In a recent opinion, the Fourth Circuit cited waiver as its basis to refuse to compel arbitration, but the result seems animated by a sense that the arbitration agreements were unenforceable.  Degidio v. Crazy Horse Saloon & Restaurant, Inc., __ F.3d __, 2018 WL 456905 (4th Cir. Jan. 18, 2018).

The case involved a putative collective and class action case by “exotic dancers” at a club in South Carolina, alleging they were wrongly classified as independent contractors and thereby denied minimum wages and other statutory protections.  The complaint was filed against the club in August of 2013.  [I can’t call it a saloon.  We aren’t in the wild west.]  At that point, it is undisputed that none of the potential plaintiffs had arbitration agreements with the club.

The club participated in discovery for a year.  In November and December 2014, the club obtained arbitration agreements with some of its dancers “as a condition of performing.”  In December of 2014, the club moved for summary judgment on the merits, arguing the dancers were properly classified as independent contractors.  Then in January of 2015, the club brought a motion to compel arbitration against plaintiffs who had signed arbitration agreements.  The district court denied the motion, raising concerns about the enforceability of the arbitration agreements.  The club brought a new summary judgment motion on the merits in October of 2015.  When that was denied, the club sought additional discovery on the merits, attempted to certify questions to the South Carolina Supreme Court, and then moved to compel arbitration against nine plaintiffs who had opted into the litigation after its last motion.  That motion was also denied.

The Fourth Circuit set the stage for its discussion by noting that litigants may waive their rights to arbitration by “substantially utilizing the litigation machinery.”  Without citing any further case law about waiver, the opinion proceeded to review the significant extent of the club’s use of “litigation machinery” (summarized above).  The court was particularly upset at the apparent gamesmanship:

The only possible purpose of the arbitration agreements, then, was to give [the club] an option to revisit the case in the event that the district court issued an unfavorable opinion [on summary judgment].  In other words, Crazy Horse did not seek to use arbitration as an efficient alternative to litigation; it instead used arbitration as an insurance policy in an attempt to give itself a second opportunity to evade liability.

In response to the club’s argument that it could not have moved to compel arbitration until the entertainers who had actually signed the agreements opted into the case, the court suggested that it should have informed the district court of its intentions so that the court did not waste judicial resources.  In addition, the court did not want to “give defendants a perverse incentive to wait as long as possible to compel arbitration.”

At the close of this waiver discussion, the court veers into what seems to be the heart of the matter: its conclusion that the arbitration agreements were “misleading” and “sham agreements.”  The arbitration agreements told the dancers that they only reason they could keep tips and set their own schedules was because they were independent contractors, and that would change if they joined the Degidio lawsuit.  The court noted that information was false.  Furthermore, the court was upset that the agreements were presented to plaintiffs “in a furtive manner,” evading the district court’s ability to supervise contact between the potential plaintiffs and counsel.  “The setting here was ripe for duress.”  However, the court does not undertake any analysis of unconscionability or other bases to find the agreements unenforceable under South Carolina law.  It just affirms the decision to deny the motion to compel arbitration.

I find this a puzzling case.  Normally, parties are allowed to agree to arbitrate a dispute that has already begun.  And litigation conduct before that agreement can’t count as a waiver.  Furthermore, parties don’t usually tell the judge about motions that they don’t yet have a basis to bring.  So, unless FLSA cases are really so different, this seems like a case that should have been analyzed on the validity of the arbitration agreements.  It is decidedly underhanded to convince people to sign arbitration agreements by misrepresenting the law.  Maybe South Carolina unconscionability doctrines are very difficult?

Remember when Maria sang “Let’s start at the very beginning, it’s a very good place to start”?  Well, that seems to be what federal circuit courts are doing with their arbitration decisions recently.  This post will run through some Do Re Mis of arbitration law, as articulated by those decisions (and will close with some arbitration cases on SCOTUS’s docket).

