Waiver of Right to Arbitrate

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.


Phew!  Long post.  Is ArbitrationNation your primary source for analysis of state court arbitration decisions? For the latest advice on drafting arbitration clauses? Or just a home for your arbitration geekdom? If so, please consider nominating the blog for the ABA’s Blawg 100 list, by following this link.

Today’s post is brought to you by the number 8.  The 8th Circuit Court of Appeals issued a new opinion yesterday finding that a defendant who litigated in court for 8 months waived its right to arbitrate (aka, ARBITR8) plaintiff’s employment claims.  [That could be my vanity plate!!]

Messina v. North Central Distributing, Inc., 2016 WL 2640911 (8th Cir. May 10, 2016), involved an employee’s claims of wrongful termination and breach of contract against his employer.  The employee brought those claims in Minnesota state court.  In response, the employer removed the case to federal court, filed an answer asserting 24 affirmative defenses, and later moved to transfer the case to federal court in California.  Only after the federal judge in Minnesota denied the motion to transfer did the employer move to compel arbitration.  That motion came eight months after the plaintiff had filed his complaint.  The district court denied the motion to compel, finding the employer had waived its right to arbitrate, and the appellate court affirmed that result.

The appellate court agreed that all three elements of the test for waiving arbitration rights were met.  First, the employer “knew of [its] existing right to arbitration,” because it had the arbitration agreement in its possession.  Second, the employer “acted inconsistently with that right” by litigating for eight months, including making two motions (removal and transfer), and filing scheduling reports that indicated the case would proceed to trial.  The court also faulted the employer for not raising arbitration at the earliest possible time — in its Answer or in the Rule 26(f) report.  And third, the employer “prejudiced the other party by these inconsistent acts,” in that it caused delay and forced the employee to respond to motions and participate in procedures not available in arbitration.

The 8th Circuit seemed most concerned about the gamesmanship, however.  It commented that “[t]he timing of [the employer’s] actions demonstrates that it ‘wanted to play heads I win, tails you lose,’ which ‘is the worst possible reason’ for failing to move for arbitration sooner than it did.”

The test used by the 8th Circuit to determine waiver of arbitration rights is similar to that used in many circuits, so this case is a good opportunity to remind parties and counsel that there are serious risks to not raising the existence of an arbitration agreement early in a case.  My rule of thumb — not yet adopted by any court — is that it should be raised within the first three months of litigation and before making any (other) affirmative motion that requires court resources.

Lots of interesting arbitration law has been made already in 2016, so here is a roundup from the first four weeks of the year. As a teaser, courts have breathed life into the effective vindication doctrine, found arbitrators cannot determine the availability of class actions, and found state laws not preempted.  More surprisingly, state courts are following SCOTUS’s interpretations of the FAA.

Effective Vindication Lives On

Although I thought Italian Colors was an “effective elimination” of the effective vindication doctrine, the Tenth Circuit affirmed its use as a defense to a motion to compel arbitration this month in Nesbitt v. FCNH, Inc., 2016 WL 53816 (10th Cir. Jan. 5, 2016).  [Side note to WestLaw: can there really have been 53,816 cases by January 5th of the year??  Or do I misunderstand the numbering system?]  In that case, class action plaintiffs in a Fair Labor Standards Act case defeated a motion to compel individual arbitrations by asserting that under the AAA Commercial Rules, each plaintiff would have to pay between $2,300 and $12,500 in arbitrator fees and could not recover attorneys’ fees.  The appellate court affirmed.

Incorporation of AAA Rules Can “Unmistakably” Delegate Some Gateway Issues, But Maybe Not the Availability of Class Actions

The Third Circuit drew what seems to me a questionable distinction between parties’ ability to delegate some substantive issues of arbitrability from others. Despite acknowledging that federal courts of appeals have universally found that when parties agree to be bound by the AAA rules, they delegate substantive arbitrability to arbitrators, the Third Circuit found that does not extend to the availability of class arbitration. Chesapeake Appalachia, LLC v. Scout Petroleum, LLC, 2016 WL 53806 (3d Cir. Jan. 5, 2015).  Recall that in general, courts are presumed to have authority to determine whether an arbitration exists, whether it is valid, and whether it covers the scope of the parties’ dispute.  But, under First Options of Chicago, a SCOTUS opinion, parties can delegate even those issues to arbitrators as long as their intent to do so is “clear and unmistakable.”  In Chesapeake Appalachia, the court repeats its pronouncement from Opalinski that the “availability of classwide arbitration” is one of those substantive questions of arbitrability that courts presumptively decide, unless parties clearly and unmistakably state otherwise.  And then it further protects courts’ ability to make that determination by holding that the parties’ incorporation of AAA rules, which explicitly allow arbitrators to determine their own jurisdiction and contain supplementary rules about class arbitration, is not sufficient to delegate the availability of classwide arbitration to arbitrators.  Drawing on statements from Sutter, the court leaned on the “great” procedural differences between bilateral and class-action arbitration to support its distinction.

