March comes in like a lion, right?  Well, that’s not true with respect to the weather here in Minneapolis.  But it may be true with respect to arbitration decisions from around the country.  This post focuses on two recent decisions from state high courts that refuse to compel arbitration.

In Global Client Solutions, LLC v. Ossello, 2016 WL 825140 (Mont. Mar. 2, 2016), a majority of Montana’s Supreme Court refused to enforce the arbitration clause between a consumer and a financial institution (that set up a bank account for the consumer’s efforts with a debt relief company).  The arbitration clause provided for AAA arbitration of all claims arising out of the agreement, even claims relating to the validity of the agreement, but the bank had the right to bring collections actions in court. The trial court found the arbitration clause was unconscionable and refused to compel arbitration.

On appeal, the Montana Supreme Court first found there was no enforceable delegation clause in the parties’ arbitration clause, because the language was “ambiguous and confusing” instead of clear and unmistakable, largely due to what appears to be a typo in the clause. (The clause said the parties would arbitrate “the breach, termination, enforcement, interpretation or validity [of the entire agreement], including the termination of the scope or applicability of this Agreement to arbitrate”.  The bank argued “termination” was supposed to be “determination.”)  The court also refused to find that incorporation of the AAA rules constituted an enforceable delegation clause, because it did not specify which AAA rules applied and this was not a contract between two sophisticated commercial parties.

After confirming it could address the validity of the arbitration clause, the court found the clause unconscionable under Montana law because the bank had the right to bring collection matters to court, while the consumer had no similar right. The court reasoned that its holding was not preempted under the Concepcion rule, because other post-Concepcion courts have relied on lack of mutuality to invalidate an arbitration clause.

A concurring justice wrote “The elephant in the room is not state hostility toward arbitration…If there is any hostility, it is toward those who hide behind the FAA…to escape any material consequence of running fraudulent confidence schemes.” [But of course that assumes that a AAA arbitrator would not find wrongdoing when confronted with a “fraudulent confidence scheme”… ] Two justices dissented, asserting that the incorporation of AAA rules was a valid delegation clause, such that the arbitration clause’s validity should have been decided by a AAA arbitrator.

The second case comes from Alabama and is a cautionary tale for companies trying to add arbitration agreements to existing contracts with many consumers.  In Moore v. Franklin, 2016 WL 761698 (Ala. Feb. 26, 2016), the Supreme Court of Alabama found the parties did not form a valid arbitration agreement by virtue of the bank posting a notice to the customer’s online banking profile.  Citing cases from five federal courts, Alabama concluded that in order to form part of the parties’ agreement, there must be proof that the recipient accessed the web page containing the arbitration provision.

What lessons can we give drafters from these two cases?  Well, check for typos.  And then double and triple-check.  Then, and only then, considering increasing the likelihood the arbitration clause will be found enforceable by making any carve-outs mutual.  If the company can bring collection claims in court, then why not let the consumer bring modest claims in small claims court?  Finally, once you drafted the clause, find a way of making sure those customers see it (and hopefully even click a button confirming that they agreed to it).

Some arbitration topics just never die.  This post strings together new cases on three of those topics: 1) whether arbitration agreements that call for the now-defunct National Arbitration Forum (NAF) are enforceable; 2) formation fights in nursing home agreements; and 3) the continuing fight between the NLRB and the courts over class action waivers in employment agreements .

In a 3-2 decision, the Supreme Court of Pennsylvania refused to enforce an arbitration agreement that called for administration by the NAF.  Wert v. Manorcare of Carlisle PA, 2015 WL 6499141 (Pa. October 27, 2015).  In the context of a wrongful death claim against a nursing home, the parties disputed the enforceability of an arbitration agreement in the admission paperwork.  Pennsylvania’s highest court adopted a 2010 decision from its intermediate appellate court finding that the incorporation of the National Arbitration Forum Code was an essential term, such that if the NAF was unavailable, the entire arbitration agreement was unenforceable. The court found the subjective intent of the Appellee (who admitted she did not read the agreement) was irrelevant.  Relying on its analysis of the NAF rules, the court found “the provision integral and non-severable.”  For good measure, the court also noted that its result was not preempted by federal law because it was “based on settled Pennsylvania contract law principles that stand independent of arbitration.”  State courts, as well as federal courts, are now split on how to handle arbitration clauses incorporating NAF rules.

