One year ago, the NLRB ruled in D.R. Horton, Inc. that it is a violation of federal labor law for employers to require their employees to sign arbitration agreements waiving class actions, and that any arbitration agreements waiving class arbitration would be void.  This week, the Eighth Circuit became the first federal circuit court to refuse to enforce the NLRB’s ruling.

In Owen v. Bristol Care, Inc., __ F.3d __, 2013 WL 57874 (8th Cir. Jan. 7, 2013), an employee sued her employer for violations of the Fair Labor Standards Act (FLSA), and sought to proceed as a class action.  The employer moved to compel arbitration, based on the employee’s arbitration agreement which specifically covered “claims for violation of any federal … statute … including but not limited to … the Fair Labor Standards Act” and which also waived any class actions.  The district court denied the motion, based largely on the D.R. Horton ruling.

The Eighth Circuit reversed, finding that the class waiver is enforceable and mandating the employee arbitrate (on an individual basis, I would presume).  It relied on two legal propositions in reaching that conclusion.  First, for a statute to override the FAA, it must be clear in the text or legislative history of that statute.  The Eighth Circuit found nothing in the text or history of the FLSA indicating that Congress intended that statute to be outside the purview of the FAA.  Second, the Eighth Circuit created distance from the D.R. Horton ruling.  It distinguished the facts of D.R. Horton before noting that “even if D.R. Horton addressed the more limited type of class waiver present here, we still would owe no deference to its reasoning.” It cited six federal district courts that had reached similar decisions (by my count there are at least eight), and two that had upheld the NLRB ruling.

This seems to put employers in a bind. On one hand, the NLRB considers it a labor law violation to have employees sign arbitration agreements that waive class actions, and on the other hand, the federal courts will enforce those same arbitration agreements.  So, what does a rational employer put in its employment contracts??  It depends whether they view the risk of an NLRB penalty as greater or smaller than the reward of avoiding class actions.

 

 

Let’s say you are considering updating your form contract, or you are in the midst of negotiating a new contract with someone.  Should you include mandatory arbitration for resolving any disputes?  Assuming you have the choice, my view is you should only include arbitration if at least one of these five factors are present:

1.  Having a knowledgeable industry professional decide the dispute is very important (an architect, engineer, doctor, reinsurance expert, etc), instead of a judge or jury without that expertise, because disputes are likely to be very technical.

2.  Keeping the proceedings confidential (and not publicly available in court filings) is very important to you.  (Although, if either party moves to vacate, much of your arbitration proceeding could become part of a court record.)

3.  You do not want class actions.  (They can be precluded in an arbitration agreement; it is less clear whether they can be precluded without an arbitration agreement.)

4.  You want to arbitrate because other parties on the same project or deal have arbitration provisions.  (For example, if the owner and general contractor on a construction project are bound to arbitrate, the owner and architect may also want to agree to arbitrate in case the architect is implicated in claims between the owner and general.)

5.  There is a chance that you may have to enforce a judgment in a foreign court.  The New York Arbitration Convention allows the winning party in an arbitration to enforce its judgment abroad much more easily than if the judgment had come from a U.S. court, which is important if the loser’s assets are located abroad.  [*Note that the original version of this post only included the first four reasons.  But I received useful feedback via Twitter and email about this additional benefit of arbitration over litigation and added it to the list.  Thanks for the input!]

It is a relatively short list.  But, in my view, these are the only four bases on which arbitration has a significant advantage over litigation.  You will note that speed of resolution is not on the list (unless parties opt for expedited proceedings, arbitrations generally take about as long as court proceedings — the median case valued between 1 and $10 million dollars administered by the AAA took 414 days to get to an award).  You will also note that cost is not on the list (in my experience on complicated commercial matters, there is no cost saving to arbitration and I found a recent study supporting my anecdotal evidence).  Speed and cost used to be the primary reasons people chose arbitration.

There are other potential reasons to choose arbitration that I am also discounting.  For example, the risk of an illogical jury verdict is not significantly greater in my mind than the risk of an illogical arbitration award.  I also do not see any advantage to the greater informality and looser rules in arbitration, or find it less adversarial.  And, although you can make someone conduct the arbitration hearing in the basement of your building, you could just as easily have a forum selection clause choosing your home town courthouse in most circumstances, so I do not count that as a big advantage for arbitration.

