The Supreme Court of Arkansas has joined Florida, Ohio, and Arizona (at least) in holding that a non-lawyer is guilty of the “unauthorized practice of law” if he or she attempts to represent a corporation in arbitration proceedings.  Nisha v. Tribuilt Constr. Group, __ S.W.3d __, 2012 1034641 (Ark. Mar. 29, 2012).

Nisha involved a general contractor who claimed the owner owed it over $666,000 for completing construction of a hotel.  A year after the trial court compelled arbitration, the contractor’s counsel withdrew, and the contractor’s President sought to represent the company in the arbitration.  The owner objected and moved to enjoin the President from representing the contractor in arbitration, arguing that to do so constitutes the unauthorized practice of law.  The trial court found that the arbitrators, not the court, should decide whether the contractor could proceed without a lawyer, but certified the issue for immediate appeal.

The Supreme Court of Arkansas seemed offended that the trial court punted this issue to the arbitrators.  Just as the New York federal court noted in disqualifying lawyers from an arbitration, the courts have “exclusive authority to regulate the practice of law.”  After firmly claiming jurisdiction over the issue, Arkansas’s high court held that companies must be represented by lawyers, both in court and in arbitration.  The court cited two bases for its conclusion — first, Arkansas’s long-standing rule that corporations cannot engage in the practice of law through their officers, and second, “arbitration proceedings bear significant indicia of legal proceedings” and party representatives will make arguments, present evidence, and cross-examine witnesses.  Those two factors won the day, despite the court’s concern that arbitration is supposed to be cheaper than litigating in court.

Legitimate concern about the “unauthorized practice of law” comes up regularly in arbitration.  Not only for companies that may want to represent themselves, like the general contractor in Nisha, but also for out-of-state lawyers whose clients are contractually bound to arbitrate in another state (must I get admitted pro hac vice before the courts of Hawaii to represent a client at a hearing in Hawaii?  It might be worth it…).    Rule 5.5 of the ABA Model Rules of Professional Conduct (and its comments), and the relevant state’s equivalent rule, are the place to start for attorneys who are analyzing that issue.  Some mediators and arbitrators are also concerned that their work may be considered the “practice of law” and therefore need to be sanctioned by each state court where they offer dispute resolution services.   On top of these issues of how each state defines the practice of law, courts will likely have to consider the interplay of the FAA, and whether it preempts any state rules governing parties’ representation and choice of neutrals in arbitration.  For now, though, this area is in flux and parties must be cautious when analyzing their compliance with state rules governing the unauthorized practice of law.

The Missouri Supreme Court just acknowledged that its 2010 decision, finding a class arbitration waiver was unenforceable under state law, is preempted by the FAA, pursuant to the rationale of Concepcion.  In Robinson v. Title Lenders, Inc., __ S.W.3d __, 2012 724669 (Mo. Mar. 6, 2012) and Brewer v. Mo. Title Loans, Inc., __S.W.3d __, 2012 WL 716878 (Mo. Mar. 6, 2012) (“Brewer II“), the Missouri Supreme Court bid farewell to case law that survived about one year.

In the 2010 decision, Brewer v. Missouri Title Loans, Inc., 323 S.W.3d 18 (Mo. 2010), the Missouri court reasoned that forcing individual arbitration would essentially deny consumers a remedy for their claims, and therefore the class arbitration waiver was unconscionable.  It refused to sever the class waiver and instead found the entire arbitration agreement was unenforceable.  After the U.S. Supreme Court decided Concepcion, that Court vacated and remanded Brewer.  (In Brewer II, the Missouri court goes out of its way to point out that it was not the only court who had an opinion vacated based on Concepcion — it gives a footnote shout out to five other decisions with a similar history.)

In two opinions issued on the same day, the Missouri Supreme Court said that it got the message of Concepcion.  In Robinson, it notes that “Concepcion invalidates this Court’s reasoning in Brewer I” and that “post-Concepcion, courts may not apply state public policy concerns to invalidate an arbitration agreement even if the public policy at issue aims to prevent undesirable results to consumers.”  While public policy concerns may be off the table, the court affirmed in Brewer II that  “Concepcion permits state courts to apply state law defenses to the formation of the particular contract at issue.”