In another nursing home case, the Alabama Supreme Court found an arbitration agreement was not validly formed because the person who signed it did not have proper authority.  Diversicare Leasing Corp v. Hubbard, 2015 WL 5725116 (Ala. Sept. 30, 2015), involved a mother’s claim about the wrongful death of her son in a long-term care facility. When the adult son, whose mental capacity had not progressed beyond that of a toddler, was admitted, his mother signed the admission agreement as the “responsible party” and “resident’s representative.”  After she brought suit, the nursing home moved to compel arbitration.  However, the Alabama trial and appellate courts found that no valid arbitration agreement had been formed.  Critically, the son had never been mentally competent to authorize his mother to act on his behalf, and she had never been given his power of attorney, or health care decision-making rights, or been appointed his legal guardian after his 18th birthday.  Therefore, the mother’s signature did not bind the son.  The Alabama decision is in line with other state court decisions that have strictly interpreted the legal authority of relatives who sign arbitration agreements in nursing home contracts.

Finally, the third case taught me a new legal doctrine: nonacquiescence.  And who is not acquiescing to federal authority?  Well, the NLRB, at least according to the 5th Circuit.  In its D.R. Horton decision in 2013, the Fifth Circuit had rejected the NLRB’s analysis that federal labor laws override the FAA and preclude class action waivers.  Despite D.R. Horton, the NLRB applied its same analysis in Murphy Oil, just ten months later.  On review, the Fifth Circuit forcefully reaffirmed its earlier holding.  Murphy Oil USA v. NLRB, 2015 WL 6457613 (5th Cir. Oct. 26, 2015).  However, the court was not willing to hold the NLRB in contempt or otherwise penalize the Board. Because the Board only has to acquiesce to circuit court rulings when a case will be reviewed by that same circuit, and the Murphy Oil case could have been reviewed in multiple circuits, the court noted “[w]e do not celebrate the Board’s failure to follow our D.R. Horton reasoning, but neither do we condemn its nonacquiescence.”

Arbitration is having its 15 minutes of fame.  Thanks to a series in the New York Times, my inbox is full of links to the articles, questions about the information, and fascinating commentary.  [Next time I am in Oakland, I am totally having the “Scalia” cocktail at Italian Colors.]  With the far-reaching audience of the NYT, the policy questions surrounding waivers of class arbitration are no longer just a conversation among in-house counsel, advocates, and law professors, but reached the general water cooler set.  For anyone passionate about arbitration law, it’s like Christmas morning.  Jumping past the merits of the policy questions for a moment, what could happen if the public demands that its representatives take action?

One possibility is that there may be more cases like McLeod v. General Mills, Inc., Case No. 15-494 (D. Minn., October 23, 2015).  In that case, the Chief Judge of the District of Minnesota found that an employee collective action could go forward in court, despite a valid arbitration agreement that demanded individual actions.  Why?  Because language in the Older Workers Benefit Protection Act of 1990 (OWBPA) provides that any worker challenging the validity of a waiver of ADEA (Age Discrimination in Employment Act) rights “shall have the burden of proving in a court of competent jurisdiction that a waiver was knowing and voluntary.”  The court found that the statute’s use of “shall” along with “court” was sufficient to trump the earlier and more general requirement that courts enforce arbitration agreements (in the FAA).  [Some of the workers in the case are just 42, and 44 years old.  Could I really be that close to the definition of an “older worker”??]

Unless there is a wholesale rewriting of the FAA, which seems unlikely, any action to ensure the availability of class and collective actions in court will likely take place one industry or one specific statute at a time.   The CFPB may require that consumers of financial products can bring class actions in court.  And members of Congress may start inserting language like the text of the OWBPA into other statutes designed to protect certain classes of employees and consumers.  Although, in my experience, the most likely outcome is that arbitration’s 15 minutes will pass, and it will go back to something talked about only by lawyers, judges and professors, and nothing will change until the current SCOTUS majority becomes the minority.

Nursing home arbitration agreements are among the most unpopular arbitration agreements around.  Last week, Kentucky’s Supreme Court issued a lengthy, but fractured, opinion, finding three arbitration agreements were never validly formed because the signing parties did not have authority to give up the decedent’s constitutional right to a jury trial.  Extendicare Homes, Inc. v. Whisman, ___ S.W.3d___, 2015 WL 5634309 (Ky. Sept. 24, 2015).

The Extendicare case consolidated three separate matters, all of which involved nursing homes attempting to compel arbitration of wrongful death and personal injury claims by estates of deceased residents.  In each case, a relative with power of attorney had signed an admission document when the resident entered the nursing home.  In a 2012 case, the Kentucky Supreme Court held that decedents cannot affect the rights of their beneficiaries with respect to wrongful death claims.  Therefore, the wrongful death claims were already not subject to arbitration.  The Extendicare case confronted the open issue of whether other personal injury claims had to be arbitrated.

