This is my 290th post at ArbitrationNation and today I celebrate six years of blogging.  Woo hoo — that’s longer than most celebrity marriages!  In honor of the occasion, here are updates on six of the hottest issues in arbitration law so far this year.

  1. Agency regulation of arbitration agreements.  On the one hand, the CFPB issued a rule that will preclude financial institutions from using class action waivers in arbitration agreements.  To understand how “yuge” this is, remember that the CFPB’s initial study showed there are likely over 100 million arbitration agreements impacted by this rule.  (And there does not seem to be the necessary political willpower to stop it.)  On the other hand, agencies headed by Trump appointees have moved to roll back Obama-era consumer-friendly regulations of arbitration agreements in nursing homes and educational institutions.
  2. NLRB.  While the CFPB attacks class action waivers in the financial industry, the NLRB has been attacking those waivers in the employment context, taking the position that such waivers violate the National Labor Relations Act.  A circuit split developed, with the 6th, 7th, and 9th circuits on NLRB’s side, and the 2nd, 5th and 8th circuits siding with the employers.  The Supreme Court will hear arguments on October 2.
  3. Wholly Groundless.  When considering whether to enforce delegation clauses, some federal court have developed a carve-out for claims they think are nothing but hot air.  [Remember delegation clauses are those portions of arbitration agreements that authorize arbitrators to determine even arbitrability — whether the arbitration agreement is valid and encompasses the claims — issues usually decided by courts.]  That carve-out has been called the “wholly groundless” exception, and it is coming up with greater frequency.  Currently there is a circuit split: the 5th, 6th and federal circuits are in favor of spot-checking claims of arbitrability (e.g. Evans v. Building Materials Corp. of Am., 2017 WL 2407857 (Fed. Cir. June 5, 2017)), while the 10th and 11th Circuits believe SCOTUS’s precedent leaves no room for conducting a smell test (e.g. Jones v. Waffle House, Inc., 2017 WL 3381100 (11th Cir. Aug. 7, 2017)).
  4. Formation.  SCOTUS decided the Kindred case in May, confirming that state law on contract formation is also subject to preemption by the Federal Arbitration Act.  That was timely, given that plaintiffs appear to be placing their bets on challenging formation as the most effective way around an arbitration agreement.  They might be right.  See James v. Global Tellink Corp., 852 F.3d 262 (3d Cir. Mar. 29, 2017); Noble v. Samsung Electronics America, Inc., 2017 WL 838269 (3d Cir. March 3, 2017); King v. Bryant, 795 S.E.2d 340 (N.C. Jan. 27, 2017).
  5. Small Claims Court.  If a company starts a small claims court action to collect a debt, does that waive the company’s right to compel arbitration years later in response to a suit by the consumer?  This is a question multiple courts are facing, with differing results.  E.g., Cain v. Midland Funding, LLC, 156 A.3d 807 (Md. Mar. 24, 2017) (waiver); Hudson v. Citibank, 387 P.3d 42 (Alaska Dec. 16, 2016) (no waiver); Citibank, N.A. v. Perry, 797 S.E.2d 803 (W. Va. Nov. 10, 2016) (no waiver).  It is important because many consumer arbitration agreements exempt small claims from arbitrable claims, but may reconsider if that is considered a waiver of everything else.
  6. Statutory Preclusion.  The Federal Arbitration Act generally requires courts to enforce arbitration agreements.  But, if there is a contrary congressional command entitling the litigant to a court trial, it can override the FAA.  That issue has already come up multiple times this year, with the FAA generally winning its battles with other statutes.  E.g., McLeod v. General Mills, Inc., 854 F.3d 420 (8th Cir. Apr. 14, 2017).

Thanks to all of you for providing great feedback, leads on cases and topics, client referrals, and a warm community of fellow arbitration geeks.  I look forward to another year of blogging.

In January of 2016, SCOTUS granted review of an arbitration case from Hawaii, but summarily vacated and remanded it without analysis.  (Unless you consider “Please read DIRECTV” substantive analysis.)  Here’s the risk of that course of action: Hawaii can refuse to change its mind.

