Two different panels of the Second Circuit issued opinions about class arbitration on the same day last week.  One creates a circuit split over how specific parties must be to delegate the availability of class arbitration to arbitrators, and the second addresses when bankruptcy law can preempt the federal arbitration act.

In Wells Fargo Advisors, LLC v. Sappington, 2018 WL 1177230 (2d Cir. March 7, 2018), a putative class of former Wells Fargo employees brought suit for unpaid overtime (FLSA).  Wells Fargo moved to compel “bilateral” (individual) arbitration.  The district court denied the motion, finding that the arbitrator was authorized to decide whether class arbitration was available.   The Second Circuit affirmed.

As you may recall from this blog, at least four federal circuit courts have found that whether class arbitration is available is a gateway issue of arbitrability, meaning that it is presumptively for the courts to determine.  (The 8th, 6th, 4th, and 3d.)  And, while parties can delegate gateway issues to the arbitrator if they do so clearly and unmistakably, at least three of those circuits have held that a higher standard applies to the class arbitration issue.  (For example, the Eighth Circuit found that incorporating AAA rules was not sufficient to delegate class arbitrability, while it is sufficient to delegate other gateway issues.)

In the Wells Fargo matter, the Second Circuit “assume[d] without deciding” that the availability of class arbitration is a gateway question.  (Wimps.  Just decide.)  It then considered whether the delegation of that issue to an arbitrator was clear and unmistakable under Missouri law.  One set of plaintiffs had an agreement stating that “any controversy relating to your duty to arbitrate hereunder, or to the validity or enforceability of this arbitration clause, or to any defense to arbitration, shall also be arbitrated.”    The court found that was clear and unmistakable delegation of the class arbitration issue to an arbitrator.

More surprisingly, the court found that a second set of plaintiffs had also clearly and unmistakable delegated class arbitration to an arbitrator, even though their agreement only agreed to arbitrate “any dispute” and adopted either FINRA rules or alternatively 1993 Securities Arbitration Rules of the AAA.  In its analysis, the court noted that because some types of disputes were excluded from arbitration (unemployment), but class arbitration was not excluded, Missouri law would consider it included.  And the court found that more recent iterations of the AAA rules applied, which allow an arbitrator to determine whether a class can proceed.  This decision creates a circuit split on the issue of whether class arbitration is special enough to deserve its own rules for delegation.

As if creating a circuit split on class arbitrability wasn’t exciting enough, the Second Circuit also allowed another putative class action to go forward, despite an arbitration clause.  In In re Anderson, 2018 WL 1177227 (2d Cir. March 7, 2018), Mr. Anderson went through Chapter 7 bankruptcy and his debts were released.  One of those debts was to his credit card company.  However, Mr. Anderson alleged that the credit card company refused to update his credit reports after the bankruptcy.  So, he filed a putative class action.  The credit card moved to compel arbitration under the cardholder agreement, but the bankruptcy court found it was non-arbitrable because it “was a core bankruptcy proceeding that went to the heart of the ‘fresh start’ guaranteed to debtors.”  On appeal, the Second Circuit agreed.

The issue in analyzing whether a party waived its right to arbitrate is usually whether the defendant waited too long to assert the arbitration obligation.  But, this week the Second Circuit had the opportunity to address whether a plaintiff waives its right to arbitrate by the simple fact of bringing a case in court.

In LG Electronics, Inc. v. Wi-LAN USA, Inc., 2015 WL 5254894 (2d Cir. Sept. 10, 2015), the appellate court affirmed the district court’s decision that defendant Wi-LAN had not waived its right to arbitrate.  The court found that Wi-LAN’s four month delay in asserting arbitration was not sufficient to show waiver, when LG could not prove prejudice other than litigation expenses.  Furthermore, the court noted that Wi-LAN had not waived its right to arbitration merely by bringing suit in federal court in the first place.

The Supreme Court of Alabama made that same point earlier this year in IBI Group, Michigan, LLC v. Outokumpu Stainless USA, 2015 WL 2161150 (Ala. May 9, 2015).  In that case, clients had sued the designer of their facilities in federal court.  After the parties had engaged in Rule 26 disclosures and served discovery (and even debated whether there was complete diversity of citizenship to support federal jurisdiction), the clients/plaintiffs demanded arbitration and asked the federal court to stay litigation.  In response, the designer brought its counterclaims in state court and the clients moved to compel arbitration of the state court claims.

The Alabama courts enforced the arbitration clause, despite the clients’ initial filing of the federal action.  The Alabama Supreme Court noted it had previously held that plaintiffs are not barred from exercising contractual arbitration rights just because they initiated litigation.  But the complicating factor in this case was that the arbitration agreement gave the clients the “sole discretion” to choose whether a dispute would be arbitrated or litigated, and the designer argued that once the clients made that decision, it was “irrevocable.”  The Alabama courts disagreed, interpreting the arbitration agreement to allow the clients to change their mind about the dispute resolution forum.