Waiver of the Right to Arbitrate is an Issue Presumptively for Courts

Maybe Bryan Garner can come up with a new term for “waiving” the right to arbitrate, so that it is not the same verb as waiving the substantive claim being arbitrated. If so, that would alleviate the problem that the Supreme Court of Nevada addressed in Principal Investments, Inc. v. Harrison, 2016 WL 166011 (Nev. Jan. 14, 2016).  That court wrestled with the issue of whether a court or an arbitrator should decide if a party has waived its right to arbitrate by participating in litigation.  In other words, is that type of waiver a substantive question of arbitrability (like whether there is a valid arbitration agreement) that is presumptively for courts, or a procedural question of arbitrability that is presumptively for arbitrators?  Adding to the confusion is language from Howsam and BG Group characterizing “waiver” as an issue presumptively for arbitrators.  After canvassing other courts and finding the majority have concluded that waiver-by-litigation is presumptively for courts, the Nevada Supreme Court followed the herd.

Missouri Enforces Prima Paint’s Severability Doctrine

As I have picked on Missouri for bucking federal arbitration law, I owe it to the Show-Me State to point out that it recently (but reluctantly) followed federal precedent on severability. In Ellis v. JF Enterprises, LLC, 2016 143281 (Mo. Jan. 12, 2016), the Supreme Court of Missouri recognized that under federal precedent, a plaintiff cannot avoid an arbitration agreement by asserting the contract as a whole is void, it must point to a deficiency with the arbitration clause specifically.  As a result, the court held that “no matter what logic or fairness” undergirded the plaintiff’s argument that her auto sale was invalid, she had to arbitrate that claim.

Kentucky’s Precedent on Wrongful Death Actions is not Preempted by FAA

In Richmond Health Facilities v. Nichols, 2016 WL 192004 (6th Cir. Jan. 15, 2016), the Sixth Circuit analyzed Kentucky’s state law rule, which holds that wrongful-death claims belong only to beneficiaries, and therefore any arbitration agreement signed by a decedent cannot bind a beneficiary bringing a wrongful death claim.  The Sixth Circuit found that state law rule does not stand as an obstacle to the FAA, because it does not categorically prohibit arbitration of wrongful death claims, so was not preempted.

Lots of Action on Attorneys’ Fees

The Supreme Court of Utah held that an arbitrator cannot award attorneys’ fees incurred in confirming the arbitration award, under the Uniform Arbitration Act. Westgate Resorts, Ltd. V. Adel, 2016 WL 67717 (Utah Jan. 5, 2016).

Massachusetts’ highest court also found an arbitrator is not authorized to award attorneys’ fees due to one party’s assertion of frivolous defenses (unless the parties specifically granted the arbitrator that authority). Beacon Towers Condominium Trust v. Alex, 2015 WL 9646024 (Mass. January 7, 2016).

Similarly, the Second Circuit held that a federal district court erred in awarding attorneys’ fees and costs to the party that successfully confirmed its arbitration award. Zurich Am. Ins. Co. v. Team Tankers (2d Cir. Jan. 28, 2016).  As part of its contractual analysis, the court repeated that parties may not contract around Section Ten of the FAA.  In other words, it would not read the parties’ contract as precluding an attempt to vacate the award.

PHEW. I have now alleviated the guilt that has been weighing on me for not blogging about these cases yet.  Hope February brings a more reasonable stream of opinions!

Before I can sum up 2015 in arbitration (next post!), I need to report on some new cases coming out of the federal and state appellate courts in recent weeks.  Two are just good reminders of basic arbitration law, but the third addresses an interesting question of double recovery.

Our first “reminder” case comes from New York’s highest court.  In Cusimano v. Schnurr, 2015 WL 8787554 (N.Y. Dec. 16, 2015), that court held that the Federal Arbitration Act applies, even to intrafamily transactions among New York residents (sing: “it’s a family affaaaair…”), and even when defendants argue their family business is “passive” and has no impact on interstate commerce.  The court basically said family shmamily, look at the type of business you have and what it owns.  “The idea that the intrafamilial nature of the agreements has some bearing on whether the FAA is applicable finds no support in the caselaw.”  Instead, the fact that the family business owned commercial properties inside and outside New York was key.  (But, the plaintiffs waived their right to arbitrate by litigating aggressively for a year.)

