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.

 

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.]

 

The Supreme Court of Missouri has issued two significant arbitration decisions in recent weeks, showing its willingness to sever any aspects of an arbitration agreement that it finds unconscionable (while enforcing the overall obligation to arbitrate).

First, in a contentious decision, the Supreme Court of Missouri found that a former employee of the St. Louis Rams football team does have to arbitrate his age discrimination claims, but he does not have to do so using the NFL Commissioner as the arbitrator. State ex rel. Hewitt v. Hon. Kristine Kerr, __ S.W.3d __, 2015 WL 2061986 (Mo. Apr. 29, 2015). The employment agreement incorporated rules stating the “Commissioner shall have full, complete and final jurisdiction and authority to arbitrate… any dispute between any player, coach, and/or other employee of any [team].” The court found that term unconscionable, because “[i]n effect, [] the commissioner is required to arbitrate claims against his employers.” (The team owners select the commissioner and determine his salary.) The decision has two full dissents and two partial dissents, but a majority of the court hung together for that gutsy decision. (Reading between the lines, the federal judge in the Adrian Peterson labor dispute appeared to agree that the Commissioner should not be arbitrating NFL employment disputes.)  Instead of invalidating the entire agreement to arbitrate, the Supreme Court of Missouri found that the state’s uniform arbitration act would provide the mechanism for appointing an arbitrator to decide the dispute.

More recently, in an uncontentious opinion, the Supreme Court of Missouri also refused to enforce an aspect of an arbitration agreement that it found unconscionable.  Eaton v. CMH Homes, Inc., __ S.W.3d __, 2015 WL 3387910 (Mo. May 26, 2015). In Eaton, a purchaser sued a seller for fraud and negligent misrepresentation. The seller sought to compel arbitration. The purchaser responded that the arbitration agreement was unenforceable, largely because it lacked mutuality. Both the trial court and the intermediate appellate court refused to compel arbitration. The Supreme Court of Missouri reversed.

Missouri’s highest court clarified that lack of mutuality in an arbitration agreement is not sufficient by itself to make the arbitration agreement unconscionable, but is a factor that courts should consider.  In doing so, the court confirmed that its recent Bristol Care decision (which refused to enforce an arbitration agreement in an employment agreement, finding it illusory and without consideration) is not as sweepingly anti-arbitration as some had feared. The court limited the Bristol Care decision to its unique facts: an arbitration agreement that was added by amendment to an existing contract without sufficient consideration and with an illusory promise in return. Even so, the court found that the lack of mutuality in the Eaton arbitration agreement, in combination with an “anti-waiver” provision (requiring the purchaser to arbitrate claims, even if those claims arose as counterclaims to a court action by the buyer), was unconscionable. Instead of refusing to enforce the entire arbitration agreement, the court found those terms were not essential to the agreement to arbitrate and severed them.

 

Using a different analysis, but reaching the same result as a recent decision from the Seventh Circuit, the Eleventh Circuit agreed that a defendant could not compel arbitration of consumer claims before the Cheyenne River Sioux Tribal Nation in South Dakota.  Inetianbor v. CashCall, __ F.3d__, 2014 WL 4922225 (11th Cir. Oct. 2, 2014).  The Eleventh Circuit found that arbitral forum was integral to the parties’ agreement, but unavailable, and therefore the dispute could remain in federal court.

The consumer in this case sued the loan servicer in federal court and the servicer moved to compel arbitration.  The loan agreement called for disputes to be “resolved by Arbitration, which shall be conducted by the Cheyenne River Sioux Tribal Nation by an authorized representative in accordance with its consumer dispute rules.”  The district court initially compelled arbitration and the consumer twice tried to demand arbitration.  In response, the Tribe explained it did not conduct arbitration.  (In fact, the Tribal Elder that the servicer chose as an arbitrator explained that the “Tribe has nothing to do with any of this business.”)  Based on that evidence, the district court changed course and refused to compel arbitration.

