Within weeks of its issuance, SCOTUS’s Sutter decision is already making an impact on other cases. Both the Eleventh Circuit and the D.C. Court of Appeals cite Sutter repeatedly in recent decisions that refuse to vacate arbitration awards.  Of course, new decisions are not the only ones that reverberate: Concepcion, a 2011 decision, was just applied by the Ninth Circuit to preempt Montana case law on contracts of adhesion.

Sutter

In Southern Commc’n Servs., Inc. v. Thomas, __ F.3d __, 2013 WL 3481467 (11th Cir. July 12, 2013), the court affirmed an arbitrator’s decision to allow a class action.  The plaintiffs are mobile phone consumers who allege they were charged unlawful penalties for canceling phone service.  Under the Wireless Industry Arbitration Rules of the AAA, an arbitrator found the arbitration clause allowed class actions and certified the class.  The wireless provider then moved to vacate that determination in federal court, claiming the arbitrator exceeded his authority and refused to apply the law.  The court, however, carefully applied the language of the recent Sutter decision and said that because the arbitrator engaged with the contract’s language and the parties’ intent, his construction of the contract must be upheld.

The D.C. Court of Appeals also cited Sutter recently in refusing to vacate an arbitration award.  In Wolf v. Sprenger + Lang, PLLC, __ A.3d. __, 2013 WL 3466348 (D.C. Ct. App. July 11, 2013), two attorneys sought to vacate an arbitration award against them in a fight over attorneys’ fees.  They argued the arbitrator exceeded his powers by addressing an issue outside the scope of the arbitration and by basing his award on notions of ethics instead of the co-counsel agreement.  In its analysis, the court summarized that the “‘sole question’ before the court in a challenge [that an arbitrator exceeded his power] is ‘whether the arbitrator (even arguably) interpreted the parties’ contract,'” citing Sutter.  Given that limited question, and the fact that the court said there was “no doubt” the arbitrator reached his decisions after interpreting the parties’ co-counsel agreement, the court affirmed the district court’s denial of the motion to vacate.

Concepcion

In a ruling that applies Concepcion in a new context, the Ninth Circuit just struck down Montana case law finding many arbitration agreements void as against public policy.  Mortensen v. Bresnan Commc’ns, LLC, __ F.3d. __, 2013 WL 3491415 (9th Cir. July 15, 2013), a putative class of Montana internet service subscribers asserted claims against the internet provider, based on the provider’s decision to allow an advertising company to create profiles of subscribers based on their internet usage and target them with “preference-sensitive advertising.”  The provider moved to compel arbitration, but the district court denied the motion under Montana law (even after considering application of Concepcion).

The Ninth Circuit reversed.  It found the Montana state law at issue was preempted by the FAA, even though it was ostensibly generally applicable contract law and not specific to arbitration.  The rule at issue said that provisions within contracts of adhesion are void as against public policy if they are not “in the reasonable expectations of both parties when contracting.”  Applying that rule, Montana has found that arbitration agreements in contracts of adhesion are void (because they waive parties’ right to trial by jury and access to court) unless they are explained to and initialed by consumers.  The court found that doctrine disproportinoally affects arbitration agreements and is therefore preempted by the FAA under the reasoning set forth in Concepcion.

The Ninth Circuit repeatedly distances itself from the result by noting that it is simply applying Supreme Court mandates.  For example: “Montana has an interest in protecting its consumers from unfair agreements, particularly those that force waiver of fundamental rights without notice.  But the Supreme Court in Concepcion told us to hold that the FAA preempts all laws that have a disproportional impact on arbitration agreements.”  It feels like making a promise while crossing your fingers behind your back.

The recent Sutter decision drives home repeatedly that a court may not vacate an arbitrator’s decision under the FAA just because a judge thinks the arbitrator reached the wrong result.  Justice Kagan said that under Section 10(a)(4) the court cannot second-guess the award, not even in the face of “grave error.”  Instead, the award must be confirmed, whether it is “good, bad, or ugly.”  If an ugly and gravely erroneous arbitration award does not establish that an arbitrator “exceeded his or her powers,” what does?

In general, the answer relates back to the fact that arbitration is a matter of contract.  If an arbitrator forgets that he or she is an all powerful genie only within the confines of his or her own lamp, which is defined by the arbitration agreement, there is a risk that the award can be vacated.  (Can you tell I watched “Aladdin” with the kids on my ArbitrationVacation?)  Here are a few examples of recent cases finding an arbitrator exceeded his or her powers, that would likely survive the test articulated in Sutter.