Missouri was not ready to enforce the arbitration agreements at issue, however.  Instead, in a compromise of sorts, the Missouri courts seemed to agree to look harder for unconscionability that is unrelated to the class action waiver (and for reasons to distinguish the arbitration agreements from the one at issue in Concepcion).  In Brewer II, the Missouri court determined that under its general contract law precedent, the arbitration agreement was unconscionable because it was non-negotiable, its terms were one-sided, the arbitration requirement was unilateral, and the plaintiff had submitted affidavits from attorneys that it would not be cost-effective to pursue the claims on an individual basis.  (Brewer II was a 4-3 decision, with one dissenter writing “This case is nothing more than evidence of the majority’s refusal to abide by controlling federal law.”)  In Robinson, the court remanded the case to the trial judge to determine whether it is unconscionable under state law precedent that do survive Concepcion. 

 

 

Three state law decisions relating to arbitration were toppled recently, based on application of the U.S. Supreme Court’s preemption decision in Concepcion. 

In Kilgore v. Keybank, __ F.3d __, 2012 WL 718344 (9th Cir. Mar. 7, 2012), the Ninth Circuit held that California case law, which precluded arbitration of claims asking for public injunctive relief, was preempted by the Federal Arbitration Act.  The California rule (called the Broughton-Cruz rule) was based on the judgment of its highest court that only courts should address claims for  injunctive relief under public statutes (like the Consumers Legal Remedies Act and Unfair Competition Law), because courts are better suited for supervising injunctive relief and are more accountable to the public.  Although federal district courts had been split on how to apply Concepcion to the Broughton-Cruz rule, the Ninth Circuit held California’s rule was preempted.

The Ninth Circuit expressed reservation about its outcome, however, noting that forcing arbitration of public injunctive relief may “reduce the effectiveness of state laws like” the Unfair Competition Law and may not serve the purpose of the state legislature.  It also hinted that it felt the Broughton-Cruz rule was based upon sound policy judgments.  “These concerns, however, cannot justify departing from the appropriate preemption analysis as set forth by the Supreme Court in Concepcion.”  Id. at *10.   In order to clear up any confusion about whether state legislatures had the power to preclude arbitration of claims, the court clarified that those constraints must come from federal statutes.

The Ninth Circuit also applied Concepcion to clarify that a decision from the Washington Supreme Court, finding that class action arbitration waivers are unconscionable, is preempted by the FAA.  Coneff v. AT&T Corp., __ F.3d __, 2012 WL 887598 (9th Cir. Mar. 16, 2012). 

Finally, the Third Circuit applied Concepcion to find that a Pennsylvania precedent, which concluded class action waivers were generally unconscionable in consumer cases, was preempted.  Quilloin v. Tenet Healthsystem Philadelphia, __ F.3d __, 2012 WL 833742 (3d Cir. Mar. 14, 2012).  The Third Circuit cited its decision in Litman, where it found New Jersey precedent was preempted by the FAA, and noted “the Pennsylvania law is even more egregious than the New Jersey law” because it “has often prohibited class action waivers based on their arbitration-specific context.”  Id. at *9. 

As these decisions demonstrate, the Supreme Court’s ruling in Concepcion is likely to continue to play out for many more months, giving parties who are compelling arbitration good ammunition to counter state law precedent suggesting the arbitration agreement is unenforceable.

Building off last post’s discussion of the Solymar case, and the surprisingly fuzzy line between challenges to the formation of contracts containing arbitration provisions and challenges to the validity of those contracts, here is a hypothetical for you to consider.  (Why a hypothetical?  Because it is spring break, and spring break reminds me of law school, and law school reminds me of endless hypotheticals about a fictitious restaurant named “The Lobster Pot”.) 

Let’s say A held a gun to the head of B, demanding that B sign a Contract to buy widgets.  So, B signed.  But since B never wanted to buy widgets from A in the first place, B defaulted.  A then demands arbitration with B, citing an arbitration agreement within the Contract.  Assuming the Federal Arbitration Act applies, will a Court hear the merits of a claim from B that the arbitration agreement is not enforceable?

 In general, Prima Paint and the severability doctrine mean that challenges to a contract as a whole must be sent to the arbitrator, while challenges to the arbitration agreement itself are for the courts to determine.  See Prima Paint Corp. v. Flood & Conklin, 388 U.S. 395, 403-04 (1967).  But, the Supreme Court has recognized that some types of challenges to the contract as a whole do belong in court: those that challenge “whether any agreement between the obligor and obligee was ever concluded.”  Buckeye Check Cashing v. Cardegna, 546 U.S. 440, 444 n.1 (2006); Granite Rock Co. v. Int’l B’hood of Teamsters, 130 S. Ct. 2847, 2855-56 (2010).

