BY JEFF MASON

The First and Ninth Circuits recently issued opinions concerning the validity of state laws requiring “informed consent” to, or “full disclosure” of, arbitration clauses in attorney retainer agreements.  Although the First Circuit found its way around the issue, the Ninth Circuit took it squarely on, holding that such requirements, at least as set forth by Washington state law, are not preempted by the FAA.

In Bezio v. Draeger, __ F.3d __, No. 13-1910, 2013 WL 6570920 (1st Cir. Dec. 16, 2013), an investment adviser sued a law firm that had represented him in a securities enforcement action, alleging malpractice and disputing the firm’s fees.  The firm moved to compel arbitration under the arbitration clause in the parties’ engagement agreement.  In opposition, the adviser argued the arbitration clause was unenforceable because the Maine Rules of Professional Conduct demand “informed consent” for agreements requiring arbitration of malpractice claims.

To support this interpretation of Maine law, the adviser relied on Hodges v. Reasonover, 103 So. 3d 1069 (La. 2012), in which the Supreme Court of Louisiana held that “attorney[s] must disclose the following legal effects of binding arbitration, assuming they are applicable” to the attorney’s retainer agreement:

• Waiver of the right to a jury trial;

• Waiver of the right to an appeal;

• Waiver of the right to broad discovery under . . . Federal Rules of Civil Procedure;

• Arbitration may involve substantial upfront costs compared to litigation;

• Explicit disclosure of the nature of claims covered by the arbitration clause, such as fee disputes or malpractice claims;

• The arbitration clause does not impinge upon the client’s right to make a disciplinary complaint to the appropriate authorities; [and]

• The client has the opportunity to speak with independent counsel before signing the contract.

The district court in Bezio concluded that the holding in Hodges would be preempted by the FAA, and it thus compelled arbitration of the adviser’s claims against the law firm.

On appeal, the First Circuit found it unnecessary to opine on the viability of Hodges, holding instead that Maine law clearly rejected the necessity of “informed consent” for arbitration clauses in attorney retainer agreements (and noting that the ABA has released an ethics opinion giving a stamp of approval to arbitration clauses within retainer agreements).  “That other jurisdictions may follow different interpretations of their professional liability rules,” the First Circuit noted, “is of no moment.”

While Maine may not require special informed consent to arbitration with counsel, Washington state does.  In Smith v. JEM Group, Inc., __ F.3d __, No. 11-35810, 2013 WL 6570899 (9th Cir. Dec. 16, 2013), a debt-settlement company appealed the denial of a motion to compel arbitration of claims asserted against it by a debtor.  The relevant arbitration clause was found in the attorney retainer agreement embedded in a contract for debt-settlement services.  The district court found the arbitration clause unconscionable under Washington state law that makes arbitration clauses material provisions in attorney retainer agreements and, as such, enforceable only if “fully disclosed.”

On appeal, the debt-settlement company contended the FAA preempts relevant Washington case law interpreting  the Washington Rules of Professional Conduct.  The Ninth Circuit disagreed.  It held the relevant Washington state law is not preempted because (1) it does not make arbitration “slower, more costly, [or] more likely to generate [a] procedural morass”; (2) it does not specify “the manner in which the arbitration could or should be conducted,” but relates instead only to “defects in the process of contract formation” under “general principles of contract law”; and (3) it does not “single out or place any additional burden on arbitration provisions” since it merely “clarifies” that arbitration clauses are material provisions of attorney retainer agreements and that, accordingly, they must be fully disclosed like other material provisions of such agreements.

Although the debt-settlement company had not argued that the arbitration clause in question complied with Washington state law, the Ninth Circuit noted (perhaps tellingly) that “[t]here was no explanation of the arbitration clause” in the attorney retainer agreement or the larger debt-settlement contract.  Therefore it affirmed the district court’s conclusion that the arbitration clause was unenforceable.

This leaves us asking a similar question to the one from last week.  Are lawyers’ clients really such a special group of consumers that their arbitration clauses should be held to different standards?