The second “reminder” comes from the Eleventh Circuit and relates to appeal timing.  In the Wise Alloys case, 2015 WL 8119326 (11th Cir. Dec. 8, 2015), that court held that the defendant did not appeal the district court order compelling arbitration within the allowed deadline.  (The court had fun with this one, quoting Carole King to say “it’s too late…”)  Critically, the entire complaint related to the union’s effort to compel the defendant company to arbitration.  The district court compelled arbitration in June of 2012, but the company did not appeal until after the arbitration was complete and the award had been confirmed in late 2014 (well beyond the 30-day deadline in the federal rules).  The lesson from this case is that while Section 16 of the FAA commands that “interlocutory” orders compelling arbitration are not immediately appealable, not all orders compelling arbitration are interlocutory: if the only relief a complaint seeks is an order compelling arbitration, then the order granting that relief is final and immediately appealable.

The most interesting outcome in this group comes from the Ninth Circuit (with Judge Shira Scheindlin from SDNY sitting by designation on the opposite coast).  In Uthe Technology Corp. v. Aetrium, Inc., 2015 8538090 (9th Cir. Nov. 19, 2015), the plaintiff had already been awarded millions of dollars against related defendants in an arbitration and then brought a RICO claim for treble damages in U.S. federal court for the same conspiracy.  The question was whether that RICO claim was precluded by the “one satisfaction” rule that avoids double recovery.  (P.s. That arbitration lasted two decades.  Score one for litigation.)   The Ninth Circuit found the RICO claims were not precluded, largely because the arbitration claim was against a different set of defendants, and RICO provides remedies that were not available to Uthe in the arbitration, and the arbitration award specifically noted that it was made without prejudice to Uthe’s right to bring further claims in federal court.  The 9th Circuit did note that any damages in the RICO case must be offset by the sums paid as a result of the arbitral award

The issue in analyzing whether a party waived its right to arbitrate is usually whether the defendant waited too long to assert the arbitration obligation.  But, this week the Second Circuit had the opportunity to address whether a plaintiff waives its right to arbitrate by the simple fact of bringing a case in court.

In LG Electronics, Inc. v. Wi-LAN USA, Inc., 2015 WL 5254894 (2d Cir. Sept. 10, 2015), the appellate court affirmed the district court’s decision that defendant Wi-LAN had not waived its right to arbitrate.  The court found that Wi-LAN’s four month delay in asserting arbitration was not sufficient to show waiver, when LG could not prove prejudice other than litigation expenses.  Furthermore, the court noted that Wi-LAN had not waived its right to arbitration merely by bringing suit in federal court in the first place.

The Supreme Court of Alabama made that same point earlier this year in IBI Group, Michigan, LLC v. Outokumpu Stainless USA, 2015 WL 2161150 (Ala. May 9, 2015).  In that case, clients had sued the designer of their facilities in federal court.  After the parties had engaged in Rule 26 disclosures and served discovery (and even debated whether there was complete diversity of citizenship to support federal jurisdiction), the clients/plaintiffs demanded arbitration and asked the federal court to stay litigation.  In response, the designer brought its counterclaims in state court and the clients moved to compel arbitration of the state court claims.

The Alabama courts enforced the arbitration clause, despite the clients’ initial filing of the federal action.  The Alabama Supreme Court noted it had previously held that plaintiffs are not barred from exercising contractual arbitration rights just because they initiated litigation.  But the complicating factor in this case was that the arbitration agreement gave the clients the “sole discretion” to choose whether a dispute would be arbitrated or litigated, and the designer argued that once the clients made that decision, it was “irrevocable.”  The Alabama courts disagreed, interpreting the arbitration agreement to allow the clients to change their mind about the dispute resolution forum.

Finally, in a more run-of-the-mill waiver case, the Sixth Circuit recently concluded that the defendant had waived its contractual right to arbitrate by participating in federal litigation for 15 months, including filing dispositive and non-dispositive motions.  Gunn v. NPC Int’l, Inc., 2015 WL 5061545 (6th Cir. Aug. 28, 2015).

Three federal appellate courts recently affirmed lower courts’ refusal to compel arbitration.  These cases show that the federal policy favoring arbitration is not absolute – the parties must have agreed to arbitrate the claims at issue and the defendant cannot have waived its right to arbitrate by engaging in significant discovery and motion practice.

