The Supreme Court of Louisiana refuses to send customers who were injured while playing at Sky Zone to arbitration, finding that the arbitration clause “is adhesionary and therefore unenforceable”.  Duhon v. Activelaf, LLC, __ So. 3d __, 2016 WL 6123820 (La. Oct. 19 2016); Alicea v. Activelaf, LLC, __ So. 3d __, 2016 6123859 (La. Oct. 19, 2016).  [My alternate title for this post is “I TOLD YOU SO, SKY ZONE.”  Every time I bring my children to the trampoline park for a birthday party, I tell those poor teenagers who are enforcing the rules that those contracts are likely not enforceable.  But, I cared more about the waiver of liability than the arbitration bit.]

The arbitration clause at issue, which is required to participate in activities, was clicked electronically.  It states “If there are any disputes regarding this agreement, I on behalf of myself and/or my child(ren) hereby waive any right I and/or my child(ren) may have to a trial and agree that such dispute shall be brought within one year of the date of this Agreement and will be determined by binding arbitration before one arbitrator to be administrated by JAMS…in the state of Louisiana.”  Furthermore, the agreement imposes $5,000 of liquidated damages for any customer who files a lawsuit.

Louisiana’s highest court held that agreement was unenforceable.  Applying its ruling regarding an arbitration clause in 2005, the court analyzed whether consent of the non-drafting party was calling into question by the existence of a standard contract between unequal bargaining parties, and in particular the “physical characteristics of the arbitration clause” and its mutuality.  Because Sky Zone’s arbitration language was “the only specific provision not relegated to a separate paragraph or set apart in some explicit way,” Sky Zone was not bound to arbitration by the clause, and patrons could be subject to a penalty of $5,000 for filing suit, the court found the arbitration clause “adhesionary and unenforceable.”  The court then dutifully noted that its “application of Louisiana contract law…in the instant case is consistent with [Section] 2 of the FAA”.

While the court states that this decision employs the same type of contract defense that is applicable to any contract — not just one with an arbitration clause — it does not appear to cite any cases outside the arbitration context.  That alone leads me to believe this case is susceptible to a GVR by SCOTUS under the DirecTV analysis.

Within the U.S. Government, the CFPB has gotten most of the attention for trying to regulate consumer arbitration.  But this month, the Centers for Medicare & Medicaid Services (CMS) are bumping the CFPB out of the arbitration regulation spotlight.  In particular, the CMS issued a rule that will prohibit the use of pre-dispute arbitration agreements in most long term care facilities.

On its blog, the CMS explains the change this way:

The rule makes important changes to strengthen the rights of residents and families in the event that a dispute arises with a facility. Historically, many facilities require residents to agree to binding arbitration clauses when they are admitted to these facilities. These clauses require the resident to settle any dispute that may arise using arbitration rather than the court system. Effective November 28, 2016, our final rule will prohibit the use of pre-dispute binding arbitration agreements. This means that facilities may not require residents to sign pre-dispute arbitration agreements as a condition of admission to that long-term care facility.

The rule applies to all long-term care facilities that participate in the Medicare or Medicaid programs.  The prohibition is in keeping with the recommendation of the American Bar Association.

The rule is also in keeping with the decisions of many state courts, which have largely refused to enforce arbitration agreements in nursing home admission documents.  For example, the Supreme Court of Florida last month found that an admission document signed by the resident’s son did not bind the resident, and therefore claims of negligence and statutory violations could proceed in court.  Mendez v. Hampton Court Nursing Ctr., __ So. 3d __, 2016 WL 5239873 (Fl. Sept. 22, 2016).  The highest courts in Pennsylvania, Alabama, South Carolina, Kentucky, and Oklahoma have also refused to enforce arbitration agreements in recent years, for a variety of reasons.

It will be interesting to see whether CMS’ regulation of arbitration draws the same type of challenge that CFPB’s regulation of arbitration has drawn.

