As we close out 2018, it is a good time to reflect on the year in arbitration law.  Overall, I would characterize the year as another in which everyone was mildly obsessed with class actions, the U.S. Supreme Court again showed its willingness to enforce arbitration agreements of all kinds, and lower courts and groups of citizens attempted to resist the high court’s blind faith in arbitration with some success.  Here are my thoughts on the biggest stories of the year:

  • Decision With Biggest Impact: SCOTUS’s ruling in Epic Systems Groups of employees argued that the National Labor Relations Act gave them the right to join class actions and no arbitration agreement could overcome that statutory right.  But the Court emphatically rejected that argument, holding that employees are bound to the agreements they sign and nothing in the NLRA contradicts that result.  The outcome of this case was not unexpected, but the fallout was dramatic.  Many class actions dried up almost immediately, while others took a few months.  Yet other employees decided to give mass individual arbitration a go, filing hundreds of arbitration demands against the same employer simultaneously.
  • Circuit Split Most Likely To Go To SCOTUS: The split over who — judges or arbitrators — should decide whether the parties’ arbitration agreement allows class arbitration.   Seven federal circuits have looked at this issue.  Four have concluded that the issue of class arbitration is a big enough deal that it is presumptively for courts to decide, even when the parties have incorporated arbitration rules that authorize an arbitrator to decide jurisdictional questions.  Three circuits disagree.  Given the Supreme Court’s attraction to everything class arbitration, this seems likely to pique the Justices’ interest.  (Indeed, a cert petition has been filed in the 11th Circuit case, which is on the minority side of this circuit split, and the Justices have asked the winning party to respond.)
  • Best Evidence That Arbitration Law Is Still In Its Infancy: The conflicting cases over whether Uber’s arbitration agreement is enforceable.  Nothing says “This is a developing area of law” like having the First Circuit refuse to enforce the same arbitration agreement that the Second Circuit had just agreed to enforce.  Even better — the difference turned on the color of the hyperlink.  [Runner up in this category are the conflicting cases over whether the arbitration agreements printed on the outside of roofing shingle packages are enforceable.]
  • Most Successful Political Attack on Arbitration: The #MeToo movement successfully brought public attention to  concerns that having arbitration agreements in employment contracts may exacerbate a discriminatory workplace.  As a result, legislation declaring arbitration agreements invalid in cases of sexual assault or harassment was introduced at the federal level and many states.  To date, I am aware of it passing in only New York and Washington.  But, those state statutes are likely preempted by the Federal Arbitration Act.  More effective may be the public pronouncements by many major corporations that they will not enforce arbitration agreements in cases of sexual assault or harassment.
  • New Face of the Resistance: Kentucky.  First place had to go to Kentucky, after this decision, in which it just ignored the fact that the U.S. Supreme Court had schooled it on arbitration law last year.  But there are many runners-up in this category, frequently consisting of courts who are using the flexibility inherent in state contract law to find ways around arbitration.  For example, the courts who have recently decided that if the parties either did not choose an entity to administer the arbitration, or chose one that is no longer available, that voids the entire arbitration agreement. (See postscript on this entry.)  Or the courts who found that, despite the federal presumption in favor of arbitrability, the parties’ disagreement was outside the scope of their arbitration agreement.
  • Most Outrageous Motion To Compel: There are moments you just want to say “What were you thinking??” to counsel for the defense.  This year, this case stood out to me for outrageous conduct, as the plaintiffs did not originally have an arbitration agreement but apparently were duped into signing one a year into the class action litigation.  But, this case was a close second (where the defense argued that blind plaintiffs should be bound by the arbitration agreement, despite no evidence they were made aware of its existence).

Turning our sights forward, what can we expect in 2019?  Well, SCOTUS owes us three arbitration decisions (Henry Schein, Lamps Plus, and New Prime).  None of those are likely to have broad impact on arbitration law, as they each deal with fairly narrow issues.  So, big stories will likely come from elsewhere.  Maybe the new Democratic majority in the House will have more interest (and success) in passing federal arbitration legislation?   Maybe mass individual arbitration filings will change the cost-benefit-analysis of class action waivers for corporations?  I look forward to watching it unfold with all of you!  Happy New Year.

