I called it.  SCOTUS issued its unanimous opinion today in Henry Schein v. Archer & White, vacating and remanding the Fifth Circuit decision and making clear that there is no “wholly groundless” exception to the Federal Arbitration Act’s enforcement of delegation clauses.

As you may recall, a circuit split had developed over the “wholly groundless” exception.  Some circuits, including the Fifth, concluded that even when parties have delegated questions of arbitrability (questions like: is the arbitration agreement valid? and does it cover the current dispute?) to an arbitrator, courts have the right to do an initial smell test.  If the court finds the defendant’s argument for arbitrability is “wholly groundless” (and stinks), then it can refuse to send it to arbitrator.  Other circuits, however, found room for no such exception in SCOTUS’s decisions.

After quickly shooting down the four primary arguments proffered in favor of the exception, the Court concluded:

In sum, we reject the “wholly groundless” exception. The exception is inconsistent with the statutory text and with our precedent. It confuses the question of who decides arbitrability with the separate question of who prevails on arbitrability. When the parties’ contract delegates the arbitrability question to an arbitrator, the courts must respect the parties’ decision as embodied in the contract.

Given that this outcome was expected, is there anything interesting about this decision?   On first glance, there is at least one thing.  The Court’s emphasis in this decision is on the parties’ agreement: it reasons that “a court may not decide an arbitrability question that the parties have delegated to an arbitrator.”  That could be read as a signal that the Court also favors arbitrators determining the availability of class arbitration, in the circuit split on whether a delegation clause authorizes an arbitrator to decide that issue.

However, SCOTUS inserted a final paragraph that leaves it some wiggle room on that question.  It notes that “We express no view about whether the contract at issue in this case in fact delegated the arbitrability question to an arbitrator. The Court of Appeals did not decide that issue.”  In other words, if the Court is going to keep the decision regarding class arbitrability in courts, it will likely be because it finds that an incorporation of arbitral rules is not sufficient to “clearly and unmistakably” delegate arbitrability to an arbitrator.

 

I am a true arbitration nerd.  But, when SCOTUS takes a THIRD arbitration case for its upcoming term, I wonder if the Justices are more obsessed with arbitration than I am.  (Reminder of the other two here.)  If they hear about the same total number of cases as this year (69), arbitration will make up more than 4% of their docket.  Now, 4% isn’t huge.  For reference, intellectual property cases made up less than 4% of cases filed in federal district courts last year, and there were three I.P. cases decided by SCOTUS (two on inter partes review and the WesternGeco case).  At least I.P. cases have a category in the annual judiciary report, though.  That’s more than arbitration can say.  And still, it has three cases before the Supremes.

Enough stats, what is this case?  It is Henry Schein Inc. v. Archer and White Sales Inc., in which SCOTUS is going to resolve the circuit split over the “wholly groundless” doctrine.  Given how the NLRB decision just came out, I don’t think I’m stepping too far out on a limb if I predict: “wholly groundless” will be grounded.  (Maybe even “grounded wholly?”  Seriously, there has got to be some good word play possible, but I am too tired from watching the World Cup to develop it.)  Put simply, that doctrine will not stand in the way of any future delegation clauses.

(Thanks to Mark Kantor for being the first to tell me certiorari was granted in this case.)

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Switching gears, there are three new decisions from state high courts on the arbitrability of claims against nursing homes.  Two enforce the arbitration clauses, and one decidedly does not.

Nebraska and Colorado issued the pro-arbitration decisions, in both cases reversing a trial court’s refusal to enforce arbitration agreements.  In Colorow Health Care, LLC v. Fischer, 2018 WL 2771051 (Colo. June 11, 2018), the district court denied the nursing home’s motion to compel arbitration because it was not in bold text, as required by a state statute.  Without any discussion of the FAA (which would have been a much easier ground for reversal), the Colorado Supreme Court found that the statute only requires substantial compliance, and the defendant had substantially complied (by including the right language, in a larger font size than required, just not in bold). In Heineman v. Evangelical Lutheran Good Samaritan Society, 300 Neb. 187 (June 8, 2018), the district court had found the arbitration agreement lacked mutuality, violated the state arbitration statute, and violated public policy (because of the CMS rule on arbitration).  On appeal, the Supreme Court of Nebraska found mutuality, found the FAA applied and preempted the state arbitration statute, and noted that the CMS rule had been enjoined.

