A recent decision from the 10th Circuit shows there is a whole new way to invalidate an arbitration agreement.  In Citizen Potawatomi Nation v. Oklahoma, 2018 WL 718606 (10th Cir. Feb. 6, 2018), the court found the arbitration agreement unenforceable because the parties provided for de novo review of any arbitration award in federal court, which is prohibited under the Hall Street decision from SCOTUS in 2008.

The agreement at issue was a Tribal-State gaming compact between the Citizen Potawatomi Nation and the State of Oklahoma.  The Compact had a dispute resolution procedure providing for arbitration under AAA rules.  But it also stated that “notwithstanding any provision of law, either party to the Compact may bring an action against the other in a federal district court for the de novo review of any arbitration award …”

The parties then had a dispute over liquor licensing and taxes, which was heard in arbitration.  The Potawatomi Nation moved to confirm the award in federal court, and argued for narrow review under FAA Section 10.  Oklahoma moved to vacate the award,  seeking de novo review of the dispute under the Compact.  The district court applied the narrow review in Section 10 and confirmed the award.

On appeal, the 10th Circuit upended the entire arbitration agreement.  It noted that the 2008 Hall Street decision makes clear that parties cannot alter the standard of review in Section 10.  It also found that the provision for de novo review could not just be severed, because it was material to the parties’ decision to choose arbitration, as evidenced by a review of the Compact as a whole.  As a result, the court found the arbitration agreement as a whole unenforceable.

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While I was busy writing deep thoughts about arbitration at the end of 2017 (see here and here), courts around the country rudely kept churning out new arbitration opinions.  Hmph.  So, I have some catching up to do.  I start with one that has most captured my attention, Snow v. Bernstein, Shur, Sawyer & Nelson, ___ A.3d ___, 2017 WL 6520900 (Me. Dec. 21, 2017).  It finds an arbitration agreement between a law firm and its client unenforceable, because the law firm did not specifically explain to the client that arbitration entails a loss of a jury trial, narrower appeal rights, and different evaluation of evidence.

Susan Snow hired the Bernstein firm to handle a civil action.  The opinion does not tell us anything about Snow or her level of sophistication.  But, it does tell us that she signed Bernstein’s standard terms of engagement, which included an arbitration clause.  The arbitration clause dealt specifically with arbitrability of “fee disputes,” and then said “any other dispute that arises out of or relates to this agreement or the services provided by the law firm shall also, at the election of either party, be subject to binding arbitration.”

Snow later sued the law firm for malpractice, and the firm moved to compel arbitration.  The district court denied that motion, and the high court of Maine affirmed that ruling.  Both courts found that the arbitration agreement was unenforceable because the law firm had not verbally discussed the arbitration clause with Snow and informed her of its “scope and effect”.

The Snow opinion used “public policy” to invalidate the arbitration agreement.  It largely relied on two bases for its public policy.  First, a 2002 formal opinion from the ABA Standing Committee on Ethics and Professional Responsibility, which found that because attorneys are fiduciaries, and arbitration “results in a client waiving significant rights,” an attorney must explain the implication of the proposed arbitration agreement so that the client can make an informed decision.  The ABA opinion requires an attorney to explain that the client is waiving a jury trial, waiving discovery, and losing a right to appeal.  Second, the Snow opinion relied on a 2011 opinion from Maine’s Professional Ethics Commission, requiring attorneys to obtain informed consent “as to the scope and effect of an arbitration requirement or a jury waiver clause.”

Because the law firm in this case did not dispute that it made no attempt to discuss the arbitration agreement with Ms. Snow before she signed it, and the court found the written arbitration agreement “was not sufficiently clear to inform her”, the court declared the arbitration agreement unenforceable.

So, what is required in Maine for an attorney to have a binding arbitration agreement with a client?  “The attorney must effectively communicate to the client that malpractice claims are covered under the agreement to arbitrate.  The attorney must also explain, or ensure that the client understands, the differences between the arbitral forum and the judicial forum, including the absence of a jury and such ‘procedural aspects of forum choice such as timing, costs, appealability, and the evaluation of evidence and credibility.'”  All of that should be done with regard to the particular client’s capacity to understand the information.

