In March, the highest courts of Montana, Texas, and Wisconsin all held that, when parties have a valid arbitration agreement, the issue of whether an arbitration demand was timely is presumptively for the arbitrator to decide.  That principle of law has been established under the FAA at least since the Howsam decision in 2002 (and confirmed in BG Group in 2014), but now seems to be firmly taking hold in state courts, even when those courts are interpreting state arbitration acts.

In the Montana case, Montana Public Employees Assoc. v. City of Bozeman, __ P.3d __, 2015 WL 895731 (Mont. March 3, 2015), the City of Bozeman fired a building inspector.  The collective bargaining agreement had a four-step grievance procedure, with time limits, and stated that any grievance not filed within the time limits “shall be deemed permanently withdrawn.”  The inspector only completed three and a half of those steps within the time limits provided in the CBA.  Based on that, the City refused to arbitrate.  The union sued to force the City to arbitrate, and the City asked the court to find the dispute was time-barred.  The Montana Supreme Court noted that it has adopted the distinction between procedural and substantive arbitrability from Howsam (and John Wiley), and that the issue of whether the inspector’s claims were time-barred was a “classic question of procedural arbitrability that is for an arbitrator and not for a court to decide.”

In the Texas case, G.T. Leach Builders, LLC v. Sapphire V.P., __ S.W.3d __, 2015 WL 1288373 (Tex. March 20, 2015), a developer sued three insurance brokers who had allowed its builder’s risk insurance to expire just before a hurricane hit its condominiums (which were still under construction).  Later, the developer added the general contractor and others as third parties.  The general contractor moved to compel arbitration, and the developer responded that the demand was untimely, because the arbitration agreement incorporated a statute of limitation.  The court of appeals ruled that the general contractor’s arbitration demand was untimely, but the Texas Supreme Court reversed.  Citing to BG Group and Howsam, it held that “courts must defer to the arbitrators to determine the meaning and effect of the contractual deadline.”

Addressing the developer’s argument that the limitations question was actually one of substantive (not procedural) arbitrability, the Texas court clarified that it was not substantive because “the parties’ dispute over the meaning and effect of the contractual deadline does not touch upon the issue of whether an enforceable agreement to arbitrate [the developer’s] claims exists.”  (The court conceded that timeliness could turn into a substantive issue of arbitrability if the challenger asserted that the contractual deadline made the agreement unconscionable.)  Therefore, the Texas Court of Appeals erred by deciding whether the dispute was arbitrable.

Similarly, in the case First Weber Group, Inc. v. Synergy Real Estate Group, LLC, __ N.W.2d __, 2015 WL 1292570 (Wis. March 24, 2015), the Wisconsin Supreme Court also held that the timeliness of an arbitration demand was an issue for the arbitrator.  First Weber involved a brokerage firm that filed an arbitration demand against another broker.  The broker refused to arbitrate, and the firm moved a court to compel arbitration.  The trial court found the firm’s demand for arbitration was untimely, because the governing agreement required arbitration to be demanded within 180 days after the transaction closed.  Citing to Howsam, the Wisconsin Supreme Court held that the broker’s “timeliness and estoppel defenses against arbitration are to be determined in the arbitration proceedings, not by a court” under Wisconsin’s arbitration act.  And more broadly, the court adopted the holdings of BG Group and Howsam, so that Wisconsin law now also requires that procedural arbitrability must be decided by an arbitrator, unless the parties agreed otherwise.

Just a few weeks after First Weber, the Seventh Circuit issued an opinion confirming how firmly entrenched this rule is under the FAA.  In an opinion of barely three pages, the court rebuked a district court that ruled on the timeliness of a plaintiff’s arbitrable claims.  Johnson v. Western & Southern Life Ins. Co., 2015 1637847 (7th Cir. Apr. 15, 2015).  In that case, an employee asserted discrimination claims against her employer in federal court and the district court compelled arbitration.  Based on language in the arbitration agreement stating that any arbitration must be commenced within six months of termination, the district court dismissed the claims with prejudice.  The Seventh Circuit called that a “misstep,” because “the district court improperly ruled on a matter that is presumptively reserved for the arbitrator,” citing BG Group and Howsam.  The court wrote:

The Supreme Court has applied this rule consistently, making clear in more recent decisions that federal courts must presume that the parties intended arbitrators to decide whether a party has complied with time limits and other arbitrational prerequisites.

