I have been making my way through the rest of the May arbitration cases (the photo shows how high my stack got), and one thing that stands out is this: I was right.  Delegation clauses remain a hot topic in arbitration law.

Three recent cases demonstrate the power of having a delegation clause in an arbitration agreement.

The Fifth Circuit enforced a delegation clause in Edwards v. DoorDash, 2018 WL 1954090 (5th Cir. Apr. 25, 2018), a case involving a putative FLSA class action brought by “Dashers.”  Not to be confused with reindeers who pull Santa’s sleigh, these Dashers  deliver restaurant food to people’s homes.  And they all signed an Independent Contractor Agreement with an arbitration agreement.  That agreement called for AAA rules and waived class and collective actions.  In response to the filing of the class action, DoorDash successfully moved to compel individual arbitration. On appeal, the class representative argued the arbitration agreement was unconscionable.  But once the Fifth Circuit was satisfied that the independent contractor agreement was validly formed, it found the incorporation of AAA rules was a valid delegation clause that the plaintiffs had failed to challenge.  The case was sent to arbitration.

In another Fifth Circuit case, Arnold v. HomeAway, Inc., 2018 WL 2222661 (5th Cir. May 15, 2018), incorporation of AAA rules also served as the parties’ delegation clause.  In that case, consumers filed putative class action complaints against a company that facilitates short-term vacation rentals.  HomeAway argued that its 2016 terms and conditions applied, which contained an arbitration clause providing that arbitration would be governed by AAA rules and that awards would be “on an individual basis.”  The consumers argued that the 2015 terms and conditions applied, which lacked an arbitration agreement (and that any subsequent modification was invalid).  The district court denied the motion to compel arbitration, finding the arbitration agreement illusory.

On appeal, the Fifth Circuit faulted the district court for ignoring the delegation clause in the terms and conditions.  It found the incorporation of AAA rules was a clear and unmistakable delegation of questions relating to the validity of the arbitration agreement to an arbitrator.  Because the plaintiffs’ challenge to the arbitration agreement was not specific to the delegation clause, arbitration must be compelled.

Not far away, in the Supreme Court of Alabama, another delegation clause was enforced.  Eickhoff Corp. v. Warrior Met Coal, LLC, 2018 WL 2075985 (Alabama May 4, 2018), did not involve a putative class action, but something just as sexy: five agreements between the parties, only two of which had arbitration clauses (both calling for AAA rules).  When one party filed in court, the other moved to compel arbitration.  The party opposing arbitration claimed that its court claims were based on the three contracts without arbitration clauses and the trial court agreed.  The Supreme Court reversed, finding that the incorporation of AAA Rules was an enforceable delegation clause, delegating questions of scope to an arbitrator, and it should have resulted in an order compelling arbitration.

The focus today is recent state appellate court decisions on arbitration. Because there are an awful lot of them, I am going to divide them roughly into those that are pro arbitration, and those that are hostile to arbitration.  This post focuses on the three relatively hostile cases (with the friendly cases coming in a sequel), on issues of scope, delegation clause, and vacatur.

In Keyes v. Dollar General Corp., 2018 WL 1755266 (Miss. April 12, 2018),  the Mississippi Supreme Court wrestled with whether claims of “malicious prosecution” are within the scope of an arbitration agreement.  Just as it did a few months ago, the court concluded those claims are not within the scope of the arbitration agreement.  Even though in Keyes, the employee’s arbitration agreement provided for arbitration of all disputes “arising out of your employment…or termination of employment” and the employee was accused of stealing a gift card, which led to a criminal complaint.  The court noted that there was no evidence the employee “contemplated” this situation and that the employer could have specifically included claims of malicious prosecution, false imprisonment, etc. in the arbitration agreement.  [Can you imagine if we all had to list every possible claim for it to be covered by an arbitration agreement?  So.  Many.  Pages.]  On a similar issue, Texas reached the opposite result.