One of the most confounding doctrines in federal arbitration jurisprudence is the severability doctrine.  The U.S. Supreme Court has held, since Prima Paint in 1967, that courts must enforce arbitration clauses within contracts, even if the entire contract is invalid or unenforceable.  (Most non-arbitration geeks don’t believe me when I tell them that’s the law.)  The only time a court can address the argument for invalidity is if the litigant directs it specifically at the arbitration clause.  For example, an argument that the elves’ contract with Santa is invalid because it’s illegal to pay them in candy canes is an argument about the contract as a whole, and would get sent to arbitration if the elves’ contract had a valid arbitration clause.  On the other hand, an argument that the arbitration clause in the elves’ contract with Santa is unconscionable because it calls for arbitration in the South Pole with Mrs. Claus as the arbitrator *is* specific to the arbitration clause, and should be decided by the court.  Unless, of course, the arbitration clause clearly and unmistakably delegated questions of validity to an arbitrator…

Two courts recently had an opportunity to remind litigants of the severability doctrine.  In Rogers v. Swepi LP, 2018 WL 6444014 (6th Cir. Dec. 10, 2018), the Sixth Circuit reversed a district court judge who failed to apply the severability doctrine.  In Rogers, a putative class of landowners brought suit against Shell for claims arising out of lease agreements.  Shell responded by moving to compel arbitration.  The landowners argued that the arbitration clause within the lease agreement (as well as the whole “second phase” of the lease) was only triggered upon payment of a bonus.  The court found this was an attack on more than just the arbitration clause, and therefore application of the severability doctrine called for the issue of arbitrability to be decided by an arbitrator.  (However, whether class arbitration was permissible should be decided by the court on remand.)

Similarly, the Supreme Court of Montana sent a dispute over arbitrability to an arbitrator in Peeler v. Rocky Mountain Log Homes Canada, Inc., 2018 WL 6498693 (Mont. Dec 11, 2018).   In Peeler, an owner sued both the design professional and contractor over claims relating to construction of a custom log home.  Only the contractor’s agreement had an arbitration clause, but the complaint alleged the design firm was an affiliated entity that should be treated the same as the contractor.  So the contractor and design firm moved to compel arbitration.  The homeowner argued that the arbitration agreement was permissive, not mandatory, and that the defendants had waived their right to arbitrate by waiting to assert it until after he filed suit.  Those arguments did not prevail at the trial court or the appellate court.  The Montana Supreme Court noted that the defendants did not waive their right to arbitrate, and because the owner did not challenge the validity or enforceability of the arbitration agreement, his arguments should be heard by an arbitrator.  Finally, the court found that the design firm could compel arbitration as a matter of equitable estoppel.

Speaking of construction cases, the Supreme Court of Nevada continues its campaign to remind all construction litigators that the FEDERAL Arbitration Act governs even local disputes between homeowners and contractors.  Since its Ballasteros decision in February of this year, it has issued two more decisions reiterating that holding: Lanier, 2018 WL 6264809 (Nev. Nov. 28, 2018), and Greystone Nevada, 2018 WL 6264756 (Ne. Nov. 28, 2018).  As evidence of interstate commerce, Lanier points to three things: the builder was incorporated in Delaware while the homeowners were Nevada residents, the large number of subcontractors and material suppliers who worked on the home made it likely that at least some of them are engaged in interstate commerce, and “in the aggregate, the general practice of developing, buying, and selling homes substantially affects interstate commerce.”  All of this mattered because trial court judges were relying on Nevada anti-arbitration rules to refuse to compel arbitration.  Those rules are preempted if the dispute is governed by the FAA.

The ABA Journal released its Web 100 awards recently, and I am happy to announce that ArbitrationNation is still in the Blawg Hall of Fame!  ArbitrationNation was inducted into the Hall of Fame last year, after multiple years on the Top 100 list, for being “consistently outstanding,” which is embarrassingly high praise.    There are now 60 blogs in the Blawg Hall of Fame, but Arbitration Nation remains the only blog on the list about arbitration (and the only one authored by a Minnesotan).

I must say that as December approached, I got a bit anxious about Arbitration Nation’s place in the Blawg Hall of Fame.  Does the ABA Journal follow the example of the Hollywood Walk of Fame, that once you have a star you can’t be removed??  (Looks like pro sports Hall of Fames are similarly permanent.)  What if I published a couple fewer posts this year?  What if I wasn’t sufficiently witty??!  Thankfully, at least this year, my performance was sufficient to stay.

