Whenever people ask me why I choose arbitration law to write and talk about, one of the reasons I give is that the law is in flux, creating a demand for information and analysis.  Despite the fact that the Federal Arbitration Act has been around for over 90 years, there are constantly new developments in its interpretation.  Especially in the past two decades, with the Supreme Court highly engaged in the enforcement of arbitration agreements, the pace of legal development has quickened.  That pace means that litigants, advocates, arbitrators and judges are struggling to keep up.  It also means that even on recurring issues, there is still a lack of consensus on how to apply the rules that have been developed.

To demonstrate this point, I went back through the important cases from 2017.  I found multiple instances where two cases with very similar facts received opposite results.  And I am not talking about circuit splits over novel issues like the NLRB and “wholly groundless” exception.  I am talking about issues like formation, waiver, and non-signatories, where the “rules” have ostensibly been settled for some time.

Two Tales of Non-Signatories

These two cases involve a bank teaming up with a retail entity to issue branded credit cards that offered rewards.  The credit card agreement, which called for arbitration of disputes, was only between the consumers and the banks, however. In each case, plaintiffs sued the retail entity regarding the card and the retail entity moved to compel arbitration as a non-signatory to the credit card agreement.  In one case, White v. Sunoco, Inc., 2017 WL 3864616 (3d Cir. Sept. 5, 2017), the retail entity’s motion was denied.  In the other, Bluestem Brands, Inc. v. Shade, 2017 WL 4507090 (W. Va. Oct. 6, 2017), the retail entity’s motion was granted.  While these cases depend on the laws of different states, the courts were applying the same general estoppel rules, but reaching opposite results.

Two Tales of Waiver

Whether a party has waived its contractual right to arbitrate is an issue that comes up regularly.  Yet it remains surprisingly hard to predict whether a court will find waiver or not on any set of circumstances.

These two cases involve lenders bringing collection actions in state court for credit card debts.  In both, they were granted a default judgment.  And in both, the credit card holder later sued for problems with the collection efforts.  In response to that suit, the lenders moved to compel arbitration.  In one case, Cain v. Midland Funding, LLC, 156 A.3d 807 (Md. Mar. 24, 2017), the court denied the motion to compel, finding the lender had waived its rights.  In the other, Hudson v. Citibank, 387 P.3d 42 (Alaska Dec. 16, 2016), the court granted the motion to compel, finding the lender did not waive its rights.  In both cases, the analysis turned on whether the default action and later action were sufficiently related.

Two Tales of Formation

All of us do more and more of our business over mobile devices and the internet, where we don’t physically sign our name to contracts, and in fact we generally don’t read the terms and conditions.  That leads to hard legal questions over when a contract is validly formed and what terms the parties agreed to.

In these two cases, consumers have little or no choice between providers.  In order to sign up for the service, they receive one message.  In the first case, the message is “your account…[is] governed by the terms of use at [defendant’s website].”  In the second case, the message is “by creating an [] account, you agree to the TERMS OF SERVICE & PRIVACY POLICY.”  The consumers did not have to take any affirmative act to consent to the terms other than proceeding to set up their account.  In both cases, consumers later sued the provider and the providers moved to compel arbitration based on the terms available at their websites.  The consumers responded by arguing the parties had not validly formed any arbitration agreement.

In the first case, the provider was not successful in compelling arbitration.  James v. Global Tellink Corp., 852 F.3d 262 (3d Cir. Mar. 29, 2017).  In the second case, the provider was successful in compelling arbitration.  Meyer v. Uber Technologies, Inc., 868 F.3d 66 (2d Cir. Aug. 17, 2017).  Can it be that the wording difference between “your account.. is governed” and “by creating an account, you agree” explains the outcomes?  Or the fact that the consumers in the Uber case could have just clicked on the terms from the same device they were using to set up the account, while the prisoners in the first case would have had to hang up their telephones, find a computer and find the website?  The cases really give us no assistance in figuring that out.

Maybe every area of law has similar issues regarding the predictability of decisions.  But arbitration law is rife with legal “rules” to guide decision making that are so flexible as to hardly constitute rules at all.  And courts have not yet applied those rules enough times to allow them to develop a systemic approach, with internal consistency between the decisions.  And I predict that will only get worse, not better, as consumers and employees find new and creative ways to challenge arbitration agreements.

The high courts of two states have allowed non-signatories to compel arbitration in recent weeks.  The cases show courts are addressing non-signatory issues using different standards and raise important drafting issues for joint ventures and business affiliates.

