The highest state court in West Virginia just found that a credit card company did not waive its right to arbitrate, despite initially choosing a court forum and waiting almost five years to raise its right to arbitrate.  That is a somewhat surprising decision from a court that has been repeatedly willing to buck SCOTUS precedent in order to let parties avoid arbitration.

It was the right decision under current precedent though. The parties in Citibank, N.A. v. Perry, __ S.E.2d __, 2016 WL 6677944 (W. Va. Nov. 10, 2016), had an arbitration provision that could be enforced at any time.  It said a party who starts a court proceeding “may elect arbitration with respect to any Claim advanced in that proceeding by any other party.”  It also stated that “[a]t any time you or we may ask an appropriate court to compel arbitration of Claims…unless a trial has begun or a final judgment has been entered.”  And finally, the arbitration provision had a class action waiver and said it could not be waived without a written agreement.

The case started in 2010 with Citibank filing a debt collection action against the credit cardholder. The consumer appeared to acknowledge the debt, and Citibank filed a motion for judgment on the pleadings.  But the trial court never ruled.  In December of 2014, Citibank served discovery and got a scheduling order in place.  In May of 2015, the consumer filed a class counterclaim.  In response, Citibank asked the court to compel individual arbitration of the claims.  The district court found Citibank had waived its right to arbitration.

On appeal, Citibank argued that under the plain terms of its arbitration agreement, it could compel arbitration at any time before trial or judgment, unless the opposing party could show actual prejudice. The court was not willing to base its decision on the language of the agreement, however, citing federal cases that refuse to allow “no waiver” clauses to alter the usual waiver analysis.  Instead, it focused on whether Citibank’s conduct demonstrated that it had intentionally relinquished its right to arbitrate. Critically, the court turned the tables and said that in a situation where the consumer waited 4.5 years to assert a counterclaim, “we will not attribute the lengthy duration of activity…solely to Citibank.”  The court noted that the counterclaim changed the character of the case, and after that happened, Citibank timely filed a motion to compel arbitration.

____

In the “Don’t get too cute” category… An exotic dancer just won her right to keep her wage-and-hour claims in court, despite an arbitration agreement in her contract. Why?  Because the club styled her contract as a landlord/tenant arrangement in which she leased the stage.  Because the arbitration clause applied only to disputes arising out of the agreement, and the agreement purported to be a lease, the court refused to find its scope broad enough to cover her FLSA claims. Herzfeld v. 1416 Chancellor, Inc., 2016 WL 6574075 (3d Cir. Nov. 7, 2016).

Echoing a holding already issued by four other circuits, the Third Circuit recently found that a defendant does not waive its right to arbitration by continuing to litigate in court, if the reason it failed to move to compel arbitration is that the motion would have been futile.  Chassen v. Fidelity Nat’l Fin., Inc., 2016 WL 4698256 (3d Cir. Sept. 8, 2016).

The case involves a class of real estate purchasers who claim they were overcharged for recording documents in New Jersey.  Although there were arbitration agreements in the relevant contracts, the defendants did not move to compel “bipolar” arbitration for two and a half years.  (Where did that term come from, Third Circuit?  Are we equating individual arbitration to a mental health condition now?)  In that time, plaintiffs served 150 non-party subpoenas and spent $50,000 on experts.

Although defendants did not attempt to explain their inaction, the Court concluded the long delay in seeking arbitration was excused.  In short, New Jersey law had nearly outlawed class action waivers in consumer arbitration clauses, so until SCOTUS decided Concepcion in 2011 (finding California’s similar rule preempted by federal law), it would not have made sense for defendants to compel arbitration.  The court reasoned that unlike in other cases of inaction, the prejudice to plaintiffs “is attributable to a change in the applicable law, not to any negligent action on the part of either party.”  It also noted that futility is a recognized exception to ripeness and administrative exhaustion, two analogous doctrines.

