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.

I would understand if not every state supreme court got the memo from last year’s SCOTUS decision on FAA preemption, Kindred, which reminded state courts that the FAA prevents state courts from imposing additional requirements on arbitration agreements that are not required for other types of contracts.  But Kentucky definitely got the memo.  The memo was addressed to Kentucky. Yet, last week the Supreme Court of Kentucky released a new decision that continues to convey hostility to arbitration and SCOTUS’s decisions interpreting the FAA.

The legal issue in Northern Ky. Area Development District v. Snyder, 2018 WL 4628143 (Ky. Sept. 27, 2018) is straightforward: Does the FAA preempt a Kentucky statute that prohibits employers from conditioning employment on an employee’s agreement to arbitrate claims.  The statute prohibits an employer from requiring an employee to “waive, arbitrate, or otherwise diminish any existing or future claim, right, or benefit to which the employee or person seeking employment would otherwise be entitled.”  In this case, the plaintiff was required to sign an arbitration agreement in order to work for the governmental entity.  When she sued over her termination, the employer moved to compel arbitration.

The trial court refused to compel arbitration.  Then the court of appeals affirmed, finding that the employer never had authority to enter into the arbitration in the first place (due to the statute), so the arbitration agreement did not technically exist.  (Too cute by half.  Plus, Justice Kagan specifically said that formation issues could also be preempted.)

The Kentucky Supreme Court affirmed.  It also concluded that the employer, a state agency, was covered by the anti-arbitration statute.  And therefore, when it conditioned employment on an agreement to arbitrate, in violation of the statute, its action was “ultra vires,” and the resulting arbitration agreement was void.  (See parenthetical above.)

The court went on to find the anti-arbitration statute at issue was not preempted by the FAA.  The decision states with an apparently straight face that the statute “does not actually attack, single out, or specifically discriminate against arbitration agreements” and did not “evidenc[e] hostility to arbitration”.  The statute “simply prevents [the employer] from conditioning employment” on the arbitration agreement. Furthermore, it notes that the statute does not just preclude arbitration agreements, but also any agreement that waives or limits an employee’s rights.

BUT HERE’S THE PROBLEM.  Kentucky’s reasoning only makes sense if we agree that arbitration is a limitation or a diminishment of the employee’s rights.  If, instead, you assume that arbitration is simply an alternative forum for resolving the employee’s full set of rights, the logic falls apart.  But, will SCOTUS really want to hear another Kentucky decision?  Kentucky is betting that it won’t.  Maybe this should not surprise anyone; Kentucky did not exactly bend to SCOTUS’s will when Kindred was remanded.  And btw, the nursing home is seeking certiorari from the remand decision, and SCOTUS just relisted it, meaning it still has a chance. (For good measure, Kentucky’s high court issued a decision compelling arbitration on the same day, overruling an objection that the arbitration clause was not fully mutual.  Grimes v. GHSW Enterprises, 2018 WL 4628160 (Ky. Sept. 27, 2018).)

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Speaking of SCOTUS, Monday it denied cert in at least four arbitration cases.  Two were companion cases (from Cal. and Neb.) that sought guidance on what types of challenges can invalidate a delegation clause.  (My blog post here, SCOTUSblog here and here.)  Another presented issues regarding binding non-signatories to arbitration through equitable estoppel. The fourth involved a question of whether an employer waived its right to arbitration (Cash Biz).  (My post here, filings here.)

And – this morning, SCOTUS hears arguments in New Prime, addressing the exemption in FAA Section One.

[Thanks to @PerryCooper for alerting me to a few of these cert denials.]

Today the Supreme Court of the United States granted certiorari in another case involving the Federal Arbitration Act.  The case, Lamps Plus, Inc. v. Varela, comes from the Ninth Circuit and raises a variation of the question from Sutter: how clear does an arbitration agreement need to be to show the parties authorized class arbitration?