  • In most circuits, arbitrators cannot subpoena documents in advance of an in-person hearing.  The 9th Circuit affirmed that applies within its jurisdiction as well.  CVS Health Corp. v. Vividus, __ F.3d __, 2017 WL 6519942 (9th Cir. Dec. 21, 2017).
  • When an arbitration agreement calls for application of arbitral rules, and those rules give the arbitrator power to rule on her own jurisdiction, then the district court should send any dispute over arbitrability to the arbitrator.  The 4th Circuit confirmed that holding applies to JAMS rules, just as it does to AAA rules.  Simply Wireless, Inc. v. T-Mobile US, Inc., __ F.3d __, 2017 WL 6374105 (4th Cir. Dec. 13, 2017).
  • Claims under the Fair Labor Standards Act are subject to arbitration.  Rodriguez-Depena v. Parts Authority, Inc., __ F.3d __, 2017 WL 6327827 (2d Cir. Dec. 12, 2017).  (The Second Circuit is at least the third federal circuit to reach that conclusion.)
  • An arbitration agreement that carves out injunctive relief means what it says.  Archer & White Sales v. Henry Schein, Inc., __ F.3d __, 2017 WL 6523680 (Dec. 21, 2017).  The arbitration agreement called for arbitration of any dispute under the agreement “except for actions seeking injunctive relief and disputes related to [intellectual property].”  Plaintiff brought an antitrust action seeking damages and injunctive relief. Applying the exception, the district court denied the motion to compel arbitration and the appellate court affirmed.
  • Independent contractors are not “agents” that can be bound as a non-signatory to arbitration clause.  Oudani v. TF Final Mile, LLC, __ F.3d __, 2017 WL 5587648 (1st Cir. Nov. 21, 2017) (refusing to compel arbitration of class action brought by independent contractors for wage-and-hour claims).
  • Ambiguous awards can be sent back to the arbitrator.  Herll v. Auto-Owners Ins. Co., __ F.3d __, 2018 WL 296870 (8th Cir. Jan. 5, 2018)  (sending ambiguous “appraisal award” back to arbitrator under Minnesota’s Revised Uniform Arbitration Act.)
  • If the losing party failed to raise an argument in arbitration, it can’t use that argument to vacate the arbitration award.  Laborers’ Pension Fund v. W.R. Weis Co., __ F.3d __, 2018 WL 316555 (7th Cir. Jan. 8, 2018) (finding in an ERISA dispute that one party “waived its statutory-interpretation argument by failing to raise it in the arbitration.”)
  • First Amendment arguments will not get a putative class out of arbitration with a private party.  Okay, this is not an arbitration law “basic” point, but instead one that confirms the ingenuity of plaintiffs’ class action lawyers. These plaintiffs opposed arbitration “on First Amendment grounds” and asserted there was state action because the FAA and judicial interpretations of it encourage arbitration to the point that AT&T’s actions are attributable to the state.  Roberts v. AT&T Mobility, __ F.3d __, 2017 WL 6275537 (9th Cir. Dec. 11, 2017).  The 9th Circuit found no state action, and noted that plaintiffs’ arguments that the FAA violates consumers’ constitutional rights are incompatible with the Supreme Court’s decisions on arbitration.

_________________________________________________

Now that we’ve run through those reminders on issues that arise frequently in arbitration law, let’s talk about some unsettled issues.  SCOTUS today is considering two cases involving delegation clauses and how lower courts should put its Rent-a-Center, West decision into practice:

  • New Prime, Inc. v. Oliveira — this case comes from the First Circuit and raises the question whether the court should determine that the FAA applies before enforcing a delegation clause.  Why does that matter?   In this case a worker successfully argued the FAA did not govern, because he was an exempt transportation worker, and therefore the court refused to compel arbitration.  [Jan. 22 update: SCOTUS’s order list today does not include this as a grant or deny, so it will likely be considered again in February.]
  • Applied Underwriters Captive Risk Assurance Co. v. Minnieland Private Day School — this case comes from the Fourth Circuit and raises this question: Can a defense to arbitration that applies to the arbitration agreement as a whole ever be specific to the delegation clause?   [Disclosure: I was involved with this petition.] [ Jan. 22 update: SCOTUS denied cert.]

SCOTUS is also being asked to review a decision of the California Court of Appeal that refused to compel arbitration based on a state statute.  That California statute gives courts the discretion to deny enforcement of an arbitration provision when there is a possibility of conflicting rulings in pending litigation with third parties.  The cert petition asks whether the FAA preempts that California statute and will be considered in February.

