In the latest serve in a four-year ping-pong match between it and the Supreme Court, the Second Circuit has re-re-affirmed its holding that American Express may not compel arbitration of antitrust claims by a class of national merchants.  In Re Am. Express Merchants’ Litig., ___ F.3d ___, 2012 WL 284518 (2d Cir. Feb. 1, 2012).  The Second Circuit was persuaded by the expert affidavit of an economist who concluded that it “would not be worthwhile for an individual plaintiff” to pursue individual claims for the antitrust violations at issue (because the maximum damages was around $40,000, while the expert costs alone could exceed $1 million).  Therefore, the Second Circuit found the arbitration agreement unenforceable.

The plaintiffs alleged violations of the Sherman and Clayton Acts, arguing that the Card Acceptance Agreement that American Express (Amex) forced on merchants was an illegal “tying arrangement.”  Amex moved to compel individual arbitration of the claims, based on the Agreement’s arbitration clause, which says all claims shall be resolved by binding arbitration and states that “there shall be no right or authority for any Claims to be arbitrated on a class action basis.” 

In Amex I, the Second Circuit held “the class action waiver in the Card Acceptance Agreement cannot be enforced in this case because to do so would grant Amex de facto immunity from antitrust liability by removing the plaintiffs’ only reasonably feasible means of recovery.”  The plaintiffs, with the help of a good expert, had convinced the court that the costs of individual arbitration would be prohibitive and would preclude any rational merchant from pursuing the antitrust claims.  Amex, on the other hand, had “brought no serious challenge” to the figures cited by the expert.  The Supreme Court vacated Amex I, and remanded for consideration of its 2010 Stolt-Nielsen decision, a decision which held that class arbitrations may not be compelled unless the arbitration agreement explicitly allows it.

In Amex II, the Second Circuit stuck to its guns, finding Stolt-Nielsen did not mandate any change in the case outcome.  Shortly after Amex II was decided, the AT&T Mobility v. Concepcion case was decided, and the parties were allowed to brief the impact of Concepcion on the Amex II decision.  In the latest opinion, Amex III, the Second Circuit again affirmed its original holding.

Amex III portrayed the issue in Stolt-Nielsen as entirely distinct from the relevant issue in Amex.  It said Stolt-Nielsen only decided whether arbitrators (or courts) could force a class arbitration in the absence of an explicit contractual agreement.  However, no party in Amex was suggesting the Second Circuit should order class arbitration.  Instead, the issue in Amex was whether the preclusion of classwide arbitration, and its practical effect in the antitrust context, made the arbitration agreement unenforceable under either federal law or New York contract law. 

Amex III rested its holding on “the federal substantive law of arbitrability” and in particular two Supreme Court cases: Green Tree Financial Corp., 531 U.S. 79 (2000), and Mitsubishi Motors, 473 U.S. 614 (1985).  Those cases suggest that if a party proves an arbitration would be prohibitively expensive, it can invalidate an arbitration agreement.  Amex III states: “Since there is no indication in Stolt-Nielsen or Concepcion that the Supreme Court intended to overturn either Green Tree or Mitsubishi, both cases retain their binding authority.” 

Unless the Supreme Court decides to review this case (again), it gives renewed hope to litigants whose arbitration agreements preclude class arbitration (especially those trying to enforce federal statutes).  If those litigants present solid research and statistics showing that no rational actor would pursue the claims on an individual basis, Amex III stands for the proposition that their arbitration agreements are unenforceable and they should be able to proceed in court.

In a 2-1 decision, the Third Circuit held last week that the arbitration agreement in a personal computer purchase was valid, despite its mandate of a defunct arbitral forum.  Its decision, Khan v. Dell Inc., ___ F.3d ___, 2012 WL 163899 (3d Cir. Jan. 20, 2012), is in line with the decision of the South Dakota Supreme Court in late December, and suggests a trend toward upholding arbitration agreements that call for an impossible forum or arbitrator.

