The Eighth Circuit made quick work of a nursing home’s argument in favor of compelling arbitration this week.  In a suit alleging negligent care of a resident, the court ruled that the arbitration agreement was not enforceable because the resident never signed it.  GGNSC Omaha Oak Grove, LLC v. Payich, __ F.3d __, 2013 WL 776811 (8th Cir. March 4, 2013).

The fact pattern in this case is probably a common one.  When the mother entered the nursing home’s care, she did not sign either the Admission Agreement or the separate Arbitration Agreement.  Instead, her son signed his own name on both of those documents.  However, her son did not have power of attorney.

After the mother died, the son, as Special Executor for the Estate, sued the nursing home for negligent care.  The nursing home moved to compel arbitration.  The district court denied the motion after finding the son did not have authority to sign on his mother’s behalf and there was no valid third-party beneficiary argument.

The Eighth Circuit affirmed the district court’s refusal to compel arbitration.  On appeal, the nursing home only pursued its third-party beneficiary argument.  The argument went like this: while the son signed the agreements, the mother accepted the benefits by receiving the care, so she was a third party beneficiary and therefore her estate should be bound.  The court disagreed with the whole foundation of the argument, finding that there was no valid contract between the son and the nursing home (and therefore, no contract from which a third party could conceivably benefit).  It noted that the agreements identified the contracting parties as the mother and the nursing home, not the son and the nursing home.  There was no indication that the nursing home and the son, on his own behalf, intended to enter into an agreement.

Nursing home employees may have some training in their future about who has authority to sign contracts…

In most cases, if this blog mentions Concepcion, it means that a court has found a state statute or line of decisions is preempted by the FAA.  A Maryland rule, however, recently ran the Concepcion gauntlet and survived.  See Noohi v. Toll Bros., Inc., __ F.3d __, 2013 WL 680690 (4th Cir. Feb. 26, 2013).

The Maryland rule in question is that arbitration provisions must be supported by consideration independent of the underlying contract, “namely, mutual obligation,” and stems from a 2003 opinion from Maryland’s highest court: Cheek v. United Healthcare of Mid-Atlantic, Inc., 835 A.2d 656 (Md. 2003).  In Noohi, both the district court and Fourth Circuit found that the arbitration clause within a purchase agreement between a developer and home buyer lacked the required mutuality under Cheek. 

The arbitration clause in question said that the “Buyer… agree[s] that any and all disputes with Seller…shall be resolved by binding arbitration.” The clause also indicated that the “Buyer hereby waives the right to a proceeding in a court of law,” and that the Buyer must give the Seller written notice of a claim and an opportunity to cure before demanding arbitration.  Because the Seller was not similarly obligated to arbitrate, or to comply with any pre-arbitration notice requirement, the court found “the provision binds only [the Buyers] to arbitration, and thus lacks mutuality of consideration.”  Therefore, under the Cheek decision, the arbitration clause was unenforceable because it lacked consideration.

The Fourth Circuit then addressed the developer’s argument that Cheek was preempted under the same rationale used in Concepcion.  The court noted that “the United States Supreme Court has never held that Congress … intended to preempt states from requiring mutual consideration in an arbitration provision.”   In addition to pointing out the lack of precise precedent, the court distinguished Concepcion in three key respects.  It found the California rule at issue in Concepcion dealt with the availability of class arbitration, increased the formality of arbitration, and increased risks to defendants, none of which applied to Maryland’s Cheek rule.

Most interesting, though, was how the court dealt with the developer’s best argument: that the Cheek rule “imposes a requirement on arbitration clauses (mutuality within the clause itself) that does not apply to other contract clauses.”  It turned that argument on its head by finding “all Cheek does is treat an arbitration provision like any stand-alone contract, requiring consideration.”  That analysis fits nicely with SCOTUS’s severability rule (see Prima Paint and its progeny), which says that the enforceability of arbitration clauses must be analyzed separately from the rest of the contract.  The Fourth Circuit bolstered its analysis by opining that the Cheek rule encourages, rather than discourages, arbitration.