When’s the last time you heard a state supreme court espouse the importance of the right to a jury trial?  And pound on the importance of specifically and knowingly waiving that right?  Well, the Kindred case comes to mind for me.  And SCOTUS reversed Kentucky’s public policy rule in that case, finding it was preempted by the Federal Arbitration Act.  Kindred stated noted that the Kentucky “court did exactly what Concepcion barred: adopt a legal rule hinging on the primary characteristic of an arbitration agreement–namely, a waiver of the right to go to court and receive a jury trial.”  The Snow decision does not cite to the Kindred case, even though Kindred came out in May and Snow wasn’t argued until October of 2017.  Instead, the Snow decision gives a preemption analysis that defies logic.  It says its rule “that attorneys fully inform a client of the scope and effect” of an arbitration clause “does not ‘single out’ arbitration agreements.”  Say what?  The court goes on to say that it would apply to any client “decision to waive significant rights,” but does not offer any cites to Maine law requiring attorneys to give oral primers to clients on anything other than arbitration  Indeed, the Snow opinion’s emphasis on jury trial, appealability, and evidence show it’s rule hinges on primary characteristics of arbitration, just like Kentucky’s ill-fated rule.

Despite the similarities with Kindred, would SCOTUS treat this case differently because attorneys are held to a higher standard?  The Ninth Circuit has affirmed a decision finding the arbitration clause in an lawyer’s engagement letter unconscionable.  And the ABA favors the higher standard (but I am not aware it has reconsidered its opinion in light of recent preemption decisions).  But, I have a hard time distinguishing the rule in Snow from the one that was reversed in Kindred.

The Ninth, Sixth, and Third Circuits all recently issued decisions about whether putative class or collective actions could proceed despite the existence of arbitration clauses.  In two of those decisions, the courts found the arbitration agreements did not allow for class arbitration and therefore dismissed the claims.  In the third, the court found the arbitration agreement was not applicable to the dispute.

In Opalinski v. Robert Half Int’l, 2017 WL 395968 (3d Cir. filed Jan. 30, 2017), the Third Circuit again tackled arbitrability issues in a case that has gotten the runaround for five years (district court, then arbitrator, then district court, then appellate court, back to district court, now back to appellate court).  The case involves a collective action complaint alleging violations of the Fair Labor Standards Act.  The arbitration clause between the employees and employer provides for AAA arbitration.  In its most recent decision, the district court dismissed the action, finding the arbitration clause did not allow class arbitration.  On appeal, the Third Circuit reiterated that courts (not arbitrators) should decide whether class arbitration is available.  It found that in this case the parties’ arbitration clause does not indicate they agreed to class arbitration.  In particular, the court found the absence of any explicit mention of class arbitration was dispositive, and outweighed the fact that the parties agreed to arbitrate disputes arising under statutes that allow class litigation.

In another employment dispute, Poublon v. C.H. Robinson Co., 2017 Wl 461099 (9th Cir. Feb. 3, 2017), a class of employees asserted that the employer had misclassified them as exempt from overtime pay and asserted a Private Attorneys General Act (PAGA) claim.  The arbitration agreement provided “neither You nor the Company may bring any Claim combined with or on behalf of any other person or entity, whether on a collective, representative, or class action basis.” It ended with a severability clause, so that if any part of the arbitration agreement was invalid, the rest of it would be enforced.  The employer moved to compel arbitration and dismiss class or representative claims.  The district court found the arbitration clause was unconscionable and denied the employer’s motion.  The Ninth Circuit reversed, finding only two aspects of the arbitration clause were unconscionable/unenforceable and those could be severed, allowing the rest of the arbitration clause to be enforced.  (The two stinkers: waiver of a representative PAGA claim (see Iskanian); and a provision allowing only the employer to go to court for injunctive or equitable relief.)