 

 

In the Hall Street decision in 2008, SCOTUS held that parties could not contractually enlarge Section 10 of the Federal Arbitration Act by agreeing that a court could vacate the arbitration award for reasons not found in that section.  This week, the Ninth Circuit held that parties also cannot contractually restrict Section 10 by providing for “binding, non-appealable arbitration.”  In
re Wal-Mart Wage and Hour Employment Practices Litig., __ F.3d __, 2013 WL 6605350 (9th Cir. Dec. 17, 2013).

The dispute in In re Wal-Mart was among the successful counsel for plaintiffs in an employment suit.  The attorneys had been awarded $28 million in attorneys’ fees, but could not agree on how to divvy it up among the various firms who had handled the case.  They had an agreement calling for “binding, non-appealable arbitration” and they arbitrated their fee dispute.

After the arbitrator issued an award splitting up fees, one group of attorneys was unhappy and moved to vacate the award.  The district court confirmed the award and the unhappy attorneys appealed.

On appeal, the happy attorneys argued that the Ninth Circuit lacked jurisdiction to hear the dispute, because the parties had contractually agreed that the arbitration would not be appealable.  The Ninth Circuit disagreed for two reasons.  First, using an analysis similar to Hall Street, the court found the statutory language in the FAA “carries no hint of flexibility.”  And second, allowing parties to opt out of Section 10 review “would also frustrate Congress’s attempt to ensure a minimum level of due process for parties to an arbitration.”

This decision is important in that it protects consumers and other parties without negotiating power from arbitration agreements that write out even the minimal appeal bases in Section 10.  However, it also runs counter to SCOTUS’s oft-repeated point that the purpose of the FAA is to enforce arbitration agreements.  If that is true, why not also enforce an agreement that the award is final and not appealable?  Thoughts to ponder over some egg nog…

After three federal circuits had already refused to defer to the NLRB’s decision in D.R. Horton, it is not surprising that the Fifth Circuit yesterday overruled the NLRB’s critical holding: that precluding class arbitrations is a violation of federal labor law.  D.R. Horton, Inc. v. Nat’l Labor Relations Bd., __ F.3d __, 2013 WL 6231617 (5th Cir. Dec. 4, 2013).

D.R. Horton builds homes in many states.  Starting in 2006, its employees had to sign a Mutual Arbitration Agreement.  The MAA called for binding arbitration of disputes and provided that “the arbitrator [would] not have the authority to consolidate the claims of other employees” or “the authority to fashion a proceeding as a class or collective action.”  In 2008, a class of superintendents tried to bring a class arbitration related to allegations that the builder violated the Fair Labor Standards Act.  Horton insisted that the employees could only arbitrate on an individual basis.  In response, the lead plaintiff filed an unfair labor practice charge.

In 2012, the NLRB found that the MAA violated labor law by requiring employees to waive their right to joint, class or collective employment actions.  On a petition for review, the Fifth Circuit reversed that decision.  Because the NLRB is entitled to deference in its interpretation of the labor laws, the Fifth Circuit largely accepted the Board’s analysis that requiring employees to refrain from collective and class actions violates Sections 7 and 8(a)(1) of the NLRA, because it impedes employees ability to enage in concerted activity, i.e. class claims.  (Not without some digs, though.  Like this one: “no court decision prior to [this one] had held that the Section 7 right…prohibited class action waivers.”)  However, the court found the NLRB had not given sufficient weight to the FAA in its analysis and “[c]aselaw under the FAA points us in a different direction than the course taken by the Board.”

The court analyzed the two potential bases for finding an arbitration agreement is invalid under the FAA.  First, it looked at whether the savings clause in Section 2 of the FAA (arbitration agreements are enforceable “save upon such grounds as exist at law” for revocation) provides authority to invalidate the MAA based on the NLRA.  (Holy acronyms!)  The court concluded that the “Board’s rule does not fit within the FAA’s savings clause” under the same reasoning set forth in Concepcion.  In short, “[r]equiring a class mechanism is an actual impediment to arbitration and violates the FAA.”

