Class action arbitration continues to be a hot topic among the federal appellate courts this summer.

The 8th Circuit followed the lead of other circuit courts, finding that courts, not arbitrators, presumptively decide whether the parties’ arbitration agreement allows for class arbitration. Catamaran Corporation v. Towncrest Pharmacy, 2017 WL 3197622 (July 28, 2017).   In support of its decision, the court raised concerns about class arbitration, including loss of confidentiality, due process concerns for absent parties, and a concern about the lack of appellate review.  [Interesting that it didn’t cite any of CFPB’s report on this, but just cited other case law… ] Therefore, unless the parties have “clearly and unmistakably delegated” the class arbitration issue to the arbitrator, a court will decide the issue.  Furthermore, the court said that incorporating the AAA rules is not a clear and unmistakable delegation of the class arbitration decision, even though citing the AAA rules is sufficiently clear in analogous issues in regular “bilateral arbitration.”  The court remanded to the district court to determine whether there was a contractual basis for class arbitration.

Halfway across the country, the 9th Circuit held that employees could bring their claims related to a data breach as a class action in arbitration.  Varela v. Lamps Plus, Inc., 2017 WL 3309944 (Aug. 3, 2017).  The employees had first brought their class claims to federal court, and the employer moved to compel individual arbitration.  The district court found the arbitration agreement was valid, but ambiguous about whether class actions were waived.  Construing that ambiguity against the employer who drafted the agreement, the district court ordered class arbitration.  On appeal, the 9th Circuit affirmed the finding of ambiguity, sending the class to arbitration as a group.  One judge issued a two sentence dissent, noting “we should not allow Varela to enlist us in this palpable evasion of Stolt-Nielsen

Three state supreme courts tackled arbitration law in recent weeks: Alabama, North Carolina, and Rhode Island.  Rhode Island reversed a construction arbitration award because it disagreed with the arbitrator’s analysis.  North Carolina found that an arbitration agreement in a doctor-patient setting was unenforceable as a breach of the doctor’s fiduciary duty.  And Alabama strictly enforced an arbitral venue, even though that precluded class action.

Continuing its streak of hewing closely to the lead of federal courts on arbitration, the Supreme Court of Alabama held that plaintiffs have to arbitrate with the Better Business Bureau, even though the BBB does not conduct class action arbitration proceedings.  University Toyota & University Chevrolet Buick GMC v. Hardeman, _ So. 3d __, 2017 WL 382651 (Ala. Jan. 27, 2017).  The plaintiffs were a putative class of customers harmed by two car dealerships’ decision to stop honoring their earlier agreement to provide free oil changes.  The arbitration clause between the dealerships and purchasers called for arbitration of all disputes pursuant to the FAA, and said “either party may demand arbitration by filing with the Better Business Bureau.”  When the plaintiffs filed their demand, the BBB responded that it did not conduct class arbitrations.    The plaintiffs then withdrew their demand and filed in court, asking either to keep their fight in court or go to a forum that allowed class arbitration.  The trial court sent the plaintiffs to the AAA to decide whether class actions were available.  On appeal, the supreme court reversed in a 7-1 decision.  The majority quoted heavily from SCOTUS decisions stating that arbitration agreements should be enforced according to their terms, and found that the BBB forum was an integral part of the arbitration agreement that must be given effect.  The lone dissenter argued that, because the availability of class arbitration was for the arbitrator, it should be decided by a forum that at least retains that option.

Without any consideration of the Federal Arbitration Act, the Supreme Court of Rhode Island vacated an arbitration award.  Nappa Construction Management, LLC v. Flynn, __ A.3d __, 2017 WL 281812 (R.I. Jan. 23, 2017). (Maybe an allergy to the FAA is contagious… remember nearby New Hampshire last year?)  In a dispute between the owners of a automobile repair facility and the construction company that was hired to build it, the arbitrator issued an award that analyzed the parties’ contract and found the construction company was owed money.  The trial court refused to vacate the award, finding the arbitrator grounded his analysis in the contract and did not manifestly disregard the law.  On appeal, the Supreme Court of Rhode Island cited only cases from its own court, including labor cases, and found that the arbitrator had exceeded his authority (and the award failed to draw its essence from the agreement) by finding that the owners had effectively terminated the contract, when there was no evidence that the owners actually terminated the contract.  The court also accused the award of reaching an “irrational result.”  Two justices dissented, noting the “exceptionally deferential standard of review” for arbitration awards.  They did not, however, cite to the line from Sutter, as I would have, that even “grave error” by an arbitrator is not sufficient to vacate an award if the arbitrator in fact analyzed the contract.  (Maybe no one argued the FAA applied?  A commercial construction contract would almost certainly involve interstate commerce…)

