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.

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.

March comes in like a lion, right?  Well, that’s not true with respect to the weather here in Minneapolis.  But it may be true with respect to arbitration decisions from around the country.  This post focuses on two recent decisions from state high courts that refuse to compel arbitration.

In Global Client Solutions, LLC v. Ossello, 2016 WL 825140 (Mont. Mar. 2, 2016), a majority of Montana’s Supreme Court refused to enforce the arbitration clause between a consumer and a financial institution (that set up a bank account for the consumer’s efforts with a debt relief company).  The arbitration clause provided for AAA arbitration of all claims arising out of the agreement, even claims relating to the validity of the agreement, but the bank had the right to bring collections actions in court. The trial court found the arbitration clause was unconscionable and refused to compel arbitration.

On appeal, the Montana Supreme Court first found there was no enforceable delegation clause in the parties’ arbitration clause, because the language was “ambiguous and confusing” instead of clear and unmistakable, largely due to what appears to be a typo in the clause. (The clause said the parties would arbitrate “the breach, termination, enforcement, interpretation or validity [of the entire agreement], including the termination of the scope or applicability of this Agreement to arbitrate”.  The bank argued “termination” was supposed to be “determination.”)  The court also refused to find that incorporation of the AAA rules constituted an enforceable delegation clause, because it did not specify which AAA rules applied and this was not a contract between two sophisticated commercial parties.

After confirming it could address the validity of the arbitration clause, the court found the clause unconscionable under Montana law because the bank had the right to bring collection matters to court, while the consumer had no similar right. The court reasoned that its holding was not preempted under the Concepcion rule, because other post-Concepcion courts have relied on lack of mutuality to invalidate an arbitration clause.

A concurring justice wrote “The elephant in the room is not state hostility toward arbitration…If there is any hostility, it is toward those who hide behind the FAA…to escape any material consequence of running fraudulent confidence schemes.” [But of course that assumes that a AAA arbitrator would not find wrongdoing when confronted with a “fraudulent confidence scheme”… ] Two justices dissented, asserting that the incorporation of AAA rules was a valid delegation clause, such that the arbitration clause’s validity should have been decided by a AAA arbitrator.

The second case comes from Alabama and is a cautionary tale for companies trying to add arbitration agreements to existing contracts with many consumers.  In Moore v. Franklin, 2016 WL 761698 (Ala. Feb. 26, 2016), the Supreme Court of Alabama found the parties did not form a valid arbitration agreement by virtue of the bank posting a notice to the customer’s online banking profile.  Citing cases from five federal courts, Alabama concluded that in order to form part of the parties’ agreement, there must be proof that the recipient accessed the web page containing the arbitration provision.

What lessons can we give drafters from these two cases?  Well, check for typos.  And then double and triple-check.  Then, and only then, considering increasing the likelihood the arbitration clause will be found enforceable by making any carve-outs mutual.  If the company can bring collection claims in court, then why not let the consumer bring modest claims in small claims court?  Finally, once you drafted the clause, find a way of making sure those customers see it (and hopefully even click a button confirming that they agreed to it).

Lots of interesting arbitration law has been made already in 2016, so here is a roundup from the first four weeks of the year. As a teaser, courts have breathed life into the effective vindication doctrine, found arbitrators cannot determine the availability of class actions, and found state laws not preempted.  More surprisingly, state courts are following SCOTUS’s interpretations of the FAA.

Effective Vindication Lives On

Although I thought Italian Colors was an “effective elimination” of the effective vindication doctrine, the Tenth Circuit affirmed its use as a defense to a motion to compel arbitration this month in Nesbitt v. FCNH, Inc., 2016 WL 53816 (10th Cir. Jan. 5, 2016).  [Side note to WestLaw: can there really have been 53,816 cases by January 5th of the year??  Or do I misunderstand the numbering system?]  In that case, class action plaintiffs in a Fair Labor Standards Act case defeated a motion to compel individual arbitrations by asserting that under the AAA Commercial Rules, each plaintiff would have to pay between $2,300 and $12,500 in arbitrator fees and could not recover attorneys’ fees.  The appellate court affirmed.

