The Supreme Court issued another arbitration decision today in New Prime v. Oliveira.  And like last week’s decision in Henry Schein, it was unanimous (but Kavanaugh did not participate).  Today’s New Prime decision has two key holdings:  First, it is for courts, and not arbitrators (regardless of any delegation clause) to determine whether the Federal Arbitration Act applies.  Second, the Federal Arbitration Act does not apply to interstate transportation workers.  Those are pretty technical and dry, at least on the surface.

The Oliveira case did not start out as a dry arbitration case.  It started out as a class action by drivers for an interstate trucking company, all of whom were classified as independent contractors by the company, and all of whom alleged wage violations.  In response, the company moved to compel arbitration.

But the drivers had a great case for not arbitrating: the Federal Arbitration Act itself.   Section 1 carves out “contracts of employment of . . . workers engaged in foreign or interstate commerce.”  The drivers argued that they were workers engaged in foreign or interstate commerce.  The company’s rebuttal was two-fold: 1) the arbitrator should decide that issue, based on the parties’ delegation clause, and 2) the carve-out only applies to employees, not independent contractors.  Those arguments lost; Mr. Oliveira won at both the district court and in the First Circuit.

Writing for the unanimous court, Justice Gorsuch agreed with the lower courts.

With respect to the “who decides” question, the Court emphasized that Section 1 “warns” that nothing in the Act shall apply to those interstate workers.  So, the enforcement of Sections 2, and the authority to stay a case and compel arbitration in Sections 3-4, simply don’t apply.  The Court emphasizes the “statute’s sequencing” in its analysis — basically commenting that you don’t get to take advantage of step four of the FAA until you have passed step one.  So, you can throw your delegation clause out the window when the question is whether the FAA applies at all.

With respect to the substantive question, the Court concluded that Section 1’s exemption is not only for those who meet the current definition of “employee,” but it also encompasses independent contractors.  Why?  Because… dictionaries.  In determining the plain meaning of the text of Section 1 when it was adopted, the Court reviewed a lot of old dictionaries and legal authorities and concluded “the evidence before us remains that, as dominantly understood in 1925, a contract of employment did not necessarily imply the existence of an employer-employee or master-servant relationship.”   Therefore, the federal court lacked authority to order arbitration.

This decision raises many questions for me.  For example:

  • Did SCOTUS grant cert in these two easy cases (Henry Schein and New Prime) just to have some unanimous opinions?  Oliveira had already won at the district court and appellate court, so it’s not like SCOTUS needed to jump to his rescue.  (I expect Lamps Plus not to be unanimous…)
  • Why does it follow logically that if the FAA does not apply, then there is no authority to order arbitration?  The parties still have a contract that calls for arbitration, that the drivers are breaching by pursuing their case in court, and there can be remedies for breaching that contract…
  • Why would this exception be limited to interstate transportation workers?  If the text of the exception includes “workers engaged in foreign or interstate commerce,” that could blow a huge hole in SCOTUS’s arbitration jurisprudence.  With the case law on federal preemption in mind, pretty much every worker is engaged in interstate commerce…  And Justice Ginsburg’s dissent in Epic Systems suggested that the legislative intent was to exclude all workers from the FAA.  If so, this case turns into a backdoor Arbitration Fairness Act.
  • Why can’t these opinions be more engaging?  I swear that Justice Gorsuch was purposely trying to put us to sleep with this one.

I am sure there will be good articles discussing these questions and more in the upcoming days.  Send them my way if you are so inclined!