Therefore, the dismissal should have been without prejudice.

These cases should help increase awareness among parties and their counsel that courts can address very limited issues when the parties have a valid arbitration agreement.  Essentially, if the arbitration agreement exists, covers the present dispute, is valid under state law and has not been waived by litigation conduct, every other potential dispositive issue is presumptively for the arbitrator to decide.  (And, even some of those issues can be delegated to the arbitrator, see Rent-A-Center, West.)

Let’s say your arbitration agreement calls for arbitration administered by JAMS under JAMS rules, but the arbitrator is independent and applies AAA rules, over one party’s objection.  A new decision from the Fifth Circuit says that is enough to vacate the resulting award.

In Poolre Insurance Corp. v. Organizational Strategies, Inc., __ F.3d__, 2015 WL 1566633 (5th Cir. April 7, 2015), there was a dispute between a self-insured company, the consultants that set up its insurance program (Capstone), and its reinsurer.  The arbitration agreement between the company and Capstone called for arbitration under the Commercial Arbitration Rules of the AAA, with venue in Delaware.  The arbitration agreement between the company and the reinsurer, on the other hand, called for arbitration by the International Chamber of Commerce (ICC), in Anguilla, with the arbitrator chosen by “the Anguilla [] Director of Insurance.” (Anguilla is in the British West Indies.  Why don’t I ever get to arbitrate somewhere exotic?  Maybe that’s the reward for being a reinsurance lawyer…)

Capstone started arbitration with the company at “Conflict Resolution Systems, PLLC” (CRS) in Houston, and Dion Ramos was named the arbitrator.  When the reinsurer inquired whether the Anguilla Director of Insurance could select the arbitrator, as required in the reinsurance contract, an Anguillan official explained that “no such official existed.”  (Sounds reminiscent of these cases...)  However, the Anguillan official designated CRS to select an independent arbitrator and administer the proceedings.  The company objected to the arbitrator’s authority, and the reinsurer intervened to request an arbitrator based in Anguilla.  Ramos found he had jurisdiction over all parties, and found the reinsurer waived its right to arbitrate in Anguilla by intervening.  The company continued to object, arguing that the arbitrator did not have the power to apply AAA rules to the reinsurance dispute.

Ramos found the reinsurer was properly joined in the arbitration.  On the merits, Ramos found the company breached its contracts with Capstone and the reinsurer and granted attorneys’ fees and expenses to Capstone and the reinsurer of about a half a million dollars.  Ramos denied all the company’s claims.

The reinsurer and Capstone moved to confirm the award and the company moved to vacate.  The Texas district court found Ramos exceeded his authority by exercising jurisdiction over the reinsurer and applying AAA rules to the reinsurance dispute. Because the inclusion of the reinsurer “tainted the entire process,” the district court vacated the award.

On appeal, the Fifth Circuit affirmed the district court’s decision to vacate the award.  The court noted that arbitration awards may be vacated when arbitrators “exceed[] the express limitations” of the contractual mandate, or act contrary to express contractual provisions.  Here, the Fifth Circuit found two separate bases for vacating the award.  First, the arbitrator-selection mechanism in the reinsurance contracts was not followed.  (In a footnote, the court acknowledged that the selection mechanism provided in the contract was not actually available, since there was no official with that title, but that the parties could have come to the court under Section 5 of the FAA and asked the court to appoint an arbitrator.)  Second, Ramos “acted contrary” to the requirement that the reinsurance disputes be arbitrated by the ICC under ICC rules.  The court found that was a “forum selection clause integral to the agreement” and therefore the arbitrator exceeded his power by applying AAA rules.  (Interestingly, the Fifth Circuit did not analyze the third basis that the district court used to support vacatur: the arbitrator’s decision to join all the parties to a single arbitration, although the company had not consented to consolidation.)