 The answer to the hypothetical depends whether a federal court would find that signing a contract because a gun is put to your head is more analogous to:

  • allegations that the entire contract is void due to fraud in the inducement, violating state law or public policy (all of which have been sent to arbitration); or
  • allegations that no agreement was ever concluded because one of the parties’ names was forged on the agreement, or because the agent who executed the agreement lacked authority to do so, or because the party lacked the mental capacity to contract (all of which have been determined by courts).

What do you think??  I tend to think a majority led by Justice Scalia would say the issue goes to the arbitrator, and that four Justices would vigorously dissent, but I am interested in hearing your thoughts.

The severability doctrine of federal arbitration law tells litigants that unless they can specifically challenge the validity of the arbitration provisions of the contract, as opposed to challenging the entire contract, the courts will not address the merits of the challenge.  (See entire line of increasingly harsh cases starting with Prima Paint and continuing through Rent-A-Center.)  But, there was always one big loophole – courts would always address arguments about whether any agreement was ever concluded at all.  The federal courts have been willing to decide claims (even though not specific to the arbitration provisions) that a party’s signature was forged, or an agent lacked authority to execute the contract, or a contracting party lacked legal capacity to contract, despite the presence of arbitration clauses in those contracts.  The Supreme Court confirmed in Granite Rock that issues of contract formation are reserved for the courts, not arbitrators.  Granite Rock Co. v. Int’l B’hood of Teamsters, 130 S. Ct. 2847, 2855-56 (2010).

The Eleventh Circuit has now narrowed the types of “formation challenges” that courts in its circuit can hear.  Solymar Investments, Ltd. v. Banco Santander S.A., __ F.3d __, 2012 WL 612302 (11th Cir. Feb. 28, 2012).  In Solymar, the plaintiffs alleged that they had agreed to a multi-part settlement of their Madoff-related investment fraud with the defendants.  After significant negotiation, the parties contemplated execution of multiple documents simultaneously.  However, the defendants convinced plaintiffs that one of the documents (the Exchange Agreement) needed to be executed quickly, and the others would follow. 

After execution of the Exchange Agreement, negotiations fell apart, and no further documents were executed.  The plaintiffs took the position that because only one of the contemplated documents was executed, there was no binding settlement and initiated a lawsuit.  In response, the defendants moved to compel arbitration based on the arbitration provision in the Exchange Agreement.  The district court compelled arbitration.

The Eleventh Circuit affirmed the decision to compel arbitration based solely on the Exchange Agreement.  Using the applicable state law (Florida’s), the court found that the Exchange Agreement was a complete and final document, and because the plaintiffs did not challenge the validity of its arbitration provisions in particular, they must be enforced.  The court refused, however, to address the merits of the plaintiffs’ claims that the Exchange Agreement was invalid because it was intended to be one aspect of a broader scheme of agreements.  Without much analysis, the court found that issue was not properly characterized as “formation” but instead of “validity,” and therefore it was in the province of the arbitrator. 

Although this particular issue is not likely to arise frequently, it shows that even formation challenges may be construed very narrowly under the current Supreme Court precedent, and that the line separating formation challenges from validity challenges may not be neatly drawn.

The Fourth Circuit recently affirmed that it will consider “manifest disregard of the law” as a separate basis for attacking an arbitration award, in addition to the four bases set forth in Section 10 of the Federal Arbitration Act.  Wachovia Secs., LLC v. Brand, __ F.3d ___, 2012 WL 507022, at *8 (4th Cir. Feb 16, 2012) (“[M]anifest disregard continues to exist either ‘as an independent ground for review or as a judicial gloss on the enumerated grounds for vacatur set forth at 9 U.S.C. § 10.”)  The federal circuits are now split on whether “manifest disregard” lives on after the Supreme Court decisions in Hall Street and Stolt-Nielsen.

For many years, courts have overturned arbitration awards on the grounds that the arbitrator showed a “manifest disregard of the law,” but the Supreme Court questioned the validity of that basis in Stolt-Nielsen v. Animalfeeds Int’l Corp., 130 S. Ct. 1758, 1768 n.3 (2010) and Hall Street Associates, L.L.C. v. Mattel, Inc., 552U.S. 576, 585 (2008).  In those cases, the Court suggested that the four statutory bases in Section 10 are the exclusive bases for vacating an arbitration award.