As we close out 2018, it is a good time to reflect on the year in arbitration law.  Overall, I would characterize the year as another in which everyone was mildly obsessed with class actions, the U.S. Supreme Court again showed its willingness to enforce arbitration agreements of all kinds, and lower courts and groups of citizens attempted to resist the high court’s blind faith in arbitration with some success.  Here are my thoughts on the biggest stories of the year:

  • Decision With Biggest Impact: SCOTUS’s ruling in Epic Systems Groups of employees argued that the National Labor Relations Act gave them the right to join class actions and no arbitration agreement could overcome that statutory right.  But the Court emphatically rejected that argument, holding that employees are bound to the agreements they sign and nothing in the NLRA contradicts that result.  The outcome of this case was not unexpected, but the fallout was dramatic.  Many class actions dried up almost immediately, while others took a few months.  Yet other employees decided to give mass individual arbitration a go, filing hundreds of arbitration demands against the same employer simultaneously.
  • Circuit Split Most Likely To Go To SCOTUS: The split over who — judges or arbitrators — should decide whether the parties’ arbitration agreement allows class arbitration.   Seven federal circuits have looked at this issue.  Four have concluded that the issue of class arbitration is a big enough deal that it is presumptively for courts to decide, even when the parties have incorporated arbitration rules that authorize an arbitrator to decide jurisdictional questions.  Three circuits disagree.  Given the Supreme Court’s attraction to everything class arbitration, this seems likely to pique the Justices’ interest.  (Indeed, a cert petition has been filed in the 11th Circuit case, which is on the minority side of this circuit split, and the Justices have asked the winning party to respond.)
  • Best Evidence That Arbitration Law Is Still In Its Infancy: The conflicting cases over whether Uber’s arbitration agreement is enforceable.  Nothing says “This is a developing area of law” like having the First Circuit refuse to enforce the same arbitration agreement that the Second Circuit had just agreed to enforce.  Even better — the difference turned on the color of the hyperlink.  [Runner up in this category are the conflicting cases over whether the arbitration agreements printed on the outside of roofing shingle packages are enforceable.]
  • Most Successful Political Attack on Arbitration: The #MeToo movement successfully brought public attention to  concerns that having arbitration agreements in employment contracts may exacerbate a discriminatory workplace.  As a result, legislation declaring arbitration agreements invalid in cases of sexual assault or harassment was introduced at the federal level and many states.  To date, I am aware of it passing in only New York and Washington.  But, those state statutes are likely preempted by the Federal Arbitration Act.  More effective may be the public pronouncements by many major corporations that they will not enforce arbitration agreements in cases of sexual assault or harassment.
  • New Face of the Resistance: Kentucky.  First place had to go to Kentucky, after this decision, in which it just ignored the fact that the U.S. Supreme Court had schooled it on arbitration law last year.  But there are many runners-up in this category, frequently consisting of courts who are using the flexibility inherent in state contract law to find ways around arbitration.  For example, the courts who have recently decided that if the parties either did not choose an entity to administer the arbitration, or chose one that is no longer available, that voids the entire arbitration agreement. (See postscript on this entry.)  Or the courts who found that, despite the federal presumption in favor of arbitrability, the parties’ disagreement was outside the scope of their arbitration agreement.
  • Most Outrageous Motion To Compel: There are moments you just want to say “What were you thinking??” to counsel for the defense.  This year, this case stood out to me for outrageous conduct, as the plaintiffs did not originally have an arbitration agreement but apparently were duped into signing one a year into the class action litigation.  But, this case was a close second (where the defense argued that blind plaintiffs should be bound by the arbitration agreement, despite no evidence they were made aware of its existence).

Turning our sights forward, what can we expect in 2019?  Well, SCOTUS owes us three arbitration decisions (Henry Schein, Lamps Plus, and New Prime).  None of those are likely to have broad impact on arbitration law, as they each deal with fairly narrow issues.  So, big stories will likely come from elsewhere.  Maybe the new Democratic majority in the House will have more interest (and success) in passing federal arbitration legislation?   Maybe mass individual arbitration filings will change the cost-benefit-analysis of class action waivers for corporations?  I look forward to watching it unfold with all of you!  Happy New Year.