Finally, the Supreme Court of North Carolina refused to enforce the arbitration agreement between a doctor and patient, finding that the agreement “was obtained as a result of defendants’ breach of fiduciary duty that they owed to” the patient.  King v. Bryant, __ S.E.2d __, 2017 WL 382910 (N.C. Jan. 27, 2017).  The patient had brought a medical malpractice action against his surgeon, and the surgeon tried to enforce the arbitration agreement between them.  The arbitration agreement called for application of the FAA and arbitration under health care procedures of the AAA.

The N.C. trial court refused to compel arbitration, finding the agreement was only an “agreement to agree,” and started off a crazy game of appeals court-district court ping pong involving this case.  The court of appeals reversed and remanded.  On second thought, the trial court refused to enforce the agreement because the surgeon had a fiduciary duty to disclose the arbitration agreement to his patient as a material term, and because he did not it was unenforceable.  The court of appeals affirmed, noting the application of the FAA, but finding the agreement unconscionable.  The supreme court then remanded to the trial court for further findings of fact regarding the existence of a physician-patient relationship when the agreement was signed, and the trial court complied.  Finally, the case returned to the supreme court, which held that the doctor owed a fiduciary duty to the patient and breached it “by failing to make full disclosure of the nature and import of the arbitration agreement to him at or before the time that it was presented for his signature.”  Recognizing the possibility of an argument that its holding is preempted by the FAA, the court noted “we would have reached the same result on these facts with respect to any agreement that substantially affected [the patient’s] substantive legal rights.”  However, the opinion cites no N.C. cases to support that statement, which may be fatal under the DirecTV analysis.  Two justices wrote separate dissents, based largely on FAA preemption.  (“This jiggery-pokery is precisely the type of impermissble ‘rationalization’ admonished by the United States Supreme Court. Such a tortured attempt to obviate the FAA fails.”)

What is the take away here?  It is that there is still a huge amount of variation in how a given arbitration dispute will be handled, depending on what court hears the dispute.  And the preemption rules set out in Concepcion and DirecTV are either not well understood, or are being intentionally avoided.

In a decision that appears intentionally controversial, the Supreme Court of New Jersey yesterday refused to enforce the delegation clause in a for-profit college’s enrollment agreement in a 5-1 opinion.  Morgan v. Sanford Brown Institute, 2016 WL 3248016 (N.J. June 14, 2016).  Although the delegation clause had never been specifically challenged by the plaintiffs, as is required by SCOTUS’s Rent-A-Center in order to avoid delegating the issue of arbitrability to the arbitrator, the court found that was immaterial

The plaintiffs alleged that Sanford Brown Institute had induced them to enroll via misrepresentations and deception.  In response, the defendants moved to compel arbitration, based on an arbitration agreement in the plaintiffs’ enrollment agreement.  The trial court denied the motion, but the intermediate appellate court reversed, concluding that an arbitrator should decide whether the arbitration agreement was enforceable, due to the presence of a delegation clause.

At the state’s highest court, the issue of whether the delegation clause was enforceable was the sole issue.  The plaintiffs argued they were unaware the arbitration agreement “denied them their right of access to a judicial forum and to a jury trial,” making the arbitration agreement unenforceable under New Jersey’s Atalese decision.  Plaintiffs — and the court– characterized their failure to understand that arbitration is a substitute for court, not an addition to court, as preventing a meeting of the minds, and therefore a challenge to the very existence of the entire agreement.  In response, defendants pounded on Rent-A-Center, arguing that it is binding precedent and must be applied to conclude that since the plaintiff failed to challenge the validity of the delegation clause specifically, an arbitrator must address any challenges to arbitrability (including challenges under Atalese).

Although the NJ Supreme Court identified the key issue in this case as “who decides whether the parties agreed to arbitrate disputes arising from the enrollment agreement: a court or an arbitrator,” I would say the real issue in the case is “can New Jersey find a way around Rent-a-Center’s rule enforcing delegation clauses that does not entirely give the middle finger to SCOTUS and thereby invite reversal?”

