Federal Arbitration Act

Sometimes current events provide an occasion perfect storm to educate about arbitration basics. This is one of those occasions.

Here are questions that friends and colleagues  storming mad people have asked me in the past day or so, with my best answers:

  • Does an arbitration agreement have to be signed by both parties to be enforceable (i.e. ride out the storm)?
    • The Federal Arbitration Act provides that an arbitration agreement must be “written,” but it does not also say it must be signed by all parties.  Whether a signature is required, along with all answers about the enforceability of arbitration agreements, depends on state contract law. In general, a contract requires an offer, acceptance, and consideration. And in most states, “acceptance” of an offer can take many forms. (See, for example,  this case (about Macy’s) finding a valid agreement without one party’s signature , but these cases finding no valid agreement where a signature was missing.)
  • Do arbitrators have authority to issue temporary or ex parte injunctions?
    • It depends. Arbitrators derive their authority from the parties’ arbitration agreement. If that arbitration agreement expressly grants the power to issue emergency, temporary, or ex parte injunctions, or if the arbitration agreement incorporates rules of an administrator (like the AAA) and those rules grant the power to issue those types of injunctions, then the arbitrator has power to enjoin the parties on an emergency or temporary basis (but only the parties, otherwise non-parties will kick up a storm and vacate the award).
  • How are injunctions from arbitrators enforced?
    • Within the arbitration proceeding, a party may seek sanctions from the arbitrator if the arbitrator’s temporary injunction is violated. Those sanctions can include anything authorized by the applicable rules. (Remember in this case, when the sanction was over $600 million?  Oh, that created a sh*tstorm.) Outside the arbitration proceeding, the party wanting to enforce the injunction (whether temporary or permanent) must first obtain a final arbitration award, and then have that award confirmed in federal court. (Remember, only “final” awards can be confirmed under the Federal Arbitration Act.) After that final award is confirmed in court, it is a judgment that can be enforced like any other court judgment.
    • However, when the winning party asks a court to confirm an award, the losing party often moves to vacate the arbitration award.  And the absence of a valid arbitration agreement is a solid basis to vacate the award.  For example, the Revised Uniform Arbitration Act authorizes vacatur if: “there was no agreement to arbitrate, unless the person participated in
      the arbitration proceeding without raising the objection.”

**Thanks for all the nudges about writing this post.  You convinced me that my desire to offer context to the news should trump my desire to storm off and pretend it is not happening.

Despite how often I talk about whack-a-mole and the tug-of-war between the state courts and SCOTUS on arbitration, the truth is that the majority of state supreme courts follow SCOTUS’s arbitration precedent (whether holding their noses or not, we don’t know). Recent weeks have given us multiple of those pro-arbitration state court decisions to highlight – from Alabama, Rhode Island, Texas, and West Virginia.  Yes, that West Virginia.

In STV One Nineteen Senior Living, LLC v. Boyd, 2018 WL 914992 (Alabama Feb. 16, 2018), the Supreme Court of Alabama enforced the arbitration agreement in the admission documents of an assisted living facility.  The trial court had denied the facility’s motion to compel arbitration without explanation.  On appeal, the supreme court found the language of the arbitration agreement, which required arbitration of “any controversy or claim arising out of or relating to” the parties’ agreement, was broad enough to cover the tort claims asserted.

In Disano v. Argonaut Ins. Co., 2018 WL 1076522 (R.I. Feb. 28, 2018), the Supreme Court of Rhode Island refused to vacate an arbitration award.  Although the losing party argued that the panel of arbitrators had miscalculated damages, the supreme court applied a very deferential standard of review and noted that even if the arbitrators’ math skills were lacking, that “does not rise to the level necessary to vacate such an award.”

In Henry v. Cash Biz, 2018 WL 1022838 (Tex. Feb. 23, 2018), the Supreme Court of Texas found that a pay day lender did not waive its right to arbitrate by alerting the district attorney’s office to the borrowers’ conduct (issuing checks that were returned for insufficient funds).  The trial court had denied the lender’s motion to compel arbitration, the court of appeals had reversed, and the supreme court affirmed the intermediate appellate court.  It found: 1) that the borrowers’ claims of malicious prosecution were within the scope of the arbitration clause; and 2) that the lender’s status as the complainant in the criminal charge was not sufficient to prove that it “substantially invoked the judicial process.”  [Recall that Mississippi’s high court reached the opposite result in a very similar case just a few months ago.]