In Citizens of Humanity, LLC v. Applied Underwriters Captive Risk Assurance Co., Inc., 299 Neb. 545 (April 6, 2018), the Nebraska Supreme Court refused to enforce the delegation clause in the parties’ agreement.  [Yes, *that* Citizens of Humanity, of fancy jean fame.]  Just as in a similar 4th Circuit case, the party wanting to avoid arbitration alleged an anti-arbitration insurance statute precluded enforcement of the arbitration agreement (under the dreaded McCarran-Ferguson doctrine, which for a long time I refused to even acknowledge on this blog for fear of getting sucked into the morass).  The party seeking to arbitrate argued that the parties’ delegation clause assigned the issue of the anti-arbitration statute to the arbitrator, and that there had been no specific challenge to the delegation clause as required by Rent-A-Center. The Nebraska Supreme Court found the challenge was sufficiently specific in this case because the amended complaint mentioned the anti-arbitration statute and sought a declaration that the arbitration agreement was invalid, and because the challenger said during its hearing that its challenge included the delegation of arbitrability.  [Well, if you uttered the magic words at oral argument, then I guess that’s good enough…]  The court went on to find the delegation clause invalid and remanded the remaining arbitrability issues to the district court.

[The Third Circuit also found that a plaintiff had asserted a sufficiently specific challenge to a delegation clause in MacDonald v. Cashcall, Inc., 2018 WL 1056942 (Feb. 27, 2018).  But there, the complaint alleged that “any provision requirement that the enforceability of the arbitration procedure must be decided through arbitration is [] illusory and unenforceable.”  And the plaintiff’s brief at least stated that the delegation clause had the same defect as the arbitration provision.]

Last but not least, the Minnesota Court of Appeals issued a decision vacating an arbitration award for violating public policy. In City of Richfield v. Law Enforcement Labor Servs., Inc., 2018 WL 1701916 (Minn. Ct. App. April 9, 2018), the city terminated a police officer following his improper use of force in a traffic stop and failure to self-report that force.  The officer challenged his discharge in arbitration, and the arbitrator found the use of force was not excessive and that the failure to report it was not malicious, and ordered the city to reinstate him.  The city appealed the award.  The district court refused to vacate the award, but the appellate court found vacatur appropriate under the public-policy exception.  The court looked to the officer’s previous failures to report his use of force and found “the interest of the public must be given precedence over the arbitration award.”  The court noted its decision is rare and unusual, but that it did “not take this action lightly.”

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.

This is my 290th post at ArbitrationNation and today I celebrate six years of blogging.  Woo hoo — that’s longer than most celebrity marriages!  In honor of the occasion, here are updates on six of the hottest issues in arbitration law so far this year.

  1. Agency regulation of arbitration agreements.  On the one hand, the CFPB issued a rule that will preclude financial institutions from using class action waivers in arbitration agreements.  To understand how “yuge” this is, remember that the CFPB’s initial study showed there are likely over 100 million arbitration agreements impacted by this rule.  (And there does not seem to be the necessary political willpower to stop it.)  On the other hand, agencies headed by Trump appointees have moved to roll back Obama-era consumer-friendly regulations of arbitration agreements in nursing homes and educational institutions.
  2. NLRB.  While the CFPB attacks class action waivers in the financial industry, the NLRB has been attacking those waivers in the employment context, taking the position that such waivers violate the National Labor Relations Act.  A circuit split developed, with the 6th, 7th, and 9th circuits on NLRB’s side, and the 2nd, 5th and 8th circuits siding with the employers.  The Supreme Court will hear arguments on October 2.
  3. Wholly Groundless.  When considering whether to enforce delegation clauses, some federal court have developed a carve-out for claims they think are nothing but hot air.  [Remember delegation clauses are those portions of arbitration agreements that authorize arbitrators to determine even arbitrability — whether the arbitration agreement is valid and encompasses the claims — issues usually decided by courts.]  That carve-out has been called the “wholly groundless” exception, and it is coming up with greater frequency.  Currently there is a circuit split: the 5th, 6th and federal circuits are in favor of spot-checking claims of arbitrability (e.g. Evans v. Building Materials Corp. of Am., 2017 WL 2407857 (Fed. Cir. June 5, 2017)), while the 10th and 11th Circuits believe SCOTUS’s precedent leaves no room for conducting a smell test (e.g. Jones v. Waffle House, Inc., 2017 WL 3381100 (11th Cir. Aug. 7, 2017)).
  4. Formation.  SCOTUS decided the Kindred case in May, confirming that state law on contract formation is also subject to preemption by the Federal Arbitration Act.  That was timely, given that plaintiffs appear to be placing their bets on challenging formation as the most effective way around an arbitration agreement.  They might be right.  See James v. Global Tellink Corp., 852 F.3d 262 (3d Cir. Mar. 29, 2017); Noble v. Samsung Electronics America, Inc., 2017 WL 838269 (3d Cir. March 3, 2017); King v. Bryant, 795 S.E.2d 340 (N.C. Jan. 27, 2017).
  5. Small Claims Court.  If a company starts a small claims court action to collect a debt, does that waive the company’s right to compel arbitration years later in response to a suit by the consumer?  This is a question multiple courts are facing, with differing results.  E.g., Cain v. Midland Funding, LLC, 156 A.3d 807 (Md. Mar. 24, 2017) (waiver); Hudson v. Citibank, 387 P.3d 42 (Alaska Dec. 16, 2016) (no waiver); Citibank, N.A. v. Perry, 797 S.E.2d 803 (W. Va. Nov. 10, 2016) (no waiver).  It is important because many consumer arbitration agreements exempt small claims from arbitrable claims, but may reconsider if that is considered a waiver of everything else.
  6. Statutory Preclusion.  The Federal Arbitration Act generally requires courts to enforce arbitration agreements.  But, if there is a contrary congressional command entitling the litigant to a court trial, it can override the FAA.  That issue has already come up multiple times this year, with the FAA generally winning its battles with other statutes.  E.g., McLeod v. General Mills, Inc., 854 F.3d 420 (8th Cir. Apr. 14, 2017).

