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.)

Just five months ago, the U.S. Supreme Court weighed in on a nursing home arbitration dispute in Kindred Nursing Centers v. Clark It held that the Kentucky supreme court’s rationale for not enforcing the arbitration agreement was preempted by the Federal Arbitration Act.  Before that, multiple state courts had found state law bases for refusing to enforce arbitration agreements in nursing home agreements.

So, what is a state high court to do post-Kindred?  Wyoming did the logical thing: enforce the arbitration agreement.  In Kindred Healthcare Operating, Inc. v. Boyd, 2017 WL 4545742 (Wyo. Oct. 12, 2017), wrongful death claims were made against the nursing home.  When the defendant moved to compel arbitration based on the arbitration agreement signed by the decedent’s daughter, the plaintiff responded that the arbitration agreement was not enforceable for three reasons.  First, because the daughter did not have authority; second, because the agreement was unconscionable; and third the agreement was invalid because it selected the rules of the National Arbitration Forum (NAF) to govern the arbitration.  The district court denied the motion to compel.

Wyoming’s Supreme Court reversed, making short work of the plaintiff’s allegations.  It found that the daughter’s general power of attorney, which gave her “full power and authority to … contract” (among other powers), authorized her to sign the arbitration agreement for decedent.  It found that the arbitration agreement was not unconscionable, in part because it stated in bold print that it was optional and the resident would be admitted even if it was not signed.  Finally, it found that even though the parties agreed to arbitrate in accordance with the NAF rules “then in effect” (and the NAF no longer conducted consumer arbitrations) that did not invalidate the agreement.  That was because the agreement allowed the parties to select a different set of rules, and the NAF rules were not “an essential term” of the agreement.

I expect this may indicative of what we see from state courts regarding nursing home arbitrations after Kindred.

The Supreme Court of Arkansas has issued three opinions within the span of four weeks, all on the topic of whether defendants can compel arbitration. Each of the opinions came with a vigorous dissent.  The cases offer an interesting look at a state high court that appears to be struggling to deal with FAA case law from SCOTUS; on one hand the court cites recent federal arbitration jurisprudence, but on the other it displays real skepticism about arbitration (at least of consumer disputes) and uses some creativity in its state contract law.

Two of the opinions relate to whether nursing homes can compel arbitration of claims brought by former residents or their estates. In each of those cases, the Supreme Court of Arkansas allowed the nursing home to compel arbitration.  First, in Courtyard Gardens Health & Rehabilitation v. Arnold, 2016 Ark. 62 (Feb. 18, 2016), the court held that the agreement’s selection of the National Arbitration Forum (NAF, which no longer administers consumer arbitration) did not make the arbitration agreement impossible to perform, nor was the choice of NAF integral to the agreement.  Three justices dissented.  [The 11th Circuit just came out the other way on this issue, finding NAF was integral to an arbitration agreement and therefore refusing to compel arbitration in Flagg v. First Premier Bank, 2016 WL 703063 (11th Cir. Feb. 23, 2016).]

Then in GGNSC Holdings v. Lamb, 2016 Ark. 101 (March 10, 2016), the majority compelled arbitration of two nursing home plaintiffs’ claims.  Again, the court held that the unavailability of the NAF did not make the arbitration agreement impossible to perform.  It also held that the arbitration agreement was not unconscionable.  Two justices “strongly” dissented:

The majority’s opinion in this case goes far beyond resolving any doubts in favor of arbitration. It rubber-stamps the arbitration agreements before it based simply on our policy favoring arbitration.  This begs the question: Going forward, could there ever be an arbitration agreement the majority determines to be invalid or unenforceable?  If today’s decision is any indication, the answer to that question is no.