Last month, in Narayan v. The Ritz-Carlton Development Co., 2017 WL 3013022 (Haw. July 14, 2017), Hawaii affirmed its decision after considering DIRECTV.  The case related to whether purchasers of new condominiums could sue the developers over their abandonment of the project.  The developers moved to compel arbitration based on an arbitration clause within the Declaration for the condo project, because the Declaration was incorporated into the plaintiffs’ purchase agreement.  In 2015, Hawaii’s highest court found the parties had not clearly agreed to arbitrate and portions of the arbitration clause were unconscionable.

Two years later, after a forced reconsideration, the court dropped its analysis of whether the arbitration agreement was validly formed (smart decision, given that it was on the shakiest ground, and given Kindred’s statement that FAA preempts formation decisions that disfavor arbitration).  Instead, it focused exclusively on unconscionability.  It found the arbitration clause both procedurally and substantively unconscionable (noting “severe” discovery limitations), and added more state case law to support those findings.  Amusingly, it also cited to two other state supreme courts which have affirmed their arbitration decisions on unconscionability after receiving a “GVR” from SCOTUS GVR: West Virginia and Missouri. (As if to say: You let those other kids off the hook!)

Speaking of SCOTUS and arbitration, two updates of note:

  • Mark your calendars; SCOTUS will hear argument in the cases regarding whether the NLRB can preclude class waivers on October 2.  Even so, the federal appellate courts keep issuing decisions on both sides of this issue.  E.g. NLRB v. Alternative Entertainment, 2017 WL 2297620 (6th Cir. May 26, 2017) (enforcing NLRB order); Convergys Corp. v. NLRB, 2017 WL 3381432 (5th Cir. Aug. 7, 2017) (rejecting NLRB position); Logisticare Solutions Inc. v. NLRB, 2017 WL 3404648 (5th Cir. Aug. 9, 2017) (rejecting NLRB position).
  • Physicians from Florida are asking SCOTUS to grant certiorari in a case about the regulation of doctor-patient arbitration clauses.  If you know of other arbitration cases in the pipeline, let me know.
  • An employer from California is asking SCOTUS to grant certiorari in this case regarding when courts should review interim arbitration awards. [Ed note: this final bullet was not in the original post, but was added after a thoughtful reader alerted me to it.]

Class action arbitration continues to be a hot topic among the federal appellate courts this summer.

The 8th Circuit followed the lead of other circuit courts, finding that courts, not arbitrators, presumptively decide whether the parties’ arbitration agreement allows for class arbitration. Catamaran Corporation v. Towncrest Pharmacy, 2017 WL 3197622 (July 28, 2017).   In support of its decision, the court raised concerns about class arbitration, including loss of confidentiality, due process concerns for absent parties, and a concern about the lack of appellate review.  [Interesting that it didn’t cite any of CFPB’s report on this, but just cited other case law… ] Therefore, unless the parties have “clearly and unmistakably delegated” the class arbitration issue to the arbitrator, a court will decide the issue.  Furthermore, the court said that incorporating the AAA rules is not a clear and unmistakable delegation of the class arbitration decision, even though citing the AAA rules is sufficiently clear in analogous issues in regular “bilateral arbitration.”  The court remanded to the district court to determine whether there was a contractual basis for class arbitration.

Halfway across the country, the 9th Circuit held that employees could bring their claims related to a data breach as a class action in arbitration.  Varela v. Lamps Plus, Inc., 2017 WL 3309944 (Aug. 3, 2017).  The employees had first brought their class claims to federal court, and the employer moved to compel individual arbitration.  The district court found the arbitration agreement was valid, but ambiguous about whether class actions were waived.  Construing that ambiguity against the employer who drafted the agreement, the district court ordered class arbitration.  On appeal, the 9th Circuit affirmed the finding of ambiguity, sending the class to arbitration as a group.  One judge issued a two sentence dissent, noting “we should not allow Varela to enlist us in this palpable evasion of Stolt-Nielsen

The “Summer of Arbitration” continues. In this edition, I focus on four big recent cases from the Second Circuit.  One vacated an arbitrator’s certification of a class action.  A second refused to vacate an award, despite an allegation of perjury.  And the last two relate to nearly 1.7 billion dollars worth of international arbitration awards.  (Although I refuse the designation of “flyover country” for my beloved Midwest, I do have to acknowledge that the New York courts get much sexier arbitration cases than we do, and more of them.)

