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 James v. Global Tellink Corp., __ F.3d __, 2017 WL 1160893 (3d Cir. Mar. 29, 2017), a putative class of New Jersey inmates sued the sole provider of inmate telecommunication services, and the Defendant moved to compel individual arbitration.  The class representative who created her account through the website and actively clicked a button accepting the terms and services was dismissed.  But, the class representatives who had created accounts by telephone were a different story.  They received an audio notice that “your account…[is] governed by the terms of use at [defendant’s website].”  The system did not require those telephone users to take any affirmative step to indicate consent to the terms.

As a result, the district court refused to compel those telephone members of the class to arbitration and the Third Circuit affirmed.  Applying New Jersey law, the court distinguished this situation from those involving on-line services, where a link is easily accessible to terms, and from shrinkwrap cases, where consumer received physical copies of the terms when they open the product. It suggested the telephone situation may be closer to “browsewrap” agreements that do not require a manifestation of express consent, and which courts have refused to enforce if the terms are obscured.  In sum, the court said the telephone users “neither received GTL’s terms of use, nor were they informed that merely using GTL’s telephone service would constitute assent to those terms” and therefore there was no arbitration agreement to enforce.

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.

While the Supreme Court has put off hearing a more contentious arbitration case until the fall (presumably in hopes that it will have nine justices by then), tomorrow it will hear the nursing home arbitration case from Kentucky.  I look forward to listening to the questions and trying to figure out why the Justices granted a review on the merits…  Instead of repeating my analysis of the Kentucky case, here are some recent state court arbitration cases of interest (in addition to the three I posted about a few weeks ago).

West Virginia.  Remember when West Virginia was the thorn in the FAA’s side?  When it was the leader of the pack of anti-arbitration states?  Well, not in West Virginia CVS Pharmacy v. McDowell Pharmacy, Inc., 2017 WL 562826 (W. Va. Feb. 9, 2017).   The lower court had refused to compel arbitration of disputes between retail pharmacies and a pharmacy benefit management company.  Applying West Virginia law, the lower court found there was no arbitration agreement, because the parties did not validly incorporate the manual that contained the arbitration provision.   The West Virginia Supreme Court, however, applied Arizona law, as provided in the contract, and that made all the difference.  It found the arbitration agreements were adequately incorporated, and that their reference to AAA rules was sufficient to delegate questions of arbitrability to the arbitrator.  No cert likely here.

Missouri.  The Supreme Court of Missouri took a safe bet in siding (partially) against the arbitrator in State ex rel Greitens, 2017 WL 587296 (Mo. Feb. 14, 2017), since the Supreme Court has denied cert petitions in many cases stemming from the master settlement agreement between states and tobacco companies.  (E.g., this most recent one.)  In this case, the state’s highest court found the arbitration panel exceeded its power when it deprived Missouri of its share of $50 Million in tobacco settlement payments for 2003.  The case is too complicated to explain in this post, but know that this is one of those rare examples of a court modifying an arbitration award, as opposed to just confirming or vacating it.  No cert likely here either.

Iowa.  I never get to write about Iowa (which my daughter called “why-owa” after a long road trip through farm country), but its supreme court issued a decision in late 2016 about nursing home arbitration that merits mention here.  In Roth v. Evangelical Lutheran Good Samaritan Society, 886 N.W.2d 601 (Iowa 2016), Iowa’s highest court answered a certified question from the federal district court.  In short, it found that Iowa’s statutes do not require judicial resolution of loss of consortium cases, and in this case the children of the decedent were not bound by the decedent’s arbitration clause because the “claims belong to the adult children and they never personally agreed to arbitrate.”  (Hard to make a bet on certiorari in this case, since it is headed back to federal trial court…)

Alabama.  In Hanover Ins. Co. v. Kiva Lodge Condominium Owners’ Assoc., 2016 WL 5135201 (Ala. Oct. 21, 2016), the Supreme Court of Alabama found that when the parties adopted the following addendum to their contract, the first party who filed an action was able to dictate the forum: “Notwithstanding anything in this Addendum to the contrary, either party may pursue any claim or dispute in a court of law, or through mediation and arbitration.”  That amended language was added to the parties’ A201 General Conditions, right after language indicating that “any claim arising out of or related to the Contract… may at the election of either party…be subject to arbitration.”  After the condo association brought their claims in court and requested a referral to arbitration, the defendants argued that the case should stay in court.  The trial court sent the claims to arbitration and the supreme court affirmed that result, finding “the addendum provides that once a party elects arbitration as a method for resolution of a dispute…the other party cannot neutralize that choice by insisting on litigation in court…In short, Kiva Lodge has proven the existence of a binding mandatory arbitration agreement between the parties.”  This will not end up at the Supreme Court, but it’s an important drafting lesson for all of us.

