Class action arbitration continues to be a hot topic among the federal appellate courts this summer.

The 8th Circuit followed the lead of other circuit courts, finding that courts, not arbitrators, presumptively decide whether the parties’ arbitration agreement allows for class arbitration. Catamaran Corporation v. Towncrest Pharmacy, 2017 WL 3197622 (July 28, 2017).   In support of its decision, the court raised concerns about class arbitration, including loss of confidentiality, due process concerns for absent parties, and a concern about the lack of appellate review.  [Interesting that it didn’t cite any of CFPB’s report on this, but just cited other case law… ] Therefore, unless the parties have “clearly and unmistakably delegated” the class arbitration issue to the arbitrator, a court will decide the issue.  Furthermore, the court said that incorporating the AAA rules is not a clear and unmistakable delegation of the class arbitration decision, even though citing the AAA rules is sufficiently clear in analogous issues in regular “bilateral arbitration.”  The court remanded to the district court to determine whether there was a contractual basis for class arbitration.

Halfway across the country, the 9th Circuit held that employees could bring their claims related to a data breach as a class action in arbitration.  Varela v. Lamps Plus, Inc., 2017 WL 3309944 (Aug. 3, 2017).  The employees had first brought their class claims to federal court, and the employer moved to compel individual arbitration.  The district court found the arbitration agreement was valid, but ambiguous about whether class actions were waived.  Construing that ambiguity against the employer who drafted the agreement, the district court ordered class arbitration.  On appeal, the 9th Circuit affirmed the finding of ambiguity, sending the class to arbitration as a group.  One judge issued a two sentence dissent, noting “we should not allow Varela to enlist us in this palpable evasion of Stolt-Nielsen

Today’s post is a good one for all those defendants/ respondents who are convinced that they have a slam-dunk case and want to recover their attorneys’ fees.  Because while these particular respondents were not successful, they paved a path that may lead others to collect attorneys’ fees after defeating claims in arbitration.

The case involved an owner’s negligence claims against an architect arising out of a condominium project.  WPH Architecture, Inc. v. Vegas VP, __ P.3d __, 2015 WL 6750051 (Nev. Nov. 5, 2015).  “Prior to arbitration”, the architect made offers of judgment under Nevada’s Rule 68 (and a related statute).  That rule allows a defendant to offer to accept judgment against it in a certain amount, and provides that if the plaintiff does not “obtain a more favorable judgment,” the plaintiff “shall pay” the defendant’s costs, interest, “and reasonable attorney’s fees, if any be allowed” from the date of the offer.   (An appropriate betting mechanism for litigation over this Las Vegas condo project…)  The owner rejected the offers and then lost at arbitration.  However, when the architect filed a motion to recover its costs, fees, and interest under Rule 68, the arbitrators denied the motion, noting that there was no express authority finding offers of judgment are available in arbitration.

The architect then asked the courts to modify the arbitration award to include its attorneys’ fees, costs and interest, arguing that the arbitrators had “manifestly disregarded the law” in refusing to follow Rule 68 and Nev. Statute 17.115.  The court went through the following analysis:

  • The parties’ contract called for the AAA’s Construction Arbitration Rules to govern the arbitration, but Nevada law to govern the contract.  Applying Mastrobuono, the court held “that the arbitration was substantively governed by Nevada law and procedurally governed by the AAA rules.”
  • The court held that Rule 68 and the similar Nevada statutes “are substantive laws that apply to the arbitration proceedings in the current case.”
  • However, because those rules and statutes do not reference arbitration or arbitrators, they “do not require an arbitrator to award attorney fees or costs.”  (The court noted that California’s offer of judgment statutes explicitly applies to court and arbitration proceedings.)  “Furthermore, no Nevada caselaw exists holding that those statutes apply to arbitration proceedings.”
  • Therefore, because the rules and statutes did not explicitly apply to arbitration, and no case law had reached that issue, the architect “failed to demonstrate that the arbitrator manifestly disregarded Nevada law.”

Going forward, of course, the analysis will be different.  Thanks to this case, there now is binding case law in Nevada that Rule 68 is a substantive law that applies in arbitration.  This gives anyone whose contract is governed by Nevada law new potential leverage in defending against arbitrable claims.  If you make an early offer of judgment on a winning claim, you have the ability to later tax your costs and interest against your opponent (and a statutory basis to seek fees).  Because many states have a similar offer of judgment statute, and the analysis that the rule is substantive is based on federal cases, this same analysis should be available in many jurisdictions.

You may have already heard that SCOTUS affirmed arbitrators’ authority to interpret contractual prerequisites to arbitration last week in BG Group, PLC v. Republic of Argentina.  But that is just one of a number of recent decisions from high courts on the deference due arbitrators.

In the BG Group case, the D.C. Circuit had vacated an arbitration award, finding the arbitration panel overstepped its authority by hearing the case before certain conditions precedent had been met.  (My preview of the case is here.)  In a 7-2 decision written by Justice Breyer, the Court gave this helpful roadmap to its analysis:

we shall initially treat the document before us as if it were an ordinary contract between private parties. Were that so, we conclude, the matter would be for the arbitrators. We then ask whether the fact that the document in question is a treaty makes a critical difference. We conclude that it does not.

