In a first indication of the Trump Administration’s stance on consumer arbitration, the Centers for Medicare & Medicaid Services (CMS) this week issued a new proposed rule that rolls back the Obama Administration’s regulation, which precluded pre-dispute arbitration agreements in nursing homes. (Too many negatives in that sentence… in other words, the Trump Administration wants to ensure that nursing homes can have arbitration agreements in their admission documents.) For context, CMS just issued the regulation it is now retracting in October of 2016. The 2016 rule applied to any new agreements between residents and long-term care facilities that receive dollars through Medicare or Medicaid, and prohibited the centers from requiring residents to sign arbitration agreements as a condition of admission. Before the 2016 rule could even take effect, though, its legality was challenged and a federal court stayed implementation of the new regulation during the case. Seven months and a new president later, the agency is changing course. Why? The announcement suggests it is for three reasons. First, because a federal court found merit to the challenges to the rule. Second, because President Trump’s January 30, 2017 Executive Order “Reducing Regulation and Controlling Regulatory Costs” encouraged all agencies to repeal two existing regulations for every new regulation. And finally, “[u]pon reconsideration, we believe that arbitration agreements are, in fact, advantageous to both providers and beneficiaries because they allow for the expeditious resolution of claims without the costs and expense of litigation.” Those second and third points could support the roll back of most, if not all, of the Obama Administration’s regulations relating to arbitration. The new proposed CMS rule offers an olive branch to those who lobbied for the 2016 rule. It proposes to require that arbitration agreements be written in plain language, explained clearly to prospective residents of long term care facilities, and that the resident acknowledge his/her understanding. The new rule also prohibits any language that would discourage a resident from contacting governmental authorities, and requires facilities to keep copies of arbitration awards for five years (suggesting CMS may request inspection). The announcement summarizes that the new rule “would . . . strengthen requirements regarding the transparency of arbitration agreements in LTC facilities. This proposal would support the resident’s right to make informed choices about important aspects of his or her health care. In addition, this proposal is consistent with our approach to eliminating unnecessary burden on providers.” If you are curious how other arbitration rules proposed or passed during the Obama Administration have fared so far, Bloomberg BNA has done a great summary of where things stand. (Short answer: most are on hold.) **Many thanks to Mark Kantor for alerting me to this development.
The Federal Arbitration Act has been in effect for nearly 100 years (92, to be precise). Nevertheless, the First Circuit found two issues of first impression to address this month. In Oliveira v. New Prime, Inc., 2017 WL 1963461 (1st Cir. May 12, 2017), the court refused to compel arbitration of a class action complaint, because it interpreted Section One of the FAA to exempt contracts for independent transportation contractors.
Mr. Oliveira brought a putative class action suit against the interstate trucking company for which he worked–Prime–for violating the Fair Labor Standards Act, Missouri minimum wage statute, and other labor laws. Prime moved to compel arbitration under the FAA. In response, Plaintiffs argued that the FAA had no application to their contracts because they are transportation workers. Prime argued that that issue–the applicability of the FAA–should be decided by an arbitrator. Furthermore, it argued that the FAA does not exempt independent contractors and these workers had been classified as independent contractors. The district court agreed it must decide the threshold question, but then ordered discovery on the question of whether the named plaintiff was an independent contractor.
On appeal, the First Circuit decided to tackle both the tough legal issues head on, and not wait to see if discovery mooted either of them.
First, it analyzed whether an arbitrator or a court should decide whether the FAA applies to a plaintiff’s contract. It noted that the 8th Circuit had concluded an arbitrator should decide, while the 9th Circuit had concluded a court should decide. Finding the 9th Circuit’s analysis more persuasive, it held that “the question of whether the [Section] 1 exemption applies is an antecedent determination that must be made by the district court before arbitration can be compelled under the FAA.”
Second, it interpreted the language in Section 1 in order to answer the question of whether the exemption “extends to transportation-worker agreements that establish or purport to establish independent-contractor relationships.” (Recall that the truckers were arguing they were exempt from the FAA, whether they were independent contractors or not.) The FAA says it does not apply to “contracts of …any other class of workers engaged in foreign or interstate commerce,” and the Supreme Court interpreted that language in 2001 to mean that “contracts of employment of transportation workers” are exempted from the FAA. After noting that multiple courts have found the exemption does not extend to independent contractor relationships, the First Circuit brushed that aside with this gem: “Interpreting a federal statute is not simply a numbers game.”