It’s the start of a new year and a great time to step back and revisit our reasons for inserting arbitration in our contracts.  I’d love to hear whether you agree or disagree with my list!  Let me know @KramerLiz.

The big issue in arbitration law in 2012 was class arbitration.  Many state court opinions that had found class arbitration waivers unconscionable were preempted under federal law based on application of Concepcion.  And the federal circuit courts developed a split on how to interpret Stolt-Nielsen in cases where the parties’ arbitration agreement lacks language either allowing or disallowing class arbitrations.  It is no surprise, then, that the Supreme Court (including Santa Scalia, pictured here) accepted two cases relating to class arbitration for review in early 2013.

Fallout from Concepcion

At least five states had their pro-class-arbitration decisions reversed based on application of SCOTUS’ 2011 decision in Concepcion, which held that states could not impermissibly interfere with arbitration when they define what contract clauses are unconscionable. In the past few years, the state courts in California, Washington, Pennsylvania, Missouri and New Jersey had all declared an affinity for allowing class arbitrations, even if the parties’ agreement called exclusively for individual arbitration (California had also said claims for public injunctive relief were not appropriate for arbitration).  In 2012, all that precedent was voided, with Westlaw assigning big red flags to opinions around the country.    The Eleventh Circuit even stopped the Florida Supreme Court before it could impermissibly side with class arbitration.  The rule, articulated nicely by the Third Circuit this summer in Homa, is: “a state law that seeks to impose class arbitration despite a contractual agreement for individualized arbitration is inconsistent with, and therefore preempted by, the FAA.”

Stolt-Nielsen Split

Even if you disagree with Concepcion, you can agree that the decisions applying it are uniform.  That is not true with the decisions applying a 2010 SCOTUS arbitration opinion: Stolt-Nielsen.  In that case, SCOTUS held that arbitrators had exceeded their authority when they concluded that arbitration should proceed on a class-wide basis.  The facts were maddeningly unique, however — the parties had stipulated that their agreement was “silent” as to the availability of class actions and the panel of arbitrators had based their conclusion on public policy rationale, instead of standard gap-filling bases. Those unique facts have led courts to apply Stolt-Nielsen in at least two ways.

The popular way to interpret Stolt-Nielsen is more friendly to class arbitration.  It interprets the case’s message as a reminder to arbitrators everywhere that their job is to enforce the contract, not to be legislators.  Therefore arbitrators may authorize class arbitration as long as either the text of the arbitration agreement or other evidence shows the parties intended to allow class arbitration.   That is the approach the First, Second, and Third Circuits have taken (with opinions from the First and Third Circuits issued in 2012).  This approach is also consistent with the default rule that arbitrators interpret contracts calling for arbitration, and their interpretations are entitled to the highest level of deference.

The second way to interpret Stolt-Nielsen is as a federal presumption against class arbitration, much like the one against arbitrating arbitrability.  Courts will not assume that parties intend to arbitrate issues relating to the validity and scope of the arbitration provision itself without “clear and unmistakable” evidence of that intent (see Rent-a-Center).  Similarly, some courts (and litigants) read Stolt-Nielsen as essentially requiring clear and unmistakable evidence of the parties’ intent to allow class arbitration before an arbitrator may authorize that procedure.  In 2012 the Fifth Circuit, in particular, found that an arbitrator exceeded his authority by concluding that a common arbitration provision showed an intent to allow class arbitration.  (The provision said ““any dispute arising from [the agreement]…shall be resolved by binding arbitration.”)