Other than the use of “bipolar,” none of those conclusions strikes me as odd.  But the opinion then plows some new ground.  It finds that a defendant can independently waive individual and class arbitration, because those are “substantively distinct” types of arbitration.  (And it concludes that the defendants here had a valid futility defense for both types.) Finally, the dissent points out a key piece of information: there was no class arbitration waiver in the arbitration clauses at issue.  “These clauses…do not even mention class arbitration, let alone outright prohibit it.” Which the dissent (fairly) characterizes as seriously undercutting the futility analysis.

Now that Concepcion is more than five years old, this type of case is unlikely to come up often in terms of preempted state arbitration law, but the new rules from the CFPB (and legal challenges to those regulations) could make the futility doctrine relevant again.

In a decision this week, the Third Circuit found two related parties had waived their right to arbitrate claims.  One was no suprise — it had vigorously litigated the dispute for eleven months.  But the second may have been simply guilty by association, as it had only litigated for two months.  Supermedia v. Affordable Electric, Inc,, 2014 WL 1690749 (3d Cir. April 30, 2014).

In Supermedia, the plaintiff sued AEI for breach of contract.  The contract at issue had been signed by Mr. Morley, AEI’s alleged president.  AEI moved to dismiss the complaint, and when that failed, it answered the compaint and engaged in months of discovery, incuding discovery motions to the court.  During those eleven months, AEI never mentioned its alleged right to arbitrate the dispute.  Instead, it primarily disputed Mr. Morley’s right to bind it to a contract.  Therefore, about nine months after filing its first suit, the plaintiff also sued Mr. Morley directly.  The two cases were then consolidated.

Mr. Morley and AEI made a joint motion to compel arbitration.  The district court denied the motion, finding both defendants had waived any right to arbitrate.  On appeal, the Third Circuit affirmed.

In analyzing AEI’s waiver, the Third Circuit focused on the eleven months during which AEI never mentioned its alleged right to arbitrate and vigorously pursued the litigation.  Furthermore, AEI had taken the position that the arbitration agreement was unenforceable in previous litigation between the parties.  With respect to Mr. Morley, the court acknowledged it was “a closer call.”  Although Mr. Morley moved to compel arbitration just two months after the lawsuit began, he did three things that the court found sufficient to constitute waiver.  First, he asserted claims against third parties.  Second, in answering claims, he asserted that there was no binding agreement among the parties.  And third, he participated in the pre-trial conference and acquiesced in the consolidation of the cases.

The Third Circuit ruled last week that Delaware’s Chancery Court could not offer its judges’ services as neutral arbitrators in its courtrooms, unless those arbitrations were open to the public.

In 2009, the Delaware courts decided to provide arbitration.  The state amended its laws to create an arbitration process that was only open to disputes worth more than a million dollars with at least one party being a business incorporated in Delaware (and no party being a consumer).  The parties did not need to have a pre-dispute arbitration agreement.  As long as they both consented, they could file their arbitration in the Delaware courts for a$12,000 initial fee and have the Chancellor select a Chancery Court judge to hear the arbitration in the Delaware courthouse (for another $6,000/day).  However, “the statute and rules governing Delaware’s proceedings bar public access.”  Only parties and their representatives could attend the proceedings.

In Delaware Coalition for Open Government, Inc. v. Strine, __ F.3d __, 2013 WL 5737309 (3d Cir. Oct. 23, 2013), the Third Circuit found that it violates the First Amendment to bar the public from Delaware business arbitrations.  Applying the “experience and logic” test (sounds like the kind of test courts should always apply!), the Court found “[w]hen we properly account for the type of proceeding that Delaware has instituted — a binding arbitration before a judge that takes place in a courtroom…the right of access to government-sponsored is deeply rooted in the way the judiciary functions in a democratic society.”  Further, the court noted that public access would be beneficial for stockholders, ensure transparency of the process, and discourage perjury.  For all those reasons, the Third Circuit found a right of public access to state-sponsored arbitrations in Delaware.