For all these reasons, the court affirmed the district court’s denial of the developer’s motion to compel arbitration, finding the arbitration agreement was unenforceable under Maryland law.

The Supreme Court heard arguments in AmEx III today, the case that presents the question whether an arbitration agreement precluding class actions can be invalid if it makes it impossible for plaintiffs to vindicate federal statutory rights (in this case, because individual antitrust cases would be prohibitively expensive).  The full transcript is available here.

After a first read of the transcripts, here is what grabbed my attention:

  • • Appellant’s primary arguments were that the Second Circuit’s opinion in AmEx is contrary to Concepcion, and that affirming it would create an enforcement nightmare for district courts.  (“I don’t think we can expand Mitsubishi into a free-floating inquiry for district courts into the costs and benefits of each case.”)
  • • Appellant’s counsel (taking the pro-arbitration position here) was immediately asked a series of questions by Justice Ginsburg about the high costs of pursuing antitrust claims, and whether those could be shared among individual plaintiffs.  After the fourth question, the attorney responded pointedly “there is no guarantee in the law that every claim has a procedural path to its effective vindication.”
  • • Justice Kagan then asked a series of hypothetical questions of the Appellant’s counsel, centered on whether Appellant’s position is that under substantive federal law a valid arbitration agreement can explicitly prohibit someone from presenting economic evidence in arbitration.  When the Appellant took the position that federal law would allow that (although state law may declare it unconscionable), Justice Kagan was incredulous: “you’re going to read Mitsubishi and Randolph in such a way that it allows an arbitration clause to 100 percent effectively absolutely frustrate your ability to bring a Sherman Act suit”?
  • • Justices Kennedy and Breyer suggested that maybe the cost-effectiveness problem could be solved by having antitrust experts sitting as arbitrators, thereby reducing the need for the parties to have their own experts.  Kennedy also asked: “why do you need a $300,000 [expert] report?”  To which Respondent’s counsel noted that American Express had not made any showing in the district court that a less expensive alternative was available.
  • • Justices Kagan and Alito asked questions about whether the plaintiffs had been coerced into the arbitration agreements at issue, which the Appellant said is not an issue properly before the Court.
  • • Justice Scalia repeatedly asked the lawyers to consider what would have happened before Rule 23 and without an arbitration clause, noting that in the normal litigation context, parties do not bring small value claims.  “I don’t see how a Federal statute is frustrated or is unable to be vindicated if it’s too expensive to bring a Federal suit. That happened for years before there was such a thing as class action in Federal courts. Nobody thought the Sherman Act was a dead letter, that it couldn’t be vindicated.” (Scalia even said it earlier, and fancier, in Latin: “De minimis non curate lex.”)
  • • The Respondent’s counsel responded to Scalia by saying “With respect, Justice Scalia, you don’t have to make that comparison [costs to arbitrate versus to litigate] part of the test, because the cases that can’t be vindicated in either place won’t show up at the courthouse door. So once you show up at the courthouse door, you’ve got a plaintiff’s lawyer. They may be crazy, but you have a plaintiff’s lawyer that thinks ‘I can do this in the litigation system. . . . the only thing that’s precluding me from doing it is this arbitration agreement’ — so this arbitration agreement is not operating as a real arbitration agreement, it’s operating as a de facto as-applied exculpatory clause.”
  • • Justice Roberts and others suggested it would be possible for multiple plaintiffs, with individual arbitrations, to pool their resources and hire a joint expert to provide a report.
  • • Justice Breyer expressed concern about embroiling the district courts in assessing whether a federal claim could be effectively pursued in arbitration, and about incentivizing plaintiffs to dream up expensive claims to avoid arbitration agreements.
  • • There was also significant discussion of whether the Appellant had changed its theory of the case– asking for cert on one question, but largely arguing something else.  Justice Kagan suggested that “the premise on which this case was presented to us was not quite right.”