In Locklear Automotive Group, Inc. v. Hubbard, 2017 WL 4324852 (Alabama Sept. 29, 2017), the Supreme Court of Alabama found most of the claims against the non-signatory must be arbitrated.  [But before we get into the merits, I have to ask: what the heck is going on in Alabama?  Is some plaintiffs’ lawyer trolling for cases against dealerships? This is the third arbitration case   involving claims against dealerships coming out of that state’s high court in the last two months!]  Seven plaintiffs brought separate actions alleging that personal financial information they provided the dealership was not safeguarded.  All seven plaintiffs were the victims of identity theft.  They sued the dealership’s LLC, as well as the corporate entity which is the sole member of that LLC (the non-signatory).

Each plaintiff had at some point signed an arbitration agreement with the dealership, but not with the non-signatory.  The court separated plaintiffs into three groups.  The first group, made up of five plaintiffs, established that defendants had waived any argument to enforce the delegation clause at the trial court.  However, the non-signatory was able to compel arbitration with this group using an estoppel theory because: a) the language of the arbitration agreement was not limited to disputes between the signing parties; and b) the claims against the non-signatory were intertwined with the claims against the dealership.  The second group involved a single plaintiff, against whom the non-signatory had preserved its delegation argument.  Therefore the court enforced the delegation clause, sending the issue of arbitrability to an arbitrator.  Finally, in the third group, the court refused to compel arbitration of a plaintiff’s claims because the signed arbitration agreement related to a previous purchase, not the credit application that resulted in identity theft.

West Virginia reached a similar result, albeit through a different analysis, in Bluestem Brands, Inc. v. Shade, 2017 WL 4507090 (W. Va. October 6, 2017).  In that case, Bluestem (aka Fingerhut) had teamed up with banks to offer credit to its customers for Fingerhut purchases.  The credit agreements between the banks and consumers called for arbitration of any disputes.  In response to a credit collection case, Ms. Shade (such a great name for a plaintiff alleging bad deeds) claimed that Bluestem violated West Virginia law with its credit program.  Ms. Shade did not assert claims against the banks.  When Bluestem moved to compel arbitration under the “alternative estoppel” theory, the court held that it could compel arbitration if “the signatory’s claims make reference to, presume the existence of, or otherwise rely on the written agreement.”  (Note that W. Va. did not require the language of the arbitration agreement to encompass more than the signing parties, like Alabama above.)  The court found that Ms. Shade’s claims all were “predicated upon the existence of the credit” agreement, so it was appropriate to compel arbitration of the claims.

So, we have two high courts applying different standards for estoppel.  And we have the Bluestem case reaching the oppose result of a recent federal court in a very similar factual circumstance (the Sunoco case, involving jointly marketed credit cards).  This leaves less than clear guidance for lawyers who are trying to craft arbitration agreements that can stick, no matter the type of case, or who the plaintiff is that is attacking the product.

While regular people count down the days to summer blockbusters that come in the form of high-paid actors fighting aliens or robots, I prefer my summer blockbusters in the form of arbitration opinions that have been months in the making (maybe finally released because the clerks are about to turn over?). Today, I report on three of these arbitration blockbusters, all from state high courts.

Blockbuster 1: New Hampshire Rejects Application of FAA.

In the most ambitious of the three decisions, the New Hampshire Supreme Court found that the FAA’s sections regarding confirming and vacating awards do not apply in state courts.  Finn v. Ballentine Partners, LLC, __ A.3d __, 2016 WL 3268852 (NH June 14, 2016) (an opinion that took five months to produce).  In that case, a company ousted one of its founders, and she instituted an arbitration challenging her termination.  She was awarded about $6.5 million.  After the company engaged in some major restructuring, which resulted in lots of cash, the ousted founder started a new arbitration.  Although the company argued her claims were barred by res judicata, the second arbitration went all the way through hearing and she was awarded another $600,000.

The New Hampshire Supreme Court refused to confirm the award.   Because the FAA allowed no avenue for vacating the award, the court based its decision on a state statute allowing courts to vacate an award for “plain mistake.”  The founder had argued that the state statute was preempted by the FAA.  The court responded that “we conclude that §§ 9-11 of the FAA apply only to arbitration review proceedings commenced in federal court.”  WAIT, WHAT?? (Truly, this stuff is what keeps me blogging.  There is never a dull moment with state courts and arbitration law.)*  The court essentially found that since most of the state court cases that have ended up at SCOTUS were about enforcing arbitration agreements in the first place, enforcing arbitration agreements is the limit of the FAA’s application in state courts.  (“Preemption… is at its apex when parties cannot get to arbitration…  In contrast, state rules . . . without the potential consequence of invalidating an arbitration agreement are not preempted.”)  Having gotten that pesky FAA out of the way, the court easily found that the failure to apply res judicata as the court interprets it was a “plain mistake” and reversible error.

