At least in theory, mutual assent remains a cornerstone of contract law and thus of arbitration.  The tricky part has become understanding what counts as mutual assent in a world where overwhelming empirical evidence, not to mention our own lived experience, demonstrates that no one reads standardized terms and conditions, including arbitration provisions buried in fine print, or more commonly these days, a maze of hyperlinks.

Basically, to get around the unilateral character of adhesive contracting, U.S. courts have, over the past five decades, refocused contract formation on constructive notice.  If a reasonable person in the position of the recipient of boilerplate should have seen the terms, the recipient will be bound by those terms, regardless of whether she ever actually read or understood the them.  Constructive awareness coupled with an individual purchasing something from a commercial party amounts to assent.  See, e.g., Starke v. SquareTrade, Inc., No. 17-2474, 2019 WL 149628 (2d Cir. Jan. 10, 2019) (“Where an offeree does not have actual notice of certain contract terms, he is nevertheless bound by such terms if he is on inquiry notice of them and assents to them through conduct that a reasonable person would understand to constitute assent.”) (citations omitted).

But a great deal of confusion persists about what counts as “reasonable notice.”  Liz has written about two conflicting cases involving Uber and arbitration.  She also wrote about a recent “shinglewrap” arbitration agreement – in a putative class action brought by homeowners against a vendor of roof shingles — upheld by the 11thCircuit.

This week, we’ll look at a recent Second Circuit case that might help make things just a tiny bit more tractable.

In  Starke v. SquareTrade, Inc., the Second Circuit concluded that the a purchaser of a consumer product protection plan did not have reasonable notice of an arbitration provision contained in the terms and conditions communicated via a hyperlink in a post-sale email.

The court starts with some generic stuff about conspicuousness.  It says that in determining whether an offeree is on inquiry notice of contract terms, courts look to whether the term was obvious and whether it was called to the offeree’s attention.  This usually “turns on whether the contract terms were presented to the offeree in a clear and conspicuous way.”  In the context of “web-based contracts, [courts] look to the design and content of the relevant interface.”

The court  goes on to list, in bullet points, various features of interfaces that were too inconspicuous and interfaces that were acceptably conspicuous.  But these bullet points sort of distill to whether the court thought that the interface was cluttered or not.  At best it feels like defining obscenity — you know it when you see it.  At worst, it feels like defining beauty — it’s in the eye of the beholder.  Either way, it’s not very helpful.

(I’ll just say, as an aside, that I was at an academic conference a week ago, and one of the presentations was on an empirical study about conspicuousness — still in progress, but if you’re interested, you could reach out to the author, Yonathan Arbel.  The study looks at the effectiveness — or more precisely, ineffectiveness — of all-caps.  Basically, all-caps seems to do nothing to help make things more conspicuous and may well make things far less readable.  That discussion reminds me that courts are offering opinions about what is or isn’t conspicuous with very little empirical evidence guiding them.)

Maybe the more useful rules of thumb that the court provides have to do with the fact that the relevant hyperlink was “neither spatially nor temporally coupled with the transaction.” The relevant link was given to the purchaser in a post-sale email.  Spatially, the court noted that the hyperlink could have (and should have?) been provided on the purchase page.  In the court’s view, doing so would have more clearly indicated that the terms and conditions, including the arbitration clause, were part of the purchase transaction. Temporally, the court concedes that “providing contract terms after a transaction has taken place may be an appropriate way to contract in certain situations,” but it found “little justification” for that sort of pay-now-terms-later structure in the particular case. Instead, “it would have been virtually costless for SquareTrade to provide the governing terms and conditions to Starke before he bought the Protection Plan.”

These “coupling” rules of thumb could be useful for drafters.  It’s not clear whether the court would have enforced the arbitration clause if it had been included in a hyperlink on the purchase page, but that’s certainly the suggestion.

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

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

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

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

This post is aimed at drafters of arbitration clauses. Because if you don’t insert an administrator for your arbitration, and don’t anticipate that the administrator may just stop providing services, your arbitration clause is dead in the water. At least, that’s the holding of two new state court cases.