One of the most confounding doctrines in federal arbitration jurisprudence is the severability doctrine.  The U.S. Supreme Court has held, since Prima Paint in 1967, that courts must enforce arbitration clauses within contracts, even if the entire contract is invalid or unenforceable.  (Most non-arbitration geeks don’t believe me when I tell them that’s the law.)  The only time a court can address the argument for invalidity is if the litigant directs it specifically at the arbitration clause.  For example, an argument that the elves’ contract with Santa is invalid because it’s illegal to pay them in candy canes is an argument about the contract as a whole, and would get sent to arbitration if the elves’ contract had a valid arbitration clause.  On the other hand, an argument that the arbitration clause in the elves’ contract with Santa is unconscionable because it calls for arbitration in the South Pole with Mrs. Claus as the arbitrator *is* specific to the arbitration clause, and should be decided by the court.  Unless, of course, the arbitration clause clearly and unmistakably delegated questions of validity to an arbitrator…

Two courts recently had an opportunity to remind litigants of the severability doctrine.  In Rogers v. Swepi LP, 2018 WL 6444014 (6th Cir. Dec. 10, 2018), the Sixth Circuit reversed a district court judge who failed to apply the severability doctrine.  In Rogers, a putative class of landowners brought suit against Shell for claims arising out of lease agreements.  Shell responded by moving to compel arbitration.  The landowners argued that the arbitration clause within the lease agreement (as well as the whole “second phase” of the lease) was only triggered upon payment of a bonus.  The court found this was an attack on more than just the arbitration clause, and therefore application of the severability doctrine called for the issue of arbitrability to be decided by an arbitrator.  (However, whether class arbitration was permissible should be decided by the court on remand.)

Similarly, the Supreme Court of Montana sent a dispute over arbitrability to an arbitrator in Peeler v. Rocky Mountain Log Homes Canada, Inc., 2018 WL 6498693 (Mont. Dec 11, 2018).   In Peeler, an owner sued both the design professional and contractor over claims relating to construction of a custom log home.  Only the contractor’s agreement had an arbitration clause, but the complaint alleged the design firm was an affiliated entity that should be treated the same as the contractor.  So the contractor and design firm moved to compel arbitration.  The homeowner argued that the arbitration agreement was permissive, not mandatory, and that the defendants had waived their right to arbitrate by waiting to assert it until after he filed suit.  Those arguments did not prevail at the trial court or the appellate court.  The Montana Supreme Court noted that the defendants did not waive their right to arbitrate, and because the owner did not challenge the validity or enforceability of the arbitration agreement, his arguments should be heard by an arbitrator.  Finally, the court found that the design firm could compel arbitration as a matter of equitable estoppel.

Speaking of construction cases, the Supreme Court of Nevada continues its campaign to remind all construction litigators that the FEDERAL Arbitration Act governs even local disputes between homeowners and contractors.  Since its Ballasteros decision in February of this year, it has issued two more decisions reiterating that holding: Lanier, 2018 WL 6264809 (Nev. Nov. 28, 2018), and Greystone Nevada, 2018 WL 6264756 (Ne. Nov. 28, 2018).  As evidence of interstate commerce, Lanier points to three things: the builder was incorporated in Delaware while the homeowners were Nevada residents, the large number of subcontractors and material suppliers who worked on the home made it likely that at least some of them are engaged in interstate commerce, and “in the aggregate, the general practice of developing, buying, and selling homes substantially affects interstate commerce.”  All of this mattered because trial court judges were relying on Nevada anti-arbitration rules to refuse to compel arbitration.  Those rules are preempted if the dispute is governed by the FAA.

You know what rarely rises to the top of my “to do” list?  Reading scholarly articles and studies about arbitration.  Blech.  But, since I haven’t seen any good court decisions lately, it is time to visit the neglected pile of articles.  Turns out, I should have read some of them right away.  Below are summaries of five new-ish articles that have crossed my desk.  A few offer peeks into arbitration data that is generally not available and some conclusions to chew on over this Thanksgiving holiday.