While the two classes of employees above were not able to continue prosecuting claims as a group (and had to go to arbitration), a class of consumers won the right to stay in court in Stevens-Bratton v. TruGreen, Inc., 2017 WL 108032 (6th Cir. Jan. 11, 2017).  In that case the class representative had hired a lawn care company for one year.   More than six months after the service contract had been terminated, the class representative received numerous telemarketing calls from the company, even though her number was on the Do-Not-Call Registry.  She then sued for violation of the TCPA.  In response, the lawn care company moved to compel arbitration, based on its service contract with the class representative, which “expressly waive[d] any ability to maintain any Class Action.”  The district court compelled arbitration, and the 6th Circuit reversed.  Although there is usually a presumption in favor of an arbitration agreement surviving the expiration of the rest of a contract, the court was not convinced that the dispute “had its real source in the contract.”  It found that the lawn care service contract was “irrelevant to this case,” since it had completely expired before the calls took place and the lawn services provided were not at issue in the TCPA claim.

Three state supreme courts tackled arbitration law in recent weeks: Alabama, North Carolina, and Rhode Island.  Rhode Island reversed a construction arbitration award because it disagreed with the arbitrator’s analysis.  North Carolina found that an arbitration agreement in a doctor-patient setting was unenforceable as a breach of the doctor’s fiduciary duty.  And Alabama strictly enforced an arbitral venue, even though that precluded class action.

Continuing its streak of hewing closely to the lead of federal courts on arbitration, the Supreme Court of Alabama held that plaintiffs have to arbitrate with the Better Business Bureau, even though the BBB does not conduct class action arbitration proceedings.  University Toyota & University Chevrolet Buick GMC v. Hardeman, _ So. 3d __, 2017 WL 382651 (Ala. Jan. 27, 2017).  The plaintiffs were a putative class of customers harmed by two car dealerships’ decision to stop honoring their earlier agreement to provide free oil changes.  The arbitration clause between the dealerships and purchasers called for arbitration of all disputes pursuant to the FAA, and said “either party may demand arbitration by filing with the Better Business Bureau.”  When the plaintiffs filed their demand, the BBB responded that it did not conduct class arbitrations.    The plaintiffs then withdrew their demand and filed in court, asking either to keep their fight in court or go to a forum that allowed class arbitration.  The trial court sent the plaintiffs to the AAA to decide whether class actions were available.  On appeal, the supreme court reversed in a 7-1 decision.  The majority quoted heavily from SCOTUS decisions stating that arbitration agreements should be enforced according to their terms, and found that the BBB forum was an integral part of the arbitration agreement that must be given effect.  The lone dissenter argued that, because the availability of class arbitration was for the arbitrator, it should be decided by a forum that at least retains that option.

Without any consideration of the Federal Arbitration Act, the Supreme Court of Rhode Island vacated an arbitration award.  Nappa Construction Management, LLC v. Flynn, __ A.3d __, 2017 WL 281812 (R.I. Jan. 23, 2017). (Maybe an allergy to the FAA is contagious… remember nearby New Hampshire last year?)  In a dispute between the owners of a automobile repair facility and the construction company that was hired to build it, the arbitrator issued an award that analyzed the parties’ contract and found the construction company was owed money.  The trial court refused to vacate the award, finding the arbitrator grounded his analysis in the contract and did not manifestly disregard the law.  On appeal, the Supreme Court of Rhode Island cited only cases from its own court, including labor cases, and found that the arbitrator had exceeded his authority (and the award failed to draw its essence from the agreement) by finding that the owners had effectively terminated the contract, when there was no evidence that the owners actually terminated the contract.  The court also accused the award of reaching an “irrational result.”  Two justices dissented, noting the “exceptionally deferential standard of review” for arbitration awards.  They did not, however, cite to the line from Sutter, as I would have, that even “grave error” by an arbitrator is not sufficient to vacate an award if the arbitrator in fact analyzed the contract.  (Maybe no one argued the FAA applied?  A commercial construction contract would almost certainly involve interstate commerce…)

Finally, the Supreme Court of North Carolina refused to enforce the arbitration agreement between a doctor and patient, finding that the agreement “was obtained as a result of defendants’ breach of fiduciary duty that they owed to” the patient.  King v. Bryant, __ S.E.2d __, 2017 WL 382910 (N.C. Jan. 27, 2017).  The patient had brought a medical malpractice action against his surgeon, and the surgeon tried to enforce the arbitration agreement between them.  The arbitration agreement called for application of the FAA and arbitration under health care procedures of the AAA.

