Validity of Arbitration Agreement

The Supreme Court of California this week enforced the arbitration agreement between an employee and employer.  Yes, you read that right.  While reputed to be reliably anti-arbitration, California’s highest court continues to provide evidence that it is tired of being reversed by SCOTUS * and is ready to follow federal precedent on the FAA.

In Baltazar v. Forever 21, Inc., 2016 WL 1176599 (Cal. Mar. 28, 2016), the question was whether the employee’s arbitration agreement was unconscionable.  The district court found it procedurally and substantively unconscionable, but the court of appeal reversed.  The Supreme Court of California agreed with the court of appeal.

While the arbitration agreement was procedurally unconscionable because the employee lacked any choice, the court found it was not substantively unconscionable for any of the three reasons asserted by the employee.  Most importantly, the court “disapproved” of a previous case from the courts of appeal (Trivedi).  That case had held that if an arbitration agreement allows the parties to seek interim relief in court, it is substantively unconscionable because the employers are more likely to take advantage of interim relief.  In Baltazar, the court noted that California statutes expressly allow parties to seek interim relief in court, therefore “simply reciting the parties’ rights under section 1281.8 does not place [the employee] at an unfair disadvantage.”

In addition, the court found the arbitration agreement was not one-sided either because it provided that the employer’s trade secrets would be kept confidential in the arbitration, or because it said all employment claims must be arbitrated, but then listed as examples only the types of claims that employees bring.

In my opinion, this arbitration agreement was not even close to the line of substantive unconscionability.  So the decision on its own is not very newsworthy, except for its disapproval of the earlier case.  But it is newsworthy in context, because this opinion is the third recent decision from the Supreme Court of California that enforces arbitration agreements even in consumer or employment contexts.  (This is the first, this is the second.)  (*The most recent California decision that got reversed by SCOTUS–DIRECTV–was actually a decision from the intermediate appellate court, not the Supreme Court of California.)  This trend is significant, given California’s reputation.

The Supreme Court of Arkansas has issued three opinions within the span of four weeks, all on the topic of whether defendants can compel arbitration. Each of the opinions came with a vigorous dissent.  The cases offer an interesting look at a state high court that appears to be struggling to deal with FAA case law from SCOTUS; on one hand the court cites recent federal arbitration jurisprudence, but on the other it displays real skepticism about arbitration (at least of consumer disputes) and uses some creativity in its state contract law.

Two of the opinions relate to whether nursing homes can compel arbitration of claims brought by former residents or their estates. In each of those cases, the Supreme Court of Arkansas allowed the nursing home to compel arbitration.  First, in Courtyard Gardens Health & Rehabilitation v. Arnold, 2016 Ark. 62 (Feb. 18, 2016), the court held that the agreement’s selection of the National Arbitration Forum (NAF, which no longer administers consumer arbitration) did not make the arbitration agreement impossible to perform, nor was the choice of NAF integral to the agreement.  Three justices dissented.  [The 11th Circuit just came out the other way on this issue, finding NAF was integral to an arbitration agreement and therefore refusing to compel arbitration in Flagg v. First Premier Bank, 2016 WL 703063 (11th Cir. Feb. 23, 2016).]

Then in GGNSC Holdings v. Lamb, 2016 Ark. 101 (March 10, 2016), the majority compelled arbitration of two nursing home plaintiffs’ claims.  Again, the court held that the unavailability of the NAF did not make the arbitration agreement impossible to perform.  It also held that the arbitration agreement was not unconscionable.  Two justices “strongly” dissented:

The majority’s opinion in this case goes far beyond resolving any doubts in favor of arbitration. It rubber-stamps the arbitration agreements before it based simply on our policy favoring arbitration.  This begs the question: Going forward, could there ever be an arbitration agreement the majority determines to be invalid or unenforceable?  If today’s decision is any indication, the answer to that question is no.

