Now that Justice Gorsuch is confirmed and can take the open seat on the Supreme Court, maybe SCOTUS can move forward on the cases about whether employers can make employees waive their right to class actions in an arbitration agreement.  (Btw, here’s a nice SCOTUSblog piece on Gorsuch’s arbitration decisions.)  In the meantime, California’s high court has decided a similar arbitration issue that seems likely to be the subject of a future cert petition.  In McGill v. Citibank, issued April 6, a unanimous California Supreme Court held that consumers cannot validly waive their statutory right to injunctive relief under California law, and found that the FAA did not preempt that result.

The case involves a woman who purchased a “credit protector” plan from the credit card issuer.  She felt the credit card did not keep its end of the bargain when she lost her job.  Although she had agreed to arbitrate claims and had waived representative or class actions, she started a putative class action in California state court alleging violations of multiple California consumer statutes.  Part of the relief she sought was an injunction preventing the credit card from continuing to violate California statutes.  (The parties agreed that the arbitration waiver prohibited the consumer from obtaining injunctive relief in any forum, not just arbitration.)

Each of the statutes at issue in her lawsuit was intended to protect consumers and each authorized injunctive relief.  One of the statutes also explicitly prohibited waiver of the statutory protections.  The Consumers Legal Remedies Act (CLRA), for example, declares that “[a]ny waiver by a consumer” of the CLRA’s provisions “is contrary to public policy and shall be unenforceable and void.”

California has codified the following contractual defense: “Any one may waive the advantage of a law intended solely for his benefit. But a law established for a public reason cannot be contravened by a private agreement.” (Civil Code Section 3513.)  Applying that doctrine in this case, California’s high court found the waiver of public injunctive relief in the arbitration agreement invalid, as it “would seriously compromise the public purposes the statutes were intended to serve.”

Now comes the tricky part of every state court opinion in this area.  Having found the arbitration agreement invalid under state law, how will the court clear the hurdles of the FAA and Concepcion/DirecTV?  The McGill opinion took the standard path: it reasoned that because the contractual defense at issue applies to every contract, this decision withstands FAA scrutiny.  (It did not, however, cite any cases in which this defense has been applied outside the arbitration context, which I believe is the unstated requirement of DirecTV.)

Furthermore, the court found reasons to distinguish the banning of class action waivers (prohibited in Concepcion) from the banning of public injunction waivers (at issue here).  For example, it noted class actions are a procedural device, while injunctions are substantive remedies.  It also found that its ruling would not interfere with the fundamental arbitration-ness of arbitration, because the injunctive relief cases will stay in court and can be heard once individual arbitrations are concluded.

Finally, the California high court remanded to the lower court to decide whether the rest of the arbitration clause should be thrown out with the bath water.  (There was conflicting language in the agreement.)

Ah, just when I worried California arbitration decisions were becoming too staid and dull…

 

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.

The Supreme Court of Louisiana refuses to send customers who were injured while playing at Sky Zone to arbitration, finding that the arbitration clause “is adhesionary and therefore unenforceable”.  Duhon v. Activelaf, LLC, __ So. 3d __, 2016 WL 6123820 (La. Oct. 19 2016); Alicea v. Activelaf, LLC, __ So. 3d __, 2016 6123859 (La. Oct. 19, 2016).  [My alternate title for this post is “I TOLD YOU SO, SKY ZONE.”  Every time I bring my children to the trampoline park for a birthday party, I tell those poor teenagers who are enforcing the rules that those contracts are likely not enforceable.  But, I cared more about the waiver of liability than the arbitration bit.]

The arbitration clause at issue, which is required to participate in activities, was clicked electronically.  It states “If there are any disputes regarding this agreement, I on behalf of myself and/or my child(ren) hereby waive any right I and/or my child(ren) may have to a trial and agree that such dispute shall be brought within one year of the date of this Agreement and will be determined by binding arbitration before one arbitrator to be administrated by JAMS…in the state of Louisiana.”  Furthermore, the agreement imposes $5,000 of liquidated damages for any customer who files a lawsuit.