With all the buzz about class action waivers in arbitration clauses (and the CFPB trying to end their use in the financial industry), it is easy to forget that it is possible for class actions to go forward in arbitration.  In Jock v. Sterling Jewelers, Inc., 2017 WL 3127243 (2d Cir. July 24, 2017), the arbitrator certified a class of plaintiffs that included “absent” class members.  The district court concluded that it was “law of the case” that the arbitrator had the necessary authority to do that, based on a 2011 decision from the Second Circuit in the same matter.  However, the Second Circuit found that the district court misunderstood – it had only ruled that the arbitrator had authority to determine whether some class arbitration was permissible – but had not ruled on the question of whether individuals who had not expressly opted into the class could be part of the class.  So, this case goes back to the district court; a continuation of its seven-year class action purgatory.

In another case seeking vacatur, the Second Circuit had the opportunity to clarify when a party’s alleged fraud is sufficient to vacate an arbitration award. It held that for “fraud to be material within the meaning of Section 10(a)(1) of the FAA, petitioner must demonstrate a nexus between the alleged fraud and the decision made by the arbitrators, although petitioner need not demonstrate that the arbitrators would have reached a different result.” Odeon Capital Group, LLC v. Ackerman, __ F.3d__ (2d Cir. July 21, 2017).  In this case, that meant that the employer was not able to vacate the $1.4 M award in favor of the employee, based on the employee’s alleged perjury, because the topic of the perjury had nothing to do with the claim on which he was awarded damages.  (The general damage to his credibility was not sufficient.)

The two cases on international arbitration are better served by a blog focused on that topic. (I read enough cases as it is!  I am sticking with my exclusive arrangement with the FAA.)  But, the executive summary is that the Second Circuit declared that an opposing party deserves personal service of a petition seeking judgment on a $1.6 billion dollar award, not just ex parte proceedings under New York state law. Mobil Cerro Negro, Ltd. V. Bolivarian Republic of Venezuela, 2017 WL 2945603 (2d Cir. July 11, 2017).  It also declared that district courts should grant “significant weight to considerations of international comity” in the rare instance that the winner in arbitration properly confirms a judgment in the U.S., but the award is later nullified (well after the deadline) by courts in another nation, and the loser in arbitration makes a Rule 60 motion to vacate that judgment. Thai-lao Lignite Co. v. Government of the Lao People’s Democratic Republic, __ F.3d__ (July 20, 2017).

I declare this the Summer of Arbitration. It’s not as sexy as the Summer of Love (which is celebrating its 50th anniversary, btw http://www.sftravel.com/summer-love-2017), but there has to be some recognition of the avalanche of arbitration cases on my desk (to say nothing of the regulation changes).

Today, I focus on the state supreme courts. In the last few months, ten separate state high courts have issued arbitration decisions.  Many of those have addressed whether arbitrators properly disclosed relationships with the parties, their counsel and their experts.  To keep things brief, I will report each state in alphabetical order, in roughly tweet length below (140 characters, not counting citation).  Put some flowers in your hair, turn up the 60s tunes, and read on.

Alabama: Fraudulent inducement of entire contract and conditions precedent are not relevant arguments on motion to compel arbitration; both for arbitrator to decide. Rainbow Cinemas, LLC v. Consolidated Constr. Co. of Alabama, 2017 WL 2610506 (Ala. June 16, 2017).

Alabama/2: Arbitration clause not invalid, even though lender (and not consumer) could bring some claims to court. Family Security Credit Union v. Etheridge, 2017 WL 2200364 (Ala. May 19, 2017).

Arkansas: Public policy is not a valid basis for vacating arbitration awards. Kilgore v. Mullenax, 2017 Ark. 204 (June 1, 2017).

Hawai’i: Arbitrator not obligated to disclose that 1 of respondent’s experts had appeared before her previously or that second expert was counsel in mediations and arbitrations she handled. Narayan v. Assoc. of Apt Owners of Kapalua Bay Condominium, 2017 WL 2591321 (Haw. June 15, 2017) (clarifying scope of relationships requiring disclosure)

Minnesota: Courts should stay an action after compelling arbitration, not dismiss it. City of Rochester v. Kottschade, 2017 WL 2464520 (June 7, 2017).

Mississippi: Tenant’s claim of assault on apartment premises is outside scope of arb agreement in lease. Doe v. Hallmark Partners, 2017 WL 2001163 (Miss. May 11, 2017).

