The First Circuit just faced a fascinating formation issue: if a customer cannot see what she is signing, and no employee reads it to her or ensures she knows there are legal terms, is there a contract?  With Justice Souter sitting by designation on the panel, the court answered “no,” and thereby kept a class action in the courts. National Federation of the Blind v. The Container Store, Inc., 2018 WL 4378174 (1st Cir. Sept. 14, 2018).

The Container Store case involves blind plaintiffs who allege the retailer violated discrimination laws by failing to use tactile keypads on its point-of-sale (POS) devices.  In response, the retailer moved to compel individual arbitration for the plaintiffs who had enrolled in a loyalty program (which has an arbitration agreement and class action waiver).  The customers who enrolled in the loyalty program in a store alleged that they enrolled with the assistance of a sales associate, and were never presented with the terms and conditions of the program, including the arbitration provision.   In response, the retailer presented excerpts from a training manual, which instructed employees to give blind plaintiffs the opportunity to review the terms on the POS device.  Critically, the retailer did not have evidence that the employee who helped sign up the named plaintiffs had in fact read the terms and conditions to those plaintiffs or otherwise made them aware that there were any terms and conditions.  Therefore, the district court found no agreement to arbitrate was formed between the Container Store and those plaintiffs, and denied the motion to compel arbitration.

On appeal, the First Circuit affirmed.  It first disagreed with the Container Store’s argument that this dispute was one about the validity of the loyalty agreement as a whole, such that it must be heard by an arbitrator.  Instead, it concluded that this was a fundamental dispute about the formation of the arbitration agreement, which was properly addressed by the court.  (The First Circuit even got punny:  “We reject the Container Store’s attempt to re-package Plaintiffs’ arguments as one regarding validity…”)

It then got into the guts of the argument.  It affirmed the critical findings of the district court: “it is undisputed that the in-store plaintiffs had no way of accessing the terms of the loyalty program, including the arbitration agreement”; and “No store clerk actually informed them that an arbitration agreement existed as a condition of entering the loyalty program.”  Therefore, even though “inability to read” is not generally a defense to contract formation, the court found no arbitration agreement was ever formed with these plaintiffs.  Unlike other situations where plaintiffs who could not read knew or should have known that they were signing documents that implicated legal rights, in this case the court found “zero hint” that the loyalty program involved terms and conditions.

Finally, with respect to a class of plaintiffs who had signed up for the loyalty program online, and thereby did have notice of the terms and conditions, the court still denied the motion to arbitrate.  It found the arbitration agreement was illusory and therefore unenforceable under Texas law.  The court found language in the arbitration agreement gave the Container Store “the right to alter the terms of the loyalty program, including the arbitration provision, ‘at any time'” and the change would have retroactive effect, affecting even parties who had already invoked arbitration.

This case reminds me of the First Circuit’s big decision in Uber  in June, when the court found that the arbitration agreement in Uber’s terms also was not conspicuous enough to be binding.  In other words, this issue is not limited to individuals who have disabilities, but gets at the fundamental question of how much information do consumers need to validly form a contract.

This case also makes me smile because guess which firm represented the Container Store?  Sheppard Mullin, the same firm that was not able to enforce its own arbitration agreement with its client in the last post.   Rough arbitration month for those attorneys.

 

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.

Demonstrating just how difficult it can be to separate questions about the “formation” of an arbitration agreement from the “validity” of that agreement, the Fifth Circuit found this month that when an argument was applied to two of the parties’ three agreements, it related to their formation, but when the same argument was applied to the third agreement, it related to its validity.

In Lefoldt v. Horne, 2017 WL 1326241 (5th Cir. April 11, 2017), the plaintiff, a community hospital, had engaged the defendant to provide auditing services.  The parties signed contracts in 2009, 2010, and 2012.  However, only the 2009 agreement was reflected in the minutes of the hospital’s board.  In 2014, the hospital filed for bankruptcy, and its trustee sued the auditor for professional malpractice.  In response, the auditor moved to compel arbitration, based on arbitration provisions in all three contracts.

In order to determine whether the dispute was arbitrable, the Fifth Circuit had to confront two confounding rules. First was Mississippi’s “minutes rule,” which the hospital raised as a defense to arbitrability.  The “minutes rule” appears to require  that a public board reflect actions taken in the minutes of its meetings, and, if an agreement to contract is not reflected in those minutes, the contract is not enforceable.  The second issue the Fifth Circuit had to address was the first footnote in SCOTUS’s Buckeye Check Cashing decision, which distinguished disputes over a contract’s validity from those over “whether any agreement between the alleged obligor and oblige was ever concluded.”  That matters because issues of validity can be sent to an arbitrator, which those over formation generally cannot.