Last month, SCOTUS  denied cert in another California arbitration case.  That petition, Betancourt v. Prudential Overall Supply, challenged California’s rule that private attorney general disputes cannot be arbitrated.  (SCOTUS passed on the same issue in 2015.)

Here’s hoping that in 2018 SCOTUS sticks with its recent practice of deciding at least one arbitration case per year!  And, here’s hoping the Vikings get in the Super Bowl!

Two cases recently fit in one of my favorite categories: those awards that get “un-vacated.”  These cases went through arbitration, had that arbitration award vacated by a district court, only to have the award later resurrected by an appellate court.  In today’s edition, the whiplash happens in both state and federal court.

In Caffey v. Lees, 2018 WL 327260 (R.I. Jan. 9, 2018), Lees was the winner after bringing a personal injury case in arbitration. He was awarded nearly $200,000.  Caffey moved to vacate the award, arguing every possible basis under the Rhode Island arbitration statute.  The trial court granted the motion to vacate, based on the initial failure of Lees’ counsel to disclose a document from its expert.  Not just any document, of course, but an early assessment that contradicted the expert’s eventual opinion about causation.  The trial court found that omission meant the award was procured by “undue means.”

On appeal, the Supreme Court of Rhode Island noted it had not addressed “undue means” since 1858.  It looked to more recent definitions from federal circuit courts of the phrase — noting that proving undue means involves proving “nefarious intent or bad faith” or “immoral” conduct.   It found that standard was not met in this case, since the losing party had the critical document well before it submitted its final brief to the arbitrator.  Indeed, the issue of the untimely disclosure was placed before the arbitrator, and the expert explained the discrepancy.  Because the expert had a plausible explanation, the court could not agree that Lees’ counsel obtained the award through underhanded or conniving means.  The Supreme Court reinstated the award.

A case in the Ninth Circuit followed the same path.  In Sanchez v. Elizondo, 2018 WL 297352 (9th Cir. Jan. 5, 2018), an investor won a $75,000 award in a FINRA arbitration.  The district court granted the broker’s motion to vacate based on an argument that the arbitrator exceeded his powers.  In particular, the arbitrator allowed the arbitration to proceed with a single arbitrator, even after the claimant had submitted a pre-hearing brief increasing its damage request to just over the FINRA line that requires a three-arbitrator panel.  (The FINRA rules provide that claims over $100,000 must be heard by three arbitrators.  The claimant had initially requested exactly $100,000, so was assigned the single arbitrator, but then sought $125,000 in the pre-hearing brief, without amending the claim.)

The Ninth Circuit reinstated the award.  After first establishing that it had appellate jurisdiction, it considered the arbitrator’s powers.  Importantly, the court affirmed that arbitrators have discretion on matters of substance as well as matters of procedure.  In this case, FINRA rules explicitly gave the arbitrator power to interpret the FINRA Code and rules. Furthermore, the arbitrator asked the parties to address the issue of the increased damage amount, considered their arguments, and interpreted the rule to reference the amount initially claimed in the demand, instead of any amount later sought in the arbitration.  Because the arbitrator had power to interpret the rule and did so, the court found he did not exceed his powers.

These don’t seem like hard cases to me.  Given the standard for vacating awards, these arbitration awards should have been straightforward to confirm.  The fact that they weren’t suggests either that the speed of development under the FAA is difficult for advocates and judges to keep up with, or that there may be some judicial hostility toward arbitration coloring the application of the standard for vacatur.

While I was busy writing deep thoughts about arbitration at the end of 2017 (see here and here), courts around the country rudely kept churning out new arbitration opinions.  Hmph.  So, I have some catching up to do.  I start with one that has most captured my attention, Snow v. Bernstein, Shur, Sawyer & Nelson, ___ A.3d ___, 2017 WL 6520900 (Me. Dec. 21, 2017).  It finds an arbitration agreement between a law firm and its client unenforceable, because the law firm did not specifically explain to the client that arbitration entails a loss of a jury trial, narrower appeal rights, and different evaluation of evidence.