When an arbitrator issued an award that significantly rewrote the parties’ contract, the Third Circuit held that the award exceeded the arbitrator’s powers.  In particular, the court noted that the relief “was not sought by either party, and was completely irrational because [the arbitrator] wrote material terms of the contract out of existence.” PMA Capital Ins. Co. v. Platinum Underwriters Bermuda, Ltd., 2010 WL 4409655 (3d Cir. 2010). See also Nat’l Hockey League Players’ Assoc. v. Nat’l Hockey League, 30 F. Supp. 2d 1025, 1029 (N.D. Ill. 1998) (vacating an award when the arbitrator considered evidence the parties had specifically agreed to exclude).

In another case, the Ninth Circuit upheld a district court’s finding that an arbitrator exceeded the scope of his authority when he issued two permanent injunctions to bind nonparties to a trademark agreement. Comedy Club, Inc. v. Improv West Assocs., 553 F.3d 1277, 1286-88 (9th Cir. 2009). The court held that the arbitrator had no authority to enjoin a nonparty since it was not a “third party beneficiary, an agent, or an assignee” of the agreement.  That portion of the award was vacated.

In a case where the court remanded an award to the arbitrator to clarify the calculation of damages, but the arbitrator did more than clarify the requested issue, the Fifth Circuit has held that the arbitrator exceeded his authority upon remand, and thereby reinstated the original arbitration award. Brown v. Witco Corp., 340 F.3d 209, 221 (5th Cir. 2003).

If “manifest disregard of the law” is no longer a separate, viable basis for vacating an arbitration award (which SCOTUS has not officially declared, but has hinted strongly twice), then parties seeking relief from an award must find ways to fit themselves into one of the four narrow bases for vacatur under Section 10(a) of the FAA.  The fourth of those, when an arbitrator exceeds his or her power, is just as narrow as the rest.   As the Court said in Stolt-Nielsen “[i]t is only when [an] arbitrator strays from interpretation and application of the agreement and effectively ‘dispense[s] his own brand of industrial
justice’ that his decision may be unenforceable.”

 

*ArbitrationNation thanks Zelda Elcin, a student at the University of Minnesota Law School, for her work on this post.

**If you find this blawg useful or interesting, please consider nominating it for the ABA Journal’s list of the top 100 Blawgs!  ArbitrationNation would be honored to be listed for a second year.  http://www.abajournal.com/blawgs/blawg100_submit/

Albert Einstein supposedly once said “you have to learn the rules of the game. And then you have to play better than anyone else.” In arbitration, that means figuring out which organizations’ rules are best suited for your arbitration clause. This post is designed to help drafters make that decision by giving a quick and dirty overview of the similarities and differences between the administered rules for commercial disputes at the three most common arbitration providers: AAA, JAMS, and CPR.

Generally speaking, the rules of the three organizations are very similar. That said, attorneys and clients should consider the following:

  • FEES:  In addition to hourly arbitrator rates, all three organizations have some kind of administrative/filing fee.  JAMS charges this administrative fee as a function of the arbitrator’s time and thus may be the most cost-effective for short arbitrations. On the other hand, AAA and CPR charge on claim value.  Between those two organizations, AAA is more cost-effective for claims under $5,000,000, while CPR becomes cheaper for claims above that figure.
  • DEFAULT AWARD: JAMS and AAA do not allow arbitrators to render an award solely on the basis of default or absence of a party. CPR, on the other hand, does provide for a default award.  However, all three organizations require an arbitrator to consider substantive evidence before ruling against an absent party.
  • DISCOVERY: JAMS has a detailed set of Expedited Procedures parties can adopt that limit discovery (for example, to one deposition per party) and preclude dispositive motions.  The AAA also allows parties to adopt its Expedited Procedures (those procedures apply automatically to disputes under $75,000), but the procedures do not expressly limit discovery and instead generally adopt shorter timelines for the arbitration.  If speed and efficiency of arbitration is your number one goal, the Expedited Procedure under JAMS are a great choice. On the other hand, for parties anticipating a more complex dispute, or needing more flexibility in discovery, the general commercial rules of these organizations all allow the arbitrator(s) to tailor the discovery to the needs of the case.
  • ARBITRATORS: The three organizations all have similar, and complicated, methods for selecting arbitrations if (okay, when) the parties cannot agree on their own.  The number of available arbitrators varies, though.  Our best research indicates there are over 3,600 on the AAA roster, 500-600 on the CPR roster, and approximately 150-300 on the JAMS roster.
  • AWARD DEADLINES: JAMS and AAA explicitly require 30 days’ time in which arbitrators must render a final award. However, the CPR’s 30-day requirement is more of a “best efforts” suggestion than a hard and fast rule.  Thus, parties looking to get to the final award as quickly as possible may want to choose JAMS or AAA.
  • MOTION PRACTICE: AAA and CPR do not explicitly provide for summary disposition, but the JAMS Comprehensive Arbitration rules do (the Comprehensive rules are for claims over $250,000. JAMS has a Streamlined set of rules for claims under $250,000).  Thus, drafting parties who want to ensure the possibility of summary disposition are better off looking to JAMS’ Comprehensive rules.