First is “Arbitration Nation,” an empirical study of 40,775 consumer, employment and tort cases filed with four different arbitration providers between 2010 – 2016 (AAA, JAMS, ADR Services and Kaiser).*   The data came from two sources: public data that the State of California requires arbitration providers to file, as well as a cache of data  gathered by the New York Times.  After reviewing the data, the authors conclude: 1) arbitration is faster that court litigation and generally more affordable for plaintiffs; 2) there was no surge in arbitration filings after the Concepcion decision, but there is evidence of at least a few mass-individual filings (same law firm filing 200 – 1300 individual arbitrations against the same defendant in the same time period); 3) plaintiffs win at a lower rate in arbitration than in court, and pro se plaintiffs “struggle mightily” in arbitration; and 4) the concerns about “repeat-player bias” are “well-founded” — but those repeat players are both defendants who appear often, as well as plaintiffs-side law firms who appear often.  For example, within the JAMS set of data, the authors report that a consumer’s probability of winning increased 79.9% if it was represented by a “super repeat-player” law firm (as compared to appearing pro se), and an employee’s probability of winning increased 55.1% if he was represented by a “high-level” repeat player firm.  (See pp. 42-43.)  Read this article if you: want to compare JAMS and AAA (on cost and speed); want to see data on how Concepcion affected arbitration filings; or want to see statistical evidence of “repeat player” bias.

Second, “Inside the Black Box” reflects findings from surveys of construction arbitrators, advocates, and industry representatives.  Although some of the survey findings just confirmed what most people would expect (like party-appointed arbitrators are not always neutral), there are some unexpected nuggets.  For example, I found it interesting that 68.5% of construction arbitrators report allowing depositions in “regular” sized cases, and 88.9% of arbitrators report allowing them in large, complex cases.  And 75% of arbitrators allow prehearing subpoenas.  Furthermore “advocates prefer more discovery than arbitrators are allowing in … cases in which claims are below $1 million.”  (p. 59)  Furthermore, the authors say “summary judgment motions in construction arbitrations perhaps have been over-criticized.  If a healthy majority of 63.7% of arbitrators found they were useful half the time or more..it is hard to argue their use should be constrained.” (p. 65)  I also like this one: 44.6% of the arbitrators who responded said that evidentiary objections have no impact on their view of the evidence or their deliberations.  So, stop shouting “Objection: hearsay” in arbitration! Read this article if you: are a construction litigator and want to understand the norms in this industry’s arbitration practice.

Third, “Arbitration in the Americas” reports findings from surveys of arbitration “practitioners” across the Americas.  Amusingly, of the 212 U.S. respondents, 60.45% describe legislators as “having a Low or Very Low understanding of arbitration.”  In keeping with the “Arbitration Nation” study above, “U.S. respondents reported that arbitration in the United States is faster than litigation, with 44.32% describing it as Slightly Faster, and a further 43.24% describing it as Much Faster.” (p. 60)  More surprisingly, “U.S. respondents overwhelmingly described arbitration as on average cheaper than litigation, with 49.19% describing it as Slightly Cheaper and a further 22.70% describing it as Much Cheaper.” (61).  Read this article if you want to compare perceptions of how well arbitration works and is supported in this country with perceptions in other countries.

Fourth, “The Black Hole of Mandatory Arbitration” argues that between 315,000 and 722,000 potential employment arbitrations are “missing in action”.   As the abstract states: “The great bulk of employment disputes that are subject to [mandatory arbitration agreements] simply evaporate before they are ever filed. They are “MIA,” or “missing in arbitration.” That conclusion emerges from a comparison of the tiny number of employment claims that are filed in arbitration with an estimated number of claims one would expect to see given the number of employees who are covered by MAAs and the volume of employment litigation by those who are free to litigate.”  Read this article if you like public policy and are concerned about current SCOTUS jurisprudence.

Fifth, “Running It Twice“, proposes new types of baseball arbitration, in which separate arbitrators (or panels) decide the same dispute to ensure no rogue result.  Read this article if you like shiny new things and sports analogies.

*You didn’t read that wrong; the article’s name is the same as this blog.  I gave them permission.

Happy Thanksgiving all!