The Ninth, Sixth, and Third Circuits all recently issued decisions about whether putative class or collective actions could proceed despite the existence of arbitration clauses.  In two of those decisions, the courts found the arbitration agreements did not allow for class arbitration and therefore dismissed the claims.  In the third, the court found the arbitration agreement was not applicable to the dispute.

In Opalinski v. Robert Half Int’l, 2017 WL 395968 (3d Cir. filed Jan. 30, 2017), the Third Circuit again tackled arbitrability issues in a case that has gotten the runaround for five years (district court, then arbitrator, then district court, then appellate court, back to district court, now back to appellate court).  The case involves a collective action complaint alleging violations of the Fair Labor Standards Act.  The arbitration clause between the employees and employer provides for AAA arbitration.  In its most recent decision, the district court dismissed the action, finding the arbitration clause did not allow class arbitration.  On appeal, the Third Circuit reiterated that courts (not arbitrators) should decide whether class arbitration is available.  It found that in this case the parties’ arbitration clause does not indicate they agreed to class arbitration.  In particular, the court found the absence of any explicit mention of class arbitration was dispositive, and outweighed the fact that the parties agreed to arbitrate disputes arising under statutes that allow class litigation.

In another employment dispute, Poublon v. C.H. Robinson Co., 2017 Wl 461099 (9th Cir. Feb. 3, 2017), a class of employees asserted that the employer had misclassified them as exempt from overtime pay and asserted a Private Attorneys General Act (PAGA) claim.  The arbitration agreement provided “neither You nor the Company may bring any Claim combined with or on behalf of any other person or entity, whether on a collective, representative, or class action basis.” It ended with a severability clause, so that if any part of the arbitration agreement was invalid, the rest of it would be enforced.  The employer moved to compel arbitration and dismiss class or representative claims.  The district court found the arbitration clause was unconscionable and denied the employer’s motion.  The Ninth Circuit reversed, finding only two aspects of the arbitration clause were unconscionable/unenforceable and those could be severed, allowing the rest of the arbitration clause to be enforced.  (The two stinkers: waiver of a representative PAGA claim (see Iskanian); and a provision allowing only the employer to go to court for injunctive or equitable relief.)

While the two classes of employees above were not able to continue prosecuting claims as a group (and had to go to arbitration), a class of consumers won the right to stay in court in Stevens-Bratton v. TruGreen, Inc., 2017 WL 108032 (6th Cir. Jan. 11, 2017).  In that case the class representative had hired a lawn care company for one year.   More than six months after the service contract had been terminated, the class representative received numerous telemarketing calls from the company, even though her number was on the Do-Not-Call Registry.  She then sued for violation of the TCPA.  In response, the lawn care company moved to compel arbitration, based on its service contract with the class representative, which “expressly waive[d] any ability to maintain any Class Action.”  The district court compelled arbitration, and the 6th Circuit reversed.  Although there is usually a presumption in favor of an arbitration agreement surviving the expiration of the rest of a contract, the court was not convinced that the dispute “had its real source in the contract.”  It found that the lawn care service contract was “irrelevant to this case,” since it had completely expired before the calls took place and the lawn services provided were not at issue in the TCPA claim.

Three state supreme courts tackled arbitration law in recent weeks: Alabama, North Carolina, and Rhode Island.  Rhode Island reversed a construction arbitration award because it disagreed with the arbitrator’s analysis.  North Carolina found that an arbitration agreement in a doctor-patient setting was unenforceable as a breach of the doctor’s fiduciary duty.  And Alabama strictly enforced an arbitral venue, even though that precluded class action.