The delegation clause that was enforced in Rent-A-Center, because plaintiff did not challenge its validity in particular, stated: “[t]he Arbitrator, and not any federal state, or local court or agency, shall have exclusive authority to resolve any dispute relating to the interpretation, applicability, enforceability or formation of this Agreement.”  The delegation clause that New Jersey refused to enforce in Morgan stated: “Any disputes, claims, or controversies between the parties to this Enrollment Agreement arising out of or relating to…(v) any objection to arbitrability or the existence scope, validity, construction, or enforceability of this Arbitration Agreement shall be resolved pursuant to this paragraph (the “Arbitration Agreement”).”  [Note that the NJ sample does not specifically say the issue will not be addressed by a court, but the words used to describe the types of disputes that will be arbitrated are very similar.]

After acknowledging that the plaintiffs did not specifically challenge the delegation clause in Morgan, the court went on to establish some logical building blocks for distinguishing Rent-A-Center.  First, it noted that state law governs whether the parties “entered an agreement to delegate” arbitrability.  Second, delegation clause must be clear and unmistakable under First Options.  Third, no one challenged the “clarity” of the delegation clause in Rent-A-Center.  (There is the wiggle room!)  Therefore, because the NJ plaintiffs challenge whether the delegation clause was clear enough to allow a meeting of the minds, the New Jersey Supreme Court defines that as a challenge to the formation of the arbitration agreement containing the delegation clause, putting the issue of arbitrability squarely before the court.  And, having concluded that the court, not an arbitrator could decide the validity of the arbitration clause, this Court went on to find it unenforceable. Critically:

The arbitration provision in the Sanford Brown enrollment agreement suffers from the same flaw found in the arbitration provision in Atalese — it does not explain in some broad or general way that arbitration is a substitute for the right to seek relief in our court system.  That flaw– non-compliance with the dictates of Atalese–extends to the purported delegation clause…

***

In conclusion, the arbitration provision and purported delegation clause do not meet the requirements of First Options and Atalese and do not satisfy the elements necessary for the formation of a contract, and therefore are unenforceable.

The lone dissenting justice stated “I cannot reconcile the majority’s reasoning with the United States Supreme Court’s decision in Rent-A-Center.”

Here is some context:

  • The Morgan majority repeatedly comments that the defendants did not raise the delegation clause issue at the trial court.  So, why not just say the appeal issue was not properly preserved and reject delegation on those narrow procedural grounds?  SCOTUS would never grant cert of that.  Instead, however, NJ went out of its way to forge a path through Rent-A-Center.  
  • Actually, not much forging happened here.  NJ followed the trail blazed by Kentucky last year.  Kentucky also refused to enforce the delegation clause in a for-profit college agreement, finding it was never formed (in that case, because the signatures were not at the end of the agreement).  West Virginia did something similar, refusing to enforce a delegation clause because it was not “clear and unmistakable,” because “arbitrability” is an ambiguous word.  (W. Va, Kentucky, and NJ are strange bedfellows, no?)
  • NJ may not have openly thumbed its nose at SCOTUS in this opinion, but a recent opinion from its intermediate appellate court did.  It complained that SCOTUS’s “liberal federal policy favoring arbitration…in many cases has caused the forfeiture of important rights because consumers and employees lack the bargaining power to object to an arbitration clause’s inclusion; citation of the ‘liberal federal policy favoring arbitration’ merely evokes the old saying, ‘a good catchphrase can obscure fifty years of analysis’.”  Kleine v. Emeritus at Emerson, Docket A-4452-14T3 (N.J. Ct. App. June 9, 2016).
  • The U.S. Department of Education has recently proposed a rule that would preclude postsecondary institutions from requiring that students arbitrate disputes.  So, New Jersey has some political cover in deciding not to force these students into arbitration.  (We just did it a year before the rule would have done it anyway!)
  • And – one state supreme court enforced a delegation clauses in recent weeks.  Alabama enforced this delegation clause: “Any dispute regarding whether a particular controversy is subject to arbitration, including any …dispute over the enforceability, scope, reach or validity of this agreement…shall be decided by the arbitrator(s).”    Regions Bank v. Rice, 2016 WL 3031357 (Ala. May 27, 2016).

All in all, I often feel that arbitration law is a big game of Whack-a-mole, where the U.S. Supreme Court is the kid holding the hammer, and the state courts keep randomly popping up with new and creative ways around arbitration precedent.  But now, with only eight Justices, and no Scalia, will SCOTUS be willing to bring down the hammer on states for not following its controversial 5-4 decision in Rent-A-Center?  I am guessing not.  Send me your thoughts.