Thanks to all of you for providing great feedback, leads on cases and topics, client referrals, and a warm community of fellow arbitration geeks.  I look forward to another year of blogging.

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.

The 9th Circuit’s decision to enforce the arbitration agreement in Uber’s agreements with drivers made lots of news last week.  And although it includes no new principles of law, it does emphasize some principles that come up regularly in consumer and employment arbitration, so it’s worth reviewing the details.

Former drivers brought an action in federal court, alleging two primary things: that when Uber terminated them for having bad consumer credit, Uber violated statutes regulating the use of credit reports; and that Uber had misclassified them as independent contractors.  Mohamed v. Uber Technologies, Inc., __ F.3d __, 2016 WL 4651409 (9th Cir. Sept. 7, 2016).  Uber responded by moving to compel arbitration.  The district court denied the motion, finding that the delegation clauses were not “clear and unmistakable” and that the delegation clauses were unconscionable.

The appellate court disagreed on both fronts.  Critically, the operative agreements had this language in the Arbitration Provision: “Such disputes include without limitation disputes arising out of or relating to interpretation or application of this Arbitration Provision, including the enforceability, revocability or validity of the Arbitration Provision or any portion of the Arbitration Provision.”  Furthermore, the agreements mandated arbitration on an individual basis (precluding class or collective actions).  Drivers could opt out of the Arbitration Provision, but the named plaintiffs did not exercise that option.

The 9th held:

  • The delegation clause — authorizing an arbitrator to determine the validity of the Arbitration Provision — was clear and unmistakable (and therefore likely enforceable).  Although the drivers’ contracts also had venue clauses, providing that San Francisco courts had exclusive jurisdiction, the appellate court found the “conflicts are artificial.”  The venue provisions address the jurisdiction for fights over arbitration or those outside the scope of the Arbitration Provision; they don’t nullify the Arbitration Provision.  [This is an issue that comes up frequently, and the 9th Circuit addressed it head on.]
  • The delegation clause was not unconscionable.  Importantly, the ability of drivers to opt out of arbitration meant the delegation clause could not be procedurally unconscionable (a requisite aspect of unconscionability) under 9th Circuit precedent.  Nor did the requirement that drivers opt out in person or by overnight delivery make the ability to opt out illusory.  The court noted that some drivers successfully opted out.  [While not all federal circuits have addressed this issue, it provides good persuasive authority to use in favor of the conscionability of arbitration agreements with opt outs in any court.]
  • The drivers could effectively vindicate their rights in arbitration.  Plaintiffs argued they could not effectively vindicate their federal statutory rights because they had to split the costs of arbitration, which “may exceed $7,000 per day.”  However, because Uber “committed to paying the full costs,” the court did not reach that legal question.  [By agreeing to just pay the costs, Uber avoided a fight over the costs of arbitration to the drivers and probably helped its chances of winning the appeal.  This is a tactic that other litigants should consider when facing strong opposition to enforcement of an arbitration agreement.]