What are the lessons here for parties?  Here are at least two.  First, do not try to consolidate arbitrations that call for different administrators or different rules unless all parties agree.  And second, if you are going to specify an unusual arbitrator-selection process, make sure to put a “Plan B” in the contract.

Two other bits of arbitration news:

First, SCOTUS denied cert in one of the cases that refused to enforce an arbitration clause calling for arbitration before a Native American tribe.

Second, Delaware’s Rapid Arbitration Act officially became a law on April 3 and will go into effect in May.  Will Delaware businesses see the promise of speedy dispute resolution (max resolution time is 180 days by law) as enough of a benefit to give it a try? We may never know, as the process will be confidential…

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.

Almost two years ago in American Express Co. v. Italian Colors, SCOTUS significantly narrowed, but did not overrule, the “effective vindication” doctrine, which allows plaintiffs to invalidate an arbitration agreement if it precludes them from effectively vindicating their federal statutory rights.  A decision today from the Eighth Circuit shows just how difficult it is for plaintiffs to take advantage of the effective vindication doctrine after AmEx.

In Torres v. Simpatico, Inc., a putative class of cleaning business franchisees sued the franchisor and related companies for RICO violations.  The defendants moved to compel individual arbitration, based on language in the franchise agreements.  In response, the plaintiffs argued that the arbitration agreement was unconscionable, and that some defendants were non-signatories and therefore could not enforce the arbitration agreement.  The district court compelled individual arbitration and the Eighth Circuit affirmed.

The plaintiffs raised four arguments as to why the arbitration agreement was unconscionable — “first, the costs to arbitrate will exceed the average claimant’s loss; second, the arbitration claimant must pre-pay the filing fee and other pre-hearing fees; third, the prevailing party is entitled to reimbursement of costs and expenses; and fourth, the agreement limits the franchisee’s available remedies.”  (Quoted from district court opinion.)  The plaintiffs noted that their average loss was $6,100, that individual filing fees would be between $775-975, that average daily fees for arbitrators in four cities were between $1300-$1800, and that their cases would likely take three hearing days.  Therefore, plaintiffs argued the costs of individual arbitration would exceed any individual’s damages.

Keeping in mind the statement from AmEx that “[t]he FAA’s command to enforce arbitration agreements trumps any interest in ensuring the prosecution of low-value claims,” the courts were not interested in the comparison between each class member’s damage and their potential costs of arbitration.  Instead, the Eighth Circuit focused on whether plaintiffs had proven that the costs of arbitration were so high that they could not proceed.  It found the plaintiffs’ proof fells short because the arbitrations would not proceed in any of the four cities for which daily rates were provided, and because the plaintiffs themselves did not submit any affidavits stating that they could not afford the costs of arbitration (they relied on an affidavit of their lawyer to that effect).  In short, the Court held “[t]he Appellants failed to carry their burden to show that the costs of individual arbitration ‘are so high as to make access to the forum impracticable’ or to prevent them from effectively vindicating their rights in the arbitral forum.” [With respect to plaintiffs’ complaint about the limitation of remedies, the court found that was an issue for the arbitrator.]

On the issue of whether the non-signatory defendants could enforce the arbitration agreement, the court found two reasons why they could.  First, those non-signatories were third party beneficiaries of the contract under Missouri law.  But second, the arbitration agreement explicitly bound the franchisee to arbitrate disputes with those parties by stating “all controversies, disputes, or claims between us and our affiliates, and our and their respective members, officers, managers, agents, and/or employees, and you . . . must be submitted for binding arbitration.”

This case gives important guidance for any other potential plaintiffs who hope to make a successful argument under the “effective vindication” doctrine.  Notably: put in individual affidavits from each named plaintiff about his or her inability to pay the filing fees and arbitrator fees; get information on arbitrator rates in cities where the plaintiff’s hearing will likely be heard; and use the new CFPB study to add statistics about how often arbitrators award individual claimant’s their arbitration costs.  Conversely, for drafters of arbitration agreements who want to avoid class actions, consider inserting specific language authorizing the arbitrator to award the claimant his or her filing fees or arbitrator fees if the claim is successful.