In the wake of those two decisions, the circuits are split into opposing camps about the vitality of “manifest disregard.”  The First, Fifth, Seventh, Eighth and Eleventh Circuits have determined that “manifest disregard” is no longer viable.  See Affymax, Inc. v. Ortho-McNeil-Janssen Pharmaceuticals, Inc., 660 F.3d 281, 285 (7th Cir. 2011); Frazier v. CitiFinancial Corp., 604 F.3d 1313, 1324-25 (11th Cir. 2010); Medicine Shoppe Intern., Inc. v. Turner Investments, Inc., 614 F.3d 485, 489 (8th Cir. 2010); Citigroup Global Mkts., Inc. v. Bacon, 562 F.3d 349, 358 (5th Cir. 2009); Ramos-Santiago v. UPS, 524 F.3d 120, 124 n.3 (1st Cir. 2008). 

On the other hand, in addition to the Fourth Circuit, the Second, Sixth,  Ninth and Tenth Circuits have continued to analyze cases under the “manifest disregard” standard. Biller v. Toyota Motor Corp., __ F.3d __, 2012 WL 336135, at *5-6 (9th Cir. Feb. 3, 2012); Jock v. Sterling Jewelers, 646 F.3d 113, 121-22 (2d Cir. 2011); Lynch v. Whitney, 419 Fed. Appx. 826 (10th Cir. 2011); Coffee Beanery Ltd. v. WW, LLC., 300 F. App’x 415, 419 (6th Cir. 2008).

 The Third Circuit has taken a middle ground, finding cases did not meet the “manifest disregard” standard, assuming it was still valid.  Rite Aid New Jersey, Inc. v. UFCW, 2011 WL 5075657, at *2 (3d Cir. Oct. 26, 2011).

Given how active the Supreme Court has been in this area, I predict it is simply waiting for the perfect “manifest disregard” case, and then it will resolve this circuit split (most likely against the vitality of any bases other than those in Section 10).

The U.S. Supreme Court today vacated the West Virginia Supreme Court of Appeals’ decision from last June, holding that pre-dispute arbitration clauses in nursing home contracts will not be enforced in that state.  The content of the decision is not surprising, as it relies on notions of federal preemption and follows the analysis in Concepcion.  The only mildly surprising thing about today’s decision in Marmet Health Care Center, Inc. v. Brown is the Court’s tone.

Today’s per curiam decision from the Court appears intended to serve as a stern warning to state courts: Follow our FAA case law or face reversal.  The Supreme Court was especially perturbed that the West Virginia court had very publicly criticized the Court’s arbitration case law.  The West Virginia court considered whether its conclusion (that its state public policy prevented the enforcement of pre-dispute arbitration clauses in nursing home agreements) was preempted by federal law, but rejected preemption based on its analysis that the Supreme Court’s interpretation of the Federal Arbitration Act was “created from whole cloth.”  The state court might as well have hired MIA to dance on the steps of the Supreme Court and flip the Justices the bird. 

In no uncertain terms, the Court wrote: “When this Court has fulfilled its duty to interpret federal law, a state court may not contradict or fail to implement the law so established.”  The West Virginia court will get a second chance to find the nursing home agreements unenforceable, however, as the Court remanded for consideration of their unconscionability.

Given this decision, it will be interesting to see if the Court also vacates related cases from the Florida Supreme Court, which distinguished various SCOTUS precedent to find that arbitration agreements in nursing home admission contracts were unenforceable because they did not comport with state statutes.

The Sixth and Second Circuits addressed whether to vacate an arbitrator’s award recently.  The Sixth Circuit vacated the award of an arbitrator who “exceeded his powers,” while the Second Circuit refused to vacate for “evident partiality.” 

 Based on the parties’ agreement, the Sixth Circuit considered vacatur under the Michigan Arbitration Act.  In particular, the appellant argued that the arbitrator “exceeded his powers.”  Muskegon Central Dispatch 911 v. Tiburon, Inc., 2012 WL 340319 (6th Cir. Feb. 2, 2012).  The Sixth Circuit agreed, finding that the arbitrator exceeded his power by ignoring “the plain language of the contract” and improperly concluding that a contract section provided an exclusive remedy.  In other words, the arbitrator exceeded his powers by interpreting the contract in a way that the Sixth Circuit thought was incorrect. 

 Not only did the Sixth Circuit vacate the award, but it refused to remand to the original arbitrator.  Invoking “functus officio” like Hogwarts heroes, the court declared “a new arbitrator should review” the claims.  Id.

The next day* the Second Circuit came out with an opinion that reversed the S.D.N.Y’s decision to vacate an arbitrator’s award.  Scandinavian Reinsurance Co. Ltd. v. St. Paul Fire & Marine Ins. Co., __ F.3d __, 2012 WL 335772 (2d Cir. Feb. 3, 2012).  The district court judge had concluded that the award of three arbitrators should be vacated for “evident partiality” because two of the three arbitrators did not disclose that they were also serving together on a different arbitration panel, with similar issues, related parties, and a common witness.  The judge’s concern was that the two panelists could “receive ex parte information about” relevant issues and make credibility determinations based on their service in the second panel, and that because the conflict was not disclosed, it constituted “evident partiality.”