Nevada: Arbitrator did not exceed power by disagreeing with employee’s interpretation of CBA; colorable justification for award. Unvacated.  Washoe County School District v. White, 2017 WL 2825902 (Nev. June 29, 2017).

Nevada/2: Fact that arbitrator had worked with counsel for claimant 15 years before disclosures, and mediated cases for same counsel 7 years before, did not merit vacatur. Eagle Jet Aviation v. Milton Woods, 2017 WL 2813985 (Nev. June 27, 2017).

North Dakota: Even though arbitrator not selected by method in contract, can’t be basis for vacatur when no objection until after award. Thompson v. Lithia ND Acquisition Corp., 2017 WL 2464536 (N.D. June 7, 2017).

Texas: $21 M arb award confirmed; arbitrator unaware of trivial fact not disclosed & damages within authority. Forest Oil Corp. v. El Rucio Land & Cattle Co., 2017 WL 1541086 (Tex. Apr. 28, 2017).

Vermont: Just bc defendant is compelling arbitration, doesn’t mean a court can make it initiate the arbitration (and pay the fee). That’s plaintiff’s job.  –Hermitage Inn Real Estate Holding Co. v. Extreme Contracting, 2017 WL 2391725 (Vt. June 2, 2017) (reversing default judgment for plaintiff).

Virgin Islands: Loser cannot vacate award based on lack of arb agmt, when it never raised issue in court and first raised on final day of arb hearing. Bashiti v. Tutu Park, 2017 WL 2333809 (May 26, 2017). [I can count this as a state, right??]

These decisions show that arbitrator disclosures are popular bases for attempting to vacate arbitration awards right now.  As those cases bubble up, state high courts are clarifying the narrow set of relationships that must be disclosed as well as those which will form a valid basis for objection.

The CFPB today issued a consumer-friendly rule that is likely to significantly curtail the use of arbitration in consumer financial agreements.  That rule has two major components.  First, it prohibits institutions from relying on arbitration clauses to avoid class actions.  And second, it mandates the submission of redacted data on consumer financial arbitrations that will be accessible on the internet.

The rule was originally proposed in May of 2016, roughly a year after the CFPB issued its report on the use of arbitration in the financial industry.  During the required 90-day period, the CFPB received around 110,000 public comments on its proposal.  Yet, the CFPB waited over a year to finalize and issue the rule.  During that time, President Trump took office and his administration reversed course on three previous arbitration-related rules/positions from the Obama Administration.  That context lead to speculation that the CFPB might weaken its proposed rule or otherwise take a safer course.

Yet today the rule was issued and it appears substantially the same as the initial proposal.  Maybe the CFPB wisely spent the past year gearing up for the challenges that similar pro-consumer arbitration rules have faced — like lawsuits challenging the rule’s validity or Congress using its ability to pull the plug on rules within the first 60 days.  Or maybe it just took a year to draft this 775 page behemoth of a rule with all its arguments in favor of its issuance (and responses to its detractors).  (Note that the Trump Administration has been trying to convince a federal court that the President has the authority to fire the CFPB director without cause, which probably did not help any negotiations over the proposed rule.)

In any case, the result is a very far-reaching rule that will likely lead to an uptick in class actions in the financial industry.  It applies to all consumer lending, credit card agreements, auto leases, debt management services, check cashing services, and debt collectors.  Starting six months after the effective date of the rule (assuming no court injunction), it will affect all new agreements within its scope.

The text of the key provisions of the rule follows:

(a) Use of pre-dispute arbitration agreements in class actions—(1) General rule. A

provider shall not rely in any way on a pre-dispute arbitration agreement entered into after the

date set forth in § 1040.5(a) with respect to any aspect of a class action that concerns any of the

consumer financial products or services covered by § 1040.3, including to seek a stay or

dismissal of particular claims or the entire action, unless and until the presiding court has ruled

that the case may not proceed as a class action and, if that ruling may be subject to appellate

review on an interlocutory basis, the time to seek such review has elapsed or such review has

been resolved such that the case cannot proceed as a class action.