The plaintiff, Khan, purchased a Dell computer in 2004 and signed a contract including this arbitration language: “Any claim, dispute, or controversy…shall be resolved exclusively and finally by binding arbitration administered by the National Arbitration Forum (NAF) under its Code of Procedure.”  NAF’s Code of Procedure provided that it “shall be administered only by the National Arbitration Forum.”  After Kahn sued Dell for defective design, Dell moved to compel arbitration.  The district court denied the motion, based on the fact that the NAF no longer administers consumer arbitrations and the court’s conclusion that the NAF was “integral” to the arbitration agreement.

 The Third Circuit reversed the district court.  It first restated the applicable standard in a way that make it harder for Khan to meet, writing that for an impossible forum to invalidate an arbitration agreement  “the parties must have unambiguously expressed their intent not to arbitrate their disputes in the event that the designated arbitral forum is unavailable.”   The court then went out of its way to find ambiguity in the arbitration agreement.  For example, it found that it was ambiguous whether “exclusively” modified only the phrase “binding arbitration” or the entire phrase “binding arbitration administered by the [NAF]” and it found that the incorporation of the NAF rules still leaves ambiguous “what should happen in the event that the NAF is unavailable.”  In support of ambiguity, the Third Circuit cited cases that have interpreted similar NAF language and come to conflicting conclusions.  

After finding ambiguity in the agreement, the court concluded “we must resolve this ambiguity in favor of arbitration.”  The court then found Section 5 of the FAA was applicable and required the district court to appoint a substitute arbitrator.

The dissent found no ambiguity in the arbitration agreement between Khan and Dell.  It found “the selection of the NAF as arbitrator was an integral part” of the arbitration agreement.  It also cited to facts from an amicus brief from the National Association of Consumer Advocates, detailing the allegations of fraud against the NAF that led to the demise of NAF’s administration of consumer claims, suggesting that Dell should not be rewarded for requiring a biased arbitration forum in its consumer contracts. 

The Third Circuit is the highest federal court to date to address this exact issue — whether to enforce an arbitration agreement that calls for administration by the defunct NAF — and its decision makes it much more difficult for consumers with similar arbitration agreeements to convince trial courts to allow them to litigate their claims in court.

 

The highest court in the District of Columbia has held that piercing the corporate veil is outside the scope of the arbitration clause in Giron v. Dodds, 2012 WL 18574 (D.C. Ct. App. 2012).  But the case’s reasoning may extend to all cases in which a party must bring a court case in order to collect on an arbitration award.

In Giron, property owners sued a construction company after the company abandoned a renovation project.  In response to the construction company’s motion to compel, the trial court ordered arbitration.  After the arbitrator awarded the owners almost $121,000 from the construction company, however, the company refused to pay.

 The owners then brought a new complaint in the trial court, seeking to pierce the company’s corporate veil and hold the two shareholders individually responsible for the arbitration award.  The shareholders moved to compel arbitration of the veil-piercing claim, but the trial court denied the motion.  (Why would the shareholders of the construction company, who had just been roundly defeated in arbitration, would want the veil-piercing claims sent back to arbitration anyway?!  Must be gluttons for punishment.)  The D.C. Court of Appeals affirmed that decision.

 The court found that the veil-piercing claim did not fall within the scope of the parties’ arbitration agreement.  The court held the claim did not “ari[se] out of or relat[e] to [the] contract, or the breach thereof,” but arose “out of the [owners’] efforts to collect the arbitration award.”  The court analyzed the issue under D.C.’s Uniform Arbitration Act, but cited supportive cases decided under the FAA.  

This is a useful case for any party who must institute follow-up litigation to collect on an arbitration award.  An important practice pointer here is that the lawyer for the owners wisely asked the arbitrator to clarify that she did not consider the veil-piercing claim.

In a very narrow decision today, the U.S. Supreme Court found that the Credit Repair Organizations Act (CROA) does not preclude the arbitration of consumer suits alleging violations of that Act.  CompuCredit Corp. v. Greenwood, 565 U.S. ___ (2012).  The 8-1 decision was written by (who else?) Justice Scalia, with a concurring opinion filed by Justice Sotomayor and joined by Justice Kagan, and a dissent from Justice Ginsburg.  Despite the show of solidarity in the holding, the opinions show there may be disagreement at the Court about how clear Congress needs to be to preclude arbitration of particular statutory claims.