SCOTUS will likely clarify its position on when class arbitrations are allowed in two cases it will hear in early 2013 (AmEx is set for argument on Feb. 27), so class arbitration is likely to be part of my year-end round up next year as well…

Even if we do not know for certain whether class arbitration will end up on Scalia’s naughty list or his nice list, we do know three courts that received big lumps of coal from SCOTUS in 2012: the West Virginia Supreme Court, Oklahoma Supreme Court, and Second Circuit.  The tone of its opinions vacating decisions of the high courts in West Virginia and Oklahoma was that of a parent washing out a child’s mouth with soap.  The Court seemed disgusted that those two lower courts would defy its authority by refusing to follow federal precedents on arbitration, to say nothing of the cheeky language those courts used to describe federal precedent.  And one has to believe that after remanding the AmEx case once already to the Second Circuit, someone at the Court is banging their head against the wall about hearing that case again.  (How could they not get the hint?!  We wanted them to reverse themselves!)

That’s the beauty of this area of the law, though.  It is changing rapidly, SCOTUS seems passionate about it, and the interplay between the FAA and state contract law is a constant tug of war about federalism and public policy.  I can’t wait to see what’s on Scalia’s naughty list in 2013!

Illustration by Jason Bryan (jason@fivepointsarthouse.com)

Just last Friday, the Supreme Court agreed to review a second circuit court case that allowed a class action to proceed, despite arguments that the arbitration clause precluded any collective actions.  The granting of these petitions is a fitting way to end a year in which there has been considerable discussion about how to apply Stolt-Nielsen, Concepcion, and other precedent in the context of claims by a group (or defined class) of plaintiffs.  Here is a preview of what is at issue, and at stake, in this arbitration double-feature.

CASE ONE: OXFORD HEALTH PLANS, LLC V. SUTTER

Summary: The Third Circuit affirmed an arbitrator’s decision to allow doctors’ claims against a health plan to proceed on a class basis.  The arbitrator had analyzed the text of the broad arbitration agreement at issue, which lacked any explicit language about whether class actions were authorized, and concluded the parties intended to allow class arbitration.  The Third Circuit said this did not amount to “exceed[ing] [his] powers” within the meaning of Section 10(a)(4) of the FAA.  The Third Circuit refused to vacate the award largely because the arbitrator made a rational attempt to interpret the parties’ arbitration agreement and that attempt is entitled to great deference by the courts.

Issue:  The Petitioner argued for review of this case based on the difference in how the circuit courts have interpreted Stolt-Nielsen (with some seeming to require explicit consent within the arbitration clause for any collective action to proceed in arbitration, but the majority noting that as long as the arbitration clause does not prohibit class arbitration, the arbitrator should use general contract interpretation principles to discern the parties’ intent regarding class actions).  It noted that “at least seven cases on this issue have reached the courts of appeals in just the last two years.”

The parties’ framing of the “question presented” reflect the different legal lenses through which the Court could view this case.  The Petitioner framed the question presented as: “Whether a contract provision requiring arbitration rather than litigation of any dispute, without more, can be a sufficient ‘contractual basis [to] support a finding that the parties agreed to authorize class-action arbitration,'” quoting from Stolt-Nielsen.  The Respondent framed the question very differently, following the Third Circuit’s lead: “Did the arbitrator exceed his powers under the [FAA] when he interpreted the atypical terms of the agreement in this case to authorize the arbitration of class claims?”

If this case were simply about the appropriate deference that courts should grant arbitrators, SCOTUS would not have granted review.  In my mind then, the relevant issue is how does SCOTUS plan to clarify its ruling in Stolt-Nielsen?  Possible options include indicating that:

  1. Stolt-Nielsen was unique, because the parties had stipulated that the arbitration provision was “silent” regarding class arbitration and the arbitrators applied their own policy judgments. The point is that arbitrators should try and determine the parties’ intent; this outcome would affirm the approach of the First, Second and Third Circuits ;
  2. Broad arbitration clauses, like the one at issue in Sutter, cannot reasonably be interpreted to authorize class arbitration; or
  3. As a matter of substantive federal law, class arbitration is precluded unless the arbitration clause explicitly allows it.

I don’t see a clear path that SCOTUS could take to reach conclusion 2 or 3, however, because contract interpretation is a matter of state law and the deference granted to an arbitrator’s decision on the merits is so great.  Of course, Justice Scalia could always surprise me. . .

Two groups already have permission to file amici — the Chamber of Commerce and DRI (“The Voice of the Defense Bar”).  They are firmly in favor of outcome 2 or 3 above.