Thanks to all of you for continuing to visit the blog, send me ideas for posts, and geek out about arbitration with me!

Today’s post covers three new developments from this past week. The Fifth Circuit found a defendant waived its right to arbitrate a class action; the Second Circuit found arbitrators retain power to clarify ambiguous awards; and Jay-Z found his list of potential arbitrators sorely lacking in diversity.

In Forby v. One Technologies, 2018 WL 6191349 (5th Cir. Nov. 28, 2018), a class of plaintiffs filed an action for consumer fraud. The defendant waited two years before compelling arbitration. In the meantime, it removed the case to federal court, transferred venue, and filed a Rule 12 motion to dismiss, which was only partially successful.

In response to the motion to compel, the plaintiffs argued the defendant had waived its right to arbitrate. The district court disagreed, finding that “delay alone is insufficient” to establish the prejudice required to prove waiver. On appeal, however, the Fifth Circuit found prejudice because the plaintiff would “have to re-litigate in the arbitration forum an issue already decided by the district court in its favor”, i.e. the Rule 12 issue. Even if defendant did not make another motion to dismiss in arbitration, the court disapproved of the tactic of “check[ing] the district court’s temperature” on the dispositive issue, before moving the case to another forum.

In General Re Life Corp. v. Lincoln Nat’l Life Ins Co., 2018 WL 6186078 (Nov. 28, 2018), the Second Circuit examined whether a panel of arbitrators can clarify their own award. In the underlying reinsurance arbitration, the arbitrators had ordered the parties to unwind their agreement, and work together to figure out how much money had to be repaid. In the award, the arbitrators retained jurisdiction to resolve any dispute over the payments. The parties did not agree on the amount of repayment, or even how to calculate it. So, more than three months after the final award, one party wrote the arbitrators, seeking resolution of the payment dispute. The other side objected, characterizing the request as one to reconsider the final award. The panel clarified its award, after finding the award had ambiguities.

The Second Circuit confirmed the clarified award. Although usually an arbitration panel loses authority after issuing the final award, five circuits have recognized an exception to that “functus officio” doctrine where the final award is “susceptible to more than one interpretation”. The Second Circuit adopted the same exception, but limited it to when three conditions are present: the award is ambiguous; the clarification only clarifies the award, and does not substantively modify the award; and the clarification comports with the parties’ arbitration agreement.

Finally, making headlines across the country, Jay-Z has asked a New York state court to stay his arbitration, due to a lack of available African-American arbitrators. I will let you know when I hear of a decision. But, the underlying premise is one I have wondered about – are large arbitration providers a place of “public accommodation”? In the meantime, maybe Jay-Z will write a rap about arbitration… then it could be my theme song!

You know what rarely rises to the top of my “to do” list?  Reading scholarly articles and studies about arbitration.  Blech.  But, since I haven’t seen any good court decisions lately, it is time to visit the neglected pile of articles.  Turns out, I should have read some of them right away.  Below are summaries of five new-ish articles that have crossed my desk.  A few offer peeks into arbitration data that is generally not available and some conclusions to chew on over this Thanksgiving holiday.

First is “Arbitration Nation,” an empirical study of 40,775 consumer, employment and tort cases filed with four different arbitration providers between 2010 – 2016 (AAA, JAMS, ADR Services and Kaiser).*   The data came from two sources: public data that the State of California requires arbitration providers to file, as well as a cache of data  gathered by the New York Times.  After reviewing the data, the authors conclude: 1) arbitration is faster that court litigation and generally more affordable for plaintiffs; 2) there was no surge in arbitration filings after the Concepcion decision, but there is evidence of at least a few mass-individual filings (same law firm filing 200 – 1300 individual arbitrations against the same defendant in the same time period); 3) plaintiffs win at a lower rate in arbitration than in court, and pro se plaintiffs “struggle mightily” in arbitration; and 4) the concerns about “repeat-player bias” are “well-founded” — but those repeat players are both defendants who appear often, as well as plaintiffs-side law firms who appear often.  For example, within the JAMS set of data, the authors report that a consumer’s probability of winning increased 79.9% if it was represented by a “super repeat-player” law firm (as compared to appearing pro se), and an employee’s probability of winning increased 55.1% if he was represented by a “high-level” repeat player firm.  (See pp. 42-43.)  Read this article if you: want to compare JAMS and AAA (on cost and speed); want to see data on how Concepcion affected arbitration filings; or want to see statistical evidence of “repeat player” bias.