In A-1 Premium Acceptance, Inc. v. Hunter, 2018 WL 4998256 (Mo. Oct. 16, 2018), the Supreme Court of Missouri affirmed the lower court’s decision to deny a defendant’s motion to compel arbitration. The reason was that the arbitration agreement within the 2006 loan documents provided “any claim or dispute related to this agreement…shall be resolved by binding arbitration by the National Arbitration Forum [NAF], under the Code of Procedure then in effect.” As regular readers are aware, the NAF stopped administering consumer arbitration in 2009. Although many courts have enforced arbitration agreements, despite their inclusion of NAF, Missouri did not. It found that the language of this clause showed that the parties intended to arbitrate before the NAF and only the NAF. Therefore, the court refused to use Section 5 of the FAA to appoint a replacement administrator.

In Flanzman v. Jenny Craig, Inc., Docket No. A-2580-17T1 (N.J. Super. Ct. App. Div. Oct. 17, 2018), New Jersey’s appellate division was faced with a slightly different problem: the parties’ arbitration clause did not provide what rules would govern the arbitration nor which entity would administer it.  As a result, the court found the arbitration clause was never formed, because the employee could not give informed assent. It reasoned:

Selecting an arbitral institution informs the parties, at a minimum, about that institution’s arbitration rules and procedures.  Without knowing this basic information, parties to an arbitration agreement will be unfamiliar with the rights that replaced judicial adjudication.  That is, the parties will not reach a “meeting of the minds.”

While clarifying that no magic words were required, the New Jersey court noted that if the parties don’t identify an “arbitral institution (such as AAA or JAMS)” they should at least identify the process for selecting a forum.  Otherwise, arbitration agreements will not be enforced under New Jersey law. (Unlike Missouri, the New Jersey court did not discuss Section 5 of the FAA and the statutory authority for courts to appoint arbitrators.)

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.

 

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.

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.

In January of 2016, SCOTUS granted review of an arbitration case from Hawaii, but summarily vacated and remanded it without analysis.  (Unless you consider “Please read DIRECTV” substantive analysis.)  Here’s the risk of that course of action: Hawaii can refuse to change its mind.

Last month, in Narayan v. The Ritz-Carlton Development Co., 2017 WL 3013022 (Haw. July 14, 2017), Hawaii affirmed its decision after considering DIRECTV.  The case related to whether purchasers of new condominiums could sue the developers over their abandonment of the project.  The developers moved to compel arbitration based on an arbitration clause within the Declaration for the condo project, because the Declaration was incorporated into the plaintiffs’ purchase agreement.  In 2015, Hawaii’s highest court found the parties had not clearly agreed to arbitrate and portions of the arbitration clause were unconscionable.

Two years later, after a forced reconsideration, the court dropped its analysis of whether the arbitration agreement was validly formed (smart decision, given that it was on the shakiest ground, and given Kindred’s statement that FAA preempts formation decisions that disfavor arbitration).  Instead, it focused exclusively on unconscionability.  It found the arbitration clause both procedurally and substantively unconscionable (noting “severe” discovery limitations), and added more state case law to support those findings.  Amusingly, it also cited to two other state supreme courts which have affirmed their arbitration decisions on unconscionability after receiving a “GVR” from SCOTUS GVR: West Virginia and Missouri. (As if to say: You let those other kids off the hook!)

Speaking of SCOTUS and arbitration, two updates of note:

  • Mark your calendars; SCOTUS will hear argument in the cases regarding whether the NLRB can preclude class waivers on October 2.  Even so, the federal appellate courts keep issuing decisions on both sides of this issue.  E.g. NLRB v. Alternative Entertainment, 2017 WL 2297620 (6th Cir. May 26, 2017) (enforcing NLRB order); Convergys Corp. v. NLRB, 2017 WL 3381432 (5th Cir. Aug. 7, 2017) (rejecting NLRB position); Logisticare Solutions Inc. v. NLRB, 2017 WL 3404648 (5th Cir. Aug. 9, 2017) (rejecting NLRB position).
  • Physicians from Florida are asking SCOTUS to grant certiorari in a case about the regulation of doctor-patient arbitration clauses.  If you know of other arbitration cases in the pipeline, let me know.
  • An employer from California is asking SCOTUS to grant certiorari in this case regarding when courts should review interim arbitration awards. [Ed note: this final bullet was not in the original post, but was added after a thoughtful reader alerted me to it.]

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.]

Demonstrating just how difficult it can be to separate questions about the “formation” of an arbitration agreement from the “validity” of that agreement, the Fifth Circuit found this month that when an argument was applied to two of the parties’ three agreements, it related to their formation, but when the same argument was applied to the third agreement, it related to its validity.