The court explained that the arbitration agreements would be validly formed only if the attorney-in-fact had authority to bind the residents to arbitrate claims by the power-of-attorney instrument.  The court found the following statements of authority insufficient to allow the attorney-in-fact to bind the resident to arbitration:

  • power to “institute or defend suits concerning [the principal’s] property rights.”  [The court found “suits” are actions in courts of law, and that signing an arbitration agreement is not incidental to instituting or defending a suit];
  • power “to draw, make and sign any and all checks, contracts…agreements.”  [The court found that statement was limited to managing the principal’s financial and banking affairs.]
  • power “to demand, sue for, collect, recover, and receive all debts, monies” ever due or owing.  [The court found that statement limited to court actions and said arbitration is not reasonably necessary or incidental to the specified powers.]
  • power to “make…contracts of every nature in relation to both real and personal property.”  [The court found that while personal injury claims are personal property, a “pre-dispute arbitration agreement was not a contract made ‘in relation’ to a property claim.”]

The only language that the Kentucky court found did encompass entering into an arbitration agreement was the power to “transact, handle, and dispose of all matters affecting me and/or my estate” and “generally to do and perform for me in my name all that I might if present.”  However, the court refused to infer the agent’s “authority to waive his principal’s constitutional right to access the courts and to trial by jury” unless that power is “unambiguously expressed” in the power-of -attorney document.

In dramatic fashion, the court analogized entering into an arbitration agreement to: putting a child up for adoption, aborting a pregnancy, and entering into personal servitude.  The majority reasoned that if an agent’s general authority cannot be extended to those serious waivers of constitutional rights, then it is equally “absurd” to infer that a general grant of authority carries with it the power to waive the right to a jury trial in a court of law.  How specific would the power of attorney need to be?  The decision suggests it has to expressly provide for “authority to waive the fundamental right to an adjudication by judge or jury.”

In response to the three dissenters, the Extendicare majority reasons that its holding does not conflict with Marmet Health Care Center or Concepcion because it is not a “blanket prohibition” against arbitration agreements and is instead “a long-standing and well-established policy disfavoring the unknowing and involuntary relinquishment of fundamental constitutional rights regardless of the context in which they arise.”

The three dissenters write that the majority’s rule does, in fact, conflict with SCOTUS’s interpretations of the FAA.  “[T]his Court is not at liberty to conclude that in Kentucky a power of attorney that gives the agent express authority to contract does not include the authority to contract for arbitration… Any such holding would fly in the face of federal law and be preempted by the Supremacy Clause because it … singles out arbitration agreements for disfavored treatment….”  Furthermore, the dissenters note that agreeing to arbitrate is fundamentally different from giving up parental rights or personal liberty because “arbitration agreements…involve no substantive waiver.  The principal’s substantive rights remain intact, only the forum for addressing those rights is affected.”

Kentucky’s Supreme Court is not the only governmental entity working against nursing home arbitration agreements.  Just last week, Senator Al Franken joined 33 other senators to urge the Center for Medicare and Medicaid Services (CMS) to “outlaw the use of unfair pre-dispute arbitration clauses in contracts with long-term care facilities like nursing homes.”  CMS is already considering restrictions on pre-dispute arbitration agreements in Long-Term Care facilities, but consumer advocates feel they are not protective enough.

 

A few months ago, the Ninth Circuit found that the arbitration agreement in Barnes & Noble’s website was not enforceable.  This week, the Ninth Circuit found that the arbitration agreement Sirius XM Radio relied upon was not enforceable because the user did not know he had any agreement with Sirius XM, let alone an arbitration agreement.  Knutson v. Sirius XM Radio Inc., __ F.3d__, 2014 WL 5802284 (9th Cir. Nov. 10, 2014).

The plaintiff in this case purchased a Toyota truck.  The truck came with a 90-day trial subscription to Sirius XM satellite radio.  The plaintiff did not have to sign any documents to receive or activate the radio, it was activated just after his purchase.  Over a month later, the plaintiff received a “Welcome Kit” in the mail from Sirius XM.  The kit had a customer agreement with an arbitration provision.  The plaintiff did not pay any attention to the Welcome Kit. The plaintiff also did not ask to end his trial subscription.

Five days after the trial subscription ended, the plaintiff brought a putative class action suit against Sirius XM.  He alleged that Sirius XM made three unauthorized calls to him that violated the Telephone Consumer Protection Act.  Sirius XM quickly moved to compel arbitration, pointing out that not only did the dispute belong in arbitration, but the plaintiff had waived his right to a class action in the arbitration provision.  The district court granted the motion and the Ninth Circuit reversed.