Instead of playing a numbers game, the First Circuit played a “pull out the antique dictionary” game. It looked at definitions of contracts of employment from 1925, when the FAA was enacted, and concluded the phrase means any agreement to perform work, and is broad enough to include independent contracting. Therefore, because Prime had conceded Mr. Oliveira was a transportation worker, “the contract in this case is excluded from the FAA’s reach.”
However, the court inserted a footnote allowing that a state arbitration act may provide a basis to compel arbitration in a future scenario like this one. . . which raises interesting preemption issues.
Just as I predicted, SCOTUS reversed the Kentucky Supreme Court’s decision in Kindred this morning. The interesting piece, though, is that the seven member majority went out of its way to cut off some of the “on trend” methods that state courts have been using to avoid arbitration clauses.
The Kentucky decision can be summarized easily. The case involved nursing homes attempting to compel arbitration of wrongful death and personal injury claims by estates of deceased residents. In each case, a relative with power of attorney had signed an admission document that included arbitration when the resident entered the nursing home. However, the Kentucky court refused to infer the agent’s “authority to waive his principal’s constitutional right to access the courts and to trial by jury” unless that power is “unambiguously expressed” in the power-of -attorney document. (You may recall this is the decision that analogized entering into an arbitration agreement to: putting a child up for adoption, aborting a pregnancy, and entering into personal servitude. If that doesn’t cry out “judicial hostility to arbitration,” I don’t know what does.)
Justice Kagan, writing for the seven-member majority, found Kentucky’s “clear statement rule” preempted by the Federal Arbitration Act. “[T]he court did exactly what Concepcion barred: adopt a legal rule hinging on the primary characteristic of an arbitration agreement–namely, a waiver of the right to go to court and receive a jury trial.” In response to Kentucky’s attempt to paint its rule as broader than arbitration, the Court said “No Kentucky court, so far as we know, has ever before demanded that a power of attorney explicitly confer authority to enter into contracts implicating constitutional guarantees.”
That preemption aspect of the decision seems to confirm what I have been saying about the impact of DirecTV: states are in much better position to defend their anti-arbitration “general contract rule” if they can point to at least one non-arbitration circumstance in which it has been applied. (The decision added a footnote to clarify this isn’t an absolute necessity: “We do not suggest that a state court is precluded from announcing a new, generally applicable rule of law in an arbitration case.” But that’s like saying it is conceivable that your mother will appreciate a new vacuum for mothers day, but we don’t recommend it.)
The Court’s decision to clearly state that courts cannot invalidate arbitration agreements based on their (necessary) waiver of the right to a jury trial also cuts off a trendy argument in state courts. New Jersey courts, for example, have invalidated arbitration agreements in recent years based on their failure to clearly advise consumers they are waiving their rights to jury trials (SCOTUS denied cert in the key NJ case, Atalese.) Those NJ decisions are now shaky precedent, IMHO.
The decision then went beyond the basic preemption analysis. Respondents had argued the FAA had no application to contract formation, that only state law controlled that question. SCOTUS quickly disabused the respondents, and all state courts, of that notion, reasoning that the purpose of the FAA would be completely undercut by the rule: “If the respondents were right, States could just as easily declare everyone incompetent to sign arbitration agreements. (That rule too would address only formation.)” In doing so, the Court cut off another avenue for avoiding the FAA. (In my view, though, the slippery slope argument relied on by SCOTUS also cuts against the formation/validity distinction used to separate which issues are decided in court and which by arbitrators.)
[As usual, Justice Thomas dissented based on his position that the FAA does not apply in state courts.]
It is not uncommon for lenders to exempt small claims actions from their arbitration provisions. The question confronted by the Court of Appeals of Maryland in a recent case was: when a lender opts for small claims court, does that waive any later right to enforce the arbitration clause? The court’s answer was yes, if the claims are related.
In Cain v. Midland Funding, LLC, __ A.3d__, 2017 WL 1101804 (Md. Mar. 24, 2017), the lender pursued its collection action against the credit card holder in small claims court in 2009. It obtained a default judgment for $4,520. In 2013, that same credit card holder filed a class action complaint against the lender, arguing the lender had been an unlicensed collection agency. The lender moved to compel arbitration. The trial court compelled arbitration, finding the lender had not waived its right to arbitrate by bringing the 2009 case, and the intermediate appellate court agreed.