Incorporation of AAA Rules Can “Unmistakably” Delegate Some Gateway Issues, But Maybe Not the Availability of Class Actions

The Third Circuit drew what seems to me a questionable distinction between parties’ ability to delegate some substantive issues of arbitrability from others. Despite acknowledging that federal courts of appeals have universally found that when parties agree to be bound by the AAA rules, they delegate substantive arbitrability to arbitrators, the Third Circuit found that does not extend to the availability of class arbitration. Chesapeake Appalachia, LLC v. Scout Petroleum, LLC, 2016 WL 53806 (3d Cir. Jan. 5, 2015).  Recall that in general, courts are presumed to have authority to determine whether an arbitration exists, whether it is valid, and whether it covers the scope of the parties’ dispute.  But, under First Options of Chicago, a SCOTUS opinion, parties can delegate even those issues to arbitrators as long as their intent to do so is “clear and unmistakable.”  In Chesapeake Appalachia, the court repeats its pronouncement from Opalinski that the “availability of classwide arbitration” is one of those substantive questions of arbitrability that courts presumptively decide, unless parties clearly and unmistakably state otherwise.  And then it further protects courts’ ability to make that determination by holding that the parties’ incorporation of AAA rules, which explicitly allow arbitrators to determine their own jurisdiction and contain supplementary rules about class arbitration, is not sufficient to delegate the availability of classwide arbitration to arbitrators.  Drawing on statements from Sutter, the court leaned on the “great” procedural differences between bilateral and class-action arbitration to support its distinction.

Waiver of the Right to Arbitrate is an Issue Presumptively for Courts

Maybe Bryan Garner can come up with a new term for “waiving” the right to arbitrate, so that it is not the same verb as waiving the substantive claim being arbitrated. If so, that would alleviate the problem that the Supreme Court of Nevada addressed in Principal Investments, Inc. v. Harrison, 2016 WL 166011 (Nev. Jan. 14, 2016).  That court wrestled with the issue of whether a court or an arbitrator should decide if a party has waived its right to arbitrate by participating in litigation.  In other words, is that type of waiver a substantive question of arbitrability (like whether there is a valid arbitration agreement) that is presumptively for courts, or a procedural question of arbitrability that is presumptively for arbitrators?  Adding to the confusion is language from Howsam and BG Group characterizing “waiver” as an issue presumptively for arbitrators.  After canvassing other courts and finding the majority have concluded that waiver-by-litigation is presumptively for courts, the Nevada Supreme Court followed the herd.

Missouri Enforces Prima Paint’s Severability Doctrine

As I have picked on Missouri for bucking federal arbitration law, I owe it to the Show-Me State to point out that it recently (but reluctantly) followed federal precedent on severability. In Ellis v. JF Enterprises, LLC, 2016 143281 (Mo. Jan. 12, 2016), the Supreme Court of Missouri recognized that under federal precedent, a plaintiff cannot avoid an arbitration agreement by asserting the contract as a whole is void, it must point to a deficiency with the arbitration clause specifically.  As a result, the court held that “no matter what logic or fairness” undergirded the plaintiff’s argument that her auto sale was invalid, she had to arbitrate that claim.

Kentucky’s Precedent on Wrongful Death Actions is not Preempted by FAA

In Richmond Health Facilities v. Nichols, 2016 WL 192004 (6th Cir. Jan. 15, 2016), the Sixth Circuit analyzed Kentucky’s state law rule, which holds that wrongful-death claims belong only to beneficiaries, and therefore any arbitration agreement signed by a decedent cannot bind a beneficiary bringing a wrongful death claim.  The Sixth Circuit found that state law rule does not stand as an obstacle to the FAA, because it does not categorically prohibit arbitration of wrongful death claims, so was not preempted.

Lots of Action on Attorneys’ Fees

The Supreme Court of Utah held that an arbitrator cannot award attorneys’ fees incurred in confirming the arbitration award, under the Uniform Arbitration Act. Westgate Resorts, Ltd. V. Adel, 2016 WL 67717 (Utah Jan. 5, 2016).