Blockbuster 2: Michigan Allows Law Firm To Compel Arbitration Of Suit Against Its Principals

Michigan’s decision has more interesting facts but less of a jaw-dropping result.   In Altobell v. Hartmann, __ N.W.2d__, 2015 WL 3247615 (Mich. June 13, 2016), a principal in a law firm had gotten the chance to be an assistant football coach at the University of Alabama.  (What attorney has a second act as a football coach?  I imagine him giving his clients half-time type pep talks during trial: “Clear eyes.  Full hearts.  Can’t lose!”)   He got the impression that his firm would allow him to keep his ownership interest for a year, but the firm audibled and declared the coach had withdrawn from the partnership.  No law firm money was coming his way.

The coach then sued seven principals of the law firm in court, and the firm moved to compel arbitration.  Although the lower courts had found that naming individual defendants was sufficient to avoid his arbitration agreement with the firm, the Michigan Supreme Court sided with common sense. The arbitration agreement called for binding arbitration of any dispute “between the Firm…and any current or former Principal.”  The court found it “must consider the concept of agency” in interpreting whether the firm was meant to include the individuals who makes its decisions.  Therefore, the court found claims against the individual defendants were arbitrable, and the coach’s claims were also within the scope of the arbitration agreement.

Blockbuster 3: Kentucky Finds CPA Determination Is Not “Arbitration”

Kentucky waded into the muddy issue of defining arbitration in The Kentucky Shakespeare Festival, Inc. v. Dunaway, __ S.W.3d__, 2016 WL 3371085 (Ky. June 16, 2016).  In that case, a theater fired its director but agreed to pay his bonus for 2013.  The agreement noted that “the parties agree to abide by the determination of the … certified public accountants…in case of a dispute as to the true amount of the net profits, and each party agrees to accept such determination as final.”  After the CPAs concluded the director was entitled to no bonus, the director filed suit.  A year later, the theater filed for summary judgment, arguing the CPA determination was a binding arbitration award.  The district court denied the motion and the intermediate appellate court agreed.

The Kentucky Supreme Court affirmed for two reasons. First, it found even if the language was binding, it related only to “net profits” not to the director’s bonus.  But more interestingly, it rejected the concept that this was an arbitration clause, as it “makes no express reference to arbitration”, did not allow for “fundamental components of due process” like presenting evidence and cross-examining witnesses, and the agreement had a general venue provision selecting Kentucky state court.

Speaking of defining arbitration, watch for an upcoming post about how courts around the country are trying to put some parameters on what is and is not an arbitration. 

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*Would love to hear from any academic types who have looked into this argument. What about these statements from SCOTUS, not limited to Sections 2-4 of the FAA??

  • “State and federal courts must enforce the Federal Arbitration Act (FAA), 9 U.S.C. § 1 et seq., with respect to all arbitration agreements covered by that statute.” Marmet Health Care Ctr., Inc. v. Brown, 132 S. Ct. 1201, 1202, 182 L. Ed. 2d 42 (2012).
  • “It is well settled that ‘the substantive law the Act created [is] applicable in state and federal courts.’” Nitro-Lift Technologies, LLC v. Howard, 133 S.Ct. 500, 503 (2012).

In three cases in recent months, courts have found that plaintiffs who did not sign an arbitration agreement (non-signatories) are not obligated to arbitrate.  In all three cases, a key issue was that the plaintiff’s claims in court did not rely on the contract containing the arbitration clause.

In the most interesting and widely applicable case, the Fifth Circuit found that a spouse is not necessarily bound by an arbitration agreement signed by her spouse. Zinante v. Drive Electric, LLC, 2014 WL 4567762 (5th Cir. Sept. 16, 2014). After a defective electric golf cart allegedly caused a fire in Mrs. Zinante’s home, she sued the seller of the cart. The seller moved to compel arbitration, based on a clause in the purchase agreement that only her husband executed. The seller first argued that Mrs. Zinante was equitably estopped from avoiding arbitration. The Fifth Circuit disagreed, because Mrs. Zinante’s claims were not based on the purchase agreement nor “intertwined” with the purchase agreement  (she claimed negligence). The seller also argued that Mrs. Zinante was a third party beneficiary of the purchase agreement. Without even cracking a joke, the court noted there was “no evidence that [husband] intended for his spouse [] to benefit from the purchase of the golf cart.” [Couldn’t there have been a funny footnote about how she didn’t even golf?  Or how the husband kept the cart in the neighbor’s garage so the wife couldn’t use it?] In sum, the court found “the spousal relationship alone does not make Zinante a third party beneficiary to the contract.”