Finally, in a more run-of-the-mill waiver case, the Sixth Circuit recently concluded that the defendant had waived its contractual right to arbitrate by participating in federal litigation for 15 months, including filing dispositive and non-dispositive motions.  Gunn v. NPC Int’l, Inc., 2015 WL 5061545 (6th Cir. Aug. 28, 2015).

In American Express Co. v. Italian Colors Restaurant, a divided Supreme Court today reversed the Second Circuit and held that plaintiffs may not invalidate an arbitration agreement containing a class action waiver merely because proving their claims on an individual basis would cost many times more than their potential recovery.  In doing so, Justice Scalia, writing for the five-member majority, gave this characteristically harsh assessment: “The FAA’s command to enforce arbitration agreements trumps any interest in ensuring the prosecution of low-value claims.”  This decision cuts off avenues that federal and state courts have used to invalidate class waivers in arbitration agreements, but does not totally do away with the “effective vindication” line of cases.

The Majority

In this case, a putative class of merchants claim that American Express violated federal antitrust laws (the Sherman and Clayton Act).  Their agreements with AmEx stated “[t]here shall be no right or authority for any Claims to be arbitrated on a class action basis.”  The agreements also precluded any joinder or consolidated actions.  AmEx moved to compel individual arbitration.  The district court granted the motion, but the Second Circuit reversed.  Under the line of Supreme Court cases establishing that an arbitration agreement could be invalidated it if prevented the effective vindication of federal statutory rights, the Second Circuit found the plaintiffs had proven that the costs of arbitrating antitrust claims individually (due largely to the requirement of expert economic analyses) was prohibitive.

The Supreme Court reversed, not by declaring that the entire line of “effective vindication” cases were dicta or overruled (Mitsubishi Motors, 14 Penn Plaza, Gilmer, and Green Tree), but by narrowing its application.  From now on, the doctrine only applies if the plaintiffs “right to pursue” federal statutory remedies is prevented, not if the cost to prove those federal statutory claims makes them irrational to pursue.  As examples, Scalia noted that arbitration clauses outright forbidding certain statutory claims would still be precluded by the “effective vindication” doctrine, as would clauses that involve prohibitively high “filing and administrative fees” in the arbitral forum.

Scalia also directly addressed the interplay between the Concepcion decision (finding California case law invalidating class action waivers in consumer arbitration clauses was preempted by the FAA) and this case by saying Concepcion “all but resolves this case.”  Why?  Because it “rejected the argument that class arbitration was necessary to prosecute claims ‘that might otherwise slip through the legal system.’”

The Dissent

Justice Kagan authored a sharply worded dissent on behalf of herself, Justice Ginsburg, and Justice Breyer.  The dissent focuses on the practical impact of the decision: “the monopolist gets to use its monopoly power to insist on a contract effectively depriving its victims of all legal recourse.”  In the course of the dissent, Kagan takes on Scalia’s view of the FAA as intended to rigidly enforce agreements to arbitrate.  Instead, she writes, the FAA “reflects a federal policy favoring actual arbitration—that is, arbitration as a streamlined ‘method of resolving disputes,’ not as a foolproof way of killing off valid claims.  Put otherwise: What the FAA prefers to litigation is arbitration, not de facto immunity.”  (internal citation omitted)

The dissent concludes that AmEx’s arbitration clause falls squarely within the “effective vindication” line of cases and should be invalidated, because it precludes not only class arbitration but any type of consolidation or joinder which would make it economically rational for plaintiffs to pursue their antitrust claims.

The dissent also disagrees with the majority’s application of Concepcion to this case.  It notes that not only did Concepcion never cite any of the effective-vindication cases, the plaintiff in that case could feasibly vindicate her claim in individual arbitration, and the case was about federal preemption of a state law.  “Our effective-vindication rule comes into play only when the FAA is alleged to conflict with another federal law, like the Sherman Act here.”


In this decision, the Supreme Court continues its recent trend of eliminating legal bases for invalidating arbitration agreements.  This decision will encourage more and more companies to add waivers of class and consolidated proceedings into their arbitration agreements, knowing that those waivers are likely to be strictly enforced.

Going forward, putative class plaintiffs who want to rely on the “effective vindication” doctrine to keep federal statutory claims in court must focus on their inability to assert those claims at the beginning of an arbitration – by an unreasonable statute of limitation or a prohibitive filing fee.  Arguments relating to the costs of “proving” the claims are irrelevant.

What does this decision do to case law in states like Massachusetts, which recently adopted “effective vindication” as a matter of state law? I think the broad language of the majority’s ruling–including its comment that Concepcion controls the outcome by establishing that “the FAA does…favor the absence of litigation when that is the consequence of a class-action waiver, since its ‘principal purpose’ is the enforcement of arbitration agreements according to their terms”–is strong evidence that those state decisions are preempted by the FAA.  This decision could lead to another string of state law decisions falling like dominoes on preemption grounds.