In a third case, the Supreme Court of Arkansas refused to compel arbitration of a class action alleging breach of contract and deceptive trade practices against a bank. Bank of the Ozarks, Inc. v. Walker, 2016 Ark. 116 (March 17, 2016).  The court found the arbitration agreement lacked mutuality and therefore was unenforceable.  (“Mutual obligation” is the fifth “essential element” of a contract in Arkansas.)  In one of the two provisions causing the lack of mutuality, the arbitration agreement obligated the customer to pay any attorneys’ fees the bank incurred “in good faith” in a dispute.  “In imposing all of the costs of arbitration on appellees, the parties in this case are treated differently, and ‘this disparate treatment results in a lack of mutuality.'”  The majority stated that it was cognizant of the severability doctrine and of Concepcion and was not violating either. [The court also seemed to hold that the one-sided fee provision precluded the customers from “effectively vindicating” their rights, citing to Green Tree.  The court conveniently ignored the subsequent language in Italian Colors, limiting that doctrine, and the fact that the doctrine only applies to federal statutory rights…]

The lone dissenter in Bank of the Ozarks sided with FAA preemption.  Citing DIRECTV, the dissenting justice pointed out occasions where the Supreme Court of Arkansas has recognized that “a contract does not lack mutuality merely because every obligation of one party is not met by an equivalent counter obligation of the other party.  With the decision in this case, the majority stretches the concept of mutuality of obligation so as to undermine our basic principles of contract law.”

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By the way, Arkansas is not the only court compelling arbitration of nursing home disputes. Alabama recently found that a resident’s daughter had apparent authority to bind her mother to the arbitration agreement. Kindred Nursing Centers East, LLC v. Jones, 2016 WL 762450 (Ala. Feb. 26, 2016). (Two justices dissented.)  The Fifth Circuit also reversed a district court’s refusal to compel arbitration of residents’ claims against nursing homes in Gross v. GGNSC Southaven, LLC, 2016 WL 1019200 (5th Cir. March 14, 2016).  The district court had held there was insufficient evidence that the individual signing the arbitration agreement had been authorized by the resident.  The Fifth Circuit found Mississippi law on authority was not so restrictive and remanded for further fact finding.

Some arbitration topics just never die.  This post strings together new cases on three of those topics: 1) whether arbitration agreements that call for the now-defunct National Arbitration Forum (NAF) are enforceable; 2) formation fights in nursing home agreements; and 3) the continuing fight between the NLRB and the courts over class action waivers in employment agreements .

In a 3-2 decision, the Supreme Court of Pennsylvania refused to enforce an arbitration agreement that called for administration by the NAF.  Wert v. Manorcare of Carlisle PA, 2015 WL 6499141 (Pa. October 27, 2015).  In the context of a wrongful death claim against a nursing home, the parties disputed the enforceability of an arbitration agreement in the admission paperwork.  Pennsylvania’s highest court adopted a 2010 decision from its intermediate appellate court finding that the incorporation of the National Arbitration Forum Code was an essential term, such that if the NAF was unavailable, the entire arbitration agreement was unenforceable. The court found the subjective intent of the Appellee (who admitted she did not read the agreement) was irrelevant.  Relying on its analysis of the NAF rules, the court found “the provision integral and non-severable.”  For good measure, the court also noted that its result was not preempted by federal law because it was “based on settled Pennsylvania contract law principles that stand independent of arbitration.”  State courts, as well as federal courts, are now split on how to handle arbitration clauses incorporating NAF rules.

In another nursing home case, the Alabama Supreme Court found an arbitration agreement was not validly formed because the person who signed it did not have proper authority.  Diversicare Leasing Corp v. Hubbard, 2015 WL 5725116 (Ala. Sept. 30, 2015), involved a mother’s claim about the wrongful death of her son in a long-term care facility. When the adult son, whose mental capacity had not progressed beyond that of a toddler, was admitted, his mother signed the admission agreement as the “responsible party” and “resident’s representative.”  After she brought suit, the nursing home moved to compel arbitration.  However, the Alabama trial and appellate courts found that no valid arbitration agreement had been formed.  Critically, the son had never been mentally competent to authorize his mother to act on his behalf, and she had never been given his power of attorney, or health care decision-making rights, or been appointed his legal guardian after his 18th birthday.  Therefore, the mother’s signature did not bind the son.  The Alabama decision is in line with other state court decisions that have strictly interpreted the legal authority of relatives who sign arbitration agreements in nursing home contracts.