Why is the conditions precedent issue for the arbitrators in an ordinary contract?  SCOTUS repeatedly cites its 2002 decision in Howsam and explains that “courts presume that the parties intend arbitrators, not courts, to decide disputes about the meaning and application of particular procedural preconditions for the use of arbitration…includ[ing] the satisfaction of ‘prerequisites such as time limits, notice, laches, estoppel, and other conditions precedent to an obligation to arbitrate.'”  Because the section of the treaty at issue dealt with a condition precedent to arbitration, the Court found it was properly a question for the arbitrators, and the fact of the treaty did not change that analysis one bit.

After concluding the arbitrators properly had authority to determine whether the conditions precedent were satisfied, the Supreme Court easily determined that the arbitrators’ substantive determination about those conditions precedent did not “exceed their powers” under the highly deferential standard of Stolt-Nielsen.  While this case is about international arbitration, its analysis begins as a normal contract analysis and in that way is a helpful reminder even in FAA cases about which decisions belong squarely with the arbitrator(s).

The U.S. Supreme Court is not the only one that has been busy confirming arbitration awards, however.

  • West Virginia recently confirmed an arbitration award after hearing arguments that the arbitrators lacked authority to interpret a lease.  In CDS Family Trust, LLC v. ICG, Inc., 2014 WL 184441 (W. Va. Jan. 15, 2014), the high court of West Virginia disposed of the arguments in support of vacatur easily by noting that the losing party had not raised those arguments to the arbitration panel and that the arbitrators were at least arguably construing the lease, citing Sutter.
  • In McAlpine v. Priddle, 2014 WL 685854 (Alaska Feb. 21, 2014), the Supreme Court of Alaska affirmed an arbitration award in favor of an attorney in a dispute with a client.  In response to most of the client’s arguments for vacatur, the court found that “[u]nder our precedent, neither the panel’s factual findings nor its legal conclusions are reviewable.”  Even the arbitrators’ finding that the fee agreement was not falsified or a fraudulent copy was not reviewable.
  • In Hawaii State Teachers Assoc. v. Univ. Laboratory School, 2014 WL 783135 (Hawaii Feb. 27, 2014), the Supreme Court of Hawaii enforced the parties’ agreement that “the arbitrator shall first determine the question of arbitrability” and found that the union was therefore entitled to arbitrate its claim that its grievance is arbitrable.

A few months ago, you would have reasonably thought that West Virginia was one of the most anti-arbitration states in the country.  There was not an unconscionability argument that the state didn’t seem to buy with respect to arbitration clauses.  (Recall its arbitration feud with SCOTUS in 2012?)  But, this month, West Virginia’s highest court issued two decisions enforcing arbitration agreements, suggesting it has had a change of heart.

In the first opinion, New v. Gamestop, __S.E.2d__, 2013 WL 5976104 (W. Va. Nov. 6, 2013), the court found an employee handbook was sufficient to create an arbitration agreement between the employee and employer and that the arbitration agreement was enforceable.  The primary argument from the employee was that the agreement was unconscionable because the employer could change it at any time.  (Didn’t I tell you the illusory argument is hot this year?!)

The arbitration agreement provided that “GameStop may from time to time modify or discontinue [its dispute resolution program] by giving covered employees thirty (30) calendar days notice…any such modification…shall be applied prospectively only.”  The court found that the 30-day notice requirement, and the fact that existing disputes would proceed under the terms existing when they were submitted, meant the agreement was not unconscionable

In the second opinion, Ocwen Loan Serv. v. Webster, __S.E.2d__, 2013 WL 6050723 (W. Va. Nov. 13, 2013), the court reversed a circuit court’s denial of a motion to compel individual arbitration.  The lower court had concluded the Dodd-Frank Act prevented arbitration of claims by mortgagees and that the arbitration agreement was unconscionable.

On appeal, West Virginia’s highest court made short work of the Dodd-Frank argument.  (One part of Dodd-Frank provides that residential mortgage loans may not require arbitration.  15 USC § 1639c(e)(1).)  It noted that the named plaintiffs’ mortgage was executed in 2006 while the Dodd-Frank Act was not effective until 2010 and was not retroactive.

With respect to procedural unconscionability, the plaintiffs argued their relative lack of sophistication and lack of counsel.  The court disagreed, finding that presence of counsel is not dispositive and because of language in all caps in the agreement providing “THIS IS A VOLUNTARY ARBITRATION AGREEMENT.  IF YOU DECLINE TO SIGN THIS ARBITRATION AGREEMENT, LENDER WILL NOT REFUSE TO COMPLETE THE LOAN TRANSACTION.”

The plaintiffs argued the arbitration agreement was substantively unconscionable because it waived class actions, restricted attorneys’ fees, lacked mutualty, and limited discovery.  After block quoting ad nauseum from AmEx (reading these opinions, I started to wonder if the members of this court get paid per block-quoted word…), the court concluded that the class waiver did not make the agreement unconscionable.  The court also found that the requirement that each party pay its own attorneys fees, and the lender’s carveout of its foreclosure right (and a few others) from the scope of the arbitration, did not render the agreement unconscionable.  Finally, the agreement’s statement that “discovery in the arbitration proceedings may be limited by the rules” of the provider also did not make the agreement unconscionable.

I am not convinced that West Virginia is a bellwether and other reliably anti-arbitration states may be following suit.  But this is still an interesting shift.