Second, “Inside the Black Box” reflects findings from surveys of construction arbitrators, advocates, and industry representatives.  Although some of the survey findings just confirmed what most people would expect (like party-appointed arbitrators are not always neutral), there are some unexpected nuggets.  For example, I found it interesting that 68.5% of construction arbitrators report allowing depositions in “regular” sized cases, and 88.9% of arbitrators report allowing them in large, complex cases.  And 75% of arbitrators allow prehearing subpoenas.  Furthermore “advocates prefer more discovery than arbitrators are allowing in … cases in which claims are below $1 million.”  (p. 59)  Furthermore, the authors say “summary judgment motions in construction arbitrations perhaps have been over-criticized.  If a healthy majority of 63.7% of arbitrators found they were useful half the time or more..it is hard to argue their use should be constrained.” (p. 65)  I also like this one: 44.6% of the arbitrators who responded said that evidentiary objections have no impact on their view of the evidence or their deliberations.  So, stop shouting “Objection: hearsay” in arbitration! Read this article if you: are a construction litigator and want to understand the norms in this industry’s arbitration practice.

Third, “Arbitration in the Americas” reports findings from surveys of arbitration “practitioners” across the Americas.  Amusingly, of the 212 U.S. respondents, 60.45% describe legislators as “having a Low or Very Low understanding of arbitration.”  In keeping with the “Arbitration Nation” study above, “U.S. respondents reported that arbitration in the United States is faster than litigation, with 44.32% describing it as Slightly Faster, and a further 43.24% describing it as Much Faster.” (p. 60)  More surprisingly, “U.S. respondents overwhelmingly described arbitration as on average cheaper than litigation, with 49.19% describing it as Slightly Cheaper and a further 22.70% describing it as Much Cheaper.” (61).  Read this article if you want to compare perceptions of how well arbitration works and is supported in this country with perceptions in other countries.

Fourth, “The Black Hole of Mandatory Arbitration” argues that between 315,000 and 722,000 potential employment arbitrations are “missing in action”.   As the abstract states: “The great bulk of employment disputes that are subject to [mandatory arbitration agreements] simply evaporate before they are ever filed. They are “MIA,” or “missing in arbitration.” That conclusion emerges from a comparison of the tiny number of employment claims that are filed in arbitration with an estimated number of claims one would expect to see given the number of employees who are covered by MAAs and the volume of employment litigation by those who are free to litigate.”  Read this article if you like public policy and are concerned about current SCOTUS jurisprudence.

Fifth, “Running It Twice“, proposes new types of baseball arbitration, in which separate arbitrators (or panels) decide the same dispute to ensure no rogue result.  Read this article if you like shiny new things and sports analogies.

*You didn’t read that wrong; the article’s name is the same as this blog.  I gave them permission.

Happy Thanksgiving all!

In an opinion that coins new terms and uses the insouciant tone of a blogger, the 11th Circuit just shut down a putative class action brought by homeowners against a vendor of roof shingles.  The Court found that the terms and conditions printed on the exterior of the shingle packaging formed an enforceable contract (with a class arbitration waiver), and when the roofing contractors opened the shingles, the roofers bound the homeowners who had hired them.  Dye v. Tamko Building Products, Inc., 2018 WL 5729085 (11th Cir. Nov. 2, 2018).

The Dye decision relies heavily on two decades of case law finding that consumers are bound to terms and conditions that accompany software or consumer products or phone apps.  Indeed, the Court suggests that consumers have been on notice that they are bound by terms on the outside of packaging, or with a product, since the 1997 decision in Hill v Gateway 2000, 105 F.3d 1147 (7th Cir. 1997).  Those types of terms are called “shrinkwrap” or “clickwrap” or “scrollwrap” agreements.  And the Court found no reason to treat this agreement, which it termed a “shinglewrap” agreement, any differently.  Therefore, the Court found that by printing its arbitration clause, with a class action waiver, on the exterior of the shingle packaging, the defendant had formed an enforceable contract.

The harder part of the opinion, in my view, is with whom did the defendant form an enforceable contract.  It was not the homeowners who opened the shingle packaging, it was their roofers.  And there are no facts suggesting that the roofers informed the homeowners of the terms on the packaging, or that there were terms at all.  But the Court found that because the roofers were the homeowners’ agents for the purpose of purchasing and installing roof shingles, and because accepting the purchase terms is the kind of thing that should have been expected of the agents, the roofers bound the homeowners to the arbitration agreement (along with the rest of the terms).

