Waiver of Right to Arbitrate

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.

The Supreme Court of Nebraska gave an unpleasant surprise to its trial court judges last week: they cannot enforce arbitration agreements sua sponteBoyd v. Cook, 298 Neb. 819 (Feb. 2, 2018).

The case involved a messy shareholder dispute.  A key contract to the dispute contained an arbitration provision covering “any dispute or controversy arising out of” the agreement.  The suit began in April of 2014, and eventually included many parties and at least a dozen claims.  In 2016, the trial court granted partial summary judgment.  But then it had apparently had enough.  In January of 2017, the trial court “dismissed sua sponte all of the claims in the case” other than one, based on the arbitration provision in the contract.  It found it lacked jurisdiction.

After confirming its appellate jurisdiction, and noting that arbitration clauses can never defeat a court’s subject matter jurisdiction (Dude! Don’t get your hackles up), the Nebraska Supreme Court got around to the good stuff.  It found that because arbitration is a contractual right “it necessarily follows that this right may be enforced only by a party to the contract.”  Therefore, “it is improper for a court to try to enforce such a contractual right on behalf of the parties.”  Trial courts will have to resort to other tactics in getting irritating cases off their dockets.

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If the Boyd case can be described as parties ignoring their rights to arbitrate, then a Vermont case can be described as a party ignoring its potential right to litigate.  In Adams v. Barr Law Group, 2018 WL 671444 (Feb. 2, 2018), a law firm tried to recover unpaid fees from its client in arbitration.  The client participated in arbitration (without counsel) for seven months.  Then, one week before the hearing, it alleged for the first time that the arbitration agreement was unenforceable, because the law firm did not fully explain to the client the ramifications of agreeing to arbitration.  The arbitrator denied the motion to dismiss and issued an award in favor of the law firm.  The client then moved to vacate the award and lost.  On appeal, the Vermont Supreme Court explained that the client had waived its right to object to arbitration by participating fully for seven months without raising the issue.  It noted that the requirement is “designed to avoid unnecessary investments in time and resources of exactly these types.”

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Finally, another post script to the SCOTUS preview : a new cert petition raises the circuit split over the “wholly groundless” doctrine.  Maybe the Court will finally bite on one of my favorite issues!

In a recent opinion, the Fourth Circuit cited waiver as its basis to refuse to compel arbitration, but the result seems animated by a sense that the arbitration agreements were unenforceable.  Degidio v. Crazy Horse Saloon & Restaurant, Inc., __ F.3d __, 2018 WL 456905 (4th Cir. Jan. 18, 2018).

The case involved a putative collective and class action case by “exotic dancers” at a club in South Carolina, alleging they were wrongly classified as independent contractors and thereby denied minimum wages and other statutory protections.  The complaint was filed against the club in August of 2013.  [I can’t call it a saloon.  We aren’t in the wild west.]  At that point, it is undisputed that none of the potential plaintiffs had arbitration agreements with the club.

The club participated in discovery for a year.  In November and December 2014, the club obtained arbitration agreements with some of its dancers “as a condition of performing.”  In December of 2014, the club moved for summary judgment on the merits, arguing the dancers were properly classified as independent contractors.  Then in January of 2015, the club brought a motion to compel arbitration against plaintiffs who had signed arbitration agreements.  The district court denied the motion, raising concerns about the enforceability of the arbitration agreements.  The club brought a new summary judgment motion on the merits in October of 2015.  When that was denied, the club sought additional discovery on the merits, attempted to certify questions to the South Carolina Supreme Court, and then moved to compel arbitration against nine plaintiffs who had opted into the litigation after its last motion.  That motion was also denied.

The Fourth Circuit set the stage for its discussion by noting that litigants may waive their rights to arbitration by “substantially utilizing the litigation machinery.”  Without citing any further case law about waiver, the opinion proceeded to review the significant extent of the club’s use of “litigation machinery” (summarized above).  The court was particularly upset at the apparent gamesmanship:

The only possible purpose of the arbitration agreements, then, was to give [the club] an option to revisit the case in the event that the district court issued an unfavorable opinion [on summary judgment].  In other words, Crazy Horse did not seek to use arbitration as an efficient alternative to litigation; it instead used arbitration as an insurance policy in an attempt to give itself a second opportunity to evade liability.