In a third case, the Supreme Court of Arkansas refused to compel arbitration of a class action alleging breach of contract and deceptive trade practices against a bank. Bank of the Ozarks, Inc. v. Walker, 2016 Ark. 116 (March 17, 2016).  The court found the arbitration agreement lacked mutuality and therefore was unenforceable.  (“Mutual obligation” is the fifth “essential element” of a contract in Arkansas.)  In one of the two provisions causing the lack of mutuality, the arbitration agreement obligated the customer to pay any attorneys’ fees the bank incurred “in good faith” in a dispute.  “In imposing all of the costs of arbitration on appellees, the parties in this case are treated differently, and ‘this disparate treatment results in a lack of mutuality.'”  The majority stated that it was cognizant of the severability doctrine and of Concepcion and was not violating either. [The court also seemed to hold that the one-sided fee provision precluded the customers from “effectively vindicating” their rights, citing to Green Tree.  The court conveniently ignored the subsequent language in Italian Colors, limiting that doctrine, and the fact that the doctrine only applies to federal statutory rights…]

The lone dissenter in Bank of the Ozarks sided with FAA preemption.  Citing DIRECTV, the dissenting justice pointed out occasions where the Supreme Court of Arkansas has recognized that “a contract does not lack mutuality merely because every obligation of one party is not met by an equivalent counter obligation of the other party.  With the decision in this case, the majority stretches the concept of mutuality of obligation so as to undermine our basic principles of contract law.”

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By the way, Arkansas is not the only court compelling arbitration of nursing home disputes. Alabama recently found that a resident’s daughter had apparent authority to bind her mother to the arbitration agreement. Kindred Nursing Centers East, LLC v. Jones, 2016 WL 762450 (Ala. Feb. 26, 2016). (Two justices dissented.)  The Fifth Circuit also reversed a district court’s refusal to compel arbitration of residents’ claims against nursing homes in Gross v. GGNSC Southaven, LLC, 2016 WL 1019200 (5th Cir. March 14, 2016).  The district court had held there was insufficient evidence that the individual signing the arbitration agreement had been authorized by the resident.  The Fifth Circuit found Mississippi law on authority was not so restrictive and remanded for further fact finding.

A short new opinion from the Ninth Circuit may run counter to long-standing Supreme Court precedent. In Casa Del Caffe Vergnano v. Italflavors, 2016 WL 1016779 (9th Cir. Mar. 15, 2016), the court refused to enforce an arbitration agreement in a contract that the parties admitted signing, because the parties simultaneously signed a second agreement declaring the first one a sham.

The story is that two undocumented immigrants chose to become a franchisee of an Italian corporation, Caffe Vergnano, and open an Italian-style coffee shop in San Diego. They signed two contracts on the same day: a “commercial contract,” which was a standard franchise agreement including an arbitration clause; and a “hold harmless agreement” that said the commercial contract “does not have any validity” because it was designed simply to allow the immigrants to obtain visas to work in the U.S. The hold harmless agreement stated the parties “will sign a future contract which will regulate their commercial relationship.”

However, the parties did not enter into a new contract. Instead, the franchisees opened their Italian coffee shop and it folded within eight months. The franchisees sued the franchisor for violations of California statutes and the franchisor moved to compel arbitration. The district court compelled arbitration and the Ninth Circuit reversed.

Repeating language from Granite Rock that contract formation is for courts to decide, and relying on federal common law regarding contracts, a majority of the panel concluded that the commercial contract “was a mere sham to help Hector Rabellino obtain a visa” and was therefore unenforceable. The majority reasoned that the hold harmless agreement proved that the parties did not mutually consent to be bound by the commercial contract.