Massachusetts’ highest court also found an arbitrator is not authorized to award attorneys’ fees due to one party’s assertion of frivolous defenses (unless the parties specifically granted the arbitrator that authority). Beacon Towers Condominium Trust v. Alex, 2015 WL 9646024 (Mass. January 7, 2016).

Similarly, the Second Circuit held that a federal district court erred in awarding attorneys’ fees and costs to the party that successfully confirmed its arbitration award. Zurich Am. Ins. Co. v. Team Tankers (2d Cir. Jan. 28, 2016).  As part of its contractual analysis, the court repeated that parties may not contract around Section Ten of the FAA.  In other words, it would not read the parties’ contract as precluding an attempt to vacate the award.

PHEW. I have now alleviated the guilt that has been weighing on me for not blogging about these cases yet.  Hope February brings a more reasonable stream of opinions!

The Alabama Supreme Court has followed the Eighth Circuit’s lead, concluding that when the parties agree to arbitrate pursuant to the AAA Rules, they have clearly and unmistakably authorized the arbitrator to determine who is bound by that arbitration agreement.  Federal Ins. Co. v. Reedstrom, __ So. 3d __, 2015 WL 9264282 (Ala. Dec. 18, 2015).

The dispute in Reedstrom centered on whether an executive liability insurance policy covered a judgment against a former executive for misconduct.  The executive sued the insurance company for breach of contract, and the company moved to compel arbitration.  The trial court denied the motion without any rationale.

The Alabama Supreme Court reversed.  On appeal, two key issues were analyzed: whether the insurance company could compel arbitration with the executive, even though he did not sign the insurance policy (his former employer did); and whether the insurance company had waived its right to arbitrate.  The court noted that the default rule is that courts generally decide both those issues, unless the arbitration provision “clearly and unmistakably” delegates them to the arbitrator.  And in this case, the majority found the arbitration provision did exactly that by agreeing to arbitrate pursuant to the current AAA commercial rules, which allow the arbitrator to rule on his or her own jurisdiction.

Three justices dissented from the opinion, generally concluding that incorporating the AAA rules is not enough, by itself, to constitute clear and unmistakable evidence that parties intend to submit arbitrability to an arbitrator.

Usually, when faced with a respondent who refuses to pay its share of the arbitration fees, a claimant simply pays both sides’ fees, so that the arbitration can proceed.  A new case out of the Tenth Circuit answers the question: what happens if it does not pay both sides’ fees?  Pre-Paid Legal Services, Inc. v. Cahill, __ F.3d__, 2015 WL 3372136 (10th Cir. May 26, 2015).  Somewhat surprisingly, the answer is that the claimant can choose to litigate its case in court, where there are no fees.

Pre-Paid Legal Services sued its former employee for allegedly taking its trade secrets to a new employer.  Pre-Paid brought that suit in state court.  The employee removed to federal court and moved to stay the case pending arbitration.  The district court agreed.  The day after the district court’s order, Pre-Paid started a AAA arbitration against the ex-employee.  Pre-Paid paid its share of the arbitration fees, but the ex-employee never paid its share.  “Pre-Paid declined to pay [the employee’s] share of the fees.”  (Maybe it wanted to be a test case??)  After many warnings, the AAA terminated the arbitration for non-payment of fees.  Because the employee refused to pay its share of the fees, and Pre-Paid would not pay its share either, Pre-Paid’s claims were never heard on the merits in arbitration.

So, Pre-Paid went back to federal court, asking the district court to lift the stay and allow litigation to proceed.  The ex-employee opposed the motion based on Section 3 of the FAA.  He argued that the language of Section 3 only allows a stay to be lifted after an arbitration is heard on the merits.  The statute says that if suit is brought on an arbitrable issue, the court:

shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement, providing the applicant for the stay is not in default in proceeding with such arbitration.

Both the district court and the Tenth Circuit disagreed with the ex-employee.  They refused to allow him to create a loophole whereby a defendant/respondent could avoid ever getting to the merits of a claim against him by simply refusing to pay his share of arbitration fees.

