The Eleventh Circuit has decided to proactively preempt Florida law, before it could get in the way of the FAA by favoring class arbitrations (despite contract language precluding them).

In Pendergast v. Sprint Nextel Corp., __ F.3d. __, 2012 WL 3553466 (11th Cir. Aug. 20, 2012), a wireless customer wanted to bring a class action alleging improper roaming fees.  The arbitration agreements in the plaintiff’s contracts all waived class actions (for example: “We each agree not to pursue arbitration on a classwide basis”).  But the plaintiff argued that the waivers were unconscionable under Florida law, because they effectively shield Sprint from liability from claims that are too small for consumers to pursue on an individual basis.  Nevertheless, the district court granted Sprint’s motion to compel arbitration, and the plaintiff appealed.

In January of 2010, the Eleventh Circuit found that the appeal turned on unsettled questions of Florida unconscionability law and certified four of those questions to the Florida Supreme Court.  However, the decision in Concepcion came out before the Florida Supreme Court had spoken.  Sprint then successfully moved the Florida Supreme Court to decline jurisdiction in light of Concepcion and the case was bounced back to the Eleventh Circuit.  At that point, the Eleventh Circuit affirmed the district court.

The final time around, the Eleventh Circuit said that it doesn’t matter what Florida law says about the conscionability of precluding class actions.  Because either way, the language of the agreement must be enforced under the FAA.  (If the Sprint agreement were unconscionable under Florida law, then that common law rule would be preempted by the FAA under the reasoning of Concepcion and the agreement would be enforced.  If the Sprint agreement were hunky-dory under Florida law, then the agreement would also be enforced.)

This is the first time I have seen a court of appeals find that state law, which has not yet been made, is preempted!

Take out your birthday hats and balloons — Arbitration Nation is celebrating its first full year of existence!  I have enjoyed reading all the developments in arbitration law over the past year and connecting with many people — through this blog, listservs, emails and Twitter– about their reactions to the case law. 

Here are some fun stats:

Posts: 58

Visitor Growth:  The volume of monthly visitors has grown six-fold in the past twelve months  (plus many people see the content on other websites, like Lexology, ADRTimes, JDSupra, and then the content scraping sites that we battled for a few months….)

Pages per visit: 1.72

Most visited post: Dissonance between SCOTUS and BUSINESS on Arbitration

Most frequent search terms that get people to the blog (after “not provided”): Arbitration Nation and arbitrationnation.com (or fat finger variations, like Arbitration natino); then “supreme court arbitration cases florida”

Award: Among “Top 25 Minnesota Blawgs”

Posts with pop culture references in title: 7 

Reflecting on the past year reminded me of Malcolm Gladwell’s book Outliers.  I took away two main things from that book:  1) I should red-shirt my son from kindergarten if I want him to play professional sports; and 2) it takes 1,000 practices to be really good at something.  At this rate, it would take me 17 years to become an “outlier!” (And my son would be ready to red-shirt for college, not kindergarten.)  But, whether I have another sixteen years in me or not, the point is I am just getting started, and I hope to keep fine-tuning the content.  As always, please contact me if you have ideas for a blog post or for how to make this blog more useful!

The Eleventh Circuit has “ironed out a wrinkle” in Alabama’s arbitration jurisprudence that seemed to find executors outside the scope of arbitration contracts signed by the decedent. 

In Entrekin v. Internal Medicine Assocs. of Dothan, P.A., ___ F.3d __, 2012 WL 3208641 (11th Cir. Aug. 9, 2012), the district court had denied a nursing home’s motion to compel arbitration of a wrongful death claim brought by the executor of the decedent’s estate.  The district court rested its decision on old Alabama state cases saying that wrongful death claims do not belong to the decedent or its estate, but only to the personal representative.  Here, as the decedent had signed the arbitration agreement, the district court reasoned that the agreement did not bind the executor of that estate.

The Eleventh Circuit reversed.  Brushing aside any technical distinctions between personal representatives and executors, the Eleventh Circuit pointed out that the Alabama Supreme Court had compelled arbitration of wrongful death claims against nursing homes in three recent cases.  Those three cases established “the rule that an executor suing a nursing home for wrongful death is bound by an arbitration agreement that binds the decedent.” 

Interestingly, on appeal the nursing home tried to argue that there was a valid delegation clause that authorized only the arbitrator to determine the scope of the arbitration agreement.  The Eleventh Circuit was not impressed, noting that “if arguments were people, this one would be so feeble that it would need nursing care.”  Fundamentally, the nursing home was precluded from raising that issue on appeal because it never raised that issue in the district court and instead asked the court to determine the question of arbitrability.