Susan Snow hired the Bernstein firm to handle a civil action.  The opinion does not tell us anything about Snow or her level of sophistication.  But, it does tell us that she signed Bernstein’s standard terms of engagement, which included an arbitration clause.  The arbitration clause dealt specifically with arbitrability of “fee disputes,” and then said “any other dispute that arises out of or relates to this agreement or the services provided by the law firm shall also, at the election of either party, be subject to binding arbitration.”

Snow later sued the law firm for malpractice, and the firm moved to compel arbitration.  The district court denied that motion, and the high court of Maine affirmed that ruling.  Both courts found that the arbitration agreement was unenforceable because the law firm had not verbally discussed the arbitration clause with Snow and informed her of its “scope and effect”.

The Snow opinion used “public policy” to invalidate the arbitration agreement.  It largely relied on two bases for its public policy.  First, a 2002 formal opinion from the ABA Standing Committee on Ethics and Professional Responsibility, which found that because attorneys are fiduciaries, and arbitration “results in a client waiving significant rights,” an attorney must explain the implication of the proposed arbitration agreement so that the client can make an informed decision.  The ABA opinion requires an attorney to explain that the client is waiving a jury trial, waiving discovery, and losing a right to appeal.  Second, the Snow opinion relied on a 2011 opinion from Maine’s Professional Ethics Commission, requiring attorneys to obtain informed consent “as to the scope and effect of an arbitration requirement or a jury waiver clause.”

Because the law firm in this case did not dispute that it made no attempt to discuss the arbitration agreement with Ms. Snow before she signed it, and the court found the written arbitration agreement “was not sufficiently clear to inform her”, the court declared the arbitration agreement unenforceable.

So, what is required in Maine for an attorney to have a binding arbitration agreement with a client?  “The attorney must effectively communicate to the client that malpractice claims are covered under the agreement to arbitrate.  The attorney must also explain, or ensure that the client understands, the differences between the arbitral forum and the judicial forum, including the absence of a jury and such ‘procedural aspects of forum choice such as timing, costs, appealability, and the evaluation of evidence and credibility.'”  All of that should be done with regard to the particular client’s capacity to understand the information.

When’s the last time you heard a state supreme court espouse the importance of the right to a jury trial?  And pound on the importance of specifically and knowingly waiving that right?  Well, the Kindred case comes to mind for me.  And SCOTUS reversed Kentucky’s public policy rule in that case, finding it was preempted by the Federal Arbitration Act.  Kindred stated noted that the Kentucky “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.”  The Snow decision does not cite to the Kindred case, even though Kindred came out in May and Snow wasn’t argued until October of 2017.  Instead, the Snow decision gives a preemption analysis that defies logic.  It says its rule “that attorneys fully inform a client of the scope and effect” of an arbitration clause “does not ‘single out’ arbitration agreements.”  Say what?  The court goes on to say that it would apply to any client “decision to waive significant rights,” but does not offer any cites to Maine law requiring attorneys to give oral primers to clients on anything other than arbitration  Indeed, the Snow opinion’s emphasis on jury trial, appealability, and evidence show it’s rule hinges on primary characteristics of arbitration, just like Kentucky’s ill-fated rule.

Despite the similarities with Kindred, would SCOTUS treat this case differently because attorneys are held to a higher standard?  The Ninth Circuit has affirmed a decision finding the arbitration clause in an lawyer’s engagement letter unconscionable.  And the ABA favors the higher standard (but I am not aware it has reconsidered its opinion in light of recent preemption decisions).  But, I have a hard time distinguishing the rule in Snow from the one that was reversed in Kindred.

Whenever people ask me why I choose arbitration law to write and talk about, one of the reasons I give is that the law is in flux, creating a demand for information and analysis.  Despite the fact that the Federal Arbitration Act has been around for over 90 years, there are constantly new developments in its interpretation.  Especially in the past two decades, with the Supreme Court highly engaged in the enforcement of arbitration agreements, the pace of legal development has quickened.  That pace means that litigants, advocates, arbitrators and judges are struggling to keep up.  It also means that even on recurring issues, there is still a lack of consensus on how to apply the rules that have been developed.