The Tenth Circuit analyzed two key phrases in the statutory language quoted above.  First, it found that “arbitration has been had in accordance with the terms of the agreement” does not necessarily mean a full hearing on the merits.  Instead, where the parties incorporate the rules of the AAA in their arbitration agreement, and those rules allow the AAA to terminate an arbitration for non-payment, even a terminated arbitration did happen “in accordance with the terms of the agreement.”

Second, the Tenth Circuit identified an alternative basis for lifting the stay: the ex-employee was “in default in proceeding” with the arbitration.  The ex-employee’s failure to pay constituted a default under Section 3, especially since he made no attempt to show he was unable to pay or ask the arbitrators for any relief from the payment obligation.

What is the result of this decision?  Pre-Paid will “resume with litigation” in the federal district court, almost three years after it initially filed its court case against the ex-employee.  What else?  Defendants everywhere are on notice that non-payment is not a “get out of litigation free” card.

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Another interesting tidbit: Judge Posner, writing for a panel of the Seventh Circuit, recently expressed his displeasure with the “strong federal policy” in favor of arbitration.  “It’s not clear that arbitration, which can be expensive because of the high fees charged by some arbitrators and which fails to create precedents to guide the resolution of future disputes, should be preferred to litigation.”  Andermann v. Sprint Spectrum L.P., No. 14-3478 (7th Cir. May 11, 2015).

The Minnesota Supreme Court today unanimously confirmed an arbitration award of over $600 million in punitive sanctions. Seagate Technology, LLC v. Western Digital Corp., (Minn. Oct. 8, 2014).  Although the appellant argued the arbitrator exceeded his authority by severely sanctioning appellant for fabricating evidence, the court concluded that the parties’ agreement gave the arbitrator power to impose the sanctions. In contrast to the two recent state court decisions vacating arbitration awards, this decision deserves a gold star. (Of course it does. In Minnesota, the women are strong, the men are good looking, and the judges are all above average.)

The parties’ arbitration agreement provided that arbitration would proceed “in accordance with the rules then in effect of the American Arbitration Association. The arbitrator may grant injunctions or other relief in such dispute or controversy.” The relevant AAA rules in turn empowered the arbitrator to “grant any remedy or relief that would have been available to the parties had the matter been heard in court.”  The court found that both the language of the agreement and the incorporated rule were broad enough to allow the arbitrator to issue sanctions, even big sanctions, against a party who fabricated evidence.

The court found the sanctions were “injunctions or other relief” within the meaning of the agreement, and a “remedy or relief” contemplated in the AAA rules. The court therefore held the arbitrator did not exceed his power and the award could not be vacated. (The court also disagreed with the opinion below by finding that arbitrators do not automatically have power to sanction parties, it must come from the language of the parties’ agreement or any incorporated arbitral rules.  The court refused to get into the merits of whether punitive sanctions was an appropriate remedy given the specific facts of this case, noting that the parties chose arbitration and with that choice comes “very limited review of the final award.” )

The court also found the arbitrator did not “refuse to hear evidence” within the meaning of the statute allowing vacatur. Because the arbitrator conducted a full evidentiary hearing before issuing his sanctions award, the court construed the appellant’s challenge as centering on how the arbitrator used or weighed evidence, which is not a basis for vacatur.

The most surprising thing about this case is that the parties do not appear to have argued for application of the FAA.  In fact, the court analyzed the case under Minnesota’s Uniform Arbitration Act (which has since been replaced by the Revised Uniform Arbitration Act).  Given that both of these parties engage in interstate commerce every day, never mind the sheer dollars at issue in this dispute, the FAA definitely applies.  Although the award would be confirmed under both state and federal arbitration statutes, I would have loved to see the Minnesota Supreme Court use this case as an opportunity to help educate the Minnesota bar about the broad application of the federal act.

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Other ArbitrationNation News

The University of the District of Columbia Law Review is looking for practitioners to present at its March 2015 conference: “Not All Controversies End in Court: Checking the Balance In Alternative Dispute Resolution.” If you are interested, send an abstract of 200 words or less to lawreview@udc.edu by November 1.