My initial summary of the Ninth Circuit opinion is here.  It didn’t even merit an entire post of its own, but shared time with another circuit court opinion.  In my view, the issue of class arbitration has largely been hammered out.  SCOTUS ruled in Stolt-Nielsen that class arbitration is only allowed if the parties’ arbitration agreement authorizes it.  More recently, courts have generally concluded that courts, not arbitrators, should decide whether the parties’ arbitration agreement allows for class arbitration.  Finally, state law governs the question of how to interpret whether the parties’ arbitration agreement authorizes class arbitration.  Yet, now we will have a new decision on whether an interpretation of state law (interpreting ambiguity against a drafter to find class arbitration is authorized) should be preempted by the federal policy favoring arbitration (and particularly, favoring non-class arbitration).

In fact, the other two arbitration cases on SCOTUS’s docket also relate to class actions.  The NLRB case (whether forcing employees to waive their right to class actions in arbitration agreements is a violation of labor statutes) is still under consideration (it was argued last October).  And another upcoming case, New Prime, Inc. v. Oliveira, stems from a putative class action brought by independent contractors, even though the narrow issue before SCOTUS is whether an arbitrator or court should determine the applicability of the FAA.

If any Supreme Court clerk or justice had called me and asked “what are some of the really hot arbitration questions that this Court should resolve in order to ensure consistent decision-making around the country?,” class arbitration would not have been on my list.  I read every arbitration opinion that issues from the federal circuit courts and state high courts, and the issues I see courts struggling with most often include delegation clauses and issues relating to non-signatories.  Maybe I am not giving enough credit to the few class action opinions that come out (despite the fact that they impact many people), or alternatively maybe the Court’s emphasis on class arbitration highlights a political aspect of the cert process, or a particular interest of a majority of justices, or just the persuasiveness of this team.

 

The last post focused on three recent state appellate court decisions that refused to compel arbitration or vacated an award, and this follow-up post focuses on seven recent cases that are friendly to arbitration.

My favorite is from Montana.  Although none of its arbitration decisions have been addressed by SCOTUS, Montana decided to preempt any federal preemption issues by adjusting its stance on unconscionability.  (It waited five years after the 9th Circuit put it on notice, though.)  Lenz v. FSC Sec. Corp., 2018 WL 1603927 (Mont. April 3, 2018), involves claims by investors against investment advisors over “substantial losses.”  The defendants moved to compel arbitration and the district court granted the motion.  On appeal, the Montana Supreme Court affirmed.  In its decision, it took the opportunity to clarify that the previous test it had used to determine unconscionability was improper, because it mixed unconscionability analysis with the reasonable expectations doctrine from the insurance context.  (Read this mea culpa: “We have continued to perpetuate confusion by inaccurately referencing [bad tests for unconscionability] …Even more problematic in particular regard to arbitration agreements, we have failed to recognize the manifest incompatibility of the insurance-specific reasonable expectations doctrine as a generally applicable contract principle.”)  I read that as “we do not want to be reversed by the U.S. Supreme Court.”

The others can be reviewed more quickly:

  • Substantive unconscionability cannot be established by showing only that the arbitration agreement is broad in scope.  SCI Alabama Funeral Servs. v. Hinton, 2018 WL 1559795 (Ala. March 30, 2018) [I’m a bit surprised that needed clarifying];
  • The Federal Arbitration Act applies to arbitration agreements within a common interest community’s covenants (and preempts conflicting state law).  In U.S. Home Corp. v. The Michael Ballesteros Trust, 2018 WL 1755536 (Nev. April 12, 2018), 12 homeowners argued that the FAA did not apply to the arbitration agreement in their covenants because land is traditionally a local concern.  The court found that the covenants’ larger purpose was to facilitate the creation of a community of multiple homes, and multiple out-of-state business contributed to construction of the homes.  Therefore, the FAA controlled and preempted Nevada rules requiring the same procedures as in court and requiring arbitration agreements to be more conspicuous than other text in a contract;
  • Non-signatories may compel arbitration if the plaintiff’s claims are based on facts that are “intertwined” with arbitrable claims.  Melendez v. Horning, 2018 WL 1191150 (N.D. March 8, 2018) (reversing district court order denying motion to compel arbitration);
  • Scope of arbitration agreement broad enough to encompass claims against related entity.  Bridgestone Americas Tire Operations v. Adams, 2018 WL 1355966 (Ala. March 16, 2018), concluded that where the employee’s arbitration agreement was with the “Company,” which was defined to include affiliate and related companies, the employee’s suit against a related company was arbitrable;
  • Arbitrator did not manifestly disregard contractual language in construction contract.  In ABC Building Corp. v. Ropolo Family, 2018 WL 1309761 (R.I. Mar. 14, 2018), the owner tried to vacate an arbitration award in favor of the general contractor.  It relied on contract language requiring submission of payroll records with payment applications in order to argue that the contractor could not receive additional compensation for labor without having provided that contemporaneous documentation.  However, the arbitrator considered that provision of the contract in his decision-making (and the owner had never complained), so vacatur was inappropriate (one judge dissented);
  • Delegation clause must be enforced if not specifically challenged.  Family Dollar Stores of W. Va. v. Tolliver, 2018 WL 1074947 (Feb. 27, 2018).  I know, it’s a stretch to call this one a spring decision.  But, it’s snowing in Minnesota on April 14th, so my seasons are totally confused.  That’s why we call it “Minnesnowta.”

 

While I was busy writing deep thoughts about arbitration at the end of 2017 (see here and here), courts around the country rudely kept churning out new arbitration opinions.  Hmph.  So, I have some catching up to do.  I start with one that has most captured my attention, Snow v. Bernstein, Shur, Sawyer & Nelson, ___ A.3d ___, 2017 WL 6520900 (Me. Dec. 21, 2017).  It finds an arbitration agreement between a law firm and its client unenforceable, because the law firm did not specifically explain to the client that arbitration entails a loss of a jury trial, narrower appeal rights, and different evaluation of evidence.

Susan Snow hired the Bernstein firm to handle a civil action.  The opinion does not tell us anything about Snow or her level of sophistication.  But, it does tell us that she signed Bernstein’s standard terms of engagement, which included an arbitration clause.  The arbitration clause dealt specifically with arbitrability of “fee disputes,” and then said “any other dispute that arises out of or relates to this agreement or the services provided by the law firm shall also, at the election of either party, be subject to binding arbitration.”

Snow later sued the law firm for malpractice, and the firm moved to compel arbitration.  The district court denied that motion, and the high court of Maine affirmed that ruling.  Both courts found that the arbitration agreement was unenforceable because the law firm had not verbally discussed the arbitration clause with Snow and informed her of its “scope and effect”.

The Snow opinion used “public policy” to invalidate the arbitration agreement.  It largely relied on two bases for its public policy.  First, a 2002 formal opinion from the ABA Standing Committee on Ethics and Professional Responsibility, which found that because attorneys are fiduciaries, and arbitration “results in a client waiving significant rights,” an attorney must explain the implication of the proposed arbitration agreement so that the client can make an informed decision.  The ABA opinion requires an attorney to explain that the client is waiving a jury trial, waiving discovery, and losing a right to appeal.  Second, the Snow opinion relied on a 2011 opinion from Maine’s Professional Ethics Commission, requiring attorneys to obtain informed consent “as to the scope and effect of an arbitration requirement or a jury waiver clause.”

Because the law firm in this case did not dispute that it made no attempt to discuss the arbitration agreement with Ms. Snow before she signed it, and the court found the written arbitration agreement “was not sufficiently clear to inform her”, the court declared the arbitration agreement unenforceable.