To demonstrate this point, I went back through the important cases from 2017.  I found multiple instances where two cases with very similar facts received opposite results.  And I am not talking about circuit splits over novel issues like the NLRB and “wholly groundless” exception.  I am talking about issues like formation, waiver, and non-signatories, where the “rules” have ostensibly been settled for some time.

Two Tales of Non-Signatories

These two cases involve a bank teaming up with a retail entity to issue branded credit cards that offered rewards.  The credit card agreement, which called for arbitration of disputes, was only between the consumers and the banks, however. In each case, plaintiffs sued the retail entity regarding the card and the retail entity moved to compel arbitration as a non-signatory to the credit card agreement.  In one case, White v. Sunoco, Inc., 2017 WL 3864616 (3d Cir. Sept. 5, 2017), the retail entity’s motion was denied.  In the other, Bluestem Brands, Inc. v. Shade, 2017 WL 4507090 (W. Va. Oct. 6, 2017), the retail entity’s motion was granted.  While these cases depend on the laws of different states, the courts were applying the same general estoppel rules, but reaching opposite results.

Two Tales of Waiver

Whether a party has waived its contractual right to arbitrate is an issue that comes up regularly.  Yet it remains surprisingly hard to predict whether a court will find waiver or not on any set of circumstances.

These two cases involve lenders bringing collection actions in state court for credit card debts.  In both, they were granted a default judgment.  And in both, the credit card holder later sued for problems with the collection efforts.  In response to that suit, the lenders moved to compel arbitration.  In one case, Cain v. Midland Funding, LLC, 156 A.3d 807 (Md. Mar. 24, 2017), the court denied the motion to compel, finding the lender had waived its rights.  In the other, Hudson v. Citibank, 387 P.3d 42 (Alaska Dec. 16, 2016), the court granted the motion to compel, finding the lender did not waive its rights.  In both cases, the analysis turned on whether the default action and later action were sufficiently related.

Two Tales of Formation

All of us do more and more of our business over mobile devices and the internet, where we don’t physically sign our name to contracts, and in fact we generally don’t read the terms and conditions.  That leads to hard legal questions over when a contract is validly formed and what terms the parties agreed to.

In these two cases, consumers have little or no choice between providers.  In order to sign up for the service, they receive one message.  In the first case, the message is “your account…[is] governed by the terms of use at [defendant’s website].”  In the second case, the message is “by creating an [] account, you agree to the TERMS OF SERVICE & PRIVACY POLICY.”  The consumers did not have to take any affirmative act to consent to the terms other than proceeding to set up their account.  In both cases, consumers later sued the provider and the providers moved to compel arbitration based on the terms available at their websites.  The consumers responded by arguing the parties had not validly formed any arbitration agreement.

In the first case, the provider was not successful in compelling arbitration.  James v. Global Tellink Corp., 852 F.3d 262 (3d Cir. Mar. 29, 2017).  In the second case, the provider was successful in compelling arbitration.  Meyer v. Uber Technologies, Inc., 868 F.3d 66 (2d Cir. Aug. 17, 2017).  Can it be that the wording difference between “your account.. is governed” and “by creating an account, you agree” explains the outcomes?  Or the fact that the consumers in the Uber case could have just clicked on the terms from the same device they were using to set up the account, while the prisoners in the first case would have had to hang up their telephones, find a computer and find the website?  The cases really give us no assistance in figuring that out.

Maybe every area of law has similar issues regarding the predictability of decisions.  But arbitration law is rife with legal “rules” to guide decision making that are so flexible as to hardly constitute rules at all.  And courts have not yet applied those rules enough times to allow them to develop a systemic approach, with internal consistency between the decisions.  And I predict that will only get worse, not better, as consumers and employees find new and creative ways to challenge arbitration agreements.