I haven’t heard of other states trying to compete with the AAA, so this decision does not have broader implications, but it is worth pondering whether the same benefits of public access the Third Circuit noted in this case also apply to private arbitrations.

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Now for some brief updates on recent topics:

  • The Minnesota Supreme Court granted review of this case, in which the Minnesota Court of Appeals confirmed an arbitration award involving a significant sanction against a party who was accused of manufacturing evidence.
  • The defense of illusoriness is still on the upswing.  Last week the Fifth Circuit affirmed a district court’s refusal to compel arbitration based on a finding that the agreement was illusory under Texas law.  Scudiero v. Radio One of Texas II, 2013 WL 5755484 (5th Cir. Oct. 24, 2013).
  • In case anyone thought Sutter was limited to deference for arbitrators who find arbitration agreements allow for class actions, the Eleventh Circuit clarified the same deference applies to arbitrator decisions to allow collective actions as well.  DirecTV v. Arndt, 2013 WL 5718384 (11th Cir. Oct. 22, 2013).
  • A thoughtful reader drew my attention to a case the U.S. Supreme Court will hear on November 13: Unite HERE Local 355 v. MulhallThe central question in the case is one of labor law, not arbitration, but the labor law questions were interpreted by arbitrators under the parties’ agreement, and the National Academy of Arbitrators has weighed in to support the use of “pre-recognitional governance systems” including arbitration.

 

The U.S. Supreme Court issued its decision in Sutter today, unanimously holding that as long as the arbitrator bases a decision to allow or disallow class arbitration on the text of the parties’ agreement, her “construction holds, however good, bad, or ugly.”  Oxford Health Plans LLC v. Sutter, 569 U.S. ___ (June 10, 2013).  The case resolved a circuit split on how to interpret SCOTUS’ Stolt-Nielsen decision.  It also proved me right (yahoo!).  (I predicted the Court would affirm the Third Circuit both when it granted review, and when it heard the argument.)

As you may recall, this case involves a putative class of doctors who sued a health insurer over allegedly inadequate payments for services.  The case was brought in state court, the insurer successfully compelled arbitration, and the parties then agreed that the arbitrator should decide whether the contract authorized class arbitration.  The contract did not explicitly allow or disallow class actions in arbitration.  The arbitrator construed the text of the arbitration agreement and found that the parties’ intent was to allow class arbitration.

In the District of New Jersey, the Third Circuit and again the Supreme Court, the insurer argued that the arbitrator had “exceeded [his] powers” within the meaning of Section 10(a)(4) of the FAA by allowing class arbitration.  In its decision, the Supreme Court firmly refused to look behind the curtain of an arbitration.  Because it was clear that the arbitrator was given authority to determine whether the contract authorized class arbitration, and he based his decision on the text of the arbitration clause, the Supreme Court would not consider whether “he performed that task poorly.”

This is a big defeat for opponents of class arbitration.  Not only does the Sutter decision do away with the Fifth Circuit’s interpretation of Stolt-Nielsen, which was essentially that class arbitration was precluded unless the parties agreement explicitly allowed it, it also refuses to create any kind of exception for really bad contract interpretations.  The insurer argued strongly that the arbitration agreement at issue in this case was “garden-variety” and contained no indicia that the parties intended to use class procedures in arbitration, so the arbitrator’s decision was wrong.  But, Justice Kagan, writing for the Court, declined the insurer’s invitation to consider the merits of the arbitrator’s decision.  Once the court is satisfied that the arbitrator was “arguably construing the contract,” his or her decision will be affirmed even in the case of “grave error.”  Indeed “[t]he potential for those mistakes is the price of agreeing to arbitration.”  In that regard, this decision is not limited to class arbitration at all, but is a strong decision for affirming arbitration awards in general.  It further calls into question whether “manifest disregard of the law” is a legitimate basis for vacating an arbitration award.