Just as I was beginning to worry that arbitration had fallen out of favor at the nation’s highest court… today the Supreme Court announced that it will hear the case of DIRECTV, Inc. v. Imburgia during its October Term, an appeal from a California Court of Appeals.  In DIRECTV, a case pitting Kirkland & Ellis against the aptly named Consumer Watchdog (and other firms), the Court will consider whether parties’ choice of state law to govern enforceability of an arbitration clause can be interpreted as trumping the FAA (and precluding a preemption analysis).

The case started in 2008 as a putative class action asserting false advertising and violation of California statutes based on DIRECTV’s allegedly improper charge of early termination fees.  In May of 2011, just after Concepcion was decided, and after a class had been certified on at least one theory, the defendant moved to stay the action and compel individual arbitration.  (Before that, it decided such a motion would be futile under California precedent.)  The district court denied the motion and the appellate court confirmed that result.

The key provisions from the agreement are these:

“Neither you nor we shall be entitled to join or consolidate claims in arbitration by or against other individuals or entities, or arbitrate any claim as a representative member of a class or in a private attorney general capacity. Accordingly, you and we agree that the JAMS Class Action Procedures do not apply to our arbitration. If, however, the law of your state would find this agreement to dispense with class arbitration procedures unenforceable, then this entire Section 9 is unenforceable.”

***

“The interpretation and enforcement of this Agreement shall be governed by the rules and regulations of the Federal Communications Commission, other applicable federal laws, and the laws of the state and local area where Service is provided to you. This Agreement is subject to modification if required by such laws. Notwithstanding the foregoing, Section 9 shall be governed by the Federal Arbitration Act.”

The California Court of Appeals used California contract law to interpret the phrase “if . . . the law of your state would find this agreement . . . unenforceable” as meaning ““the law of your state without considering the preemptive effect, if any, of the FAA.”  Therefore, it held that because the “class action waiver is unenforceable under California law, so the entire arbitration agreement is unenforceable.”  The opinion acknowledged, but disregarded, Ninth Circuit precedent interpreting the same provision and reaching the opposite result.

The question that was presented to SCOTUS for consideration is this:

Whether the California Court of Appeal erred by holding, in direct conflict with the Ninth Circuit, that a reference to state law in an arbitration agreement governed by the Federal Arbitration Act requires the application of state law preempted by the Federal Arbitration Act.

I expect that this decision will clear up some of the confusion that exists about what kind of contract language is required to choose operation of state arbitration law, as opposed to merely which state’s law will govern interpretation of the arbitration agreement, and whether it is ever possible to completely contract around the FAA.

In other SCOTUS news, the Court denied cert in the Opalinski case, that presented the issue of whether the availability of class arbitration is a gateway issue of arbitrability that courts should presumptively decide.  (I heard about that denial from SCOTUS guru @lylden himself at a dinner in Saint Paul!  It’s like hearing who will be kicked off SYTYCD directly from Cat Deeley …)

What’s one way to derail a potentially large collective action about Fair Labor Standards Act violations?  To implement a new arbitration policy within days, thereby ensuring that your current employees cannot join the court case.  At least, that was the successful tactic used by a Chicago restaurant recently.

In Conners v. Gusano’s Chicago Style Pizzeria, __ F.3d __, 2015 WL 1003860 (8th Cir. Mar. 9, 2015), a former server alleged the restaurant where she had worked violated the FLSA.  She planned to represent other current and former servers at the restaurant.  However, a month later, the restaurant rolled out a new arbitration agreement for employees (but gave them the option of opting out as well, and explicitly explained that the agreement prevented the employee from joining the Conners action).  The plaintiffs (the original woman and other former servers who had already opted in), asked the court to enjoin the restaurant from using its new arbitration agreement to reduce the number of potential plaintiffs.  The district court granted the plaintiffs’ motion “to prevent a chilling effect on future collection actions under the [FLSA],” and enjoined the restaurant from enforcing the arbitration agreement against anyone who wanted to become a plaintiff in the action.