Lest anyone think that the preemption doctrine in arbitration has gone dormant, today’s cases should set the record straight.  Courts have recently found the FAA preempted state rules in Pennsylvania, South Carolina, and Alabama.

The Pennsylvania Supreme Court found that one of its rules of civil procedure was preempted by the FAA in Taylor v Extendicare Health Facilities, Inc., __ A.3d ___, 2016 WL 5630669 (Penn. Sept. 28, 2016).  The case involved claims regarding whether a nursing home properly cared for a patient.  The patient had signed an arbitration agreement, and under Pennsylvania law, that meant the “survival claim” on her behalf had to be arbitrated, but her heirs’ wrongful death claims were not subject to arbitration.  However, a rule of state civil procedure required that survival actions be consolidated with wrongful death actions for trial. Relying on that rule, the trial court and intermediate appellate court refused to enforce the arbitration agreement.  After clarifying its feelings about the current state of FAA case law (the court comments that the FAA has implicitly altered the Constitution and created a “preemption juggernaut” with Concepcion), the court acknowledged that it is “bound by the Supreme Court’s directive to favor enforcement over efficiency.”  Therefore, the survival action can proceed in arbitration.

Similarly, the South Carolina Supreme Court reversed two lower courts that had refused to compel arbitration of claims in Parsons v. John Wieland Homes & Neighborhoods of the Carolinas, Inc., __ S.E.2d __, 2016 WL 441112 (S.C. Aug. 17, 2016).  Those courts had relied on the “outrageous tort exception” in South Carolina common law, which allowed “parties whose claims arose out of an opponent’s ‘outrageous’ tortious conduct to avoid arbitration.”   Though a majority of the court did not agree to totally overrule the doctrine, it did decide that it was preempted using the analysis of DirecTV.

The Alabama Supreme Court found one of its insurance regulations preempted by the FAA in African Methodist Episcopal Church v. Smith, __ So. 3d __, 2016 WL 4417268 (Ala. Aug. 19, 2016).  In that case, plaintiffs argued that the arbitration agreement in their group life insurance policy was unenforceable because the company had not included the disclosures required by the Alabama Department of Insurance.  The court found “[a]ny state requirement that an arbitration provision in an insurance contract be specially disclosed . . . is unenforceable; federal law prohibits arbitration provisions from being singled out for such special treatment.”

If you stuck with me this far, here are two bonus cases for you.  Although the FAA is usually the winner in a preemption war, there are times another federal statute overrides the FAA.  For example, the Supreme Court of Arizona held that the Medicare Act preempts the FAA.  United Behavioral Health v. Maricopa Integrated Heath Sys., 2016 WL 4474155 (Ariz. Aug. 25, 2016) (holding that the “administrative appeals process provided under the Medicare Act preempts arbitration of Medicare-related coverage disputes between private healthcare administrators and providers”).  However, the Eleventh Circuit found that the Uniformed Services Employment and Reemployment Rights Act (USERRA) did not preempt the FAA.  Bodine v. Cook’s Pest Control, Inc., 2016 WL 4056031 (11th Cir. July 29, 2016).  Instead, the court found the two statutes could be harmonized, by modifying the aspects of an arbitration agreement that offended USERRA.

Echoing a holding already issued by four other circuits, the Third Circuit recently found that a defendant does not waive its right to arbitration by continuing to litigate in court, if the reason it failed to move to compel arbitration is that the motion would have been futile.  Chassen v. Fidelity Nat’l Fin., Inc., 2016 WL 4698256 (3d Cir. Sept. 8, 2016).

The case involves a class of real estate purchasers who claim they were overcharged for recording documents in New Jersey.  Although there were arbitration agreements in the relevant contracts, the defendants did not move to compel “bipolar” arbitration for two and a half years.  (Where did that term come from, Third Circuit?  Are we equating individual arbitration to a mental health condition now?)  In that time, plaintiffs served 150 non-party subpoenas and spent $50,000 on experts.

