”) and issued new customer account agreements in 2012 which lacked arbitration agreements.  A motion to compel based on the arbitration clause in the earlier agreement was denied, and the new bank appealed.  At about the same time, the new bank sent customers an amended agreement that included an arbitration provision.  The amended agreement was effective in February 2013.

The new bank lost its appeal.  After the case was remanded to district court, the new bank again moved to compel arbitration, this time based on the February 2013 amendment.  The motion was made in December of 2014.  The district court denied the motion, finding the new bank had waived its right to arbitrate under the 2013 amendment.

On appeal, the 11th Circuit agreed that the new bank could not compel arbitration, but for a different reason.  It held that the new bank failed to prove that the parties had agreed to the 2013 amendment.  The opinion found that under North Carolina law, it could consider the parties’ words and actions to determine whether the parties intended to amend the 2012 customer agreement.  And here, it concluded that the named plaintiff gave mixed responses to the proposed 2013 amendment.  Through counsel, the named plaintiff was fighting the motion to arbitrate in the courts.  But his “uncounseled response” was silence.  The court was clearly bothered by the fact that the new bank sent its proposed amendment directly to all of its customers, without advising either the plaintiffs’ attorney or the court.  Therefore, while it did not want to write “an ethics opinion,” it still refused to find the 2013 amendment was enforceable.

This is an important decision for many reasons.  First, it offers future courts an alternative argument to  “waiver” in situations like this one.  (As the 4th Circuit decision showed, waiver didn’t seem to sit well.)  Second, it offers an important reminder to defendants that courts do not take kindly to repeated motions to compel arbitration based on evolving arbitration agreements.  While they may be willing to overlook it if the “redo” motion is due to a change in the legal landscape, that’s probably the only good reason.  That means the left hand (the litigators and the in-house counsel overseeing them) always need to know what the right hand (whomever is deciding what goes in the customer contracts) is doing.