The Eleventh Circuit affirmed.  First, it found that because the agreement had many references to the Tribe (it was referenced in five of nine paragraphs about arbitration), the choice of that arbitral forum was “integral” to the arbitration agreement.  The pervasive references to the Tribe also prevented the court from using the severability clause to “sever” the choice of forum and compel arbitration in some alternative forum.  Second, the court agreed with the district court that the chosen forum was unavailable.  It noted that the Tribe did not authorize arbitration, the chosen arbitrator refused to serve, and the Tribe lacked any consumer dispute resolution rules.

An interesting aspect of this decision is how the analysis differs from the Seventh Circuit’s analysis of the same provision in August.  The Seventh Circuit refused to enforce the arbitration agreement because it found it: 1) illusory; and 2) unconscionable.  It did not analyze whether the forum was integral to the parties’ arbitration agreement.

Another interesting point of comparison is with the decisions that enforce arbitration provisions, even when they call for an arbitral forum that no longer accepts cases (like the National Arbitration Forum), because the forum was not integral to the parties’ arbitration agreement.  A concurrence in Inetianbor distinguished those cases by noting that the NAF was a valid forum, with relevant rules, when the contracts were drafted and simply became unavailable over time.  In contrast, in these payday loan cases it appears the Cheyenne River Sioux Tribal Nation was never prepared to handle consumer arbitration.

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Other ArbitrationNation News

SCOTUS recently decided NOT to review two arbitration cases.  The first was a decision from the West Virginia Supreme Court, finding an arbitration agreement was not properly incorporated into the parties’ contract.  (Here’s the SCOTUSblog case page.)  The second was a decision from the Ninth Circuit about when to find parties have waived their right to arbitrate.  (Here’s the SCOTUSblog case page.)  To my knowledge, there are no juicy arbitration cases coming up on the Supreme Court’s docket. 🙁

Cue the R.E.M folks, because the Supreme Court of Missouri issued a 4-3 opinion recently that appears to upend many employment arbitration agreements in that state.  Baker v. Bristol Care, Inc., __ S.W.3d__, 2014 WL 4086378 (Mo. Aug. 19, 2014).  However, the situation is not as dire as it may seem.

The high court in Missouri agreed with the lower court that the arbitration agreement in the parties’ employment contract was invalid (and therefore the employer could not compel arbitration of the putative class action claim by plaintiffs seeking unpaid overtime).  In particular, it concluded that “there was no consideration to create a valid arbitration agreement” for two reasons: continued at-will employment was insufficient consideration; and the arbitration agreement was illusory.

In this case, the employee was first asked to sign an arbitration agreement upon receiving a promotion to a managerial position.  But the managerial agreement allowed the employee to be terminated without notice and receive only five days’ compensation.  Based on that, the court characterized the arrangement as at-will employment, and followed earlier Missouri cases finding “continued at-will employment is not valid consideration to support” an arbitration agreement.  That conclusion puts Missouri at odds with many other courts around the country However, the court relied on its ability to apply generally applicable Missouri contract law, even in the context of the FAA, and found “an offer of continued at-will employment is not valid consideration [for an arbitration agreement] because the employer makes no legally enforceable promise to do or refrain from doing anything it is not already entitled to do.”

The arbitration agreement also allowed the employer “to amend, modify or revoke this agreement upon thirty (30) days’ prior written notice to the Employee.”  The court concluded that that statement allowed the employer to modify the agreement “unilaterally and retroactively,” making it illusory.  The court hypothesized that the provision allowed the employer, in the course of an arbitration that was not going its way, to provide the employee notice that “effective in 30 days, it no longer would consider itself bound by the results of the arbitration.”  For that reason, the employer’s argument that the arbitration agreement was supported by consideration due to its “mutuality” failed.