A week later, though, Nebraska rejected arbitrability in a different case against a nursing home.  In Cullinane v. Beverly Enterprises-Nebraska, Inc., 300 Neb. 210 (June 15, 2018), the issue was whether the arbitration agreement signed by the deceased’s husband was enforceable.  He admitted he signed all the admission documents, but stated in an affidavit that he understood he had to agree to arbitrate for his wife to be admitted to the facility.  He also stated that he did not understood he was waiving his wife’s right to a jury trial, and would not have signed if he had known that and that arbitration was optional.  Applying the FAA and state contract law, the Nebraska Supreme Court found the district court was not “clearly wrong” when it found the husband was fraudulently induced to executing the arbitration agreement for his wife.  Critically, the facility had not introduced any affidavit contradicting the alleged statements made at the time of admission.

Remember when Maria sang “Let’s start at the very beginning, it’s a very good place to start”?  Well, that seems to be what federal circuit courts are doing with their arbitration decisions recently.  This post will run through some Do Re Mis of arbitration law, as articulated by those decisions (and will close with some arbitration cases on SCOTUS’s docket).

  • In most circuits, arbitrators cannot subpoena documents in advance of an in-person hearing.  The 9th Circuit affirmed that applies within its jurisdiction as well.  CVS Health Corp. v. Vividus, __ F.3d __, 2017 WL 6519942 (9th Cir. Dec. 21, 2017).
  • When an arbitration agreement calls for application of arbitral rules, and those rules give the arbitrator power to rule on her own jurisdiction, then the district court should send any dispute over arbitrability to the arbitrator.  The 4th Circuit confirmed that holding applies to JAMS rules, just as it does to AAA rules.  Simply Wireless, Inc. v. T-Mobile US, Inc., __ F.3d __, 2017 WL 6374105 (4th Cir. Dec. 13, 2017).
  • Claims under the Fair Labor Standards Act are subject to arbitrationRodriguez-Depena v. Parts Authority, Inc., __ F.3d __, 2017 WL 6327827 (2d Cir. Dec. 12, 2017).  (The Second Circuit is at least the third federal circuit to reach that conclusion.)
  • An arbitration agreement that carves out injunctive relief means what it saysArcher & White Sales v. Henry Schein, Inc., __ F.3d __, 2017 WL 6523680 (Dec. 21, 2017).  The arbitration agreement called for arbitration of any dispute under the agreement “except for actions seeking injunctive relief and disputes related to [intellectual property].”  Plaintiff brought an antitrust action seeking damages and injunctive relief. Applying the exception, the district court denied the motion to compel arbitration and the appellate court affirmed.
  • Independent contractors are not “agents” that can be bound as a non-signatory to arbitration clauseOudani v. TF Final Mile, LLC, __ F.3d __, 2017 WL 5587648 (1st Cir. Nov. 21, 2017) (refusing to compel arbitration of class action brought by independent contractors for wage-and-hour claims).
  • Ambiguous awards can be sent back to the arbitrator.  Herll v. Auto-Owners Ins. Co., __ F.3d __, 2018 WL 296870 (8th Cir. Jan. 5, 2018)  (sending ambiguous “appraisal award” back to arbitrator under Minnesota’s Revised Uniform Arbitration Act.)
  • If the losing party failed to raise an argument in arbitration, it can’t use that argument to vacate the arbitration awardLaborers’ Pension Fund v. W.R. Weis Co., __ F.3d __, 2018 WL 316555 (7th Cir. Jan. 8, 2018) (finding in an ERISA dispute that one party “waived its statutory-interpretation argument by failing to raise it in the arbitration.”)
  • First Amendment arguments will not get a putative class out of arbitration with a private party.  Okay, this is not an arbitration law “basic” point, but instead one that confirms the ingenuity of plaintiffs’ class action lawyers. These plaintiffs opposed arbitration “on First Amendment grounds” and asserted there was state action because the FAA and judicial interpretations of it encourage arbitration to the point that AT&T’s actions are attributable to the state.  Roberts v. AT&T Mobility, __ F.3d __, 2017 WL 6275537 (9th Cir. Dec. 11, 2017).  The 9th Circuit found no state action, and noted that plaintiffs’ arguments that the FAA violates consumers’ constitutional rights are incompatible with the Supreme Court’s decisions on arbitration.