Second, the court looked at whether Congress intended the NRLA to override the FAA.  Nothing explicit in the text of the NLRA shows that intent and the court found nothing in the legislative history showing that intent.  Therefore, it looked to whether there was an “inherent conflict between the FAA and the NLRA’s purpose.”  The court found no inherent conflict, largely because courts have allowed arbitration of NLRA claims generally, and courts have specifically found that arbitration agreements cannot be voided based on inequality in bargaining power.  In its final paragraph on this issue, the court said it is “loath to create a circuit split.  Every one of our sister circuits to consider the issue has either suggested or expressly stated that they would not defer to the NLRB’s rationale, and held arbitration agreements containing class waviers enforceable.”

On a different issue, however, the court upheld the NLRB’s decision.  It found that the MAA improperly gave the impression that an employee was waiving his or her administrative rights.  (The agreement included the employee’s waiver of “the right to file a lawsuit or other civil proceeding relating to Employee’s employment with [Horton].”)  Therefore, the court held the Board properly forced the builder to change that language in its MAA.

The ABA Journal released its seventh annual list of the top 100 legal blogs in the country and ArbitrationNation is honored to be included for a second year in a row.  ArbitrationNation is the only blawg on the list devoted to arbitration.  (And it looks like one of only two from Minnesota authors…)

Now that the editors have made their picks, the ABA Journal is asking readers to weigh in and vote on their favorites in each of the 7th Annual Blawg 100’s 13 categories. To vote for ArbitrationNation, please click here, register your name, and vote for me in the “Litigation” category.   Voting ends at close of business on Dec. 20, 2013.

Thank you for your readership and support.  Have a great Thanskgiving!

 

A few months ago, you would have reasonably thought that West Virginia was one of the most anti-arbitration states in the country.  There was not an unconscionability argument that the state didn’t seem to buy with respect to arbitration clauses.  (Recall its arbitration feud with SCOTUS in 2012?)  But, this month, West Virginia’s highest court issued two decisions enforcing arbitration agreements, suggesting it has had a change of heart.

In the first opinion, New v. Gamestop, __S.E.2d__, 2013 WL 5976104 (W. Va. Nov. 6, 2013), the court found an employee handbook was sufficient to create an arbitration agreement between the employee and employer and that the arbitration agreement was enforceable.  The primary argument from the employee was that the agreement was unconscionable because the employer could change it at any time.  (Didn’t I tell you the illusory argument is hot this year?!)

The arbitration agreement provided that “GameStop may from time to time modify or discontinue [its dispute resolution program] by giving covered employees thirty (30) calendar days notice…any such modification…shall be applied prospectively only.”  The court found that the 30-day notice requirement, and the fact that existing disputes would proceed under the terms existing when they were submitted, meant the agreement was not unconscionable

In the second opinion, Ocwen Loan Serv. v. Webster, __S.E.2d__, 2013 WL 6050723 (W. Va. Nov. 13, 2013), the court reversed a circuit court’s denial of a motion to compel individual arbitration.  The lower court had concluded the Dodd-Frank Act prevented arbitration of claims by mortgagees and that the arbitration agreement was unconscionable.

On appeal, West Virginia’s highest court made short work of the Dodd-Frank argument.  (One part of Dodd-Frank provides that residential mortgage loans may not require arbitration.  15 USC § 1639c(e)(1).)  It noted that the named plaintiffs’ mortgage was executed in 2006 while the Dodd-Frank Act was not effective until 2010 and was not retroactive.

With respect to procedural unconscionability, the plaintiffs argued their relative lack of sophistication and lack of counsel.  The court disagreed, finding that presence of counsel is not dispositive and because of language in all caps in the agreement providing “THIS IS A VOLUNTARY ARBITRATION AGREEMENT.  IF YOU DECLINE TO SIGN THIS ARBITRATION AGREEMENT, LENDER WILL NOT REFUSE TO COMPLETE THE LOAN TRANSACTION.”