The Ninth Circuit found that Sirius XM and the plaintiff never formed any contract at all.  First, applying California contract law, the court found that at the time of the truck purchase, no reasonable person would understand that he had agreed to arbitrate with Sirius XM.   Indeed, there was no reason to think the plaintiff had entered into a contract with anyone but Toyota.  Second, the court found that the plaintiff’s continued use of the radio service after receiving the Welcome Kit did not operate to form a contract with Sirius XM. (The Welcome Kit stated that if the subscription was not canceled within 3 days of activation, the customer was deemed to have accepted the terms.)  The court concluded the customer was not obligated to review the entire Welcome Kit and act on it because “there was no effective notice that action was required.”

Although the court refused to acknowledge three “shrinkwrap” cases from California district courts were rightly decided, it distinguished them anyway.  (Those cases had all upheld agreements provided to a customer after the initial point of sale.)  It summarized that “[h]ere, by contract, there is no evidence that Knutson purchased anything from Sirius XM, or ever knew that he was entering into a  contractual relationship with the satellite radio service provider.”  Because there was no initial transaction between the parties, in other words, the customer had no reason to closely review things in the mail from Sirius.  As a public service, the court even explained how Toyota and Sirius XM could remedy this situation going forward.  (Give notice in Toyota’s purchase agreement or other literature.)

A retailer/service provider should now consider that: a general term of use on its website is not sufficient to bind customers to arbitration; an arbitration agreement provided after the customer agrees to the service may not be sufficient (whether paper or electronic); and any arbitration agreement will not be upheld if the customer did not have reasonable notice of the terms at the time of purchase (see Zakaib and these cases).  This is fair.  If companies are going to be able to reap major litigation benefits by using arbitration agreements (precluding class actions and restricting types of damages, for example), consumers should at least have the option of reviewing those provisions and saying “no thanks.”

Cue the R.E.M folks, because the Supreme Court of Missouri issued a 4-3 opinion recently that appears to upend many employment arbitration agreements in that state.  Baker v. Bristol Care, Inc., __ S.W.3d__, 2014 WL 4086378 (Mo. Aug. 19, 2014).  However, the situation is not as dire as it may seem.

The high court in Missouri agreed with the lower court that the arbitration agreement in the parties’ employment contract was invalid (and therefore the employer could not compel arbitration of the putative class action claim by plaintiffs seeking unpaid overtime).  In particular, it concluded that “there was no consideration to create a valid arbitration agreement” for two reasons: continued at-will employment was insufficient consideration; and the arbitration agreement was illusory.

In this case, the employee was first asked to sign an arbitration agreement upon receiving a promotion to a managerial position.  But the managerial agreement allowed the employee to be terminated without notice and receive only five days’ compensation.  Based on that, the court characterized the arrangement as at-will employment, and followed earlier Missouri cases finding “continued at-will employment is not valid consideration to support” an arbitration agreement.  That conclusion puts Missouri at odds with many other courts around the country However, the court relied on its ability to apply generally applicable Missouri contract law, even in the context of the FAA, and found “an offer of continued at-will employment is not valid consideration [for an arbitration agreement] because the employer makes no legally enforceable promise to do or refrain from doing anything it is not already entitled to do.”

The arbitration agreement also allowed the employer “to amend, modify or revoke this agreement upon thirty (30) days’ prior written notice to the Employee.”  The court concluded that that statement allowed the employer to modify the agreement “unilaterally and retroactively,” making it illusory.  The court hypothesized that the provision allowed the employer, in the course of an arbitration that was not going its way, to provide the employee notice that “effective in 30 days, it no longer would consider itself bound by the results of the arbitration.”  For that reason, the employer’s argument that the arbitration agreement was supported by consideration due to its “mutuality” failed.

For employees, this is another case in the string of cases finding arbitration agreements illusory and therefore unenforceable.  For employers who are worried about arbitration agreements in Missouri, I have an easy solution.  Make sure that if you have a modification clause, it does not apply to existing disputes.  That simple change would have likely make this arbitration agreement enforceable and probably avoided the class action.  (The Missouri Supreme Court made clear that the arbitration agreement was “enforceable if either source of consideration [was] valid,” so true mutuality alone should be sufficient.)