Of course, there are many more rules for each organization and other important issues to consider.  However, this list should give drafters a good starting point for analyzing which arbitral forum (and specific rules in that forum) are best for their arbitration agreement.

**ArbitrationNation thanks Max Corey, a student at the University of Virginia School of Law, for his work on this post.

In American Express Co. v. Italian Colors Restaurant, a divided Supreme Court today reversed the Second Circuit and held that plaintiffs may not invalidate an arbitration agreement containing a class action waiver merely because proving their claims on an individual basis would cost many times more than their potential recovery.  In doing so, Justice Scalia, writing for the five-member majority, gave this characteristically harsh assessment: “The FAA’s command to enforce arbitration agreements trumps any interest in ensuring the prosecution of low-value claims.”  This decision cuts off avenues that federal and state courts have used to invalidate class waivers in arbitration agreements, but does not totally do away with the “effective vindication” line of cases.

The Majority

In this case, a putative class of merchants claim that American Express violated federal antitrust laws (the Sherman and Clayton Act).  Their agreements with AmEx stated “[t]here shall be no right or authority for any Claims to be arbitrated on a class action basis.”  The agreements also precluded any joinder or consolidated actions.  AmEx moved to compel individual arbitration.  The district court granted the motion, but the Second Circuit reversed.  Under the line of Supreme Court cases establishing that an arbitration agreement could be invalidated it if prevented the effective vindication of federal statutory rights, the Second Circuit found the plaintiffs had proven that the costs of arbitrating antitrust claims individually (due largely to the requirement of expert economic analyses) was prohibitive.

The Supreme Court reversed, not by declaring that the entire line of “effective vindication” cases were dicta or overruled (Mitsubishi Motors, 14 Penn Plaza, Gilmer, and Green Tree), but by narrowing its application.  From now on, the doctrine only applies if the plaintiffs “right to pursue” federal statutory remedies is prevented, not if the cost to prove those federal statutory claims makes them irrational to pursue.  As examples, Scalia noted that arbitration clauses outright forbidding certain statutory claims would still be precluded by the “effective vindication” doctrine, as would clauses that involve prohibitively high “filing and administrative fees” in the arbitral forum.

Scalia also directly addressed the interplay between the Concepcion decision (finding California case law invalidating class action waivers in consumer arbitration clauses was preempted by the FAA) and this case by saying Concepcion “all but resolves this case.”  Why?  Because it “rejected the argument that class arbitration was necessary to prosecute claims ‘that might otherwise slip through the legal system.’”

The Dissent

Justice Kagan authored a sharply worded dissent on behalf of herself, Justice Ginsburg, and Justice Breyer.  The dissent focuses on the practical impact of the decision: “the monopolist gets to use its monopoly power to insist on a contract effectively depriving its victims of all legal recourse.”  In the course of the dissent, Kagan takes on Scalia’s view of the FAA as intended to rigidly enforce agreements to arbitrate.  Instead, she writes, the FAA “reflects a federal policy favoring actual arbitration—that is, arbitration as a streamlined ‘method of resolving disputes,’ not as a foolproof way of killing off valid claims.  Put otherwise: What the FAA prefers to litigation is arbitration, not de facto immunity.”  (internal citation omitted)

The dissent concludes that AmEx’s arbitration clause falls squarely within the “effective vindication” line of cases and should be invalidated, because it precludes not only class arbitration but any type of consolidation or joinder which would make it economically rational for plaintiffs to pursue their antitrust claims.

The dissent also disagrees with the majority’s application of Concepcion to this case.  It notes that not only did Concepcion never cite any of the effective-vindication cases, the plaintiff in that case could feasibly vindicate her claim in individual arbitration, and the case was about federal preemption of a state law.  “Our effective-vindication rule comes into play only when the FAA is alleged to conflict with another federal law, like the Sherman Act here.”