[I am aware of at least one court that came out on the opposite side of this “shinglewrap” issue.  In 2015, the Missouri Court of Appeals refused to enforce the same vendor’s arbitration agreement, finding the circumstances distinguishable from cases like Hill v. Gateway.]

Although the Court makes short work of the agency portion of this opinion, I think it merits a deeper analysis.  Usually, even in the case of contracts of adhesion, courts note that the party had some semblance of choice: either to not buy the product, or not work for that employer, etc.  Here, it is hard to see how the homeowners had a choice, since they were unaware that their roofers were considering shingles that would preclude class actions.  Should owners (commercial and residential) put clauses in all their construction contracts revoking the right of contractors and subcontractors to enter into agreements on their behalf??  Is that their only option for unwittingly entering contract terms to which they may object?  I’d love to hear your thoughts.

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And now, a postscript on last month’s post reporting that New Jersey and Missouri refused to enforce arbitration clauses where there was a problem identifying the administrator.  Turns out, other courts have been thinking about the same issue, but resolving it differently.  In Paulozzi v. Parkview Custom Homes, 2018-Ohio-4425 (Ohio Ct. App. Nov. 1, 2018), the Ohio Court of Appeals enforced the parties’ arbitration agreement, even though it called for administration by a now-defunct ADR institution (not NAF).  The Ohio court just severed that aspect of the arbitration clause and called on the trial court to appoint a replacement arbitrator.  In Beltran v. AuPairCare, Inc., 2018 WL 5571319 (10th Cir. Oct. 30, 2018), the arbitration agreement allowed the employer to select the arbitration provider.  The court found that unconscionable, but instead of invalidating the entire arbitration agreement, it also severed that provision and noted that both the FAA and California’s arbitration statutes provide alternate methods of selecting an administrator.

Those two cases make Missouri and New Jersey look out of step.  But, Missouri may now be alone.  I understand that the New Jersey courts have “withdrawn” the decision in Flanzman, and indeed I cannot find it on Westlaw.

**Big thanks to my friends in NJ, Ohio, and NY who alerted me to these developments.

 

There are only four ways to avoid an arbitration agreement.  You can prove: 1)  it was never formed; 2) it was formed, but is invalid under state law; 3) the current dispute is outside the scope of it; or 4) the other party waived their right to arbitrate (through litigation conduct).  Today’s post is about the third method.  Because of the federal presumption in favor of arbitrability, which applies when courts are determining whether the parties’ dispute falls within the scope of the clause, it is not the most common way to evade an arbitration agreement.   Yet, I collected four recent decisions in which courts find the parties’ dispute is not covered by their arbitration agreement.

In Anderson v. Deere & Co., 2018 WL 5262778 (Mont. Oct. 23, 2018), the Montana Supreme Court found that a fight between John Deere Company and the former owner of one of its dealerships was not arbitrable.  The Dealer Agreement had an arbitration clause obligating the Dealer, and its guarantors, officers, and shareholders, to arbitrate “any dispute” “between Dealer and Company.”  The plaintiff signed the Dealer Agreement as managing partner of the Dealer and as guarantor.  Later, the plaintiff sold his interest in the Dealer and sued Deere for tortious interference.  The trial court denied the motion to compel and the supreme court affirmed.  It focused on the language saying arbitrable disputes were those “between Dealer and Company,” and found that because the plaintiff alleged defendant committed torts against him personally, not as part of “Dealer,” there was no obligation to arbitrate.  One judge wrote a special concurrence, disagreeing with the majority’s finding on scope.

In Perez v. DirecTV, 2018 WL 5115531 (9th Cir. Oct. 19, 2018), the 9th Circuit found the named plaintiff in a putative class action did not have to arbitrate her claims for violations of the Communications Act.  DirecTV’s Customer Agreement with the plaintiff specifically exempted disputes “involving a violation of the Communications Act”.  That sounds fairly straightforward, but one member of the panel dissented, finding the exception was ambiguous and therefore should have been resolved in favor of arbitration.

