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.

 

In a fight over whether a single lending transaction involved interstate commerce, the Supreme Court of Nebraska found the Federal Arbitration Act (FAA) applied and preempted its state arbitration act.  Wilczewski v. Charter West Nat’l Bank, __ N.W.2d__ (Neb. Dec. 9, 2016).

The case involved buyers who purchased a home from a bank (who owned it after a foreclosure) and then sued the bank alleging misrepresentation and fraud.  The bank moved to compel arbitration.  In response, the buyers argued (among other things) that the purchase agreement did not comply with the notice provision in Nebraska’s arbitration act.  The bank conceded that fact, but argued that the FAA applied, so it was immaterial.

The buyers pointed out that the real estate was in Nebraska, the buyers were residents of Nebraska, and the alleged statements were made in Nebraska.  Therefore, they argued, the purchase did not “affect interstate commerce.”  Nebraska’s courts disagreed.  Its highest court issued a well-reasoned analysis (with citations in footnotes!  Go Bryan Garner!) concluding that “there does not have to be a multi-state transaction for the FAA to be applicable.”  Instead, it pointed out the broad and nationwide impact of residential real estate lending was the critical factor in implicating the FAA.  Although the bank had briefed the multi-state nature of the homeowner’s insurance, title insurance, cashier’s check, etc., the court called those “tangential details” and did not rely on them in reaching its conclusion.

The court also distinguished opinions from other courts that refused to compel arbitration of disputes from individual residential real estate transactions.  It commented “none of the cases declining to compel arbitration involved a comprehensive practice or activity of lending money on residential real estate, enforcing liens, acquiring title, and reselling…. We need not decide and do not suggest whether the FAA applies to a simple contract for the sale of residential real estate.”

Having done the heavy lifting of finding the FAA applied, the court easily concluded that the buyers’ claims fell within the scope of the arbitration clause and therefore affirmed the lower court’s decision to compel arbitration.

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).

Today we take a close look at that rare creature: an opinion finding sufficient basis under the FAA to vacate an arbitration award. In Tenaska Energy Inc. v. Ponderosa Pine Energy, LLC, __S.W.3d __, 2014 WL 2139215 (Tex. May 23, 2014), the Supreme Court of Texas found an arbitrator had shown “evident partiality” due to his misleading “partial” disclosures of his contacts with the law firm representing the claimant.

The underlying dispute was over whether Tenaska had breached representations and warranties to Ponderosa in a power plant purchase agreement. The purchase agreement required that any disputes be arbitrated before a panel of three arbitrators, with each party choosing one neutral arbitrator and the two party-appointed arbitrators selecting the third. Ponderosa, represented by Nixon Peabody, demanded arbitration and chose Samuel Stern as its arbitrator. Stern, along with the third arbitrator, awarded Ponderosa $125 million.

Tenaska moved to vacate the award, arguing that Stern had shown evident partiality. After “extensive discovery” on the issue of Stern’s contacts with Nixon Peabody, the trial court agreed and vacated the award. The intermediate appellate court reversed the trial court, finding that Tenaska had waived its right to argue evident partiality by not objecting to Stern’s appointment after receiving his limited disclosures. The Texas Supreme Court reinstated the district court’s order vacating the arbitration award.

Upon his appointment, Stern  disclosed that Nixon Peabody had designated him as an arbitrator in three other disputes, that he was a director of a litigation services company, LexSite, based in India, and that he had met with Nixon Peabody lawyers about outsourcing some of their discovery tasks to LexSite. However, he said the firm had done no business with LexSite and “it is not clear that Nixon-Peabody would ever have any business to give LexSite.”

The court found it material that Stern did not disclose the following facts: Stern owned shares of LexSite, was being paid $6,000 per month by LexSite to actively solicit business from U.S. law firms, had communicated multiple times with the individual lawyers representing Ponderosa on this very matter about Nixon Peabody using LexSite, and allowed Ponderosa’s counsel to edit his arbitration disclosures. The court held that “[t]aken together, this undisclosed information might cause a reasonable person to view Stern as being partial toward [Nixon Peabody’s] client, Ponderosa, to gain their favor in securing business for LexSite from Nixon Peabody.” Because the court found that the Tenaska did not have to prove “actual bias,” the fact that a reasonable, objective person could conclude Stern was partial was sufficient to vacate the award. [In a nod to Stern, the court “reiterate[d] that [its] holding should not be read as indicating that Stern was actually biased.”]