Although defendants did not attempt to explain their inaction, the Court concluded the long delay in seeking arbitration was excused.  In short, New Jersey law had nearly outlawed class action waivers in consumer arbitration clauses, so until SCOTUS decided Concepcion in 2011 (finding California’s similar rule preempted by federal law), it would not have made sense for defendants to compel arbitration.  The court reasoned that unlike in other cases of inaction, the prejudice to plaintiffs “is attributable to a change in the applicable law, not to any negligent action on the part of either party.”  It also noted that futility is a recognized exception to ripeness and administrative exhaustion, two analogous doctrines.

Other than the use of “bipolar,” none of those conclusions strikes me as odd.  But the opinion then plows some new ground.  It finds that a defendant can independently waive individual and class arbitration, because those are “substantively distinct” types of arbitration.  (And it concludes that the defendants here had a valid futility defense for both types.) Finally, the dissent points out a key piece of information: there was no class arbitration waiver in the arbitration clauses at issue.  “These clauses…do not even mention class arbitration, let alone outright prohibit it.” Which the dissent (fairly) characterizes as seriously undercutting the futility analysis.

Now that Concepcion is more than five years old, this type of case is unlikely to come up often in terms of preempted state arbitration law, but the new rules from the CFPB (and legal challenges to those regulations) could make the futility doctrine relevant again.

The 9th Circuit’s decision to enforce the arbitration agreement in Uber’s agreements with drivers made lots of news last week.  And although it includes no new principles of law, it does emphasize some principles that come up regularly in consumer and employment arbitration, so it’s worth reviewing the details.

Former drivers brought an action in federal court, alleging two primary things: that when Uber terminated them for having bad consumer credit, Uber violated statutes regulating the use of credit reports; and that Uber had misclassified them as independent contractors.  Mohamed v. Uber Technologies, Inc., __ F.3d __, 2016 WL 4651409 (9th Cir. Sept. 7, 2016).  Uber responded by moving to compel arbitration.  The district court denied the motion, finding that the delegation clauses were not “clear and unmistakable” and that the delegation clauses were unconscionable.

The appellate court disagreed on both fronts.  Critically, the operative agreements had this language in the Arbitration Provision: “Such disputes include without limitation disputes arising out of or relating to interpretation or application of this Arbitration Provision, including the enforceability, revocability or validity of the Arbitration Provision or any portion of the Arbitration Provision.”  Furthermore, the agreements mandated arbitration on an individual basis (precluding class or collective actions).  Drivers could opt out of the Arbitration Provision, but the named plaintiffs did not exercise that option.

The 9th held:

  • The delegation clause — authorizing an arbitrator to determine the validity of the Arbitration Provision — was clear and unmistakable (and therefore likely enforceable).  Although the drivers’ contracts also had venue clauses, providing that San Francisco courts had exclusive jurisdiction, the appellate court found the “conflicts are artificial.”  The venue provisions address the jurisdiction for fights over arbitration or those outside the scope of the Arbitration Provision; they don’t nullify the Arbitration Provision.  [This is an issue that comes up frequently, and the 9th Circuit addressed it head on.]
  • The delegation clause was not unconscionable.  Importantly, the ability of drivers to opt out of arbitration meant the delegation clause could not be procedurally unconscionable (a requisite aspect of unconscionability) under 9th Circuit precedent.  Nor did the requirement that drivers opt out in person or by overnight delivery make the ability to opt out illusory.  The court noted that some drivers successfully opted out.  [While not all federal circuits have addressed this issue, it provides good persuasive authority to use in favor of the conscionability of arbitration agreements with opt outs in any court.]
  • The drivers could effectively vindicate their rights in arbitration.  Plaintiffs argued they could not effectively vindicate their federal statutory rights because they had to split the costs of arbitration, which “may exceed $7,000 per day.”  However, because Uber “committed to paying the full costs,” the court did not reach that legal question.  [By agreeing to just pay the costs, Uber avoided a fight over the costs of arbitration to the drivers and probably helped its chances of winning the appeal.  This is a tactic that other litigants should consider when facing strong opposition to enforcement of an arbitration agreement.]