This decision raises a close question between formation and validity, in my view, that the court ignores completely. On questions of a contract’s validity, the severability doctrine, clarified in Buckeye Check Cashin, dictates that a party challenging arbitrability must “challenge[] specifically the validity of the agreement to arbitrate” in order to have that challenge heard by the court. Otherwise, the validity issue will be addressed by the arbitrator. SCOTUS found it was immaterial whether the challenge made the underlying contract void or voidable. In a footnote in Buckeye Check Cashing, however, SCOTUS excluded a limited set of formation issues from the severability doctrine, suggesting those still belong in court:

The issue of the contract’s validity is different from the issue of whether any agreement between the alleged obligor and obligee was ever concluded. Our opinion today addresses only the former, and does not speak to the issue decided in the cases cited by respondents (and by the Florida Supreme Court), which hold that it is for courts to decide whether the alleged obligor ever signed the contract, Chastain v. Robinson-Humphrey Co., 957 F. 2d 851 (CA11 1992), whether the signor lacked authority to commit the alleged principal, Sandvik AB v. Advent Int’l Corp., 220 F. 3d 99 (CA3 2000); Sphere Drake Ins. Ltd. v. All American Ins. Co., 256 F. 3d 587 (CA7 2001), and whether the signor lacked the mental capacity to assent, Spahr v. Secco, 330 F. 3d 1266 (CA10 2003).

Is the franchisee’s argument that the hold harmless agreement nullified the commercial contract really closer to an argument that the franchisee lacked mental capacity, and therefore belonged in court? Or is it closer to an argument that the commercial contract was fraudulently induced? In my view, that is a close call, but fraudulent inducement seems the better fit, meaning this decision belonged to the arbitrator. The line between formation and validity is not clearly drawn in FAA jurisprudence, and this decision blurs it further.

March comes in like a lion, right?  Well, that’s not true with respect to the weather here in Minneapolis.  But it may be true with respect to arbitration decisions from around the country.  This post focuses on two recent decisions from state high courts that refuse to compel arbitration.

In Global Client Solutions, LLC v. Ossello, 2016 WL 825140 (Mont. Mar. 2, 2016), a majority of Montana’s Supreme Court refused to enforce the arbitration clause between a consumer and a financial institution (that set up a bank account for the consumer’s efforts with a debt relief company).  The arbitration clause provided for AAA arbitration of all claims arising out of the agreement, even claims relating to the validity of the agreement, but the bank had the right to bring collections actions in court. The trial court found the arbitration clause was unconscionable and refused to compel arbitration.

On appeal, the Montana Supreme Court first found there was no enforceable delegation clause in the parties’ arbitration clause, because the language was “ambiguous and confusing” instead of clear and unmistakable, largely due to what appears to be a typo in the clause. (The clause said the parties would arbitrate “the breach, termination, enforcement, interpretation or validity [of the entire agreement], including the termination of the scope or applicability of this Agreement to arbitrate”.  The bank argued “termination” was supposed to be “determination.”)  The court also refused to find that incorporation of the AAA rules constituted an enforceable delegation clause, because it did not specify which AAA rules applied and this was not a contract between two sophisticated commercial parties.

After confirming it could address the validity of the arbitration clause, the court found the clause unconscionable under Montana law because the bank had the right to bring collection matters to court, while the consumer had no similar right. The court reasoned that its holding was not preempted under the Concepcion rule, because other post-Concepcion courts have relied on lack of mutuality to invalidate an arbitration clause.

A concurring justice wrote “The elephant in the room is not state hostility toward arbitration…If there is any hostility, it is toward those who hide behind the FAA…to escape any material consequence of running fraudulent confidence schemes.” [But of course that assumes that a AAA arbitrator would not find wrongdoing when confronted with a “fraudulent confidence scheme”… ] Two justices dissented, asserting that the incorporation of AAA rules was a valid delegation clause, such that the arbitration clause’s validity should have been decided by a AAA arbitrator.

The second case comes from Alabama and is a cautionary tale for companies trying to add arbitration agreements to existing contracts with many consumers.  In Moore v. Franklin, 2016 WL 761698 (Ala. Feb. 26, 2016), the Supreme Court of Alabama found the parties did not form a valid arbitration agreement by virtue of the bank posting a notice to the customer’s online banking profile.  Citing cases from five federal courts, Alabama concluded that in order to form part of the parties’ agreement, there must be proof that the recipient accessed the web page containing the arbitration provision.