Import

In this decision, the Supreme Court continues its recent trend of eliminating legal bases for invalidating arbitration agreements.  This decision will encourage more and more companies to add waivers of class and consolidated proceedings into their arbitration agreements, knowing that those waivers are likely to be strictly enforced.

Going forward, putative class plaintiffs who want to rely on the “effective vindication” doctrine to keep federal statutory claims in court must focus on their inability to assert those claims at the beginning of an arbitration – by an unreasonable statute of limitation or a prohibitive filing fee.  Arguments relating to the costs of “proving” the claims are irrelevant.

What does this decision do to case law in states like Massachusetts, which recently adopted “effective vindication” as a matter of state law? I think the broad language of the majority’s ruling–including its comment that Concepcion controls the outcome by establishing that “the FAA does…favor the absence of litigation when that is the consequence of a class-action waiver, since its ‘principal purpose’ is the enforcement of arbitration agreements according to their terms”–is strong evidence that those state decisions are preempted by the FAA.  This decision could lead to another string of state law decisions falling like dominoes on preemption grounds.

Finally, what can parties do who are concerned, like the dissenting Justices, about adhesion contracts essentially insulating large companies from all sorts of claims through their arbitration agreements?  With respect to federal statutes, the only avenue is to appeal to Congress (until the dissenters become a majority of the Supreme Court).  Justice Scalia’s opinion reiterates that the only real way to protect the right to bring a class action under a federal statute (or the right to proceed in court at all) is for Congress to expressly override the FAA.  Therefore, if DOJ feels strongly that antitrust claims do not belong in arbitration, it should ask Congress to amend the antitrust statutes to expressly allow court actions, regardless of the parties’ contract terms.  Good luck.

As we were waiting for SCOTUS’s decision in AmEx, we got a decision on vindicating statutory rights from a different high court: the Supreme Judicial Court of Massachusetts.  In an opinion that could be a blueprint for other plaintiff-friendly states, the supremes in Massachusetts held that courts may invalidate arbitration agreements that preclude class actions if a plaintiff proves he or she “effectively cannot pursue a claim against the defendant in individual arbitration.”  Feeney v. Dell Inc., __ N.E.2d ___, 2013 WL 2479603 (Mass. June 12, 2013).

The Massachusetts plaintiffs in Feeney allege that Dell charged and collected money for a state sales tax that Massachusetts did not actually impose.  The putative class brought the lawsuit in 2003 alleging violation of Massachusetts’s consumer protection act, which specifically provides for class actions.  Dell successfully moved to compel individual arbitration, based on the language of its contract (which mandated individual arbitration at the now defunct National Arbitration Forum).

This case has been up to the Massachusetts high court twice.  The first time, in 2009, it invalidated the arbitration clause after concluding that class action prohibitions in consumer arbitration agreements contravene Massachusetts public policy.  After the case was remanded for further proceedings, however, SCOTUS decided Concepcion, and the validity of the class arbitration waiver had to be considered anew.

Massachusetts stuck to its guns, however.  After conceding that the analysis in Concepcion means that the FAA preempts Massachusetts’s public policy in favor of consumer class actions, Massachusetts found an alternative basis for its decision.  In effect, it adopted a state-law version of Green Tree Financial v. Randolph, the Supreme Court decision declaring that arbitration agreements may be unenforceable if plaintiffs can prove that arbitration would be so expensive that they cannot realistically vindicate their federal statutory rights.  A Massachusetts plaintiff can now avoid the class action waiver in his or her arbitration clause if they can “prove as a matter of fact that the class waiver provision… effectively prohibits him or her from pursuing a claim.”

Applying that new rule, the court found support in the record to conclude that the plaintiffs’ claims “are nonremediable in individual arbitration pursuant to the terms of the agreement.”  The support largely came from the complex nature of the claims, which required advanced knowledge of the tax codes, the small individual damages ($14 and $216 for the named plaintiffs), and the lack of any mandatory fee-shifting provisions in the statute.  For that reason, the court refused to compel arbitration at all, and instead remanded for class litigation of the claims in state court.  (In a companion case, Machado v. System4 LLC, __ N.E.2d __, 2013 WL 2479604 (June 12, 2013), however, the court applied the same rule and found the plaintiffs had not proven they could not pursue their claims in individual arbitration.  The individual plaintiffs’ damages in Machado were between $9,000 and $22,000, and the statutes at issue required the defendant to pay attorneys’ fees and costs to a prevailing plaintiff.)

