I am a true arbitration nerd.  But, when SCOTUS takes a THIRD arbitration case for its upcoming term, I wonder if the Justices are more obsessed with arbitration than I am.  (Reminder of the other two here.)  If they hear about the same total number of cases as this year (69), arbitration will make up more than 4% of their docket.  Now, 4% isn’t huge.  For reference, intellectual property cases made up less than 4% of cases filed in federal district courts last year, and there were three I.P. cases decided by SCOTUS (two on inter partes review and the WesternGeco case).  At least I.P. cases have a category in the annual judiciary report, though.  That’s more than arbitration can say.  And still, it has three cases before the Supremes.

Enough stats, what is this case?  It is Henry Schein Inc. v. Archer and White Sales Inc., in which SCOTUS is going to resolve the circuit split over the “wholly groundless” doctrine.  Given how the NLRB decision just came out, I don’t think I’m stepping too far out on a limb if I predict: “wholly groundless” will be grounded.  (Maybe even “grounded wholly?”  Seriously, there has got to be some good word play possible, but I am too tired from watching the World Cup to develop it.)  Put simply, that doctrine will not stand in the way of any future delegation clauses.

(Thanks to Mark Kantor for being the first to tell me certiorari was granted in this case.)

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Switching gears, there are three new decisions from state high courts on the arbitrability of claims against nursing homes.  Two enforce the arbitration clauses, and one decidedly does not.

Nebraska and Colorado issued the pro-arbitration decisions, in both cases reversing a trial court’s refusal to enforce arbitration agreements.  In Colorow Health Care, LLC v. Fischer, 2018 WL 2771051 (Colo. June 11, 2018), the district court denied the nursing home’s motion to compel arbitration because it was not in bold text, as required by a state statute.  Without any discussion of the FAA (which would have been a much easier ground for reversal), the Colorado Supreme Court found that the statute only requires substantial compliance, and the defendant had substantially complied (by including the right language, in a larger font size than required, just not in bold). In Heineman v. Evangelical Lutheran Good Samaritan Society, 300 Neb. 187 (June 8, 2018), the district court had found the arbitration agreement lacked mutuality, violated the state arbitration statute, and violated public policy (because of the CMS rule on arbitration).  On appeal, the Supreme Court of Nebraska found mutuality, found the FAA applied and preempted the state arbitration statute, and noted that the CMS rule had been enjoined.

A week later, though, Nebraska rejected arbitrability in a different case against a nursing home.  In Cullinane v. Beverly Enterprises-Nebraska, Inc., 300 Neb. 210 (June 15, 2018), the issue was whether the arbitration agreement signed by the deceased’s husband was enforceable.  He admitted he signed all the admission documents, but stated in an affidavit that he understood he had to agree to arbitrate for his wife to be admitted to the facility.  He also stated that he did not understood he was waiving his wife’s right to a jury trial, and would not have signed if he had known that and that arbitration was optional.  Applying the FAA and state contract law, the Nebraska Supreme Court found the district court was not “clearly wrong” when it found the husband was fraudulently induced to executing the arbitration agreement for his wife.  Critically, the facility had not introduced any affidavit contradicting the alleged statements made at the time of admission.

The Fifth Circuit recently refused to vacate an arbitration award, despite the loser’s arguments that: the arbitrators decided claims outside the scope of the arbitration agreement; and the winner’s expert used incorrect damage numbers in his testimony. Morgan Keegan & Co., Inc. v. Garrett, 2012 WL 5209985 (5th Cir. Oct. 23, 2012). 

At issue in Garrett were 18 investors’ claims of securities fraud.  Each investor’s Client Agreement with Morgan Keenan contained an arbitration clause, and after the dispute arose, the parties executed a FINRA Submission Agreement, agreeing to submit the investors’ claims and any related cross claims or answers, to the FINRA arbitrators.  Despite those agreements, Morgan Keenan made a motion late in the arbitration process to dismiss the arbitration because the claims were not within the scope of the FINRA arbitration rules (because they were allegedly derivative and/or some of the investors were not “customers”).  The arbitrators denied the motion. 

With almost no reasoning, the district court vacated the arbitration award, finding the arbitrators had “exceeded their power” by deciding derivative claims and claims of non-customers.  The Fifth Circuit reversed that decision.  It relied heavily on the two broad arbitration agreements between the parties, as well as the extraordinary deference granted to arbitrators, repeating the mantra that courts may not vacate arbitration awards “simply because [they] disagree[] with the arbitrator’s legal reasoning.”  (The emphasis on deference is a bit disingenuous, given the Fifth Circuit’s recent refusal to grant deference to an arbitrator’s rationale for allowing class arbitration.)

With respect to the expert, he had testified regarding the investors’ losses attributable to the fraud.  One week later, in an arbitration brought by a different group of investors relating to the same fraud by the same defendant, the expert used different figures.  He explained that one of his staff had made an error, and he did not realize it until after the Garrett arbitration.  (The opinion does not indicate the magnitude of the error, nor whether it increased or lowered the investors’ damages.  It does say, however, that there is no evidence suggesting the error was intentional.) 

Morgan Keegan also moved to vacate the arbitration award on this second basis, characterising the award as being “procured by fraud” within the meaning of Section 10 of the FAA.  The district court granted the motion to vacate the award, but the Fifth Circuit reversed.  It found that Morgan Keegan had not proven that the “fraud was not discoverable by due diligence before or during the arbitration hearing.”  Because Morgan Keegan knew about the error before the award was issued, and because Morgan Keegan could have discovered the error on its own before or during the hearing, the Fifth Circuit found it had not proven its own due diligence.  The Fifth Circuit reversed the district court’s vacatur, and remanded with instructions to confirm the arbitration award.

I think this case turns on the fact that Morgan Keegan was not a sympathetic party.  The fact that it waited until just before the arbitration hearing (when it may have realized the chips were stacked against it) to argue that the claims should be dismissed, and the fact that it did nothing to raise the expert’s revised calculations before the arbitration award was issued (let alone find those errors on its own), gave the odor of sour grapes to this entire arbitration appeal.