The plaintiffs argued the arbitration agreement was substantively unconscionable because it waived class actions, restricted attorneys’ fees, lacked mutualty, and limited discovery.  After block quoting ad nauseum from AmEx (reading these opinions, I started to wonder if the members of this court get paid per block-quoted word…), the court concluded that the class waiver did not make the agreement unconscionable.  The court also found that the requirement that each party pay its own attorneys fees, and the lender’s carveout of its foreclosure right (and a few others) from the scope of the arbitration, did not render the agreement unconscionable.  Finally, the agreement’s statement that “discovery in the arbitration proceedings may be limited by the rules” of the provider also did not make the agreement unconscionable.

I am not convinced that West Virginia is a bellwether and other reliably anti-arbitration states may be following suit.  But this is still an interesting shift.

Just four months ago, SCOTUS suggested (but did not hold) that the decision to allow class arbitrations might be a “gateway” issue of arbitrability that defaults to courts.  This week, the Sixth Circuit was the first to take the bait and declare the availability of class actions a gateway question that a court decides unless the parties clearly assign the question to the arbitrator.

In Reed Elsevier, Inc. v. Crockett, __ F.3d __, 2013 5911219 (6th Cir. Nov. 5, 2013), a lawyer filed an arbitration demand with the AAA against LexisNexis on behalf of himself, a putative class of law firms, and a putative class of law firm clients.  The lawyer alleged that LexisNexis misrepresented its subscription services and sought damages of over $500 million.  In response, LexisNexis brought a declaratory judgment action in federal court, asking the court to find that the arbitration clause did not authorize class arbitration.  The clause itself said nothing explicit about the availability of class arbitration — it did not preclude or allow class actions.  It provided that “any controversy, claim or counterclaim…arising out of or in connection with this Order…will be resolved by binding arbitration…”

The district court granted summary judgment in favor of LexisNexis and the Sixth Circuit affirmed.  The critical analysis related to whether the courts even had the power to decide whether the arbitration clause authorized class actions.  The court started by dividing questions of arbitrability into “gateway disputes” and “subsidiary questions.”  (I have never heard the latter group called subsidiary questions, have you?  I have heard of substantive v. procedural, and gateway v. other, but not this new paradigm.)  It recited the two universally recognized gateway issues — whether a valid arbitration agreement exists and whether it applies to the controversy at hand.  Those two questions are reserved for judges, unless the parties have “clearly and unmistakably” given the arbitrator the power to decide them.  On the other hand, it defined the “subsidiary” questions as those that bear on the dispute’s final disposition, including waiver, delay, and any failure to satisfy a condition precedent.  It characterized the subsidiary questions (unfairly) as “mere details.”

The Sixth Circuit then had to decide whether class arbitration falls into the “gateway” or “subsidiary” camp.  It acknowledged that the Supreme Court has not held that the availability of class arbitration is a gateway issue to be reserved for the courts, but instead has hinted strongly in recent years that this issue belongs in the courts.  Those hints began with Stolt-Nielsen, continued in Concepcion, and grew louder in Sutter this summer.  Therefore, even though a plurality of the Supreme Court concluded in Bazzle that classwide arbitration is a question for arbitrators, the Sixth Circuit held this week that it is a gateway question that is presumptively for judges.  Furthermore, in this case the parties had not clearly and explicitly authorized arbitrators to determine the availability of class action, so the default rule governed.

Once the court gave itself permission to decide the issue, it quickly found the parties’ arbitration agreement did not allow a class action.  “The principal reason to conclude that this arbitration clause does not authorize classwide arbitration is that the clause nowhere mentions it.”  The court also noted that the agreement provided for arbitration of claims arising out of “this Order,” suggesting the arbitration was limited to the two parties to that agreement.  Finally, applying AmEx, the court found the arbitration was not unconscionable, even if it “favors LexisNexis at every turn.”

This is a significant decision.  It allows parties who want a court to decide whether class arbitration is available to cite to a published opinion from a federal appellate court, instead of just hints and whispers from the Supreme Court.  It also suggests that at least the Sixth Circuit will require fairly specific language in an arbitration agreement to support the parties’ intent to allow class arbitration.