In a dispute over how faithful a court must be to the parties’ arbitration agreement when it is asked to resolve an impasse in arbitrator selection under Section 5 of the FAA, the Fifth Circuit decided the court must give effect to the letter of the agreement, even if that defies its spirit.

In BP Exploration Libya Ltd. v. ExxonMobil Libya Ltd., __ F.3d __, 2012 WL 3065317 (5th Cir. 2012), the parties’ contract provided for three arbitrators to decide any disputes.  Each party would appoint one arbitrator, and those two party-appointed arbitrators would choose the third.  However, a dispute arose between three parties (all of whom were bound by the arbitrator selection process).  The parties could not resolve their dispute over how to select arbitrators.  If they each appointed one arbitrator, there would be no neutral arbitrator.  But the two responding parties would not agree on a “joint” second arbitrator.  Their dispute came before a federal district court in Houston, with two parties claiming there was a “lapse in the naming of an arbitrator” that authorized the court to appoint an arbitrator under Section 5 of the FAA.

The district court fashioned a solution:  each of the three parties should appoint their own arbitrator, and those three appointed arbitrators then would unanimously select two neutral arbitrators.  In other words, there would be five arbitrators hearing the dispute.  While that seems like an appropriate, Solomonic solution, the party who originally initiated the arbitration appealed the court’s decision.  It argued that the district court erred in ordering a five-member panel when the parties’ agreement explicitly provided for three arbitrators.

The Fifth Circuit agreed with the appellant and reversed the district court’s decision.  The appeals court confirmed that this situation was the type of “lapse” that authorizes court intercession under Section 5, but held that “where the parties’ agreement provides for three arbitrators, such as here, the district court is limited under Section 5 to appointment of three arbitrators.”  In support of its decision, the court pointed to the FAA’s deference to the parties’ agreement, the FAA’s model of “circumscribed judicial involvement in the arbitral process,” and the fact that arbitration awards have been vacated when arbitrators were not selected according to the method chosen in the contract.

So, how did the Fifth Circuit resolve the problem?  It required the two respondents to jointly appoint a second arbitrator, but if they could not agree, the district court could appoint the second arbitrator.  That second arbitrator would then work with the claimant’s arbitrator to select a neutral third arbitrator to fill out the three-person panel.  And, if the parties don’t like that result, the Fifth Circuit pointed out that “nothing in this opinion prohibits the parties from reaching an agreement between or among themselves upon which they can agree for the appointment of arbitrators to hear this dispute.”

This is not an unusual circumstance.  Multi-party disputes frequently arise under an arbitration agreement whose method of arbitrator selection appears to contemplate only two parties.  Drafters should consider providing for a separate selection process in the case of multi-party disputes.

Three federal circuit courts have recently looked at the shelf-life of an arbitration agreement.  Can it apply even before the contract is effective?  What about after a successor takes over the relationship?  What if one party unilaterally changes its terms?  The answer is that a properly worded arbitration agreement can apply in all those instances, with appropriate notice.

In Gove v. Career Systems Development Corp., ___ F.3d ___, 2012 WL 2892472 (1st Cir. July 17, 2012), a pregnant woman applied for a job and was rejected.  After she sued in federal court alleging gender discrimination, the defendant moved to compel arbitration based on a provision in the job application stating that her “submission of this Employment Application constitutes [her] agreement that the procedure set forth in the Arbitration Agreement will also be used to resolve all pre-employment disputes.”  The district court denied the motion to compel and the First Circuit affirmed that ruling. 

The appellate court found that the language “pre-employment disputes” was susceptible to two meanings: either the period of time between applying and discovering whether or not the applicant obtained the position; or only the process leading up to an actual hiring of the applicant, because “pre-employment” assumes employment.  Therefore, the agreement was ambiguous and the court construed it against the drafter, the defendant.  Interestingly, the court noted that the contract rule of interpreting language against the drafter conflicted with the arbitration rule of construing ambiguity in favor of arbitration, and said that under the applicable state law, the contract interpretation rule trumped (which elicited a significant dissent).

In another employment dispute, Dawson v. Rent-A-Center, Inc., 2012 WL 3038175 (6th Cir. 2012), the employee had entered into an arbitration agreement with Rent-Way, Inc.  After Rent-Way became a subsidiary of Rent-A-Center, Inc. through a merger, the employee sued Rent-A-Center for racial discrimination.  Rent-A-Center moved to compel arbitration and the district court denied the motion, finding insufficient continuity between Rent-Way and Rent-A-Center.  The Sixth Circuit reversed, noting that the arbitration agreement defined Rent-Way to include “its present and future parents, subsidiaries, affiliates, successors and assigns.”  Because Rent-A-Center is a “successor” to Rent-Way by virtue of the merger, and because the applicable state law binds all successor corporations to assume the predecessors’s liabilities, the court concluded that Rent-A-Center could enforce the arbitration agreement at issue.