The court found the issue of whether Mississippi’s “minutes rule” was one about formation or validity “a close question.” However, it concluded that the minutes rule raised an issue of the very formation of the 2010 and 2012 service contracts.  That decision allowed the court to decide whether those contracts were formed, and it found they were not validly formed, so the trustee did not have to arbitrate issues under those two contracts.

However, the court found that because the hospital board recorded the auditing contract in its 2009 minutes, the application of the “minutes rule” in that instance involved the validity of the 2009 contract. The court found an arbitrator should decide “whether and how the minutes rule applies to the 2009 engagement letter and the scope of the arbitration clause,” unless the district court finds a delegation clause on remand.

This case is a great example of how the current arbitration jurisprudence may have gotten off course.  Should it be this difficult for a court to decide whether a particular argument should be heard by a court or an arbitrator?  See my post from five years ago (has it really been that long?!) on the thin line between formation and validity.

In a decision that appears intentionally controversial, the Supreme Court of New Jersey yesterday refused to enforce the delegation clause in a for-profit college’s enrollment agreement in a 5-1 opinion.  Morgan v. Sanford Brown Institute, 2016 WL 3248016 (N.J. June 14, 2016).  Although the delegation clause had never been specifically challenged by the plaintiffs, as is required by SCOTUS’s Rent-A-Center in order to avoid delegating the issue of arbitrability to the arbitrator, the court found that was immaterial

The plaintiffs alleged that Sanford Brown Institute had induced them to enroll via misrepresentations and deception.  In response, the defendants moved to compel arbitration, based on an arbitration agreement in the plaintiffs’ enrollment agreement.  The trial court denied the motion, but the intermediate appellate court reversed, concluding that an arbitrator should decide whether the arbitration agreement was enforceable, due to the presence of a delegation clause.

At the state’s highest court, the issue of whether the delegation clause was enforceable was the sole issue.  The plaintiffs argued they were unaware the arbitration agreement “denied them their right of access to a judicial forum and to a jury trial,” making the arbitration agreement unenforceable under New Jersey’s Atalese decision.  Plaintiffs — and the court– characterized their failure to understand that arbitration is a substitute for court, not an addition to court, as preventing a meeting of the minds, and therefore a challenge to the very existence of the entire agreement.  In response, defendants pounded on Rent-A-Center, arguing that it is binding precedent and must be applied to conclude that since the plaintiff failed to challenge the validity of the delegation clause specifically, an arbitrator must address any challenges to arbitrability (including challenges under Atalese).

Although the NJ Supreme Court identified the key issue in this case as “who decides whether the parties agreed to arbitrate disputes arising from the enrollment agreement: a court or an arbitrator,” I would say the real issue in the case is “can New Jersey find a way around Rent-a-Center’s rule enforcing delegation clauses that does not entirely give the middle finger to SCOTUS and thereby invite reversal?”

The delegation clause that was enforced in Rent-A-Center, because plaintiff did not challenge its validity in particular, stated: “[t]he Arbitrator, and not any federal state, or local court or agency, shall have exclusive authority to resolve any dispute relating to the interpretation, applicability, enforceability or formation of this Agreement.”  The delegation clause that New Jersey refused to enforce in Morgan stated: “Any disputes, claims, or controversies between the parties to this Enrollment Agreement arising out of or relating to…(v) any objection to arbitrability or the existence scope, validity, construction, or enforceability of this Arbitration Agreement shall be resolved pursuant to this paragraph (the “Arbitration Agreement”).”  [Note that the NJ sample does not specifically say the issue will not be addressed by a court, but the words used to describe the types of disputes that will be arbitrated are very similar.]

After acknowledging that the plaintiffs did not specifically challenge the delegation clause in Morgan, the court went on to establish some logical building blocks for distinguishing Rent-A-Center.  First, it noted that state law governs whether the parties “entered an agreement to delegate” arbitrability.  Second, delegation clause must be clear and unmistakable under First Options.  Third, no one challenged the “clarity” of the delegation clause in Rent-A-Center.  (There is the wiggle room!)  Therefore, because the NJ plaintiffs challenge whether the delegation clause was clear enough to allow a meeting of the minds, the New Jersey Supreme Court defines that as a challenge to the formation of the arbitration agreement containing the delegation clause, putting the issue of arbitrability squarely before the court.  And, having concluded that the court, not an arbitrator could decide the validity of the arbitration clause, this Court went on to find it unenforceable. Critically:

The arbitration provision in the Sanford Brown enrollment agreement suffers from the same flaw found in the arbitration provision in Atalese — it does not explain in some broad or general way that arbitration is a substitute for the right to seek relief in our court system.  That flaw– non-compliance with the dictates of Atalese–extends to the purported delegation clause…

***

In conclusion, the arbitration provision and purported delegation clause do not meet the requirements of First Options and Atalese and do not satisfy the elements necessary for the formation of a contract, and therefore are unenforceable.

