In an opinion that coins new terms and uses the insouciant tone of a blogger, the 11th Circuit just shut down a putative class action brought by homeowners against a vendor of roof shingles.  The Court found that the terms and conditions printed on the exterior of the shingle packaging formed an enforceable contract (with a class arbitration waiver), and when the roofing contractors opened the shingles, the roofers bound the homeowners who had hired them.  Dye v. Tamko Building Products, Inc., 2018 WL 5729085 (11th Cir. Nov. 2, 2018).

The Dye decision relies heavily on two decades of case law finding that consumers are bound to terms and conditions that accompany software or consumer products or phone apps.  Indeed, the Court suggests that consumers have been on notice that they are bound by terms on the outside of packaging, or with a product, since the 1997 decision in Hill v Gateway 2000, 105 F.3d 1147 (7th Cir. 1997).  Those types of terms are called “shrinkwrap” or “clickwrap” or “scrollwrap” agreements.  And the Court found no reason to treat this agreement, which it termed a “shinglewrap” agreement, any differently.  Therefore, the Court found that by printing its arbitration clause, with a class action waiver, on the exterior of the shingle packaging, the defendant had formed an enforceable contract.

The harder part of the opinion, in my view, is with whom did the defendant form an enforceable contract.  It was not the homeowners who opened the shingle packaging, it was their roofers.  And there are no facts suggesting that the roofers informed the homeowners of the terms on the packaging, or that there were terms at all.  But the Court found that because the roofers were the homeowners’ agents for the purpose of purchasing and installing roof shingles, and because accepting the purchase terms is the kind of thing that should have been expected of the agents, the roofers bound the homeowners to the arbitration agreement (along with the rest of the terms).

[I am aware of at least one court that came out on the opposite side of this “shinglewrap” issue.  In 2015, the Missouri Court of Appeals refused to enforce the same vendor’s arbitration agreement, finding the circumstances distinguishable from cases like Hill v. Gateway.]

Although the Court makes short work of the agency portion of this opinion, I think it merits a deeper analysis.  Usually, even in the case of contracts of adhesion, courts note that the party had some semblance of choice: either to not buy the product, or not work for that employer, etc.  Here, it is hard to see how the homeowners had a choice, since they were unaware that their roofers were considering shingles that would preclude class actions.  Should owners (commercial and residential) put clauses in all their construction contracts revoking the right of contractors and subcontractors to enter into agreements on their behalf??  Is that their only option for unwittingly entering contract terms to which they may object?  I’d love to hear your thoughts.

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And now, a postscript on last month’s post reporting that New Jersey and Missouri refused to enforce arbitration clauses where there was a problem identifying the administrator.  Turns out, other courts have been thinking about the same issue, but resolving it differently.  In Paulozzi v. Parkview Custom Homes, 2018-Ohio-4425 (Ohio Ct. App. Nov. 1, 2018), the Ohio Court of Appeals enforced the parties’ arbitration agreement, even though it called for administration by a now-defunct ADR institution (not NAF).  The Ohio court just severed that aspect of the arbitration clause and called on the trial court to appoint a replacement arbitrator.  In Beltran v. AuPairCare, Inc., 2018 WL 5571319 (10th Cir. Oct. 30, 2018), the arbitration agreement allowed the employer to select the arbitration provider.  The court found that unconscionable, but instead of invalidating the entire arbitration agreement, it also severed that provision and noted that both the FAA and California’s arbitration statutes provide alternate methods of selecting an administrator.

Those two cases make Missouri and New Jersey look out of step.  But, Missouri may now be alone.  I understand that the New Jersey courts have “withdrawn” the decision in Flanzman, and indeed I cannot find it on Westlaw.

**Big thanks to my friends in NJ, Ohio, and NY who alerted me to these developments.

 

Usually the plaintiffs in a class action want to stay out of arbitration, but in the recent case of JPAY v. Kobel, 2018 WL 4472207 (11th Cir. Sept. 19, 2018), it was the class representatives who were fighting for arbitration.  In particular, they wanted the arbitrator to decide whether they could have a class action.  And they won.