In CompuCredit, consumers brought a lawsuit against the issuer of a credit card alleging violations of CROA.  Those consumers argued that the arbitration agreements in their contracts were unenforceable because CROA mandates that any suits to enforce it be heard in a court.  The federal district court and Ninth Circuit sided with the consumers, finding CROA precluded enforcement of the arbitration agreements.

The essential question in the case was whether CROA’s requirement that a consumer be told it has “a right to sue” for violations of the Act was sufficient to override the Federal Arbitration Act’s mandate in favor of enforcing arbitration agreements.  As predicted, the majority of the Supreme Court found the language did not show Congressional intent to preclude arbitration primarily because the “right to sue” language was only in a section of the statute about what disclosures had to be provided to consumers, not a section detailing the rights created by the statute.  The majority also described the phrase “right to sue” as a “colloquial method of communicating to consumers that they have [a] legal right,” but not one that excludes the possibility of arbitration.  

In contrast, Justice Ginsburg’s dissent accused the majority of placing a “sophisticated gloss” on the phrase “right to sue.”  Justice Ginsburg wrote “The right to sue, I would hold, means the right to litigate in court.”

Maybe more important than what the Supreme Court said in CompuCredit  is what the Supreme Court did not say in CompuCredit.  The Supreme Court did not set out a new or higher standard for how clearly Congress must show its intent to override the FAA when it is drafting legislation.  In fact, that seems to be the entire point of the concurring opinion from Justices Sotomayor and Kagan.  The majority held out as a model of “clarity” a statute (7 U.S.C.  §26(n)(2)) that provides “no predispute arbitration agreement shall be valid or enforceable, if the agreement requires arbitration of a dispute arising under this section.”  In her concurring opinion, however, Justice Sotomayor writes “I do not understand the majority opinion to hold that Congress must speak so explicitly in order to convey its intent to preclude arbitration of statutory claims.”  In the dissent, Justice Ginsburg reminds her colleagues that under current precedent Congress “need not employ ‘magic words'” to override the FAA.

Because CompuCredit fails to set forth any new test for finding a Congressional override of the FAA, it will be interesting to see if it has any effect on the current trend of litigating whether arbitration is precluded under particular federal statutes.  It will also be interesting to see if Congress gets the message and begins adding very direct language about whether arbitration is or is not consistent with drafted legislation.

Earlier in 2011, courts in both Pennsylvania and Illinois issued decisions finding that when a consumer’s arbitration agreement called for the National Arbitration Forum (NAF) to administer the arbitration, but the NAF no longer administered consumer disputes, the arbitration agreements were unenforceable.  Those courts found the parties’ choice of NAF was “integral” to the arbitration agreement and could not be severed.  Just last week, the South Dakota Supreme Court disagreed.

In Wright v. GGNSC Holdings LLC, ___ N.W.2d ___, 2011 WL 68490097 (S.D. Dec. 28, 2011), a wrongful death claim against a nursing home (and related parties), the South Dakota Supreme Court considered the defendants’ motion to appoint a “substitute” arbitrator under Section 5 of the Federal Arbitration Act.  (That section says the court “shall” appoint an arbitrator if there is a lapse in naming an arbitrator for any reason.)  The relevant agreement provided that all disputes would be “resolved exclusively by binding arbitration . . . in accordance with the National Arbitration Forum Code of Procedure.”  While the defendants’ motion to compel arbitration of the estate’s suit was pending, the NAF “became unavailable to administer an arbitration” of the dispute.  The lower court then denied the nursing home’s motion to compel arbitration based on the unavailability of the NAF.

The South Dakota Supreme Court reversed that decision, concluding that “designation of the NAF’s Code of Procedure was an ancillary logistical concern that was not as important to the agreement as the agreement to arbitrate.”   Its analysis that the NAF Code was not “integral” was based on two things: first, South Dakota’s “overriding policy that arbitration will be favored”; and second, the fact that the NAF Code did not require an “NAF arbitrator.”  In other words, the court concluded that any arbitrator chosen by the agreed-upon process could still hear the dispute under the NAF rules.  (The court found “of little significance” that the NAF Code itself provides that only the NAF could administer the NAF Code.)  Finally, the court chided the plaintiff for never raising the unavailability of the NAF Code as a defense, using that as additional evidence that the choice of code was not “integral.”  Because the court found NAF’s unavailability to administer the dispute was not “integral,” it found that the court was required to appoint a substitute arbitrator under the FAA.