(2) Provision required in covered pre-dispute arbitration agreements. Upon entering

into a pre-dispute arbitration agreement for a consumer financial product or service covered by

  • 1040.3 after the date set forth in § 1040.5(a):

(i) Except as provided elsewhere in this paragraph (a)(2) or in § 1040.5(b), a provider

shall ensure that any such pre-dispute arbitration agreement contains the following provision:

“We agree that neither we nor anyone else will rely on this agreement to stop you from being

part of a class action case in court. You may file a class action in court or you may be a member

of a class action filed by someone else.”

(ii) When the pre-dispute arbitration agreement applies to multiple products or services,

only some of which are covered by § 1040.3, the provider may include the following alternative

provision in place of the one required by paragraph (a)(2)(i) of this section: “We are providing

you with more than one product or service, only some of which are covered by the Arbitration

Agreements Rule issued by the Consumer Financial Protection Bureau. The following provision

applies only to class action claims concerning the products or services covered by that Rule: We

agree that neither we nor anyone else will rely on this agreement to stop you from being part of a

class action case in court. You may file a class action in court or you may be a member of a

class action filed by someone else.”

(iii) When the pre-dispute arbitration agreement existed previously between other parties

and does not contain either the provision required by paragraph (a)(2)(i) of this section or the

alternative permitted by paragraph (a)(2)(ii) of this section:

(A) The provider shall either ensure the pre-dispute arbitration agreement is amended to

contain the provision specified in paragraph (a)(2)(i) or (a)(2)(ii) of this section or provide any

consumer to whom the agreement applies with the following written notice: “We agree not to

rely on any pre-dispute arbitration agreement to stop you from being part of a class action case in

court. You may file a class action in court or you may be a member of a class action filed by

someone else.” When the pre-dispute arbitration agreement applies to multiple products or

services, only some of which are covered by § 1040.3, the provider may, in this written notice,

include the following optional additional language: “This notice applies only to class action

claims concerning the products or services covered by the Arbitration Agreements Rule issued

by the Consumer Financial Protection Bureau.”

(B) The provider shall ensure the pre-dispute arbitration agreement is amended or provide

the notice to consumers within 60 days of entering into the pre-dispute arbitration agreement.

***

(b) Submission of arbitral and court records. For any pre-dispute arbitration agreement

for a consumer financial product or service covered by § 1040.3 entered into after the date set

forth in § 1040.5(a), a provider shall comply with the requirements set forth below.

(1) Records to be submitted. A provider shall submit a copy of the following records to

the Bureau, in the form and manner specified by the Bureau:

(i) In connection with any claim filed in arbitration by or against the provider concerning

any of the consumer financial products or services covered by § 1040.3:

(A) The initial claim and any counterclaim;

(B) The answer to any initial claim and/or counterclaim, if any;

(C) The pre-dispute arbitration agreement filed with the arbitrator or arbitration

administrator;

(D) The judgment or award, if any, issued by the arbitrator or arbitration administrator;

and

(E) If an arbitrator or arbitration administrator refuses to administer or dismisses a claim

due to the provider’s failure to pay required filing or administrative fees, any communication the

provider receives from the arbitrator or an arbitration administrator related to such a refusal;

(ii) Any communication the provider receives from an arbitrator or an arbitration

administrator related to a determination that a pre-dispute arbitration agreement for a consumer

financial product or service covered by § 1040.3 does not comply with the administrator’s

fairness principles, rules, or similar requirements, if such a determination occurs; and

(iii) In connection with any case in court by or against the provider concerning any of the

consumer financial products or services covered by § 1040.3:

(A) Any submission to a court that relies on a pre-dispute arbitration agreement in

support of the provider’s attempt to seek dismissal, deferral, or stay of any aspect of a case; and

(B) The pre-dispute arbitration agreement relied upon in the motion or filing.

(2) Deadline for submission. A provider shall submit any record required pursuant to

paragraph (b)(1) of this section within 60 days of filing by the provider of any such record with

the arbitrator, arbitration administrator, or court, and within 60 days of receipt by the provider of

any such record filed or sent by someone other than the provider, such as the arbitration

administrator, the court, or the consumer.

(3) Redaction. Prior to submission of any records pursuant to paragraph (b)(1) of this

section, a provider shall redact the following information:

(i) Names of individuals, except for the name of the provider or the arbitrator where

either is an individual;

(ii) Addresses of individuals, excluding city, State, and zip code;

(iii) Email addresses of individuals;

(iv) Telephone numbers of individuals;

(v) Photographs of individuals;

(vi) Account numbers;

(vii) Social Security and tax identification numbers;

(viii) Driver’s license and other government identification numbers; and

(ix) Passport numbers.