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Now that we’ve run through those reminders on issues that arise frequently in arbitration law, let’s talk about some unsettled issues.  SCOTUS today is considering two cases involving delegation clauses and how lower courts should put its Rent-a-Center, West decision into practice:

  • New Prime, Inc. v. Oliveira — this case comes from the First Circuit and raises the question whether the court should determine that the FAA applies before enforcing a delegation clause.  Why does that matter?   In this case a worker successfully argued the FAA did not govern, because he was an exempt transportation worker, and therefore the court refused to compel arbitration.  [Jan. 22 update: SCOTUS’s order list today does not include this as a grant or deny, so it will likely be considered again in February.]
  • Applied Underwriters Captive Risk Assurance Co. v. Minnieland Private Day School — this case comes from the Fourth Circuit and raises this question: Can a defense to arbitration that applies to the arbitration agreement as a whole ever be specific to the delegation clause?   [Disclosure: I was involved with this petition.] [ Jan. 22 update: SCOTUS denied cert.]

SCOTUS is also being asked to review a decision of the California Court of Appeal that refused to compel arbitration based on a state statute.  That California statute gives courts the discretion to deny enforcement of an arbitration provision when there is a possibility of conflicting rulings in pending litigation with third parties.  The cert petition asks whether the FAA preempts that California statute and will be considered in February.

Last month, SCOTUS  denied cert in another California arbitration case.  That petition, Betancourt v. Prudential Overall Supply, challenged California’s rule that private attorney general disputes cannot be arbitrated.  (SCOTUS passed on the same issue in 2015.)

Here’s hoping that in 2018 SCOTUS sticks with its recent practice of deciding at least one arbitration case per year!  And, here’s hoping the Vikings get in the Super Bowl!

This is my 290th post at ArbitrationNation and today I celebrate six years of blogging.  Woo hoo — that’s longer than most celebrity marriages!  In honor of the occasion, here are updates on six of the hottest issues in arbitration law so far this year.

  1. Agency regulation of arbitration agreements.  On the one hand, the CFPB issued a rule that will preclude financial institutions from using class action waivers in arbitration agreements.  To understand how “yuge” this is, remember that the CFPB’s initial study showed there are likely over 100 million arbitration agreements impacted by this rule.  (And there does not seem to be the necessary political willpower to stop it.)  On the other hand, agencies headed by Trump appointees have moved to roll back Obama-era consumer-friendly regulations of arbitration agreements in nursing homes and educational institutions.
  2. NLRB.  While the CFPB attacks class action waivers in the financial industry, the NLRB has been attacking those waivers in the employment context, taking the position that such waivers violate the National Labor Relations Act.  A circuit split developed, with the 6th, 7th, and 9th circuits on NLRB’s side, and the 2nd, 5th and 8th circuits siding with the employers.  The Supreme Court will hear arguments on October 2.
  3. Wholly Groundless.  When considering whether to enforce delegation clauses, some federal court have developed a carve-out for claims they think are nothing but hot air.  [Remember delegation clauses are those portions of arbitration agreements that authorize arbitrators to determine even arbitrability — whether the arbitration agreement is valid and encompasses the claims — issues usually decided by courts.]  That carve-out has been called the “wholly groundless” exception, and it is coming up with greater frequency.  Currently there is a circuit split: the 5th, 6th and federal circuits are in favor of spot-checking claims of arbitrability (e.g. Evans v. Building Materials Corp. of Am., 2017 WL 2407857 (Fed. Cir. June 5, 2017)), while the 10th and 11th Circuits believe SCOTUS’s precedent leaves no room for conducting a smell test (e.g. Jones v. Waffle House, Inc., 2017 WL 3381100 (11th Cir. Aug. 7, 2017)).
  4. Formation.  SCOTUS decided the Kindred case in May, confirming that state law on contract formation is also subject to preemption by the Federal Arbitration Act.  That was timely, given that plaintiffs appear to be placing their bets on challenging formation as the most effective way around an arbitration agreement.  They might be right.  See James v. Global Tellink Corp., 852 F.3d 262 (3d Cir. Mar. 29, 2017); Noble v. Samsung Electronics America, Inc., 2017 WL 838269 (3d Cir. March 3, 2017); King v. Bryant, 795 S.E.2d 340 (N.C. Jan. 27, 2017).
  5. Small Claims Court.  If a company starts a small claims court action to collect a debt, does that waive the company’s right to compel arbitration years later in response to a suit by the consumer?  This is a question multiple courts are facing, with differing results.  E.g., Cain v. Midland Funding, LLC, 156 A.3d 807 (Md. Mar. 24, 2017) (waiver); Hudson v. Citibank, 387 P.3d 42 (Alaska Dec. 16, 2016) (no waiver); Citibank, N.A. v. Perry, 797 S.E.2d 803 (W. Va. Nov. 10, 2016) (no waiver).  It is important because many consumer arbitration agreements exempt small claims from arbitrable claims, but may reconsider if that is considered a waiver of everything else.
  6. Statutory Preclusion.  The Federal Arbitration Act generally requires courts to enforce arbitration agreements.  But, if there is a contrary congressional command entitling the litigant to a court trial, it can override the FAA.  That issue has already come up multiple times this year, with the FAA generally winning its battles with other statutes.  E.g., McLeod v. General Mills, Inc., 854 F.3d 420 (8th Cir. Apr. 14, 2017).