In another waiver case, the Supreme Court of Appeals of West Virginia held that a party’s “pre-litigation conduct” did not waive its right to arbitrate. In Chevron U.S.A. v. Bonar, 2018 WL 871567 (W. Va. Feb. 14, 2018), the trial court had denied Chevron’s motion to compel arbitration.  It found that Chevron’s decision to take actions consistent with its interpretation of the parties’ agreement had waived the right to arbitrate, because Chevron had “unilaterally decided” the questions instead of posing them to an arbitrator.  On appeal, the supreme court found “such a result simply is unreasonable” and “absurd.”  Therefore, it reversed with instruction for the trial court to issue an order compelling arbitration.

Just two days later, the Supreme Court of Appeals of West Virginia enforced the arbitration agreement in a contract of adhesion, again reversing the decision of a trial court. In Hampden Coal, LLC v. Varney, 2018 WL 944159 (W. Va. Feb. 16, 2018), an employee sued his employer and the employer moved to compel arbitration.  In response, the employee argued the arbitration clause was unenforceable.  On appeal, the supreme court clarified that it applies “the same legal standards to our review of all arbitration agreements,” and not a special standard if they involve employees or consumers.  It then found that the mutual agreement to arbitrate was sufficient consideration for the arbitration clause and that the arbitration clause was not unconscionable.

In a fitting ending to a post about high courts,  our nation’s highest court has agreed to decide a new arbitration case.  The case, New Prime Inc. v . Oliveiracomes from the 1st Circuit and raises two questions: whether a court or arbitrator should decide if an exemption to the FAA applies; and whether the FAA’s exemption (in Section 1) includes independent contractors.

Remember when Maria sang “Let’s start at the very beginning, it’s a very good place to start”?  Well, that seems to be what federal circuit courts are doing with their arbitration decisions recently.  This post will run through some Do Re Mis of arbitration law, as articulated by those decisions (and will close with some arbitration cases on SCOTUS’s docket).

  • In most circuits, arbitrators cannot subpoena documents in advance of an in-person hearing.  The 9th Circuit affirmed that applies within its jurisdiction as well.  CVS Health Corp. v. Vividus, __ F.3d __, 2017 WL 6519942 (9th Cir. Dec. 21, 2017).
  • When an arbitration agreement calls for application of arbitral rules, and those rules give the arbitrator power to rule on her own jurisdiction, then the district court should send any dispute over arbitrability to the arbitrator.  The 4th Circuit confirmed that holding applies to JAMS rules, just as it does to AAA rules.  Simply Wireless, Inc. v. T-Mobile US, Inc., __ F.3d __, 2017 WL 6374105 (4th Cir. Dec. 13, 2017).
  • Claims under the Fair Labor Standards Act are subject to arbitrationRodriguez-Depena v. Parts Authority, Inc., __ F.3d __, 2017 WL 6327827 (2d Cir. Dec. 12, 2017).  (The Second Circuit is at least the third federal circuit to reach that conclusion.)
  • An arbitration agreement that carves out injunctive relief means what it saysArcher & White Sales v. Henry Schein, Inc., __ F.3d __, 2017 WL 6523680 (Dec. 21, 2017).  The arbitration agreement called for arbitration of any dispute under the agreement “except for actions seeking injunctive relief and disputes related to [intellectual property].”  Plaintiff brought an antitrust action seeking damages and injunctive relief. Applying the exception, the district court denied the motion to compel arbitration and the appellate court affirmed.
  • Independent contractors are not “agents” that can be bound as a non-signatory to arbitration clauseOudani v. TF Final Mile, LLC, __ F.3d __, 2017 WL 5587648 (1st Cir. Nov. 21, 2017) (refusing to compel arbitration of class action brought by independent contractors for wage-and-hour claims).
  • Ambiguous awards can be sent back to the arbitrator.  Herll v. Auto-Owners Ins. Co., __ F.3d __, 2018 WL 296870 (8th Cir. Jan. 5, 2018)  (sending ambiguous “appraisal award” back to arbitrator under Minnesota’s Revised Uniform Arbitration Act.)
  • If the losing party failed to raise an argument in arbitration, it can’t use that argument to vacate the arbitration awardLaborers’ Pension Fund v. W.R. Weis Co., __ F.3d __, 2018 WL 316555 (7th Cir. Jan. 8, 2018) (finding in an ERISA dispute that one party “waived its statutory-interpretation argument by failing to raise it in the arbitration.”)
  • First Amendment arguments will not get a putative class out of arbitration with a private party.  Okay, this is not an arbitration law “basic” point, but instead one that confirms the ingenuity of plaintiffs’ class action lawyers. These plaintiffs opposed arbitration “on First Amendment grounds” and asserted there was state action because the FAA and judicial interpretations of it encourage arbitration to the point that AT&T’s actions are attributable to the state.  Roberts v. AT&T Mobility, __ F.3d __, 2017 WL 6275537 (9th Cir. Dec. 11, 2017).  The 9th Circuit found no state action, and noted that plaintiffs’ arguments that the FAA violates consumers’ constitutional rights are incompatible with the Supreme Court’s decisions on arbitration.