Finally, the third case taught me a new legal doctrine: nonacquiescence.  And who is not acquiescing to federal authority?  Well, the NLRB, at least according to the 5th Circuit.  In its D.R. Horton decision in 2013, the Fifth Circuit had rejected the NLRB’s analysis that federal labor laws override the FAA and preclude class action waivers.  Despite D.R. Horton, the NLRB applied its same analysis in Murphy Oil, just ten months later.  On review, the Fifth Circuit forcefully reaffirmed its earlier holding.  Murphy Oil USA v. NLRB, 2015 WL 6457613 (5th Cir. Oct. 26, 2015).  However, the court was not willing to hold the NLRB in contempt or otherwise penalize the Board. Because the Board only has to acquiesce to circuit court rulings when a case will be reviewed by that same circuit, and the Murphy Oil case could have been reviewed in multiple circuits, the court noted “[w]e do not celebrate the Board’s failure to follow our D.R. Horton reasoning, but neither do we condemn its nonacquiescence.”

In a 2-1 decision, the Third Circuit held last week that the arbitration agreement in a personal computer purchase was valid, despite its mandate of a defunct arbitral forum.  Its decision, Khan v. Dell Inc., ___ F.3d ___, 2012 WL 163899 (3d Cir. Jan. 20, 2012), is in line with the decision of the South Dakota Supreme Court in late December, and suggests a trend toward upholding arbitration agreements that call for an impossible forum or arbitrator.

The plaintiff, Khan, purchased a Dell computer in 2004 and signed a contract including this arbitration language: “Any claim, dispute, or controversy…shall be resolved exclusively and finally by binding arbitration administered by the National Arbitration Forum (NAF) under its Code of Procedure.”  NAF’s Code of Procedure provided that it “shall be administered only by the National Arbitration Forum.”  After Kahn sued Dell for defective design, Dell moved to compel arbitration.  The district court denied the motion, based on the fact that the NAF no longer administers consumer arbitrations and the court’s conclusion that the NAF was “integral” to the arbitration agreement.

 The Third Circuit reversed the district court.  It first restated the applicable standard in a way that make it harder for Khan to meet, writing that for an impossible forum to invalidate an arbitration agreement  “the parties must have unambiguously expressed their intent not to arbitrate their disputes in the event that the designated arbitral forum is unavailable.”   The court then went out of its way to find ambiguity in the arbitration agreement.  For example, it found that it was ambiguous whether “exclusively” modified only the phrase “binding arbitration” or the entire phrase “binding arbitration administered by the [NAF]” and it found that the incorporation of the NAF rules still leaves ambiguous “what should happen in the event that the NAF is unavailable.”  In support of ambiguity, the Third Circuit cited cases that have interpreted similar NAF language and come to conflicting conclusions.  

After finding ambiguity in the agreement, the court concluded “we must resolve this ambiguity in favor of arbitration.”  The court then found Section 5 of the FAA was applicable and required the district court to appoint a substitute arbitrator.

The dissent found no ambiguity in the arbitration agreement between Khan and Dell.  It found “the selection of the NAF as arbitrator was an integral part” of the arbitration agreement.  It also cited to facts from an amicus brief from the National Association of Consumer Advocates, detailing the allegations of fraud against the NAF that led to the demise of NAF’s administration of consumer claims, suggesting that Dell should not be rewarded for requiring a biased arbitration forum in its consumer contracts. 

The Third Circuit is the highest federal court to date to address this exact issue — whether to enforce an arbitration agreement that calls for administration by the defunct NAF — and its decision makes it much more difficult for consumers with similar arbitration agreeements to convince trial courts to allow them to litigate their claims in court.

 

Earlier in 2011, courts in both Pennsylvania and Illinois issued decisions finding that when a consumer’s arbitration agreement called for the National Arbitration Forum (NAF) to administer the arbitration, but the NAF no longer administered consumer disputes, the arbitration agreements were unenforceable.  Those courts found the parties’ choice of NAF was “integral” to the arbitration agreement and could not be severed.  Just last week, the South Dakota Supreme Court disagreed.