After reading this transcript, I sense that the Justices are frustrated with having to decide this important rule of law on this particular set of facts.  They may remand for further consideration (seriously?  AmEx IV?), or say cert was improvidently granted.  Or they may affirm, but strike a compromise position in their reasoning.

The Third Circuit just issued a decision that tries to divine the dividing line between challenges to the formation of contracts containing arbitration clauses (which are presumptively for courts), and challenges to the validity of contracts containing arbitration clauses (which are presumptively for arbitrators, if the challenge is to the contract as a whole).  It held that an allegation that a contract is void because the signatory was not authorized to enter into that contract “must be decided by a court.”  SBRMCOA, LLC v. Bayside Resort, Inc., __ F.3d __, 2013 WL 491254 (3d Cir. Feb. 11, 2013).

The case involved claims by a condominium association on the island of St. Thomas against the developer.  A relevant agreement between the parties contained an arbitration clause, so the defendants moved to compel arbitration.  In response, the association argued that its Board did not have authority to enter into that agreement, making the arbitration clause unenforceable (along with the rest of the agreement).  The district court compelled arbitration, finding that an arbitrator should determine whether the Board had authority to execute the agreement.

The Third Circuit vacated the district court’s opinion, holding that the district court must decide the ultra vires argument on the merits.  It noted that the majority of federal appellate courts have concluded that courts should decide whether parties had authority to contract (the 11th, 2nd, 5th, 7th, 9th, and 3d Circuits), while only the Sixth Circuit has issued a contrary decision.  The court also found that additional discovery is warranted regarding the authority of the Board.

In contrast, the Third Circuit found that the association’s alternative claim, that it was coerced into executing the agreement, was arbitrable because it is a challenge to the validity of the agreement, instead of the formation of the agreement.

So, if the contract is void because the Board did not have authority to sign it, that stays in court.  But if the contract is void because the Board was coerced into signing it, that issue is punted to the arbitrator.  That is the result under Buckeye Check Cashing.  Whether that result makes sense is a question for another day.

 

Two federal circuit courts recently reversed district court decisions allowing non-signatories to compel arbitration.  The analysis emphasizes that for a defendant to prove equitable estoppel compels arbitration, the plaintiff’s legal claims must be closely related to the contract containing the arbitration clause.

Retail grocers asserted antitrust claims against wholesalers in In re Wholesale Grocery Products Antitrust Litig., ___ F.3d __, 2013 WL 514758 (8th Cir. Feb. 13, 2013).  The plaintiffs expressly crafted their claims to avoid arbitration: “[i]n an effort to avoid arbitration, each Retailer brought claims only against the Wholesaler with whom they did not have a supply and arbitration agreement.”  In other words, while each retailer-plaintiff did have an arbitration agreement with one wholesaler-defendant, no retailer asserted claims against the wholesaler with whom they contracted, and instead asserted claims only against another wholesaler, alleging conspiracy.  (Why?  Because the arbitration clause prohibited class actions, of course.  At least, that’s what the district court opinion suggests.)

In response to the wholesalers’ motion to compel arbitration, the district court found plaintiffs equitably estopped from avoiding arbitration.  The judge grounded her opinion in the relationship between the parties, finding “[t]he agreements to arbitrate, therefore, are a fundamental component of the entire wholesaler-retailer relationship between the signatories. Further, the broad scope of the agreements evince a clear intent on behalf of the Arbitration Plaintiffs that disputes regarding that relationship be subject to arbitration. This is precisely the relationship that is at issue in this litigation.”

The Eighth Circuit reversed, reasoning that the district court’s analysis “focuse[d] too much on the relationship between the signatories, rather than on the relationship between the signatory’s claims against the non-signatory and the contract containing the arbitration clause.”  The court found that under federal precedent, equitable estoppel did not compel arbitration of the dispute because the statutory antitrust claims did not depend on the supply agreements that contained the arbitration agreements at all.  “These statutory claims exist independent of the supply and arbitration agreements.”   (That conclusion was not unanimous, however.  The dissenting judge primarily argues that the majority mis-read Minnesota law on equitable estoppel.)