_________________________________________________

Now that we’ve run through those reminders on issues that arise frequently in arbitration law, let’s talk about some unsettled issues.  SCOTUS today is considering two cases involving delegation clauses and how lower courts should put its Rent-a-Center, West decision into practice:

  • New Prime, Inc. v. Oliveira — this case comes from the First Circuit and raises the question whether the court should determine that the FAA applies before enforcing a delegation clause.  Why does that matter?   In this case a worker successfully argued the FAA did not govern, because he was an exempt transportation worker, and therefore the court refused to compel arbitration.  [Jan. 22 update: SCOTUS’s order list today does not include this as a grant or deny, so it will likely be considered again in February.]
  • Applied Underwriters Captive Risk Assurance Co. v. Minnieland Private Day School — this case comes from the Fourth Circuit and raises this question: Can a defense to arbitration that applies to the arbitration agreement as a whole ever be specific to the delegation clause?   [Disclosure: I was involved with this petition.] [ Jan. 22 update: SCOTUS denied cert.]

SCOTUS is also being asked to review a decision of the California Court of Appeal that refused to compel arbitration based on a state statute.  That California statute gives courts the discretion to deny enforcement of an arbitration provision when there is a possibility of conflicting rulings in pending litigation with third parties.  The cert petition asks whether the FAA preempts that California statute and will be considered in February.

Last month, SCOTUS  denied cert in another California arbitration case.  That petition, Betancourt v. Prudential Overall Supply, challenged California’s rule that private attorney general disputes cannot be arbitrated.  (SCOTUS passed on the same issue in 2015.)

Here’s hoping that in 2018 SCOTUS sticks with its recent practice of deciding at least one arbitration case per year!  And, here’s hoping the Vikings get in the Super Bowl!

Two cases recently fit in one of my favorite categories: those awards that get “un-vacated.”  These cases went through arbitration, had that arbitration award vacated by a district court, only to have the award later resurrected by an appellate court.  In today’s edition, the whiplash happens in both state and federal court.

In Caffey v. Lees, 2018 WL 327260 (R.I. Jan. 9, 2018), Lees was the winner after bringing a personal injury case in arbitration. He was awarded nearly $200,000.  Caffey moved to vacate the award, arguing every possible basis under the Rhode Island arbitration statute.  The trial court granted the motion to vacate, based on the initial failure of Lees’ counsel to disclose a document from its expert.  Not just any document, of course, but an early assessment that contradicted the expert’s eventual opinion about causation.  The trial court found that omission meant the award was procured by “undue means.”

On appeal, the Supreme Court of Rhode Island noted it had not addressed “undue means” since 1858.  It looked to more recent definitions from federal circuit courts of the phrase — noting that proving undue means involves proving “nefarious intent or bad faith” or “immoral” conduct.   It found that standard was not met in this case, since the losing party had the critical document well before it submitted its final brief to the arbitrator.  Indeed, the issue of the untimely disclosure was placed before the arbitrator, and the expert explained the discrepancy.  Because the expert had a plausible explanation, the court could not agree that Lees’ counsel obtained the award through underhanded or conniving means.  The Supreme Court reinstated the award.