There are only four ways to avoid an arbitration agreement.  You can prove: 1)  it was never formed; 2) it was formed, but is invalid under state law; 3) the current dispute is outside the scope of it; or 4) the other party waived their right to arbitrate (through litigation conduct).  Today’s post is about the third method.  Because of the federal presumption in favor of arbitrability, which applies when courts are determining whether the parties’ dispute falls within the scope of the clause, it is not the most common way to evade an arbitration agreement.   Yet, I collected four recent decisions in which courts find the parties’ dispute is not covered by their arbitration agreement.

In Anderson v. Deere & Co., 2018 WL 5262778 (Mont. Oct. 23, 2018), the Montana Supreme Court found that a fight between John Deere Company and the former owner of one of its dealerships was not arbitrable.  The Dealer Agreement had an arbitration clause obligating the Dealer, and its guarantors, officers, and shareholders, to arbitrate “any dispute” “between Dealer and Company.”  The plaintiff signed the Dealer Agreement as managing partner of the Dealer and as guarantor.  Later, the plaintiff sold his interest in the Dealer and sued Deere for tortious interference.  The trial court denied the motion to compel and the supreme court affirmed.  It focused on the language saying arbitrable disputes were those “between Dealer and Company,” and found that because the plaintiff alleged defendant committed torts against him personally, not as part of “Dealer,” there was no obligation to arbitrate.  One judge wrote a special concurrence, disagreeing with the majority’s finding on scope.

In Perez v. DirecTV, 2018 WL 5115531 (9th Cir. Oct. 19, 2018), the 9th Circuit found the named plaintiff in a putative class action did not have to arbitrate her claims for violations of the Communications Act.  DirecTV’s Customer Agreement with the plaintiff specifically exempted disputes “involving a violation of the Communications Act”.  That sounds fairly straightforward, but one member of the panel dissented, finding the exception was ambiguous and therefore should have been resolved in favor of arbitration.

In Pictet Overseas Inc. v. Helvetia Trust, 2018 WL 4560685 (11th Cir. Sept. 24, 2018), the 11th Circuit affirmed a district court’s conclusion that the plaintiff’s claims were not arbitrable.  The dispute was between investment trusts whose funds had been stolen, on one hand, and the owners and affiliates of a Swiss Bank on the other.  The trusts started a FINRA arbitration, but the Swiss Bank objected that the claims did not belong in FINRA arbitration.  FINRA Rule 12200 requires FINRA members and associated persons to arbitrate when the dispute “arises in connection with the business activities of the member or the associated person.”  There was no dispute that the Swiss Bank was a FINRA member, but the court had to interpret the meaning of “business activities of ..the associated person.”  The court concluded that “only disputes arising out of business activities of an associated person as an associated person are covered” by the rule and must be arbitrated.  One judge concurred specially, to give further examples of why the rule could not be read the way the trusts advocated.

Finally, in Grand Summit Hotel Condominium United Owners’ Assoc. v. L.B.O. Holding, Inc., 2018 WL 4440370 (N.H. Sept. 18, 2018), the New Hampshire Supreme Court affirmed the lower court’s decision that the claims of condo owners against their property manager were not arbitrable.  The parties’ arbitration agreement provided for decision  by an independent public accountant of disputes over “actual costs” — pass-through costs of operation and maintenance — or management fees.  The court “assume[d] without deciding that the provision is an arbitration clause and that the presumption in favor of arbitrability applies.”  Even so, the court found that the disputes provision was narrow and because the owners did not dispute the Actual Costs, but instead sought damages caused by the manager’s misconduct (in failing to engage anyone to winterize the cooling tower), they were not obligated to arbitrate their claims.

Is this the new arbitration resistance??  Some kind of “scope-a-dope,” in which courts that don’t take kindly to arbitration can hold up their hands and say “I accepted that the arbitration agreement was formed, and that it was valid, but under state contract law, I interpret this claim as outside the scope.”  That is a hard type of case to preempt under federal law, especially if it’s done without announcing a “rule” of contract interpretation.

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.)