For employees, this is another case in the string of cases finding arbitration agreements illusory and therefore unenforceable.  For employers who are worried about arbitration agreements in Missouri, I have an easy solution.  Make sure that if you have a modification clause, it does not apply to existing disputes.  That simple change would have likely make this arbitration agreement enforceable and probably avoided the class action.  (The Missouri Supreme Court made clear that the arbitration agreement was “enforceable if either source of consideration [was] valid,” so true mutuality alone should be sufficient.)

In my view, though, the enforceability of this arbitration agreement should never have been considered by the court.  The parties’ agreement gave the arbitrator “exclusive authority to resolve any disputes relating to applicability or enforceability of this Agreement.”  The Missouri Supreme Court found that clause did not give the arbitrator authority to address the plaintiff’s defenses to arbitration, however, because they were about contract formation, which it distinguished from contract enforceability.  While contracts professors and hornbooks talk about  peppercorns being necessary to form a contract in the first place, in real life consideration is an enforceability issue.  It is not a dispute about whether the parties really signed the contract, or had authority to sign, or whether this document really was incorporated into the parties’ agreement, which are the type of challenge to the entire arbitration agreement that SCOTUS has said do belong in court.  Buckeye Check Cashing v. Cardegna, 546 U.S. 440, 444 n.1 (2006).  Instead, it is an argument that the employee’s assent to the contract should be invalidated post-hoc because the contract did not meet state law rules, more akin to unconscionability challenges than true formation challenges.

 

California is the Judd Nelson of The Preemption Club.  (Or the John Bender, if you prefer using character names.)  The Supreme Court has sent the California courts to preemption detention for ignoring the Federal Arbitration Act in blockbuster, groundbreaking cases (see Concepcion).  But California cannot help itself.  It keeps coming up with novel arguments to avoid arbitration.  And in doing so, it keeps inviting reversal.  Of course, other states get sent to The Preemption Club (West Virginia and Oklahoma, for example), just not with the same panache.

Just last week, the Supreme Court reversed a decision of the California Court of Appeals and remanded it for reconsideration in light of AmEx. In CarMax Auto Superstores California, LLC v. Fowler, a putative class of CarMax employees alleged CarMax violated California labor laws.  The parties engaged in discovery and motion practice for over a year and then stayed the case.  Two years into the stay period, in June of 2011, CarMax moved to compel the plaintiffs to individually arbitrate their claims, in accordance with the terms of their employment agreement.  The plaintiffs opposed the motion, arguing that CarMax had waived its right to arbitrate and that the arbitration agreement was unconscionable.  Plaintiffs also relied on California’s Gentry rule, which provides that class-action waivers in employment arbitration agreements are invalid if “a class arbitration is likely to be a significantly more effective practical means of vindicating the rights of the affected employees than individual litigation or arbitration.”

The district court sided with CarMax but in March of 2013 the California Court of Appeals reversed.  It did not rest its decision on an uncontroversial issue like waiver, however.  (It gave CarMax a break for not moving to compel arbitration before Concepcion, as the motion would have likely been futile under California law, and it also said that the discovery and dispositive motion proceedings could have taken place in arbitration so there was no prejudice.)  The court also did not rest its decision on the alleged illusoriness of the arbitration agreement, because California law does not find agreements illusory, even if they can be modified without advance notice.  Instead, the court went with the riskiest possible basis for its decision: finding that Gentry was not preempted under the Concepcion analysis.  After the California Supreme Court refused to review the decision, CarMax took the issue up to the Supreme Court.

The Supreme Court made short work of the matter.  Just three days after considering the certiorari petition in conference, the Supreme Court granted cert, reversed the Court of Appeals, and remanded the case for reconsideration in light of AmExAmEx is the decision that, in June of 2013, seriously weakened the “effective vindication of statutory rights” line of cases.  So, what will the Court of Appeals do now?  I don’t see much room for fitting the case into what is left of the “effective vindication” doctrine, because that only applies to federal statutory rights and CarMax appears based on state statutory rights.  So if California really wants these CarMax employees to continue as a class, it either has to reverse itself on waiver, or come up with a different basis for finding the arbitration agreement unenforceable.  And in doing so, it will effectively say “Eat… My… Shorts” to SCOTUS.