In a case that reads as if it is charting significant new ground, even though the court reached almost the same conclusion just a few weeks ago, the Eleventh Circuit clarified a few holdings.  First, the availability of class arbitration is a “gateway issue” that is presumptively for courts to decide.  [To be fair, in the earlier decision, it had assumed that result without actually reaching that holding.]  Second, the availability of class arbitration can be delegated to arbitrators just as easily as other gateway questions.  In other words, the 11th Circuit reaffirmed its opposition to the rule adopted by three other circuits: that the question of class arbitrability takes special delegation language, and incorporating JAMS or AAA rules is not enough.

In this case, the court found that the parties had delegated the question of whether the action could proceed on a class basis in arbitration in two independent ways.  First, they had agreed to arbitrate under AAA rules (the agreement mentions both consumer and commercial rules).  Because the AAA rules authorize arbitrators to determine their own jurisdiction, the 11th Circuit found this was sufficient to authorize the arbitrator to decide whether a class action was available under the language of the parties’ arbitration agreement.  It disagreed that the parties needed to have adopted or referenced the AAA Supplementary Rules for Class Arbitrations.

Second, the parties had included this language in the arbitration clause: “the ability to arbitrate the dispute, claim or controversy shall likewise be determined in the arbitration.”  The court found that was sufficient, even without the incorporation of AAA rules, to take the class arbitrability decision out of the court’s ambit.

The court also took on some of the public policy arguments made in favor of keeping class arbitrability in the courts.  It said “[t]he arbitrator’s decision whether a class is available will be more efficient and more confidential than a court’s would be.  The determination of class availability has the same stakes and involves the same parties whether it is decided in a court or in arbitration.”  And while the arbitrator’s decision is “somewhat less reviewable than a court’s,….it will be no less reviewable than any other decision made in arbitration, and the law generally favors arbitration of many high-stakes questions.”  This is one of the most respectful, positive statements I have seen about arbitration in a court decision in a long time.  Curious though that the court did not address the frequent rebuttal to these arguments: that there could be financial incentive for an arbitrator or administrator to find a class can proceed.

The decision was not unanimous.  The lone dissenter from the panel wrote that “without a specific reference to class arbitration the court should presume that the parties did not intend to delegate to an arbitrator an issue of such great consequence.”

I am taking bets on how quickly SCOTUS grants cert to decide this circuit split.

In the past year, if I wrote about “FLSA” and “arbitration” in the same post, it likely meant that another federal court had found employers can include class action waivers in their employment contracts without violating the Fair Labor Standards Act.  Today, however, is different.  The Eleventh Circuit last week found that it was the FLSA that gave the district court sufficient “managerial responsibility” over workers’ collective actions to override an employer’s coercive, post-lawsuit rollout of a new arbitration agreement.  Billingsley v. Citi Trends, Inc., 2014 1199501 (11th Cir. March 25, 2014).

The collective action is made up of store managers at a clothing retailer, who allege the retailer systematically failed to compensate them for overtime.    The putative class action was filed in February of 2012.  By June of 2012 there was a preliminary scheduling order.  Under Eleventh Circuit precedent, the plaintiff would start the process of notifying similarly-situated store managers 60 days after the scheduling order.  In response, the retailer asked for extensions and then presented the court with new arbitration agreements executed by “several dozen” store managers.  The store argued that these managers were now subject to arbitration and unable to join the court action.  The plaintiffs objected and requested “corrective actions” (i.e., sanctions).

After a two-day evidentiary hearing, the district court in Alabama made its findings and conclusions.  It found that after the scheduling order in the case came out, the retailer got busy instituting a new ADR policy.  The new policy called for binding arbitration that could only proceed on an individual basis.  And, instead of being handed out in a group setting like the retailer’s usual handbook changes, the new policy was delivered individually to store managers in small rooms at the back of the store, “the same places where the store interrogated or investigated its employees.”  H.R. representatives asked the store managers to sign the new arbitration agreement along with a fill-in-the-blank declaration about their job duties.  The store managers testified they understood they would be fired if they did not consent.