This decision opens the door to more arbitrators authorizing class actions.  Arbitrators now have the confidence that as long as the class arbitration decision is grounded in the text of the parties’ agreement, it will not be overturned.  (Of course, if the parties’ arbitration agreement explicitly precludes class actions, an arbitrator would exceed his or her power by authorizing a class.)  Even an arbitrator who believes as a matter of public policy that plaintiffs with small-dollar claims should be able to assert those claims as a class in arbitration will be affirmed, as long as the official decision is based in the language of the contract.

There are two issues that the Court left for another day, and those could eventually be the death knell of class arbitrations.  First, a long footnote suggests that the availability of class arbitration could be one of the gateway questions of arbitrability that are presumptively for courts (not arbitrators) to decide.  Second, Justices Alito and Thomas wrote a concurrence suggesting that there may be no satisfactory procedure for conducting class arbitrations — because the absent members cannot consent to the arbitrator’s authority and opt-out notices are not effective.  However, because the insurer agreed to have the arbitrator decide the issues of class arbitration, neither of these issues was before the Court in Sutter.

In an opinion that feels a bit like a report from the annual meeting of arbitration nerds, the Third Circuit last week clarified when district courts must allow discovery about arbitrability.  Guidotti v. Legal Helpers Debt Resolution, LLC, ___ F.3d ___, 2013 WL 2302324 (3d Cir. May 28, 2013).  Although the standard articulated is a bit unwieldy, it at least gives district courts in that federal circuit (and the others who have not clarified this issue) some method of identifying when plaintiffs are entitled to discovery and when to apply the summary judgment standard.

In Guidotti, the plaintiff in a putative class action sued 22 parties, alleging they were supposed to help negotiate down her consumer debt but did nothing other than accept her significant monthly payments.  Thirteen defendants moved to compel arbitration, and the district court granted that motion with respect to eleven of them.  The district court refused to compel arbitration of the plaintiff’s claims against two defendants, the financial institution where plaintiff had to open a special new account (RMBT) and the process agent that transferred money to and from the account (Global Client Solutions).

The district court concluded that those defendants had not proved they had any agreement to arbitrate with the plaintiff.  It did not allow any discovery relating to the motion to compel, but relied on inferences from the face of the documents themselves.  The contract between RMBT and the plaintiff did not explicitly provide for arbitration, but instead incorporated another agreement that provided for arbitration (the “Account Agreement”).  Yet there was no proof that the defendants provided the plaintiff with the Account Agreement at the time she signed the RMBT agreement.  In particular, the RMBT agreement was electronically signed via the DocuSign process, and reflected that timing, but the Account Agreement had no similar DocuSign stamp.  The plaintiff alleged the Account Agreement was sent to her three weeks after she signed the electronic documents.

[As a side note, I do hope the Third Circuit addresses the merits of this case at some point, because it raises very interesting issues.  For example, can an arbitration agreement be formed by documents that are not available when the main document is signed?  (The Second Circuit has said no.)  And, is an arbitration enforceable if one party has no input in the selection of the arbitrator?  The Account Agreement called for binding arbitration “utilizing a qualified independent arbitrator of Global’s choosing”.]

The Third Circuit vacated the district court decision and remanded for “limited discovery” on what documents were available to the plaintiff at the time of her electronic signature and a decision under the summary judgment standard.  After acknowledging that its earlier pronouncements on whether motions to compel arbitration should be treated like motions to dismiss or motions for summary judgment were not crystal clear, the Third Circuit took the opportunity to give guidance to district court judges.  Here is the standard it set:

“[W]hen it is apparent, based on ‘the face of a complaint, and documents relied upon in the complaint,’ that certain of a party’s claims ‘are subject to an enforceable arbitration clause, a motion to compel arbitration should be considered under a Rule 12(b)(6) standard without discovery’s delay.’  But if the complaint and its supporting documents are unclear regarding the agreement to arbitrate, or if the plaintiff has responded to a motion to compel arbitration with additional facts sufficient to place the agreement to arbitrate in issue, then ‘the parties should be entitled to discovery on the question of arbitrability before a court entertains further briefing on [the] question.’  After limited discovery, the court may entertain a renewed motion to compel arbitration, this time judging the motion under a summary judgment standard.  In the event that summary judgment is not warranted because … there is ‘a genuine dispute as to the enforceabilty of the arbitration clause,’ the ‘court may then proceed summarily to a trial regarding the ‘making of the arbitration agreement.'”

(Internal citations omitted.)  Applying its standard, the Third Circuit found that the plaintiff in Guidotti raised sufficient doubt about the existence of an arbitration agreement with the financial institutions, and therefore the dispute should have been treated as one requiring discovery and a Rule 56 standard.

 

The Third Circuit just issued a decision that tries to divine the dividing line between challenges to the formation of contracts containing arbitration clauses (which are presumptively for courts), and challenges to the validity of contracts containing arbitration clauses (which are presumptively for arbitrators, if the challenge is to the contract as a whole).  It held that an allegation that a contract is void because the signatory was not authorized to enter into that contract “must be decided by a court.”  SBRMCOA, LLC v. Bayside Resort, Inc., __ F.3d __, 2013 WL 491254 (3d Cir. Feb. 11, 2013).

The case involved claims by a condominium association on the island of St. Thomas against the developer.  A relevant agreement between the parties contained an arbitration clause, so the defendants moved to compel arbitration.  In response, the association argued that its Board did not have authority to enter into that agreement, making the arbitration clause unenforceable (along with the rest of the agreement).  The district court compelled arbitration, finding that an arbitrator should determine whether the Board had authority to execute the agreement.

The Third Circuit vacated the district court’s opinion, holding that the district court must decide the ultra vires argument on the merits.  It noted that the majority of federal appellate courts have concluded that courts should decide whether parties had authority to contract (the 11th, 2nd, 5th, 7th, 9th, and 3d Circuits), while only the Sixth Circuit has issued a contrary decision.  The court also found that additional discovery is warranted regarding the authority of the Board.

In contrast, the Third Circuit found that the association’s alternative claim, that it was coerced into executing the agreement, was arbitrable because it is a challenge to the validity of the agreement, instead of the formation of the agreement.

So, if the contract is void because the Board did not have authority to sign it, that stays in court.  But if the contract is void because the Board was coerced into signing it, that issue is punted to the arbitrator.  That is the result under Buckeye Check Cashing.  Whether that result makes sense is a question for another day.

 

The earthquake that was the Concepcion decision (in April of 2011) is still sending aftershocks throughout the judicial system.  In last week’s ruling, the Third Circuit compelled individual arbitration in Homa v. American Express Co., 2012 WL 3594231(3d Cir. Aug. 22, 2012), a case in which the parties have been fighting about whether the plaintiff must arbitrate individually, or may bring a class arbitration, since 2007.

The plaintiff in this case sought to represent a class of AmEx cardholders alleging false marketing.  However, the arbitration clause in his credit card agreement explicitly waived any right to a class arbitration.  The plaintiff brought his case in NJ federal court court and argued that the class action waiver was unconscionable under a 2006 decision from New Jersey’s high court.  The plaintiff then rode this procedural roller coaster: the federal district court granted AmEx’s motion to compel individual arbitration (down); the Third Circuit reversed, based on the New Jersey state precedent and remanded for careful application of the Jersey law (up!); on remand, the parties conducted additional discovery (whee!);  AmEx then successfully moved to stay the case pending the Supreme Court’s Concepcion decision (car stuck upside down on loop); after Concepcion, the district court reinstated its initial ruling, and, in this opinion, the Third Circuit affirmed the mandate for individual arbitration (full stop; ride over).