What lessons can we give drafters from these two cases?  Well, check for typos.  And then double and triple-check.  Then, and only then, considering increasing the likelihood the arbitration clause will be found enforceable by making any carve-outs mutual.  If the company can bring collection claims in court, then why not let the consumer bring modest claims in small claims court?  Finally, once you drafted the clause, find a way of making sure those customers see it (and hopefully even click a button confirming that they agreed to it).

Showing it will soldier on without Justice Scalia, the Supreme Court granted cert, vacated, and remanded an arbitration decision from West Virginia yesterday.  Because this is the exact same treatment the Court gave a case from Hawaii’s highest court in January (and the same treatment I predicted, ahem), it suggests SCOTUS is trying to go on with business as usual.

So, what was the West Virginia case? It is the Schumacher Homes case I wrote about last July, in which that state’s highest court refused to enforce the parties’ delegation clause, even after acknowledging the rule in Rent-A-Center, because it found the word “arbitrability” was ambiguous.

This GVR (grant, vacate, and remand), although not a summary reversal because it ostensibly leaves it up to the West Virginia courts to decide what to do next, falls in line with recent arbitration summary reversals from SCOTUS.  Prof. Drahozal, in an interesting article called “Error Correction and the Supreme Court’s Arbitration Docket,” helps put it in context (Ohio State Journal on Dispute Resolution, Vol. 29, No. 1, 2014).  

He writes:

Indeed, since O.T. 2000, the proportion of summary reversals that addressed arbitration issues (4 of 83, or 4.8%) is more than double the proportion of argued cases (18 of 948, or 1.9%) that addressed arbitration issues.

What are the common characteristics of cases that receive a summary reversal?  First, they misapply the FAA.  But also, Prof. Drahozal points out:

The summary reversals were all in cases that originated in state rather than federal courts, and often included some suggestion that the state court disagreed with Supreme Court decisions interpreting the FAA.

Bingo!  That last factor is definitely present in Schumacher Homes.  In addition to calling the rule in Rent-A-Center “absurd” and an “ivory-tower interpretation of the FAA,” the opinion criticized all federal arbitration jurisprudence, explaining that the SCOTUS decisions construing the FAA “create an eye-glazing conceptual framework” that is “a tad oversubtle for sensible application” and that “the rules derived from these decisions are difficult for lawyers and judges—and nearly impossible for people of ordinary knowledge—to comprehend.”

So, here’s a tip for all state courts that want to buck the FAA, but not risk summary reversal or GVR: don’t insult SCOTUS.

Most questions of arbitrability can be resolved on motion, using a summary judgment-like standard.  However, just like summary judgment, if there are genuine disputes of material fact about whether a claim must be arbitrated — like competing evidence about whether the parties ever formed an arbitration agreement — those should be determined by a trial.  That is the lesson of three recent cases from the Third Circuit, the Ninth Circuit, and the Supreme Court of Alabama.

The two federal court opinions are short and sweet.  In Gib, LLC v. Salon Ware, Inc., 2016 WL 463429 (9th Cir. Feb. 5, 2016), the district court granted a motion to compel arbitration, despite the undisputed fact that the plaintiff never signed the written agreement and the fact that the plaintiff “raised a genuine issue of material fact by submitting a sworn declaration denying that the parties had entered into a written agreement.”  Because of that genuine issue of fact, the Ninth Circuit reversed and remanded for either a court or jury trial under Section 4 of the FAA.

In Guidotti v. Legal Helpers Debt Resolution, 2016 WL 521173 (3d Cir. Feb. 10, 2016), the Third Circuit is hoping that the third time is a charm for the district court.  (This same case has previously been remanded to the district court, so this remand will be the district court’s third attempt to resolve the arbitration issue.)  The plaintiffs asserted statutory claims against many defendants who had pledged to offer debt relief.  This order relates to whether two of those defendants could compel arbitration.  Plaintiffs had signed one agreement with those defendants: an account application (without any arbitration clause).  The dispute was over whether she also received an account agreement (which contained an arbitration clause) or whether that was otherwise validly incorporated into the application.  After seven months of discovery on those issues, the district court denied the motion to compel discovery.  It concluded that genuine issues of fact persisted about whether the account agreement was incorporated, but that was immaterial because the district court found the arbitration clause invalid under New Jersey law.  The Third Circuit vacated that order and remanded the case for a jury trial, noting that the factual dispute must be resolved, and only then should the court consider whether New Jersey law invalidates the arbitration agreement (and whether that New Jersey law is preempted by the FAA).