Thanks to all of you for providing great feedback, leads on cases and topics, client referrals, and a warm community of fellow arbitration geeks.  I look forward to another year of blogging.

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…

 

The actual and potential arbitration docket at the Supreme Court contracted in the last week due to three events.

First, SCOTUS made quick work of an appeal from the Hawaii Supreme Court.  Remember when I predicted that the DIRECTV case was going to make it even harder for state courts to find arbitration agreements unenforceable under state law?  Well, that must have been exactly the point.  Because less than a month later, on Jan. 11, SCOTUS granted cert, vacated, and then remanded this series of decisions from the Hawaii Supreme Court.  What helpful instructions did SCOTUS offer to Hawaii’s highest court?  Just this: “further consideration in light of DIRECTV, Inc. v. Imburgia, 577 U.S. __ (2015).”  If history is any guide (see West Virginia, and Missouri), Hawaii will find a safer basis to uphold its initial decision.  That is especially likely in this case, since Hawaii hedged its bets from the get-go, by identifying two bases for not enforcing the arbitration agreement: there was no arbitration agreement; and, if there was, it was unconscionable.

Second, a pending arbitration matter, scheduled to be argued at SCOTUS just next month, settled. It was the California case about whether invalid aspects of an arbitration agreement should be severed.  But, the parties resolved the matter after DIRECTV.

Finally, SCOTUS denied cert in a Texas arbitration decision this week.

What’s still left?  Well, I know of at least one petition in an arbitration case that will be conferenced in coming weeks.  It is this case from West Virginia, a state with a history of bucking the federal arbitration system.  Surely you remember this memorable decision, where the West Virginia Supreme Court called SCOTUS’s arbitration precedent  “absurd” and an “ivory-tower interpretation of the FAA”??!  West Virginia basically invited the same GVR treatment as Hawaii.

Post Script (added 1/15/16): A reader informed me of an interesting second petition for cert in an arbitration case.  In the franchise context, the case presents the question of whether a state can require franchisors to include an addendum to their franchise agreement that negates the arbitration clause in that franchise agreement without running afoul of the FAA.

**Thanks to Mark Kantor and Karl Bayer for being the first to alert me to some of these events.

Just under the wire, SCOTUS released an arbitration opinion today, ensuring that 2015 would continue the string of years with cases interpreting the Federal Arbitration Act.  In DIRECTV v. Imburgia, the Supreme Court found that California’s interpretation of an arbitration clause was preempted by the FAA.  DIRECTV is a 6-3 decision, with Justice Kagan (who vociferously dissented in Italian Colors) joining the majority, and it appears to make it even harder for courts to apply state contract doctrines to find arbitration agreements unenforceable.

The issue in DIRECTV was primarily how to interpret the poison pill in the parties’ arbitration agreement, which stated that if the “law of your state” made the waiver of class arbitration unenforceable, then the entire arbitration agreement was unenforceable.  The California Court of Appeal found the phrase’s meaning ambiguous, but relied on two doctrines of contract interpretation to conclude that it referred to California’s contract law, without consideration of any federal preemption.  In other words, it meant California law before, or without respect to, Concepcion, which found California’s refusal to enforce class action waivers was preempted by the FAA.  Therefore, the California court used the poison pill to blow up the arbitration agreement altogether.  The California Supreme Court denied review, but SCOTUS took up the case.  (And disposed of it quickly — the argument was just about two months ago.)