So, what is required in Maine for an attorney to have a binding arbitration agreement with a client?  “The attorney must effectively communicate to the client that malpractice claims are covered under the agreement to arbitrate.  The attorney must also explain, or ensure that the client understands, the differences between the arbitral forum and the judicial forum, including the absence of a jury and such ‘procedural aspects of forum choice such as timing, costs, appealability, and the evaluation of evidence and credibility.'”  All of that should be done with regard to the particular client’s capacity to understand the information.

When’s the last time you heard a state supreme court espouse the importance of the right to a jury trial?  And pound on the importance of specifically and knowingly waiving that right?  Well, the Kindred case comes to mind for me.  And SCOTUS reversed Kentucky’s public policy rule in that case, finding it was preempted by the Federal Arbitration Act.  Kindred stated noted that the Kentucky “court did exactly what Concepcion barred: adopt a legal rule hinging on the primary characteristic of an arbitration agreement–namely, a waiver of the right to go to court and receive a jury trial.”  The Snow decision does not cite to the Kindred case, even though Kindred came out in May and Snow wasn’t argued until October of 2017.  Instead, the Snow decision gives a preemption analysis that defies logic.  It says its rule “that attorneys fully inform a client of the scope and effect” of an arbitration clause “does not ‘single out’ arbitration agreements.”  Say what?  The court goes on to say that it would apply to any client “decision to waive significant rights,” but does not offer any cites to Maine law requiring attorneys to give oral primers to clients on anything other than arbitration  Indeed, the Snow opinion’s emphasis on jury trial, appealability, and evidence show it’s rule hinges on primary characteristics of arbitration, just like Kentucky’s ill-fated rule.

Despite the similarities with Kindred, would SCOTUS treat this case differently because attorneys are held to a higher standard?  The Ninth Circuit has affirmed a decision finding the arbitration clause in an lawyer’s engagement letter unconscionable.  And the ABA favors the higher standard (but I am not aware it has reconsidered its opinion in light of recent preemption decisions).  But, I have a hard time distinguishing the rule in Snow from the one that was reversed in Kindred.

If I had to choose a favorite subset of arbitration cases, it might be the ones that come after SCOTUS remands to a state supreme court.  How does a state high court full of accomplished professionals, the cream of the legal crop in their state, respond after the U.S. Supreme Court has found their previous arbitration opinion was flawed?  Often, they find a way to stick to their guns.  We already saw that once in 2017, when Hawaii affirmed its arbitration decision, despite the GVR from SCOTUS.  And now Kentucky has followed suit.

In Kindred Nursing Centers Ltd P’ship v. Wellner, 2017 WL 5031530 (Ky. Nov. 2, 2017), the Kentucky Supreme Court addressed what was left of its Extendicare decision after SCOTUS took it apart in May of this year.  But not much was left.  The original decision had consolidated three separate actions: one was not appealed to SCOTUS, one was reversed by SCOTUS, and only the third was remanded by SCOTUS.  In the remanded matter, the Kentucky Supreme Court had rested its decision on two alternative grounds–the ground that SCOTUS found was preempted (that a power of attorney must clearly grant the right to give up a court or jury trial in order to have a valid arbitration agreement executed by the agent), and a finding that the language of the power of attorney at issue was not broad enough to encompass entering into a pre-dispute arbitration agreement.  So, the job on remand was to determine whether the second ground could stand up on its own, or whether it was “impermissibl[y] taint[ed]” by the preempted ground.

A majority of the Kentucky Supreme Court found there was no taint.  The nursing home relied on two provisions in the power of attorney, one giving power to demand or collect money and institute legal proceedings, and another giving the power to make contracts “in relation to both real and personal property.”  The court found that the arbitration agreement “was not the enforcement…of something then due or to become due” “nor was it the making of a contract…pertaining to” property.  As a result, “that aspect of the Extendicare decision remains undisturbed.”