Continuing its streak of hewing closely to the lead of federal courts on arbitration, the Supreme Court of Alabama held that plaintiffs have to arbitrate with the Better Business Bureau, even though the BBB does not conduct class action arbitration proceedings.  University Toyota & University Chevrolet Buick GMC v. Hardeman, _ So. 3d __, 2017 WL 382651 (Ala. Jan. 27, 2017).  The plaintiffs were a putative class of customers harmed by two car dealerships’ decision to stop honoring their earlier agreement to provide free oil changes.  The arbitration clause between the dealerships and purchasers called for arbitration of all disputes pursuant to the FAA, and said “either party may demand arbitration by filing with the Better Business Bureau.”  When the plaintiffs filed their demand, the BBB responded that it did not conduct class arbitrations.    The plaintiffs then withdrew their demand and filed in court, asking either to keep their fight in court or go to a forum that allowed class arbitration.  The trial court sent the plaintiffs to the AAA to decide whether class actions were available.  On appeal, the supreme court reversed in a 7-1 decision.  The majority quoted heavily from SCOTUS decisions stating that arbitration agreements should be enforced according to their terms, and found that the BBB forum was an integral part of the arbitration agreement that must be given effect.  The lone dissenter argued that, because the availability of class arbitration was for the arbitrator, it should be decided by a forum that at least retains that option.

Without any consideration of the Federal Arbitration Act, the Supreme Court of Rhode Island vacated an arbitration award.  Nappa Construction Management, LLC v. Flynn, __ A.3d __, 2017 WL 281812 (R.I. Jan. 23, 2017). (Maybe an allergy to the FAA is contagious… remember nearby New Hampshire last year?)  In a dispute between the owners of a automobile repair facility and the construction company that was hired to build it, the arbitrator issued an award that analyzed the parties’ contract and found the construction company was owed money.  The trial court refused to vacate the award, finding the arbitrator grounded his analysis in the contract and did not manifestly disregard the law.  On appeal, the Supreme Court of Rhode Island cited only cases from its own court, including labor cases, and found that the arbitrator had exceeded his authority (and the award failed to draw its essence from the agreement) by finding that the owners had effectively terminated the contract, when there was no evidence that the owners actually terminated the contract.  The court also accused the award of reaching an “irrational result.”  Two justices dissented, noting the “exceptionally deferential standard of review” for arbitration awards.  They did not, however, cite to the line from Sutter, as I would have, that even “grave error” by an arbitrator is not sufficient to vacate an award if the arbitrator in fact analyzed the contract.  (Maybe no one argued the FAA applied?  A commercial construction contract would almost certainly involve interstate commerce…)

Finally, the Supreme Court of North Carolina refused to enforce the arbitration agreement between a doctor and patient, finding that the agreement “was obtained as a result of defendants’ breach of fiduciary duty that they owed to” the patient.  King v. Bryant, __ S.E.2d __, 2017 WL 382910 (N.C. Jan. 27, 2017).  The patient had brought a medical malpractice action against his surgeon, and the surgeon tried to enforce the arbitration agreement between them.  The arbitration agreement called for application of the FAA and arbitration under health care procedures of the AAA.

The N.C. trial court refused to compel arbitration, finding the agreement was only an “agreement to agree,” and started off a crazy game of appeals court-district court ping pong involving this case.  The court of appeals reversed and remanded.  On second thought, the trial court refused to enforce the agreement because the surgeon had a fiduciary duty to disclose the arbitration agreement to his patient as a material term, and because he did not it was unenforceable.  The court of appeals affirmed, noting the application of the FAA, but finding the agreement unconscionable.  The supreme court then remanded to the trial court for further findings of fact regarding the existence of a physician-patient relationship when the agreement was signed, and the trial court complied.  Finally, the case returned to the supreme court, which held that the doctor owed a fiduciary duty to the patient and breached it “by failing to make full disclosure of the nature and import of the arbitration agreement to him at or before the time that it was presented for his signature.”  Recognizing the possibility of an argument that its holding is preempted by the FAA, the court noted “we would have reached the same result on these facts with respect to any agreement that substantially affected [the patient’s] substantive legal rights.”  However, the opinion cites no N.C. cases to support that statement, which may be fatal under the DirecTV analysis.  Two justices wrote separate dissents, based largely on FAA preemption.  (“This jiggery-pokery is precisely the type of impermissble ‘rationalization’ admonished by the United States Supreme Court. Such a tortured attempt to obviate the FAA fails.”)