Justice Breyer wrote the decision for the majority.  He focused heavily on the states’ obligation to abide by federal law and the Court’s interpretation of those federal laws.  Recognizing that interpreting contracts is “ordinarily a matter of state law,” the Court framed this case as an issue of whether California’s interpretation of “law of your state” to mean “invalid California law” “is consistent with the [FAA].”  As usual, the way the Court frames the issue gives away the ending.  Indeed, the Court goes on to essentially accuse the California Court of Appeals of being results-oriented.  (The dissent calls this “demeaning”)  The Court “conclude[s] that California courts would not interpret contracts other than arbitration contracts the same way.”  Why? Because, the opinion argues, state law normally means “valid” state law, and California criminal pleas are presumed to incorporate the state’s ability to amend the law, and SCOTUS’ esteemed law clerks could not find any California case that interpreted “law of your state” to mean state laws that had been preempted by any federal statute.  Finally, the majority addressed one of the two doctrines relied on by the California court: contra proferentem , which allows ambiguous terms to be construed against the drafter.  The Court found the doctrine does not apply in this case, because the phrase is not ambiguous, and in any case using the doctrine here was stretching it too far: “the reach of the canon construing contract language against the drafter must have limits”.

There are two dissents.  Justice Thomas dissented, as usual, because he believes the FAA does not apply in state court.  Justice Ginsburg (joined by Sotomayor) dissented because she will “take no further step to disarm consumers, leaving them without effective access to justice.”  Her dissent largely focuses on the appropriate use of the contra proferentem doctrine in this case.  But she also points out that this is the first time in 25 years that SCOTUS has “reversed a state-court decision on the ground that the state court misapplied state contract law.”  (The recipient of the reversal 25 years ago, in Volt Information Sciences, was also California.)  She points out that parties can agree on any law to apply to their arbitration, so providing for pre-Concepcion law in California is not beyond the pale.  And finally, Justice Ginsburg engages in a broader attack on the state of arbitration law, citing the recent NYTimes series and articles by Prof. Resnik to argue that the Court’s interpretation of the FAA no longer has any connection to the legislative intent behind the statute and goes too far in “insulat[ing] powerful economic interests from liability for violations of consumer protection laws.”

Here are some first-day impressions:

  • The Court should not have taken this case.  The majority seems to anticipate that reaction by noting that the Ninth Circuit reached the opposite result from the California Court of Appeals on how to interpret this version of DIRECTV’s poison pill.  But, that could have resolved over time.  And even if it didn’t, I doubt there are many arbitration agreements out there with this uniquely worded poison pill, so this particular elucidation on its meaning does not help very many parties.  This is pure and simple error-correction, which SCOTUS generally avoids.
  • Plus, California has largely turned the corner; its recent arbitration jurisprudence is generally in line with the FAA.  So, there is no reason to continue focusing exclusively on California in SCOTUS’ game of arbitration whack-a-mole.
  • What broader impacts might there be?  Well, one is that future state courts will have to think carefully before construing ambiguous language against the drafter in the context of an arbitration clause.  Another is that transactional attorneys should re-think any use of the phrase “law of your state” or any variations thereof.
  • But the most significant impact is that this decision calls into question any state’s ability to defend their arbitration decisions.  The preemption test articulated in  Concepcion was imprecise and has been hard for lower courts to apply.  (When does a state rule really stand as “an obstacle” to the Congressional intent behind the FAA?  Almost every contract defense is an obstacle of some sort.  But the language of Concepcion does not help distinguish between run-of-the-mill obstacles and true preemption.)  In this first post-Concepcion example of how the highest court in the land interprets that test, it seems to require that a state anti-arbitration ruling meet an impossible burden: show us cases in which you (the state) have done exactly the same thing, with the same phrase, in a non-arbitration context.  A lot of the phrases and clauses used in arbitration agreements are unique, there may not be a perfect comparison to draw on in non-arbitration decisions from the same state’s courts.  This decision, if read broadly, may provide precedential authority to overturn almost any state court’s invalidation of an arbitration agreement.  Which brings me back to point number one — this case was improvidently granted.

2015 has been a dry spell in arbitration decisions from the U.S. Supreme Court, but 2016 promises to be much more interesting.  In addition to the California case being heard next week, SCOTUS just granted certiorari in another California-based arbitration decision.  This one, MHN Government Services, Inc. v. Zaborowski, will review an unpublished 2-1 decision of the Ninth Circuit that affirmed a district court’s refusal to compel arbitration.  The beautifully succinct question presented is “whether California’s arbitration-only severability rule is preempted by the FAA.”