While four members signed the majority opinion, three members of the court dissented, complaining that the majority failed to follow SCOTUS’s directive.  The dissent wrote “this Court’s distinction between pre-dispute arbitration agreements as not pertaining to a principal’s property rights . . . is simply another attempt to single out arbitration for ‘hostile’ treatment under the guise of Kentucky contract and agency law.”

Indeed, the majority had not completed edited out its hostility to SCOTUS’s arbitration case law from the decision.  For example, it criticized the Supreme Court’s

perception that our application of the clear statement rule, rather than the manifestation of our profound respect for the right of access to the Court of Justice explicitly guaranteed by the Kentucky Constitution and the right to trial by jury designated as “sacred” by Section 7 of the Kentucky Constitution, demonstrated instead a hostility to federal policies implicit in the Federal Arbitration Act and a resulting aversion to any implication of authority to make an arbitration agreement.

Pro tip to Kentucky: edit out any future references to jury trials being sacred if you want to avoid another certiorari petition in an arbitration case.

 

 

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.

In January of 2016, SCOTUS granted review of an arbitration case from Hawaii, but summarily vacated and remanded it without analysis.  (Unless you consider “Please read DIRECTV” substantive analysis.)  Here’s the risk of that course of action: Hawaii can refuse to change its mind.

Last month, in Narayan v. The Ritz-Carlton Development Co., 2017 WL 3013022 (Haw. July 14, 2017), Hawaii affirmed its decision after considering DIRECTV.  The case related to whether purchasers of new condominiums could sue the developers over their abandonment of the project.  The developers moved to compel arbitration based on an arbitration clause within the Declaration for the condo project, because the Declaration was incorporated into the plaintiffs’ purchase agreement.  In 2015, Hawaii’s highest court found the parties had not clearly agreed to arbitrate and portions of the arbitration clause were unconscionable.

Two years later, after a forced reconsideration, the court dropped its analysis of whether the arbitration agreement was validly formed (smart decision, given that it was on the shakiest ground, and given Kindred’s statement that FAA preempts formation decisions that disfavor arbitration).  Instead, it focused exclusively on unconscionability.  It found the arbitration clause both procedurally and substantively unconscionable (noting “severe” discovery limitations), and added more state case law to support those findings.  Amusingly, it also cited to two other state supreme courts which have affirmed their arbitration decisions on unconscionability after receiving a “GVR” from SCOTUS GVR: West Virginia and Missouri. (As if to say: You let those other kids off the hook!)

Speaking of SCOTUS and arbitration, two updates of note:

  • Mark your calendars; SCOTUS will hear argument in the cases regarding whether the NLRB can preclude class waivers on October 2.  Even so, the federal appellate courts keep issuing decisions on both sides of this issue.  E.g. NLRB v. Alternative Entertainment, 2017 WL 2297620 (6th Cir. May 26, 2017) (enforcing NLRB order); Convergys Corp. v. NLRB, 2017 WL 3381432 (5th Cir. Aug. 7, 2017) (rejecting NLRB position); Logisticare Solutions Inc. v. NLRB, 2017 WL 3404648 (5th Cir. Aug. 9, 2017) (rejecting NLRB position).
  • Physicians from Florida are asking SCOTUS to grant certiorari in a case about the regulation of doctor-patient arbitration clauses.  If you know of other arbitration cases in the pipeline, let me know.
  • An employer from California is asking SCOTUS to grant certiorari in this case regarding when courts should review interim arbitration awards. [Ed note: this final bullet was not in the original post, but was added after a thoughtful reader alerted me to it.]

Just as I predicted, SCOTUS reversed the Kentucky Supreme Court’s decision in Kindred this morning.  The interesting piece, though, is that the seven member majority went out of its way to cut off some of the “on trend” methods that state courts have been using to avoid arbitration clauses.