CASE TWO: AMERICAN EXPRESS CO. V. ITALIAN COLORS RESTAURANT (a/k/a “Amex III”)

Summary: The case is called “Amex III” because the Second Circuit has issued three opinions in the dispute, two after remand from SCOTUS to consider the impact of first Stolt-Nielsen and then Concepcion.  The Second Circuit never changed its holding — it concluded that the parties’ clause prohibiting class arbitration was unenforceable.  The Second Circuit said that antitrust claims like those of these plaintiffs are so expensive to prosecute that it would never be rational for any individual claimant to bring them, therefore denying class actions would effectively preclude the plaintiffs from vindicating their rights under antitrust laws.  The Second Circuit grounded its decision in Green Tree Financial Corp-Ala. v. Randolph, 531 U.S. 79 (2000), and the strong expert testimony the plaintiffs presented with respect to the viability of individual suits.  (However, the language at issue in Green Tree is a pretty thin reed upon which to rest such a significant decision.)

Issue: The petitioner in this case framed the issue as: “Whether the [FAA] permits courts, invoking the “federal substantive law of arbitrability,” to invalidate arbitration agreements on the ground that they do not permit class arbitration of a federal-law claim.”  The respondent has a different view of the issue: “[W]hether an arbitration clause should be enforced when there is no dispute that a litigant has shown it would be unable to effectively vindicate its federal statutory rights in the arbitral forum.”

In my view, the real issue here is will SCOTUS acknowledge any expense-based exception to its arbitration precedent.  It could conceivably say that: 1) economic realities of litigation are never a sufficient reason to invalidate an arbitration agreement (if Congress wants to preclude arbitration, it can do that in the statutes); or 2) more narrowly, it could say that there is no federal substantive rule that arbitration can only proceed if it is economically viable, and leave any review of state-based arguments for another time.  In either case, this decision is likely to be reversed.

Four outside groups have already weighed in on this issue — the New England Legal Foundation (“protecting the free enterprise system”), Chamber of Commerce, DRI, and a group of “senior legal officers for public companies” — all of whom advocate for reversing AmexIII.  The amici worry about an exception that could swallow the rule, and present the situation in the most dire of terms — DRI, for example, argues that AmexIII affects the enforceability of millions of arbitration agreements and “substantially undermines” the federal right to enforce arbitration agreements.

No matter how SCOTUS decides Sutter, corporations are likely to continue drafting arbitration agreements that explicitly exclude class arbitrations.  If those are strictly enforced (without any state law exceptions, see Concepcion), then we must acknowledge that our justice system is writing off a significant amount of smaller cases that cannot effectively be arbitrated on an individual basis, like those at issue in Amex III.  Some of those cases may even have significant public value.  Yet we are not likely to see amici briefs in favor of making sure claims with small dollar values have a cost-effective way of being arbitrated.

In contrast to recent decisions from other circuit courts, the Fourth Circuit found a defendant did not waive its right to arbitrate, despite litigating for more than 6 months and conducting discovery.  Rota-McLarty v. Santander Consumer USA, Inc., __ F.3d __, 2012 WL 5936033 (4th Cir. Nov. 28, 2012).

In this potential class action, the named plaintiff alleged a finance company violated Maryland consumer protection laws.  The finance company answered the complaint (asserting arbitration as an affirmative defense) and participated in discovery, including agreeing to phased discovery, taking and defending multiple depositions, and producing documents.  After six and a half months, the defendant moved to compel individual arbitration.  It explained its delay by pointing to “uncertainty” in the federal law regarding class arbitration, and saying it waited until after Stolt-Nielsen was decided and the district courts began applying it.

The district court found that the defendant’s actions waived its right to arbitrate, but the Fourth Circuit reversed.  It said the dispositive test in the Fourth Circuit is whether the opposing party has suffered actual prejudice (and noted that the reason for delay should not be considered).  It concluded that the plaintiff had not been prejudiced because six and a half months of litigation is “relatively short” and because the mere fact of participating in discovery does not equate to prejudice.