 

While I was busy blogging out listicles and “think pieces” last month, my stack of unread arbitration cases grew exponentially.  August was apparently a very busy month for publishing arbitration opinions.  Maybe most surprisingly, the federal appellate courts vacated three arbitration awards in recent weeks.  So I will start there, and end with two headline-worthy awards that got confirmed.

First, in Bankers Life & Cas. Ins. Co. v. CBRE, Inc., __ F3d __, 2016 WL 4056400 (7th Cir. July 29, 2016), the Seventh Circuit vacated an arbitration award after finding the panel of arbitrators “exceeded its authority.”  The panel had concluded that a real estate broker did not violate its listing agreement with a client when the broker provided an inaccurate cost-benefit analysis to the client.  The panel said that because the cost-benefit analysis had a disclaimer on it, the broker was not responsible.  The district court had confirmed the award.  Writing for the Seventh Circuit, Judge Posner found that because the panel was only authorized to interpret the contract, not the cost-benefit analysis, “[t]he panel’s reliance on the disclaimer in the CBAs was … unjustified.”  One bit of helpful context here is that the court found the Illinois Uniform Arbitration Act applied.  I don’t think this result would fly under the FAA or Sutter .

Second, in Star Ins. Co. v. Nat’l Union Fire Ins. Co. of Pittsburgh, 2016 WL 4394563 (6th Cir. Aug. 18, 2016), the Sixth Circuit vacated an arbitration award pursuant to the arbitration act in Michigan.  Although the district court had confirmed the award, the appellate court reversed due to one arbitrator’s ex parte communications with the party who selected that arbitrator.  That communication violated the parties’ agreement to arbitrate as set forth in the scheduling orders.

Third, although not exactly a vacatur, in Linde Health Care Staffing, Inc. v. Claiborne County Hospital, __ So.3d __, 2016 WL 4245435 (Miss. Aug. 11, 2016), the Mississippi Supreme Court refused to recognize a Missouri judgment based on an arbitration award.  It found the losing party was not a party to the arbitration agreement.  Intriguingly, the winning party claimed that the three months for vacating the award had already passed, so the judgment could not be set aside.  The court refused to apply the FAA, however, asking “How can the Hospital be bound by the FAA’s procedural rules if it never entered a contract with an arbitration clause?  The simple answer is it cannot.”

On the other hand, two very interesting arbitration cases were confirmed.

In one, a famous football player had the arbitration award against him un-vacated.  The district court around the corner from my office had found Adrian Peterson was not fairly on notice of the potential penalty against him.  The Eighth Circuit reversed, concluding:

As applied to Peterson’s case, therefore, the arbitrator thought the terms of the Agreement, the law of the shop, and the Personal Conduct Policy gave the Commissioner discretion to impose a six-game suspension and fine if he concluded that shorter suspensions in prior cases had been inadequate.  The arbitrator’s decision on this point was grounded in a construction and application of the terms of the Agreement and a specific arbitral precedent.  It is therefore not subject to second-guessing by the courts.

Nat’l Football League Players Assoc. v. Nat’l Football League, __ F.3d__, 2016 WL 4136958 (8th Cir. Aug 4, 2016).

Another fun case confirming an arbitration award involved a significant award for a Mexican subsidiary of KBR and quite the international legal dispute.  Corporacion Mexicana de Mantenimiento Integral v. Pemex-Exploracion y Produccion, __F.3d__, 2016 WL 4087215 (2d Cir. Aug. 2, 2016).  The losing party in that arbitration happened to be an oil and gas company “acting on behalf of the Mexican government.”  Three years into the arbitration proceeding, the Mexican Congress vested exclusive jurisdiction for disputes over public contracts in its Tax & Administrative Court.  And nearly five years into the arbitration proceeding, the Mexican Congress “ended arbitration” for the claims.  After KBR’s subsidiary won big, it confirmed the award in SDNY.  But a court in Mexico ordered that the award be annulled.  The Second Circuit was having none of that.  It found the district court was right to confirm the award “notwithstanding invalidation of the award in the Mexican courts,” due to four “powerful considerations” including waiver of sovereign immunity, the “repugnancy of retroactive legislation that disrupts contractual expectation,” the need for legal claims to have a forum, and the “prohibition against government expropriation without compensation.”