In Lloyd v. J.P. Morgan Chase & Co., __ F.3d __, 2015 WL 3937978 (2d Cir. June 29, 2015), the issue was whether putative class and collective actions by former financial advisors could proceed in court.  The employment agreements call for arbitration of “any claim or controversy … required to be arbitrated by the FINRA Rules … no claims shall be arbitrated on a  … collective or class-wide basis.”  The current FINRA Rules prohibit arbitration of any class or collective claims.  The employer moved to compel arbitration and the district court denied the motion, finding that plaintiffs’ class and collective action claims fall outside the scope of the arbitration clause.  The Second Circuit affirmed.  It engaged in a grammatical analysis of the arbitration clause (rejecting the employer’s argument about the “rule of the last antecedent”) and found that the phrase “required to be arbitrated by the FINRA Rules” modifies “claim or controversy.”  Therefore, because the current FINRA Rules did not require arbitration of class or collective actions, the claims could proceed in federal court.

In another case about whether the parties really intended to arbitrate their claims, the Eighth Circuit found that the plaintiff never accepted the terms of the contract containing the arbitration agreement, despite starting to perform under that contract.  LoRoad, LLC v. Global Expedition Vehicles, LLC, __ F.3d __, 2015 WL 3449847 (8th Cir. June 1, 2015).  The plaintiff and defendant had exchanged multiple revisions of the contract, until finally the defendant sent a version that plaintiff appeared to accept by wiring a deposit on the funds due under the contract and faxing the contract back with the signature of an (unauthorized) principal and “minor handwriting notations and changes.”  Later, however, plaintiff asserted “unfinished business” and threatened to rescind the contract, and the defendant suggested revising the contract.  Applying UCC and Missouri law, the Eighth Circuit found the plaintiff never accepted the contract.  Furthermore, even though every version of the agreement contained the same arbitration provision, the Eighth Circuit found “there was an enforceable agreement to arbitrate if, and only if, [plaintiff] proved there was a final, enforceable [contract].”  (Plaintiff had filed suit to compel arbitration.)

Finally, in a class action antitrust case, In re Cox Enterprises, Inc. Settop Cable Television Box Antitrust Litig., ___ F.3d __, 2015 WL 3875726 (10th Cir. June 24, 2015), the defendant’s motion to compel arbitration was denied because the court found the defendant waived its right to compel.  The appellate court found that the defendant waived its right by waiting until two years into the litigation – after moving to dismiss the claim, engaging in “extensive pretrial discovery,” and opposing class certification.  In particular, the district court was offended that the defendant’s failure to inform the court of the arbitration agreement until after class certification had wasted significant court resources and suggested an attempt at “multiple bites at the apple” and to “play heads I win, tails you lose.”

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

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

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

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

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

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

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

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

We haven’t had a good waiver case in a while.  The First Circuit served one up last week with a flourish, teaching me multiple new words in the process (not for the first time, either).  It found that a plaintiff had waived its right to arbitrate, not by bringing its claims to court in the first place, but by waiting nine months to compel arbitration, thereby seeming to “use [] an arbitration clause as a parachute when judicial winds blow unfavorably.”

In Joca-Roca Real Estate, LLC v. Brennan, __ F.3d __, 2014 WL 6737103 (1st Cir. Dec. 1. 2014), the plaintiff alleged fraud and breach of contract stemming from an asset purchase agreement.  The agreement required arbitration.  The parties conducted significant discovery, involved the court in discovery disputes, and were scheduled for trial on February 3, 2014.  On December 6, 2013, shortly before the summary judgment deadline, the plaintiff moved to stay proceedings pending arbitration.  (First big word: the court says the plaintiff did not explain its “cunctation” in invoking the arbitration provision.)  The district court found the plaintiff had waived its right to seek arbitration.

The First Circuit affirmed.  It reiterated the rule in its circuit that mere delay in seeking arbitration is insufficient to find waiver, there must be prejudice to the non-moving party.  To analyze prejudice, the court reviews a “salmagundi” of factors.  But the court admits the prejudice requirement is “tame” and can be inferred from a long delay accompanied by significant activity in the courts. In this case, the court focused on: the fact that the parties engaged in significant discovery, that the plaintiff waited until close to trial to seek arbitration, and that the change in forum would have delayed final disposition of the case and “nullify one of the primary benefits of arbitration.”

So we know at least two things: first, if you’re appearing before the First Circuit, you should use some fifty cent words in your briefs; and second, if you are on the eve of trial, it is probably too late to compel arbitration of the claim.

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

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

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

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

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


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

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

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

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

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

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

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