In response to the club’s argument that it could not have moved to compel arbitration until the entertainers who had actually signed the agreements opted into the case, the court suggested that it should have informed the district court of its intentions so that the court did not waste judicial resources.  In addition, the court did not want to “give defendants a perverse incentive to wait as long as possible to compel arbitration.”

At the close of this waiver discussion, the court veers into what seems to be the heart of the matter: its conclusion that the arbitration agreements were “misleading” and “sham agreements.”  The arbitration agreements told the dancers that they only reason they could keep tips and set their own schedules was because they were independent contractors, and that would change if they joined the Degidio lawsuit.  The court noted that information was false.  Furthermore, the court was upset that the agreements were presented to plaintiffs “in a furtive manner,” evading the district court’s ability to supervise contact between the potential plaintiffs and counsel.  “The setting here was ripe for duress.”  However, the court does not undertake any analysis of unconscionability or other bases to find the agreements unenforceable under South Carolina law.  It just affirms the decision to deny the motion to compel arbitration.

I find this a puzzling case.  Normally, parties are allowed to agree to arbitrate a dispute that has already begun.  And litigation conduct before that agreement can’t count as a waiver.  Furthermore, parties don’t usually tell the judge about motions that they don’t yet have a basis to bring.  So, unless FLSA cases are really so different, this seems like a case that should have been analyzed on the validity of the arbitration agreements.  It is decidedly underhanded to convince people to sign arbitration agreements by misrepresenting the law.  Maybe South Carolina unconscionability doctrines are very difficult?

It is not uncommon for lenders to exempt small claims actions from their arbitration provisions. The question confronted by the Court of Appeals of Maryland in a recent case was: when a lender opts for small claims court, does that waive any later right to enforce the arbitration clause?  The court’s answer was yes, if the claims are related.

In Cain v. Midland Funding, LLC, __ A.3d__, 2017 WL 1101804 (Md. Mar. 24, 2017), the lender pursued its collection action against the credit card holder in small claims court in 2009.  It obtained a default judgment for $4,520.  In 2013, that same credit card holder filed a class action complaint against the lender, arguing the lender had been an unlicensed collection agency. The lender moved to compel arbitration.  The trial court compelled arbitration, finding the lender had not waived its right to arbitrate by bringing the 2009 case, and the intermediate appellate court agreed.

A five-member majority of Maryland’s highest court applied a de novo standard of review and reversed on the issue of waiver (two judges dissented).  It applied Maryland case law that holds participating in a judicial proceeding only constitutes a waiver of the right to arbitrate issues raised in that proceeding, but not “unrelated issues.”  Therefore, the court looked at whether the lender could have arbitrated its collection action, and if so, whether that was related to the licensing issue raised in 2013.

The arbitration agreement at issue states that “claims filed in a small claims court are not subject to arbitration, so long as the matter remains in such court and advances only an individual. . . Claim.” The court found that language, along with the broad language that “all Claims . . . are subject to arbitration,” gave the lender the choice to litigate or arbitrate the collection issue.

The court also found the 2009 and 2013 claims were sufficiently related to apply the waiver doctrine. “Put simply, if Midland had not pursued its 2009 collection action, Cain’s current claims would not exist.”  The majority noted that 2016 cases from both Nevada and Utah had reached similar conclusions.  Finally, the court refused to require a showing of prejudice: “Cain does not have to demonstrate that he will suffer prejudice if the arbitration clause is enforced.”

This issue is an important one for lending institutions. If the small claims court option is generally efficient, it may be worthwhile adding a clause to those arbitration provisions that pursuit of a claim in small claims court does not waive the right to raise arbitration as a defense in any later action.

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Maryland did not make my list of 5 states most hostile to arbitration last summer (and still wouldn’t). BUT, some of the states on that list have recently issued surprisingly pro arbitration decisions.  Check these out:

  • WEST VIRGINIA recently reversed a lower court’s refusal to enforce arbitration. It found the employee had failed to show the arbitration provision was unconscionable. It wasn’t all sunshine and arbitration butterflies, though.  One justice wrote a concurring opinion asking Congress to take action. “We can only hope that…Congress will implement better safeguards to the FAA to ensure that the legal rights of unsophisticated employees are protected.” Employee Resource Group, LLC v. Harless, 2017 WL 1371287 (W.Va. April 13, 2017).
  • WEST VIRGINIA also enforced an arbitration clause waiving class actions in Citizens Telecommunications Co. v. Sheridan, 2017 WL 1457006 (W.Va April 20, 2017). In that case, the class action waiver had been added via notice to all consumers pursuant to a modification clause in the original terms of the agreement. Because the new terms and conditions were distributed with a paper billing statement and “accepted” via continued use of the internet service, the court found they were a valid unilateral contract, just like an employee handbook. Therefore, the court enforced individual arbitration of the claims.
  • HAWAII confirmed an arbitration award in RT Import v. Torres, 2017 WL 1366999 (Ha. April 13, 2017), although reversed the trial court’s award of additional costs above the award. The court did get a jab in at arbitration in a footnote, though. It noted that the arbitrator awarded damages for emotional distress to a corporation. After commenting that there is no legal authority allowing such damages, the opinion states: “parties who submit their claims to binding arbitration assume all the hazards of the arbitration process, including the risk that the arbitrator may make mistakes in the application of law and in their findings of fact.”
  • ALABAMA found the arbitration agreement between a family and a funeral home was not unconscionable in Newell v. SCI Alabama Funeral Services, LLC, 2017 WL 1034469 (March 17, 2017).

I really should have titled this post “State Court Smorgasbord”…

The New Jersey Supreme Court refused to allow a respondent to benefit from its refusal to pay arbitration fees in Roach v. BM Motoring, LLC, 2017 WL 931430 (NJ March 9, 2017).

First, Ms. Jackson filed a demand for arbitration against a New Jersey car dealership with the AAA.  The parties’ arbitration agreement required the dealership to “advance both party’s [sic] filing, service, administration, arbitrator, hearing or other fees, subject to reimbursement by decision of the arbitrator.”  Nevertheless, the dealership refused to pay any filing fees or even respond to the claim and the AAA dismissed the case for non-payment.  (Sing it: “Sorry Ms. Jackson, I am for real…”)  Another buyer, Ms. Roach, also had her claim dismissed due to the dealership’s failure to comply with the AAA rules.

Ms. Jackson and Ms. Roach then filed a putative class action in New Jersey state court.  The dealership had the nerve to move for dismissal, due to the arbitration clause. The trial court granted the dealership’s motion, and the high court reversed.

The NJ Supreme Court had no patience for the dealership’s arguments.  It first disposed of the dealership’s argument that the consumers were wrong to take their arbitration demand to the AAA.  The agreement provided that “arbitration shall be conducted in accordance with the rules of the” AAA.  The court noted that Rule R-2 of the AAA’s Commercial Rules provides that parties who agree to use the AAA rules also consent to AAA administration, and the plaintiff’s choice of forum is granted deference.

Second, the court found the dealership materially breached the arbitration agreement by failing to pay AAA fees and respond to the arbitration demands, and as a result, the dealership could no longer compel arbitration.  Otherwise “the result would be a ‘perverse incentive scheme’–a company could ignore an arbitration demand, and if the claimant did not abandon the claim, later compel arbitration.”  (internal quotes from a Ninth Circuit decision on the topic).

What’s the lesson?  As my contracts professor liked to say: “Don’t try to game it.” 


As long as we’re on the subject of state courts, I will share that Georgia’s high court enforced an arbitration agreement in the context of an allegation of wrongful death at a nursing home.  United Health Services of Georgia, Inc. v. Norton, 2017 WL 875035 (Ga. March 6, 2017).  That’s not the direction that many state courts have taken recently.

 

 

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

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

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

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

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

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

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

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

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

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

The highest state court in West Virginia just found that a credit card company did not waive its right to arbitrate, despite initially choosing a court forum and waiting almost five years to raise its right to arbitrate.  That is a somewhat surprising decision from a court that has been repeatedly willing to buck SCOTUS precedent in order to let parties avoid arbitration.

It was the right decision under current precedent though. The parties in Citibank, N.A. v. Perry, __ S.E.2d __, 2016 WL 6677944 (W. Va. Nov. 10, 2016), had an arbitration provision that could be enforced at any time.  It said a party who starts a court proceeding “may elect arbitration with respect to any Claim advanced in that proceeding by any other party.”  It also stated that “[a]t any time you or we may ask an appropriate court to compel arbitration of Claims…unless a trial has begun or a final judgment has been entered.”  And finally, the arbitration provision had a class action waiver and said it could not be waived without a written agreement.

