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.

March comes in like a lion, right?  Well, that’s not true with respect to the weather here in Minneapolis.  But it may be true with respect to arbitration decisions from around the country.  This post focuses on two recent decisions from state high courts that refuse to compel arbitration.

In Global Client Solutions, LLC v. Ossello, 2016 WL 825140 (Mont. Mar. 2, 2016), a majority of Montana’s Supreme Court refused to enforce the arbitration clause between a consumer and a financial institution (that set up a bank account for the consumer’s efforts with a debt relief company).  The arbitration clause provided for AAA arbitration of all claims arising out of the agreement, even claims relating to the validity of the agreement, but the bank had the right to bring collections actions in court. The trial court found the arbitration clause was unconscionable and refused to compel arbitration.

On appeal, the Montana Supreme Court first found there was no enforceable delegation clause in the parties’ arbitration clause, because the language was “ambiguous and confusing” instead of clear and unmistakable, largely due to what appears to be a typo in the clause. (The clause said the parties would arbitrate “the breach, termination, enforcement, interpretation or validity [of the entire agreement], including the termination of the scope or applicability of this Agreement to arbitrate”.  The bank argued “termination” was supposed to be “determination.”)  The court also refused to find that incorporation of the AAA rules constituted an enforceable delegation clause, because it did not specify which AAA rules applied and this was not a contract between two sophisticated commercial parties.

After confirming it could address the validity of the arbitration clause, the court found the clause unconscionable under Montana law because the bank had the right to bring collection matters to court, while the consumer had no similar right. The court reasoned that its holding was not preempted under the Concepcion rule, because other post-Concepcion courts have relied on lack of mutuality to invalidate an arbitration clause.

A concurring justice wrote “The elephant in the room is not state hostility toward arbitration…If there is any hostility, it is toward those who hide behind the FAA…to escape any material consequence of running fraudulent confidence schemes.” [But of course that assumes that a AAA arbitrator would not find wrongdoing when confronted with a “fraudulent confidence scheme”… ] Two justices dissented, asserting that the incorporation of AAA rules was a valid delegation clause, such that the arbitration clause’s validity should have been decided by a AAA arbitrator.

The second case comes from Alabama and is a cautionary tale for companies trying to add arbitration agreements to existing contracts with many consumers.  In Moore v. Franklin, 2016 WL 761698 (Ala. Feb. 26, 2016), the Supreme Court of Alabama found the parties did not form a valid arbitration agreement by virtue of the bank posting a notice to the customer’s online banking profile.  Citing cases from five federal courts, Alabama concluded that in order to form part of the parties’ agreement, there must be proof that the recipient accessed the web page containing the arbitration provision.

What lessons can we give drafters from these two cases?  Well, check for typos.  And then double and triple-check.  Then, and only then, considering increasing the likelihood the arbitration clause will be found enforceable by making any carve-outs mutual.  If the company can bring collection claims in court, then why not let the consumer bring modest claims in small claims court?  Finally, once you drafted the clause, find a way of making sure those customers see it (and hopefully even click a button confirming that they agreed to it).