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.

 

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.

 

The primary purpose of this blog is to educate lawyers and clients about arbitration law. So, what better way to celebrate my fourth blogiversary than with an awesome new infographic about compelling arbitration! Making a motion to compel arbitration is trickier than it seems. When people call me for advice, I often have to tell them they missed a key analytical step. So, I worked with my firm’s marketing team and a graphic designer and came up with a one page pictorial summary of the analysis lawyers and judges should follow when they consider compelling arbitration – it starts with what court you should be in, and what law you should apply, identifies which issues are appropriate for courts to decide, and leads you through other key issues on a path either to arbitration or court. Now, some caveats. Of course I cannot put every nuance of 90 years of federal case law interpreting the Federal Arbitration Act on a single page (at least not while keeping it attractive). So, this infographic should be considered a big picture checklist to ensure you considered each of the major issues and are on the right track, and not a comprehensive list of everything you might possibly need to know. For the same reason, this picture cannot take the place of a real live lawyer, who knows something of the facts of your case and can give you case and jurisdiction-specific advice. Finally, if you end up in an English roundabout while following the arrows, going in circles instead of toward any destination, I advise you to try again without the cocktail or just give me a call. (Note: You’ll want to click on the infographic for a high resolution PDF version. It’s a bit small to read otherwise.) ** Have I succeeded in educating you or someone you know about arbitration? If so, please nominate my blog for the ABA Journal’s Blawg 100 list here. I would be honored to have ArbitrationNation recognized for a fourth consecutive year.

Decision Flowchart for Compelling Arbitration
Decision Flowchart for Compelling Arbitration (Select image to open a high resolution PDF.)
 

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/ .

The Supreme Court of Texas issued three decisions last week that all relate to arbitrator selection and offer reminders to drafters and litigators that arbitrator selection is a critical component of arbitration agreements.

Two of the decisions involved tort claims against the same defendant, a cemetery owner.  In re Serv. Corp. Int’l, ___ S.W.3d ___, 2011 WL 6276124 (Tex. Dec. 16, 2011); In re Serv. Corp. Int’l, ___ S.W.3d ___, 2011 WL 6276126 (Tex. Dec. 16, 2011).  The arbitration provisions within the cemetery owner’s contracts called for the parties to choose an arbitrator by agreement, but if that was not possible, the American Arbitration Association was authorized to select the arbitrator. 

In one of the cases, it took several months for the parties to agree on an arbitrator, and that individual was then disqualified based on his previous representation of the defendant.   About a month after the disqualification, the trial court concluded that the parties were unable to agree on an arbitrator and appointed an arbitrator of the court’s choosing.  The Supreme Court of Texas issued a writ of mandamus, directing the trial court to vacate its appointment of the arbitrator.   The court analyzed Section 5 of the Federal Arbitration Act, which governs how and when courts may intercede in arbitrator selection.  Section 5 provides that the selection provisions in the contract “shall be followed,” but if the parties “fail to avail” themselves of such a method or if there is a “lapse” in the naming of an arbitrator, the court may appoint the arbitrator. 

Though the Texas court noted that previous cases have found a five month “lapse” in arbitrator selection was sufficient to allow the trial court to step in, it held that an impasse of “at most one month” did not constitute a “lapse” within the meaning of Section 5.  (In the second cemetery case, the Texas court also issued a writ of mandamus, directing the trial court to vacate its order appointing an arbitrator, when there had been a two-month delay in the selection of an arbitrator.  Would three months be enough?  Or four?  Those are questions for another day…)

Texas’ third arbitrator selection case from December 16 relates to whether a party-appointed arbitrator must meet the regular standards of the AAA, or only the requirements of the contract.  Americo Life, Inc. v. Myer, __ S.W.3d __, 2011 WL 6276529 (Tex. Dec. 16, 2011).  In the Americo case, the contract provided that the arbitration would be decided by a panel of three arbitrators: each party would appoint an arbitrator who is a “knowledgeable, independent businessperson or prrofessional” (does that really cut down the list of possibilities??); and those two arbitrators would select the third arbitrator.  The contract also incorporated the commercial arbitration rules of the AAA, which provide that arbitrators shall be “impartial and independent.”  Americo’s chosen arbitrator ended up being removed by the AAA for lack of impartiality.  After Americo lost the arbitration (unanimously), it moved to vacate the award, arguing that the arbitration panel was not formed according to the parties’ contract.  Americo argued that the party-appointed arbitrators only had to be “knowledgeable, independent business[people]” and did not have to meet the impartiality standards of the AAA.   The Supreme Court of Texas did not address the merits of that dispute, however, and just clarified that Americo had properly preserved that issue for appeal.  (We will post the substantive result when it is available.)

These three cases illustrate that if the parties are going to insert an arbitrator selection process in the contract that varies at all from the “standard” arbitration rules they are incorporating, it is worth the time to clarify any potential inconsistencies between those two processes.  It also shows that if there are alternative processes offered (like first trying to mutually agree, and then going to the AAA), it may be worth spelling out how to determine when the first process has failed and how the parties must move to the second option.