(4) Internet posting of arbitral and court records. The Bureau shall establish and

maintain on its publicly available internet site a central repository of the records that providers

submit to it pursuant to paragraph (b)(1) of this section, and such records shall be easily

accessible and retrievable by the public on its internet site.

So you’ve got an arbitration award, what next? In other types of civil cases, the Federal Rules of Civil Procedure (Rules) control service, and they have greatly reduced the role of U.S. Marshals in serving parties. See Fed. R. Civ. P. 4(c). But enter the Federal Arbitration Act § 9 and § 12 (FAA). When a party seeks to confirm, vacate, or modify an arbitration award, § 9 and § 12 say that a nonresident party must be “served by the marshal of any district within which the adverse party may be found in like manner as other process of the court.” Which set of requirements controls here?

Since adequate service is necessary for the court to have personal jurisdiction, the question of service has been litigated in a few district courts, but no federal appellate courts. See Logan & Kanawha Coal Co.v. Detherage Coal Sales, LLC, 789 F. Supp. 2d 716, 718 (2011) (chronicling the courts that have analyzed the issue). Some courts, like the D.C. District Court in VentureForth Holdings LLC v. Joseph, have found that service consistent with the Rules also satisfies FAA § 9 and § 12. Those courts rely on the final phrase of § 9 or § 12 that says, “in like manner as other process of the court.” They read that phrase as indicating that arbitration award confirmation or modification service should follow the same rules as other civil suits. They derisively dismiss the requirement in §§ 9 and 12 as an artifact or an anachronism.

However, some courts, like the Southern District of West Virginia in Logan & Kanawha v. Detherage Coal Sales, require service by U.S. Marshal. The first and primary argument for those courts is that the plain language of the FAA §§ 9 and 12 requires service by U.S. Marshal. When confronted with the apparent tension between the Rules and the FAA, they point to the fact that Congress has not yet repealed the marshal requirement in the FAA even if the new Rules reduce the role of U.S. Marshals. The Rules, in fact, still retain the option of using U.S. Marshals to serve other parties, so a court could order service by U.S. Marshal without violating Rule 4.

All in all, there are some district courts—but not circuit courts—talking about the potential conflict between the service requirements in the Rules and the FAA, and they do not all agree. There is no circuit law on it yet, but at least some of the district courts seem content to allow Congress’ anachronism to control current outcomes. The safest bet for any party seeking to confirm, vacate, or modify an arbitration award in federal court is to use a U.S. Marshal for service, or to get an express waiver of that requirement from the opposing party.

ArbitrationNation thanks Claire Williams, a law student at the University of Minnesota Law School, for researching and drafting this post.

____________________________________________________

A nonexhaustive list of courts not requiring marshal service

  • VentureForth Holdings LLC v. Joseph, 80 F. Supp. 3d 147, 148 (D.D.C. 2015) (“[T]his Court holds that service of a nonresident complies with § 9 of the FAA if service is provided in accordance with Rule 4 of the Federal Rules of Civil Procedure.”)
  • United Cmty. Bank v. Campbell, No. 1:10 CV 79, 2011 WL 815684, at *2 (W.D.N.C. Mar. 1, 2011) (The Court finds that the Bank properly effected service pursuant to Rule 4(e).)
  • Elevation Franchise Ventures, LLC v. Rosario, No. 1:13-CV- 719 AJT/JFA, 2013 WL 5962984, at *4 (E.D. Va. Nov. 6, 2013) (“Service of process upon an individual is governed in this court by Fed. R. Civ. P. 4(e)(1) . . . .”)
  • Hancor, Inc. v. R &R Eng’g Prod., Inc., 381 F. Supp. 2d 12, 15 (D.P.R. 2005) (relying on Reed & Martin, Inc. v. Westinghouse Elec. Corp.)
  • Litigants in the Second Circuit should be aware of Reed & Martin, Inc. v. Westinghouse Elec. Corp., 439 F.2d 1268, 1277 (2d Cir. 1971). In it, the Second Circuit analyzed the same phrase “in like manner” that courts point to when arguing that service in accordance with Rule 4 is sufficient. The court held that “[t]he phrase ‘in like manner as other process of the court’ found in § 9 of the Arbitration Act refers to Fed. R. Civ. P. 4 on the accomplishment of appropriate service, not to Fed. R. Civ. P. 12(a). . . .” While this quote appears to support service in accordance with the Rules, there are two big caveats. First, the court was addressing an issue on which the FAA is silent (time to answer). Second, this case was decided in 1971 when Rule 4 required “[s]ervice of all process shall be made by a United States marshal . . .” so at the time there was no conflict between the Rules and the FAA and therefore the court could not have addressed the current tension between the FAA and the Rules.