Two good new articles are available from Prof. Thomas Stipanowich, both including empirical data from recent surveys of arbitrators and mediators. The first is “Commercial Arbitration and Settlement: Empirical Insights into the Roles Arbitrators Play,” available at http://ssrn.com/abstract=2461839. The second is “Managing Construction Conflict: Unfinished Revolution, Continuing Evolution” available at http://ssrn.com/abstract=2484598.

 

In recent weeks, four federal and state appellate courts have vacated district court decisions that denied motions to compel arbitration.  The courts seem to be saying to defendants with arbitration agreements: don’t worry if you lose in the trial court, we will be your Tim Howard and save you from the gaping jaws of litigation.  (I have watched *a lot* of World Cup soccer in recent weeks, folks.  That is partly to blame for the huge stack of arbitration cases waiting for me to write about them.  Well, that and the fact that judges all over the nation appear to be churning out opinions at record speed before their law clerks turn into pumpkins in August.)

These are not just run of the mill reversals, either.  One dealt with an issue of first impression and another with a wholesale gutting of twenty years of case law.

In Al Rushaid v. Nat’l Oilwell Varco, Inc., __ F.3d__, 2014 WL 2971701 (5th Cir. July 2, 2014), the plaintiff filed suit against six defendants in August 2011, but could not serve one of them, NOV Norway, until August of 2012, after the other parties had engaged in significant discovery.  NOV Norway moved to compel arbitration within three months of being served the complaint.  The district court denied the motion because a) it found the price quote did not effectively incorporate the terms containing the arbitration agreement, and b) it found NOV Norway waived its right to arbitrate by invoking the judicial process.  On appeal, the Fifth Circuit reversed on both those grounds.  It found the plain language of the price quote did incorporate a general terms and conditions document with an arbitration agreement.  And, as a matter of first impression, it found that even though all the defendants were jointly owned and controlled and represented by the same counsel, the litigation activity of its codefendants could not be imputed to NOV Norway for the purpose of determining waiver.  (The court said the outcome would change if there were a basis to pierce the defendants’ corporate veil or an alter ego situation.)

Dean v. Heritage Healthcare of Ridgeway, LLC, __S.E.2d__, 2014 WL 2771300 (S.C. June 18, 2014), involved wrongful death claims against a nursing home, and the relevant arbitration agreement said that “any arbitration proceeding that takes place under this [] Agreement shall follow the rules of the [AAA]”.  However, the AAA stopped accepting personal injury disputes based on pre-injury arbitration agreements in 2003.  The nursing home moved to compel arbitration and the trial court denied the motion.  It found that the language about the AAA rules meant that the dispute should be heard by the AAA and since the AAA was not available, the arbitration agreement was invalid.  The Supreme Court of South Carolina reversed.  But before the supremes could get to the merits, they had to overrule their own 1993 decision, which held that nursing home contracts did not involve interstate commerce.  After reviewing the intervening cases from SCOTUS, the court found the nursing home agreement does involve interstate commerce and is governed by the FAA.  On the merits, the court found that the availability of the AAA to administer the arbitration was not a material term and instead the parties’ agreement simply calls for the arbitration to be governed by the AAA rules, regardless of what entity administers the proceeding.

In a Texas case, the defendant’s motion to compel arbitration was denied after the trial court found the arbitration agreement was unconscionable because it limited the plaintiffs’ statutory remedies and had a unilateral attorneys fees provision.  While the court of appeals affirmed that result, the Supreme Court of Texas reversed.  Venture Cotton Cooperative v. Freeman, __S.W.3d__, 2014 WL 2619535 (Tex. June 13, 2014).  Importantly, the court held that the agreement’s waiver of aspects of state law was invalid, but that was insufficient to invalidate the entire arbitration agreement.  Instead, it found the “objectionable limitation on the farmers’ statutory rights” should have been severed.  (And the attorneys’ fees provision also was insufficient to invalidate the arbitration agreement.)