In Wright v. GGNSC Holdings LLC, ___ N.W.2d ___, 2011 WL 68490097 (S.D. Dec. 28, 2011), a wrongful death claim against a nursing home (and related parties), the South Dakota Supreme Court considered the defendants’ motion to appoint a “substitute” arbitrator under Section 5 of the Federal Arbitration Act.  (That section says the court “shall” appoint an arbitrator if there is a lapse in naming an arbitrator for any reason.)  The relevant agreement provided that all disputes would be “resolved exclusively by binding arbitration . . . in accordance with the National Arbitration Forum Code of Procedure.”  While the defendants’ motion to compel arbitration of the estate’s suit was pending, the NAF “became unavailable to administer an arbitration” of the dispute.  The lower court then denied the nursing home’s motion to compel arbitration based on the unavailability of the NAF.

The South Dakota Supreme Court reversed that decision, concluding that “designation of the NAF’s Code of Procedure was an ancillary logistical concern that was not as important to the agreement as the agreement to arbitrate.”   Its analysis that the NAF Code was not “integral” was based on two things: first, South Dakota’s “overriding policy that arbitration will be favored”; and second, the fact that the NAF Code did not require an “NAF arbitrator.”  In other words, the court concluded that any arbitrator chosen by the agreed-upon process could still hear the dispute under the NAF rules.  (The court found “of little significance” that the NAF Code itself provides that only the NAF could administer the NAF Code.)  Finally, the court chided the plaintiff for never raising the unavailability of the NAF Code as a defense, using that as additional evidence that the choice of code was not “integral.”  Because the court found NAF’s unavailability to administer the dispute was not “integral,” it found that the court was required to appoint a substitute arbitrator under the FAA.

By Liz Kramer and Patrick Burns (http://www.valuesolveadr.org/patrick.html ), Guest Blogger

If an arbitration agreement calls for the dispute to be administered by an ADR provider that will not or cannot accept the case, or calls for the application of non-existent rules, it may not be enforceable.  That issue seems to be increasingly prevalent in consumer arbitrations today, which frequently call for the application of rules or arbitral fora that are unavailable. 

Consumer arbitration in the United States changed drastically in 2009.  In July of that year, the National Arbitration Forum (NAF) was essentially put out of the consumer arbitration business by the Minnesota State Attorney General’s Office.  Soon thereafter, the American Arbitration Association (AAA) ceased administering almost all consumer cases.  

Yet the resulting void of administrated consumer arbitration programs did not change the fact that many existing contracts still called for arbitration via those primary providers’ programs.  Nor does it appear to have stopped businesses from naming those same two ADR administrators in their subsequently-revised contracts.

The result is that after a dispute arises, both consumers and businesses are faced with an arbitration provision that calls for something impossible –arbitration administered by an ADR provider that refuses to accept the dispute or under rules that do not exist.  If the parties cannot agree to proceed in a replacement forum or under replacement rules, they must decide whether to roll the dice with the courts.  The trend among courts to date appears to be that they will not compel arbitration (under any rules or in any forum) if the arbitration agreement calls for arbitration before an administrator that refuses to hear the dispute. 

For example, a Pennsylvania state court recently refused to enforce an arbitration agreement between orthopedists and their patients when it called for non-existing rules.  The agreement in question called for the application of “‘Health Care Claims Arbitration Rules of the American Arbitration Association,” yet there are no rules with that title from the AAA.  In fact, the only health care rules available from the AAA do not govern disputes between doctors and patients.  The AAA’s health care rules only apply to “business-to-business” disputes (such as reimbursement disputes between health care providers and insurance payors).  The orthopedists argued that the agreement to arbitrate should still be enforced, just in another forum and under different rules, but the court found that the specific rules and forum were essential terms of the agreement.  Because those essential terms failed, the arbitration agreement was not enforceable.  (The decision is not reported; its title is Luderer v. Nazarian, and it was issued on Sept. 12 by the Philadelphia Common Pleas Court.)

 Similarly, in February of this year, the Supreme Court of Illinois held that the selection of the NAF in a consumer contract was “integral to the parties’ agreement to arbitrate,” such that when the NAF stopped conducting consumer arbitrations, the arbitration agreement was unenforceable.  Carr v. Gateway, Inc., 944 N.E.2d 327 (Ill. 2011).  However, the authors are aware of a Minnesota state court judge who resolved this problem by ordering the parties to select a new forum for arbitration when the one specified in the arbitration agreement was no longer available.   

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