The N.C. trial court refused to compel arbitration, finding the agreement was only an “agreement to agree,” and started off a crazy game of appeals court-district court ping pong involving this case.  The court of appeals reversed and remanded.  On second thought, the trial court refused to enforce the agreement because the surgeon had a fiduciary duty to disclose the arbitration agreement to his patient as a material term, and because he did not it was unenforceable.  The court of appeals affirmed, noting the application of the FAA, but finding the agreement unconscionable.  The supreme court then remanded to the trial court for further findings of fact regarding the existence of a physician-patient relationship when the agreement was signed, and the trial court complied.  Finally, the case returned to the supreme court, which held that the doctor owed a fiduciary duty to the patient and breached it “by failing to make full disclosure of the nature and import of the arbitration agreement to him at or before the time that it was presented for his signature.”  Recognizing the possibility of an argument that its holding is preempted by the FAA, the court noted “we would have reached the same result on these facts with respect to any agreement that substantially affected [the patient’s] substantive legal rights.”  However, the opinion cites no N.C. cases to support that statement, which may be fatal under the DirecTV analysis.  Two justices wrote separate dissents, based largely on FAA preemption.  (“This jiggery-pokery is precisely the type of impermissble ‘rationalization’ admonished by the United States Supreme Court. Such a tortured attempt to obviate the FAA fails.”)

What is the take away here?  It is that there is still a huge amount of variation in how a given arbitration dispute will be handled, depending on what court hears the dispute.  And the preemption rules set out in Concepcion and DirecTV are either not well understood, or are being intentionally avoided.

The Supreme Court of Louisiana refuses to send customers who were injured while playing at Sky Zone to arbitration, finding that the arbitration clause “is adhesionary and therefore unenforceable”.  Duhon v. Activelaf, LLC, __ So. 3d __, 2016 WL 6123820 (La. Oct. 19 2016); Alicea v. Activelaf, LLC, __ So. 3d __, 2016 6123859 (La. Oct. 19, 2016).  [My alternate title for this post is “I TOLD YOU SO, SKY ZONE.”  Every time I bring my children to the trampoline park for a birthday party, I tell those poor teenagers who are enforcing the rules that those contracts are likely not enforceable.  But, I cared more about the waiver of liability than the arbitration bit.]

The arbitration clause at issue, which is required to participate in activities, was clicked electronically.  It states “If there are any disputes regarding this agreement, I on behalf of myself and/or my child(ren) hereby waive any right I and/or my child(ren) may have to a trial and agree that such dispute shall be brought within one year of the date of this Agreement and will be determined by binding arbitration before one arbitrator to be administrated by JAMS…in the state of Louisiana.”  Furthermore, the agreement imposes $5,000 of liquidated damages for any customer who files a lawsuit.

Louisiana’s highest court held that agreement was unenforceable.  Applying its ruling regarding an arbitration clause in 2005, the court analyzed whether consent of the non-drafting party was calling into question by the existence of a standard contract between unequal bargaining parties, and in particular the “physical characteristics of the arbitration clause” and its mutuality.  Because Sky Zone’s arbitration language was “the only specific provision not relegated to a separate paragraph or set apart in some explicit way,” Sky Zone was not bound to arbitration by the clause, and patrons could be subject to a penalty of $5,000 for filing suit, the court found the arbitration clause “adhesionary and unenforceable.”  The court then dutifully noted that its “application of Louisiana contract law…in the instant case is consistent with [Section] 2 of the FAA”.

While the court states that this decision employs the same type of contract defense that is applicable to any contract — not just one with an arbitration clause — it does not appear to cite any cases outside the arbitration context.  That alone leads me to believe this case is susceptible to a GVR by SCOTUS under the DirecTV analysis.

A short new opinion from the Ninth Circuit may run counter to long-standing Supreme Court precedent. In Casa Del Caffe Vergnano v. Italflavors, 2016 WL 1016779 (9th Cir. Mar. 15, 2016), the court refused to enforce an arbitration agreement in a contract that the parties admitted signing, because the parties simultaneously signed a second agreement declaring the first one a sham.