The Third Circuit ruled last week that Delaware’s Chancery Court could not offer its judges’ services as neutral arbitrators in its courtrooms, unless those arbitrations were open to the public.

In 2009, the Delaware courts decided to provide arbitration.  The state amended its laws to create an arbitration process that was only open to disputes worth more than a million dollars with at least one party being a business incorporated in Delaware (and no party being a consumer).  The parties did not need to have a pre-dispute arbitration agreement.  As long as they both consented, they could file their arbitration in the Delaware courts for a$12,000 initial fee and have the Chancellor select a Chancery Court judge to hear the arbitration in the Delaware courthouse (for another $6,000/day).  However, “the statute and rules governing Delaware’s proceedings bar public access.”  Only parties and their representatives could attend the proceedings.

In Delaware Coalition for Open Government, Inc. v. Strine, __ F.3d __, 2013 WL 5737309 (3d Cir. Oct. 23, 2013), the Third Circuit found that it violates the First Amendment to bar the public from Delaware business arbitrations.  Applying the “experience and logic” test (sounds like the kind of test courts should always apply!), the Court found “[w]hen we properly account for the type of proceeding that Delaware has instituted — a binding arbitration before a judge that takes place in a courtroom…the right of access to government-sponsored is deeply rooted in the way the judiciary functions in a democratic society.”  Further, the court noted that public access would be beneficial for stockholders, ensure transparency of the process, and discourage perjury.  For all those reasons, the Third Circuit found a right of public access to state-sponsored arbitrations in Delaware.

I haven’t heard of other states trying to compete with the AAA, so this decision does not have broader implications, but it is worth pondering whether the same benefits of public access the Third Circuit noted in this case also apply to private arbitrations.

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Now for some brief updates on recent topics:

  • The Minnesota Supreme Court granted review of this case, in which the Minnesota Court of Appeals confirmed an arbitration award involving a significant sanction against a party who was accused of manufacturing evidence.
  • The defense of illusoriness is still on the upswing.  Last week the Fifth Circuit affirmed a district court’s refusal to compel arbitration based on a finding that the agreement was illusory under Texas law.  Scudiero v. Radio One of Texas II, 2013 WL 5755484 (5th Cir. Oct. 24, 2013).
  • In case anyone thought Sutter was limited to deference for arbitrators who find arbitration agreements allow for class actions, the Eleventh Circuit clarified the same deference applies to arbitrator decisions to allow collective actions as well.  DirecTV v. Arndt, 2013 WL 5718384 (11th Cir. Oct. 22, 2013).
  • A thoughtful reader drew my attention to a case the U.S. Supreme Court will hear on November 13: Unite HERE Local 355 v. MulhallThe central question in the case is one of labor law, not arbitration, but the labor law questions were interpreted by arbitrators under the parties’ agreement, and the National Academy of Arbitrators has weighed in to support the use of “pre-recognitional governance systems” including arbitration.

 

You hear more about Lena Dunham than you expect, given the audience for “Girls”, right?  (Read this article for more.)  The same is true, or should be true, for the contract defense of illusoriness.  After decades of disuse, it is popping up more and more often as a defense to the enforcement of arbitration clauses (like in New Mexico and the Fifth Circuit), and therefore qualifies as the “it girl” of arbitration law.  Just last week, the Sixth Circuit issued a new decision, affirming the district court’s denial of a motion to compel arbitration based on its conclusion that the arbitration agreement was illusory.

In Day v. Fortune Hi-Tech Marketing, Inc., 2013 WL 4859781 (6th Cir. Sept. 12, 2013), a number of independent sales representatives sued Fortune, alleging it was running an illegal pyramid scheme.  The parties’ agreement had an arbitration clause.  It also had a separate clause saying that Fortune could modify the agreement at any time, effective upon notice. Fortune moved to compel arbitration, and the district court denied the motion.  The district court concluded the arbitration clause was unenforceable because Fortune had the ability to modify the contract at any time, making its promises illusory and meaning the agreement lacked consideration under Kentucky law.  On appeal, the Sixth Circuit affirmed that ruling.