In an another case, Merrill Lynch was accused in court of having helped to “disrupt” a decedent’s estate plan.  Malloy v. Thompson, __S.E.2d___, 2014 WL 4087881 (S.C. Aug. 20, 2014).  It tried to compel arbitration of that claim, based on the arbitration clause in the decedent’s contract.  Although neither the decedent nor his estate were party to the case, Merrill Lynch argued that any duty it had to the plaintiff derived from its client agreement, so the plaintiff was bound by that agreement.  The South Carolina Supreme Court recited five bases for compelling arbitration with non-signatories, and found Merrill Lynch had not proved any of them, largely because the plaintiff’s claim was based on a general tort theory and not on any contractual duties grounded in the client agreement.

Finally, the Third Circuit refused to compel arbitration of an insurance dispute.  Flintkote Co. v. Aviva PLC, __ F.3d__, 2014 WL 5033218 (3d Cir. Oct. 9, 2014).  In Flintkote, a supplier of asbestos-based products moved to compel arbitration of a dispute between it and its insurance company over  the scope of coverage available.  The parties’ agreement, however, explicitly called for resolution through litigation: “nothing contained in…this Agreement…shall required [Aviva] and Flintkote to resolve any disputes that may arise between them…through ADR.”  The insured argued that because the insurer had participated in a mediation of claims and had drafted an arbitration agreement for the insured to sign (that was never executed), the insurer was equitably estopped from refusing to arbitrate.  The court disagreed, finding that the inurer did not clearly and convincingly “embrace” the insured’s agreement with other insurers (that called for arbitration) by mediating or taking other actions.  The court also concluded that the insured did not reasonably rely on the insurer’s offer to arbitrate.

Finally, on a related topic, the Supreme Court of Alabama ruled that if the parties have incorporated the AAA rules, it is clear and unmistakable evidence that the arbitrator should decide whether a non-signatory is obligated to arbitrate.  Anderton v. The Practice-Monroeville, P.C., __ So.3d__, 2014 WL 4798898 (Ala. Sept. 26, 2014).  It relied in part on the Eighth Circuit’s recent decision on that same issue.

What did we learn today?  If you are buying a product that could harm you, make sure only your spouse signs the agreement with the arbitration clause.  Happy Halloween everyone!

Two federal circuit courts recently reversed district court decisions allowing non-signatories to compel arbitration.  The analysis emphasizes that for a defendant to prove equitable estoppel compels arbitration, the plaintiff’s legal claims must be closely related to the contract containing the arbitration clause.

Retail grocers asserted antitrust claims against wholesalers in In re Wholesale Grocery Products Antitrust Litig., ___ F.3d __, 2013 WL 514758 (8th Cir. Feb. 13, 2013).  The plaintiffs expressly crafted their claims to avoid arbitration: “[i]n an effort to avoid arbitration, each Retailer brought claims only against the Wholesaler with whom they did not have a supply and arbitration agreement.”  In other words, while each retailer-plaintiff did have an arbitration agreement with one wholesaler-defendant, no retailer asserted claims against the wholesaler with whom they contracted, and instead asserted claims only against another wholesaler, alleging conspiracy.  (Why?  Because the arbitration clause prohibited class actions, of course.  At least, that’s what the district court opinion suggests.)

In response to the wholesalers’ motion to compel arbitration, the district court found plaintiffs equitably estopped from avoiding arbitration.  The judge grounded her opinion in the relationship between the parties, finding “[t]he agreements to arbitrate, therefore, are a fundamental component of the entire wholesaler-retailer relationship between the signatories. Further, the broad scope of the agreements evince a clear intent on behalf of the Arbitration Plaintiffs that disputes regarding that relationship be subject to arbitration. This is precisely the relationship that is at issue in this litigation.”

The Eighth Circuit reversed, reasoning that the district court’s analysis “focuse[d] too much on the relationship between the signatories, rather than on the relationship between the signatory’s claims against the non-signatory and the contract containing the arbitration clause.”  The court found that under federal precedent, equitable estoppel did not compel arbitration of the dispute because the statutory antitrust claims did not depend on the supply agreements that contained the arbitration agreements at all.  “These statutory claims exist independent of the supply and arbitration agreements.”   (That conclusion was not unanimous, however.  The dissenting judge primarily argues that the majority mis-read Minnesota law on equitable estoppel.)

The Fifth Circuit case is shorter and harsher in its criticism of the district court.  After suggesting that the district court did not understand there were two separate contracts at issue, only one of which contained an arbitration agreement, and maybe did not even understand which party was the plaintiff (yikes), the Fifth Circuit reversed the district court’s order compelling arbitration of a claim by a non-signatory, and remanded for consideration of equitable estoppel.  (The district court’s opinion did not explicitly mention equitable estoppel, leaving it unclear on what basis the arbitration was compelled.)  VT HalterMarine, Inc. v. Wartsila N. Am., Inc., 2013 WL 586819 (5th Cir. Feb. 8, 2013).