A case in the Ninth Circuit followed the same path.  In Sanchez v. Elizondo, 2018 WL 297352 (9th Cir. Jan. 5, 2018), an investor won a $75,000 award in a FINRA arbitration.  The district court granted the broker’s motion to vacate based on an argument that the arbitrator exceeded his powers.  In particular, the arbitrator allowed the arbitration to proceed with a single arbitrator, even after the claimant had submitted a pre-hearing brief increasing its damage request to just over the FINRA line that requires a three-arbitrator panel.  (The FINRA rules provide that claims over $100,000 must be heard by three arbitrators.  The claimant had initially requested exactly $100,000, so was assigned the single arbitrator, but then sought $125,000 in the pre-hearing brief, without amending the claim.)

The Ninth Circuit reinstated the award.  After first establishing that it had appellate jurisdiction, it considered the arbitrator’s powers.  Importantly, the court affirmed that arbitrators have discretion on matters of substance as well as matters of procedure.  In this case, FINRA rules explicitly gave the arbitrator power to interpret the FINRA Code and rules. Furthermore, the arbitrator asked the parties to address the issue of the increased damage amount, considered their arguments, and interpreted the rule to reference the amount initially claimed in the demand, instead of any amount later sought in the arbitration.  Because the arbitrator had power to interpret the rule and did so, the court found he did not exceed his powers.

These don’t seem like hard cases to me.  Given the standard for vacating awards, these arbitration awards should have been straightforward to confirm.  The fact that they weren’t suggests either that the speed of development under the FAA is difficult for advocates and judges to keep up with, or that there may be some judicial hostility toward arbitration coloring the application of the standard for vacatur.

Whenever people ask me why I choose arbitration law to write and talk about, one of the reasons I give is that the law is in flux, creating a demand for information and analysis.  Despite the fact that the Federal Arbitration Act has been around for over 90 years, there are constantly new developments in its interpretation.  Especially in the past two decades, with the Supreme Court highly engaged in the enforcement of arbitration agreements, the pace of legal development has quickened.  That pace means that litigants, advocates, arbitrators and judges are struggling to keep up.  It also means that even on recurring issues, there is still a lack of consensus on how to apply the rules that have been developed.

To demonstrate this point, I went back through the important cases from 2017.  I found multiple instances where two cases with very similar facts received opposite results.  And I am not talking about circuit splits over novel issues like the NLRB and “wholly groundless” exception.  I am talking about issues like formation, waiver, and non-signatories, where the “rules” have ostensibly been settled for some time.

Two Tales of Non-Signatories

These two cases involve a bank teaming up with a retail entity to issue branded credit cards that offered rewards.  The credit card agreement, which called for arbitration of disputes, was only between the consumers and the banks, however. In each case, plaintiffs sued the retail entity regarding the card and the retail entity moved to compel arbitration as a non-signatory to the credit card agreement.  In one case, White v. Sunoco, Inc., 2017 WL 3864616 (3d Cir. Sept. 5, 2017), the retail entity’s motion was denied.  In the other, Bluestem Brands, Inc. v. Shade, 2017 WL 4507090 (W. Va. Oct. 6, 2017), the retail entity’s motion was granted.  While these cases depend on the laws of different states, the courts were applying the same general estoppel rules, but reaching opposite results.

Two Tales of Waiver

Whether a party has waived its contractual right to arbitrate is an issue that comes up regularly.  Yet it remains surprisingly hard to predict whether a court will find waiver or not on any set of circumstances.

These two cases involve lenders bringing collection actions in state court for credit card debts.  In both, they were granted a default judgment.  And in both, the credit card holder later sued for problems with the collection efforts.  In response to that suit, the lenders moved to compel arbitration.  In one case, Cain v. Midland Funding, LLC, 156 A.3d 807 (Md. Mar. 24, 2017), the court denied the motion to compel, finding the lender had waived its rights.  In the other, Hudson v. Citibank, 387 P.3d 42 (Alaska Dec. 16, 2016), the court granted the motion to compel, finding the lender did not waive its rights.  In both cases, the analysis turned on whether the default action and later action were sufficiently related.