In my view, though, the enforceability of this arbitration agreement should never have been considered by the court.  The parties’ agreement gave the arbitrator “exclusive authority to resolve any disputes relating to applicability or enforceability of this Agreement.”  The Missouri Supreme Court found that clause did not give the arbitrator authority to address the plaintiff’s defenses to arbitration, however, because they were about contract formation, which it distinguished from contract enforceability.  While contracts professors and hornbooks talk about  peppercorns being necessary to form a contract in the first place, in real life consideration is an enforceability issue.  It is not a dispute about whether the parties really signed the contract, or had authority to sign, or whether this document really was incorporated into the parties’ agreement, which are the type of challenge to the entire arbitration agreement that SCOTUS has said do belong in court.  Buckeye Check Cashing v. Cardegna, 546 U.S. 440, 444 n.1 (2006).  Instead, it is an argument that the employee’s assent to the contract should be invalidated post-hoc because the contract did not meet state law rules, more akin to unconscionability challenges than true formation challenges.

 

In a case between an on-line customer and Barnes & Noble, the Ninth Circuit recently refused to enforce the arbitration agreement found in the website’s “Terms of Use.” Nguyen v. Barnes & Noble Inc., __ F.3d__, 2014 WL 4056549 (9th Cir. Aug. 18, 2014). The decision further calls into question the validity of “browsewrap” agreements, which the consumer does not have to assent to or acknowledge before making a purchase.

The plaintiff’s case against B&N stemmed from his attempt to buy a Touchpad during a “fire sale” on those devices in 2011. The plaintiff purchased two Touchpads on the B&N website and received an email confirmation. But the next day, B&N cancelled his order due to high demand. Plaintiff then brought a putative class action for false advertising and deceptive business practices against B&N. In response, B&N moved to compel arbitration. Both the district court and the Ninth Circuit refused to compel arbitration.

The issue was whether the plaintiff had “assented” to the website’s “Terms of Use,” which provided for binding arbitration on an individual (not consolidated or class) basis, thereby making them part of his contract. The Terms of Use were available to visitors of the B&N website via a hyperlink in the bottom left-hand corner of every page, and the hyperlink was underlined and in green typeface. However, the plaintiff never had to click on a box indicating he agreed to the Terms of Use. Indeed, the plaintiff never did click on the Terms of Use or otherwise read them. That structure made the Terms of Use a “browsewrap agreement”, which is one where “the user can continue to use the website or its services without visiting the page hosting the browsewrap agreement or even knowing that such a webpage exists.” (A “clickwrap” agreement requires the user to “click” on a box indicating agreement with the terms.)

The court found that the website did not put a reasonably prudent user “on inquiry notice of the terms of the contract.” It explained that

in keeping with courts’ traditional reluctance to enforce browsewrap agreements against individual consumers, we therefore hold that where a website makes its terms of use available via a conspicuous hyperlink on every page of the website but otherwise provides no notice to users nor prompts them to take any affirmative action to demonstrate assent, even close proximity of the hyperlink to relevant buttons users must click on–without more–is insufficient to give rise to constructive notice.

This case should give pause to any on-line retailers that still use browsewrap agreements.  If they want their arbitration agreements (with those valuable waivers of class actions) to be enforceable, the customers should have to read and assent to those terms before making a purchase.

The Eighth Circuit made quick work of a nursing home’s argument in favor of compelling arbitration this week.  In a suit alleging negligent care of a resident, the court ruled that the arbitration agreement was not enforceable because the resident never signed it.  GGNSC Omaha Oak Grove, LLC v. Payich, __ F.3d __, 2013 WL 776811 (8th Cir. March 4, 2013).

The fact pattern in this case is probably a common one.  When the mother entered the nursing home’s care, she did not sign either the Admission Agreement or the separate Arbitration Agreement.  Instead, her son signed his own name on both of those documents.  However, her son did not have power of attorney.

After the mother died, the son, as Special Executor for the Estate, sued the nursing home for negligent care.  The nursing home moved to compel arbitration.  The district court denied the motion after finding the son did not have authority to sign on his mother’s behalf and there was no valid third-party beneficiary argument.

The Eighth Circuit affirmed the district court’s refusal to compel arbitration.  On appeal, the nursing home only pursued its third-party beneficiary argument.  The argument went like this: while the son signed the agreements, the mother accepted the benefits by receiving the care, so she was a third party beneficiary and therefore her estate should be bound.  The court disagreed with the whole foundation of the argument, finding that there was no valid contract between the son and the nursing home (and therefore, no contract from which a third party could conceivably benefit).  It noted that the agreements identified the contracting parties as the mother and the nursing home, not the son and the nursing home.  There was no indication that the nursing home and the son, on his own behalf, intended to enter into an agreement.

Nursing home employees may have some training in their future about who has authority to sign contracts…