2017 New Year blue background.

2017 was a big year in arbitration law.  We went from a country that seemed on the verge of banning arbitration in most consumer and employee contracts to a country whose federal policy embraces arbitration in nearly every context.  From my vantage point, here are the ten top developments in the last twelve months:

  1. Regulation Reversal.  At the end of 2016, federal agencies were proposing rules to ban arbitration in various settings (student loans, nursing home agreements, consumer financial contracts).  Today, all of those have been reversed.  Most were reversed by the agencies themselves (CMS, Dept of Ed.), but in the big CFPB story, it was Congress that did the reversing.
  2. New Preemption Case from SCOTUS: Kindred Nursing Ctrs v. Clark, 137 S. Ct. 1421 (May 15, 2017).  This case found Kentucky had developed a rule for analyzing “power of attorney” documents that stood as an obstacle to arbitration.  What should state supreme courts learn from this decision?  To avoid FAA preemption, don’t insult SCOTUS, don’t worship the jury, and you really should be able to cite to a case where you’ve applied the same rule outside the arbitration context.  (Read the postscript.)
  3. Arbitration on Trial.  The public discourse in 2017 was hostile to arbitration.  Arbitration was literally on trial in a case against JAMS (for an arbitrator’s alleged resume-padding), but also was figuratively on trial as a contributor to the problem for sexual harassment victims and an obstacle for consumers impacted by the fake accounts at Wells Fargo and Equifax data breaches.  However, the level of public interest in this issue does not seem high enough to capture the interest of Congress (see vote on CFPB in #1), and one primary arbitration critic in the Senate, Al Franken, will resign shortly.
  4. Waiting for NLRB.  This fight between the NLRB and the courts has been brewing for so long!  My first post about the NLRB’s decision that class action waivers in employment agreements violated the federal labor laws, and the federal courts’ disagreement with that decision, was in 2013.  This year, the drama heated up as not only did SCOTUS take the case and hear argument in October, but the Dept. of Justice shifted its support from one side to the other shortly before the argument.
  5. Circuit Split on “Wholly Groundless.”  Should courts do any spot check on arbitrability before enforcing a delegation clause?  Until this year, the only answer was yes, and that came from three circuits (Fed, 5th, 6th), but in 2017, two circuits said “no way!” because it violates SCOTUS’s precedent (10th, 11th).  This could end up on SCOTUS’s docket soon.
  6. Small Claims Court Confusion.  A number of cases took up the issue of whether a company’s effort to collect a debt in small claims court (usually pursuant to a carve out in the arbitration clause) waived its right to later enforce arbitration when that consumer sued about the debt collection effort.  E.g., Cain v. Midland Funding, LLC, 156 A.3d 807 (Md. Mar. 24, 2017). The case outcomes were inconsistent.
  7. Statutory Preclusion.  Attempting to avoid arbitration by holding up a statute that appears to require a claim to be heard in court is always a solid argument (but usually unavailable).  This year it came up often, but not successfully.  See McLeod v. General Mills, Inc., 854 F.3d 420 (8th Cir. 2017).
  8. Non-Signatories Get Divergent Results.  Another perennial favorite topic is defendants who want to compel the arbitration clause in a plaintiff’s contract with someone else.  This came up often again this year, but with notable losses and generally inconsistent results.  (Teaser for an upcoming post…)
  9. Clarifying That Awards Don’t Get Vacated For Trivial or Old Relationships. One area of law that courts seem to be trying to clean up this year is the standard for what types of relationships are significant enough that the award could be vacated.  What’s not enough?  Having decided a different matter with the same expert, and having been colleagues with counsel for one party 15 years before are two examples of what is not enough.
  10. Are There Exceptions To The Three Month Window For Vacating Awards?  The Ninth Circuit said yes (in the case of fraud), but the Nebraska Supreme Court found no exceptions available.  Given that this statute has been in place since 1925, this seems like the kind of thing that would have been settled by now…

 

2017web100-blawghalloffame.jpg[4]

It’s the most wonderful time of the year!  Not just because of the chestnuts roasting and mistletoeing, but because it is when the ABA Journal names the best legal blogs.  Arbitration Nation made it to the Top 100 list for the sixth year running, and remains the only arbitration blog on the list.  Even more exciting, Arbitration Nation was one of five blogs added to the ABA Journal’s “Blawg Hall of Fame,” which recognizes the “very best law blogs, known for their untiring ability to craft high-quality, engaging posts sometimes on a daily basis.”