What is the take away here?  It is that there is still a huge amount of variation in how a given arbitration dispute will be handled, depending on what court hears the dispute.  And the preemption rules set out in Concepcion and DirecTV are either not well understood, or are being intentionally avoided.

If you are a party that wants courts to rigidly enforce delegation clauses – sending questions about even the validity of the agreement to arbitration – then you will appreciate a new decision from the Tenth Circuit. In Belnap v. Iasis Healthcare, __ F.3d __, 2017 WL 56277 (10th Cir. Jan. 5, 2017), the court refused to do even a spot check of whether defendant’s claims of arbitrability were accurate and enforced the parties’ delegation clause.

Belnap involved a surgeon suing a medical center, its parent company, four doctors on its Medical Executive Committee, and its “risk manager,” for notifying data banks that he had been suspended, but not notifying all relevant organizations when it later vacated his suspension.  The surgeon’s agreement with the medical center had a dispute resolution clause that called for first mediation and then arbitration “administered by JAMS and conducted in accordance with its” rules.  Relying on that agreement, all defendants moved to compel arbitration.  The district court found the medical center could compel arbitration of one of the seven claims, but that the other six were outside the scope of the arbitration clause.  The district court rejected the non-signatories’ attempt to compel arbitration and rejected the argument that the parties had delegated questions of scope to the arbitrator.

On appeal, the Tenth Circuit began its analysis, as it should, with the question of who should decide whether the claims are arbitrable. On that question, it found that by incorporating the JAMS Rules into the agreement, the surgeon and the medical center had shown a clear and unmistakable intent to delegate questions of arbitrability to an arbitrator.  It also took exception to the fact that “some courts have suggested that the Tenth Circuit is the only federal appellate court that has deviated from this consensus.” (The consensus being that referencing arbitral rules which delegate arbitrability to an arbitrator is clear and unmistakable agreement to alter the default rule that courts decide those issues.)  It clarified a 1998 decision that had led other courts to that conclusion, thereby appearing to mend any alleged circuit split on that issue.

After finding the arbitrator should decide arguments about scope, however, the 10th Circuit still had to address another of the surgeon’s arguments supporting the court’s review.  The surgeon asked the 10th Circuit to “adopt the ‘wholly groundless’ approach of the Fifth, Sixth, and Federal Circuits.”    That approach allows a district court, after finding the parties delegated arbitrability, to conduct a smell test of sorts: whether the assertion of arbitrability is “wholly groundless.”  The idea is, let’s not let parties with delegation clauses go around enforcing them willy nilly, even in instances where there is no legitimate basis for the claim to be arbitrated.  That would force the plaintiffs to waste time and resources going to arbitration, just to be sent back to court again (we hope).

However, the 10th Circuit “decline[d] to adopt the ‘wholly groundless’ approach.”  It found it is in tension with the inflexible language of SCOTUS’s decisions.  It also cited multiple cases from other federal circuits that require enforcement of a delegation clause, but in fairness it appears that the “wholly groundless” approach was not presented to those appellate courts.  Therefore, there is now a split among the federal circuits regarding whether a court can at least spot-check a defendant’s claim of arbitrability before enforcing a delegation clause.

Finally, to end its arbitrability tome, the Tenth Circuit addressed whether the defendants who were not parties to the arbitration clause could also compel arbitration of the surgeon’s claims because they are “principals and agents” of the medical center. The court found against the non-signatories, finding Utah law did not support binding a parent company to an arbitration clause signed by its subsidiary, and that Utah law also did not support the individuals’ ability to compel arbitration.

Just three weeks into the year and already my pile of arbitration cases is a skyscraper! So, I will cover a lot of ground in this update.

First, the headline. Kimberly, Kourtney, and Khloe Kardashian moved to compel arbitration, although they were not signatories to the arbitration agreement.  Kroma Makeup EU v. Boldface Licensing + Branding, 2017 WL 192690 (11th Cir. Jan. 18, 2017).  Despite their celebrity status, they lost in both the Florida district court and the 11th Circuit.  The problem was that the claims they wanted to arbitrate were not within the scope of the arbitration clause, because the clause was limited to “disputes arising between [the Parties]” and they were not parties.  The court had a lot of fun with the fact that the dispute was over makeup companies, writing:

“Like makeup, Florida’s doctrine of equitable estoppel can only cover so much.  It does not provide a non-signatory with a scalpel to re-sculpt what appears on the face of a contract.”