Apparently, the problem of lower courts rushing to resolution of disputed issues on arbitrability is not unique to the federal courts.  In Dannelly Enterprises, LLC v. Palm Beach Grading, Inc., 2016 WL 360668 (Ala. Jan. 29, 2016), the Supreme Court of Alabama also remanded a case for a jury trial on the disputed issue of whether a sub-subcontractor agreed to arbitrate disputes.  In Dannelly, a sub-subcontractor (Dannelly) submitted a bid to the grading subcontractor (PBG), the bid was accepted, and PBG issued a work order.  Neither the bid or the work order had arbitration clauses.  However, PBG’s “standard subcontract” has an arbitration clause, and PBG’s contract with the general contractor also called for arbitration.  PBG submitted an affidavit stating that Dannelly had agreed to the standard subcontract, but PBG was unable to locate the signed copy.  Dannelly submitted a competing affidavit swearing that it had never signed the standard subcontract or otherwise agreed to its terms.

The trial court granted PBG’s motion to compel arbitration.  The Alabama Supreme Court reversed and remanded for a jury trial.  It found there was a genuine dispute of material fact about whether Dannelly had ever agreed to arbitrate disputes with PBG, because both parties had submitted contradictory testimony and there were no other objective manifestations of Dannelly’s assent.  In addition, it found Dannelly was not a third-party beneficiary of the contract between PBG and the general contractor, because the arbitration language in that contract was specific to PBG and the general contractor and did not demonstrate any intent to bind third parties.  Similarly, the court rejected an equitable estoppel argument, finding no evidence that Dannelly received benefits under PBG’s contract with the general contractor.

These cases serve as an important reminder that the very existence of an arbitration agreement can be hotly disputed.  For contract negotiators, that means it is critical to obtain (and retain) a signed copy of the final agreement including the arbitration clause.  For advocates trying to enforce agreements, that means it is critical to recognize when to give up on motion practice and ask for a trial on the issue, so that you don’t waste years on appeal, only to get sent back to square one.

This week, the Fourth Circuit found an arbitration agreement invalid because it waived all federal and state laws.  Although two other federal circuit courts had already found the same company’s arbitration agreement unenforceable because it called for an impossible arbitration process, the Fourth Circuit found it invalid for a new reason.

The issue in Hayes v. Delbert Services Corp., __ F.3d___, 2016 WL 386016 (4th Cir. Feb. 2, 2016), was whether a putative class of plaintiffs could assert violations of two federal statutes (Fair Debt Collection Practices Act and Telephone Consumer Protection Act) by the servicing agent of a payday lender in court, or whether they had to arbitrate the claims.  The servicer relied on the arbitration clause in the loan agreement to compel arbitration.  The arbitration clause called for arbitration by the Cheyenne River Sioux Tribal Nation, in accordance with the Tribe’s “consumer dispute rules.”  However, the Tribe had no arbitration rules and no capacity to administer arbitrations.  Those failures had led the Second and Seventh Circuits to find the arbitration agreement in the same lender’s loan agreement unenforceable.  But, the arbitration clause in this case was slightly different, as it allowed the borrower the right to select either AAA or JAMS to “administer the arbitration.”  So, the question in this case seemed to be whether that could save the arbitration clause, by providing a real arbitration forum.

The Fourth Circuit did not answer that question, however.  Instead, it issued a much bolder decision.  It focused on the fact that the loan agreement “purports to disavow the authority of all state or federal law.”  In its “Governing Law” section, for example, the loan agreement states “this Agreement shall be subject to and construed in accordance only with the provisions of the laws of the Cheyenne River Sioux Tribe, and that no United States state or federal law applies to this Agreement.”  (Similar language was repeated within the arbitration clauses, so there is no severability doctrine problem here.)