Relying on Kentucky state court cases from 1912, 1938, and 1949, the Sixth Circuit held that “because the contract lacked consideration, the entire contract, including the arbitration clause, is void and unenforceable.”  The problem, as the district court found, is that “in this case, in effect, [Fortune] promised to do certain things unless it decided not to, and that is by definition illusory.”   The court noted that Fortune could have made its contract enforceable by ensuring that unilateral changes were not effective until a notice period (30 days?) had passed.

The problem that I see with the reasoning in this case is it does not confront the severability doctrine (that began with Prima Paint and extends to Rent-a-Center).  That line of Supreme Court case law holds that in deciding the validity of an arbitration agreement, courts may not consider arguments that attack the validity of the contract as a whole, and instead courts are limited to arguments that identify something invalid in the arbitration agreement itself.  In this case, the invalidity came from the unilateral modification clause, which was outside the arbitration agreement.  The Sixth Circuit did not discuss that argument, so maybe no one argued it.  Alternatively, the Sixth Circuit may have concluded the illusoriness sufficiently affected the arbitration clause (it did say “Defendant could modify the arbitration clause to suit its purposes at any time”) to satisfy the severability doctrine, but that analysis is not set forth.  (To be fair, this case is not set for publication.)

Is illusoriness an up and coming argument for invalidating arbitration agreements?  Yes.  Should drafting parties reduce their risk by ensuring that unilateral modifications are not effective for a certain period of time?  Yes.  Does the party hoping to avoid arbitration need to construct an argument that the illusoriness is specific to the arbitration agreement itself?  That answer should also be yes.

After reading more than 40 decisions about arbitration from state high courts, issued just in the past eight months, I have two bits of wisdom to share.  First, that is not the best way to spend your summer vacation, even for a devoted arbitration nerd.  And second, there are arbitration issues percolating in state courts that counsel practicing in this area should be aware of.  In particular, state courts are: 1) working hard to avoid having the FAA preempt their developed defenses to arbitration clauses; and 2) confronting a lot of issues relating to whether there is an agreement to arbitrate at all (especially authority issues in nursing home settings).

PREEMPTION

A big category of cases relate to preemption.  Most of these cases involve state courts trying to explain how application of state law is not preempted by federal law under Concepcion.  (One case that falls under this heading, Feeney, has already been reversed.)

The Supreme Court of Washington, in particular, spilled a lot of ink explaining why Concepcion did not bar it from reaching various results.  For example, it held that an arbitration clause requiring that the demand be made within 30 days, the hearing take place in California, and the prevailing party recover attorneys fees was unconscionable.  Gandee v. LDL Freedom Enterprises, Inc., 293 P.3d 1197 (Wash. 2013).  It found Concepcion did not preclude that result.  Washington also concluded that Concepcion did not preclude it from enforcing a state statute prohibiting insurance contracts from calling for arbitration (it held FAA preemption was essentially preempted by the McCarran-Ferguson Act).  State v. James River Ins. Co., 292 P.3d 118 (Wash. 2013).  Finally, Washington refused to vacate an arbitration award in favor of Subway franchisees based on the franchisor’s argument that its arbitration agreement called for arbitration in Connecticut, but the Washington court compelled arbitration in Washington.  Saleemi v. Doctor’s Assocs., Inc., 292 P.3d 108 (Wash. 2013).  While rejecting the franchisor’s preemption arguments, the court said (pre Amex) “[w]hether Concepcion reaches beyond class arbitraiton procedures is subject to debate.”  Id.