The Eighth Circuit reversed.  It found that the plaintiffs “lacked standing to challenge the current employees’ arbitration agreement,” which deprived the district court of jurisdiction to enjoin enforcement of the new arbitration agreement.  Critically, the court did not buy the argument that the new arbitration agreement caused plaintiffs to suffer a “concrete and particularized injury” in the form of an increased pro rata share of litigation expenses.  The court faulted plaintiffs for failing to provide any evidence that the current employees were going to join the lawsuit, even without an arbitration agreement.  It noted that at the time the motion was filed, no current employees had joined the collective action, and the plaintiffs’ counsel could offer nothing other than “a hopeful guess” that current employees would eventually join the cause.

In short, the court concluded that “one must resort to pure speculation to conclude the former employees’ portion of the litigation costs is any greater than it would have been absent the agreement.  This does not satisfy Article III.”

The problem with this decision is that it feels impractical to expect plaintiffs, whose lawsuit is just a few weeks old, to already have evidence available of what classes of employees will opt in to the collective action.  In short, if other circuits adopt this approach, this tactic could be an effective way to reduce the size of new class or collective actions whose representative is a former employee.

In my last post, I shared some of the highlights from the first half of the new CFPB Arbitration Study.  This post covers the second half of the report, with juicy information gleaned from CFPB’s analysis of almost 2,000 actual consumer arbitrations and its comparison of those results to actual consumer court actions.

Arbitration Outcomes

The AAA gave the CFPB access to information about 1850 total disputes filed with it in 2010, 2011, and 2012 relating to credit cards, checking accounts, payday loans, (GPR) prepaid cards, student loans, and auto loans.  The average claim made by a consumer was $27,000, and the average claim made by the financial institution was $16,011 (debt collection).  The bulk of the claims related to credit cards, with auto loans and students loans following a distant second and third.  Arbitration was usually completed within 5-8 months. Of the disputes resolved by arbitrators, 74% were resolved by an arbitrator who also was appointed on at least one other consumer arbitration in the sample set.

32% of the consumer arbitrations filed in 2010 and 2011 were resolved on the merits.  (The rest either settled or ended in another fashion.)  Of the 158 cases in which the consumer had an affirmative claim, arbitrators provided consumers with relief in 20% of them, with an average award around $5,400.  “When consumers were provided relief on their claims, consumers won an average of 57 cents for every dollar they claimed.”  In contrast, of the 244 affirmative claims by companies that resulted in an award, arbitrators provided the companies relief in 93% of those disputes, with an average award of $12,500 (“companies won 98 cents for every dollar claimed” in the cases where companied were provided relief).  (That could be read as indicating bias.  But, it could also mean that an unpaid debt is inherently easier to prove than a FDCPA (or other consumer) claim.)

If you’ve ever wondered how often the AAA appoints a new arbitrator after receiving a “factual objection” to the arbitrator’s service, the CFPB found that happened in response to 68% of objections in these consumer arbitrations.

With respect to attorneys’ fees, consumers who were represented and took their claims all the way to an award received fees in 14% of those cases, with an average fee award of $8,148.  Companies also received attorneys’ fees in 14% of disputes resolved by the arbitrators, with an average award of $3,387.

Litigation Outcomes

Individual Federal Court Claims 2010-2012

If there were about 2,000 individual consumer arbitrations filed in these six areas in three years, how many individual federal actions were filed?  3,462 — and 2,621 of those related to credit cards.  A whopping 87% of the individual actions asserted FDCPA claims.  And 93% of the individual plaintiffs requested a jury.  The individual federal cases were concluded in an average of 171 days.