 

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.

 

A recent report showed that less than half of arbitration agreements in the consumer financial arena include delegation clauses in their arbitration agreements.  Two recent decisions from state high courts suggest that is a wise decision because courts do not like to enforce delegation clauses. (Reminder: a delegation clause gives the arbitrator explicit authority to decide issues of substantive arbitrability that would otherwise be decided by a court, like the enforceability and scope of the arbitration clause.)

In Schumacher Homes of Circleville v. Spencer, __ S.E.2d.___, 2015 WL 1880234 (W.Va. 2015), the highest court in West Virginia refused to enforce the parties’ delegation clause.  The construction contract contained an arbitration agreement, which stated that “The arbitrator(s) shall determine all issues regarding the arbitrability of the dispute.” When the homeowners sued over construction defects, the builder moved to compel arbitration. The trial court denied the motion, finding the arbitration clause unconscionable. On appeal, the builder focused on the delegation clause, arguing that the trial court erred in not sending the unconscionability issue to the arbitrator.

The West Virginia Supreme Court of Appeals called the rule in Rent-A-Center, that delegation clauses must be enforced unless the plaintiff alleges the clause itself is unenforceable, “absurd” and an “ivory-tower interpretation of the FAA.”  Yet, it also recognized the rule is binding on state courts, so it found a different basis to object to the delegation clause. Noting that delegation clauses must be “clear and unmistakable,” the court found that “arbitrability” is an ambiguous term, so the delegation clause here did not clearly delegate the question of unconscionability to the arbitrator. (It did not help that the builder first raised the delegation clause orally after the issues were briefed in the trial court.) One justice dissented from the opinion, calling it “blatant ‘judicial hostility’ toward arbitration” and noting that the court “has been notoriously chastised by” SCOTUS for singling out arbitration agreements for hostile treatment.

[Editor’s note: The decision in Circleville reiterates the need for this blog to exist and continue educating people about arbitration law. The opinion starts by 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.” That’s why I’m here, folks! To stop your eyes from glazing over and help lawyers and judges and “ordinary” people understand the FAA. Okay, back to our regular program.]

The Supreme Court of Kentucky did something similar in Dixon v. Daymar Colleges Group, LLC, __S.W.3d__, 2015 WL 1544450 (Ky. 2015). The single-page student enrollment agreement at issue in that case had an arbitration agreement on its back side, with a clause saying “all determinations as to the scope or enforceability of this arbitration provision shall be determined by the arbitrator, and not by the court.” After the students brought suit, the college moved to compel arbitration. The trial court denied the motion, finding the arbitration agreement was unconscionable. The Court of Appeals reversed, finding no unconscionability.

The state supreme court applied the FAA, but found a way out of Rent-a-Center by reframing the issue as not one over the enforceability of the delegation clause, but instead whether the parties formed an arbitration agreement at all. Because the students argued that their signature was only on the front side of the agreement, and they were fraudulently induced to sign the agreement, the court defined this as a formation dispute that belonged in the courts. Applying Kentucky’s Statute of Frauds, the court held that the signatures had to be at the end of the document and because they were not, the parties were not bound by the arbitration agreement that appeared after the students’ signature.

In drafting arbitration agreements, we must take it as a given that there will be state courts that are hostile to arbitration and eager to find ways not to enforce an arbitration agreement. That is likely exactly the sentiment that led drafters to invent delegation clauses in the first place – hoping that if the very validity of the arbitration agreement could be decided by the arbitrator, there was a higher chance of the arbitration agreement’s survival. However, if the delegation clause is not likely to be enforced anyway, it bears reconsidering its insertion. Reading these two opinions, it strikes me that the argument over enforcing the delegation clause, which involves arguing over Rent-A-Center, may instead remind some judges exactly why they dislike federal arbitration case law so much and give them extra incentive to throw out the arbitration agreement.