Louisiana’s highest court held that agreement was unenforceable.  Applying its ruling regarding an arbitration clause in 2005, the court analyzed whether consent of the non-drafting party was calling into question by the existence of a standard contract between unequal bargaining parties, and in particular the “physical characteristics of the arbitration clause” and its mutuality.  Because Sky Zone’s arbitration language was “the only specific provision not relegated to a separate paragraph or set apart in some explicit way,” Sky Zone was not bound to arbitration by the clause, and patrons could be subject to a penalty of $5,000 for filing suit, the court found the arbitration clause “adhesionary and unenforceable.”  The court then dutifully noted that its “application of Louisiana contract law…in the instant case is consistent with [Section] 2 of the FAA”.

While the court states that this decision employs the same type of contract defense that is applicable to any contract — not just one with an arbitration clause — it does not appear to cite any cases outside the arbitration context.  That alone leads me to believe this case is susceptible to a GVR by SCOTUS under the DirecTV analysis.

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.

 

Put this post in the “I called it” category.

On June 12, the Massachusetts Supreme Judicial Court declared in Feeney that class arbitration waivers are invalid under Massachusetts law if plaintiffs cannot effectively pursue their claims in individual arbitration.  On June 20, the U.S. Supreme Court decided American Express, holding that arbitration agreements must be enforced according to their terms under the Federal Arbitration Act, even if it means that low-dollar claims will not be prosecuted.  That same day, this blog predicted that Feeney would be overturned based on Amex.  On August 1, as anticipated, Massachusetts’ highest court concluded “that following Amex, [its] analysis in Feeney II no longer comports with the Supreme Court’s interpretation of the FAA.”  Feeney v. Dell, Inc., __ N.E.2d __, 2013 WL 3929051 (Aug. 1, 2013).

The justices of Massachusetts make clear that they disagree with the Amex majority, though:  “Although we regard as untenable the Supreme Court’s view that ‘the FAA’s command to enforce arbitration agreements trumps any interest in ensuring the prosecution of low-value claims,’ [] we are bound to accept that view as a controlling statement of Federal law.”

More predictions about state court decisions in next week’s anniversary post. . . that’s right ArbitrationNation is almost two years old!

*If you like having your own personal arbitration crystal ball, or if you otherwise find this blawg useful or interesting, please consider nominating it for the ABA Journal’s list of the top 100 Blawgs!  The deadline is August 9 and ArbitrationNation would be honored to be listed for a second year.  http://www.abajournal.com/blawgs/blawg100_submit/

 

Within weeks of its issuance, SCOTUS’s Sutter decision is already making an impact on other cases. Both the Eleventh Circuit and the D.C. Court of Appeals cite Sutter repeatedly in recent decisions that refuse to vacate arbitration awards.  Of course, new decisions are not the only ones that reverberate: Concepcion, a 2011 decision, was just applied by the Ninth Circuit to preempt Montana case law on contracts of adhesion.

Sutter

In Southern Commc’n Servs., Inc. v. Thomas, __ F.3d __, 2013 WL 3481467 (11th Cir. July 12, 2013), the court affirmed an arbitrator’s decision to allow a class action.  The plaintiffs are mobile phone consumers who allege they were charged unlawful penalties for canceling phone service.  Under the Wireless Industry Arbitration Rules of the AAA, an arbitrator found the arbitration clause allowed class actions and certified the class.  The wireless provider then moved to vacate that determination in federal court, claiming the arbitrator exceeded his authority and refused to apply the law.  The court, however, carefully applied the language of the recent Sutter decision and said that because the arbitrator engaged with the contract’s language and the parties’ intent, his construction of the contract must be upheld.

The D.C. Court of Appeals also cited Sutter recently in refusing to vacate an arbitration award.  In Wolf v. Sprenger + Lang, PLLC, __ A.3d. __, 2013 WL 3466348 (D.C. Ct. App. July 11, 2013), two attorneys sought to vacate an arbitration award against them in a fight over attorneys’ fees.  They argued the arbitrator exceeded his powers by addressing an issue outside the scope of the arbitration and by basing his award on notions of ethics instead of the co-counsel agreement.  In its analysis, the court summarized that the “‘sole question’ before the court in a challenge [that an arbitrator exceeded his power] is ‘whether the arbitrator (even arguably) interpreted the parties’ contract,'” citing Sutter.  Given that limited question, and the fact that the court said there was “no doubt” the arbitrator reached his decisions after interpreting the parties’ co-counsel agreement, the court affirmed the district court’s denial of the motion to vacate.