The Federal Arbitration Act sets forth only four bases for vacating arbitration awards.  See 9 U.S.C. § 10 (a).    After SCOTUS’s 2008 decision in Hall Street, at least half of the circuit courts have concluded that those four bases are exclusive, de-legitimizing the creative bases that judges had developed over the years.  However, a recent Fourth Circuit opinion vacated an arbitration award for “manifest disregard of the law,” a judicially-created basis for vacating arbitration awards that is not contained in Section 10 of the FAA.

In Dewan v. Walia, 2013 WL 5781207 (4th Cir. Oct. 28, 2013), there was an arbitration between a company and its former employee.  Each side made claims against the other.  Critically, however, the employee had executed a Release Agreement in exchange for $7,000 just three months before the arbitration, which allegedly released all his employment claims.  After the hearing, the Arbitrator concluded that the Release Agreement was enforceable, but still awarded damages to the employee.  The district court confirmed the arbitrator’s award.

On appeal, the Fourth Circuit reversed.  It instructed the district court to vacate the arbitration award because it was “the product of a manifest disregard of the law by the Arbitrator.”  The court conducted its own analysis of the release language and concluded that the employee had released all claims against the company, including those he pursued in the arbitration, and therefore the arbitrator should not have awarded the employee any damages on his claims in the arbitration.

One judge dissented.  The dissent, while never citing Sutter, invokes the same standard used in Sutter, noting that the arbitrator did her job and interpreted the contract.  “Because the arbitrator unquestionably construed the release agreement at issue, we are not at liberty to substitute our preferred interpretation for the arbitrator’s.”

It does seem nearly impossible to square Justice Kagan’s language in Sutter, instructing courts to confirm arbitration awards whether “good, bad or ugly” and even if containing “grave error,” with this Dewan opinion from the Fourth Circuit.  While the insurer in Sutter moved to vacate under a legitimate FAA basis (that the arbitrator exceeded his power), and the company in this case moved to vacate claiming “manifest disregard,” the same standard should apply to all claims that arbitrators got the law wrong: as long as the arbitrator even arguably construed the contract, that construction holds.

**Finally, a short update on a previous post.  In April, the Ninth Circuit ducked the question of whether California’s Broughton-Cruz rule was preempted by the FAA.  (That rule exempted claims for public injunctive relief from arbitration under California law.)  Last week, however, the Ninth Circuit determined that Broughton-Cruz is preempted.  Ferguson v. Corinthian Colleges, Inc., __ F.3d __, 2013 WL 5779514.  The court relied on Concepcion as well as Marmet Health Care Center, and Mastrubuono to reach its result.

No haunted house can scare general counsel as much as an opinion invalidating their company’s arbitration clause and thereby allowing a class action to proceed.  So, here is a Halloween tale for all to keep in mind.

Ralphs Grocery Company hired Zenia Chavarria to work in the deli of one of its grocery stores.  Ms. Chavarria’s employment application agreed that she would be bound by Ralphs’ arbitration policy, but Ralphs did not send her that arbitration policy until three weeks after she signed her application.  The arbitration policy included the following:

  • a prohibition on using AAA or JAMS to administer the arbitration;
  • a requirement that a single arbitrator decide the dispute, and the arbitrator must be a retired state or federal judge;
  • a method of selecting the arbitrator that ensured that, unless the parties agreed on the arbitrator, the arbitrator would be chosen by the party who did not demand arbitration;
  • a provision that each party must pay half of the arbitrator’s total expected fees at the outset of the proceeding; and
  • a provision allowing Ralphs to unilaterally modify the arbitration policy without notice.

After her employment terminated, Ms. Chavarria brought a putative class action against Ralphs.  In response, Ralphs moved to compel arbitration of her individual claims.  The district court denied the motion, finding the arbitration agreement was unconscionable and unenforceable under California law.  The Ninth Circuit affirmed that result in Chavarria v. Ralphs Grocery Co., __ F.3d__, 2013 WL 5779332 (9th Cir. Oct. 28, 2013).

The court found the arbitration agreement was procedurally unconscionable because Chavarria had to accept it in order to be employed and because she was not given the policy until three weeks after she was forced to accept it.  The court found the arbitration agreement was substantively unconscionable (i.e., so one-sided that it “shocks the conscience”) because: Ralphs would always get to choose the arbitrator in any dispute initiated by an employee; the employee must pay half of the arbitrator’s fees at the beginning of the process (fees that would run between $3,000 -$7,000 per day); and Ralphs could modify the arbitration policy without any notice.