Montana found that Concepcion did not prevent it from declaring the arbitration agreement in a payday loan unconscionable.  Kelker v. Geneva-Roth Ventures, Inc., 303 P.3d 777 (Mont. 2013).  The Supreme Court of Montana applied a Montana rule invalidating adhesion contracts if they are not within the weaker party’s “reasonable expectations” or are otherwise oppressive.  In applying the rule, it focused on the facts that the arbitration clause was not conspicuous, the plaintiff did not understand it, the plaintiff was less sophisticated than the lender, and the clause was vague.  Two justices dissented, noting that Montana has only applied the rule to evaluate arbitration clauses and therefore it is preempted under the Concepcion reasoning.  Those two justices got the last laugh — the Ninth Circuit in July found that Montana’s rule is preempted under Concepcion.

In another case involving a payday lender, the Supreme Court of Florida concluded the lower court’s ruling was preempted.  McKenzie Check Advance of Florida, LLC v. Betts, 112 So. 3d 1176  (Fla. 2013).  In that case, the trial court found the arbitration clause was void as against public policy because it would prevent consumers from vindicating their state statutory rights.  The high court, however, found that Concepcion prevented Florida from adopting its own state-law version of the Green Tree rule at issue in Amex (which only applies to federal statutes, and has now been decimated in any case). 

Finally, addressing both nursing home arbitration and preemption, New Mexico held that the party alleging an arbitration agreement is unconscionable bears the burden of proving that unconscionablility, even when the other party is a nursing home accused of negligent care.  Strausberg v. Laurel Healthcare Providers, LLC, __ P.3d __, 2013 WL 3226753 (N.M. 2013).  The court noted that to adopt the opposite rule would be preempted by the FAA.

AUTHORITY

Really, the heading for this could be “Nursing Home Arbitration Litigation,” because in 2013 there have already been five separate opinions from state high courts relating to when wrongful death or negligence claims against nursing homes have to be arbitrated.  In general, the issue is: did the relative who signed documents for the nursing home resident have the resident’s authority to sign on his or her behalf?  Without proof of authority, state courts have concluded that there is no valid arbitration agreement in the nursing home admission documents.  E.g., SSC Montgomery Cedar Crest Ooperating Co. v. Bolding, __ So. 3d__, 2013 WL 1173975 (Ala. 2013); Courtyard Gardens Health & Rehab., LLC v. Quarles, __ S.W.3d __, 2013 WL 2361051 (Ark. 2013); GGNSC Batesville, LLC v. Johnson,  109 So. 3d 562 (Miss. 2013); State v. King, 740 S.E.2d 66 (W. Va. 2013).  However, if the resident dies, his or her estate and heirs are bound by an arbitration agreement the resident actually signed.  Laizure v. Avante at Leesburg, Inc., 109 So. 3d 752 (Fla. 2013).

NON-SIGNATORIES

Another issue that comes up regularly in both state and federal courts is when arbitration can be enforced by or against non-signatories.  On that topic, the Supreme Court of New Jersey found that the lower courts had erred by allowing a non-signatory to compel arbitration.  Hirsch v. Amper Fin. Servs., LLC, __ A.3d __, 2013 WL 4005282 (N.J. 2013).  The court disliked the way the lower courts had applied the equitable estoppel doctrine.  “Equitable estoppel is more properly viewed as a shield to prevent injustice rather than a sword to compel arbitration.”  Id. at *1.   Even when the parties and claims are intertwined, New Jersey will not compel arbitration without proof of detrimental reliance.

DID THE PARTIES INTEND ARBITRATION TO BE PART OF THE AGREEMENT?

The Supreme Court of Iowa recently concluded that an agreement to arbitrate existed, even though all negotiations of the contract were oral and did not mention arbitration.  Bartlett Grain Co. v. Sheeder, 829 N.W.2d 18 (Iowa 2013).  Over the course of several phone calls, Sheeder agreed to sell corn to Bartlett at particular prices on certain dates.  Bartlett then sent Sheeder confirmation forms to sign, which provided for arbitration under the National Grain Feed Association arbitration rules.  The court relied largely on the UCC to reject Sheeder’s argument that he was not bound by the arbitration term in the confirmations.