A five-member majority of Maryland’s highest court applied a de novo standard of review and reversed on the issue of waiver (two judges dissented). It applied Maryland case law that holds participating in a judicial proceeding only constitutes a waiver of the right to arbitrate issues raised in that proceeding, but not “unrelated issues.” Therefore, the court looked at whether the lender could have arbitrated its collection action, and if so, whether that was related to the licensing issue raised in 2013.
The arbitration agreement at issue states that “claims filed in a small claims court are not subject to arbitration, so long as the matter remains in such court and advances only an individual. . . Claim.” The court found that language, along with the broad language that “all Claims . . . are subject to arbitration,” gave the lender the choice to litigate or arbitrate the collection issue.
The court also found the 2009 and 2013 claims were sufficiently related to apply the waiver doctrine. “Put simply, if Midland had not pursued its 2009 collection action, Cain’s current claims would not exist.” The majority noted that 2016 cases from both Nevada and Utah had reached similar conclusions. Finally, the court refused to require a showing of prejudice: “Cain does not have to demonstrate that he will suffer prejudice if the arbitration clause is enforced.”
This issue is an important one for lending institutions. If the small claims court option is generally efficient, it may be worthwhile adding a clause to those arbitration provisions that pursuit of a claim in small claims court does not waive the right to raise arbitration as a defense in any later action.
Maryland did not make my list of 5 states most hostile to arbitration last summer (and still wouldn’t). BUT, some of the states on that list have recently issued surprisingly pro arbitration decisions. Check these out:
- WEST VIRGINIA recently reversed a lower court’s refusal to enforce arbitration. It found the employee had failed to show the arbitration provision was unconscionable. It wasn’t all sunshine and arbitration butterflies, though. One justice wrote a concurring opinion asking Congress to take action. “We can only hope that…Congress will implement better safeguards to the FAA to ensure that the legal rights of unsophisticated employees are protected.” Employee Resource Group, LLC v. Harless, 2017 WL 1371287 (W.Va. April 13, 2017).
- WEST VIRGINIA also enforced an arbitration clause waiving class actions in Citizens Telecommunications Co. v. Sheridan, 2017 WL 1457006 (W.Va April 20, 2017). In that case, the class action waiver had been added via notice to all consumers pursuant to a modification clause in the original terms of the agreement. Because the new terms and conditions were distributed with a paper billing statement and “accepted” via continued use of the internet service, the court found they were a valid unilateral contract, just like an employee handbook. Therefore, the court enforced individual arbitration of the claims.
- HAWAII confirmed an arbitration award in RT Import v. Torres, 2017 WL 1366999 (Ha. April 13, 2017), although reversed the trial court’s award of additional costs above the award. The court did get a jab in at arbitration in a footnote, though. It noted that the arbitrator awarded damages for emotional distress to a corporation. After commenting that there is no legal authority allowing such damages, the opinion states: “parties who submit their claims to binding arbitration assume all the hazards of the arbitration process, including the risk that the arbitrator may make mistakes in the application of law and in their findings of fact.”
- ALABAMA found the arbitration agreement between a family and a funeral home was not unconscionable in Newell v. SCI Alabama Funeral Services, LLC, 2017 WL 1034469 (March 17, 2017).
I really should have titled this post “State Court Smorgasbord”…
Demonstrating just how difficult it can be to separate questions about the “formation” of an arbitration agreement from the “validity” of that agreement, the Fifth Circuit found this month that when an argument was applied to two of the parties’ three agreements, it related to their formation, but when the same argument was applied to the third agreement, it related to its validity.
In Lefoldt v. Horne, 2017 WL 1326241 (5th Cir. April 11, 2017), the plaintiff, a community hospital, had engaged the defendant to provide auditing services. The parties signed contracts in 2009, 2010, and 2012. However, only the 2009 agreement was reflected in the minutes of the hospital’s board. In 2014, the hospital filed for bankruptcy, and its trustee sued the auditor for professional malpractice. In response, the auditor moved to compel arbitration, based on arbitration provisions in all three contracts.