Not only is this case interesting because it may foreshadow a whole new line of state cases trying to invalidate arbitration agreements, but also because of the exasperated tone of the decision.  Writing an opinion invalidating waivers of class arbitrations after Concepcion is no easy feat. Here are some choice quotes from the opinion:

  • After noting that the savings clause in Section 2 of the FAA is not “a dead letter,” the court wrote “[t]he question we seek to answer today, one that courts across the country have struggled with in the wake of Concepcion, is under what conditions a State court may still invalidate an arbitration agreement containing a class waiver as unconscionable or against public policy without running afoul of the FAA.”
  • “There is no principled reason to conclude that Congress in enacting the FAA had even the remote intention to prevent a State court from invalidating such an egregiously exculpatory agreement in an adhesive consumer contract merely because it took the form of an arbitration agreement”; and
  • “The FAA may be a powerful tool for consumer businesses, but it is not a trump card.”

Because this case is ostensibly based in state law (although I don’t see any Massachusetts cases cited in support of the new rule), it may not be impacted if SCOTUS disavows the Green Tree exception altogether later this month.  However, whether SCOTUS would agree with Massachusetts’ application of Concepcion is a whole other question.

 

The U.S. Supreme Court issued its decision in Sutter today, unanimously holding that as long as the arbitrator bases a decision to allow or disallow class arbitration on the text of the parties’ agreement, her “construction holds, however good, bad, or ugly.”  Oxford Health Plans LLC v. Sutter, 569 U.S. ___ (June 10, 2013).  The case resolved a circuit split on how to interpret SCOTUS’ Stolt-Nielsen decision.  It also proved me right (yahoo!).  (I predicted the Court would affirm the Third Circuit both when it granted review, and when it heard the argument.)

As you may recall, this case involves a putative class of doctors who sued a health insurer over allegedly inadequate payments for services.  The case was brought in state court, the insurer successfully compelled arbitration, and the parties then agreed that the arbitrator should decide whether the contract authorized class arbitration.  The contract did not explicitly allow or disallow class actions in arbitration.  The arbitrator construed the text of the arbitration agreement and found that the parties’ intent was to allow class arbitration.

In the District of New Jersey, the Third Circuit and again the Supreme Court, the insurer argued that the arbitrator had “exceeded [his] powers” within the meaning of Section 10(a)(4) of the FAA by allowing class arbitration.  In its decision, the Supreme Court firmly refused to look behind the curtain of an arbitration.  Because it was clear that the arbitrator was given authority to determine whether the contract authorized class arbitration, and he based his decision on the text of the arbitration clause, the Supreme Court would not consider whether “he performed that task poorly.”

This is a big defeat for opponents of class arbitration.  Not only does the Sutter decision do away with the Fifth Circuit’s interpretation of Stolt-Nielsen, which was essentially that class arbitration was precluded unless the parties agreement explicitly allowed it, it also refuses to create any kind of exception for really bad contract interpretations.  The insurer argued strongly that the arbitration agreement at issue in this case was “garden-variety” and contained no indicia that the parties intended to use class procedures in arbitration, so the arbitrator’s decision was wrong.  But, Justice Kagan, writing for the Court, declined the insurer’s invitation to consider the merits of the arbitrator’s decision.  Once the court is satisfied that the arbitrator was “arguably construing the contract,” his or her decision will be affirmed even in the case of “grave error.”  Indeed “[t]he potential for those mistakes is the price of agreeing to arbitration.”  In that regard, this decision is not limited to class arbitration at all, but is a strong decision for affirming arbitration awards in general.  It further calls into question whether “manifest disregard of the law” is a legitimate basis for vacating an arbitration award.

This decision opens the door to more arbitrators authorizing class actions.  Arbitrators now have the confidence that as long as the class arbitration decision is grounded in the text of the parties’ agreement, it will not be overturned.  (Of course, if the parties’ arbitration agreement explicitly precludes class actions, an arbitrator would exceed his or her power by authorizing a class.)  Even an arbitrator who believes as a matter of public policy that plaintiffs with small-dollar claims should be able to assert those claims as a class in arbitration will be affirmed, as long as the official decision is based in the language of the contract.

There are two issues that the Court left for another day, and those could eventually be the death knell of class arbitrations.  First, a long footnote suggests that the availability of class arbitration could be one of the gateway questions of arbitrability that are presumptively for courts (not arbitrators) to decide.  Second, Justices Alito and Thomas wrote a concurrence suggesting that there may be no satisfactory procedure for conducting class arbitrations — because the absent members cannot consent to the arbitrator’s authority and opt-out notices are not effective.  However, because the insurer agreed to have the arbitrator decide the issues of class arbitration, neither of these issues was before the Court in Sutter.