THE ARBITRATION CLAUSE IS UNENFORCEABLE

An interesting New Mexico case found an arbitration agreement was illusory.  Much like a 2012 Fifth Circuit case applying Texas law, the New Mexico Supreme Court found the employer’s promise to arbitrate was illusory because the employer could amend or terminate its Dispute Resolution Program at any time, even after the employee’s claim accrued.  Flemma v. Halliburton Energy Servs., Inc., 303 P.3d 814 (N.M. 2013).

In addition, the Gandee decision from Washington and Kelker decision from Montana (discussed in the preemption section above) both found arbitration agreements unconscionable in consumer settings.

APPEALS

One area where state courts seem to be completely in line with the federal courts is in enforcing the limited bases for appealing arbitration awards.  So far this year, for example, Mississippi declared that “manifest disregard of the law” is not a valid basis for vacating arbitration awards under Mississippi’s arbitration act.  Robinson v. Henne, 115 So. 3d. 797 (Miss. 2013); but see C-Sculptures, LLC v. Brown, __ S.E.2d __, 2013 WL 1898379 (S.C. 2013) (applying the state uniform arbitration act, not the FAA, and vacating an award based on the arbitrator’s “manifest disregard” of state law).

New Mexico held that an employee who did not raise any objection about the scope of his arbitration proceedings with the arbitrator had waived any right to later argue that he reserved some claims for litigation.  Horne v. Los Alamos Nat’l Security, LLC, 296 P.3d 478 (N.M. 2013).  That decision is in accord with the recent decisions of the Minnesota Court of Appeals finding that parties must raise objections with arbitrators or else they are waived.

**Why this doozy of a blog post?  Because ArbitrationNation just celebrated its second birthday!  Nothing else quite says “thanks for sticking with me” like 1250 dense words… **

The earthquake that was the Concepcion decision (in April of 2011) is still sending aftershocks throughout the judicial system.  In last week’s ruling, the Third Circuit compelled individual arbitration in Homa v. American Express Co., 2012 WL 3594231(3d Cir. Aug. 22, 2012), a case in which the parties have been fighting about whether the plaintiff must arbitrate individually, or may bring a class arbitration, since 2007.

The plaintiff in this case sought to represent a class of AmEx cardholders alleging false marketing.  However, the arbitration clause in his credit card agreement explicitly waived any right to a class arbitration.  The plaintiff brought his case in NJ federal court court and argued that the class action waiver was unconscionable under a 2006 decision from New Jersey’s high court.  The plaintiff then rode this procedural roller coaster: the federal district court granted AmEx’s motion to compel individual arbitration (down); the Third Circuit reversed, based on the New Jersey state precedent and remanded for careful application of the Jersey law (up!); on remand, the parties conducted additional discovery (whee!);  AmEx then successfully moved to stay the case pending the Supreme Court’s Concepcion decision (car stuck upside down on loop); after Concepcion, the district court reinstated its initial ruling, and, in this opinion, the Third Circuit affirmed the mandate for individual arbitration (full stop; ride over).

The Third Circuit quoted its 2011 opinion in Litman, explaining the holding of Concepcion: “a state law that seeks to impose class arbitration despite a contractual agreement for individualized arbitration is inconsistent with, and therefore preempted by, the FAA.”

In response to the evidence the plaintiff had developed showing that enforcing the arbitration clause “would make it impossible for any person . .. to effectively vindicate his substantive statutory rights,” the court was apologetic, but firm: “Even if [plaintiff] cannot effectively prosecute his claim in an individual arbitration that procedure is his only remedy, illusory or not.”  In a footnote, the court backpedaled a bit “We are not implying that we believe that we are reaching an unfair result…we merely are recognizing that other persons might think that we are doing so.”  The Third Circuit thus joined a growing number of courts who apologetically enforce SCOTUS’s arbitration decisions.

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