Two Tales of Formation

All of us do more and more of our business over mobile devices and the internet, where we don’t physically sign our name to contracts, and in fact we generally don’t read the terms and conditions.  That leads to hard legal questions over when a contract is validly formed and what terms the parties agreed to.

In these two cases, consumers have little or no choice between providers.  In order to sign up for the service, they receive one message.  In the first case, the message is “your account…[is] governed by the terms of use at [defendant’s website].”  In the second case, the message is “by creating an [] account, you agree to the TERMS OF SERVICE & PRIVACY POLICY.”  The consumers did not have to take any affirmative act to consent to the terms other than proceeding to set up their account.  In both cases, consumers later sued the provider and the providers moved to compel arbitration based on the terms available at their websites.  The consumers responded by arguing the parties had not validly formed any arbitration agreement.

In the first case, the provider was not successful in compelling arbitration.  James v. Global Tellink Corp., 852 F.3d 262 (3d Cir. Mar. 29, 2017).  In the second case, the provider was successful in compelling arbitration.  Meyer v. Uber Technologies, Inc., 868 F.3d 66 (2d Cir. Aug. 17, 2017).  Can it be that the wording difference between “your account.. is governed” and “by creating an account, you agree” explains the outcomes?  Or the fact that the consumers in the Uber case could have just clicked on the terms from the same device they were using to set up the account, while the prisoners in the first case would have had to hang up their telephones, find a computer and find the website?  The cases really give us no assistance in figuring that out.

Maybe every area of law has similar issues regarding the predictability of decisions.  But arbitration law is rife with legal “rules” to guide decision making that are so flexible as to hardly constitute rules at all.  And courts have not yet applied those rules enough times to allow them to develop a systemic approach, with internal consistency between the decisions.  And I predict that will only get worse, not better, as consumers and employees find new and creative ways to challenge arbitration agreements.

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.

So you’ve got an arbitration award, what next? In other types of civil cases, the Federal Rules of Civil Procedure (Rules) control service, and they have greatly reduced the role of U.S. Marshals in serving parties. See Fed. R. Civ. P. 4(c). But enter the Federal Arbitration Act § 9 and § 12 (FAA). When a party seeks to confirm, vacate, or modify an arbitration award, § 9 and § 12 say that a nonresident party must be “served by the marshal of any district within which the adverse party may be found in like manner as other process of the court.” Which set of requirements controls here?

Since adequate service is necessary for the court to have personal jurisdiction, the question of service has been litigated in a few district courts, but no federal appellate courts. See Logan & Kanawha Coal Co.v. Detherage Coal Sales, LLC, 789 F. Supp. 2d 716, 718 (2011) (chronicling the courts that have analyzed the issue). Some courts, like the D.C. District Court in VentureForth Holdings LLC v. Joseph, have found that service consistent with the Rules also satisfies FAA § 9 and § 12. Those courts rely on the final phrase of § 9 or § 12 that says, “in like manner as other process of the court.” They read that phrase as indicating that arbitration award confirmation or modification service should follow the same rules as other civil suits. They derisively dismiss the requirement in §§ 9 and 12 as an artifact or an anachronism.

However, some courts, like the Southern District of West Virginia in Logan & Kanawha v. Detherage Coal Sales, require service by U.S. Marshal. The first and primary argument for those courts is that the plain language of the FAA §§ 9 and 12 requires service by U.S. Marshal. When confronted with the apparent tension between the Rules and the FAA, they point to the fact that Congress has not yet repealed the marshal requirement in the FAA even if the new Rules reduce the role of U.S. Marshals. The Rules, in fact, still retain the option of using U.S. Marshals to serve other parties, so a court could order service by U.S. Marshal without violating Rule 4.

All in all, there are some district courts—but not circuit courts—talking about the potential conflict between the service requirements in the Rules and the FAA, and they do not all agree. There is no circuit law on it yet, but at least some of the district courts seem content to allow Congress’ anachronism to control current outcomes. The safest bet for any party seeking to confirm, vacate, or modify an arbitration award in federal court is to use a U.S. Marshal for service, or to get an express waiver of that requirement from the opposing party.

ArbitrationNation thanks Claire Williams, a law student at the University of Minnesota Law School, for researching and drafting this post.