Filho v. Safra Nat’l Bank of N.Y., 2012 WL 3023805 (2d Cir. July 25, 2012), dealt with a successor agreement, not a successor corporation.  In it, a customer’s original agreement with a bank did not require arbitration.  But, it did authorize the Bank to change the terms of the agreement, and three years later the bank changed its general terms to include an arbitration clause.  However, the customer said he never received notice that the terms had changed.  Because the Second Circuit found the bank had not sufficiently proven that the customer received actual or constructive notice of the change in the term, it remanded the case to the district court for a trial on that issue.

**ARBITRATION NATION IS ALMOST ONE YEAR OLD!  Help me celebrate by following my arbitration news on Twitter (@KramerLiz) and/ or subscribing to this blog (via the button on the right of www.arbitrationnation.com).  It’s the Summer Lovin’ campaign!  **

The Supreme Court of South Carolina just ruled that contracts for the sale of residential property are not interstate commerce, and therefore are outside the reach of the Federal Arbitration Act.  Bradley v. Brentwood Homes, Inc., __ S.E.2d __, 2012 WL 2847616 (S.C. July 11, 2012).  That is a surprising result in my view, given that the FAA applies to all agreements that involve or affect interstate commerce, Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 271-72 (1995), and the Supreme Court has been largely unreceptive to states’ attempts to carve out certain types of arbitration contracts (like those in nursing home contracts). 

In Bradley, the plaintiff bought a “completed dwelling” in Myrtle Beach from defendant.  Two years later, the plaintiff sued in state court, alleging construction defects.  The parties engaged in six months of discovery before the defendant asserted its right to arbitrate and moved to compel arbitration.  The district court denied the motion, not on the basis of waiver (which would have been much simpler), but by finding that the arbitration agreement was unenforceable.  It held the arbitration agreement was unenforceable under South Carolina’s Uniform Arbitration Act, because it did not comply with technical requirements of that statute, and also held that the agreement did not involve interstate commerce and therefore was not covered by the Federal Arbitration Act (which would likely have made the agreement enforceable, as the FAA does not have the same technical requirements about font size, etc). 

The facts related to interstate commerce are these: 

  • the agreement stated that the defendant was “not acting as a contractor” for the plaintiff;
  • the defendant did, however, construct the home using subcontractors, materials and suppliers from outside South Carolina;
  • the defendant provided a warranty from a national company; and
  • the plaintiff used an out of state bank to finance the transaction.

Despite those last three facts, the South Carolina court held that the FAA did not apply to this arbitration clause.  The analysis relied heavily on the court’s assessment that real estate contracts are unique; it begins with a “discussion of the historical intrastate character of real estate transactions.”  To support the exceptional nature of real estate contracts, it cited a state court case from South Carolina and federal district court cases from Puerto Rico and Kentucky.  The court held that none of the facts cited by the defendant (out-of-state banks, warranty programs, subcontractors, supplies) “negate the intrastate nature of the sale and purchase of residential real estate.”  The court was careful to narrow its ruling, however, noting that if the agreement had been for the construction of the home, instead of for the completed dwelling, its arbitration clause would have been governed by the FAA. 

Because the conventional wisdom is that the vast majority of arbitration agreements are covered by the FAA, this decision provides rare support to parties who want to keep their claims in court, despite an arbitration agreement that could be unenforceable under state law grounds.

It must be near the end of the clerk year, because courts are going gangbusters issuing opinions.  Today, a roundup of three arbitration decisions from Southern states.  Notably, Louisiana makes it tough for lawyers to enforce arbitration agreements with their clients.

After prominently noting that the lower court rulings were “eminently reasonable, logical and just,” the West Virginia Supreme Court of Appeals said they were “directly contrary to the” federal interpretation of the FAA, because they denied a motion to compel arbitration on grounds that it would result in inefficient and piecemeal litigation.  Johnson Controls v. Tucker,  __ S.E.2d __, 2012 WL 2226342 (W. Va. June 13, 2012).  In that construction dispute, seven defendants were answering claims that an HVAC system was improperly designed, constructed, and/or maintained.  But only three defendants had an arbitration clause with the plaintiff, and those three moved to compel arbitration.  The plaintiff opposed the motion, arguing that to force it into piecemeal litigation made the arbitration clauses unconscionable.  After finding that federal law precluded that argument, the court also found none of the agreements were unconscionable under the plaintiff’s other arguments.