Those provisions really raised the court’s hackles.  It held that:

[A] party may not underhandedly convert a choice of law clause into a choice of no law clause–it may not flatly and categorically renounce the authority of the federal statutes to which it is and must remain subject.  Because the arbitration agreement in this case takes this plainly forbidden step, we hold it invalid and unenforceable.

To support that holding, the court cited 14 Penn Plaza, for the idea that arbitration agreements cannot waive federally protected civil rights, and to Italian Colors, for the proposition that the FAA precludes “an arbitration agreement forbidding the assertion of certain statutory rights.”  Because it found the rejection of all federal law to be at the “core of the arbitration agreement,” the court would not sever those provisions.

In closing, the court issued a bench-slap to the servicer, and a warning to drafters of arbitration agreements:

rather than use arbitration as a just and efficient means of dispute resolution, Delbert seeks to deploy it to avoid state and federal law and to game the entire system.  Perhaps in the future companies will craft arbitration agreements on the up-and-up and avoid the kind of mess that Delbert is facing here.

This opinion is interesting mostly because it could have been predictable and easy.  The Fourth Circuit could have just said “two of our sister circuits have already found this clause invalid, and the add-on language about allowing the AAA to “administer” the arbitration doesn’t save it”.  But instead, the court seems to expand on the existing case law regarding federal statutory rights and takes a strong stance against allowing corporations to use arbitration to circumvent federal claims.

The actual and potential arbitration docket at the Supreme Court contracted in the last week due to three events.

First, SCOTUS made quick work of an appeal from the Hawaii Supreme Court.  Remember when I predicted that the DIRECTV case was going to make it even harder for state courts to find arbitration agreements unenforceable under state law?  Well, that must have been exactly the point.  Because less than a month later, on Jan. 11, SCOTUS granted cert, vacated, and then remanded this series of decisions from the Hawaii Supreme Court.  What helpful instructions did SCOTUS offer to Hawaii’s highest court?  Just this: “further consideration in light of DIRECTV, Inc. v. Imburgia, 577 U.S. __ (2015).”  If history is any guide (see West Virginia, and Missouri), Hawaii will find a safer basis to uphold its initial decision.  That is especially likely in this case, since Hawaii hedged its bets from the get-go, by identifying two bases for not enforcing the arbitration agreement: there was no arbitration agreement; and, if there was, it was unconscionable.

Second, a pending arbitration matter, scheduled to be argued at SCOTUS just next month, settled. It was the California case about whether invalid aspects of an arbitration agreement should be severed.  But, the parties resolved the matter after DIRECTV.

Finally, SCOTUS denied cert in a Texas arbitration decision this week.

What’s still left?  Well, I know of at least one petition in an arbitration case that will be conferenced in coming weeks.  It is this case from West Virginia, a state with a history of bucking the federal arbitration system.  Surely you remember this memorable decision, where the West Virginia Supreme Court called SCOTUS’s arbitration precedent  “absurd” and an “ivory-tower interpretation of the FAA”??!  West Virginia basically invited the same GVR treatment as Hawaii.

Post Script (added 1/15/16): A reader informed me of an interesting second petition for cert in an arbitration case.  In the franchise context, the case presents the question of whether a state can require franchisors to include an addendum to their franchise agreement that negates the arbitration clause in that franchise agreement without running afoul of the FAA.

**Thanks to Mark Kantor and Karl Bayer for being the first to alert me to some of these events.

Just under the wire, SCOTUS released an arbitration opinion today, ensuring that 2015 would continue the string of years with cases interpreting the Federal Arbitration Act.  In DIRECTV v. Imburgia, the Supreme Court found that California’s interpretation of an arbitration clause was preempted by the FAA.  DIRECTV is a 6-3 decision, with Justice Kagan (who vociferously dissented in Italian Colors) joining the majority, and it appears to make it even harder for courts to apply state contract doctrines to find arbitration agreements unenforceable.

