What happens when state courts disagree with SCOTUS’s interpretation of the Federal Arbitration Act?  They resist, and they have a thousand different ways of doing so.  The Mississippi Supreme Court demonstrated one way to resist recently in Pedigo v. Robertson, Rent-A-Center, Inc., 2017 WL 4838243 (Miss. Oct. 26, 2017). (I neglected to mention the state appellate courts as important actors in last week’s post about what we may see now that the CFPB rule is dead.)

In Pedigo, the plaintiff entered into a Rental Purchase Agreement (RPA) from Rent-A-Center.  (Yes.  The same Rent-A-Center of delegation clause fame.)  Within about four months, he stopped making payments.  At that point, Rent-A-Center found out that plaintiff had sold the television to a pawn shop shortly after purchasing it.  Rent-A-Center then filed a complaint with the police, and the plaintiff was arrested and incarcerated.

After the plaintiff was released from jail, he filed a civil action against Rent-A-Center, alleging the police report was false.  Rent-A-Center moved to compel arbitration.  The trial court judge compelled arbitration.

On appeal, the high court found that plaintiff’s claims of malicious prosecution were outside the scope of the parties’ arbitration agreement.  The RPA itself prohibited the sale or pawning of the leased goods.  The arbitration agreement in the RPA stated that covered claims “shall be interpreted as broadly as the law allows and mean[] any dispute or controversy between you and RAC….based on any legal theory…”  The only claims not covered were those for injunctive or declaratory relief, or those seeking less than $5,000 in damages.  However, because “the agreement fails to contemplate that a lessor/signatory might pawn collateral and subsequently be indicted and jailed” the court did not require the plaintiff to arbitrate his claims.

Why do I call this “resistance”?  Because there are many cases saying that as part of the federal policy favoring arbitration, courts presume that claims are within the scope of a valid arbitration agreement.  The coin is weighted towards “heads.”  And here, the agreement explicitly prohibited pawning the TV, and the arbitration clause was about as broad as it could be.  Yet the court refused to compel arbitration.  The implication of this court ruling seems to be that if a specific claim is not enumerated in an arbitration clause in Mississippi (to show it was contemplated), the claim is not arbitrable.  And that just does not fit within the federal precedent.

You know what state is not currently resisting?  Missouri.  The Supreme Court of Missouri faithfully followed the instructions SCOTUS gave in Rent-A-Center, and enforced a delegation clause over the votes of two dissenting justices.  In Pinkerton v. Fahnestock, 2017 WL 4930289 (Mo. Oct. 31, 2017), the Missouri high court found that the parties’ incorporation of the AAA rules was a clear and unequivocal delegation clause.  It also found that the great majority of the plaintiff’s challenges were not specific to the delegation provision (they applied to the arbitration agreement as a whole) and so could not be considered; the only specific challenge was plaintiff’s argument that it is unconscionable to delegate arbitrability to “a person with a direct financial interest in the outcome.”  The court dismissed that out of hand, citing Rent-A-Center.  Because the plaintiff had made no successful challenge to the delegation clause, the Missouri high court enforced it, sending the issue of the arbitration agreement’s validity to the arbitrator.

In a footnote in Sutter, SCOTUS hinted that the question of whether an arbitration agreement allowed for class arbitration may be one of the “gateway” questions of arbitrability that are presumptively for courts to decide. Last year, the Sixth Circuit went one step further, finding that the availability of class arbitration defaults to the courts. And this week, the Third Circuit agreed.

In Opalinksi v. Robert Half Int’l, Inc., __ F.3d __, 2014 WL 3733685 (3d Cir. July 30, 2014), a putative class of plaintiffs sued their employer. Their employment agreements called for arbitration, but said nothing about whether classwide arbitration was permitted. The employer moved to compel arbitration and the district court granted that motion, finding that the arbitrator should determine whether class arbitration was available.

The appellate court disagreed. It held that “whether an agreement provides for classwide arbitration is a ‘question of arbitrability’ to be decided by the District Court.” In support of its holding, the Third Circuit likened the decision about whether a class can go forward in arbitration to other arbitrability decisions that default to judges, like whether non-signatories are bound to arbitrate. The Third Circuit also noted that while procedural questions are generally for arbitrators, the availability of class arbitration has been construed by the Supreme Court as “not solely [] a question of procedure” but instead a “substantive gateway dispute.”

I predict there will be more circuit court cases finding that judges are the presumptive decisionmakers about class arbitration in the months to come.

p.s. There is only one week left to make sure ArbitrationNation stays in the ABA Blawg 100… Here is the link to use: http://www.abajournal.com/blawgs/blawg100_submit/ .

A new opinion from the Eleventh Circuit highlights an issue that can be confusing to those encountering FAA case law for the first time: when does the federal presumption of arbitrability apply?  The answer is the presumption only applies to whether the scope of an arbitration agreement is broad enough to encompass the parties’ dispute, not whether a valid arbitration agreement exists between the parties.