In Pictet Overseas Inc. v. Helvetia Trust, 2018 WL 4560685 (11th Cir. Sept. 24, 2018), the 11th Circuit affirmed a district court’s conclusion that the plaintiff’s claims were not arbitrable.  The dispute was between investment trusts whose funds had been stolen, on one hand, and the owners and affiliates of a Swiss Bank on the other.  The trusts started a FINRA arbitration, but the Swiss Bank objected that the claims did not belong in FINRA arbitration.  FINRA Rule 12200 requires FINRA members and associated persons to arbitrate when the dispute “arises in connection with the business activities of the member or the associated person.”  There was no dispute that the Swiss Bank was a FINRA member, but the court had to interpret the meaning of “business activities of ..the associated person.”  The court concluded that “only disputes arising out of business activities of an associated person as an associated person are covered” by the rule and must be arbitrated.  One judge concurred specially, to give further examples of why the rule could not be read the way the trusts advocated.

Finally, in Grand Summit Hotel Condominium United Owners’ Assoc. v. L.B.O. Holding, Inc., 2018 WL 4440370 (N.H. Sept. 18, 2018), the New Hampshire Supreme Court affirmed the lower court’s decision that the claims of condo owners against their property manager were not arbitrable.  The parties’ arbitration agreement provided for decision  by an independent public accountant of disputes over “actual costs” — pass-through costs of operation and maintenance — or management fees.  The court “assume[d] without deciding that the provision is an arbitration clause and that the presumption in favor of arbitrability applies.”  Even so, the court found that the disputes provision was narrow and because the owners did not dispute the Actual Costs, but instead sought damages caused by the manager’s misconduct (in failing to engage anyone to winterize the cooling tower), they were not obligated to arbitrate their claims.

Is this the new arbitration resistance??  Some kind of “scope-a-dope,” in which courts that don’t take kindly to arbitration can hold up their hands and say “I accepted that the arbitration agreement was formed, and that it was valid, but under state contract law, I interpret this claim as outside the scope.”  That is a hard type of case to preempt under federal law, especially if it’s done without announcing a “rule” of contract interpretation.

The Seventh Circuit issued an opinion last week that sounded like it would be a big deal.  The case, Herrington v. Waterstone Mortgage Corp., 2018 WL 5116905 (7th Cir. Oct. 22, 2018), dealt with the fallout from SCOTUS’s Epic Systems, and addressed a class arbitrability issue of first impression, which meant it could have been epic indeed.  But instead, the decision is a fizzle that punts all the truly exciting issues back to the district court.

Herrington began in court as a collective action for minimum wages and overtime pay under the Fair Labor Standards Act.  The named plaintiff had an arbitration clause which included this statement “Such arbitration may not be joined with or join or include any claims by any persons not party to this Agreement.”  So, the defendant moved to compel individual arbitration.  But, based on the 7th Circuit’s precedent finding that class waivers in employment agreements violated federal labor laws (the NRLA), the court sent the parties to arbitration with an order instructing the arbitrator to allow the plaintiff “to join other employees to her case.”

In arbitration, the parties continued to fight over what type of suit could proceed.  The arbitrator concluded that the arbitration agreement evinced the parties’ intent to allow class arbitration, because it incorporated AAA employment rules, which the arbitrator interpreted to also include the supplementary rules for class arbitration.   In the end, however, the group proceeded as a collective arbitration with 175 members, and the arbitrator awarded them $10 million.

While the issue was on appeal, SCOTUS overruled the 7th Circuit’s precedent (in Epic Systems), which upended this entire proceeding.  On its face, it seemed as if the initial decision not to enforce the arbitration clause precluding joinder should be un-done, which would vacate the entire award.  However, the plaintiffs argued that despite the language precluding joinder, the arbitration clause still contained other language that authorized the collective arbitration.  At that, the 7th Circuit pivoted and framed the question as: who decides whether the arbitration clause allows collective arbitration?  The court or the arbitrator?

Noting it was “an open question in our circuit,” the 7th Circuit agreed with “every federal court of appeals to reach the question” that the “availability of class arbitration is a question of arbitrability” and therefore presumptively for courts to decide.  But, the 7th Circuit did not address the next logical question that must be answered to resolve the case: does or does not the parties’ choice of AAA rules delegate even the availability of class arbitration to an arbitrator?  Because that is not only an open question in the 7th Circuit, but one on which the other federal circuits are split.