Finally, the Third Circuit also just vacated a district court’s decision to deny a motion to compel arbitration in Ross Dress for Less, Inc. v. VIWY, L.P., 2014 WL 2937031 (3d Cir. July 1, 2014).  In that dispute over lease payments, the lease provided (confusingly) that disputes worth less than $50,000 should be arbitrated and those worth more than $50,000 can be litigated or arbitrated at the option of either party.  However, if the tenant withheld rent and the landlord disagreed, the dispute must be determined by an arbitrator.  In this case, their were claims relating to tenant withholding along with other claims worth more than $50,000 and the parties disagreed as to whether they had to arbitrate.  The district court found that the claims were outside the scope of the arbitration clause.  But the Third Circuit looked at the “conflicting lease provisions” and relied heavily on the federal presumption in favor of arbitrability to hold that all issues in the case must be arbitrated.

The primary lesson that can be drawn from these four cases is this: if you have a colorable argument for compelling arbitration, don’t give up if you lose at the trial court level.

It must be near the end of the clerk year, because courts are going gangbusters issuing opinions.  Today, a roundup of three arbitration decisions from Southern states.  Notably, Louisiana makes it tough for lawyers to enforce arbitration agreements with their clients.

After prominently noting that the lower court rulings were “eminently reasonable, logical and just,” the West Virginia Supreme Court of Appeals said they were “directly contrary to the” federal interpretation of the FAA, because they denied a motion to compel arbitration on grounds that it would result in inefficient and piecemeal litigation.  Johnson Controls v. Tucker,  __ S.E.2d __, 2012 WL 2226342 (W. Va. June 13, 2012).  In that construction dispute, seven defendants were answering claims that an HVAC system was improperly designed, constructed, and/or maintained.  But only three defendants had an arbitration clause with the plaintiff, and those three moved to compel arbitration.  The plaintiff opposed the motion, arguing that to force it into piecemeal litigation made the arbitration clauses unconscionable.  After finding that federal law precluded that argument, the court also found none of the agreements were unconscionable under the plaintiff’s other arguments.

The high court in Alabama also reversed a lower court’s denial of a motion to compel arbitration in Auto Owners Insurance, Inc. v. Blackmon Insurance Agency, Inc., __ So. 3d. __, 2012 WL 2477927 (Ala. June 29, 2012).  In that case between an insurance agent and the insurance company, the issue was whether the parties’ claims fell within the scope of their arbitration agreement.  That issue was made more complicated by the fact that the parties had executed three agreements between 1995 and 2010, only two of which had arbitration agreements.  While the lower court had denied the motion to compel arbitration, the Supreme Court of Alabama reversed that decision.  Its analysis rested on the fact that the parties’ first agreement, in 1995, had an arbitration agreement that incorporated the AAA rules, and those rules give the arbitrator the authority to determine whether the parties’ dispute is within the scope of the original arbitration agreement.

The Supreme Court of Louisiana had to decide whether arbitration agreements between lawyers and clients are enforceable in Hodges v. Reasonover, __ So. 3d __, 2012 WL 2529403 (La. July 2, 2012).  (Yes, Reasonover is the lawyer’s name.  Does Reasonover over-reason?  Read on…)  The retainer agreement called for arbitration by the AAA, and when the clients sued the lawyer for malpractice, the lawyer moved to compel arbitration.  The Louisiana court agreed with the ABA’s Formal Ethics Opinion 02-045 that  a binding arbitration clause between an attorney and client is not per se unenforceable.  However, it went on to find this particular clause unenforceable based on the lawyer’s failure to adequately disclose to the client at least the following seven aspects of the arbitration agreement: it waived their right to a jury trial, waived their right to appeal, waived their broad discovery rights, subjected them to higher upfront costs, it covered particular types of claims, it did not prevent the client from making a “disciplinary complaint”, and the client had the right to seek independent counsel before signing the agreement.

This high bar for disclosure was based on the attorney’s duty of candor and duty of loyalty, which the court found obligate a Louisiana lawyer to explain all consequences of agreeing to arbitrate.  Hodges cites no authority for that aspect of its opinion outside Louisiana state law, meaning it may be vulnerable to a Concepcion challenge.