As we pile up the cardboard boxes that held holiday gifts for the recycling truck and select our new year’s resolutions for 2012, here are a few reflections on the last twelve months in arbitration law.  I would summarize it as another year where the U.S. Supreme Court was playing whack-a-mole, trying to tamp down all the different ways that courts around the nation are creatively using state common law or statutes to nullify arbitration agreements that they find inequitable.    And the U.S. Supreme Court simply can never keep up (I should specify that the current majority of the Court that reflexively rules in favor of arbitration cannot keep up, because there have been vigorous dissents).

This year’s biggest arbitration “whack” from the Supreme Court was the Concepcion case in April.  That case held that the Federal Arbitration Act preempts a line of California case law that found most “collective-arbitration waivers” in consumer arbitration provisions were unconscionable.   After Concepcion, circuit courts found similar lines of case law in New Jersey and Florida were preempted by the FAA.  (Just last week the Third Circuit remanded another unconscionability case for consideration in light of Concepcion.  Antkowiak v. Taxmasters, 2011 WL 6425567 (3d Cir. Dec. 22, 2011).)  I expect that this trend will continue in 2012, with parties who seek to enforce arbitration agreements arguing that any positions their opponents take based on state contract law are preempted by the FAA.

Of course, federal and state courts spent much of 2012 still trying to figure out how to deal with 2010’s big whack from the Supreme Court: Rent-A-Center.  In that case, the Supreme Court held that because the employee did not challenge the validity of the particular delegation provision within his stand-alone arbitration agreement with his employer, the Court could not address his arguments about the validity of that arbitration agreement as a whole.  The four dissenters, however, worried that the majority’s reasoning could result in a situation where a party who seeks to avoid arbitration is required to prove that the specific sentence calling for arbitration is invalid.  (For example, imagine trying to argue that this phrase is invalid: “any and all disputes arising under this agreement shall be resolved by binding arbitration.”)  In the great majority of 2011 cases that addressed this issue, however, courts interpreted Rent-A-Center as applying only when the arbitration agreement contained a delegation provision (that authorized the arbitrator to decide questions of the agreement’s validity).   I predict that courts will continue to limit Rent-A-Center‘s impact in 2012, although it may lead to some circuit splits about the proper interpretation of the case as well as more litigation to define what is and is not a delegation provision.

Keeping with the theme here, if those were the whacks, what kinds of moles popped up in 2011?  The most interesting fell into these three categories:

  • Protecting Nursing Home Residents.   This year,  West Virginia declared that arbitration agreements executed as part of standard admission packets for nursing home residents are unenforceable, and Florida refused to enforce any arbitration agreement against nursing home residents that curtails their statutory rights .  (A petition for cert has been filed in the West Virginia case, but the Supreme Court has not taken any action on it.)  If the Supreme Court does not intervene, watch for this trend to continue in other state courts, with exceptions made for particularly vulnerable categories of litigants.
  • Finding Legislative Overrides.  Another trend this year was for courts to find that that Congress intended particular federal statutes (enacted or amended after the FAA) to trump the FAA and require disputes be venued in court.  That happened at least twice this year, with the Magnuson-Moss Warranty Act and the Carmack Amendment.  The Supreme Court will either breathe additional life into that type of argument (and encourage Members of Congress who dislike the Supreme Court’s interpretations of the FAA to add similar language in new legislation) with its forthcoming decision in CompuCredit v. Greenwood or suck the life right out of those legislative preclusion arguments by setting an impossibly high standard for how clearly the statute must indicate that it is intended to nullify arbitration agreements.
  • Scope is the New Validity.  There are two broad arguments to make about an arbitration agreement — whether it is a valid agreement and whether the dispute at issue is within the scope of that agreement.  Many of the decisions from the U.S. Supreme Court in recent years have related to the validity of arbitration agreements, and since those have made it increasingly difficult to have a court address the enforceability of arbitration, litigators have begun to focus their arguments on the scope of arbitration agreements.  And some of those arguments have been successful.  For example, the Second Circuit found that the term “customer” — a person or company who can be compelled to arbitrate under FINRA rules — is not broad enough to include an entity with whom the FINRA member lacked any written or oral contract, when there were not enough other facts suggesting a business relationship.  Wachovia Bank, Nat’l Assoc. v. VCG Special Opportunities Master Fund, Ltd., 661 F.3d 164, 172-74 (2d Cir. 2011).   Furthermore, the Eleventh Circuit found that an employee’s civil sexual assault claims were outside the scope of the arbitration agreement in her employment contract.   Parties who want to evade arbitration are likely to continue making creative arguments about why their dispute is outside the scope of their arbitration agreement in the coming year.