The high court in Alabama also reversed a lower court’s denial of a motion to compel arbitration in Auto Owners Insurance, Inc. v. Blackmon Insurance Agency, Inc., __ So. 3d. __, 2012 WL 2477927 (Ala. June 29, 2012).  In that case between an insurance agent and the insurance company, the issue was whether the parties’ claims fell within the scope of their arbitration agreement.  That issue was made more complicated by the fact that the parties had executed three agreements between 1995 and 2010, only two of which had arbitration agreements.  While the lower court had denied the motion to compel arbitration, the Supreme Court of Alabama reversed that decision.  Its analysis rested on the fact that the parties’ first agreement, in 1995, had an arbitration agreement that incorporated the AAA rules, and those rules give the arbitrator the authority to determine whether the parties’ dispute is within the scope of the original arbitration agreement.

The Supreme Court of Louisiana had to decide whether arbitration agreements between lawyers and clients are enforceable in Hodges v. Reasonover, __ So. 3d __, 2012 WL 2529403 (La. July 2, 2012).  (Yes, Reasonover is the lawyer’s name.  Does Reasonover over-reason?  Read on…)  The retainer agreement called for arbitration by the AAA, and when the clients sued the lawyer for malpractice, the lawyer moved to compel arbitration.  The Louisiana court agreed with the ABA’s Formal Ethics Opinion 02-045 that  a binding arbitration clause between an attorney and client is not per se unenforceable.  However, it went on to find this particular clause unenforceable based on the lawyer’s failure to adequately disclose to the client at least the following seven aspects of the arbitration agreement: it waived their right to a jury trial, waived their right to appeal, waived their broad discovery rights, subjected them to higher upfront costs, it covered particular types of claims, it did not prevent the client from making a “disciplinary complaint”, and the client had the right to seek independent counsel before signing the agreement.

This high bar for disclosure was based on the attorney’s duty of candor and duty of loyalty, which the court found obligate a Louisiana lawyer to explain all consequences of agreeing to arbitrate.  Hodges cites no authority for that aspect of its opinion outside Louisiana state law, meaning it may be vulnerable to a Concepcion challenge.

 

**ARBITRATION NATION IS ALMOST ONE YEAR OLD!  Help me celebrate by following my arbitration news on Twitter (@KramerLiz) and/ or subscribing to this blog (via the button on the right).  It’s the Summer Lovin’ campaign!  **

With less colorful language than its last arbitration opinion, the First Circuit sided with the Second and Third Circuits in limiting the application of the 2010 Stolt-Nielsen decision on the availability of class arbitration.  Fantastic Sams Franchise Corp. v. FSRO Assoc. Ltd., __ F.3d __, 2012 WL 2402560 (1st Cir. June 27, 2012). Decisions from these three circuits suggest that as long as the party seeking a class action can show it did not stipulate that the agreement was “silent” on the availability of class arbitration, the courts (or the arbitrator) will consider arguments based on contractual interpretation and the parties’ actions to find the parties’ intent.

In Fantastic Sams, a coalition of 35 franchisees demanded arbitration against the franchisor for common violations of their agreements and statutes.  Twenty five of the agreements had arbitration clauses that prohibited class arbitration.  Ten agreements did not expressly prohibit class arbitration, and broadly provided for arbitration of “any controversy or claim arising out of or relating in any way to this Agreement.”  The franchisor brought a petition in federal court to compel the coalition members to arbitrate individually, relying on Stolt-Nielsen. 

The 25 franchisees whose contracts prohibited class arbitration were compelled to arbitrate individually.  But the remaining ten were not.  The First Circuit concluded that Stolt-Nielsen was not as broad as the franchisor argued: “We thus reject the very different precept, on which [the franchisor’s] argument depends, that there must be express contractual language evincing the parties’ intent to permit class or collective arbitration.  Stolt-Nielsen imposes no such constraint on arbitration agreements.”  The court focused on the fact that the Stolt-Nielsen parties had stipulated that their agreement was “silent” on class arbitration, whereas in this case it was possible the arbitrator could find evidence that the parties did intend to allow class or collective arbitrations.  The First Circuit noted its agreement with the Second and Third Circuit decisions on this point, but did not address the recent Fifth Circuit decision coming out in favor of the franchisor’s argument.

Furthermore, the First Circuit noted that Stolt-Nielsen did not clearly apply because this coalition of franchisees was not a “class action” and did not have the same issues that SCOTUS noted with class arbitrations.  (No absent parties, no certifying a class or providing public notice, etc.)