The Third Circuit quoted its 2011 opinion in Litman, explaining the holding of Concepcion: “a state law that seeks to impose class arbitration despite a contractual agreement for individualized arbitration is inconsistent with, and therefore preempted by, the FAA.”

In response to the evidence the plaintiff had developed showing that enforcing the arbitration clause “would make it impossible for any person . .. to effectively vindicate his substantive statutory rights,” the court was apologetic, but firm: “Even if [plaintiff] cannot effectively prosecute his claim in an individual arbitration that procedure is his only remedy, illusory or not.”  In a footnote, the court backpedaled a bit “We are not implying that we believe that we are reaching an unfair result…we merely are recognizing that other persons might think that we are doing so.”  The Third Circuit thus joined a growing number of courts who apologetically enforce SCOTUS’s arbitration decisions.

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Although courts and practitioners may think of the Stolt-Nielsen decision as the death knell of class arbitration, the Third Circuit’s ruling last week serves as a reminder that the Stolt-Nielsen did not deal a mortal blow.  In fact, in Sutter v. Oxford Health Plans LLC, __ F.3d __, 2012 WL 1088887 (3d Cir. April 3, 2012), the Third Circuit affirmed an arbitrator’s decision to allow class arbitration based on an arbitration agreement that never mentioned class actions at all.

The arbitration agreement at issue in this dispute over medical reimbursements succinctly provided: “No civil action concerning any dispute arising under this Agreement shall be instituted before any court, and all such disputes shall be submitted to final and binding arbitration…”  (Before you criticize the drafters, let me point out that this agreement was executed in 1998, before the availability of class arbitration was a hot topic.)  The putative class of doctors initially brought their case in state court, and the court granted the insurer’s motion to compel arbitration, noting that the issue of whether the case could proceed on a class basis was for the arbitrator to determine. 

The arbitrator determined that the arbitration agreement allowed the doctors to proceed in arbitration as a class.  The arbitrator based his analysis on both the breadth of the arbitration agreement and the absence of any express carve-out for class arbitration, which led him to conclude the parties intended to authorize class arbitrations. 

After the arbitration proceeded on a class-wide basis, the insurer moved to vacate the arbitrator’s decision to allow the class-wide claim.  The insurer argued the arbitrator “exceeded his power” within the meaning of Section 10 of the FAA.  (It is probably safe to assume the insurer lost the arbitration, although the opinion does not say…)  The district court and Third Circuit both upheld the arbitrator’s decision. 

The extraordinary deference that courts grant arbitrators was critical to the decision; the Third Circuit noted that as long as an arbitrator “makes a good faith attempt” to interpret and enforce the contract, the court will not vacate the arbitrator’s decision.  Because the arbitrator in Sutter rooted his decision in an analysis of the text of the arbitration agreement, the court concluded “the arbitrator performed his duty appropriately” and his decision on class arbitration could not be vacated. 

This decision is important for other courts, counsel, and arbitratorswho are interpreting Stolt-Nielsen S.A. v. Animal Feeds Int’l Corp., 130 S. Ct. 1758 (2010).  The Third Circuit recognized that “an arbitrator may exceed his powers by ordering class arbitration without authorization,” but also addressed some misconceptions about Stolt-Nielsen.  Most critically, the court emphasized that “Stolt-Nielsen did not establish a bright line rule that class arbitration is allowed only under an arbitration agreement that…expressly provides for aggregate procedures.”  Instead, it “established a default rule” that parties may not be compelled to class arbitration unless the contract indicates the party consented to class arbitration.   

What is the distinction?  It is that courts and arbitrators should not use the presence or absence of magic words like “class arbitration” or “class action” as the basis to rule on the availability of class arbitration, but instead must carefully analyze the contract to determine the parties’ intent.  The “default rule” mentioned in Sutter leaves the door open a smidge wider for arguments about the propriety of class arbitration than the “bright line rule”.  Just a smidge.