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.)

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.

While the Supreme Court has put off hearing a more contentious arbitration case until the fall (presumably in hopes that it will have nine justices by then), tomorrow it will hear the nursing home arbitration case from Kentucky.  I look forward to listening to the questions and trying to figure out why the Justices granted a review on the merits…  Instead of repeating my analysis of the Kentucky case, here are some recent state court arbitration cases of interest (in addition to the three I posted about a few weeks ago).

West Virginia.  Remember when West Virginia was the thorn in the FAA’s side?  When it was the leader of the pack of anti-arbitration states?  Well, not in West Virginia CVS Pharmacy v. McDowell Pharmacy, Inc., 2017 WL 562826 (W. Va. Feb. 9, 2017).   The lower court had refused to compel arbitration of disputes between retail pharmacies and a pharmacy benefit management company.  Applying West Virginia law, the lower court found there was no arbitration agreement, because the parties did not validly incorporate the manual that contained the arbitration provision.   The West Virginia Supreme Court, however, applied Arizona law, as provided in the contract, and that made all the difference.  It found the arbitration agreements were adequately incorporated, and that their reference to AAA rules was sufficient to delegate questions of arbitrability to the arbitrator.  No cert likely here.

Missouri.  The Supreme Court of Missouri took a safe bet in siding (partially) against the arbitrator in State ex rel Greitens, 2017 WL 587296 (Mo. Feb. 14, 2017), since the Supreme Court has denied cert petitions in many cases stemming from the master settlement agreement between states and tobacco companies.  (E.g., this most recent one.)  In this case, the state’s highest court found the arbitration panel exceeded its power when it deprived Missouri of its share of $50 Million in tobacco settlement payments for 2003.  The case is too complicated to explain in this post, but know that this is one of those rare examples of a court modifying an arbitration award, as opposed to just confirming or vacating it.  No cert likely here either.

Iowa.  I never get to write about Iowa (which my daughter called “why-owa” after a long road trip through farm country), but its supreme court issued a decision in late 2016 about nursing home arbitration that merits mention here.  In Roth v. Evangelical Lutheran Good Samaritan Society, 886 N.W.2d 601 (Iowa 2016), Iowa’s highest court answered a certified question from the federal district court.  In short, it found that Iowa’s statutes do not require judicial resolution of loss of consortium cases, and in this case the children of the decedent were not bound by the decedent’s arbitration clause because the “claims belong to the adult children and they never personally agreed to arbitrate.”  (Hard to make a bet on certiorari in this case, since it is headed back to federal trial court…)

Alabama.  In Hanover Ins. Co. v. Kiva Lodge Condominium Owners’ Assoc., 2016 WL 5135201 (Ala. Oct. 21, 2016), the Supreme Court of Alabama found that when the parties adopted the following addendum to their contract, the first party who filed an action was able to dictate the forum: “Notwithstanding anything in this Addendum to the contrary, either party may pursue any claim or dispute in a court of law, or through mediation and arbitration.”  That amended language was added to the parties’ A201 General Conditions, right after language indicating that “any claim arising out of or related to the Contract… may at the election of either party…be subject to arbitration.”  After the condo association brought their claims in court and requested a referral to arbitration, the defendants argued that the case should stay in court.  The trial court sent the claims to arbitration and the supreme court affirmed that result, finding “the addendum provides that once a party elects arbitration as a method for resolution of a dispute…the other party cannot neutralize that choice by insisting on litigation in court…In short, Kiva Lodge has proven the existence of a binding mandatory arbitration agreement between the parties.”  This will not end up at the Supreme Court, but it’s an important drafting lesson for all of us.

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.