The Arbitration Nation award for the best “mole” of 2011, though, goes to the California courts, who have found creative ways around the Concepcion decision, including finding that it does not apply to suits under California’s Private Attorney General Act, see Brown v. Ralph’s Grocery Co., 197 Cal. App. 4th 489, (Cal. Ct. App. 2011) , and have suggested that Rent-A-Center may not apply in state courts at all, see Chin v. Advanced Fresh Concepts Franchise Corp.,  194 Cal. App. 4th 704, 708-09 (Cal. Ct. App. 2011).

Honorable mention in this category goes to Herron v. Century BMW, 2011 WL 6347845 (S.C. Dec. 19, 2011).   In 2010, the Supreme Court of South Carolina held that as a matter of state public policy, any arbitration agreements prohibiting motor vehicle consumers from bringing class action suits was unenforceable (the decision found the arbitration agreement at issue, which was fairly consumer-friendly, was not unconscionable).  The U.S. Supreme Court then vacated the decision and instructed the South Carolina court to reconsider its decision in light of Concepcion.   Just this month, the Supreme Court of South Carolina refused to reconsider its decision, finding that the question of whether the FAA preempted state public policy was not raised in the trial court or appellate courts of South Carolina:

Because the matter of preemption was not raised to and ruled upon in any of the South Carolina proceedings, we find the issue of preemption is procedurally barred as [a] matter of state law and further consideration in light of AT&T Mobility, LLC v. Concepcion is unwarranted.  We reinstate our original opinion and decline to revisit it.

Id.  I am pretty confident the U.S. Supreme Court was aware that Concepcion had not been decided when Herron was briefed, and therefore no parties had raised the preemption arguments implicated by Concepcion.  I am also pretty confident that the U.S. Supreme Court, in vacating Herron, did not mean to say “reconsider this case in light of Concepcion, if and only if you like the legal result of that reconsideration and/or you can find no legal basis not to do so.”

Happy New Year!

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The Supreme Court of Texas issued three decisions last week that all relate to arbitrator selection and offer reminders to drafters and litigators that arbitrator selection is a critical component of arbitration agreements.

Two of the decisions involved tort claims against the same defendant, a cemetery owner.  In re Serv. Corp. Int’l, ___ S.W.3d ___, 2011 WL 6276124 (Tex. Dec. 16, 2011); In re Serv. Corp. Int’l, ___ S.W.3d ___, 2011 WL 6276126 (Tex. Dec. 16, 2011).  The arbitration provisions within the cemetery owner’s contracts called for the parties to choose an arbitrator by agreement, but if that was not possible, the American Arbitration Association was authorized to select the arbitrator. 

In one of the cases, it took several months for the parties to agree on an arbitrator, and that individual was then disqualified based on his previous representation of the defendant.   About a month after the disqualification, the trial court concluded that the parties were unable to agree on an arbitrator and appointed an arbitrator of the court’s choosing.  The Supreme Court of Texas issued a writ of mandamus, directing the trial court to vacate its appointment of the arbitrator.   The court analyzed Section 5 of the Federal Arbitration Act, which governs how and when courts may intercede in arbitrator selection.  Section 5 provides that the selection provisions in the contract “shall be followed,” but if the parties “fail to avail” themselves of such a method or if there is a “lapse” in the naming of an arbitrator, the court may appoint the arbitrator. 