I am very grateful to the ABA Journal for highlighting this “new” way of lawyering and marketing for the past ten years.  I am also grateful to all of you for reading the posts, for sending me cases to blog about, and for recommending me to clients!  No time to rest on any laurels, there are new arbitration cases coming out every day and now I have lots of new law blogs to check out…

 

Cabbage Patch in Oregon CloseUp

What could be a better subject for a Black Friday weekend post than the Cabbage Patch Kids??!  Especially if you are old enough to remember the 1980s…  Whether you loved or hated the smushed-face dolls, the point of this post is that the 11th Circuit confirmed an arbitration award in their favor, showing significant deference to the arbitrator.  Original Appalachian Artworks, Inc. v. Jakks Pacific, Inc., 2017 WL 5508498 (11th Cir. Nov. 17, 2017).

The dispute was between the company that owns the Cabbage Patch Kids (CPK) brand and a company to which it licensed the intellectual property during 2012-2014 (the licensee).  As the end of the license agreement was approaching, CPK selected a new company to receive the license in 2015, and let them get started creating the new line of toys, so that the new line could launch right away in 2015.  The licensee claimed that was a breach of the agreement and started an arbitration.

The arbitrator concluded that CPK had not breached the agreement and ordered that the licensee had to repay CPK over a million dollars in unpaid royalties.  The licensee moved to vacate the award.  Curiously, it made arguments under both the Georgia Arbitration Code and the FAA, and the 11th Circuit considered them all.  [Maybe showing that New Hampshire was onto something in declaring the FAA does not preempt state law on vacatur?]

Under the Georgia Code, the licensee argued the arbitrator had manifestly disregarded the law by ignoring the parol evidence rule (and accepting extrinsic evidence regarding the agreement).  [Manifest disregard is a statutory basis for vacatur under the Georgia act, unlike the federal act.]  The court found there was no concrete evidence that the arbitrator purposely disregarded the law, which is the standard.  Instead, the transcript and award showed the arbitrator had understood Georgia law as instructing that the purpose of contract interpretation is to effectuate the parties’ intent, and that’s what he tried to do in reviewing the extrinsic evidence.  So, even “assuming the arbitrator incorrectly applied the parol evidence rule,” the court found he “simply made a mistake.”  That does not rise to the level of manifest disregard.

Under the FAA, the licensee separately argued that the arbitrator had exceeded his powers.  After quoting the standard from Sutter, the court quickly concluded that because the arbitrator did interpret the parties’ contract, it does not matter “whether he got its meaning right or wrong,” the award must be confirmed.

Revolution concept. Fist up isolated on white background, vector

If I had to choose a favorite subset of arbitration cases, it might be the ones that come after SCOTUS remands to a state supreme court.  How does a state high court full of accomplished professionals, the cream of the legal crop in their state, respond after the U.S. Supreme Court has found their previous arbitration opinion was flawed?  Often, they find a way to stick to their guns.  We already saw that once in 2017, when Hawaii affirmed its arbitration decision, despite the GVR from SCOTUS.  And now Kentucky has followed suit.

In Kindred Nursing Centers Ltd P’ship v. Wellner, 2017 WL 5031530 (Ky. Nov. 2, 2017), the Kentucky Supreme Court addressed what was left of its Extendicare decision after SCOTUS took it apart in May of this year.  But not much was left.  The original decision had consolidated three separate actions: one was not appealed to SCOTUS, one was reversed by SCOTUS, and only the third was remanded by SCOTUS.  In the remanded matter, the Kentucky Supreme Court had rested its decision on two alternative grounds–the ground that SCOTUS found was preempted (that a power of attorney must clearly grant the right to give up a court or jury trial in order to have a valid arbitration agreement executed by the agent), and a finding that the language of the power of attorney at issue was not broad enough to encompass entering into a pre-dispute arbitration agreement.  So, the job on remand was to determine whether the second ground could stand up on its own, or whether it was “impermissibl[y] taint[ed]” by the preempted ground.

A majority of the Kentucky Supreme Court found there was no taint.  The nursing home relied on two provisions in the power of attorney, one giving power to demand or collect money and institute legal proceedings, and another giving the power to make contracts “in relation to both real and personal property.”  The court found that the arbitration agreement “was not the enforcement…of something then due or to become due” “nor was it the making of a contract…pertaining to” property.  As a result, “that aspect of the Extendicare decision remains undisturbed.”