Finally, the court found that the question of whether the remaining ten franchisees could proceed in a collective arbitration was a decision for the arbitrator, because it characterized that question as a “procedural” one and because the agreements incorporated the AAA Rules, which delegate jurisdictional questions to the arbitrator. 

At least one lesson from these cases is: never stipulate your arbitration agreement is silent regarding the availability of class actions!  Give the courts some reason to distinguish your facts from the unusual facts in Stolt-Nielsen, if you want any chance of arbitrating as a class.

**ARBITRATION NATION IS ALMOST ONE YEAR OLD!  Help me celebrate by following my arbitration news on Twitter (@KramerLiz) and/ or subscribing to this blog (via the button on the right).  It’s the Summer Lovin’ campaign!  **

Arbitration agreements may shorten the statute of limitations that would otherwise be available for claims — but only to a point.  A recent opinion from the First Circuit shows that how a plaintiff frames its argument that the contractual limitations period is unreasonably short can make a difference not only on whether the argument is successful, but who hears the argument.

In Escobar-Noble v. Luxury Hotels Int’l of Puerto Rico, 680 F.3d 118 (1st Cir. 2012), an employee alleged discrimination and retaliation against his employer, the operator of the Ritz-Carlton in San Juan.  His employment agreement called for arbitration, but he asserted that the arbitration agreement impermissibly shortened the limitations period from three years to one year.  He claimed this deprived him of substantive rights afforded by Puerto Rican law.  This triggered both the district court and circuit court to analyze whether the arbitration clause precluded him from “vindicating his statutory cause of action” in arbitration, under the analysis in Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 637 (1985).

The district court decided the arbitration agreement was enforceable, but the First Circuit found the arbitrator should decide whether the statute of limitations was valid.  Because the Court found it was not clear whether Puerto Rican law allows employers to shorten statutory limitations periods for workers, it punted the issue to the arbitrator.

If the employee had characterized his challenge differently, the Court would not have been able to pass the buck (without a delegation provision).  Many plaintiffs argue that because the arbitration clause unreasonably shortens their limitations period, the arbitration agreement is unconscionable.  That argument is addressed by courts (again, unless there is a valid delegation provision empowering arbitrators to decide claims that the arbitration agreement is invalid).  E.g., Bridge Fund Capital Corp. v. Fastbucks Franchise Corp., 622 F.3d 996, 1002 (9th Cir. 2010); Ragone v. Atlantic Video at the Manhattan Center, 2008 WL 4058480 (S.D.N.Y. Aug. 29, 2008).

However, the issue may just be that the First Circuit had too much rum and reggaeton when it issued the Escobar-Noble decision.  The decision not only punts the issue of validity to the arbitrator, but also uses the following words and phrases that necessitate dictionary checks or a chuckle: “quondam employer,” “a gallimaufry of Puerto Rico statutes,” and “each dispute must stand on its own bottom.”

The saga of Brown v. Genesis Healthcare Corporation continues.  Almost exactly a year ago, the West Virginia Supreme Court declared that arbitration agreements in pre-dispute nursing home contracts were unenforceable.  Then in February SCOTUS reversed that decision and remanded the case for consideration of un-preempted unconscionability.   Now, the West Virginia court has issued its decision on remand.  Brown v. Genesis Healthcare Corp., ___ S.E.2d ___, 2012 WL 2196090 (W.Va. June 13, 2012) (Brown II). 

On remand, the West Virginia court was a bit more tactful in its discussion of SCOTUS’s analysis of the FAA than it was the first time around (but it repeated its description of the case law as “tendentious”, which the web tells me means “having a definite bias”).  West Virginia does think SCOTUS should have given a more reasoned reversal, though, commenting that the Court did not “eludicat[e] how and why the FAA applies to negligence actions that arise subsequently and only incidentally to a contract containing an arbitration clause.” 

Even so, it tried to narrow the impact of SCOTUS’s reversal of  Brown I.  It identified three holdings from Brown I and clarified that only the second of those was overruled (the one saying the FAA was not intended to apply to pre-dispute arbitration agreements in personal injury cases).  The West Virginia court did not change its mind, however: “we otherwise reaffirm all of our discussion and holdings in Brown I.” 

Perhaps in an effort to shore up its ability to later find the nursing home contracts unconscionable, the West Virginia remanded to the lower courts for further development of the record.  In doing so, it gave the plaintiffs a roadmap, noting that it might find the following attributes lead to procedural and substantive unconscionability: age, literacy and sophistication of the parties, how complex or hidden the contract terms were, the context of the contract formation, the ability to negotiate the contract, the bilaterality of the arbitration agreement, and whether arbitration costs are so high as to deter a plaintiff from pursuing a claim.