Though the Texas court noted that previous cases have found a five month “lapse” in arbitrator selection was sufficient to allow the trial court to step in, it held that an impasse of “at most one month” did not constitute a “lapse” within the meaning of Section 5.  (In the second cemetery case, the Texas court also issued a writ of mandamus, directing the trial court to vacate its order appointing an arbitrator, when there had been a two-month delay in the selection of an arbitrator.  Would three months be enough?  Or four?  Those are questions for another day…)

Texas’ third arbitrator selection case from December 16 relates to whether a party-appointed arbitrator must meet the regular standards of the AAA, or only the requirements of the contract.  Americo Life, Inc. v. Myer, __ S.W.3d __, 2011 WL 6276529 (Tex. Dec. 16, 2011).  In the Americo case, the contract provided that the arbitration would be decided by a panel of three arbitrators: each party would appoint an arbitrator who is a “knowledgeable, independent businessperson or prrofessional” (does that really cut down the list of possibilities??); and those two arbitrators would select the third arbitrator.  The contract also incorporated the commercial arbitration rules of the AAA, which provide that arbitrators shall be “impartial and independent.”  Americo’s chosen arbitrator ended up being removed by the AAA for lack of impartiality.  After Americo lost the arbitration (unanimously), it moved to vacate the award, arguing that the arbitration panel was not formed according to the parties’ contract.  Americo argued that the party-appointed arbitrators only had to be “knowledgeable, independent business[people]” and did not have to meet the impartiality standards of the AAA.   The Supreme Court of Texas did not address the merits of that dispute, however, and just clarified that Americo had properly preserved that issue for appeal.  (We will post the substantive result when it is available.)

These three cases illustrate that if the parties are going to insert an arbitrator selection process in the contract that varies at all from the “standard” arbitration rules they are incorporating, it is worth the time to clarify any potential inconsistencies between those two processes.  It also shows that if there are alternative processes offered (like first trying to mutually agree, and then going to the AAA), it may be worth spelling out how to determine when the first process has failed and how the parties must move to the second option.

 

 

Do you remember the moment when you first encountered the concept of arbitrating arbitrability?  Just the phrase is mind-bending!  It took me a while to wrap my head around the idea that parties could separately agree to arbitrate the question of whether they really had to arbitrate.   Well, here’s a similar mind-bender: how does state law regarding severability clauses intersect with the federal doctrine of severability?  This is an issue that courts (like the Florida courts in the previous post) are increasingly having to address.  (I am using “severability clause” to refer to a contractual provision stating that if any clause(s) are  found invalid, the invalid clauses should be severed and the remainder of the agreement enforced.)

44 years ago, the Court declared that arbitration provisions are severable from contracts that contain them and the enforceability of the arbitration agreement must be considered separately.  See Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 402-03 (1967); see also Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 445-46 (2006) (“[A]as a matter of substantive federal arbitration law, an arbitration provision is severable from the remainder of the contract.”)  What none of the Supreme Court cases has yet had to address is what happens if there is a severability clause in the very arbitration agreement itself and one of the parties argues that an aspect of the arbitration agreement is unenforceable. 

Like the Shotts and Gessa cases from the Florida Supreme Court, most courts will consider state law arguments that an invalid clause or provision within a larger arbitration agreement may be severed if there is a severability clause within the arbitration agreement.   See Jackson v. Cintas Corp., 425 F.3d 1313, 1317 (11th Cir. 2005) (using a severability clause within the arbitration agreement to sever the illegal provision within the arbitration agreement);  Anders v. Hometown Mortgage Services, Inc., 346 F.3d 1024, 1032 (11th Cir.2003)(finding objectionable provisions of arbitration agreement severable based on severability language within arbitration agreement); Brady v. Williams Capital Group, 64 A.D.3d 127, 137-38 (N.Y. App. Div. 2009)(excising the unconscionable fee language from the parties’ arbitration agreement based on severability clause in arbitration agreement).