Furthermore, the court found that Tenaska did not waive its right to vacate the award by accepting Stern’s appointment after he disclosed his relationship to LexSite and his meeting with Nixon Peabody. The court concluded that because material information was withheld from Tenaska, it did not waive its partiality challenge. “To hold otherwise ‘would put a premium on concealment’ in a context where the Supreme Court has long required full disclosure.”

This case has important practical implications for arbitrators and counsel alike: if you choose an arbitrator who you believe will be a strong voice in your client’s corner, do not put that appointment at risk by making partial disclosures.

Legally, I find it interesting that even though the Texas Supreme Court acknowledged that the FAA governed, it rested its analysis largely on its own precedent decided under its state arbitration act. The court did not discuss, for example, the Fifth Circuit decision from just two years ago, finding a party had waived its claim of partiality under the FAA when it received partial disclosures from an arbitrator and took no further action. The Fifth Circuit found the disclosures at issue in that case “ were sufficient to put [the party] on notice of a potential conflict” and the party had a duty to reasonably investigate. That holding appears at odds with the Texas Supreme Court’s Tenaska decision, even though both courts are applying the FAA.

In recent months, three federal circuit courts have confronted this question: can a defendant compel arbitration even in the absence of a signed written agreement containing an arbitration clause?  The answers were yes, no, and maybe, but the analysis in all three turns on whether the party resisting arbitration should reasonably have known that an arbitration clause was part of the deal.

In one case, an iron foundry had sought equipment from a sales representative of the defendant.  The rep prepared a quote on its stationery, the back of which contained the “Standard Terms and Conditions of Sale.”  The arbitration clause was included in those terms.  But when the sales rep copied only the front of the quote for the customer, no arbitration clause was included.  Six months later, the sales team emailed the foundry an addendum to the price quote, attaching the standard terms and conditions of a sister company.  The foundry agreed to the new quote.

When the foundry sued over problems with the equipment, the defendant moved to compel arbitration.  The district court denied the motion and the Eighth Circuit affirmed.  Dakota Foundry, Inc. v. Tromley Indus. Holdings, Inc., 2013 WL 6405022 (8th Cir. Dec. 9, 2013).  The court found that the parties had not incorporated the “Standard Terms and Conditions of Sale” by reference, because those terms were not readily available to the foundry and the foundry did not have a reasonable opportunity to reject the arbitration clause.  The terms later attached to the email could not bind the foundry because the terms referred to the wrong company and the foundry could reasonably have concluded the terms were mistakenly provided.

In contrast, in Tillman v. Macy’s, Inc., 2013 WL 5827729 (6th Cir. Oct. 31, 2013), the Sixth Circuit found an employee did agree to arbitrate her discrimination claim against Macy’s, notwithstanding the lack of a signed arbitration agreement.  The department store alleged that the employee agreed to arbitrate by virtue of her failure to opt-out of a dispute resolution program that the company rolled out four years after the plaintiff was hired.  Employees were mailed a postcard, plan document, and an election form that advised employees they must opt-out by a certain date if they did not want to arbitrate disputes.  (They also had to watch a mandatory video about the program.)  The Sixth Circuit held that this information was “sufficient to constitute a valid offer to arbitrate” and that the employee accepted the offer by continuing her employment without opting out of the arbitration program.

Finding the middle ground, the Second Circuit found an arbitration may have been incorporated by reference in Hirsch v. Citibank, N.A., 2013 WL 5716397 (2d Cir. Oct. 22, 2013).  In that case, plaintiffs had signed signature cards when they opened accounts at Citibank.  Those cards, in turn, bind the customers to “any agreement governing” their accounts.  Citibank argued that language incorporated a Client Manual containing an arbitration agreement.  The district court denied Citibank’s motion to compel arbitration, but the Second Circuit remanded for a determination whether the plaintiffs actually received the Client Manual upon opening their accounts.  The Second Circuit reasoned that receipt of a physical document can be enough to put the party on notice of the terms as long as it was clearly a binding legal document.