The issue in DIRECTV was primarily how to interpret the poison pill in the parties’ arbitration agreement, which stated that if the “law of your state” made the waiver of class arbitration unenforceable, then the entire arbitration agreement was unenforceable.  The California Court of Appeal found the phrase’s meaning ambiguous, but relied on two doctrines of contract interpretation to conclude that it referred to California’s contract law, without consideration of any federal preemption.  In other words, it meant California law before, or without respect to, Concepcion, which found California’s refusal to enforce class action waivers was preempted by the FAA.  Therefore, the California court used the poison pill to blow up the arbitration agreement altogether.  The California Supreme Court denied review, but SCOTUS took up the case.  (And disposed of it quickly — the argument was just about two months ago.)

Justice Breyer wrote the decision for the majority.  He focused heavily on the states’ obligation to abide by federal law and the Court’s interpretation of those federal laws.  Recognizing that interpreting contracts is “ordinarily a matter of state law,” the Court framed this case as an issue of whether California’s interpretation of “law of your state” to mean “invalid California law” “is consistent with the [FAA].”  As usual, the way the Court frames the issue gives away the ending.  Indeed, the Court goes on to essentially accuse the California Court of Appeals of being results-oriented.  (The dissent calls this “demeaning”)  The Court “conclude[s] that California courts would not interpret contracts other than arbitration contracts the same way.”  Why? Because, the opinion argues, state law normally means “valid” state law, and California criminal pleas are presumed to incorporate the state’s ability to amend the law, and SCOTUS’ esteemed law clerks could not find any California case that interpreted “law of your state” to mean state laws that had been preempted by any federal statute.  Finally, the majority addressed one of the two doctrines relied on by the California court: contra proferentem , which allows ambiguous terms to be construed against the drafter.  The Court found the doctrine does not apply in this case, because the phrase is not ambiguous, and in any case using the doctrine here was stretching it too far: “the reach of the canon construing contract language against the drafter must have limits”.

There are two dissents.  Justice Thomas dissented, as usual, because he believes the FAA does not apply in state court.  Justice Ginsburg (joined by Sotomayor) dissented because she will “take no further step to disarm consumers, leaving them without effective access to justice.”  Her dissent largely focuses on the appropriate use of the contra proferentem doctrine in this case.  But she also points out that this is the first time in 25 years that SCOTUS has “reversed a state-court decision on the ground that the state court misapplied state contract law.”  (The recipient of the reversal 25 years ago, in Volt Information Sciences, was also California.)  She points out that parties can agree on any law to apply to their arbitration, so providing for pre-Concepcion law in California is not beyond the pale.  And finally, Justice Ginsburg engages in a broader attack on the state of arbitration law, citing the recent NYTimes series and articles by Prof. Resnik to argue that the Court’s interpretation of the FAA no longer has any connection to the legislative intent behind the statute and goes too far in “insulat[ing] powerful economic interests from liability for violations of consumer protection laws.”

Here are some first-day impressions:

  • The Court should not have taken this case.  The majority seems to anticipate that reaction by noting that the Ninth Circuit reached the opposite result from the California Court of Appeals on how to interpret this version of DIRECTV’s poison pill.  But, that could have resolved over time.  And even if it didn’t, I doubt there are many arbitration agreements out there with this uniquely worded poison pill, so this particular elucidation on its meaning does not help very many parties.  This is pure and simple error-correction, which SCOTUS generally avoids.
  • Plus, California has largely turned the corner; its recent arbitration jurisprudence is generally in line with the FAA.  So, there is no reason to continue focusing exclusively on California in SCOTUS’ game of arbitration whack-a-mole.
  • What broader impacts might there be?  Well, one is that future state courts will have to think carefully before construing ambiguous language against the drafter in the context of an arbitration clause.  Another is that transactional attorneys should re-think any use of the phrase “law of your state” or any variations thereof.
  • But the most significant impact is that this decision calls into question any state’s ability to defend their arbitration decisions.  The preemption test articulated in  Concepcion was imprecise and has been hard for lower courts to apply.  (When does a state rule really stand as “an obstacle” to the Congressional intent behind the FAA?  Almost every contract defense is an obstacle of some sort.  But the language of Concepcion does not help distinguish between run-of-the-mill obstacles and true preemption.)  In this first post-Concepcion example of how the highest court in the land interprets that test, it seems to require that a state anti-arbitration ruling meet an impossible burden: show us cases in which you (the state) have done exactly the same thing, with the same phrase, in a non-arbitration context.  A lot of the phrases and clauses used in arbitration agreements are unique, there may not be a perfect comparison to draw on in non-arbitration decisions from the same state’s courts.  This decision, if read broadly, may provide precedential authority to overturn almost any state court’s invalidation of an arbitration agreement.  Which brings me back to point number one — this case was improvidently granted.