In order to determine whether the dispute was arbitrable, the Fifth Circuit had to confront two confounding rules. First was Mississippi’s “minutes rule,” which the hospital raised as a defense to arbitrability. The “minutes rule” appears to require that a public board reflect actions taken in the minutes of its meetings, and, if an agreement to contract is not reflected in those minutes, the contract is not enforceable. The second issue the Fifth Circuit had to address was the first footnote in SCOTUS’s Buckeye Check Cashing decision, which distinguished disputes over a contract’s validity from those over “whether any agreement between the alleged obligor and oblige was ever concluded.” That matters because issues of validity can be sent to an arbitrator, which those over formation generally cannot.
The court found the issue of whether Mississippi’s “minutes rule” was one about formation or validity “a close question.” However, it concluded that the minutes rule raised an issue of the very formation of the 2010 and 2012 service contracts. That decision allowed the court to decide whether those contracts were formed, and it found they were not validly formed, so the trustee did not have to arbitrate issues under those two contracts.
However, the court found that because the hospital board recorded the auditing contract in its 2009 minutes, the application of the “minutes rule” in that instance involved the validity of the 2009 contract. The court found an arbitrator should decide “whether and how the minutes rule applies to the 2009 engagement letter and the scope of the arbitration clause,” unless the district court finds a delegation clause on remand.
This case is a great example of how the current arbitration jurisprudence may have gotten off course. Should it be this difficult for a court to decide whether a particular argument should be heard by a court or an arbitrator? See my post from five years ago (has it really been that long?!) on the thin line between formation and validity.
One of the few “get out of arbitration free” cards that SCOTUS offers litigants is this: find another federal statute that clearly entitles plaintiff(s) to a court trial. In a recent 8th Circuit case, that court carefully considered, and then rejected, the argument that the Age Discrimination in Employment Act (ADEA) constituted that type of “get out of arbitration free” statute.
The claims in McLeod v. General Mills, Inc., 2017 WL 1363797 (8th Cir. Apr. 14, 2017), stem from a 2012 reduction in force at General Mills. In exchange for severance packages, terminated employees released the company from claims relating to their termination, and agreed to individual arbitration of future disputes. In McLeod, 33 of those employees sued the company alleging violations of the ADEA. In response, the company moved to compel arbitration on an individual basis.
The Chief Judge of the District of Minnesota denied General Mills’ motion. He found that the plain language of the statute at issue “requires General Mills to defend the validity of the plaintiffs’ release agreements in court, not in an arbitral forum.” The statute reads: “any dispute that may arise over whether any of the requirements, conditions, and circumstances set forth in [Section 626(f)(1) ] have been met, the party asserting the validity of a waiver shall have the burden of proving in a court of competent jurisdiction that a waiver was knowing and voluntary.” 29 U.S.C. § 626(f)(3) (emphasis added).
On appeal, the Eighth Circuit reversed. It found that the statute relied upon by the district court was not applicable, because General Mills was not asserting the validity of a waiver within the meaning of that statute. Furthermore, the Eighth Circuit concluded that the ADEA does not grant employees the substantive right to a jury trial or to a class action, but only provides procedural rights that can be waived.
**Yikes – three weeks since my last post. Where was I? In arbitration of course!
Now that Justice Gorsuch is confirmed and can take the open seat on the Supreme Court, maybe SCOTUS can move forward on the cases about whether employers can make employees waive their right to class actions in an arbitration agreement. (Btw, here’s a nice SCOTUSblog piece on Gorsuch’s arbitration decisions.) In the meantime, California’s high court has decided a similar arbitration issue that seems likely to be the subject of a future cert petition. In McGill v. Citibank, issued April 6, a unanimous California Supreme Court held that consumers cannot validly waive their statutory right to injunctive relief under California law, and found that the FAA did not preempt that result.
The case involves a woman who purchased a “credit protector” plan from the credit card issuer. She felt the credit card did not keep its end of the bargain when she lost her job. Although she had agreed to arbitrate claims and had waived representative or class actions, she started a putative class action in California state court alleging violations of multiple California consumer statutes. Part of the relief she sought was an injunction preventing the credit card from continuing to violate California statutes. (The parties agreed that the arbitration waiver prohibited the consumer from obtaining injunctive relief in any forum, not just arbitration.)