 

Joining the Sixth and Third Circuit Courts of Appeals, the Fourth Circuit this week held that “whether an arbitration clause permits class arbitration is a gateway question of arbitrability for the court.”  Dell Web Communities, Inc. v. Carlson, 2016 WL 1178829 (4th Cir. Mar. 28, 2016).

At issue was whether a federal judge or an arbitrator would decide whether class arbitration was appropriate for claims of construction defects in “approximately 2,000” homes.  The individual arbitration agreements had no explicit language regarding the availability of class actions.  The district court had determined the arbitrator should  decide the availability of the class mechanism.

The Fourth Circuit reversed.  It reviewed recent case law from SCOTUS, noting that while the Court “has not conclusively told us who gets to decide whether an arbitration agreement provides for class arbitration,” it has provided plenty of hints that the issue should be presumptively for courts.  As a result, the Fourth Circuit declined to follow its own unpublished precedent, and remanded the case to the district court for a determination “whether the parties agreed to class arbitration.”

This is an important trend in putative class action cases where the plaintiffs have signed arbitration agreements.  Defendants now have three federal appellate decisions to cite in favor of the proposition that courts should decide whether a class is allowed.  Keeping those decisions in court will help build precedent regarding the type of language in arbitration agreements that can constitute an agreement to class actions.

 

Showing it will soldier on without Justice Scalia, the Supreme Court granted cert, vacated, and remanded an arbitration decision from West Virginia yesterday.  Because this is the exact same treatment the Court gave a case from Hawaii’s highest court in January (and the same treatment I predicted, ahem), it suggests SCOTUS is trying to go on with business as usual.

So, what was the West Virginia case? It is the Schumacher Homes case I wrote about last July, in which that state’s highest court refused to enforce the parties’ delegation clause, even after acknowledging the rule in Rent-A-Center, because it found the word “arbitrability” was ambiguous.

This GVR (grant, vacate, and remand), although not a summary reversal because it ostensibly leaves it up to the West Virginia courts to decide what to do next, falls in line with recent arbitration summary reversals from SCOTUS.  Prof. Drahozal, in an interesting article called “Error Correction and the Supreme Court’s Arbitration Docket,” helps put it in context (Ohio State Journal on Dispute Resolution, Vol. 29, No. 1, 2014).  

He writes:

Indeed, since O.T. 2000, the proportion of summary reversals that addressed arbitration issues (4 of 83, or 4.8%) is more than double the proportion of argued cases (18 of 948, or 1.9%) that addressed arbitration issues.

What are the common characteristics of cases that receive a summary reversal?  First, they misapply the FAA.  But also, Prof. Drahozal points out:

The summary reversals were all in cases that originated in state rather than federal courts, and often included some suggestion that the state court disagreed with Supreme Court decisions interpreting the FAA.

Bingo!  That last factor is definitely present in Schumacher Homes.  In addition to calling the rule in Rent-A-Center “absurd” and an “ivory-tower interpretation of the FAA,” the opinion criticized all federal arbitration jurisprudence, explaining that the SCOTUS decisions construing the FAA “create an eye-glazing conceptual framework” that is “a tad oversubtle for sensible application” and that “the rules derived from these decisions are difficult for lawyers and judges—and nearly impossible for people of ordinary knowledge—to comprehend.”

So, here’s a tip for all state courts that want to buck the FAA, but not risk summary reversal or GVR: don’t insult SCOTUS.

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.

A new case from the Sixth Circuit addresses whether accountants who are resolving a dispute about payments made under an agreement can also make legal determinations about the same agreement. In a 2-1 decision, the Sixth Circuit held that the scope of the dispute clause is broad enough to allow the accountants to resolve contract interpretation issues, as long as they are “relatively simple” and “closely related to accounting.” Shy v. Navistar Int’l Corp., __ F.3d__, 2015 WL 1383106 (6th Cir. March 27, 2015).

In Shy, Navistar was obligated to make annual contributions to a trust for its retired employees. The amount of the contribution was determined by a formula. If the committee managing the trust disputed the “information or calculation” provided by Navistar to support its contribution, and the parties could not resolve the dispute, the agreement provided that an accounting firm would resolve the dispute with a final and binding decision.

In this instance, the committee disputed how Navistar classified revenue when it was applying the formula. (The dissent states that “the gravamen of the [committee’s] allegations is that Navistar is engaging in a bad faith scheme to negate its substantive contractual duty to contribute a portion of its profits to fund the benefits of its retirees.”) The committee filed suit in federal court over those issues. Navistar responded by moving to compel arbitration, and the district court denied the motion. It found the claims fell within the scope of the arbitration clause, but that Navistar had waived its right to arbitrate.