Recent cases shows significant difference among the federal circuit courts in how they are evaluating claims that a party waived its right to arbitrate.  For example:

  • In the Fourth Circuit, 6.5 months and significant discovery is not enough to waive the right to arbitrate.  In the Third Circuit, however, 10 months and no discovery is enough to waive the right to arbitrate, if a dispositive motion was filed.
  • In the Eleventh Circuit, a litigant who delays moving to compel arbitration until the law develops in a favorable direction waives its right to arbitrate.  While in the Fourth Circuit, a litigant who delays moving to compel arbitration until the law develops in a favorable direction does not waive its right to arbitrate.

Because there is so much flux in the law, defendants who want to retain their right to arbitrate should err on the side of caution and make their motion to compel early.

This blog might as well have been called Arbitration Elation on November 26!  Not only was there a new arbitration decision from the Supreme Court, which only happens a couple times a year, but editors of the ABA Journal announced that they selected Arbitration Nation as one of the 100 best blogs in the country for a legal audience.  Arbitration Nation was the only arbitration blog on the list.  (Please check out some of the other blogs on the list — it is a stellar group of blogs on a wide variety of legal subjects.)

Thank you to all of you who nominated this blog for the Blawg 100 list.  And, if you missed your opportunity to vote, it’s not too late!  Until Dec. 21, the ABA Journal is asking for votes to help them differentiate among the top 100 (Arbitration Nation is in the “niche” category).  Needless to say, I’d love your continued support.

 

 

 

On Monday, the United States Supreme Court reminded the Oklahoma Supreme Court who is boss when it comes to the Federal Arbitration Act.  In Nitro-Lift Technologies, LLC v. Howard, 2012 WL 5895686 (U.S. Nov. 26, 2012), SCOTUS declared “It is a matter of great importance [] that state supreme courts adhere to a correct interpretation of the [FAA].  Here, the Oklahoma Supreme Court failed to do so.”

The issue at hand was the severability doctrine.  This is the counterintuitive doctrine that most often vexes parties, litigators, and courts in arbitration cases.  Stemming from the 1967 Prima Paint decision, the doctrine says that when the parties have an arbitration agreement in a fully formed contract, courts may only address arguments about whether the arbitration agreement itself is invalid, not any arguments that attack the contract as a whole or that attack provisions outside the arbitration agreement.  If the arbitration agreement is valid, those broader arguments will be addressed by the arbitrator.  For example, even when Florida state courts determined that the underlying contracts at issue were illegal, SCOTUS said that because the arbitration agreement within those illegal contracts was valid, the issues must be arbitrated.  That was six years ago.  Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 446 (2006).

Now enter Oklahoma, which appears not to have received the memo from Buckeye.  [Had to make one snarky comment about Oklahoma here since my husband is a die-hard member of the Burnt Orange Nation.]  Last November, its highest court found that employees with admittedly valid arbitration clauses in their non-compete agreements did not have to arbitrate disputes with their former employers, because the non-competes as a whole were void under a state statute.  Oklahoma tossed the severability doctrine out the window without much analysis.  It declared: “We hold that the existence of an arbitration agreement in an employment contract does not prohibit judicial review of the underlying agreement.”  Howard v. Nitro-Lift Technologies, 273 P.3d 20, 27 (Okla. 2011).  Reading between the lines, the Oklahoma court thought that the non-compete agreements at issue were so egregious (precluding the employee from working in their industry anywhere in the U.S. for a period of two years), that it refused to enforce one iota of those agreements.

SCOTUS is a big fan of its severability doctrine, though, and it vacated the Oklahoma Supreme Court’s decision.  In doing so, it took the opportunity to issue two major reminders to other state supreme courts.  First, the FAA and the federal case law interpreting it are applicable in state and federal courts.  Specifically, the Court said “the Oklahoma Supreme Court must abide by the FAA, which is ‘the supreme Law of the Land,'” citing the Constitution.  Second, attacks on the validity of the contract as a whole are for the arbitrator to resolve. (“An arbitration provision is severable from the remainder of the contract”).  If all state supreme courts would keep those concepts (plus preemption) in mind, the Supreme Court promises to stop reminding them of the their place in the court hierarchy.