Every time I think the spate of state supreme court opinions about nursing home arbitration surely must be over, another one comes out to prove me wrong.  Last week, it was one from Alabama, finding an arbitration agreement was never formed, because the resident lacked capacity and the daughter who signed on his behalf lacked power of attorney.

In Stephan v. Millennium Nursing & Rehab Ctr., 2018 WL 4846501 (Ala. Oct. 5, 2018), the decedent’s estate sued the nursing home for wrongful death.  The nursing home moved to compel arbitration.  The trial court granted the motion to compel, and the Supreme Court of Alabama reversed.

The decedent’s daughter had signed the admission paperwork in a space provided for “signature of family member responsible for patient.”  She did not have power of attorney or any other legal authority to contract in his name.  (She also happened to be personal representative of his estate.)  In reviewing the record, the court found decedent was incapable of entering into a contract on the date of the admission documents due to his dementia.  In addition, the decedent could not have understood the effect of allowing his daughter to agree to arbitrate, so she lacked apparent authority.  Furthermore, the daughter was not personally bound to the arbitration clause, and thereby precluded from suing as personal representative, because she signed in her capacity as her father’s relative, not in her own capacity.   Therefore, the arbitration agreement never existed and could not be enforced.

One justice dissented, arguing that the daughter essentially fraudulently induced the nursing home to contract.

Here’s the key question: Is this ruling preempted by the FAA, or does it otherwise run afoul of Kindred?  I don’t think so.  Kindred involved an actual power of attorney document.  This case seems to rest on principles that most states would agree with, and would apply generally to contracts of other types.  SCOTUS is also unlikely to be interested in this case since Alabama has generally been following federal precepts about arbitration.

I would understand if not every state supreme court got the memo from last year’s SCOTUS decision on FAA preemption, Kindred, which reminded state courts that the FAA prevents state courts from imposing additional requirements on arbitration agreements that are not required for other types of contracts.  But Kentucky definitely got the memo.  The memo was addressed to Kentucky. Yet, last week the Supreme Court of Kentucky released a new decision that continues to convey hostility to arbitration and SCOTUS’s decisions interpreting the FAA.

The legal issue in Northern Ky. Area Development District v. Snyder, 2018 WL 4628143 (Ky. Sept. 27, 2018) is straightforward: Does the FAA preempt a Kentucky statute that prohibits employers from conditioning employment on an employee’s agreement to arbitrate claims.  The statute prohibits an employer from requiring an employee to “waive, arbitrate, or otherwise diminish any existing or future claim, right, or benefit to which the employee or person seeking employment would otherwise be entitled.”  In this case, the plaintiff was required to sign an arbitration agreement in order to work for the governmental entity.  When she sued over her termination, the employer moved to compel arbitration.

The trial court refused to compel arbitration.  Then the court of appeals affirmed, finding that the employer never had authority to enter into the arbitration in the first place (due to the statute), so the arbitration agreement did not technically exist.  (Too cute by half.  Plus, Justice Kagan specifically said that formation issues could also be preempted.)

The Kentucky Supreme Court affirmed.  It also concluded that the employer, a state agency, was covered by the anti-arbitration statute.  And therefore, when it conditioned employment on an agreement to arbitrate, in violation of the statute, its action was “ultra vires,” and the resulting arbitration agreement was void.  (See parenthetical above.)

The court went on to find the anti-arbitration statute at issue was not preempted by the FAA.  The decision states with an apparently straight face that the statute “does not actually attack, single out, or specifically discriminate against arbitration agreements” and did not “evidenc[e] hostility to arbitration”.  The statute “simply prevents [the employer] from conditioning employment” on the arbitration agreement. Furthermore, it notes that the statute does not just preclude arbitration agreements, but also any agreement that waives or limits an employee’s rights.

