As regular readers of the blog may recall, Liz wrote a brief note about a decision by the Supreme Court of Missouri holding that arbitration is not available when companies select a defunct institution to administer their arbitrations with consumers.  See A-1 Premium Acceptance, Inc. v. Hunter, 2018 WL 4998256 (Mo. Oct. 16, 2018).  In the case, the commercial party — A-1 — had designated, in a 2006 arbitration agreement contained loan documents, the National Arbitration Forum (“NAF”) as the administering institution.  The NAF, however, entered into a consent decree in 2009 requiring it immediately to stop providing arbitration services for consumer claims nationwide.

Other courts around the country have enforced similar arbitration agreements.  But a Circuit split exists about how best to handle this situation.  The Missouri court took one approach, distinguishing between agreements where the parties agree to arbitrate regardless of the availability of a particular arbitration and agreements where the two sides agree to arbitrate only in a particular forum.  Under the first kind of agreement, the Missouri court conceded that the FAA authorizes courts to name a substitute arbitrator if the forum contemplated in the original agreement is unavailable. But under the second kind of contract, in which the agreement specifies the arbitration forum, the FAA doesn’t grant courts the authority to swap in a new institution. “Nothing in the FAA authorizes (let alone requires) a court to compel a party to arbitrate beyond the limits of the agreement it made,” the Missouri court said.

Although the case presented an opportunity for SCOTUS to provide guidance on this issue, on March 18, it declined to do so.

 

This post is aimed at drafters of arbitration clauses. Because if you don’t insert an administrator for your arbitration, and don’t anticipate that the administrator may just stop providing services, your arbitration clause is dead in the water. At least, that’s the holding of two new state court cases.

In A-1 Premium Acceptance, Inc. v. Hunter, 2018 WL 4998256 (Mo. Oct. 16, 2018), the Supreme Court of Missouri affirmed the lower court’s decision to deny a defendant’s motion to compel arbitration. The reason was that the arbitration agreement within the 2006 loan documents provided “any claim or dispute related to this agreement…shall be resolved by binding arbitration by the National Arbitration Forum [NAF], under the Code of Procedure then in effect.” As regular readers are aware, the NAF stopped administering consumer arbitration in 2009. Although many courts have enforced arbitration agreements, despite their inclusion of NAF, Missouri did not. It found that the language of this clause showed that the parties intended to arbitrate before the NAF and only the NAF. Therefore, the court refused to use Section 5 of the FAA to appoint a replacement administrator.

In Flanzman v. Jenny Craig, Inc., Docket No. A-2580-17T1 (N.J. Super. Ct. App. Div. Oct. 17, 2018), New Jersey’s appellate division was faced with a slightly different problem: the parties’ arbitration clause did not provide what rules would govern the arbitration nor which entity would administer it.  As a result, the court found the arbitration clause was never formed, because the employee could not give informed assent. It reasoned:

Selecting an arbitral institution informs the parties, at a minimum, about that institution’s arbitration rules and procedures.  Without knowing this basic information, parties to an arbitration agreement will be unfamiliar with the rights that replaced judicial adjudication.  That is, the parties will not reach a “meeting of the minds.”

While clarifying that no magic words were required, the New Jersey court noted that if the parties don’t identify an “arbitral institution (such as AAA or JAMS)” they should at least identify the process for selecting a forum.  Otherwise, arbitration agreements will not be enforced under New Jersey law. (Unlike Missouri, the New Jersey court did not discuss Section 5 of the FAA and the statutory authority for courts to appoint arbitrators.)

On October 1, new Commercial Arbitration Rules became effective at the American Arbitration Association (AAA).  These rules are likely to apply to all commercial arbitrations filed on and after October 1 (unless an arbitration agreement specifically provides for old rules).  The AAA posted its own summary of the changes.  Four of the most notable include:

  • Greater specificity about allowable discovery, as well as clear authority for arbitrators to enforce discovery orders or sanction those who do not comply;
  • Specific authority for arbitrators to hear dispositive motions if “the moving party has shown that the motion is likely to succeed and dispose of or narrow the issues in the case”;
  • Authority for parties to seek emergency relief (even without having provided for it separately in the arbitration agreement) from an emergency arbitrator within specific timelines; and
  • The parties and their counsel now have a separate duty to disclose “any circumstance likely to give rise to justifiable doubt as to the arbitrator’s impartiality or independence” including past dealings with the parties and their representatives.

In my view, these are all very positive changes.

Speaking of rules, two recent courts compelled arbitration when the arbitration agreement provided for administration by the defunct NAF.  (Previous posts on that topic here and here.)  The definite trend now is to enforce arbitration agreements calling for administration by the NAF, albeit with some procedural “fixes” to the agreement.

In one case, the Seventh Circuit compelled arbitration even though the parties’ loan agreement provided for “binding arbitration by one arbitrator by and under the Code of Procedure of the National Arbitration Forum [NAF]” and the NAF had not accepted consumer cases since July of 2009.  Green v. U.S. Cash Advance Illinois, LLC, __ F.3d ___, 2013 WL 3880219 (7th Cir. July 30, 2013).  (Curiously, the agreement was signed in 2012, so there was plenty of time to revise it after the NAF stopped taking cases.)  The district court had refused to compel arbitration, finding the NAF was an “integral part of the agreement” and without it the arbitration agreement was void.  Noting a circuit split in which the 3d and 11th Circuits have compelled arbitration, despite selection of the NAF, while the 5th Circuit has declared agreements calling for the NAF unenforceable, the 7th Circuit sided with those compelling arbitration.  The decision engaged in a lengthy analysis suggesting that the line of cases finding one aspect of an arbitration clause “integral” contradicts Section 5 of the FAA and does not come from a general state law principle allowable under Section 2.  The Green decision has a dissent from Judge Hamilton, largely relying on the fact that the NAF Code itself “provides for arbitration by the Forum or by nobody.  Since the Forum made itself unavailable, that should mean arbitration by nobody.”

In a less contentious case, the Sixth Circuit also enforced an arbitration clause that referenced the NAF.  In that arbitration clause, however, the drafters had inserted a Plan B: “The National Arbitration Forum will be the Administrator unless…” the lender chose the AAA under certain circumstances.  The court concluded that even though the NAF was the preferred forum, that language could be excised pursuant to the note’s severability clause, which left the language authorizing arbitration before the AAA.   Smith v. Computertraining.com, Inc., 2013 WL 4406999 (6th Cir. Aug. 16, 2013).