The case started in 2010 with Citibank filing a debt collection action against the credit cardholder. The consumer appeared to acknowledge the debt, and Citibank filed a motion for judgment on the pleadings.  But the trial court never ruled.  In December of 2014, Citibank served discovery and got a scheduling order in place.  In May of 2015, the consumer filed a class counterclaim.  In response, Citibank asked the court to compel individual arbitration of the claims.  The district court found Citibank had waived its right to arbitration.

On appeal, Citibank argued that under the plain terms of its arbitration agreement, it could compel arbitration at any time before trial or judgment, unless the opposing party could show actual prejudice. The court was not willing to base its decision on the language of the agreement, however, citing federal cases that refuse to allow “no waiver” clauses to alter the usual waiver analysis.  Instead, it focused on whether Citibank’s conduct demonstrated that it had intentionally relinquished its right to arbitrate. Critically, the court turned the tables and said that in a situation where the consumer waited 4.5 years to assert a counterclaim, “we will not attribute the lengthy duration of activity…solely to Citibank.”  The court noted that the counterclaim changed the character of the case, and after that happened, Citibank timely filed a motion to compel arbitration.

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In the “Don’t get too cute” category… An exotic dancer just won her right to keep her wage-and-hour claims in court, despite an arbitration agreement in her contract. Why?  Because the club styled her contract as a landlord/tenant arrangement in which she leased the stage.  Because the arbitration clause applied only to disputes arising out of the agreement, and the agreement purported to be a lease, the court refused to find its scope broad enough to cover her FLSA claims. Herzfeld v. 1416 Chancellor, Inc., 2016 WL 6574075 (3d Cir. Nov. 7, 2016).

Echoing a holding already issued by four other circuits, the Third Circuit recently found that a defendant does not waive its right to arbitration by continuing to litigate in court, if the reason it failed to move to compel arbitration is that the motion would have been futile.  Chassen v. Fidelity Nat’l Fin., Inc., 2016 WL 4698256 (3d Cir. Sept. 8, 2016).

The case involves a class of real estate purchasers who claim they were overcharged for recording documents in New Jersey.  Although there were arbitration agreements in the relevant contracts, the defendants did not move to compel “bipolar” arbitration for two and a half years.  (Where did that term come from, Third Circuit?  Are we equating individual arbitration to a mental health condition now?)  In that time, plaintiffs served 150 non-party subpoenas and spent $50,000 on experts.

Although defendants did not attempt to explain their inaction, the Court concluded the long delay in seeking arbitration was excused.  In short, New Jersey law had nearly outlawed class action waivers in consumer arbitration clauses, so until SCOTUS decided Concepcion in 2011 (finding California’s similar rule preempted by federal law), it would not have made sense for defendants to compel arbitration.  The court reasoned that unlike in other cases of inaction, the prejudice to plaintiffs “is attributable to a change in the applicable law, not to any negligent action on the part of either party.”  It also noted that futility is a recognized exception to ripeness and administrative exhaustion, two analogous doctrines.

Other than the use of “bipolar,” none of those conclusions strikes me as odd.  But the opinion then plows some new ground.  It finds that a defendant can independently waive individual and class arbitration, because those are “substantively distinct” types of arbitration.  (And it concludes that the defendants here had a valid futility defense for both types.) Finally, the dissent points out a key piece of information: there was no class arbitration waiver in the arbitration clauses at issue.  “These clauses…do not even mention class arbitration, let alone outright prohibit it.” Which the dissent (fairly) characterizes as seriously undercutting the futility analysis.

Now that Concepcion is more than five years old, this type of case is unlikely to come up often in terms of preempted state arbitration law, but the new rules from the CFPB (and legal challenges to those regulations) could make the futility doctrine relevant again.

While state courts have been busy articulating novel interpretations of arbitration law this summer, federal courts seem intent on getting back to basics.  In recent weeks, federal appellate courts have reminded parties who has the burden of proving an agreement to arbitrate, what should happen to the case when arbitration gets compelled, how parties waive their right to arbitration, and what is a “reasoned award.”