 

In answer to the proverbial question “how much litigation waives the right to arbitrate?,” the Third Circuit has responded that ten months does the trick, if the party seeking arbitration has engaged in significant motion practice, regardless of whether any discovery was exchanged. In re Pharmacy Benefit Managers Antitrust Litig., __ F.3d __, 2012 WL 5519658 (3d Cir. Nov. 15, 2012).  This marks a change in the Third Circuit’s case law on waiver, which had previously placed a strong emphasis on the exchange of discovery as the point of no return.

In re Pharmacy involves a class of retail pharmacies that brought suit in federal court alleging the pharmacy benefits manager violated antitrust laws.  The defendant/benefits manager responded by first bringing a motion to dismiss, arguing the plaintiffs had no antitrust injury.  After that motion was denied, defendant filed its answer without asserting any right to arbitrate.  After the defendant obtained new counsel, and the case had been underway for ten months, the defendant filed a motion to compel arbitration.  The district court granted the motion to compel and stayed the case, finding that defendant had not waived arbitration.  The plaintiffs refused to bring their claims in arbitration and instead dismissed their claims in order to appeal the order compelling arbitration.

The Third Circuit first addressed its jurisdiction over the appeal.  The defendant argued the plaintiffs should not be rewarded for dismissing their claims in order to find an “end run” around the rule that a successful motion to compel arbitration is not normally appealable unless the judge simultaneously dismisses the case.  However, the Third Circuit found it irrelevant how the claims were dismissed–jurisdiction over the appeal was proper because the plaintiffs’ claims were dismissed (as opposed to just stayed).

Then the Third Circuit reversed the district court, finding that the defendant had waived its right to arbitrate.  The court analyzed all six relevant factors from its Hoxworth decision on waiver, but focused heavily on these two acts by the defendant: waiting ten months to bring its motion to compel arbitration without any explanation other than its change of counsel; and making a significant motion to dismiss on the merits.  However, another factor, the extent of discovery, cut against waiver because the parties had not engaged in any discovery.  Indeed, the Third Circuit acknowledged that its “cases finding waiver have uniformly featured significant discovery activity in the district court.”  Even so, the Third Circuit relied on cases from other circuits and the general rule that a defendant cannot “act inconsistently with the right to arbitrate” in finding that the benefits manager had waived its right to arbitrate.  

Because the Third Circuit reversed on the question of waiver, it did not address whether the arbitration clause was unenforceable due to its limitation on the remedies available under antitrust laws.

Two circuit court decisions in the last week have denied arbitration motions based on the lack of an arbitration agreement between the parties.  These decisions show that while the federal presumption in favor of arbitration is generally a strong current, it is not strong enough to pull non-signatories into arbitration (or even to stay their litigated cases) unless there is a great deal of overlap between the arbitrable issues and the litigated ones.

In Baldwin v. Cavett, 2012 WL 5395282 (5th Cir. Nov. 6, 2012), the Fifth Circuit determined that defendants (an accounting firm) could not compel the plaintiffs (its clients) to arbitrate their claims that the accountants had fraudulently convinced them to invest in particular securities.  The accounting firm held up an arbitration agreement between its clients and a third party, a securities broker, which said any dispute between the clients and the broker were arbitrable, including those between the clients and the broker’s “officers, directors, employees or agents.”  The accounting firm argued that although it was not a party to that agreement, it was an agent of the broker, and could therefore enforce the arbitration agreement.  It argued it was an agent because it had referred the client to the broker and because the accountants were partners with the broker in another company. 

The court in Baldwin concluded that the accountants could not compel arbitration because the actions of which their clients complained were not performed as agents of the securities broker.  In other words, while they may have been the broker’s agents on some occasions, they could not show they were serving as agents of the broker when they engaged in the conduct at issue in the complaint.  In addition, the court concluded that the accountants could not rely on equitable estoppel principles to compel arbitration, primarily because the clients’ claims did not rely on the agreement between the clients and the broker.   