BUT HERE’S THE PROBLEM.  Kentucky’s reasoning only makes sense if we agree that arbitration is a limitation or a diminishment of the employee’s rights.  If, instead, you assume that arbitration is simply an alternative forum for resolving the employee’s full set of rights, the logic falls apart.  But, will SCOTUS really want to hear another Kentucky decision?  Kentucky is betting that it won’t.  Maybe this should not surprise anyone; Kentucky did not exactly bend to SCOTUS’s will when Kindred was remanded.  And btw, the nursing home is seeking certiorari from the remand decision, and SCOTUS just relisted it, meaning it still has a chance. (For good measure, Kentucky’s high court issued a decision compelling arbitration on the same day, overruling an objection that the arbitration clause was not fully mutual.  Grimes v. GHSW Enterprises, 2018 WL 4628160 (Ky. Sept. 27, 2018).)

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Speaking of SCOTUS, Monday it denied cert in at least four arbitration cases.  Two were companion cases (from Cal. and Neb.) that sought guidance on what types of challenges can invalidate a delegation clause.  (My blog post here, SCOTUSblog here and here.)  Another presented issues regarding binding non-signatories to arbitration through equitable estoppel. The fourth involved a question of whether an employer waived its right to arbitration (Cash Biz).  (My post here, filings here.)

And – this morning, SCOTUS hears arguments in New Prime, addressing the exemption in FAA Section One.

[Thanks to @PerryCooper for alerting me to a few of these cert denials.]

The First Circuit just faced a fascinating formation issue: if a customer cannot see what she is signing, and no employee reads it to her or ensures she knows there are legal terms, is there a contract?  With Justice Souter sitting by designation on the panel, the court answered “no,” and thereby kept a class action in the courts. National Federation of the Blind v. The Container Store, Inc., 2018 WL 4378174 (1st Cir. Sept. 14, 2018).

The Container Store case involves blind plaintiffs who allege the retailer violated discrimination laws by failing to use tactile keypads on its point-of-sale (POS) devices.  In response, the retailer moved to compel individual arbitration for the plaintiffs who had enrolled in a loyalty program (which has an arbitration agreement and class action waiver).  The customers who enrolled in the loyalty program in a store alleged that they enrolled with the assistance of a sales associate, and were never presented with the terms and conditions of the program, including the arbitration provision.   In response, the retailer presented excerpts from a training manual, which instructed employees to give blind plaintiffs the opportunity to review the terms on the POS device.  Critically, the retailer did not have evidence that the employee who helped sign up the named plaintiffs had in fact read the terms and conditions to those plaintiffs or otherwise made them aware that there were any terms and conditions.  Therefore, the district court found no agreement to arbitrate was formed between the Container Store and those plaintiffs, and denied the motion to compel arbitration.

On appeal, the First Circuit affirmed.  It first disagreed with the Container Store’s argument that this dispute was one about the validity of the loyalty agreement as a whole, such that it must be heard by an arbitrator.  Instead, it concluded that this was a fundamental dispute about the formation of the arbitration agreement, which was properly addressed by the court.  (The First Circuit even got punny:  “We reject the Container Store’s attempt to re-package Plaintiffs’ arguments as one regarding validity…”)

It then got into the guts of the argument.  It affirmed the critical findings of the district court: “it is undisputed that the in-store plaintiffs had no way of accessing the terms of the loyalty program, including the arbitration agreement”; and “No store clerk actually informed them that an arbitration agreement existed as a condition of entering the loyalty program.”  Therefore, even though “inability to read” is not generally a defense to contract formation, the court found no arbitration agreement was ever formed with these plaintiffs.  Unlike other situations where plaintiffs who could not read knew or should have known that they were signing documents that implicated legal rights, in this case the court found “zero hint” that the loyalty program involved terms and conditions.

Finally, with respect to a class of plaintiffs who had signed up for the loyalty program online, and thereby did have notice of the terms and conditions, the court still denied the motion to arbitrate.  It found the arbitration agreement was illusory and therefore unenforceable under Texas law.  The court found language in the arbitration agreement gave the Container Store “the right to alter the terms of the loyalty program, including the arbitration provision, ‘at any time'” and the change would have retroactive effect, affecting even parties who had already invoked arbitration.