The district court found the timing of the rollout “was calculated to reduce or eliminate the number of collective action opt-in Plaintiffs in this case” and was designed to be “intimidating and coercive.”  Therefore, and in response to the retailer’s motion to compel arbitration against the managers who signed the new arbitration agreements, the district court concluded the arbitration agreements were unconscionable and unenforceable.  Furthermore, the district court exercised its managerial responsibility to oversee collective actions under the FLSA and refused to enforce the arbitration agreements for that second, independent basis.

The Eleventh Circuit affirmed.  Interestingly, it did not analyze whether the new arbitration agreements were unconscionable.  Instead, the opinion consists entirely of the appellate court applying the “abuse of discretion” standard to the district court’s use of its “managerial responsibility” under the FLSA.  The opinion described a district court’s responsibility for overseeing FLSA actions broadly — including governing the conduct of the counsel and parties in order to avoid confusion and unfairness (especially ex parte contact with potential class members), as well as ensuring an orderly process.  Given that expansive authority, the court concluded the district court did not abuse its discretion in determining the retailer’s conduct “undermined the court’s authority to manage the collective action” and therefore putative plaintiffs could join the lawsuit notwithstanding their signature on the new arbitration agreements.

Not many employers will attempt to rollout a new ADR policy in a “blitzkrieg fashion” like this retailer.  So, what’s the significance of this case?  It shows that in the current era of the strong federal policy in favor of arbitration, courts who believe arbitration agreements are unenforceable are searching for some basis other than the usual state law contract defenses.  That is because those contract defenses could be preempted by the Federal Arbitration Act and the allowable bases for “substantive unconscionability” narrow each year.  This case essentially re-frames the case from one about enforcing arbitration agreements to one about whether district courts have the ability to manage their cases and not get manipulated.  I believe the Eleventh Circuit saw that as less likely to be reviewed and reversed.

The severability doctrine of federal arbitration law tells litigants that unless they can specifically challenge the validity of the arbitration provisions of the contract, as opposed to challenging the entire contract, the courts will not address the merits of the challenge.  (See entire line of increasingly harsh cases starting with Prima Paint and continuing through Rent-A-Center.)  But, there was always one big loophole – courts would always address arguments about whether any agreement was ever concluded at all.  The federal courts have been willing to decide claims (even though not specific to the arbitration provisions) that a party’s signature was forged, or an agent lacked authority to execute the contract, or a contracting party lacked legal capacity to contract, despite the presence of arbitration clauses in those contracts.  The Supreme Court confirmed in Granite Rock that issues of contract formation are reserved for the courts, not arbitrators.  Granite Rock Co. v. Int’l B’hood of Teamsters, 130 S. Ct. 2847, 2855-56 (2010).

The Eleventh Circuit has now narrowed the types of “formation challenges” that courts in its circuit can hear.  Solymar Investments, Ltd. v. Banco Santander S.A., __ F.3d __, 2012 WL 612302 (11th Cir. Feb. 28, 2012).  In Solymar, the plaintiffs alleged that they had agreed to a multi-part settlement of their Madoff-related investment fraud with the defendants.  After significant negotiation, the parties contemplated execution of multiple documents simultaneously.  However, the defendants convinced plaintiffs that one of the documents (the Exchange Agreement) needed to be executed quickly, and the others would follow. 

After execution of the Exchange Agreement, negotiations fell apart, and no further documents were executed.  The plaintiffs took the position that because only one of the contemplated documents was executed, there was no binding settlement and initiated a lawsuit.  In response, the defendants moved to compel arbitration based on the arbitration provision in the Exchange Agreement.  The district court compelled arbitration.

The Eleventh Circuit affirmed the decision to compel arbitration based solely on the Exchange Agreement.  Using the applicable state law (Florida’s), the court found that the Exchange Agreement was a complete and final document, and because the plaintiffs did not challenge the validity of its arbitration provisions in particular, they must be enforced.  The court refused, however, to address the merits of the plaintiffs’ claims that the Exchange Agreement was invalid because it was intended to be one aspect of a broader scheme of agreements.  Without much analysis, the court found that issue was not properly characterized as “formation” but instead of “validity,” and therefore it was in the province of the arbitrator. 

Although this particular issue is not likely to arise frequently, it shows that even formation challenges may be construed very narrowly under the current Supreme Court precedent, and that the line separating formation challenges from validity challenges may not be neatly drawn.