In the Eighth Circuit, a smelting company (Doe Run) sought a mandatory stay of court claims brought by Peruvian children who allege they have been injured by the smelting facility near them.  Reid v. Doe Run Resources Corp., __ F.3d __, 2012 WL 5476836 (8th Cir. Nov. 13, 2012).  Not surprisingly, there is no arbitration agreement between the children and Doe Run.  However, an arbitration is proceeding between Peru and an affiliate of Doe Run about who is obligated to defend against these (and other) environmental claims related to the smelting facility.  Doe Run moved for a mandatory stay of the children’s litigation pending the outcome of arbitration, pursuant to Section 3 of the FAA.  The plain text of Section 3 applies only to cases where there is an issue that is “referable to arbitration,” but case law has authorized courts to stay some claims by nonsignatories. 

The Eighth Circuit denied Doe Run’s request to stay the children’s litigation, however, because the children’s claims were not sufficiently related to the agreement between Doe Run and Peru (which had an arbitration agreement).  The children’s claims did not rely on that agreement or turn on the key issues in the ongoing arbitration. The Eighth Circuit did not clearly enunciate a test for staying claims by nonsignatories if they are related to arbitrated claims, but the decision suggests that a stay is only appropriate if the nonsignatories could be bound by the arbitration agreement in the related case.

Helpfully, the Eighth Circuit identified the five theories available to parties to an arbitration agreement who are trying to compel arbitration with a non-signatory.  They are: “(1) incorporation by reference; (2) assumption; (3) agency; (4) veil-piercing/alter ego; and (5) estoppel.” 

The lesson for litigators here is that if you want to rely on an arbitration agreement that your client did not sign, you better show a very close nexus between that arbitration agreement and the issues in your case.  And, if you have sympathetic opponents like sick Peruvian children, the courts are likely to find your nexus lacking.

After an arbitration about-face by the defendant in a class action, the Eleventh Circuit ruled that the defendant had waived its right to compel arbitration by: participating in litigation for two years and affirmatively declining to enforce its arbitration agreement with the plaintiffs until after SCOTUS issued its Concepcion decision.  Garcia v. Wachovia Corp., ___ F.3d. ___, 2012 WL 5272942 (11th Cir. Oct. 26, 2012).

The class of plaintiffs in Garcia claimed that banks unlawfully charged them overdraft fees.  One of the banks, Wells Fargo, had arbitration clauses in its customer agreements, and the clauses precluded class arbitration.  Despite that, it did not move to compel arbitration by the motion deadline in the scheduling order.  Even when the district court specifically offered Wells Fargo the opportunity to move to compel arbitration at a later date, Wells Fargo told the court that it did not intend to seek arbitration of the plaintiffs’ claims.

However, after the Concepcion decision, Wells Fargo changed its strategic course and filed a motion to dismiss the class action in favor of arbitration.  To explain its two year delay, Wells Fargo argued that the various state laws governing the agreements had declared class actions waivers unenforceable, so Wells Fargo had concluded that moving to compel arbitration would have been futile.  The plaintiffs, of course, argued that Wells Fargo had waived its right to arbitration.

The Eleventh Circuit recognized that there is a futility exception of sorts — litigants are not required “to engage in futile gestures” — but concluded Wells Fargo’s behavior was not excused.  The only time that a party’s failure to compel arbitration will not amount to waiver, after it has “substantially invoked the litigation machinery,” is when it “would almost certainly have been futile.”  Wells Fargo did not meet that high burden here, because the Eleventh Circuit concluded that Concepcion did not change the law on preemption, it merely applied it in a new context.  The court noted that “absent controlling Supreme Court or circuit precedent foreclosing a right to arbitrate, a motion to compel arbitration will almost never be futile.”   For that reason, the court affirmed the district court’s denial of Wells Fargo’s motion to dismiss the action in favor of arbitration.

This decision reminds me of advice from my contracts professor in law school.  When we began to ask her a series of follow-up questions about her modified Socratic method  (where there was some rhyme and reason to who got asked questions when) that were clearly intended to identify on which days we could be unprepared, she cut off the questions curtly with “Don’t try to game it.  Just be ready.”  The same applies to attorneys representing parties with arbitration agreements.  If there is a chance in hell that your arbitration agreement can be enforced (and that you strategically will want that to happen), make that argument early and often.