The story is that two undocumented immigrants chose to become a franchisee of an Italian corporation, Caffe Vergnano, and open an Italian-style coffee shop in San Diego. They signed two contracts on the same day: a “commercial contract,” which was a standard franchise agreement including an arbitration clause; and a “hold harmless agreement” that said the commercial contract “does not have any validity” because it was designed simply to allow the immigrants to obtain visas to work in the U.S. The hold harmless agreement stated the parties “will sign a future contract which will regulate their commercial relationship.”

However, the parties did not enter into a new contract. Instead, the franchisees opened their Italian coffee shop and it folded within eight months. The franchisees sued the franchisor for violations of California statutes and the franchisor moved to compel arbitration. The district court compelled arbitration and the Ninth Circuit reversed.

Repeating language from Granite Rock that contract formation is for courts to decide, and relying on federal common law regarding contracts, a majority of the panel concluded that the commercial contract “was a mere sham to help Hector Rabellino obtain a visa” and was therefore unenforceable. The majority reasoned that the hold harmless agreement proved that the parties did not mutually consent to be bound by the commercial contract.

This decision raises a close question between formation and validity, in my view, that the court ignores completely. On questions of a contract’s validity, the severability doctrine, clarified in Buckeye Check Cashin, dictates that a party challenging arbitrability must “challenge[] specifically the validity of the agreement to arbitrate” in order to have that challenge heard by the court. Otherwise, the validity issue will be addressed by the arbitrator. SCOTUS found it was immaterial whether the challenge made the underlying contract void or voidable. In a footnote in Buckeye Check Cashing, however, SCOTUS excluded a limited set of formation issues from the severability doctrine, suggesting those still belong in court:

The issue of the contract’s validity is different from the issue of whether any agreement between the alleged obligor and obligee was ever concluded. Our opinion today addresses only the former, and does not speak to the issue decided in the cases cited by respondents (and by the Florida Supreme Court), which hold that it is for courts to decide whether the alleged obligor ever signed the contract, Chastain v. Robinson-Humphrey Co., 957 F. 2d 851 (CA11 1992), whether the signor lacked authority to commit the alleged principal, Sandvik AB v. Advent Int’l Corp., 220 F. 3d 99 (CA3 2000); Sphere Drake Ins. Ltd. v. All American Ins. Co., 256 F. 3d 587 (CA7 2001), and whether the signor lacked the mental capacity to assent, Spahr v. Secco, 330 F. 3d 1266 (CA10 2003).

Is the franchisee’s argument that the hold harmless agreement nullified the commercial contract really closer to an argument that the franchisee lacked mental capacity, and therefore belonged in court? Or is it closer to an argument that the commercial contract was fraudulently induced? In my view, that is a close call, but fraudulent inducement seems the better fit, meaning this decision belonged to the arbitrator. The line between formation and validity is not clearly drawn in FAA jurisprudence, and this decision blurs it further.

This week, the Fourth Circuit found an arbitration agreement invalid because it waived all federal and state laws.  Although two other federal circuit courts had already found the same company’s arbitration agreement unenforceable because it called for an impossible arbitration process, the Fourth Circuit found it invalid for a new reason.

The issue in Hayes v. Delbert Services Corp., __ F.3d___, 2016 WL 386016 (4th Cir. Feb. 2, 2016), was whether a putative class of plaintiffs could assert violations of two federal statutes (Fair Debt Collection Practices Act and Telephone Consumer Protection Act) by the servicing agent of a payday lender in court, or whether they had to arbitrate the claims.  The servicer relied on the arbitration clause in the loan agreement to compel arbitration.  The arbitration clause called for arbitration by the Cheyenne River Sioux Tribal Nation, in accordance with the Tribe’s “consumer dispute rules.”  However, the Tribe had no arbitration rules and no capacity to administer arbitrations.  Those failures had led the Second and Seventh Circuits to find the arbitration agreement in the same lender’s loan agreement unenforceable.  But, the arbitration clause in this case was slightly different, as it allowed the borrower the right to select either AAA or JAMS to “administer the arbitration.”  So, the question in this case seemed to be whether that could save the arbitration clause, by providing a real arbitration forum.