____________________________________________________

A nonexhaustive list of courts not requiring marshal service

  • VentureForth Holdings LLC v. Joseph, 80 F. Supp. 3d 147, 148 (D.D.C. 2015) (“[T]his Court holds that service of a nonresident complies with § 9 of the FAA if service is provided in accordance with Rule 4 of the Federal Rules of Civil Procedure.”)
  • United Cmty. Bank v. Campbell, No. 1:10 CV 79, 2011 WL 815684, at *2 (W.D.N.C. Mar. 1, 2011) (The Court finds that the Bank properly effected service pursuant to Rule 4(e).)
  • Elevation Franchise Ventures, LLC v. Rosario, No. 1:13-CV- 719 AJT/JFA, 2013 WL 5962984, at *4 (E.D. Va. Nov. 6, 2013) (“Service of process upon an individual is governed in this court by Fed. R. Civ. P. 4(e)(1) . . . .”)
  • Hancor, Inc. v. R &R Eng’g Prod., Inc., 381 F. Supp. 2d 12, 15 (D.P.R. 2005) (relying on Reed & Martin, Inc. v. Westinghouse Elec. Corp.)
  • Litigants in the Second Circuit should be aware of Reed & Martin, Inc. v. Westinghouse Elec. Corp., 439 F.2d 1268, 1277 (2d Cir. 1971). In it, the Second Circuit analyzed the same phrase “in like manner” that courts point to when arguing that service in accordance with Rule 4 is sufficient. The court held that “[t]he phrase ‘in like manner as other process of the court’ found in § 9 of the Arbitration Act refers to Fed. R. Civ. P. 4 on the accomplishment of appropriate service, not to Fed. R. Civ. P. 12(a). . . .” While this quote appears to support service in accordance with the Rules, there are two big caveats. First, the court was addressing an issue on which the FAA is silent (time to answer). Second, this case was decided in 1971 when Rule 4 required “[s]ervice of all process shall be made by a United States marshal . . .” so at the time there was no conflict between the Rules and the FAA and therefore the court could not have addressed the current tension between the FAA and the Rules.

 

A nonexhaustive list of courts requiring marshal service:

  • Johnson v. Drake, No. 3:16-CV- 1993-L, 2017 WL 1173275, at *6 (N.D. Tex. Mar. 30, 2017) (“[C]ourts cannot simply disregard the plain language of 9 U.S.C. § 9 . . . .”)
  • PTA-FLA, Inc. v. ZTE USA, Inc., No. 3:11-CV- 510-J- 32JRK, 2015 WL 12819186, at *6 (M.D. Fla. Aug. 5, 2015) (“[S]ervice on nonresidents must be made via marshal. . . “)
  • Logan & Kanawha Coal Co. v. Detherage Coal Sales, LLC, 789 F. Supp. 2d 716, 722 (S.D.W. Va. 2011)
  • Nu-Best Franchising, Inc. v. Motion Dynamics, Inc., No. 805 CV 507T27TGW, 2006 WL 1428319, at *3 (M.D. Fla. May 17, 2006) (“Plaintiffs were required to serve notice through the United States Marshal.”)
  • Int’l Union of Operating Engineers Local 825 Employee Benefit Funds v. Getty Contracting LLC, No. CIV. 2:14-7799 KM, 2015 WL 4461512, at *2 (D.N.J. July 20, 2015) (“If it is a nonresident of New Jersey, Getty must be served via the U.S. Marshal in its home district.”)
  • Dobco, Inc. v. Mery Gates, Inc., No. CIV. 06-0699 (HAA), 2006 WL 2056799, at *2 (D.N.J. July 21, 2006) (“Rather, Dobco had an obligation to have Mery Gates served by a marshal, as the strict language of the statute provides.”)

Just as I predicted, SCOTUS reversed the Kentucky Supreme Court’s decision in Kindred this morning.  The interesting piece, though, is that the seven member majority went out of its way to cut off some of the “on trend” methods that state courts have been using to avoid arbitration clauses.