In an opinion that feels a bit like a report from the annual meeting of arbitration nerds, the Third Circuit last week clarified when district courts must allow discovery about arbitrability.  Guidotti v. Legal Helpers Debt Resolution, LLC, ___ F.3d ___, 2013 WL 2302324 (3d Cir. May 28, 2013).  Although the standard articulated is a bit unwieldy, it at least gives district courts in that federal circuit (and the others who have not clarified this issue) some method of identifying when plaintiffs are entitled to discovery and when to apply the summary judgment standard.

In Guidotti, the plaintiff in a putative class action sued 22 parties, alleging they were supposed to help negotiate down her consumer debt but did nothing other than accept her significant monthly payments.  Thirteen defendants moved to compel arbitration, and the district court granted that motion with respect to eleven of them.  The district court refused to compel arbitration of the plaintiff’s claims against two defendants, the financial institution where plaintiff had to open a special new account (RMBT) and the process agent that transferred money to and from the account (Global Client Solutions).

The district court concluded that those defendants had not proved they had any agreement to arbitrate with the plaintiff.  It did not allow any discovery relating to the motion to compel, but relied on inferences from the face of the documents themselves.  The contract between RMBT and the plaintiff did not explicitly provide for arbitration, but instead incorporated another agreement that provided for arbitration (the “Account Agreement”).  Yet there was no proof that the defendants provided the plaintiff with the Account Agreement at the time she signed the RMBT agreement.  In particular, the RMBT agreement was electronically signed via the DocuSign process, and reflected that timing, but the Account Agreement had no similar DocuSign stamp.  The plaintiff alleged the Account Agreement was sent to her three weeks after she signed the electronic documents.

[As a side note, I do hope the Third Circuit addresses the merits of this case at some point, because it raises very interesting issues.  For example, can an arbitration agreement be formed by documents that are not available when the main document is signed?  (The Second Circuit has said no.)  And, is an arbitration enforceable if one party has no input in the selection of the arbitrator?  The Account Agreement called for binding arbitration “utilizing a qualified independent arbitrator of Global’s choosing”.]

The Third Circuit vacated the district court decision and remanded for “limited discovery” on what documents were available to the plaintiff at the time of her electronic signature and a decision under the summary judgment standard.  After acknowledging that its earlier pronouncements on whether motions to compel arbitration should be treated like motions to dismiss or motions for summary judgment were not crystal clear, the Third Circuit took the opportunity to give guidance to district court judges.  Here is the standard it set:

“[W]hen it is apparent, based on ‘the face of a complaint, and documents relied upon in the complaint,’ that certain of a party’s claims ‘are subject to an enforceable arbitration clause, a motion to compel arbitration should be considered under a Rule 12(b)(6) standard without discovery’s delay.’  But if the complaint and its supporting documents are unclear regarding the agreement to arbitrate, or if the plaintiff has responded to a motion to compel arbitration with additional facts sufficient to place the agreement to arbitrate in issue, then ‘the parties should be entitled to discovery on the question of arbitrability before a court entertains further briefing on [the] question.’  After limited discovery, the court may entertain a renewed motion to compel arbitration, this time judging the motion under a summary judgment standard.  In the event that summary judgment is not warranted because … there is ‘a genuine dispute as to the enforceabilty of the arbitration clause,’ the ‘court may then proceed summarily to a trial regarding the ‘making of the arbitration agreement.'”

(Internal citations omitted.)  Applying its standard, the Third Circuit found that the plaintiff in Guidotti raised sufficient doubt about the existence of an arbitration agreement with the financial institutions, and therefore the dispute should have been treated as one requiring discovery and a Rule 56 standard.

 

In the past few months, two federal appellate courts have had to determine whether parties were bound to arbitrate claims that arose from relationships governed by multiple agreements, only some of which called for arbitration.  While the courts reached different conclusions based on the facts, they both relied on the same critical inquiry: did the agreement containing arbitration create the essential relationship between the parties and would the claims necessarily refer to that agreement?  If so, the claims are arbitrable.

In Robinson Brog Leinwand Greene Genovese & Gluck, P.C. v. John M. O’Quinn & Assocs., No. 12-2915, 2013 WL 1707897 (2d Cir. Apr. 22, 2013), law firms were fighting about whether the Robinson firm was owed money under a joint representation relationship.  Three documents governed their relationship: a “Client Agreement” setting forth the contingency fee rate, defining the clients, and requiring arbitration; a Joint Responsibility Referral Fee Letter Agreement setting forth how the law firms would share attorneys’ fees, without an arbitration agreement; and a Client Consent document that told the clients about the law firms’ joint representation and the fact they were splitting fees.