Burden of Proof

The Eleventh Circuit took the opportunity to clarify that when the plaintiff denies the existence of an arbitration agreement, state contract law determines who has the burden of proving the existence of the agreement.  (Distancing itself from its own 1993 precedent.)  In this case, Georgia law applied, and it provided that the defendant seeking to enforce the alleged arbitration agreement bears the burden of proving a valid arbitration agreement exists.  Because the defendant credit card issuer had no proof that the plaintiff agreed to any terms at all when she completed her on-line application, and could not prove that it sent a Welcome Kit containing the arbitration agreement at issue, or even establish which cardholder agreement it sent to plaintiff, the appellate court affirmed the district court’s denial of the motion to compel arbitration.  Furthermore, having presented “woefully inadequate” proof with its motion, defendant was not entitled to try and prove the existence of an arbitration agreement at a later trial.  Bazemore v. Jefferson Capital Systems, LLC, 2016 WL 3608961 (11th Cir. July 5, 2016).

Just Stay

In the course of a “summary order” affirming the district court’s grant of a motion to compel arbitration, the Second Circuit took time to issue a reminder to lower courts.  In that Circuit, the language of Section 3 is read quite literally.  Section 3 says when there is an applicable arbitration agreement  the court “shall on application of one of the parties stay the trial…”.  Even if all claims are referred to arbitration, courts are not to dismiss an action if any party seeks a stay instead.   To dismiss in that instance is an abuse of discretion.    Virk v. Maple-Gate Anesthesiologists, PC, 2016 WL 3583248 (2d Cir. July 1, 2016).

Don’t Waffle, Or You’ll Waive

Everyone knows you can waive your right to arbitrate, right?  But sometimes you need a good example of someone doing that, so that you can see exactly what to avoid.  Martin v. Yasuda, 2016 WL 3924381  (9th Cir. July 21, 2016) can provide that example.  Here the putative class of students at a private cosmetology school had all signed an enrollment agreement calling for arbitration.  Yet in response to the students’ Fair Labor Standards Act (FLSA) case, the school moved to dismiss for a substantive failure to state a claim.  When they were not completely successful, they filed an answer in which arbitration was one of 43 affirmative defenses.  Finally, after engaging in some discovery, the defendant moved to compel arbitration, 17 months after the start of the case.  Both the district court and the appellate court found the defendant had waived its right to arbitrate.  (Key factors: defendant had told court it was not likely to enforce arbitration agreement and had forced court to decide motion on merits.)  The court also confirmed that whether a party has waived its right to arbitrate by its litigation conduct is an issue for determination by the courts, not arbitrators.

Within Reason

In arbitration, parties can usually choose among three levels of award: simple award, reasoned award, or findings of fact and conclusions of law.  But, the lines delineating those three levels are awfully fuzzy and undefined.  Why does that matter?  Because a party who contracted for “findings of fact” might be able to vacate its award if the arbitrator issued only a “reasoned award.”  In the spirit of helpfulness, the Second Circuit defined a “reasoned award” in Leeward Construction Co. v. American Univ. of Antigua-College of Medicine, 2016 WL 3457266 (2d Cir. June 24, 2016).  They held “that a reasoned award is something more than a line or two of unexplained conclusions, but something less than full findings of fact and conclusions of law on each issue raised before the panel.  A reasoned award sets forth the basic reasoning of the arbitral panel on the central issue or issues raised before it.  It need not delve into every argument made by the parties.”

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Continuing last week’s theme of “States Gone Wild,” here are three more oddball summer decisions from state supreme courts. All of them find interesting paths around federal case law (IMHO).

Georgia Says Class Complaint Is Deemed Arbitration Opt Out For All Class Members

In Bickerstaff v. SunTrust Bank, 2016 WL 3693778 (Ga. July 8, 2016), the issue was whether a class action challenging overdraft fees could proceed in court. The class complaint was filed in July of 2010, and in August of 2010 (in response to a court ruling), the bank amended its deposit agreement to allow customers to opt out of arbitration. In part, the amended arbitration agreement stated:

To reject this arbitration agreement provision, you must send the Bank written notice of your decision … by the later of October 1, 2010 or within forty-five (45) days of the opening of your Account. Such notice must include a statement that you wish to reject the arbitration agreement … along with your name, address, account name, account number and your signature … This is the sole and only method by which you can reject this arbitration agreement provision.

Just after October 1, the bank moved to compel arbitration. The issue of whether the complaint could serve as the formal rejection of the arbitration provision ended up before the Supreme Court of Georgia. That court unanimously held that “the filing of Bickerstaff’s complaint, thereby signaling his rejection of the arbitration agreement, tolled the time in which the putative class members were required to notify SunTrust of their intent to reject arbitration.”