This case reminds me of the First Circuit’s big decision in Uber  in June, when the court found that the arbitration agreement in Uber’s terms also was not conspicuous enough to be binding.  In other words, this issue is not limited to individuals who have disabilities, but gets at the fundamental question of how much information do consumers need to validly form a contract.

This case also makes me smile because guess which firm represented the Container Store?  Sheppard Mullin, the same firm that was not able to enforce its own arbitration agreement with its client in the last post.   Rough arbitration month for those attorneys.

 

In today’s post I recount an epic battle between the Rules of Professional Conduct (tagline: saving clients from unscrupulous lawyers for over 100 years!) and the Uniform Arbitration Act (tagline: saving arbitration from hostile judges for 60 years!) in the Supreme Court of California.  Spoiler alert: the Rules of Professional Conduct win.

The story in Sheppard, Mullin, Richter & Hampton, LLP v. J-M Manufacturing Co., 2018 WL 4137103 (Cal. Aug. 30, 2018), begins with a “large law firm” [ed: with too many names] taking over the defense of J-M in a qui tam action in federal court in March of 2010.  The problem was that one of the public entities that had been identified as a real party in interest in the qui tam case was also a client of the firm (for employment matters).  Because both clients had signed engagement letters with general language waiving potential conflicts, the firm concluded it could take on the qui tam action.

The SMRH firm defended J-M for just one year before its employment client moved to disqualify it.  In that time, the firm had put in 10,000 hours defending J-M, and was still owed over one million dollars in fees.  The district court disqualified the firm based on the firm’s failure to adequately inform the employment client and J-M of the adversity before obtaining waivers, as required by the Rules of Professional Conduct.

At that point, the law firm sought its million dollars of unpaid fees from J-M in a state court action, and J-M in turn sought disgorgement of the two million dollars it had already paid.  The law firm successfully moved to compel arbitration, with the trial court dismissing J-M’s argument that the conflict of interest made the whole contract illegal and unenforceable. (And, the Court of Appeals refused a discretionary review which could have avoided the wasted fees of the arbitration.)

A panel of arbitrators awarded the law firm more than $1.3 million.  The parties were then back in state court with cross-motions to confirm and vacate the award.  The trial court confirmed the award.  However, the Court of Appeal reversed.

On appeal, the Supreme Court of California agreed that the arbitration award must be vacated.  It rested its decision on precedent from 1949, noting that “an agreement to arbitrate is invalid and unenforceable if it is made as part of a contract that is invalid and unenforceable because it violates public policy.”  In this case, the court found that the Rules of Professional Conduct were an expression of public policy, such that a violation of those rules could render an arbitration agreement void.  And it also found that the firm’s failure to give both of its clients notice of the actual adversity, and obtain informed consent of the representation, was a violation that tainted the entire contract and made it illegal.  (For you ethics geeks, the rule violated was 3-310(C)(3).)

Because the contract between the law firm and J-M was unenforceable, the court found the firm was “not entitled to the benefit of the arbitrators’ decision” and the parties could resume “where they were before the case took its unwarranted detour to arbitration.”  (Not sure why the court refused to say it was vacating the arbitration award.)  But, don’t shed too many tears for the lawyers.  The law firm will be able to argue in the trial court regarding whether it is entitled to any of its fees under the equitable doctrine of quantum meruit.  (Two judges dissented from that last part, finding that the ethical conflict should prevent the firm from recovering at all.)

I leave it to other blogs to discuss the ethical issues for lawyers present here, and to therapists and firm counsel to address the rising panic that lawyers may feel when reading this opinion.  For my purpose, this case is further demonstration that the type of arbitration agreement that is most susceptible to arguments of invalidity is the one between an attorney and client.  (Recall the recent decision in Maine.)  It is also interesting in that it does not discuss whether J-M “waived” its objection to arbitrability at all by participating in the arbitration, indeed there is no discussion of whether or how often J-M raised its objection during the arbitration.  That is a sharp contrast to the rule cited by the 9th Circuit in the Asarco decision (summarized last post), and an example of how inconsistent the rules are regarding waiver.