The Fifth Circuit case is shorter and harsher in its criticism of the district court.  After suggesting that the district court did not understand there were two separate contracts at issue, only one of which contained an arbitration agreement, and maybe did not even understand which party was the plaintiff (yikes), the Fifth Circuit reversed the district court’s order compelling arbitration of a claim by a non-signatory, and remanded for consideration of equitable estoppel.  (The district court’s opinion did not explicitly mention equitable estoppel, leaving it unclear on what basis the arbitration was compelled.)  VT HalterMarine, Inc. v. Wartsila N. Am., Inc., 2013 WL 586819 (5th Cir. Feb. 8, 2013).

A recent decision from a federal district court in Tennessee raises a discrepancy in how the courts treat arbitration agreements that hinder a plaintiff’s state law and federal law claims.  Cases under the FAA state that arbitration agreements cannot be enforced if enforcement means plaintiffs will not be able to effectively vindicate their federal statutory rights (as the DOJ argued recently). But what happens if plaintiffs cannot effective vindicate their rights under state statutes in arbitration?  That is the situation that the court addressed in Dean v. Draughons Junior College, Inc., __ F. Supp. 2d __, 2013 WL 173249 (M.D. Tenn. 2013).

In Dean, a class of students at affiliated junior colleges alleged the colleges violated state statutes by making false representations about their record of placing students in jobs.  The colleges moved to compel arbitration, based on an arbitration agreement with all of the students that included a delegation clause (authorizing the arbitrator to determine even the validity of the arbitration agreement).  The class of students argued that the delegation clause itself was unenforceable, because it was prohibitively expensive for the students to arbitrate the validity of the arbitration agreement.  (There was no class action waiver.)

The court in Dean concluded that Kentucky state law, which governed the dispute, recognized a cost-prohibitiveness defense to arbitration, and it also concluded that the plaintiffs could not pay the costs to arbitrate arbitrability.  (This is the only time I have seen a successful challenge to the delegation clause itself, pursuant to Rent-A-Center.)  However, it then concluded that Kentucky’s case law  — that precluded enforcement of arbitration agreements if those agreements hinder enforcement of state statutes — was preempted under Concepcion, because the doctrine was specific to arbitration agreements.  The court summarized that “although Rent-a-Center indicated that federal district courts could entertain state law challenges to the enforcement of a delegation clause based on [cost], this court construes Concepcion … as precluding the assertion of a Kentucky cost-prohibitiveness defense to the Delegation Clause here.”  Clearly frustrated, the court granted the defendants’ motion to compel arbitration, but noted that “this result strikes the court as manifestly unjust and, perhaps, deserving of legislative attention.”

Not only is this decision interesting because federal judges do not usually say that the Supreme Court’s case law is manifestly unjust, but because it raises a parallel issue to the one before the Supreme Court right now in AmExIII    In AmEx, the Court will (I assume) decide whether federal law will allow plaintiffs to challenge arbitration agreements that make it economically unfeasible to pursue their federal statutory claims.  If that “effective vindication” rule survives for federal statutes, why shouldn’t states be allowed to enforce similar rules for their own statutes?  On the other hand, if SCOTUS strikes down the “effective vindication” rule, then state and federal laws are treated equally.

On January 29, the U.S. Dept. of Justice filed an amicus brief supporting respondents in AmEx III, arguing that to enforce the class arbitration waiver would be to create a large loophole for important federal laws.  The Solicitor General has also asked to argue at the hearing on February 27.  To my knowledge, DOJ has never previously weighed in on an arbitration case before the U.S. Supreme Court.

The issue in AmEx is whether American Express can enforce its arbitration agreement, which precludes any class or consolidated actions, against a class of plaintiffs who allege antitrust violations.  The Second Circuit has held, on remand and on reconsideration, that American Express cannot enforce that arbitration agreement.  The court held that the plaintiffs proved it was not economically feasible to pursue their cases on an individual basis and therefore precluding a class action meant precluding the enforcement of their antitrust rights, which is sufficient to invalidate the arbitration agreement under Green Tree Financial Corp.  v. Randolph, 531 U.S. 79 (2000).  