Of those individual claims that were resolved within the study period, 48% resolved by settlement, 3.7% were dismissed on a dispositive motion, 6.8% resulted in a judgment in favor of the consumer (another 41% of cases may have settled, but the docket did not clearly indicate).  Most of the cases that the consumer won were by default (78 of 82).  The average amount awarded the consumer was $13,131.  (The CFPB could not calculate the ratio of damages to claim, because unlike arbitration demands, complaints generally have generic statements about their damages like “more than 75,000.”)

Class Actions in State and Federal Court 2010-2012

In addition to the individual cases, CFPB found 470 putative class actions filed in federal court (and another 92 filed in state courts with searchable electronic records — OR, UT, OK, and NY, plus individual counties in IL, TX, FL, and CA).  Juries were requested in 80% of the class actions.  Almost half of those cases related to credit cards.  And the majority of the claims were federal or state statutory claims (FDCPA, TCPA, TILA, Deceptive Trade Practice, etc.)  The median time to close a federal class action was around 215 days (though MDL classes took around 600 days).  Class actions in state court took longer than federal court — about 400 days on average.

Most class cases settled — either by non-class settlement (CFPB estimates 60%) or a class settlement approved by the court (12%).  Another 10% of cases ended when the defendant won a dispositive motion.  Consumers obtained a judgment in their favor in only 1.8% of class cases, usually through default judgment.  No class action in the sample went to trial.

In 94 of those putative class actions, companies moved to compel arbitration, and courts granted the motion half of the time. In the 46 classes that were compelled to arbitration, CFPB was able to identify only 12 that subsequently demanded arbitration, two of which filed as putative classes in arbitration.  Similarly, for the six individual cases that were compelled to arbitration, CFPB found only one that subsequently went to arbitration.

Small Claims Court

In an effort to see if consumers are taking advantage of their arbitration carve-outs allowing claims to proceed in small claims court, CFPB searched for filings in jurisdictions where those records are accessible.  It found that credit card issuers are filing many debt collection matters in small claims court, but very few consumers are filing affirmative claims.  For example, there were 7,905 credit card debt collection cases in Harris County, Texas alone, but 870 small claims court cases filed by consumers across 31 jurisdictions combined.

Class Action Settlements 2008-2012

 To determine the benefit of class litigation, CFPB analyzed consumer financial class action settlements that took place from 2008-2012.  The 419 settlements in that time period involved more than 350 million class members (not necessarily 350M unique people) and resulted in $2.7 billion in total relief.  For the 105 settlements where a determination was possible, the average claims rate was 21% (i.e. the plaintiffs recovered 21% of the dollars they sought).  On average, it took the classes 690 days to get to a settlement.

Which Comes First — Private or Public Action?

The report presents findings about whether public enforcement of consumer protection statutes usually comes before or after similar class actions filed by private citizens.  It found that where there are overlapping actions, “public enforcement activity was preceded by private activity 71% of the time.  In contrast, private class action complaints were preceded by public enforcement activity 36% of the time.”  So, don’t knock the creativity of the plaintiffs’ bar.

Does Arbitration Lead To Cheaper Products?

The final section of the report analyzes whether arbitration agreements in financial products leads to lower prices for consumers.  After acknowledging that it is difficult to test that assertion on a broad level, the report looked at one example to test the cause and effect.  In that example, a number of credit cards agreed to remove their arbitration clauses for three and a half years as a result of a settlement.  The CFPB found no statistically significant evidence that those companies raised their prices more or differently from comparable companies with no change in ADR.

What Have We Learned?

My brain is a little fried from all the numbers and graphs and words, but here are some initial reactions from the information in the report:

  • Individual consumer actions settle more often in court than in arbitration.  Put differently, more cases get heard on the merits in arbitration.  (32% of cases are resolved on merits in arbitration, compared to about 10% in court.);
  • Arbitrators are repeat players, just like financial institutions, and plaintiffs’ lawyers;
  • Arbitration is not necessarily faster than litigation (comparing individual arbitrations to individual federal litigation);
  • Parties who don’t show up will lose — both in arbitration and in court (the volume of defaults surprised me);
  • Courts grant more damages to consumers than arbitrators do;
  • A large percent of plaintiffs will not bother prosecuting their claims if they have to go to arbitration (instead of remaining in court); and
  • Eliminating class actions can be a huge financial benefit to the financial institutions.  Whether you think that is also a benefit to the economy overall or not likely depends on your politics.