While four members signed the majority opinion, three members of the court dissented, complaining that the majority failed to follow SCOTUS’s directive.  The dissent wrote “this Court’s distinction between pre-dispute arbitration agreements as not pertaining to a principal’s property rights . . . is simply another attempt to single out arbitration for ‘hostile’ treatment under the guise of Kentucky contract and agency law.”

Indeed, the majority had not completed edited out its hostility to SCOTUS’s arbitration case law from the decision.  For example, it criticized the Supreme Court’s

perception that our application of the clear statement rule, rather than the manifestation of our profound respect for the right of access to the Court of Justice explicitly guaranteed by the Kentucky Constitution and the right to trial by jury designated as “sacred” by Section 7 of the Kentucky Constitution, demonstrated instead a hostility to federal policies implicit in the Federal Arbitration Act and a resulting aversion to any implication of authority to make an arbitration agreement.

Pro tip to Kentucky: edit out any future references to jury trials being sacred if you want to avoid another certiorari petition in an arbitration case.

 

 

IMG_5956

What happens when state courts disagree with SCOTUS’s interpretation of the Federal Arbitration Act?  They resist, and they have a thousand different ways of doing so.  The Mississippi Supreme Court demonstrated one way to resist recently in Pedigo v. Robertson, Rent-A-Center, Inc., 2017 WL 4838243 (Miss. Oct. 26, 2017). (I neglected to mention the state appellate courts as important actors in last week’s post about what we may see now that the CFPB rule is dead.)

In Pedigo, the plaintiff entered into a Rental Purchase Agreement (RPA) from Rent-A-Center.  (Yes.  The same Rent-A-Center of delegation clause fame.)  Within about four months, he stopped making payments.  At that point, Rent-A-Center found out that plaintiff had sold the television to a pawn shop shortly after purchasing it.  Rent-A-Center then filed a complaint with the police, and the plaintiff was arrested and incarcerated.

After the plaintiff was released from jail, he filed a civil action against Rent-A-Center, alleging the police report was false.  Rent-A-Center moved to compel arbitration.  The trial court judge compelled arbitration.

On appeal, the high court found that plaintiff’s claims of malicious prosecution were outside the scope of the parties’ arbitration agreement.  The RPA itself prohibited the sale or pawning of the leased goods.  The arbitration agreement in the RPA stated that covered claims “shall be interpreted as broadly as the law allows and mean[] any dispute or controversy between you and RAC….based on any legal theory…”  The only claims not covered were those for injunctive or declaratory relief, or those seeking less than $5,000 in damages.  However, because “the agreement fails to contemplate that a lessor/signatory might pawn collateral and subsequently be indicted and jailed” the court did not require the plaintiff to arbitrate his claims.

Why do I call this “resistance”?  Because there are many cases saying that as part of the federal policy favoring arbitration, courts presume that claims are within the scope of a valid arbitration agreement.  The coin is weighted towards “heads.”  And here, the agreement explicitly prohibited pawning the TV, and the arbitration clause was about as broad as it could be.  Yet the court refused to compel arbitration.  The implication of this court ruling seems to be that if a specific claim is not enumerated in an arbitration clause in Mississippi (to show it was contemplated), the claim is not arbitrable.  And that just does not fit within the federal precedent.

You know what state is not currently resisting?  Missouri.  The Supreme Court of Missouri faithfully followed the instructions SCOTUS gave in Rent-A-Center, and enforced a delegation clause over the votes of two dissenting justices.  In Pinkerton v. Fahnestock, 2017 WL 4930289 (Mo. Oct. 31, 2017), the Missouri high court found that the parties’ incorporation of the AAA rules was a clear and unequivocal delegation clause.  It also found that the great majority of the plaintiff’s challenges were not specific to the delegation provision (they applied to the arbitration agreement as a whole) and so could not be considered; the only specific challenge was plaintiff’s argument that it is unconscionable to delegate arbitrability to “a person with a direct financial interest in the outcome.”  The court dismissed that out of hand, citing Rent-A-Center.  Because the plaintiff had made no successful challenge to the delegation clause, the Missouri high court enforced it, sending the issue of the arbitration agreement’s validity to the arbitrator.