The lone dissenting justice stated “I cannot reconcile the majority’s reasoning with the United States Supreme Court’s decision in Rent-A-Center.”

Here is some context:

  • The Morgan majority repeatedly comments that the defendants did not raise the delegation clause issue at the trial court.  So, why not just say the appeal issue was not properly preserved and reject delegation on those narrow procedural grounds?  SCOTUS would never grant cert of that.  Instead, however, NJ went out of its way to forge a path through Rent-A-Center.  
  • Actually, not much forging happened here.  NJ followed the trail blazed by Kentucky last year.  Kentucky also refused to enforce the delegation clause in a for-profit college agreement, finding it was never formed (in that case, because the signatures were not at the end of the agreement).  West Virginia did something similar, refusing to enforce a delegation clause because it was not “clear and unmistakable,” because “arbitrability” is an ambiguous word.  (W. Va, Kentucky, and NJ are strange bedfellows, no?)
  • NJ may not have openly thumbed its nose at SCOTUS in this opinion, but a recent opinion from its intermediate appellate court did.  It complained that SCOTUS’s “liberal federal policy favoring arbitration…in many cases has caused the forfeiture of important rights because consumers and employees lack the bargaining power to object to an arbitration clause’s inclusion; citation of the ‘liberal federal policy favoring arbitration’ merely evokes the old saying, ‘a good catchphrase can obscure fifty years of analysis’.”  Kleine v. Emeritus at Emerson, Docket A-4452-14T3 (N.J. Ct. App. June 9, 2016).
  • The U.S. Department of Education has recently proposed a rule that would preclude postsecondary institutions from requiring that students arbitrate disputes.  So, New Jersey has some political cover in deciding not to force these students into arbitration.  (We just did it a year before the rule would have done it anyway!)
  • And – one state supreme court enforced a delegation clauses in recent weeks.  Alabama enforced this delegation clause: “Any dispute regarding whether a particular controversy is subject to arbitration, including any …dispute over the enforceability, scope, reach or validity of this agreement…shall be decided by the arbitrator(s).”    Regions Bank v. Rice, 2016 WL 3031357 (Ala. May 27, 2016).

All in all, I often feel that arbitration law is a big game of Whack-a-mole, where the U.S. Supreme Court is the kid holding the hammer, and the state courts keep randomly popping up with new and creative ways around arbitration precedent.  But now, with only eight Justices, and no Scalia, will SCOTUS be willing to bring down the hammer on states for not following its controversial 5-4 decision in Rent-A-Center?  I am guessing not.  Send me your thoughts.

 

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.

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.

The Fifth Circuit un-vacated an arbitration award last week, holding the district court had wrongly concluded that the court was the proper decision-maker on contract formation.  Although courts are presumptively authorized to decide whether an arbitration agreement exists, the Fifth Circuit found the parties altered that presumption by “submitting, briefing, and generally disputing that issue throughout the arbitration proceedings.”  OMG, L.P. v. Heritage Auctions, Inc.,  2015 WL 2151779 (5th Cir. May 8, 2015).  [Or, as I like to think of the case: “OMG!  I gave arb TMI and lost my appeal.  WTF”]

The dispute related to OMG’s claim that it was owed more commissions than the auction house had paid it for firearm sales.  The parties disputed how to interpret the term “merchandise” in the contract. Heritage demanded arbitration.  The two relevant agreements between OMG and Heritage provided for binding arbitration of “any dispute” “in any way related” to the agreements.  In arbitration, the auction house argued there was no meeting of the minds regarding the meaning of “merchandise,” so the contract was unenforceable.  The arbitrator agreed and rescinded the contract.

OMG asked the federal district court to vacate the arbitration award, arguing that the arbitrator exceeded his authority by ruling on the issue of contract formation.  The district court agreed, finding “a court was the proper decision-maker as to contract formation issues in this case, not the arbitrator.”