Watch this space for news on what the CFPB recommends going forward.

 

The Consumer Financial Protection Bureau released an “Arbitration Study” exceeding 700 pages to Congress this week.  You have likely heard the headlines – most commentators assume that the CFPB will use the study to support an effort to restrict or regulate the use of “pre-dispute” arbitration in financial transactions.  But, let’s not get ahead of ourselves.  The study itself is worth digging into; the CFPB was able to access lots of information that us regular folks cannot.  Indeed, one complaint about arbitration is that it happens inside a black box, out of reach of statistical analysis or scholarly study, and precluding development of legal precedent. Here’s part one of my peek inside that black box, courtesy of the CFPB.

What the Cool Kids Are Putting in Their Arbitration Clauses

About a year ago, CFPB published its findings on the frequency of arbitration agreements in financial agreements.  This report does not add much in that area.  But, it has new information on the features of arbitration clauses that are prevalent in contracts in the industries studied (credit cards, checking accounts, general purpose reloadable prepaid accounts, private student loans, payday loans, and mobile wireless third-party billing).

  • Would you guess that 50% of payday loan agreements and 83% of private student loan agreements allowed their customers to opt out of arbitration? I was surprised. More than a quarter of credit cards and checking account agreements did also.
  • A majority of all types of financial agreements carved out small claims from their arbitration agreements.
  • The AAA is king. It is listed as either the sole provider or an arbitral option in about 9 out of 10 financial agreements (other than student loans). By comparison, JAMS is an option for about half of the agreements (but only 14% of mobile).
  • Roughly 9 of 10 arbitration clauses in these industries preclude class actions in arbitration. Most also stated that if the class waiver is unenforceable, the entire arbitration clause is unenforceable as well. (CFPB calls it the “anti-severability provision.”)
  • What are financial institutions not putting in the agreement? They are not shortening statutes of limitations often, they are not limiting damages very often, they are not authorizing the arbitrator to award attorneys’ fees to the prevailing party often, and they are generally not addressing confidentiality.

What the Public Understands About those Arbitration Clauses

The CFPB surveyed 1007 people about their dispute rights with respect to their credit cards, and found they know *nothing.*  And this should surprise no one.  (I am not pointing fingers.  If you asked me whether I could sue one of my credit card issuers in court, I would not know either.)  The study explains partly why that is: dispute resolution clauses do not factor into a consumer’s choice of credit card.  When all 1007 people were asked what features they considered in acquiring their credit cards, literally no one mentioned the ADR clause.

The 1007 people were asked what credit cards they had, and whether they could sue the company if there was a dispute.  The people who thought they could sue their credit card issuer in court were wrong 80% of the time.

The most surprising thing about the survey results to me were just how passive people are about disputes.  When confronted with a hypothetical example of a credit card refusing to correct a billing mistake, most people would cancel their cards and take no further action. Only 2% of people would consider going to court or talking to an attorney.

In the next post (part two), I will highlight statistics and findings from the CFPB’s comparison of how consumer disputes are resolved in arbitration and how they are resolved in court.

The Third Circuit recently found that the Federal Arbitration Act preempts a Pennsylvania statute that restricts corporate plaintiffs in state and federal court in Pennsylvania to those companies that are registered to do business in Pennsylvania.  Generational Equity, LLC v. Schomaker, 2015 WL 708481 (3d Cir. Feb. 19, 2015).  In other words, a company that was not a Pennsylvania business could still confirm its arbitration award in a Pennsylvania court.

The Pennsylvania law at issue states that a “nonqualified foreign limited partnership doing business in this Commonwealth may not maintain any action or proceeding in any court of this Commonwealth until it has registered.”  After Generational Equity prevailed in its arbitration, it sought to confirm the arbitration award in the Western District of Pennsylvania.  The other side moved to dismiss on the basis of subject matter jurisdiction, citing the Pennsylvania statute.  The district court confirmed the award and refused to address the jurisdiction argument.