Concepcion

In a ruling that applies Concepcion in a new context, the Ninth Circuit just struck down Montana case law finding many arbitration agreements void as against public policy.  Mortensen v. Bresnan Commc’ns, LLC, __ F.3d. __, 2013 WL 3491415 (9th Cir. July 15, 2013), a putative class of Montana internet service subscribers asserted claims against the internet provider, based on the provider’s decision to allow an advertising company to create profiles of subscribers based on their internet usage and target them with “preference-sensitive advertising.”  The provider moved to compel arbitration, but the district court denied the motion under Montana law (even after considering application of Concepcion).

The Ninth Circuit reversed.  It found the Montana state law at issue was preempted by the FAA, even though it was ostensibly generally applicable contract law and not specific to arbitration.  The rule at issue said that provisions within contracts of adhesion are void as against public policy if they are not “in the reasonable expectations of both parties when contracting.”  Applying that rule, Montana has found that arbitration agreements in contracts of adhesion are void (because they waive parties’ right to trial by jury and access to court) unless they are explained to and initialed by consumers.  The court found that doctrine disproportinoally affects arbitration agreements and is therefore preempted by the FAA under the reasoning set forth in Concepcion.

The Ninth Circuit repeatedly distances itself from the result by noting that it is simply applying Supreme Court mandates.  For example: “Montana has an interest in protecting its consumers from unfair agreements, particularly those that force waiver of fundamental rights without notice.  But the Supreme Court in Concepcion told us to hold that the FAA preempts all laws that have a disproportional impact on arbitration agreements.”  It feels like making a promise while crossing your fingers behind your back.

The Fourth Circuit issued a bold new arbitration decision last week, sending a putative class of shuttle drivers to arbitration while expanding its application of SCOTUS’ Concepcion decision beyond cases involving federal preemption of state arbitration law.  Muriithi v. Shuttle Express, Inc., __ F.3d __, 2013 WL 1287859 (4th Cir. 2013).

Muriithi was a driver for an airport shuttle service who signed a franchise agreement containing an arbitration clause.  The franchise agreement required arbitration of “any controversy arising out of this Agreement,” required that arbitration proceed “on an individual basis only,” and required each party to bear half the “fees and costs of the arbitrator.”  Muriithi later brought employment claims as a representative of a putative class of drivers, arguing they should have been treated as employees entitled to minimum wage and overtime pay instead of labeled as franchisees.

Shuttle Express moved to compel arbitration.  The district court denied the motion, finding the arbitration clause was unconscionable, because plaintiffs could not effectively vindicate their statutory rights due to the class action waiver and fee-splitting provision (and a one year statute of limitation).

The Fourth Circuit reversed the district court, and ordered it to compel arbitration of the drivers’ claims.  The Fourth Circuit could have accomplished that in a fairly simple fashion – by finding that Muriithi did not meet his burden to prove the costs of arbitration would be prohibitive (under the same line of decisions at issue in the AmEx case currently pending before SCOTUS) because he did not present evidence about relevant arbitration fees or the value of his employment claims.  [It could not have hurt that Shuttle Express volunteered during oral argument to pay all arbitration costs if the court compelled arbitration.]

Instead, the Fourth Circuit did that, and then also went out of its way to discuss arguments about whether Concepcion had any application to the case.  The driver argued it did not, because he was not arguing for the application of any state common law that precludes class action waivers in arbitration.  The court disagreed, finding Concepcion applies to any unconscionability argument directed to waivers of class arbitration.  “[T]he Supreme Court’s holding was not merely an assertion of federal preemption, but also plainly prohibited application of the general contract defense of unconscionability to invalidate an otherwise valid arbitration agreement under these circumstances.”

That is a bold statement from the Fourth Circuit, not only because the question presented and ultimate holding in Concepcion were both specific to federal preemption, but also because it adopts the position of the Petitioner in the AmEx case, before SCOTUS has even issued a ruling.