In Lefoldt v. Horne, 2017 WL 1326241 (5th Cir. April 11, 2017), the plaintiff, a community hospital, had engaged the defendant to provide auditing services.  The parties signed contracts in 2009, 2010, and 2012.  However, only the 2009 agreement was reflected in the minutes of the hospital’s board.  In 2014, the hospital filed for bankruptcy, and its trustee sued the auditor for professional malpractice.  In response, the auditor moved to compel arbitration, based on arbitration provisions in all three contracts.

In order to determine whether the dispute was arbitrable, the Fifth Circuit had to confront two confounding rules. First was Mississippi’s “minutes rule,” which the hospital raised as a defense to arbitrability.  The “minutes rule” appears to require  that a public board reflect actions taken in the minutes of its meetings, and, if an agreement to contract is not reflected in those minutes, the contract is not enforceable.  The second issue the Fifth Circuit had to address was the first footnote in SCOTUS’s Buckeye Check Cashing decision, which distinguished disputes over a contract’s validity from those over “whether any agreement between the alleged obligor and oblige was ever concluded.”  That matters because issues of validity can be sent to an arbitrator, which those over formation generally cannot.

The court found the issue of whether Mississippi’s “minutes rule” was one about formation or validity “a close question.” However, it concluded that the minutes rule raised an issue of the very formation of the 2010 and 2012 service contracts.  That decision allowed the court to decide whether those contracts were formed, and it found they were not validly formed, so the trustee did not have to arbitrate issues under those two contracts.

However, the court found that because the hospital board recorded the auditing contract in its 2009 minutes, the application of the “minutes rule” in that instance involved the validity of the 2009 contract. The court found an arbitrator should decide “whether and how the minutes rule applies to the 2009 engagement letter and the scope of the arbitration clause,” unless the district court finds a delegation clause on remand.

This case is a great example of how the current arbitration jurisprudence may have gotten off course.  Should it be this difficult for a court to decide whether a particular argument should be heard by a court or an arbitrator?  See my post from five years ago (has it really been that long?!) on the thin line between formation and validity.

In the past week, the Third Circuit has issued two important decisions on the formation of arbitration agreements.  (Sing it Beyoncé! “Okay ladies, now let’s get in formation.”)  In one, a class action was allowed to proceed in court because the defendant did not obtain explicit enough agreement to the arbitration, and in another an arbitration award was initially vacated due to questions about whether there had been an arbitration agreement at all.

In James v. Global Tellink Corp., __ F.3d __, 2017 WL 1160893 (3d Cir. Mar. 29, 2017), a putative class of New Jersey inmates sued the sole provider of inmate telecommunication services, and the Defendant moved to compel individual arbitration.  The class representative who created her account through the website and actively clicked a button accepting the terms and services was dismissed.  But, the class representatives who had created accounts by telephone were a different story.  They received an audio notice that “your account…[is] governed by the terms of use at [defendant’s website].”  The system did not require those telephone users to take any affirmative step to indicate consent to the terms.

As a result, the district court refused to compel those telephone members of the class to arbitration and the Third Circuit affirmed.  Applying New Jersey law, the court distinguished this situation from those involving on-line services, where a link is easily accessible to terms, and from shrinkwrap cases, where consumer received physical copies of the terms when they open the product. It suggested the telephone situation may be closer to “browsewrap” agreements that do not require a manifestation of express consent, and which courts have refused to enforce if the terms are obscured.  In sum, the court said the telephone users “neither received GTL’s terms of use, nor were they informed that merely using GTL’s telephone service would constitute assent to those terms” and therefore there was no arbitration agreement to enforce.

In Aliments Krispy Kernels, Inc. v. Nichols Farms, __ F.3d __, 2017 WL 1055569 (3d Cir. Mar. 21, 2017), Aliments was attempting to confirm an arbitration award it received, and Nichols Farms was trying to vacate that award.  Aliments and Nichols had exchanged some sales confirmations to purchase pistachios, none of which were signed.  However, Nichols ended up refusing to deliver the pistachios without advance payment, based on Aliments’ credit application.  Aliments bought elsewhere, and then sought to recoup the extra cost from Nichols at arbitration (in which Nichols refused to participate).  In the action to confirm or vacate the award, the district court allowed months of discovery and then vacated the award, finding no genuine issue of fact on that issue.  On appeal, the Third Circuit vacated and remanded for further proceedings.  In the course of its decision, the Third Circuit noted that its previous expressed standard — that there must be express and unequivocal agreement to an arbitration contract — is outdated and that nothing more than relevant state law on contract formation is required.