 

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To date, courts have largely limited the impact of the Rent-A-Center decision to arbitration agreements with explicit delegation clauses. But, what if Rent-A-Center applied to every single arbitration agreement that mentioned the AAA rules?  That is a very real possibility, and one which would send almost all arbitrability disputes to arbitrators.

The ­Rent-A-Center decision used “delegation clause” to mean any aspect of an arbitration agreement that authorizes an arbitrator to decide questions about the validity of the arbitration agreement.  Rent-A-Center held that unless a party could allege a fatal flaw in the delegation clause itself, the arbitrator should decide the arbitrability question.  Courts have applied that ruling to explicit delegation clauses like this one: “Any issue concerning … the formation, applicability, interpretation or enforceability of [the arbitration agreement] . . . will be resolved by the arbitrators.”  Rai v. Ernst & Young, LLP, 2010 WL 3518056, at *1 (E.D.Mich. Sept. 8, 2010).  However, not many courts have yet had to struggle with what really constitutes a delegation clause?  Must it be so explicit?

In the 20 years before Rent-A-Center, many federal circuits reached a related decision: that an adoption of the AAA rules clearly and unmistakably demonstrates the intent of the parties to delegate the question of arbitrability to the arbitrator.  That is because the various AAA rules themselves state that the arbitrator has the power to rule on any questions of arbitrability ( the same rule should hold for any forum whose rules delegate that same power).  At least the First, Second, Eighth, Ninth, Eleventh, and Federal Circuits agree in that holding (with only the Third and Tenth Circuits disagreeing).  SCOTUS has never addressed whether adopting the AAA rules clearly and unmistakably delegates arbitrability to the arbitrator. (See case cites at end.)

The question is – how long will it take for these two lines of cases to meld into an airtight zipper that excludes 99% of arbitrability challenges from courts?   Here is how the argument would go: 1) the arbitration agreement at issue calls for application of AAA rules; 2)  federal courts have concluded that the adoption of AAA rules is an unmistakable delegation of arbitrability to the arbitrator; 3) therefore, the sentence mentioning the AAA rules is a “delegation clause”; and 4) Rent-A-Center applies, such that the anti-arbitration party must specifically challenge that delegation clause in order to have the court hear the challenge.

Of course, it may be just that sort of result  — a nearly wholesale denial of the court venue to litigants who challenge their larger arbitration agreement — that will create a five-Justice majority in favor of a less harsh severability doctrine.

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ENDNOTE

Cases holding that the parties’ agreement to arbitrate under AAA rules constitutes a clear and unmistakable delegation of arbitrability to the arbitrator:  Fadal Machining Centers, L.L.C. v. Compumachine, Inc., 2011 W.L. 6254979, *2 (9th Cir. 2011); Fallo v. High-Tech Institute, 559 F.3d 874, 878 (8th Cir. 2009); Terminix Intern. Co., L.P. v. Palmer Ranch Ltd. Partnership, 432 F.3d 1327, 1332 (11th Cir. 2005); Contec Corp. v. Remote Solution, Co., Ltd., 398 F.3d 205, 208 (2d Cir. 2005); Qualcomm Inc. v. Nokia Corp., 466 F.3d 1366, 1372-73 (Fed. Cir. 2001); Apollo Computer, Inc. v. Berg, 886 F.2d 469, 473 (1st Cir. 1989) (relating to ICC, not AAA rules).

Two Circuits have declined to follow the majority.   In Quilloin v. Tenet Health System Philadelphia, Inc., 673 F.3d 221, 225-26, 230 (3d Cir. 2012), the Third Circuit held that the parties “did not agree to arbitrate the issue of arbitrability,” despite agreeing to abide by the procedural arbitration rules of the AAA in their arbitration agreement.  Similarly, in Riley Mfg. Co., Inc. v. Anchor Glass Container Corp., 157 F.3d 775, 780 (10th Cir. 1998), the court held that, although the arbitration agreement in question required submitting to the rules of the AAA, the court could properly resolve the issue of arbitrability.