 

A nonexhaustive list of courts requiring marshal service:

  • Johnson v. Drake, No. 3:16-CV- 1993-L, 2017 WL 1173275, at *6 (N.D. Tex. Mar. 30, 2017) (“[C]ourts cannot simply disregard the plain language of 9 U.S.C. § 9 . . . .”)
  • PTA-FLA, Inc. v. ZTE USA, Inc., No. 3:11-CV- 510-J- 32JRK, 2015 WL 12819186, at *6 (M.D. Fla. Aug. 5, 2015) (“[S]ervice on nonresidents must be made via marshal. . . “)
  • Logan & Kanawha Coal Co. v. Detherage Coal Sales, LLC, 789 F. Supp. 2d 716, 722 (S.D.W. Va. 2011)
  • Nu-Best Franchising, Inc. v. Motion Dynamics, Inc., No. 805 CV 507T27TGW, 2006 WL 1428319, at *3 (M.D. Fla. May 17, 2006) (“Plaintiffs were required to serve notice through the United States Marshal.”)
  • Int’l Union of Operating Engineers Local 825 Employee Benefit Funds v. Getty Contracting LLC, No. CIV. 2:14-7799 KM, 2015 WL 4461512, at *2 (D.N.J. July 20, 2015) (“If it is a nonresident of New Jersey, Getty must be served via the U.S. Marshal in its home district.”)
  • Dobco, Inc. v. Mery Gates, Inc., No. CIV. 06-0699 (HAA), 2006 WL 2056799, at *2 (D.N.J. July 21, 2006) (“Rather, Dobco had an obligation to have Mery Gates served by a marshal, as the strict language of the statute provides.”)

It was only a few weeks ago that this blog covered the reversal of the CMS regulation on arbitration in nursing homes.  Now, the Trump Administration has altered course on two other issues of arbitration policy.

First, the Department of Education has “delayed until further notice” its ban on pre-dispute arbitration agreements.  That regulation was final in November of 2016.  The notice cites litigation regarding the rule as the primary reason for the indefinite delay.

Second, the Solicitor General announced it would switch sides in the big SCOTUS showdown over class action waivers in employment agreements.  The administration had previously supported the NLRB, but now will oppose it.

These two actions probably do not bode well for CFPB’s ability to finalize its proposed rule banning pre-dispute regulation and have the rule remain in force…

**Special greetings to new subscribers that signed up after the ABA’s Arbitration Training Institute last week!

In National Labor Relations Board v. Alternative Entertainment, Inc., No. 16-1385, 2017 WL 2297620 (6th Cir. May 26, 2017), the Sixth Circuit joined the Seventh and Ninth Circuits in upholding the NLRB’s decision that barring an employee from pursuing class action or collective claims violates the NLRA. Already lined up on the other side of a growing Circuit split are the Second, Fifth, and Eighth Circuits.

In Alternative Entertainment, Inc., the NLRB claimed that language in both the employment contract and the employee handbook used by Alternative Entertainment, Inc. (“AEI”) “violated the NLRA by barring employees from pursuing class-action litigation or collective arbitration of work-related claims.” Alternative Entertainment, Inc., 2017 WL 2297620 at *1.

Joining the Seventh Circuit’s critique of the Fifth Circuit’s logic in D. R. Horton, the Sixth expressly takes on the Fifth stating “the Fifth Circuit started with the wrong question.” When the Sixth asks the question it believes is the right one–if the NLRA is compatible with the FAA–the Court finds them in “harmony” and holds the employer’s ban on concerted action violates the NLRA. As a result, the court found the ban is also unenforceable under the FAA’s saving clause. According to the Sixth, the NLRA bans contracts that interfere with “employees’ right to engage in concerted activity, not because they mandate arbitration.” Any contract provision that interfered in this way would be illegal, which is in full accord with the FAA’s rejection of any contract that “undermine[s] employees’ right to engage in concerted legal activity.”