The Fourth Circuit did not answer that question, however.  Instead, it issued a much bolder decision.  It focused on the fact that the loan agreement “purports to disavow the authority of all state or federal law.”  In its “Governing Law” section, for example, the loan agreement states “this Agreement shall be subject to and construed in accordance only with the provisions of the laws of the Cheyenne River Sioux Tribe, and that no United States state or federal law applies to this Agreement.”  (Similar language was repeated within the arbitration clauses, so there is no severability doctrine problem here.)

Those provisions really raised the court’s hackles.  It held that:

[A] party may not underhandedly convert a choice of law clause into a choice of no law clause–it may not flatly and categorically renounce the authority of the federal statutes to which it is and must remain subject.  Because the arbitration agreement in this case takes this plainly forbidden step, we hold it invalid and unenforceable.

To support that holding, the court cited 14 Penn Plaza, for the idea that arbitration agreements cannot waive federally protected civil rights, and to Italian Colors, for the proposition that the FAA precludes “an arbitration agreement forbidding the assertion of certain statutory rights.”  Because it found the rejection of all federal law to be at the “core of the arbitration agreement,” the court would not sever those provisions.

In closing, the court issued a bench-slap to the servicer, and a warning to drafters of arbitration agreements:

rather than use arbitration as a just and efficient means of dispute resolution, Delbert seeks to deploy it to avoid state and federal law and to game the entire system.  Perhaps in the future companies will craft arbitration agreements on the up-and-up and avoid the kind of mess that Delbert is facing here.

This opinion is interesting mostly because it could have been predictable and easy.  The Fourth Circuit could have just said “two of our sister circuits have already found this clause invalid, and the add-on language about allowing the AAA to “administer” the arbitration doesn’t save it”.  But instead, the court seems to expand on the existing case law regarding federal statutory rights and takes a strong stance against allowing corporations to use arbitration to circumvent federal claims.

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.

Hawaii issued a bold arbitration decision this month. It applied its state contract law to conclude that the parties did not form a clear arbitration agreement, but even if they did, it was unconscionable because it prohibited both discovery and punitive damages.  Narayan v. The Ritz-Carlton Dev. Co., Inc., __ P.3d __, 2015 WL 3539805 (Haw. June 3, 2015).

The plaintiffs purchased the first condos in a development in Kapalua Bay.  The developer defaulted on loans, however, and it or its agent withdrew over a million dollars from the association’s operating fund.  The plaintiffs sued for breach of fiduciary duty and other claims.

In response, the developer moved to compel arbitration.  It argued that the plaintiffs’ purchase agreements incorporated the condominium declaration, which had an arbitration clause.  The trial court denied the motion to compel, but the intermediate court of appeals reversed.  The Hawaii Supreme Court found the intermediate court gravely erred and the plaintiffs did not have to arbitrate their claims.

Under Section 2 of the FAA, the Hawaii Supreme Court applied state law to decide whether an arbitration agreement existed and whether it was valid.

On the first question, the Hawaii Supreme Court found the parties did not form an agreement to arbitrate, because the purchase agreement was ambiguous regarding the parties’ intent to arbitrate.  Notably the purchase agreements themselves did not mention arbitration and instead stated that the venue for any action shall be in Hawaii state court.  The arbitration clause was only included in the separate condominium declaration.  The court found “it is facially ambiguous whether those disputes would be consigned to arbitration in Honolulu pursuant to the condominium declaration or the [state court] pursuant to the purchase agreement.”  The court’s analysis applied Hawaii case law that appears to create different (and higher) standards for proving the existence of an arbitration agreement than the standards required to prove other contracts.  But, Hawaii avoided any FAA preemption problem by offering up a second, independent basis for its refusal to enforce the arbitration clause: unconscionability.

The court also found the arbitration agreement unconscionable under Hawaii law.  It found it was procedurally unconscionable because the plaintiffs could not negotiate it, it was “buried in an auxiliary document,” and it was ambiguous.  With respect to substantive unconscionability, the court focused on three provisions of the arbitration agreement.  The arbitration agreement provided that the arbitrator could order the parties to exchange copies of “nonrebuttable exhibits” and witness lists, but “the arbitrator shall have no other power to order discovery or depositions unless and then only to the extent that all parties otherwise agree in writing.”  The arbitration agreement  also precluded parties from “disclos[ing] the facts of the underlying dispute…without prior written consent of all parties.” The Hawaii Supreme Court concluded that “if the arbitration clause were enforced as written, the [plaintiffs] would have virtually no ability to investigate their claims, and thus, would be deprived of an adequate alternative forum.”  Furthermore, the arbitration agreement precluded punitive damages, which the court found “substantively unconscionable” in a contract of adhesion.