In Zaborowski, counselors who provide services to members of the military alleged that MHN improperly classified them as independent contractors instead of employees, thereby violating federal and state labor laws.  (The district court opinion is at 936 F. Supp. 2d 1145.)  The relevant agreement had an arbitration clause which the counselors argued was unconscionable under California law.  The court summarized the provisions that the plaintiffs objected to as including: “MHN shall choose three arbitrators, and the [counselor] shall choose one amongst them; each party may depose one individual and any opposing expert witness; arbitration must be initiated within six months of the claim’s occurrence; the arbitrator may not modify or refuse to enforce any agreements; the parties may not be awarded punitive damages; and the prevailing party or substantially prevailing party’s costs are borne by the other party.”  963 F. Supp. 2d at 1150.  The district court found procedural unconscionability and determined that many of the provisions raised by plaintiffs were substantively unconscionable.

Critically, the district court refused to sever those provisions it found substantively unconscionable.  It concluded, citing primarily to a California Supreme Court decision from 2000, that the arbitration agreement was “so permeated with unconscionability that it is not severable.”  A majority of the appellate panel affirmed that conclusion, noting that while they may have made a different decision in the first instance, the district court did not abuse its discretion.  Judge Gould dissented only with respect to the severability question, opining “Concepcion and its progeny should create a presumption in favor of severance when an arbitration agreement contains a relatively small number of unconscionable provisions that can be meaningfully severed and after severing the unconscionable provisions, the arbitration agreement can still be enforced.”  601 Fed. Appx. 461.

The petition for certiorari was bold and attention-grabbing.  It states: “California courts routinely display the flagrant hostility to arbitration that the FAA was designed to end. The Ninth Circuit routinely allows this to occur. And the severability issue presented here arises literally every time a court finds one or more provisions of an arbitration agreement to be invalid under California law.”  In response, the plaintiffs argue that “California’s severance doctrine derives from statutes that apply to all contracts and from cases dealing with contracts of various sorts—not just arbitration agreements.”  (They also note that a dozen judges have refused to enforce MHN’s arbitration agreement and lean on the discretion of district courts.)

Will this case be Concepcion part II, focused on when state contract rules of interpretation should be deemed obstacles to arbitration?  Or will it be narrowly focused on appropriate rules of severability?

Also, could there be more arbitration cases this term?  My fingers are crossed.

 

 

 

Just as I was beginning to worry that arbitration had fallen out of favor at the nation’s highest court… today the Supreme Court announced that it will hear the case of DIRECTV, Inc. v. Imburgia during its October Term, an appeal from a California Court of Appeals.  In DIRECTV, a case pitting Kirkland & Ellis against the aptly named Consumer Watchdog (and other firms), the Court will consider whether parties’ choice of state law to govern enforceability of an arbitration clause can be interpreted as trumping the FAA (and precluding a preemption analysis).

The case started in 2008 as a putative class action asserting false advertising and violation of California statutes based on DIRECTV’s allegedly improper charge of early termination fees.  In May of 2011, just after Concepcion was decided, and after a class had been certified on at least one theory, the defendant moved to stay the action and compel individual arbitration.  (Before that, it decided such a motion would be futile under California precedent.)  The district court denied the motion and the appellate court confirmed that result.

The key provisions from the agreement are these:

“Neither you nor we shall be entitled to join or consolidate claims in arbitration by or against other individuals or entities, or arbitrate any claim as a representative member of a class or in a private attorney general capacity. Accordingly, you and we agree that the JAMS Class Action Procedures do not apply to our arbitration. If, however, the law of your state would find this agreement to dispense with class arbitration procedures unenforceable, then this entire Section 9 is unenforceable.”

***

“The interpretation and enforcement of this Agreement shall be governed by the rules and regulations of the Federal Communications Commission, other applicable federal laws, and the laws of the state and local area where Service is provided to you. This Agreement is subject to modification if required by such laws. Notwithstanding the foregoing, Section 9 shall be governed by the Federal Arbitration Act.”

The California Court of Appeals used California contract law to interpret the phrase “if . . . the law of your state would find this agreement . . . unenforceable” as meaning ““the law of your state without considering the preemptive effect, if any, of the FAA.”  Therefore, it held that because the “class action waiver is unenforceable under California law, so the entire arbitration agreement is unenforceable.”  The opinion acknowledged, but disregarded, Ninth Circuit precedent interpreting the same provision and reaching the opposite result.