(A defendant was also unable to compel arbitration of a non-signatory class of plaintiffs in Jones v. Singing River Health Services Foundation v. KPMG, 2017 WL 65384 (5th Cir. Jan. 5, 2017).  There, the court found the plaintiff did not rely on the contract to make their claims.)

SCOTUS. On January 13, the U.S. Supreme Court agreed to wade into the issue of whether class arbitration waivers are a violation of the federal labor laws.  The National Labor Relations Board (under the Obama Administration) has repeatedly found that they are, but a split developed among the federal courts on whether the NLRB was correct.  ( You can read more about the three cases in which cert was granted at Scotusblog.  And, yes, normally SCOTUS action on arbitration would be my headline, but I couldn’t pass up a chance to see if the Kardashians led to more blog traffic…)

California’s exception that could swallow the rule. In Prima Paint, a 1967 case, SCOTUS found that a plaintiff’s claim that a contract was induced by fraud must be sent to arbitration if that contract has an arbitration clause, as long as there is no argument that that the arbitration clause itself was induced by fraud.  But this week the 9th Circuit affirmed a finding that, under California law, there was “fraud in the inception” of a contract, making it void and the arbitration provision unenforceable.  DKS, Inc. v. Corporate Business Solutions, Inc., 2017 167475 (9th Cir. Jan. 17, 2017).  If I were a plaintiff, I might just try variations on the theme, maybe a claim of “misrepresentation in the inducement”?

Florida voids arbitration agreement as against public policy.  Without any consideration of federal preemption (maybe the parties didn’t raise it?), the Supreme Court of Florida held that the arbitration agreement in a patient’s contract with her clinic was “void as against public policy” because it excluded required provisions of a Florida statute (the Medical Malpractice Act).  Hernandez v. Crespo, 2016 WL 7406537 (Fl. Dec. 22, 2016).  In particular, the court found the contract’s arbitration clause was less favorable to the patient than the statute would have been in six ways.

Alaska says suing to collect debt does not waive the right to compel arbitration in later statutory case.  Banks had litigated debt-collection actions with credit card holders and gotten default judgments.  Later, the card holders filed statutory claims against those banks and the banks moved to compel arbitration.  Applying federal waiver law, Alaska’s Supreme Court found the banks had not waived their right to arbitrate by litigating the debts.  Hudson v. Citibank, 2016 WL 7321567 (Alaska Dec. 16, 2016).

Alabama says “ripeness” is a question for the arbitrator.  In the context of litigation over a claim of indemnification that was made before the claimant had been determined liable, the Alabama Supreme Court found that the defendant’s defense of “ripeness” had to be determined in arbitration, not in court.  “As we have held that the subject matter of the dispute is clearly within the arbitration provision, any ripeness issue must be resolved by the arbitrator, not by this Court.”  FMR Corp. v. Howard, 2017 WL 127991 (Alabama Jan. 13, 2017).

As a teaser, the Tenth Circuit also issued a blockbuster opinion recently, but it deserves its own (future) post…

If I had drafted this annual summary post on November 7, 2016, it would have looked different. At that point, the year had produced numerous (final or proposed) federal regulations that significantly restricted the use of arbitration with consumers in large industries.  In addition, Justice Scalia’s death, along with the prospective election of Secretary Clinton, appeared poised to alter the make-up of the U.S. Supreme Court, which has voted 5-4 in many of the critical arbitration decisions in the last decade.

As I draft this post on January 4, 2017, it is still true that 2016 produced multiple federal regulations and some significant decisions that move away from the rigid arbitration-enforcement world view that Justice Scalia professed, but the election of Donald Trump, and the opening on the U.S. Supreme Court, may undo those pro-consumer changes.