In Dasher v. RBC Bank (USA), __ F.3d __, 2014 WL 504704 (11th Cir. Feb. 10, 2014), the class action plaintiffs allege a bank charged excessive overdraft fees in breach of their account agreement.  While the parties were conducting discovery related to the bank’s motion to compel arbitration, the bank was acquired by another bank, who issued new account agreements to all the customers (including the named plaintiff).  The new account agreement had no agreement to arbitrate disputes; the old account agreement did.  A dispute then arose as to which account agreement controlled.

The defendant bank argued that the FAA’s presumption in favor of arbitrability should apply to find the parties still had an arbitration agreement.  The Eleventh Circuit set it straight, noting that in Granite Rock SCOTUS said courts may apply “the presumption of arbitrability only where a validly formed and enforceable arbitration agreement is ambiguous about whether it covers the dispute at hand.”  It also cited the Second Circuit which has explicitly recognized that “the presumption does not apply to disputes concerning whether an agreement to arbitrate has been made.”  In this case, because the dispute centered on whether the parties had an arbitration agreement at all, the FAA did not provide a presumption in favor of arbitrability.  (For a classic case in which the presumption operates to find a dispute falls within the scope of an arbitration agreement, despite a “lack of clarity” in the agreement, see Pureworks, Inc. v. Unique Software Solutions, Inc., 2014 WL 211831 (6th Cir. 2014).)

The Eleventh Circuit ended up finding there was no valid arbitration agreement between the Dasher plaintiffs and the bank.  The account agreements had language showing that the new agreement completely superseded the old agreement, therefore the court concluded that the absence of any arbitration clause in the new agreement was controlling.  Furthermore, even though the alleged excessive charges took place while the old agreement was effective, the court found the new agreement controlled the dispute resolution.  That was because the amendment clause stated that the “most current version” of the account agreement “will at all times govern,” which the court interpreted to mean that the parties intended the new agreement to apply retroactively.  In my view, this is a curious result, which places a great deal of reliance on very few words in the contract, and may show that the Eleventh Circuit was working hard to avoid the plaintiffs’ backup argument: that the arbitration agreement was invalid because it deterred him from vindicating his rights, an argument that is likely not supportable after Concepcion and AmEx.

While the oral argument before the United States Supreme Court in Sutter today was ostensibly about whether to affirm an arbitrator’s decision that the parties’ contract authorized class arbitration, the decision really turns on how the Court will review all arbitration decisions.  (Transcript here.)  Multiple Justices expressed an unwillingness to create a special standard for reviewing arbitrator decisions involving class arbitration.  (Info on the underlying case here.)

Appellant’s counsel tried valiantly to express some standard of review that fit within the Court’s past jurisprudence, but also allowed for vacatur of this particular result.  In response to questions like “how wrong does an arbitrator’s decision have to be to become an issue of law?” (from Justice Sotomayor), counsel advocated that Stolt-Nielsen and Concepcion established a “presumption” that there is no consent to class arbitration without a “very clear statement of a meeting of the parties’ minds.”  However, Justice Kagan quickly noted that the Court had never suggested such a presumption in either of those cases.  Appellant’s counsel later advocated for a slightly different formulation: a reviewing court may vacate the arbitrator’s decision to allow class  arbitration if the contractual language “leaves no room for a conclusion that the parties agreed to” arbitrate on a classwide basis.  Justice Kennedy, who often casts a deciding vote in close cases,  expressed skepticism about whether the Court’s repeated and highly deferential standard of review for decisions by arbitrators allowed any kind of inquiry into the merits of the arbitrator’s contractual analysis.

Respondent’s counsel, of course, emphasized the very limited grounds for vacating an arbitration award.  He noted that Appellant argues the arbitrator “exceeded his power,” but because Appellant consented to giving the arbitrator authority to determine whether the arbitration could proceed as a class, the only way the arbitrator could have exceeded his power was by basing his award on something other than an interpretation of the contract.  This led to a series of amusing hypotheticals in which Justice Breyer asked Respondent’s counsel to assume that an arbitrator made her decision based on consulting a “magic 8-ball” (Justice Scalia pretended not to know the reference) and then asked whether that would constitute “manifest disregard” of the law or otherwise serve as grounds for vacating the award.  Justice Breyer’s questions hint that the Court may give “manifest disregard of the law” new life as a separate basis for vacating arbitration awards, and that the Court is looking for a backstop beyond just the four bases in the FAA for parties to rely on if arbitrators get the law or facts really, really wrong.

Curiously, from a Court that has vigorously enforced arbitration agreements for all types of cases, the Justices appeared skeptical of arbitrators’ capability to handle class actions, and questioned whether arbitrators were wrongly incentivized.  Justices asked how the arbitrator was compensated in this case, whether he was experienced, how many class actions were handled in arbitration (neither side could answer, since that information is not public), and whether an arbitrator would be incentivized by his own fees to create a class action after seeing a case like Sutter drag on for eleven years.  To that, Respondent’s counsel gave a good soundbite: “if we trust arbitrators to handle such important issues as civil rights issues and other very important matters [], we have to expect that they will follow the precepts of this Court and the FAA as to what constitutes grounds for class arbitration.”