A few months ago, I was concerned that the only amici weighing in on this case seemed to be on the side of rigid enforcement of class action waivers.  I spoke too soon.  A host of knights in shining armor have appeared to argue on behalf of these antitrust plaintiffs, including 22 state attorneys general, Public Citizen, a group of professors, and the Solicitor General himself.  (Maybe this should not be surprising, after other federal agencies have taken stands against class waivers in arbitration agreements.  Also, maybe I am reading too much Game of Thrones…)

The brief of the Department of Justice works hard to strengthen the precedent supporting an affirmance of AmEx.  It argues that for decades the Supreme Court has refused to enforce arbitration agreements that prevent any “effective vindication” of federal statutory claims (citing Mitsubishi, Gilmer, Vimar Seguros y Reaseguros, and 14 Penn Plaza, as well as Randolph).  It argues that affirming the “effective-vindication rule” would not undermine the FAA,  that the standard is not unworkable for courts to apply, and that Concepcion does not dictate a reversal.

What I found most compelling in the Government’s brief, however, was its focus on how the Supreme Court’s decision will influence the drafting of arbitration agreements in the years to come:

“the effective-vindication principle, it should be emphasized, is not simply a sound rule of decision for the rare case in which a federal statutory claim cannot feasibly be pursued through the arbitration procedure specified in the parties’ agreement. . . . the [rule] creates a salutary incentive for companies that prefer arbitration to ensure that such cases remain rare, by adopting arbitration procedures that can feasibly be invoked even for small-value claims.”  In contrast, “under petitioners’ approach… companies could use a combination of class-action and joinder prohibitions, confidentiality requirements, and other procedural restrictions to increase the likelihood that a plaintiff’s cost of arbitration will exceed its projected recovery …That would deprive a range of federal statutes of their intended deterrent and compensatory effect, without promoting the actual use of arbitration as an alternative means of dispute resolution.”

Will that be enough to sway one of the usual conservative block of justices that votes for rigid enforcement of the FAA?  (Justice Sotomayor is recused from this case, so only eight justices will consider it.)  I hope so.

The Ninth Circuit ruled this week that a class of car owners could pursue their court claims against the manufacturer, Toyota, for product defects and false advertising, despite the existence of an arbitration agreement in each of the owners’ purchase agreements with the car dealerships.  The court held that Toyota had not proven either of the types of equitable estoppel that would allow it, as a non-signatory to the purchase agreements, to enforce the agreements’ arbitration clause.   Kramer v. Toyota Motor Corp., __ F.3d __, 2013 WL 357792 (9th Cir. Jan. 30, 2013).  (How could I resist posting about an arbitration case with “Kramer’ in the caption?!)

The plaintiffs’ claims related to defects in the antilock brake systems of 2010 models of the Toyota Prius and Lexus HS 250h.  Plaintiffs asserted multiple claims against Toyota, including violation of California laws prohibiting unfair competition and false advertising, breach of the implied warranty of merchantability, and breach of contract.  After “vigorously litigating the action” for almost two years, Toyota moved to compel arbitration a few months after SCOTUS issued Concepcion.  Toyota pointed to language in the purchase agreements allowing arbitration, delegating scope issues to the arbitrator, and waiving any right to arbitrate as a class.  The district court denied the motion to compel arbitration.

The Ninth Circuit affirmed.  In a very thorough opinion, the court found Toyota had no right to enforce the arbitration agreement, and therefore it was not necessary to consider whether Toyota had waived that right by participating in litigation.