The Kentucky decision can be summarized easily.  The case  involved nursing homes attempting to compel arbitration of wrongful death and personal injury claims by estates of deceased residents.  In each case, a relative with power of attorney had signed an admission document that included arbitration when the resident entered the nursing home.  However, the Kentucky court refused to infer the agent’s “authority to waive his principal’s constitutional right to access the courts and to trial by jury” unless that power is “unambiguously expressed” in the power-of -attorney document.  (You may recall this is the decision that analogized entering into an arbitration agreement to: putting a child up for adoption, aborting a pregnancy, and entering into personal servitude.  If that doesn’t cry out “judicial hostility to arbitration,” I don’t know what does.)

Justice Kagan, writing for the seven-member majority, found Kentucky’s “clear statement rule” preempted by the Federal Arbitration Act.  “[T]he court did exactly what Concepcion barred: adopt a legal rule hinging on the primary characteristic of an arbitration agreement–namely, a waiver of the right to go to court and receive a jury trial.”  In response to Kentucky’s attempt to paint its rule as broader than arbitration, the Court said No Kentucky court, so far as we know, has ever before demanded that a power of attorney explicitly confer authority to enter into contracts implicating constitutional guarantees.”

That preemption aspect of the decision seems to confirm what I have been saying about the impact of DirecTV: states are in much better position to defend their anti-arbitration “general contract rule” if they can point to at least one non-arbitration circumstance in which it has been applied.  (The decision added a footnote to clarify this isn’t an absolute necessity: “We do not suggest that a state court is precluded from announcing a new, generally applicable rule of law in an arbitration case.” But that’s like saying it is conceivable that your mother will appreciate a new vacuum for mothers day, but we don’t recommend it.)

The Court’s decision to clearly state that courts cannot invalidate arbitration agreements based on their (necessary) waiver of the right to a jury trial also cuts off a trendy argument in state courts.  New Jersey courts, for example, have invalidated arbitration agreements in recent years based on their failure to clearly advise consumers they are waiving their rights to jury trials (SCOTUS denied cert in the key NJ case, Atalese.)  Those NJ decisions are now shaky precedent, IMHO.

The decision then went beyond the basic preemption analysis.  Respondents had argued the FAA had no application to contract formation, that only state law controlled that question.  SCOTUS quickly disabused the respondents, and all state courts, of that notion, reasoning that the purpose of the FAA would be completely undercut by the rule: “If the respondents were right, States could just as easily declare everyone incompetent to sign arbitration agreements.  (That rule too would address only formation.)” In doing so, the Court cut off another avenue for avoiding the FAA.  (In my view, though, the slippery slope argument relied on by SCOTUS also cuts against the formation/validity  distinction used to separate which issues are decided in court and which by arbitrators.)

[As usual, Justice Thomas dissented based on his position that the FAA does not apply in state courts.]

One of the few “get out of arbitration free” cards that SCOTUS offers litigants is this: find another federal statute that clearly entitles plaintiff(s) to a court trial. In a recent 8th Circuit case, that court carefully considered, and then rejected, the argument that the Age Discrimination in Employment Act (ADEA) constituted that type of “get out of arbitration free” statute.

The claims in McLeod v. General Mills, Inc., 2017 WL 1363797 (8th Cir. Apr. 14, 2017), stem from a 2012 reduction in force at General Mills.  In exchange for severance packages, terminated employees released the company from claims relating to their termination, and agreed to individual arbitration of future disputes.  In McLeod, 33 of those employees sued the company alleging violations of the ADEA.  In response, the company moved to compel arbitration on an individual basis.

The Chief Judge of the District of Minnesota denied General Mills’ motion. He found that the plain language of the statute at issue “requires General Mills to defend the validity of the plaintiffs’ release agreements in court, not in an arbitral forum.” The statute reads: “any dispute that may arise over whether any of the requirements, conditions, and circumstances set forth in [Section 626(f)(1) ] have been met, the party asserting the validity of a waiver shall have the burden of proving in a court of competent jurisdiction that a waiver was knowing and voluntary.” 29 U.S.C. § 626(f)(3) (emphasis added).

On appeal, the Eighth Circuit reversed. It found that the statute relied upon by the district court was not applicable, because General Mills was not asserting the validity of a waiver within the meaning of that statute.  Furthermore, the Eighth Circuit concluded that the ADEA does not grant employees the substantive right to a jury trial or to a class action, but only provides procedural rights that can be waived.

**Yikes – three weeks since my last post. Where was I?  In arbitration of course!