The question that was presented to SCOTUS for consideration is this:

Whether the California Court of Appeal erred by holding, in direct conflict with the Ninth Circuit, that a reference to state law in an arbitration agreement governed by the Federal Arbitration Act requires the application of state law preempted by the Federal Arbitration Act.

I expect that this decision will clear up some of the confusion that exists about what kind of contract language is required to choose operation of state arbitration law, as opposed to merely which state’s law will govern interpretation of the arbitration agreement, and whether it is ever possible to completely contract around the FAA.

In other SCOTUS news, the Court denied cert in the Opalinski case, that presented the issue of whether the availability of class arbitration is a gateway issue of arbitrability that courts should presumptively decide.  (I heard about that denial from SCOTUS guru @lylden himself at a dinner in Saint Paul!  It’s like hearing who will be kicked off SYTYCD directly from Cat Deeley …)

The U.S. Supreme Court has been knocking out blockbuster arbitration opinions annually in recent years.  2010?  Stolt-Nielsen and Rent-a-Center.  2011?  Concepcion.  2012? CompuCredit (Okay, that does not qualify as a blockbuster.) 2013? AmEx and Sutter.  At this point, SCOTUS has accepted roughly half of the cases it will hear this year, and only one arbitration case is on the docket, with two other petitions having been denied.

The case it will hear (on December 2) is BG Group v. Republic of Argentina.  (ScotusBlog’s case page here.)  That case, according to Petitioner, presents this question: “In disputes involving a multi-staged dispute resolution process, does a court or instead the arbitrator determine whether a precondition to arbitration has been satisfied?” 

The Argentina case arises out of the economic crisis in Argentina in the late 90s, and the measures the government took to address that crisis.  The Petitioner is a British company that invested in an Argentinian natural gas company.  It claimed that the Argentine measures “destroyed its investment and restricted it from both pursuing judicial relief and benefiting from the renegotiation process.”  The parties participated in UNCITRAL arbitration and Argentina lost.  Most important to the appeal, Argentina argued that the arbitrators lacked authority because the Bilateral Investment Treaty between the U.K and Argentina requires 18 months of litigation in an Argentine court before the arbitration could proceed, and no litigation had taken place in Argentine courts.  The arbitration panel determined it had jurisdiction to hear the case and ruled for the investor.

Argentina then moved to vacate the award, and the district court denied its motion.  The D.C. Circuit, however, reversed that decision and vacated the arbitration award.  It found the Panel had “rendered a decision wholly based on outside legal sources and without regard to the contracting parties’ agreement establishing a precondition to arbitration.”

It will be interesting to see if SCOTUS deals with this case based purely on its deferential standard of review, a la Sutter, or whether it takes the opportunity to clarify which issues are “gateway” issues for courts to decide.

SCOTUS denied cert in these two other arbitration cases on Monday:

Toyota Motor Corp. v. Choi, an appeal from this Ninth Circuit decision.  (Case page at ScotusBlog here.)  The Petitioner framed the question presented as:

“The parties to a contract agreed to arbitrate any claim or dispute arising out of the contract, including disputes over the arbitrability of the claim itself. Plaintiffs sued a non-signatory to the contract, and that non-signatory defendant sought to compel arbitration to determine whether the plaintiffs’ claims are arbitrable. The question presented in this case is whether the non-signatory defendant can compel arbitration of the arbitrability of the plaintiffs’ claims.”

In other words, can non-signatories use a delegation clause to get an arbitrator to decide whether equitable estoppel applies?  That issue will have to develop further in the district and circuit courts.

Bakoss v. Certain Underwriters at Lloyd’s of London, an appeal from this Second Circuit decision.  (Case page here.)  The Petitioner framed the question presented as two-fold:

“1. By electing not to define the term ‘arbitration,’ did Congress evince an intent to respect relevant state-law definitions of ‘arbitration,’ so long as applying them would not undermine the FAA’s policy goals?

2. If it is proper to disregard relevant state-law definitions of ‘arbitration’ in favor of one created by federal judges, should that definition exclude ADR that does not necessarily (a) resolve the plaintiff’s entire cause of action (b) through an adversarial process?”

I could hardly believe SCOTUS didn’t bite on the very definition of arbitration!  (Of course, I was biased, having authored an amicus brief in favor of cert.)

There is still time to get cases on the Court’s Spring calendar, but at this point, the Argentina case is the only arbitration law SCOTUS will be deciding.