Each of the statutes at issue in her lawsuit was intended to protect consumers and each authorized injunctive relief. One of the statutes also explicitly prohibited waiver of the statutory protections. The Consumers Legal Remedies Act (CLRA), for example, declares that “[a]ny waiver by a consumer” of the CLRA’s provisions “is contrary to public policy and shall be unenforceable and void.”
California has codified the following contractual defense: “Any one may waive the advantage of a law intended solely for his benefit. But a law established for a public reason cannot be contravened by a private agreement.” (Civil Code Section 3513.) Applying that doctrine in this case, California’s high court found the waiver of public injunctive relief in the arbitration agreement invalid, as it “would seriously compromise the public purposes the statutes were intended to serve.”
Now comes the tricky part of every state court opinion in this area. Having found the arbitration agreement invalid under state law, how will the court clear the hurdles of the FAA and Concepcion/DirecTV? The McGill opinion took the standard path: it reasoned that because the contractual defense at issue applies to every contract, this decision withstands FAA scrutiny. (It did not, however, cite any cases in which this defense has been applied outside the arbitration context, which I believe is the unstated requirement of DirecTV.)
Furthermore, the court found reasons to distinguish the banning of class action waivers (prohibited in Concepcion) from the banning of public injunction waivers (at issue here). For example, it noted class actions are a procedural device, while injunctions are substantive remedies. It also found that its ruling would not interfere with the fundamental arbitration-ness of arbitration, because the injunctive relief cases will stay in court and can be heard once individual arbitrations are concluded.
Finally, the California high court remanded to the lower court to decide whether the rest of the arbitration clause should be thrown out with the bath water. (There was conflicting language in the agreement.)
Ah, just when I worried California arbitration decisions were becoming too staid and dull…
In the past week, the Third Circuit has issued two important decisions on the formation of arbitration agreements. (Sing it Beyoncé! “Okay ladies, now let’s get in formation.”) In one, a class action was allowed to proceed in court because the defendant did not obtain explicit enough agreement to the arbitration, and in another an arbitration award was initially vacated due to questions about whether there had been an arbitration agreement at all.
In Aliments Krispy Kernels, Inc. v. Nichols Farms, __ F.3d __, 2017 WL 1055569 (3d Cir. Mar. 21, 2017), Aliments was attempting to confirm an arbitration award it received, and Nichols Farms was trying to vacate that award. Aliments and Nichols had exchanged some sales confirmations to purchase pistachios, none of which were signed. However, Nichols ended up refusing to deliver the pistachios without advance payment, based on Aliments’ credit application. Aliments bought elsewhere, and then sought to recoup the extra cost from Nichols at arbitration (in which Nichols refused to participate). In the action to confirm or vacate the award, the district court allowed months of discovery and then vacated the award, finding no genuine issue of fact on that issue. On appeal, the Third Circuit vacated and remanded for further proceedings. In the course of its decision, the Third Circuit noted that its previous expressed standard — that there must be express and unequivocal agreement to an arbitration contract — is outdated and that nothing more than relevant state law on contract formation is required.
The New Jersey Supreme Court refused to allow a respondent to benefit from its refusal to pay arbitration fees in Roach v. BM Motoring, LLC, 2017 WL 931430 (NJ March 9, 2017).
First, Ms. Jackson filed a demand for arbitration against a New Jersey car dealership with the AAA. The parties’ arbitration agreement required the dealership to “advance both party’s [sic] filing, service, administration, arbitrator, hearing or other fees, subject to reimbursement by decision of the arbitrator.” Nevertheless, the dealership refused to pay any filing fees or even respond to the claim and the AAA dismissed the case for non-payment. (Sing it: “Sorry Ms. Jackson, I am for real…”) Another buyer, Ms. Roach, also had her claim dismissed due to the dealership’s failure to comply with the AAA rules.
Ms. Jackson and Ms. Roach then filed a putative class action in New Jersey state court. The dealership had the nerve to move for dismissal, due to the arbitration clause. The trial court granted the dealership’s motion, and the high court reversed.
The NJ Supreme Court had no patience for the dealership’s arguments. It first disposed of the dealership’s argument that the consumers were wrong to take their arbitration demand to the AAA. The agreement provided that “arbitration shall be conducted in accordance with the rules of the” AAA. The court noted that Rule R-2 of the AAA’s Commercial Rules provides that parties who agree to use the AAA rules also consent to AAA administration, and the plaintiff’s choice of forum is granted deference.