The Second Circuit reversed, finding that the appellant did not meet its burden of showing that the undisclosed matter (service on the second panel) was indicative of bias.  While the court reaffirmed the principle that non-disclosure of a relationship or interest can be suggestive of bias, it also noted that not all undisclosed matters indicate bias.  After adopting four factors for courts to use in determining whether a failure to disclose amounted to evident partiality,  the court rested on its analysis that “the fact that one arbitration resembles another in some respects does not suggest to us that an arbitrator presiding in both is somehow therefore likely to be biased in favor of or against any party.” 

Wary of encouraging non-disclosure, however, the Second Circuit clarified that it does “not in any way wish to demean the importance of timely and full disclosure by arbitrators. . . but the better course is not necessarily the only permissible one.”  Id.  The Scandinavian Reinsurance decision should give comfort to the many arbitrators who are concerned that by not disclosing their every Facebook friend or LinkedIn link, they may subject themselves to a claim of “evident partiality.”

Of the two decisions, the Sixth Circuit’s is more surprising as it feels like a de novo review of a lower court’s legal conclusions rather than the exceedingly deferential standard usually applied to arbitrator awards.  Its national impact is limited, however, given that it was interpreting the Michigan state statute.

 *Curiously, the Ninth Circuit also issued a decision on vacatur on February 3: Biller v. Toyota Motor Corp., __ F.3d__, 2012 WL 336135 (9th Cir. Feb. 3, 2012).  It was one of the more run of the mill vacatur decisions, however, where the courts show the appellant the many, many ways in which it does not meet the standards for vacatur under the FAA.

A reasonable person may have thought that the Supreme Court effectively killed off class arbitrations with its decisions in Stolt-Nielsen and Concepcion, but at least two government agencies have recently made decisions that ensure financial consumers and employees can bring classwide claims in some arbitrations.

FINRA, the Financial Industry Regulatory Authority, regulates all securities firms doing business in the United States.  It also administers the largest dispute resolution forum for investors and investment firms.  FINRA has enacted rules that prohibit investment firms from including class action waivers in their agreements with customers.    Not only does it have those rules, but it is enforcing them.  Just last week, FINRA brought an enforcement action against Charles Schwab for “violating FINRA rules by requiring its customers to waive their rights to bring class actions against the firm.”

In January, the NLRB, National Labor Relations Board, “ruled that it is a violation of federal labor law to require employees to sign arbitration agreements that prevent them from joining together to pursue employment-related legal claims in any forum, whether in arbitration or in court.”   In its decision, the NLRB acknowledged that it was confronted for the first time with a conflict between federal precedent interpreting the Federal Arbitration Act and precedent interpreting the National Labor Relations Act.  The NLRB’s outcome, it found, was an “appropriate accomodation of the policies underlying the two statutes.” 

It appears the executive branch is ready to take on the judicial branch over the issue of class arbitration.

Applying Texas law, the Fifth Circuit recently found that an employer cannot compel arbitration under an agreement that gives the employer the right to unilaterally change the terms of the agreement.  Carey v. 24 Hour Fitness, USA, Inc., __ F.3d __, 2012 WL 205851 (5th Cir. Jan. 25, 2012). 

The employee in the case brought a class action in federal court, alleging violations of the Fair Labor Standards Act.  The employer moved to compel arbitration, based on its employee handbook that provided for mandatory arbitration and provided that the employer “has the right to revise, delete, and add to the employee handbook.” 

The district court denied the motion to compel, finding that the arbitration agreement was illusory under Texas law.  The Fifth Circuit agreed.  It listed the multiple nefarious ways in which an employer could enact a change in the agreement, including after an employee had filed their arbitration demand, and thereby frustrate an employee’s attempt to pursue their claims.  “Thus, the fundamental concern driving this line of case law is the unfairness of a situation where two parties enter into an agreement that ostensibly binds them both, but where one party can escape its obligations under the agreement by modifying it.”

So, add “illusoriness” to the list of potential contractual arguments (along with unconscionability and illegality and public policy) that can render an arbitration agreement unenforceable under state law.  However, I can’t shake the nagging feeling that a unilateral change provision outside the arbitration agreement should not be considered, given Prima Paint and the severability doctrine, which dictate that the arbitration provisions within a contract be evaluated separately from the rest of the contract.