If there is a continuum of state arbitration decisions, varying from hostile to arbitration on one end to rubber-stamping of arbitration on the other end, I think Hawaii just situated itself on the very hostile end, even further than California and Missouri.  But, this case offers a reminder of two important rules for drafters of arbitration clauses: make the agreement to arbitrate very clear and easy to find; and do not overreach when inserting arbitration provisions that favor your client.

Two state supreme courts found consumer arbitration agreements unenforceable in the past week: Arkansas and New Jersey. Arkansas grounded its decision on the lack of mutuality in the consumer arbitration agreement (similar to Missouri’s recent ruling). Alltel Corp. v. Rosenow, 2014 WL 4656609 (Ark. Sept. 18, 2014). New Jersey grounded its decision on the arbitration agreement’s failure to clarify that the consumer was giving up its right to a court trial. Atalese v. U.S. Legal Servs. Group, __ A.3d __, 2014 WL 4689318 (N.J. Sept. 23, 2014).

Alltel is a consumer class action alleging that a cell phone provider engaged in a deceptive trade practice when it charged early termination fees. The company moved to limit the class to exclude customers with arbitration provisions, and later to compel arbitration with those customers, and the trial court denied those motions. On appeal, the Supreme Court of Arkansas affirmed the lower court’s finding that the arbitration agreement was unenforceable.

Critically, the Alltel arbitration agreement was preceded by this clause “If we do not enforce any right or remedy available under this Agreement, that failure is not a waiver.” The court construed that clause as “Alltel clearly reserv[ing] to itself the option of pursuing remedies other than arbitration, without the consequence of waiver. Moreover that reservation and protection was limited solely to Alltel and was not extended to the customer.” Therefore, the court found the arbitration agreement was invalid because it lacked mutuality. The court also found that its result was not preempted by the FAA, because Arkansas considers “the doctrine of mutuality” when analyzing all contracts. However, the opinion does not appear to cite any case outside the arbitration context to support that statement. (That’s Problem Number One with this decision, ie. preemption and Concepcion. Problem Number Two is that the court ignores the Prima Paint doctrine by looking outside the arbitration agreement to find the lack of mutuality. )

Atalese is an individual claim by a consumer who contracted with a debt-adjustment company, and then sued for violations of the consumer fraud act, among other claims. The contract stated that “any claim or dispute” related to the agreement “shall be submitted to binding arbitration” and that “any decision of the arbitrator shall be final and may be entered into any judgment in any court of competent jurisdiction.” The company moved to compel arbitration. The trial court granted that motion and the intermediate appellate court affirmed.

The New Jersey Supreme Court reversed, largely by characterizing arbitration as a waiver of a citizen’s right under the New Jersey Constitution to a trial by jury and assuming that “an average member of the public may not know…that arbitration is a substitute for the right to have one’s claim adjudicated in a court of law.” Given that framing of the issue, the court found the arbitration clause lacked “clear and unambiguous language that the plaintiff is waiving her right to sue or go to court to secure relief,” and therefore was unenforceable. Like the Arkansas court, New Jersey tried to shield itself from Concepcion by positioning its decision as a general application of New Jersey contract law. The opinion has a string cite that continues for half a page, in which all the opinions cited relate to waivers of statutory rights. Notably, though, the court does not address the fact that SCOTUS has not found the Sixth Amendment right to a jury trial an impediment to enforcing arbitration agreements.

What can we say about these two cases and last post’s Missouri case? I can find ways that each of them contravene federal case law, but it is unlikely that SCOTUS will take the time to correct them. However, these cases do point to a real need to clarify the Concepcion decision. If the intent of the Concepcion decision was to tamp down on state courts’ creativity in developing “general state law doctrines” that invalidate arbitration, it is simply not doing its job.