The Ninth Circuit also concluded that California’s procedural unconscionability rules are not preempted, because they do not disproportionately affect arbitration agreements.  With respect to substantive unconscionability, the court found that its holding fell within the newly narrowed “effective vindication” doctrine that SCOTUS set forth in AmEx.  In particular, because Ralphs arbitration policy made it prohibitively expensive to file an arbitration against Ralphs (not just prove a case against Ralphs), it “effectively foreclose[d] pursuit of the claim.”

Finally, the Ninth Circuit made a plea in favor of allowing states to define some arbitration agreements as unconscionable:

“If state law could not require some level of fairness in an arbitration agreement, there would be nothing to stop an employer from imposing an arbitration clause that, for example, made its own president the arbitrator of all claims brought by its employees.  Federal law favoring arbitration is not a license to tilt the arbitration process in favor of the party with more bargaining power.”

What is the lesson for arbitration clause drafters everywhere? Do not overreach.

The Third Circuit ruled last week that Delaware’s Chancery Court could not offer its judges’ services as neutral arbitrators in its courtrooms, unless those arbitrations were open to the public.

In 2009, the Delaware courts decided to provide arbitration.  The state amended its laws to create an arbitration process that was only open to disputes worth more than a million dollars with at least one party being a business incorporated in Delaware (and no party being a consumer).  The parties did not need to have a pre-dispute arbitration agreement.  As long as they both consented, they could file their arbitration in the Delaware courts for a$12,000 initial fee and have the Chancellor select a Chancery Court judge to hear the arbitration in the Delaware courthouse (for another $6,000/day).  However, “the statute and rules governing Delaware’s proceedings bar public access.”  Only parties and their representatives could attend the proceedings.

In Delaware Coalition for Open Government, Inc. v. Strine, __ F.3d __, 2013 WL 5737309 (3d Cir. Oct. 23, 2013), the Third Circuit found that it violates the First Amendment to bar the public from Delaware business arbitrations.  Applying the “experience and logic” test (sounds like the kind of test courts should always apply!), the Court found “[w]hen we properly account for the type of proceeding that Delaware has instituted — a binding arbitration before a judge that takes place in a courtroom…the right of access to government-sponsored is deeply rooted in the way the judiciary functions in a democratic society.”  Further, the court noted that public access would be beneficial for stockholders, ensure transparency of the process, and discourage perjury.  For all those reasons, the Third Circuit found a right of public access to state-sponsored arbitrations in Delaware.

I haven’t heard of other states trying to compete with the AAA, so this decision does not have broader implications, but it is worth pondering whether the same benefits of public access the Third Circuit noted in this case also apply to private arbitrations.

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Now for some brief updates on recent topics:

  • The Minnesota Supreme Court granted review of this case, in which the Minnesota Court of Appeals confirmed an arbitration award involving a significant sanction against a party who was accused of manufacturing evidence.
  • The defense of illusoriness is still on the upswing.  Last week the Fifth Circuit affirmed a district court’s refusal to compel arbitration based on a finding that the agreement was illusory under Texas law.  Scudiero v. Radio One of Texas II, 2013 WL 5755484 (5th Cir. Oct. 24, 2013).
  • In case anyone thought Sutter was limited to deference for arbitrators who find arbitration agreements allow for class actions, the Eleventh Circuit clarified the same deference applies to arbitrator decisions to allow collective actions as well.  DirecTV v. Arndt, 2013 WL 5718384 (11th Cir. Oct. 22, 2013).
  • A thoughtful reader drew my attention to a case the U.S. Supreme Court will hear on November 13: Unite HERE Local 355 v. Mulhall.  The central question in the case is one of labor law, not arbitration, but the labor law questions were interpreted by arbitrators under the parties’ agreement, and the National Academy of Arbitrators has weighed in to support the use of “pre-recognitional governance systems” including arbitration.