The Third Circuit, however, took up the question of jurisdiction.  It noted that the FAA allows a federal court in “the district within which” the award was made to confirm the award.  It also noted that the AAA rules, which the parties had incorporated, provided that judgment on the award could take place in any federal or state court with jurisdiction.  Therefore, the Court reasoned that both Congress and the parties had conferred jurisdiction on the Pennsylvania federal court (among others).  Therefore, the Pennsylvania statute at issue “stands as an obstacle” to the execution of the FAA and is preempted.

The Court noted that state laws are usually preempted when they stand in the way of enforcing an arbitration agreement, and here the state law was standing in the way of enforcing an arbitration award.  But, the Court found, “that is a distinction without a difference.”

A federal judge in Minnesota today vacated the arbitration award that confirmed the NFL’s discipline of Adrian Peterson.  You can read the decision here.  The judge found two separate bases for vacating the award: 1) the award failed to “draw its essence” from the parties’ Collective Bargaining Agreement; and 2) the arbitrator exceeded his authority by deciding an issue not submitted to him.  (Last week it was Lance Armstrong, this week it’s Adrian Peterson. Sports stars are giving us great opportunities to discuss arbitration law lately…)

The court began its analysis by acknowledging the high bar for vacating arbitration awards, but then immediately noted that deference has its limits.  “Arbitration awards, however, are not inviolate, and the court need not merely rubber stamp the arbitrator’s interpretations and decisions.”

In this case, the court concluded that the award did not draw its essence from the CBA.  The court made that finding primarily because the NFL applied its new Personal Conduct Policy to Peterson, even though Peterson’s conduct took place before that new policy was enacted.  The court cited testimony showing that the NFL Commissioner had previously admitted he could not retroactively apply the new policy, as well as cited a previous arbitration award finding that the NFL could not apply its policies retroactively.  Those two factors convinced the court that the “law of the shop,” which it considered part of the “essence” of the CBA, precluded the NFL from applying the new policy to Peterson.  Therefore, it found the arbitration award–which affirmed the application of the new policy–failed to draw its essence from the parties’ agreement and must be vacated.

The court also found a second basis to vacate the award: the arbitrator’s willingness to analyze whether the discipline was allowed under the old policy.  Because the Players Association did not ask the arbitrator to address that issue, the court found the arbitrator lacked authority to do so.

Other sites will talk about the implications of this decision for the Vikings, for Adrian Peterson’s career, for the NFL’s image, or for child protection, so I only offer a few thoughts about the arbitration analysis.  This case drives home again that labor arbitration is different.  For example, failing to “draw its essence” from the parties’ agreement is not one of the four bases for vacating arbitration awards under the FAA.  Indeed, it seems that if a court applied the very hands-off review prescribed by SCOTUS in Sutter to the Adrian Peterson arbitration award, the award would have survived.  (You may recall that Justice Kagan said even if an arbitrator committed “grave error” in his analysis, the award must be confirmed as long as the arbitrator was even arguably construing the parties’ agreement.)  In this case, the court’s discussion of the arbitration award makes clear that the arbitrator was at least arguably construing the parties’ CBA, and makes equally clear that the court vehemently disagreed with the construction.

After reading the reasons the court stacked up as to why the new policy should not have been applied to Peterson, and the NFL’s previous acknowledgement of the prohibition against retroactive application, I was left wondering whether the vacatur decision was animated by a sense that the arbitrator had been biased.  One of the arguments the Players’ Association made in favor of vacatur was, in fact, that the arbitrator was biased in favor of the NFL as a result of his previous employment by the NFL and his continuing receipt of funds from the NFL.  But the court found it did not have to address that issue head on after it found two other bases for vacating the award.  Was that just a Minnesota Nice solution that avoided pointing fingers? Maybe that issue will be discussed in more depth if this case gets appealed.