Robinson started an action in federal court to recover fees, and the defendants successfully moved for dismissal based on its argument that the claims must be arbitrated.  The Second Circuit affirmed.  It found that the Client Agreement was “the foundation of these interdependent documents,” because without an attorney-client relationship there could be no basis for sharing attorneys’ fees.  Robinson argued its claims arose only out of the Joint Letter Agreement, but the court concluded no claims could arise solely from that agreement between the law firms, since it did not “contain an independent means of generating the pool of funds from which those fees would be paid.” Therefore, even though Robinson was not a party to the Client Agreement, the court held it was bound by the arbitration agreement in that document by the doctrine of equitable estoppel.

The Sixth Circuit had recently reached the opposite result by applying similar rationale.  In Dental Associates v. American Dental Partners of Mich., No. 12-1008, 2013 WL 1272086 (6th Cir. March 28, 2013), a group of dentists brought suit for breach of contract and tortious interference against a service provider that had purchased most of their assets.  The defendant, ADPM, had executed two agreements with the plaintiff: an Asset Purchase Agreement (through which its parent company bought many of the plaintiff’s assets) that contained an arbitration agreement; and a Service Agreement detailing the administrative services ADPM would provide to the plaintiff, which lacked an arbitration agreement.  The Service Agreement also required the plaintiff to execute employment agreements with three dentists – those Employment Agreements all called for arbitration of disputes.

The defendant in this case was unsuccessful in dismissing the plaintiff’s claims and compelling arbitration in the district court, and the Sixth Circuit affirmed.  The appellate court stated the relevant rule as: “Where there are multiple contracts between the parties, a dispute is arbitrable pursuant to the arbitration clause in a related contract if ‘the arbitration clause is part of the umbrella agreement governing the parties’ overall relationship.’”  However, even if the umbrella agreement has an arbitration provision, claims can be heard in court if the action can be maintained “without reference” to the umbrella agreement.  In this case, the court concluded that the APA was not an umbrella agreement, because it did not “create the relationship between the parties” and instead governed the “one-time purchase and transfer of assets,” while the Service Agreement defined the ongoing business relationship.  The court also found that the plaintiffs’ claims could be maintained without reference to the APA.

The lesson of these cases for drafters is clear: make sure that any time multiple agreements will function interdependently, their arbitration clauses mirror each other (unless the parties intentionally want some claims to go to court, in which case that should be made explicit).  For litigators, the lesson is that when multiple agreements are at issue, you need to find an argument that the agreement whose arbitration clause (or lack thereof) you prefer is the “foundational” or “umbrella” agreement.

Just after I posted about the awesome power of federal courts to enjoin other cases, the Federal Circuit reminds us the power is not absolute.  In Sanofi-Aventis Deutschland Gmbh v. Genentech, Inc., __ F.3d __, 2013 WL 1921073 (Fed. Cir. May 10, 2013), it affirmed the district court’s decision not to enjoin a foreign arbitration over a patent dispute, even though a very similar issue had been fully litigated in the U.S. courts.

Sanofi claimed that Genentech’s drug sales had infringed Sanofi’s patents. The parties had a licensing agreement, which called for the application of German law and for arbitration of disputes with the International Chamber of Commerce. The alleged infringement started in 1997 and constituted a breach of that agreement, but was first raised by Sanofi in 2008.  Once it was raised, Genentech terminated the agreement.

Sanofi started an ICC arbitration on October 24, 2008.  Genentech then filed an action in U.S. federal court, asking the court to find no infringement of the patent.  Genentech won; the district and appellate court found it had not infringed the patent.  However, the district court refused to enjoin Sanofi from continuing with the ICC arbitration.

[In a prime example of how proceeding in multiple venues can lead to conflicting results, the ICC arbitrator then ruled against Genentech.  Applying German substantive law, it found Genentech liable for damages under the licensing agreement.]

Genentech appealed the denial of its motion to enjoin the arbitration.  The federal circuit affirmed the district court’s decision.  A three-factor test applies when district courts decide whether to enjoin parties from pursuing foreign arbitration or litigation: whether the parties and issues are the same, whether the foreign case frustrates a U.S. policy, and “whether the impact on comity would be tolerable.”  Here, the first factor was dispositive.  The U.S. case had determined whether Genentech infringed the patent under U.S. law after the agreement was terminated, while the foreign arbitration centered on whether under German law Genentech had breached the agreement while it was in effect.  Because of those differences, the issues were not the same and the U.S. policy of res judicata was not frustrated.  Furthermore, the court found no reason to override the parties’ selection of the ICC as the forum for disputes under the agreement.