What can we take away from these decisions?  Maybe that losing parties in arbitration have a better chance of vacating an award under state arbitration acts, that the 8th Circuit is not sympathetic to wealthy football players, and the Second Circuit will not allow a foreign government to legislate its way out of an arbitration award.

I am celebrating my fifth anniversary of blogging by publishing one listicle per day this week, and today is the last one (sniff, sniff). To recap: Monday’s topic was the five biggest surprises in arbitration law; Tuesday’s was the five states most hostile to arbitration; Wednesday’s was the five arbitration cases lawyers really ought to know; and Thursday’s was the five biggest surprises in the arbitration process.  Today’s topic might be the most practical: five things you should have in your arbitration clause.

Five Things That Should Be In Your Arbitration Agreement

  1. A clear statement of the “scope” of the arbitration agreement — what kinds of disputes the parties are willing to arbitrate.
  2. The rules that will govern the arbitration.  The rules of the arbitration impact every aspect of the proceeding, including the court’s jurisdiction over issues of arbitrability.  So, identify the rules.  And please make sure they are rules that actually exist somewhere.
  3. The location of the arbitration hearing.  Two reasons for this: first, it avoids haggling over which cities are most convenient after a dispute has arisen; and second, many courts tie court venue (for compelling arbitration, etc.) to the location of the arbitration hearing.
  4. A limitation period.  Many states have held that their general statutes of limitation do not apply to arbitration proceedings.  If you want to ensure that there will be some deadline for claims, insert one into the arbitration agreement.
  5. A severability provision.  Under the FAA, courts are supposed to determine whether an arbitration agreement is enforceable without regard to any other terms in the larger contract.  Therefore, if you want to give the court latitude to simply strike any unenforceable portions of the arbitration agreement without striking the arbitration agreement altogether, the severability clause needs to be right in the arbitration agreement.

I hope you have enjoyed this series of listicles as much as I have!  Next week I may have to do “five new cases I should have blogged about instead of just sending out listicles…”

I am celebrating five years of blogging by publishing one “listicle” per day this week.  Monday, the topic was the five biggest surprises in arbitration law; Tuesday it was the five states most hostile to arbitration; Wednesday it was the five arbitration cases lawyers really ought to know.  Today, we leave case law behind and talk about the process of arbitration itself.  What are the biggest surprises for parties and advocates who find themselves in arbitration?

Five Biggest Surprises In The Arbitration Process

  1. No need for a “complaint” with numbered paragraphs or lengthy recitations to start the ball rolling.  (To start an arbitration proceeding, a claimant usually just needs to complete a form identifying the parties, the claim amount, and the type of dispute, with a copy of the arbitration agreement attached.  No Twiqbal standards, no formal service.)
  2. Parties are not obligated to keep arbitration proceedings confidential.  (If confidentiality is important to your client, ask the arbitrator(s) for a protective order.  Or insert a confidentiality requirement in your agreement.)
  3. Counsel may ask follow-up questions about potential arbitrators.  (Did the potential arbitrator disclose something that sounds fishy, but you don’t have enough information to know if it is fishy?  Come up with some follow-up questions and see if the answers bring any clarity.)
  4. Neither the rules of civil procedure nor the rules of evidence necessarily apply in arbitration.  (Only the rules of the arbitration administrator apply.  That means no one is entitled to serve requests for admission, or take depositions, or even to exclude hearsay from the record, unless those rules allow it or the arbitrator has given her blessing.)
  5. You can tailor the arbitration process to fit your case.  (This is a positive surprise.  Would your case benefit from bifurcation? Or having most witnesses just give written statements? Or having the experts arm-wrestle?  Go ahead and ask the arbitrator for it!  If you can show it would lead to an efficient resolution of the dispute, you just might get your wish.)