This is an important drafting point.  If the drafting party wants an ironclad arbitration agreement,  it may want to insert a severability clause that is specific to that arbitration agreement (or specific to the paragraphs of the contract that form the arbitration agreement).

The Supreme Court of Florida has moxie.  It issued two new decisions the day before Thanksgiving which go out of their way to sidestep and distinguish the U.S. Supreme Court’s decision in Rent-A-Center, West v. Jackson, 130 S. Ct. 2772 (2010), in order to find that nursing home residents may not be compelled to arbitrate under an arbitration agreement that undermines their statutory rights.  Shotts v. OP Winter Haven, Inc., __ So. 3d __, 2011 WL 5864830 (Fla. Nov. 23, 2011); Gessa v. Manor Care of Fla., Inc., __ So. 3d. __, 2011 WL 5864823 (Fla. Nov. 23, 2011).  Florida’s current action feels especially bold as it comes just five years after the U.S. Supreme Court reversed a different attempt by the Florida Supreme Court to distinguish federal arbitration precedent.  See Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006) (reversing the Florida Supreme Court and holding that, pursuant to Prima Paint, arguments about a contract’s legality may only be heard by courts if they are specifically directed at the parties’ arbitration agreement).

The new cases, Shotts and Gessa, both involve negligence claims against nursing homes.  In both, the nursing homes moved to compel arbitration of the claims based on stand-alone arbitration contracts, signed along with many other agreements at the time the nursing home residents entered the facilities.  In each contract, the nursing home’s liability was limited — either by precluding punitive damages or also limiting “noneconomic damages” to $250,000.  Because Florida’s Nursing Home Resident’s Rights Act provides for punitive damages and contains no cap on pain and suffering damages, the Florida Supreme Court found the limitations of liability in the arbitration contracts “undermine specific statutory remedies created by the Legislature” and are unenforceable.  In doing so, Florida followed West Virginia’s lead in curtailing the enforcement of arbitration agreements in nursing home agreements.

That substantive conclusion is less surprising than the fact that the Florida Supreme Court found it could address the enforceability of the arbitration contract at all.  Just last year, the U.S. Supreme Court looked at a stand-alone arbitration contract in the Rent-A-Center case, and found that attacks to that arbitration contract as a whole must be heard by an arbitrator.  The Supreme Court found there were multiple agreements to arbitrate different issues within the single arbitration contract and that Rent-A-Center was only trying to enforce one of those multiple agreements (the one that held the arbitrator would decide any dispute about the validity of the arbitration contract — called the “delegation provision”).   Because there was no allegation that the delegation provision was invalid, the Supreme Court enforced that delegation provision and sent all the remaining complaints about the unconscionability of the arbitration contract to the arbitrator.  Rent-A-Center, West v. Jackson, 130 S. Ct. 2772, 2779 (2010)

Shotts and Gessa limit Rent-A-Center’s application to arbitration agreements containing delegation provisions.  Furthermore, the decisions conclude that the stand-alone arbitration contracts in Shotts and Gessa constitute single arbitration agreements, while Rent-A-Center involved multiple arbitration agreements within one arbitration contract.  Shotts at *22.  With that analytical move, the Florida court was able to consider the nursing home residents’ complaints levied at the arbitration contract as a whole — “it is for the court, not the arbitrator, to decide whether an arbitration agreement violates public policy.”  Shotts at *7.

A third interesting piece of the Shotts decision is that the arbitration contract had a “severability clause” within it.  (“In the event that any portion of this Agreement will be determined to be invalid or unenforceable, the remainder of this agreement will be deemed to continue to be binding.”)  Despite that language, the Florida Supreme Court refused to sever the aspects of the agreement that it found violate Florida’s public policy.  The court applied Florida state contract law on severability and concluded that one of the unenforceable parts of the provision (the application of American Health Lawyers Association rules) “goes to the very essence of the agreement,” and therefore could not be severed.

These decisions are interesting because they continue the recent trend of courts carving particular types of cases out of arbitration (like complaints about care by nursing homes) and because they continue the trend of limiting the Rent-A-Center decision to arbitration contracts with clear delegation provisions.  Stay tuned to see if the Supreme Court grants cert in either of these cases.