Second, the court found the dealership materially breached the arbitration agreement by failing to pay AAA fees and respond to the arbitration demands, and as a result, the dealership could no longer compel arbitration. Otherwise “the result would be a ‘perverse incentive scheme’–a company could ignore an arbitration demand, and if the claimant did not abandon the claim, later compel arbitration.” (internal quotes from a Ninth Circuit decision on the topic).
What’s the lesson? As my contracts professor liked to say: “Don’t try to game it.”
As long as we’re on the subject of state courts, I will share that Georgia’s high court enforced an arbitration agreement in the context of an allegation of wrongful death at a nursing home. United Health Services of Georgia, Inc. v. Norton, 2017 WL 875035 (Ga. March 6, 2017). That’s not the direction that many state courts have taken recently.
Two federal circuit courts of appeals have recently found that documents Samsung included in boxes with consumer products did not effectively create an arbitration agreement. In both cases, the documents had titles indicating they related to safety and warranty information, and therefore were ruled insufficient to put consumers on notice of any obligation to arbitrate.
In Noble v. Samsung Electronics America, Inc., 2017 WL 838269 (3d Cir. March 3, 2017), the putative class action complained that the battery life of the Samsung Galaxy Gear S Smartwatch was significantly less than advertised. In response, Samsung moved to compel individual arbitration with the class representative and to dismiss the class action. Samsung relied on an arbitration clause, including a class waiver, contained on pages 97-102 of a “Health and Safety and Warranty Guide” that was packaged in the box with the watch. The district court denied the motion to compel and the Third Circuit affirmed. Critically, the appellate court found that under New Jersey state law, there had been no meeting of the minds with respect to arbitration, because the Warranty Guide “did not appear to be a bilateral contract, and the terms were buried in a manner that gave no hint to a consumer that an arbitration provision was within.” The court distinguished this case from enforceable shrink-wrap or click-wrap agreements by saying those agreements clearly inform consumers that they contain contractual terms.
Just a few weeks earlier, the Ninth Circuit had reached a similar result with regard to Samsung’s ability to compel arbitration of class claims about its phones. In Norcia v. Samsung Telecommunications America, LLC, 2017 WL 218027 (9th Cir. Jan. 19, 2017), the putative class complained of misrepresentations regarding the Galaxy S4 phone. Samsung moved to compel arbitration. The district court denied the motion, and the Ninth Circuit affirmed. Mr. Norcia’s receipt from the Verizon Wireless store stated “I am agreeing to …settlement of disputes by arbitration and other means instead of jury trials and other important terms in the Customer Agreement.” But the Customer Agreement only mentioned Verizon Wireless, so Samsung could not avail itself of that language. Inside the phone’s box was a 101-page brochure called “Product Safety & Warranty Information,” which included a statement that “all disputes with Samsung arising in any way from this limited warranty or the sale, condition or performance of the products shall be resolved exclusively through final and binding arbitration.”
Applying California contract law, the court found that the consumer did not express any consent to the terms in the Warranty brochure. And, while silence can in some instances be treated as consent to a contract, the court noted that is not true when the silent person did not reasonably know there was an offer on the table. The Ninth Circuit also distinguished shrink-wrap and click-wrap cases, by saying the outside of the Galaxy S4 box “did not notify the consumer that opening the box would be considered agreement to the terms” in the brochure and finding that in this instance the customers did not have “inquiry notice of the arbitration provision”.
The issue of whether arbitration clauses within warranty documents packaged with consumer products are enforceable is an issue in a petition for certiorari at SCOTUS right now. In that case, the manufacturer of roofing shingles printed its warranty on the wrapper of every bundle of shingles, and the warranty included an arbitration clause. The Missouri Court of Appeals found insufficient evidence that the consumers consented to the arbitration clause and therefore refused to enforce it. SCOTUS appears to be holding that case in abeyance while it decides the Kindred case.
What are manufacturers of consumer products to do with these cases? If the goods are sold by third parties, such that the manufacturer cannot get its arbitration terms on the receipt itself, the next best thing may be to put clear language on the outside of the box, informing consumers that if they open and keep the goods, they will be agreeing to the terms of X document. If nothing else, it sounds like these brochures and guides need to be renamed.