Finally, what can parties do who are concerned, like the dissenting Justices, about adhesion contracts essentially insulating large companies from all sorts of claims through their arbitration agreements?  With respect to federal statutes, the only avenue is to appeal to Congress (until the dissenters become a majority of the Supreme Court).  Justice Scalia’s opinion reiterates that the only real way to protect the right to bring a class action under a federal statute (or the right to proceed in court at all) is for Congress to expressly override the FAA.  Therefore, if DOJ feels strongly that antitrust claims do not belong in arbitration, it should ask Congress to amend the antitrust statutes to expressly allow court actions, regardless of the parties’ contract terms.  Good luck.

Did you know that you can form an arbitration agreement without ever using the word “arbitration”?  That’s what the Second Circuit held this week in Bakoss v. Certain Underwriters at Lloyds of London, __ F.3d __, 2013 238708 (2d Cir. Jan. 23, 2013).

Bakoss analyzed the clause in a disability insurance certificate providing what happens if the parties dispute whether the insured is “totally disabled.”  The certificate gives the insured and insurer the right to get an opinion from a doctor of their choice.  If the two doctors disagree, they “shall [jointly] name a third Physician to make a decision on the matter which shall be final and binding.”  The legal issue was whether that agreement — to name a third doctor to decide the dispute — was an arbitration agreement within the meaning of the Federal Arbitration Act.  The federal district court found it was, and the Second Circuit affirmed.

Finding that federal common law was the right place to look in deciding what is and is not an arbitration agreement, the Second Circuit cited two cases from the 1980s finding that similar dispute resolution provisions were “arbitration agreements.”  In essence, those cases say that any time “the parties have agreed to submit a dispute for a decision by a third party, they have agreed to arbitration.”

Why is this important?  Because it means that many contracting parties have unknowingly inserted an “arbitration agreement” into their contracts, one which carries with it all the enforcement provisions of the FAA (and the New York Convention, for international contracts).  Just as one example, the parties to those contracts may have lost their ability to have a court decide whether the contracts as a whole are invalid under applicable law, because under the Prima Paint line of cases the court may only hear objections to the validity of the arbitration agreement itself.  Similarly, if these arbitration agreements do not contain any provision for class actions, the parties to these contracts may have lost their ability to bring any sort of collective action.

In an opinion that runs less than three pages, the Eighth Circuit ruled that a managing broker-dealer is not obligated under the FINRA rules to arbitrate with a group of investors who purchased securities from another party.  Berthel Fisher & Co. Fin. Servs., Inc. v. Larmon, __ F.3d. __, 2012 WL 4477433 (8th Cir. Oct. 1, 2012).  The Eighth Circuit found that because the managing broker-dealer provided its services to other broker-dealers, who in turn offered the securities directly to the investors,  the investors were not “customers” of the managing broker dealer within the meaning of Rule 12200 of the FINRA Code.

Rule 12200 of FINRA requires its members (including the managing broker-dealer here, Berthel) to arbitrate disputes with customers if the dispute arises in connection with “the business activities of the member or the associated persons.”  The parties agreed that their dispute was connected to Berthel’s business activities, so the entire appeal related to whether the investors were Berthel’s “customers” within the meaning of the FINRA Code.  The Eighth Circuit held the investors were not customers because: they had no direct contact with Berthel; and Berthel’s services were provided to the issuing company and to the group of broker-dealers that sold directly to investors.  “Simply put, there is no “relationship” between Berthel and the Investors as required…”

An interesting note about this decision is that the Eighth Circuit never mentioned a recent case from the Second Circuit, also interpreting who is a “customer” entitled to arbitrate under Rule 12200 of the FINRA Code.  That fact is more striking given that the case, UBS Fin. Servs., Inc. v. W. Va. Univ. Hosps., Inc., 660 F.3d 643 (2d Cir. 2011), was one of only two cases cited by the Berthel Appellants as “apposite authority” in their brief’s statement of the issues.  In that case, UBS argued unsuccessfully that because a hospital system that used UBS as an underwiter to issue municipal bonds was not an investor, but an issuer of securities, the term “customer” did not apply to it.  However, the Second Circuit in UBS rejected a number of narrow definitions of customer, before holding that the hospital system was a customer of UBS within the meaning of FINRA Rule 12200 because the hospital system purchased auction services from UBS

Given that the Second Circuit recently interpreted the word “customer” in FINRA Rule 12200 broadly, while the Eighth Circuit interpreted it rather narrowly in Berthel, this seems like an area of law that will likely see more litigation before the circuit courts of appeal come to some common understanding (or SCOTUS steps in).