The first legal issue the court addressed was whether to enforce the delegation clause in the arbitration agreement.  The purchase agreement stated that the parties would arbitrate “any claim or dispute about the interpretation and scope of this Arbitration Clause,” and Toyota argued that whether a non-signatory could compel arbitration was essentially a question of scope.  The court concluded that there was not the necessary “clear and unmistakable evidence” that the plaintiffs agreed to arbitrate arbitrability with Toyota.  (I take issue with this part of the opinion because it seems premised on the later conclusion that Toyota has no right to arbitrate under the agreement.  It would be simpler to rely on the default proposition, stated most recently in Granite Rock, that it is always for the court to determine whether an arbitration agreement exists at all.)

Having concluded that the court could properly address the merits of the dispute, the Ninth Circuit methodically destroyed Toyota’s arguments that it was entitled to compel arbitration under California’s equitable estoppel doctrine.   There are only two ways for a non-signatory to enforce an arbitration clause in California: 1) when the signatory’s claims rely on terms of the agreement containing the arbitration clause; and 2) when the signatory alleges concerted misconduct by the non-signatory and another signatory that is “intimately connected” with the agreement containing the arbitration clause.

The court concluded Toyota had not shown the first type of equitable estoppel, because the plaintiffs’ claims against Toyota were not sufficiently intertwined with their purchase agreements.  The court noted that the complaint never even referenced the purchase agreements.  With respect to the plaintiffs’ implied warranty claim, the purchase agreements clarified the dealer was not a party to the manufacturer’s warranty.  Therefore, the warranty claim against Toyota was not intertwined with the purchase agreements.  Similarly, though plaintiffs asserted breach of contract against Toyota, it was based on their alleged status as third-party beneficiaries to the contracts between the dealers and Toyota, and therefore did not relate to their purchase agreements.  The court also clarified that plaintiffs’ requested remedies were immaterial to an equitable estoppel analysis, only their claims were relevant.  (Toyota had argued that because the plaintiffs sought revocation of the purchase, which implicates the purchase agreements, they should be equitably estopped from avoiding arbitration.)

Finally, the court concluded Toyota had not show the second type of equitable estoppel.  It found the plaintiffs did not allege collusion between the dealerships and Toyota, and even if they had, that collusion was not connected to the purchase agreements at all, which is necessary for application of equitable estoppel.

This opinion is interesting because it provides another analysis of the nexus required between claims and an arbitration agreement to prove equitable estoppel.  It is also interesting because it shows what kind of fallout results from a major change in the law.  Before the 2011 decision in Concepcion, many states refused to enforce waivers of class arbitration.  So, frequently counsel for defendants like Toyota did not try to enforce that class waiver (by virtue of enforcing the arbitration agreement).  But, everything changed with first the Stolt-Nielsen and then the Concepcion decisions, and multiple defendants have made very tardy arguments in favor of arbitration (individual arbitration, in particular) to take advantage of those changes in the law.  Some have failed, like Toyota in this case, this defendant in the 11th Cir, and the defendant in Gutierrez v. Wells Fargo Bank, __ F.3d __, 2012 WL 6684748 (9th Cir. Dec. 26, 2012).  On the other hand, some have been successful, like this defendant in the 4th Cir. , and the defendant in Chassen v. Fidelity Nat’l Fin., Inc., 2013 WL 265228 (D.N.J. Jan. 23, 2013).  That mix of recent decisions show it is probably worth it for defendants to move to belatedly enforce arbitration agreements prohibiting class actions.  It also shows how important it is to have consistent case law that parties can rely on in making strategic decisions about litigation.

Did you know that you can form an arbitration agreement without ever using the word “arbitration”?  That’s what the Second Circuit held this week in Bakoss v. Certain Underwriters at Lloyds of London, __ F.3d __, 2013 238708 (2d Cir. Jan. 23, 2013).

Bakoss analyzed the clause in a disability insurance certificate providing what happens if the parties dispute whether the insured is “totally disabled.”  The certificate gives the insured and insurer the right to get an opinion from a doctor of their choice.  If the two doctors disagree, they “shall [jointly] name a third Physician to make a decision on the matter which shall be final and binding.”  The legal issue was whether that agreement — to name a third doctor to decide the dispute — was an arbitration agreement within the meaning of the Federal Arbitration Act.  The federal district court found it was, and the Second Circuit affirmed.