The Sixth’s second disagreement with the Fifth Circuit is expressed by the Sixth’s use of Chevron deference (arguing in the alternative, after stating there is no statutory ambiguity). The Sixth accepts the NLRB’s permissible construction of the NLRA’s right to concerted activity as a substantive, not procedural right.

In a partial dissent, and referring to the “manifestation of hostility toward arbitration,” Justice Sutton references the history of judicial protection and support of arbitration agreements provided over time. Specifically, the dissent objects to the majority’s overreaching use of Chevron, and states the majority opinion ignores Concepcion’s rejection of similar arguments harmonizing the NLRA with the FAA. (The majority opinion, however, distinguishes the kind of arbitration provision used by AEI and the kind of arbitration provision used by the employer in Concepcion.)

One question here is why would the Sixth Circuit bother drafting and filing this opinion when SCOTUS has already accepted review of this issue? It is possible the Sixth decided to issue this opinion in an effort to intentionally level the sides of this split by adding its voice to the Seventh and Ninth Circuits. It is also possible that since arguments had been heard in November 2016, opinions had already been formed by the time SCOTUS granted cert. on the question in January 2017. Either way, SCOTUS is expected to opine later this year on cases consolidated as National Labor Relations Board v. Murphy Oil USA, Inc., which will resolve the growing divide among the circuits. In granting cert., SCOTUS acknowledged the extent of the Circuit split as it existed in January—and footnoted this Sixth circuit case along with four other potential cases from the Third, Fourth, Eleventh and the D.C. Circuits. SCOTUS saw this one coming their way. I look forward to reading the resolution of this split.

ArbitrationNation thanks Jaclyn Schroeder, a law student at Mitchell Hamline School of Law, for researching and drafting this post.

In a first indication of the Trump Administration’s stance on consumer arbitration, the Centers for Medicare & Medicaid Services (CMS) this week issued a new proposed rule that rolls back the Obama Administration’s regulation, which precluded pre-dispute arbitration agreements in nursing homes.  (Too many negatives in that sentence… in other words, the Trump Administration wants to ensure that nursing homes can have arbitration agreements in their admission documents.) For context, CMS just issued the regulation it is now retracting in October of 2016.  The 2016 rule applied to any new agreements between residents and long-term care facilities that receive dollars through Medicare or Medicaid, and prohibited the centers from requiring residents to sign arbitration agreements as a condition of admission.  Before the 2016 rule could even take effect, though, its legality was challenged and a federal court stayed implementation of the new regulation during the case. Seven months and a new president later, the agency is changing course.  Why?  The announcement suggests it is for three reasons.  First, because a federal court found merit to the challenges to the rule.  Second, because President Trump’s January 30, 2017 Executive Order “Reducing Regulation and Controlling Regulatory Costs” encouraged all agencies to repeal two existing regulations for every new regulation.  And finally, “[u]pon reconsideration, we believe that arbitration agreements are, in fact, advantageous to both providers and beneficiaries because they allow for the expeditious resolution of claims without the costs and expense of litigation.”  Those second and third points could support the roll back of most, if not all, of the Obama Administration’s regulations relating to arbitration. The new proposed CMS rule offers an olive branch to those who lobbied for the 2016 rule.  It proposes to require that arbitration agreements be written in plain language, explained clearly to prospective residents of long term care facilities, and that the resident acknowledge his/her understanding.  The new rule also prohibits any language that would discourage a resident from contacting governmental authorities, and requires facilities to keep copies of arbitration awards for five years (suggesting CMS may request inspection).   The announcement summarizes that the new rule “would . . . strengthen requirements regarding the transparency of arbitration agreements in LTC facilities. This proposal would support the resident’s right to make informed choices about important aspects of his or her health care. In addition, this proposal is consistent with our approach to eliminating unnecessary burden on providers.” If you are curious how other arbitration rules proposed or passed during the Obama Administration have fared so far, Bloomberg BNA has done a great summary of where things stand.  (Short answer: most are on hold.) **Many thanks to Mark Kantor for alerting me to this development.