On appeal, the Sixth Circuit reversed. It found that the claims were arbitrable, and that Navistar had not waived its right to arbitrate.

Why am I writing about accountants determining the application of a financial formula on an arbitration blog? Because contract clauses that allow an appraisal process to determine a value, or an accountant to resolve a financial dispute, are generally deemed arbitration clauses under federal law, even when no derivative of the word “arbitration” appears in the clause. As long as there is an independent adjudicator, substantive standards (like a contract) that apply, an opportunity for both sides to present their case, and a final decision, the process is deemed an arbitration that falls within the FAA.

And, in this decision, the Sixth Circuit found that the bean counters who determine how the formula applies were not limited to just counting beans. Because the contract clause called for the accountants to resolve disputes over “information or calculation,” the court held the language was broad enough to also encompass how Navistar categorized the information, and even “operational practices of Navistar” if those were closely tied to the information provided to the committee. The court did not exclude questions of contract interpretation from the scope of the arbitration, finding no indication the parties intended that limitation and finding the contract disputes at issue were “relatively simple” and “closely related to accounting.”

The dissent complained that the majority took the presumption in favor of arbitration too far. It accused the majority’s holding – that the accountants could determine legal questions that are closely connected to the financial questions –of having “no limiting principle.” “If applied as a general rule, any form of misconduct or bad faith dealing, or any fundamental change in the nature of the relevant business or transaction, could be characterized as an informational dispute…”

I find this an interesting case because many industries commonly use dispute mechanisms in which a specialist of some type is called on to resolve a specific type of dispute. (A panel of doctors determine whether you qualify for disability insurance, for example, or a panel of real estate appraisers determine the value of a property.) However, drafters of these clauses should take note that these clauses will be deemed arbitration clauses, and then the broad presumption of arbitrability will apply to the scope of those clauses. So, if you don’t want your bean counter to have the power to determine whether your beans are legal, these clauses must be written with carefully demarcated boundaries.

In a footnote in Sutter, SCOTUS hinted that the question of whether an arbitration agreement allowed for class arbitration may be one of the “gateway” questions of arbitrability that are presumptively for courts to decide. Last year, the Sixth Circuit went one step further, finding that the availability of class arbitration defaults to the courts. And this week, the Third Circuit agreed.

In Opalinksi v. Robert Half Int’l, Inc., __ F.3d __, 2014 WL 3733685 (3d Cir. July 30, 2014), a putative class of plaintiffs sued their employer. Their employment agreements called for arbitration, but said nothing about whether classwide arbitration was permitted. The employer moved to compel arbitration and the district court granted that motion, finding that the arbitrator should determine whether class arbitration was available.

The appellate court disagreed. It held that “whether an agreement provides for classwide arbitration is a ‘question of arbitrability’ to be decided by the District Court.” In support of its holding, the Third Circuit likened the decision about whether a class can go forward in arbitration to other arbitrability decisions that default to judges, like whether non-signatories are bound to arbitrate. The Third Circuit also noted that while procedural questions are generally for arbitrators, the availability of class arbitration has been construed by the Supreme Court as “not solely [] a question of procedure” but instead a “substantive gateway dispute.”

I predict there will be more circuit court cases finding that judges are the presumptive decisionmakers about class arbitration in the months to come.

p.s. There is only one week left to make sure ArbitrationNation stays in the ABA Blawg 100… Here is the link to use: http://www.abajournal.com/blawgs/blawg100_submit/ .

In a short and sweet opinion issued just six weeks after argument, the Eighth Circuit yesterday held that an arbitrator was authorized to decide whether a non-signatory was able to arbitrate a dispute.  Eckert/Wordell Architects, Inc. v. FJM Props. of Willmar, LLC, __ F.3d __, 2014 WL 2922343 (8th Cir. June 30, 2014).

The dispute was over the design and construction of a laser eye clinic in Minnesota.  The contract containing the arbitration agreement was between the architects and Fischer Laser Eye Center, the owner of the property where the clinic would be.  The shareholders of Fischer later formed a separate company to own and develop the land for the clinic, and that second company then changed its name to FJM Properties.  When it discovered problems with ventilation, FJM Properties demanded arbitration with the architects.  That arbitration proceeding went on for more than a year.  Just a month before the evidentiary hearing, the architects objected to participating further, based on their assertion that they had no arbitration agreement with FJM Properties.  The arbitrator found he had power to determine whether the parties had an arbitration agreement and invited briefing.