The Kentucky decision can be summarized easily.  The case  involved nursing homes attempting to compel arbitration of wrongful death and personal injury claims by estates of deceased residents.  In each case, a relative with power of attorney had signed an admission document that included arbitration when the resident entered the nursing home.  However, the Kentucky court refused to infer the agent’s “authority to waive his principal’s constitutional right to access the courts and to trial by jury” unless that power is “unambiguously expressed” in the power-of -attorney document.  (You may recall this is the decision that analogized entering into an arbitration agreement to: putting a child up for adoption, aborting a pregnancy, and entering into personal servitude.  If that doesn’t cry out “judicial hostility to arbitration,” I don’t know what does.)

Justice Kagan, writing for the seven-member majority, found Kentucky’s “clear statement rule” preempted by the Federal Arbitration Act.  “[T]he court did exactly what Concepcion barred: adopt a legal rule hinging on the primary characteristic of an arbitration agreement–namely, a waiver of the right to go to court and receive a jury trial.”  In response to Kentucky’s attempt to paint its rule as broader than arbitration, the Court said No Kentucky court, so far as we know, has ever before demanded that a power of attorney explicitly confer authority to enter into contracts implicating constitutional guarantees.”

That preemption aspect of the decision seems to confirm what I have been saying about the impact of DirecTV: states are in much better position to defend their anti-arbitration “general contract rule” if they can point to at least one non-arbitration circumstance in which it has been applied.  (The decision added a footnote to clarify this isn’t an absolute necessity: “We do not suggest that a state court is precluded from announcing a new, generally applicable rule of law in an arbitration case.” But that’s like saying it is conceivable that your mother will appreciate a new vacuum for mothers day, but we don’t recommend it.)

The Court’s decision to clearly state that courts cannot invalidate arbitration agreements based on their (necessary) waiver of the right to a jury trial also cuts off a trendy argument in state courts.  New Jersey courts, for example, have invalidated arbitration agreements in recent years based on their failure to clearly advise consumers they are waiving their rights to jury trials (SCOTUS denied cert in the key NJ case, Atalese.)  Those NJ decisions are now shaky precedent, IMHO.

The decision then went beyond the basic preemption analysis.  Respondents had argued the FAA had no application to contract formation, that only state law controlled that question.  SCOTUS quickly disabused the respondents, and all state courts, of that notion, reasoning that the purpose of the FAA would be completely undercut by the rule: “If the respondents were right, States could just as easily declare everyone incompetent to sign arbitration agreements.  (That rule too would address only formation.)” In doing so, the Court cut off another avenue for avoiding the FAA.  (In my view, though, the slippery slope argument relied on by SCOTUS also cuts against the formation/validity  distinction used to separate which issues are decided in court and which by arbitrators.)

[As usual, Justice Thomas dissented based on his position that the FAA does not apply in state courts.]

Three state supreme courts tackled arbitration law in recent weeks: Alabama, North Carolina, and Rhode Island.  Rhode Island reversed a construction arbitration award because it disagreed with the arbitrator’s analysis.  North Carolina found that an arbitration agreement in a doctor-patient setting was unenforceable as a breach of the doctor’s fiduciary duty.  And Alabama strictly enforced an arbitral venue, even though that precluded class action.

Continuing its streak of hewing closely to the lead of federal courts on arbitration, the Supreme Court of Alabama held that plaintiffs have to arbitrate with the Better Business Bureau, even though the BBB does not conduct class action arbitration proceedings.  University Toyota & University Chevrolet Buick GMC v. Hardeman, _ So. 3d __, 2017 WL 382651 (Ala. Jan. 27, 2017).  The plaintiffs were a putative class of customers harmed by two car dealerships’ decision to stop honoring their earlier agreement to provide free oil changes.  The arbitration clause between the dealerships and purchasers called for arbitration of all disputes pursuant to the FAA, and said “either party may demand arbitration by filing with the Better Business Bureau.”  When the plaintiffs filed their demand, the BBB responded that it did not conduct class arbitrations.    The plaintiffs then withdrew their demand and filed in court, asking either to keep their fight in court or go to a forum that allowed class arbitration.  The trial court sent the plaintiffs to the AAA to decide whether class actions were available.  On appeal, the supreme court reversed in a 7-1 decision.  The majority quoted heavily from SCOTUS decisions stating that arbitration agreements should be enforced according to their terms, and found that the BBB forum was an integral part of the arbitration agreement that must be given effect.  The lone dissenter argued that, because the availability of class arbitration was for the arbitrator, it should be decided by a forum that at least retains that option.