In its analysis, the court leaned heavily on Georgia cases in the class action context, finding that class representatives may satisfy statutory or contractual preconditions on behalf of those class members who remain in the class after it is certified. “[T]he satisfaction of a precondition for suit by the class plaintiff typically avoids the necessity for each class member to satisfy the precondition individually.” Curiously absent from the decision was any discussion of Stolt-Nielsen, or Section 2 of the FAA (requiring strict enforcement of valid arbitration agreements), or the preemption rulings in Concepcion and DirecTV.

[Thanks to a reader for sending me this case before Westlaw did.]

Split South Carolina Court Reasons Its Way Around Rent-A-Center

Our next state court ruling at least acknowledges the relevant federal precedent. In Smith v. D.R. Horton, Inc., 2016 WL 3660720 (S.C. July 6, 2016), the issue was whether a husband and wife had to arbitrate their construction defect claims against their builder. Section 14 of the parties’ agreement was entitled “warranties and dispute resolution,” and made up of ten subparagraphs covering topics from whether the builder could remove existing trees, to the private warranty it provided, to the requirement to arbitrate disputes. The arbitration agreement was in 14(g), with its own subheading “mandatory binding arbitration.” The builder moved to compel arbitration and the homeowners argued that clauses within Section 14 made the arbitration agreement unconscionable.

The builder relied on the severability doctrine, first set forth in Prima Paint but reiterated in Buckeye Check Cashing and Rent-A-Center, which holds that courts may only decide disputes about the validity of the arbitration agreement itself, all other challenges to the contract must be determined by the arbitrator. The builder defined the arbitration agreement as 14(g), which the homeowners did not challenge, while the homeowners defined the arbitration agreement as all of Section 14. The court agreed with the homeowners, relying largely on the title of Section 14, and the fact that the subparagraphs had “cross-references to one another, intertwining the subparagraphs so as to constitute a single provision.”

Having defined the arbitration agreement to include all of Section 14, the court went on to find the arbitration agreement unconscionable due to its disclaiming implied warranty claims and prohibiting monetary damages. (As Section 14 had no severability clause, the court refused to analyze whether the unconscionable portions could be stricken.) Two justices dissented, noting that “the majority has not followed controlling precedent of the United States Supreme Court.” (That should help the cert petition…)

[NOTE TO DRAFTERS: Move your arbitration agreement into a separate paragraph with its own heading right now! Give it its own severability clause. Then you can keep reading.]

North Dakota Forgets To Read The Footnotes

Not to be left out of the “buck SCOTUS” summer trend, North Dakota issued a decision finding that a district court did not err in compelling arbitration of the formation of the parties’ contract. 26th Street Hospitality, LLP v. REAL Builders, Inc., 2016 WL 3022054 (N.D. May 26, 2016). One party to the contract argued the contract was invalid because it was executed without the knowledge and authority of the Partnership, as proper consent had not been received pursuant to the company’s charter documents. Nevertheless, the district court compelled arbitration, without deciding the formation of the contract. The North Dakota Supreme Court unanimously found the district court did not err in refusing to decide formation before ordering arbitration, relying on Rent-A-Center’s discussion of severability.   What it did not discuss, however, is 1) the first footnote in Buckeye Check Cashing which specifically states that the severability doctrine does not apply when the issue is “whether any agreement between the alleged obligor and obligee was ever concluded,” or 2) the fact that a majority of federal courts have concluded formation is an issue for courts, not arbitrators.

As long as we’re talking state courts…

Two state supreme courts have new decisions on waiver. The Texas Supreme Court found a company did not waive its right to arbitrate claims with individual customers in RSL Funding, LLC v. Pippins, 2016 WL 3568134 (Tex. 2016). Importantly, the Texas court said that for Party A to waive its right to arbitrate with Party B, the court will only analyze Party A’s litigation conduct with respect to Party B after a dispute arises. In this case, the majority of the company’s litigation conduct at issue was directed at third parties before a dispute arose with the individual customers.

The Supreme Court of South Carolina found a nursing home waived its right to arbitrate wrongful death claims in Johnson v. Heritage Healthcare of Estill, 2016 WL 3022394 (S.C. May 25, 2016). The nursing home had litigated over the estate’s right to records and conducted discovery before moving to compel arbitration.

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