The architects went to federal district court and asked the judge to stop the arbitration.  But the court agreed that the arbitrator had the power to decide whether FJM could enforce the arbitration agreement between Fischer and the architects.  In a single paragraph of analysis, the Eighth Circuit affirmed.  It reminds us that “threshold questions of arbitrability are for a court to decide, unless there is clear and unmistakable evidence the parties intended to commit questions of arbitrability to an arbitrator.”  In this case, the parties’ incorporation of the AAA’s Construction Industry Arbitration Rules (which allow arbitrators to rule on their own jurisdiction) served as “a clear and unmistakable indication the parties intended for the arbitrator to decide threshold questions of arbitrability.”  Reading between the lines, the fact that the architects drafted the contract and then tried to design an escape hatch from arbitration after the proceeding was nearly concluded did not help their cause.

 

Because courts apply a presumption of arbitrability when they analyze whether particular claims fall within the scope of an arbitration clause, and arbitration clauses are generally drafted very broadly, I don’t usually get to write about courts finding that a dispute falls outside the scope of arbitrable claims.  But this week, both the Second and Third Circuits issued decisions holding that defendants could not compel arbitration because the plaintiffs’ claims fell outside the arbitration clause.

In Allstate Ins. Co. v. Mun, 2014 WL 1776007 (2d Cir. May 6, 2014), Allstate alleged that two New York providers had engaged in insurance fraud.  Allstate had already paid the providers for their services, and sought to recover those payments.  After Allstate sued, the providers moved to compel arbitration.  The district court denied the motion and the Second Circuit affirmed that decision.  Both courts found that the arbitration provision, although “appear[ing] quite broad,” only applied to disputes over claims for first-party benefits (i.e. the providers’ initial request for payment).  The courts reached that conclusion in part because of its interpretation of aspects of New York’s no-fault insurance statutes, which had been interpreted to require arbitration only of first party claims..

In CardioNet, Inc. v. Cigna Health Corp., 2014 WL 1778149 (3d Cir. May 6, 2014), medical device providers sued CIGNA for its decision not to pay for services related to those devices (after it had covered such services for four years).  The device company had brought two types of claims: 1) direct tort claims relating to a letter that CIGNA sent to doctors calling the devices experimental and unproven; and 2) derivative claims on behalf of individual insureds under ERISA.  CIGNA moved to compel arbitration.  The district court granted the motion, but the appellate court vacated that decision, finding both categories of claims fell outside the scope of the parties’ arbitration agreement.

The Third Circuit found the direct claims about the letter to doctors were not arbitrable.  The parties’ contract provided for arbitration of disputes “regarding the performance or interpretation of the Agreement,” and the court found that “whether CIGNA performed its obligations under the Agreement has no bearing on whether it harmed the [device company] by providing physicians with misleading information” about their services.

The Third Circuit also found that the derivative claims were outside the scope of the Agreement’s arbitration provision.  The district court had enforced the arbitration agreement because it felt to do otherwise would allow the device company to “nullify their agreement to arbitrate these claims for payment by becoming assignees of the Plan Participants’ claims.”  The Third Circuit disagreed for two reasons.  First, it found that the underlying claims did not concern the “performance or interpretation of the Agreement” and therefore the claims would not have been arbitrable even if the device company brought them directly.  Second, it found that as an assignee, the device company was in the same legal position as the plan participants, and therefore should be treated as a non-signatory even if the claims fell within the arbitration clause.  “Just as the burden of arbitration must travel with a claim, so too, must the right to litigate.”

These decisions may be part of a new direction in arbitration case law.  Courts are only authorized to decide three things: whether the parties formed an arbitration agreement; whether that agreement is valid under state and federal law; and whether the instant dispute falls within the scope of that arbitration agreement.  But SCOTUS continues to narrow (via Buckeye Check Cashing, Concepcion, Italian Colors, etc) — or should I say knock out — the potential bases for finding an arbitration agreement invalid.  It is then a very logical reaction for parties, counsel, and courts who want to get around arbitration agreements to focus on the other two categories of arguments — formation and scope.  Indeed there have been many state cases recently finding the parties never formed an arbitration agreement (often based on lack of authority).  And these two cases may be leading the way on scope.  (I note that the Third Circuit raised concerns about the “policy implications” of forcing the participants’ claims into arbitration…)