One judge wrote a concurring opinion to make sure this decision would not be misused.  That opinion emphasized that the U.S. policy favoring enforcement of forum selection clauses is not, by itself, enough to prevent the injunction of a foreign proceeding.  If the issues raised in the U.S. courts had been identical to those in the international forum, the judge wrote, “the patent holder should not be allowed to make an end run around the U.S. determination by later invoking an international proceeding.”

 

 

As a thank you to all the subscribers and readers who continue fueling Arbitration Nation’s success, this 100th blog post contains my recipe for the Best Arbitration Agreement Ever.  (I know, where did the time go??  The blog is growing up so fast!)  What should your arbitration agreement include?  How can you best take advantage of the new case law under the FAA?  Here are some tips.

First, a caveat.  I will not include draft language here.  That would be what my marketing team calls “giving away the store.”  They frown upon that.  But, here is a list of items that should be in your arbitration agreement, and others you should at least seriously consider putting in your arbitration agreement.

Ingredients You Must Have

  • A clear statement of the types of disputes that should be arbitrated (Think broad! “Any and all disputes arising out of” the contract is a good place to start.)
  • A clear statement of whether the Federal Arbitration Act will govern or a particular state’s Uniform Arbitration Act will govern instead (state acts may provide more authority for third-party discovery or judicial review, but the federal act is very strong in enforcing arbitration agreements)
  • A separate delegation clause (meaning that even disputes about the validity of the arbitration agreement will be decided by the arbitrator, taking advantage of Rent-A-Center — because in my view, if you are going to arbitrate, arbitrate everything)
  • An identification of who will administer the arbitration (AAA? JAMS? CPR? or will the arbitrators self-administer it?) and what rules will govern
  • A reasonable limitations period on claims, or an indication of what law will set statutes of limitations
  • Clear language about whether class (or even multiple-claimant) arbitration is or is not authorized (taking advantage of Stolt-Nielsen)
  • A severability clause (so that if any part of your arbitration agreement itself is invalid, the rest will be enforceable)
  • A statement that the prevailing party may turn the arbitration award into a court judgment in a specific court (taking advantage of Section 9 of the FAA)

Considering Sprinkling In:

  • A required hearing location
  • A required number of arbitrators (a single arbitrator is cheaper, but increases the chance of a wacky award; alternatively some provider’s rules say claims under a certain dollar amount will be heard by a single arbitrator, while those over that amount will be heard by a panel of three)
  • Required qualifications of the arbitrators (should it be someone from a particular industry?)
  • The availability of emergency equitable relief (with the AAA, this can be done by incorporating the “Optional Rules For Emergency Measures of Protection”)
  • A requirement that the arbitrators issue a reasoned award (otherwise you reduce your already limited ability to try and vacate any potential wacky award — but if you anticipate only small claims, this may unnecessarily drive up expense)
  • The availability of a quick appeal through the arbitration provider
  • Required mediation either before, or during, the arbitration process
  • Requiring that the loser pay the prevailing party’s attorneys fees (or other modifications to the default rules as to costs and fees of arbitration)
  • If you have chosen an institution to administer the arbitration that is uncommon, you may want to include a statement about what happens if the provider is no longer in business or otherwise unavailable
  • A limitation on the types of damages available
  • Some parameters on discovery – in all disputes or in certain types of disputes (i.e., no more than X depositions, no interrogatories, no requests for admission, no expert depositions…)
  • If your form contract will be used with thousands (or millions) of consumers, and those consumers may have claims that are not economical to pursue on an individual basis, but have significant public benefit, you may want to address the AmEx decision (which refused to compel individual arbitration of antitrust claims because plaintiffs could not “effectively vindicate” their statutory rights via individual arbitrations).  That could be accomplished by stating that claims under certain federal statutes (like antitrust statutes) are outside the scope of the arbitration clause
  • Similarly, consider allowing low-dollar individual claims to be heard in small claims court

Do you think I missed some key ingredients?  Please tell me via email or Twitter and I will consider updating the lists.

Other Resources:

If you were hoping for the full, frosted contractual cake, instead of just a recipe, and you aren’t yet ready to hire me, here are some sources you may want to consider visiting, but note that they do not take advantage of the recent case law.

AAA’s “Clause Builder” 

JAMS

CPR

Ken Adams, a specialist in contract drafting, has a suggestion for the first few lines of your agreement