Finding that federal common law was the right place to look in deciding what is and is not an arbitration agreement, the Second Circuit cited two cases from the 1980s finding that similar dispute resolution provisions were “arbitration agreements.”  In essence, those cases say that any time “the parties have agreed to submit a dispute for a decision by a third party, they have agreed to arbitration.”

Why is this important?  Because it means that many contracting parties have unknowingly inserted an “arbitration agreement” into their contracts, one which carries with it all the enforcement provisions of the FAA (and the New York Convention, for international contracts).  Just as one example, the parties to those contracts may have lost their ability to have a court decide whether the contracts as a whole are invalid under applicable law, because under the Prima Paint line of cases the court may only hear objections to the validity of the arbitration agreement itself.  Similarly, if these arbitration agreements do not contain any provision for class actions, the parties to these contracts may have lost their ability to bring any sort of collective action.

The Tenth Circuit this week refused to consider a plaintiff’s substantive arguments about its right to arbitrate because it found abstention was appropriate under the Colorado River doctrine.  D.A. Osguthorpe Family P’ship v. ASC Utah, Inc., __ F.3d __, 2013 WL 150221 (10th Cir. Jan. 15, 2013).  Though the factual situation in Osguthorpe is unusual, the decision highlights tension between the federal abstention doctrine and case law under the Federal Arbitration Act.

Osguthorpe involved a dispute over the development of a golf and ski resort in Utah.  The relevant parties included an arbitration clause within the Development Agreement.  However, when disputes initially arose, they were litigated in Utah state court.  After three years of state court litigation, one party (Wolf Mountain) moved to compel arbitration and the state courts (including the Utah Supreme Court) denied the motion after concluding Wolf Mountain had waived its right to arbitrate.  Before the Utah Supreme Court affirmed the waiver decision, however, D.A. Osguthorpe also moved to compel arbitration.  The state court denied Osguthorpe’s motion and Osguthorpe both appealed that decision in state court and filed a new action in the federal court seeking an order compelling arbitration and staying the state-court action.  Osguthorpe filed its federal case more than four years after it had initiated state court claims related to the same development, claims which had been proceeding in a consolidated case with related claims of other parties.

The federal district court dismissed Osguthorpe’s case for lack of subject-matter jurisdiction.  The Tenth Circuit affirmed.  After concluding that the Rooker-Feldman doctrine was not applicable in this case, the court held that “the Colorado River doctrine . . . mandates the dismissal of Osguthorpe’s suit.”  For those of you who, like me, avoided taking “federal jurisdiction” in law school because it had the dullest title in the course catalogue, I will summarize the Colorado River doctrine this way: sometimes federal courts can declare a lack of jurisdiction when there is a parallel state court proceeding that significantly overlaps with the proposed federal case.  In deciding whether to duck jurisdiction, courts have to analyze four factors.  The third and most “paramount” factor is “the desirability of avoiding piecemeal litigation.”  The Tenth Circuit leaned heavily on that third factor in its decision, relying on the incredible judicial resources that had already been committed by the Utah state court system in handling the protracted litigation over the five year period. (The state court case was “one of the greatest consumers of the resources of the [court] in many years” and “comprises more file volumes than any presently pending case in the [court].”)

In short, the federal court refused to exercise jurisdiction over Osguthorpe’s suit to enforce its right to arbitrate because doing so would entail piecemeal litigation.  How does that square with SCOTUS’ 2011 decision in Cocchi, saying in no uncertain terms that the point of the FAA is to enforce arbitration agreements, even if their enforcement results in piecemeal litigation?  Maybe the answer is that this case only relates to federal court jurisdiction, and it is up to the Utah state courts to enforce the Cocchi decision.  However, I can imagine cases where the conflict is more direct.  Seems like it would have consumed the same amount of federal judicial resources to hold that Osguthorpe had waived its right to arbitrate by participating in litigation for five years.