Without any consideration of the Federal Arbitration Act, the Supreme Court of Rhode Island vacated an arbitration award.  Nappa Construction Management, LLC v. Flynn, __ A.3d __, 2017 WL 281812 (R.I. Jan. 23, 2017). (Maybe an allergy to the FAA is contagious… remember nearby New Hampshire last year?)  In a dispute between the owners of a automobile repair facility and the construction company that was hired to build it, the arbitrator issued an award that analyzed the parties’ contract and found the construction company was owed money.  The trial court refused to vacate the award, finding the arbitrator grounded his analysis in the contract and did not manifestly disregard the law.  On appeal, the Supreme Court of Rhode Island cited only cases from its own court, including labor cases, and found that the arbitrator had exceeded his authority (and the award failed to draw its essence from the agreement) by finding that the owners had effectively terminated the contract, when there was no evidence that the owners actually terminated the contract.  The court also accused the award of reaching an “irrational result.”  Two justices dissented, noting the “exceptionally deferential standard of review” for arbitration awards.  They did not, however, cite to the line from Sutter, as I would have, that even “grave error” by an arbitrator is not sufficient to vacate an award if the arbitrator in fact analyzed the contract.  (Maybe no one argued the FAA applied?  A commercial construction contract would almost certainly involve interstate commerce…)

Finally, the Supreme Court of North Carolina refused to enforce the arbitration agreement between a doctor and patient, finding that the agreement “was obtained as a result of defendants’ breach of fiduciary duty that they owed to” the patient.  King v. Bryant, __ S.E.2d __, 2017 WL 382910 (N.C. Jan. 27, 2017).  The patient had brought a medical malpractice action against his surgeon, and the surgeon tried to enforce the arbitration agreement between them.  The arbitration agreement called for application of the FAA and arbitration under health care procedures of the AAA.

The N.C. trial court refused to compel arbitration, finding the agreement was only an “agreement to agree,” and started off a crazy game of appeals court-district court ping pong involving this case.  The court of appeals reversed and remanded.  On second thought, the trial court refused to enforce the agreement because the surgeon had a fiduciary duty to disclose the arbitration agreement to his patient as a material term, and because he did not it was unenforceable.  The court of appeals affirmed, noting the application of the FAA, but finding the agreement unconscionable.  The supreme court then remanded to the trial court for further findings of fact regarding the existence of a physician-patient relationship when the agreement was signed, and the trial court complied.  Finally, the case returned to the supreme court, which held that the doctor owed a fiduciary duty to the patient and breached it “by failing to make full disclosure of the nature and import of the arbitration agreement to him at or before the time that it was presented for his signature.”  Recognizing the possibility of an argument that its holding is preempted by the FAA, the court noted “we would have reached the same result on these facts with respect to any agreement that substantially affected [the patient’s] substantive legal rights.”  However, the opinion cites no N.C. cases to support that statement, which may be fatal under the DirecTV analysis.  Two justices wrote separate dissents, based largely on FAA preemption.  (“This jiggery-pokery is precisely the type of impermissble ‘rationalization’ admonished by the United States Supreme Court. Such a tortured attempt to obviate the FAA fails.”)

What is the take away here?  It is that there is still a huge amount of variation in how a given arbitration dispute will be handled, depending on what court hears the dispute.  And the preemption rules set out in Concepcion and DirecTV are either not well understood, or are being intentionally avoided.