That issue is important because if the parties validly delegated that question to the arbitrator, then the arbitrator’s decision finding the parties’ arbitration clause allowed collective action is entitled to deference.  At that point, isn’t it just like Sutter?  The arbitrator allowed the class action, and the courts have to live with that construction, “good, bad or ugly”?

Well, all those issues will have to be worked out by the district court.  The 7th Circuit found “the district court should conduct the threshold inquiry regarding class or collective arbitrability to determine whether [plaintiff’s] agreement with [defendant] authorized the kind of arbitration that took place.”

Happy Halloween!  (Or, by the time most of you read this, Day of the Dead.  Can you believe my husband carved this cool pumpkin?)

This post is aimed at drafters of arbitration clauses. Because if you don’t insert an administrator for your arbitration, and don’t anticipate that the administrator may just stop providing services, your arbitration clause is dead in the water. At least, that’s the holding of two new state court cases.

In A-1 Premium Acceptance, Inc. v. Hunter, 2018 WL 4998256 (Mo. Oct. 16, 2018), the Supreme Court of Missouri affirmed the lower court’s decision to deny a defendant’s motion to compel arbitration. The reason was that the arbitration agreement within the 2006 loan documents provided “any claim or dispute related to this agreement…shall be resolved by binding arbitration by the National Arbitration Forum [NAF], under the Code of Procedure then in effect.” As regular readers are aware, the NAF stopped administering consumer arbitration in 2009. Although many courts have enforced arbitration agreements, despite their inclusion of NAF, Missouri did not. It found that the language of this clause showed that the parties intended to arbitrate before the NAF and only the NAF. Therefore, the court refused to use Section 5 of the FAA to appoint a replacement administrator.

In Flanzman v. Jenny Craig, Inc., Docket No. A-2580-17T1 (N.J. Super. Ct. App. Div. Oct. 17, 2018), New Jersey’s appellate division was faced with a slightly different problem: the parties’ arbitration clause did not provide what rules would govern the arbitration nor which entity would administer it.  As a result, the court found the arbitration clause was never formed, because the employee could not give informed assent. It reasoned:

Selecting an arbitral institution informs the parties, at a minimum, about that institution’s arbitration rules and procedures.  Without knowing this basic information, parties to an arbitration agreement will be unfamiliar with the rights that replaced judicial adjudication.  That is, the parties will not reach a “meeting of the minds.”

While clarifying that no magic words were required, the New Jersey court noted that if the parties don’t identify an “arbitral institution (such as AAA or JAMS)” they should at least identify the process for selecting a forum.  Otherwise, arbitration agreements will not be enforced under New Jersey law. (Unlike Missouri, the New Jersey court did not discuss Section 5 of the FAA and the statutory authority for courts to appoint arbitrators.)

Every time I think the spate of state supreme court opinions about nursing home arbitration surely must be over, another one comes out to prove me wrong.  Last week, it was one from Alabama, finding an arbitration agreement was never formed, because the resident lacked capacity and the daughter who signed on his behalf lacked power of attorney.

In Stephan v. Millennium Nursing & Rehab Ctr., 2018 WL 4846501 (Ala. Oct. 5, 2018), the decedent’s estate sued the nursing home for wrongful death.  The nursing home moved to compel arbitration.  The trial court granted the motion to compel, and the Supreme Court of Alabama reversed.

The decedent’s daughter had signed the admission paperwork in a space provided for “signature of family member responsible for patient.”  She did not have power of attorney or any other legal authority to contract in his name.  (She also happened to be personal representative of his estate.)  In reviewing the record, the court found decedent was incapable of entering into a contract on the date of the admission documents due to his dementia.  In addition, the decedent could not have understood the effect of allowing his daughter to agree to arbitrate, so she lacked apparent authority.  Furthermore, the daughter was not personally bound to the arbitration clause, and thereby precluded from suing as personal representative, because she signed in her capacity as her father’s relative, not in her own capacity.   Therefore, the arbitration agreement never existed and could not be enforced.

One justice dissented, arguing that the daughter essentially fraudulently induced the nursing home to contract.

Here’s the key question: Is this ruling preempted by the FAA, or does it otherwise run afoul of Kindred?  I don’t think so.  Kindred involved an actual power of attorney document.  This case seems to rest on principles that most states would agree with, and would apply generally to contracts of other types.  SCOTUS is also unlikely to be interested in this case since Alabama has generally been following federal precepts about arbitration.