 

As a thank you to all the subscribers and readers who continue fueling Arbitration Nation’s success, this 100th blog post contains my recipe for the Best Arbitration Agreement Ever.  (I know, where did the time go??  The blog is growing up so fast!)  What should your arbitration agreement include?  How can you best take advantage of the new case law under the FAA?  Here are some tips.

First, a caveat.  I will not include draft language here.  That would be what my marketing team calls “giving away the store.”  They frown upon that.  But, here is a list of items that should be in your arbitration agreement, and others you should at least seriously consider putting in your arbitration agreement.

Ingredients You Must Have

  • A clear statement of the types of disputes that should be arbitrated (Think broad! “Any and all disputes arising out of” the contract is a good place to start.)
  • A clear statement of whether the Federal Arbitration Act will govern or a particular state’s Uniform Arbitration Act will govern instead (state acts may provide more authority for third-party discovery or judicial review, but the federal act is very strong in enforcing arbitration agreements)
  • A separate delegation clause (meaning that even disputes about the validity of the arbitration agreement will be decided by the arbitrator, taking advantage of Rent-A-Center — because in my view, if you are going to arbitrate, arbitrate everything)
  • An identification of who will administer the arbitration (AAA? JAMS? CPR? or will the arbitrators self-administer it?) and what rules will govern
  • A reasonable limitations period on claims, or an indication of what law will set statutes of limitations
  • Clear language about whether class (or even multiple-claimant) arbitration is or is not authorized (taking advantage of Stolt-Nielsen)
  • A severability clause (so that if any part of your arbitration agreement itself is invalid, the rest will be enforceable)
  • A statement that the prevailing party may turn the arbitration award into a court judgment in a specific court (taking advantage of Section 9 of the FAA)

Considering Sprinkling In:

  • A required hearing location
  • A required number of arbitrators (a single arbitrator is cheaper, but increases the chance of a wacky award; alternatively some provider’s rules say claims under a certain dollar amount will be heard by a single arbitrator, while those over that amount will be heard by a panel of three)
  • Required qualifications of the arbitrators (should it be someone from a particular industry?)
  • The availability of emergency equitable relief (with the AAA, this can be done by incorporating the “Optional Rules For Emergency Measures of Protection”)
  • A requirement that the arbitrators issue a reasoned award (otherwise you reduce your already limited ability to try and vacate any potential wacky award — but if you anticipate only small claims, this may unnecessarily drive up expense)
  • The availability of a quick appeal through the arbitration provider
  • Required mediation either before, or during, the arbitration process
  • Requiring that the loser pay the prevailing party’s attorneys fees (or other modifications to the default rules as to costs and fees of arbitration)
  • If you have chosen an institution to administer the arbitration that is uncommon, you may want to include a statement about what happens if the provider is no longer in business or otherwise unavailable
  • A limitation on the types of damages available
  • Some parameters on discovery – in all disputes or in certain types of disputes (i.e., no more than X depositions, no interrogatories, no requests for admission, no expert depositions…)
  • If your form contract will be used with thousands (or millions) of consumers, and those consumers may have claims that are not economical to pursue on an individual basis, but have significant public benefit, you may want to address the AmEx decision (which refused to compel individual arbitration of antitrust claims because plaintiffs could not “effectively vindicate” their statutory rights via individual arbitrations).  That could be accomplished by stating that claims under certain federal statutes (like antitrust statutes) are outside the scope of the arbitration clause
  • Similarly, consider allowing low-dollar individual claims to be heard in small claims court

Do you think I missed some key ingredients?  Please tell me via email or Twitter and I will consider updating the lists.

Other Resources:

If you were hoping for the full, frosted contractual cake, instead of just a recipe, and you aren’t yet ready to hire me, here are some sources you may want to consider visiting, but note that they do not take advantage of the recent case law.

AAA’s “Clause Builder” 

JAMS

CPR

Ken Adams, a specialist in contract drafting, has a suggestion for the first few lines of your agreement