Here were the big arbitration developments I saw in 2016:

  • The death of Justice Antonin Scalia in February. He authored arbitration blockbusters like Buckeye Check Cashing v. Cardegna (2006); Rent-A-Center, West v. Jackson (2010); AT&T Mobility v Concepcion (2011); American Express Co. v. Italian Colors Restaurant (2013).
  • Courts created uncertainty for the enforcement of delegation clauses. Enforced in Mohamed v. Uber Technologies, Inc., __ F.3d __, 2016 WL 4651409 (9th Cir. Sept. 7, 2016) and Regions Bank v. Rice, 2016 WL 3031357 (Ala. May 27, 2016). Rejected in Morgan v. Sanford Brown Institute, 2016 WL 3248016 (N.J. June 14, 2016) and Smith v. D.R. Horton, Inc., 2016 WL 3660720 (S.C. July 6, 2016).
  • Courts also created uncertainty regarding who decides availability of class arbitration. Chesapeake Appalachia, LLC v. Scout Petroleum, LLC, 2016 WL 53806 (3d Cir. Jan. 5, 2015) (parties’ incorporation of AAA rules is insufficient to delegate the availability of classwide arbitration to arbitrators); Sandquist v. Lebo Automotive, Inc., 376 P.3d 506 (Cal. July 28, 2016) (arbitrator decides); Dell Web Communities, Inc. v. Carlson, 2016 WL 1178829 (4th Cir. Mar. 28, 2016) (court decides).
  • FAA allows no special treatment for famous athletes. Arbitral awards against Tom Brady and Adrian Peterson, which had been vacated in federal district courts, were un-vacated by federal appellate courts.
  • Finn got under my skinn. The high court in New Hampshire got creative in Finn v. Ballentine Partners, LLC, __ A.3d __, 2016 WL 3268852 (NH June 14, 2016). After finding no avenue for vacating an arbitration award in the FAA, it concluded the FAA’s sections regarding confirming and vacating awards do not apply in state courts and vacated the award under its state arbitration act.  Threw me into a tizzy.
  • 7th Circuit supported NRLB on arbitration. The NLRB has ruled that arbitration agreements which prohibit class actions violate the federal labor laws. But, five federal circuit courts have disagreed with the Board. This year, the 7th Circuit stood up for the Board in Lewis v. Epic Systems Corp., 2016 WL 3029464 (7th Cir. May 26, 2016). Watch for SCOTUS to weigh in on this issue in the near future.


  • Agencies engaged in rule-making aimed at eliminating pre-dispute arbitration clauses in many types of contracts.
    • May 2016: CFPB proposed 2 arbitration rules for financial services industry and received almost 13,000 comments in 90 days. The rules would allow financial consumers to participate in class actions in court, even if the governing agreements call for arbitration generally, and would require providers of arbitration services to submit redacted copies of arbitration pleadings to the CFPB for its continuing monitoring. (The rule is rumored to be finalized just before president-elect Trump is inaugurated.)
    • September 2016: the Center for Medicare and Medicaid Services issued a rule that will prohibit the use of pre-dispute arbitration agreements in most long term care facilities.
    • October 2016: the Federal Communications Commission indicated that it was developing a proposed rule to address “mandatory arbitration agreements” in contracts between communication service providers and consumers.
    • October 2016: the U.S. Department of Education banned pre-dispute arbitration agreements for all “Direct Loan borrowers.”

Where does that leave us, after this year of significant change? And why do I say the election could undo much of what you just read?

I am no administrative law scholar (this blog is not called RegulationNation, thank goodness), but I do know that these agency rules can be rescinded more easily than an act of Congress or even a precedential holding from SCOTUS. (See  I predict the Trump Administration will act to roll back some or all of these regulations. (I have not seen any pronouncements from the President-elect, but base my prediction on my general Spidey sense, as well as Mr. Trump’s motions to compel arbitration in litigation against his companies, and his pro-business positions.)  I also predict that SCOTUS will again become a 5-4 majority in favor of strict enforcement of arbitration clauses.

And what will our feisty state courts do in reaction to more rigid enforcement of arbitration clauses by SCOTUS and federal agencies? I think they will again get creative with their interpretations of state contract laws and even their application of the Federal Arbitration Act in state courts (a la Finn), just like was happening before SCOTUS issued the Concepcion decision. There was less of a reason for the state courts to do that over the past year, as they saw the federal government regulation stepping in.  Watch this blog to see if my predictions are accurate… And feel free to send me your thoughts if you disagree!