Tomorrow is the last listicle in the series!  I can’t decide whether to focus on five things to put in your arbitration clause, the five most read posts, or five things to love about arbitration…  Feel free to send me your vote.

I am celebrating five years of blogging by publishing one “listicle” per day this week.  Monday, the topic was the five biggest surprises in arbitration law; Tuesday it was the five states most hostile to arbitration.  (None of those states have called me to complain yet…)  Today, it is the five arbitration cases lawyers really ought to know.  I don’t care if you are a rural solo practitioner who handles a bit of everything or a transactional lawyer or a general counsel who just handles exports, arbitration has become a significant part of our system of justice.  It is likely that every lawyer will bump up against it at some point in their career.  When (or better yet, before) that happens to you, here are the five cases you really should read.

Five Arbitration Cases You Should Know

  1. Rent-A-Center, West v. Jackson, 130 S. Ct. 2772 (2010).  This case is the culmination of the “severability” doctrine, which explains whether a litigant’s challenge to enforceability should be heard in arbitration or in court.  For the uninitiated, reading this case is like reading that Bruce Springsteen is actually an alien.  It is that counter-intuitive.
  2. BG Group, PLC v. Republic of Argentina, 134 S. Ct. 1198 (2014).  This case tries to explain which of the other potentially dispositive issues get decided in arbitration and which are decided in court (conditions precedent, waiver, scope, etc).  It also gives some guidance as to the deferential standard of review for arbitrator decisions, and shows the importance of the rules parties chose to govern the arbitration.
  3. AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011).  This case establishes that a state statute or line of cases is preempted if it “stands as an obstacle” to the objectives of the Federal Arbitration Act.  It’s a squishy standard, but you need to know it’s there, because it potentially preempts a lot of state law (that you would otherwise rely on to invalidate the arbitration agreement).
  4. Oxford Health Plans LLC v. Sutter, 133 S. Ct. 2064 (2013).  This case shows how difficult it is to have an arbitration award vacated, especially if the argument boils down to: the arbitrator just got it wrong.  Even “grave error” is not enough.
  5. Citizens Bank v. Alafabco, Inc., 123 S. Ct. 2037 (2003).  This case drives home the reach of the Federal Arbitration Act.  It can apply in state and federal courts, and it can apply when both parties are residents of the same state.  Just assume it always applies.

Of course, these cases are just the tip of the iceberg.  If you have a real arbitration dispute, you will need to read many more cases than these.  But, you have to start somewhere, and these are a solid starting place.  Watch www.arbitrationnation.com for tomorrow’s listicle!

I am celebrating five years of blogging by publishing one “listicle” per day this week.  Yesterday, the topic was the five biggest surprises in arbitration law.  Today, it is the five states where I would not want to argue in favor of arbitration — either compelling arbitration or confirming an award.  In other words, these are the five states I view as most hostile to the case law that SCOTUS has developed under the Federal Arbitration Act.

By the way, don’t think this was an easy list to put together.  In the first eight months of 2016 alone, I have blogged askance at arbitration decisions from the highest courts of Arkansas, North Dakota, South Carolina, Georgia, New Hampshire, New Jersey, West Virginia, Kentucky, Montana and Hawaii.  And I have declined to blog about plenty of others.  (Even I find some arbitration decisions just not that interesting.)   But, after much deliberation, here are the top five, with links to posts about recent opinions that helped earn the states a spot on the list.

The Five States Most Hostile To Arbitration

  1. Kentucky
  2. West Virginia
  3. New Jersey
  4. Hawaii
  5. Montana

(You expected to see California?  Sorry, it’s had a change of heart.)

Stay tuned for tomorrow’s listicle!