Some arbitration topics just never die.  This post strings together new cases on three of those topics: 1) whether arbitration agreements that call for the now-defunct National Arbitration Forum (NAF) are enforceable; 2) formation fights in nursing home agreements; and 3) the continuing fight between the NLRB and the courts over class action waivers in employment agreements .

In a 3-2 decision, the Supreme Court of Pennsylvania refused to enforce an arbitration agreement that called for administration by the NAF.  Wert v. Manorcare of Carlisle PA, 2015 WL 6499141 (Pa. October 27, 2015).  In the context of a wrongful death claim against a nursing home, the parties disputed the enforceability of an arbitration agreement in the admission paperwork.  Pennsylvania’s highest court adopted a 2010 decision from its intermediate appellate court finding that the incorporation of the National Arbitration Forum Code was an essential term, such that if the NAF was unavailable, the entire arbitration agreement was unenforceable. The court found the subjective intent of the Appellee (who admitted she did not read the agreement) was irrelevant.  Relying on its analysis of the NAF rules, the court found “the provision integral and non-severable.”  For good measure, the court also noted that its result was not preempted by federal law because it was “based on settled Pennsylvania contract law principles that stand independent of arbitration.”  State courts, as well as federal courts, are now split on how to handle arbitration clauses incorporating NAF rules.

In another nursing home case, the Alabama Supreme Court found an arbitration agreement was not validly formed because the person who signed it did not have proper authority.  Diversicare Leasing Corp v. Hubbard, 2015 WL 5725116 (Ala. Sept. 30, 2015), involved a mother’s claim about the wrongful death of her son in a long-term care facility. When the adult son, whose mental capacity had not progressed beyond that of a toddler, was admitted, his mother signed the admission agreement as the “responsible party” and “resident’s representative.”  After she brought suit, the nursing home moved to compel arbitration.  However, the Alabama trial and appellate courts found that no valid arbitration agreement had been formed.  Critically, the son had never been mentally competent to authorize his mother to act on his behalf, and she had never been given his power of attorney, or health care decision-making rights, or been appointed his legal guardian after his 18th birthday.  Therefore, the mother’s signature did not bind the son.  The Alabama decision is in line with other state court decisions that have strictly interpreted the legal authority of relatives who sign arbitration agreements in nursing home contracts.

Finally, the third case taught me a new legal doctrine: nonacquiescence.  And who is not acquiescing to federal authority?  Well, the NLRB, at least according to the 5th Circuit.  In its D.R. Horton decision in 2013, the Fifth Circuit had rejected the NLRB’s analysis that federal labor laws override the FAA and preclude class action waivers.  Despite D.R. Horton, the NLRB applied its same analysis in Murphy Oil, just ten months later.  On review, the Fifth Circuit forcefully reaffirmed its earlier holding.  Murphy Oil USA v. NLRB, 2015 WL 6457613 (5th Cir. Oct. 26, 2015).  However, the court was not willing to hold the NLRB in contempt or otherwise penalize the Board. Because the Board only has to acquiesce to circuit court rulings when a case will be reviewed by that same circuit, and the Murphy Oil case could have been reviewed in multiple circuits, the court noted “[w]e do not celebrate the Board’s failure to follow our D.R. Horton reasoning, but neither do we condemn its nonacquiescence.”