The Fifth Circuit reversed.  Critically, it found that “by their actions, the parties may agree to arbitrate disputes that they were not otherwise contractually bound to arbitrate.”  It cited Fifth Circuit precedent from 1980 (Piggly Wiggly, I am not kidding with the names here) and from 1994 (Executone Info. Sys.) to support that proposition.  Because the auction house had disputed whether there had been a meeting of the minds throughout the arbitration, and OMG “never contested the arbitrator’s authority to resolve” that issue, “the parties agreed to arbitrate contract formation.”  The court found that OMG could have refused to arbitrate the formation issue.  But it could not “simply [] wait until it receives a decision with which it disagrees before challenging the arbitrator’s authority.”

I find the analysis here very interesting.  The Fifth Circuit chose not to base the arbitrator’s authority to rescind the contract in the parties’ agreement to arbitrate any dispute, or any other language in the (now rescinded) agreement.  Instead, it looked to the parties’ conduct to authorize the award.  And in describing that conduct, it did not use a concept like waiver (OMG could have waived its right to argue the arbitrator exceeded his power by not raising that in the arbitration), but instead described the conduct as forming a separate agreement to arbitrate.  In any case, the public policy behind the decision is very clear and reminds me of the “invited error” doctrine: parties cannot ask the arbitrator to exercise power, or accede to that exercise of power, and later complain that the arbitrator exercised that power.

This is an important issue for advocates in arbitration.  Every issue that is presented to the arbitrator — by either party– should be carefully analyzed to determine whether it is validly within the scope of the parties’ arbitration agreement.  If an issue is outside the scope, and the party wants to preserve an objection to its submission to the arbitrator, it must “forcefully” object (see First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995)).  Otherwise, the party will be deemed to have agreed to arbitrate the issue, and the arbitrator’s decision will be subject to the highly deferential review of the Federal Arbitration Act.

A lot of interesting arbitration law was made this year, on topics from validity to vacatur, but the banner issue was arbitrator authority.  SCOTUS announced that theme for the year with its BG Group decision in March and federal and state courts around the country ran with it.  [Warning: this post is a doozy.  Get comfortable.  Like my cat in the picture.]

Arbitrator Authority

What did we learn about arbitrator authority?  Well, SCOTUS reminded us in BG Group PLC v. Republic of Argentina that arbitrators presumptively have authority to decide the meaning and applicability of contractual conditions precedent. That is true even when the contract states those conditions precedent must be completed before arbitration may proceed.  Why is that important?  Well, first, parties need to know in what forum to make a motion to dismiss, and second, when the arbitrator decides an issue within his or her authority, that decision is entitled to the full deference of the FAA.  Therefore, the arbitrator’s decision in BG Group to excuse a party’s non-compliance with unreasonable conditions precedent was confirmed.

Following suit, federal circuit courts held that arbitrators have authority to: determine the timeliness of an arbitration demand (5th Cir – Why Nada Cruz); determine whether a non-signatory had to arbitrate, based on incorporated AAA rules (8th Cir – Eckert/Wordell); determine whether claims fall within the scope of the parties’ arbitration agreement, based on incorporated AAA rules (11th Cir. —U.S. Nutraceuticals); determine whether a subcontractor was properly licensed, based on a broadly worded agreement (despite arguments that only a state agency had that jurisdiction, 10th Cir — Hungry Horse LLC); void an agreement based on mutual mistake (8th Cir – Assoc. Elec. Coop.); and determine that third parties benefited from an agreement, despite language prohibiting third parties from having rights (11th Cir —Southern Mills, Inc.).

In turn, state high courts held that arbitrators have authority to: issue severe sanctions for fabricating evidence, based on incorporated AAA rules (Minnesota- Seagate Technology LLC); grant dispositive motions and disregard applicable state law (Alabama — Tucker); and determine arbitrability, based on the parties’ agreement (Hawaii–Hawaii State Teachers Assoc.).

There were also many, many decisions this year confirming arbitration awards, which can be seen as a subset of “arbitrator authority” decisions.  Most surprising this year was the volume of arbitration awards that were un-vacated, in other words, an appellate court confirmed the arbitration award after a lower court had vacated it.  At least five state supreme court decisions fit in that category. (Three I already blogged about, Delaware, Florida, and Minnesota, and two other labor decisions I did not blog about from Connecticut (Town of Stratford) and Montana  (City of Livingston).)  And at least five federal circuit court decisions also had to un-vacate arbitration awards — the Second Circuit, the Sixth Circuit, the Tenth Circuit, the Eighth Circuit, and the Fourth Circuit (in Washington Gas Light Co.).  These ten decisions confirm the extreme deference that the FAA grants to arbitrators’ decisions within their authority.

While arbitrator authority was this year’s hot topic, with much of that authority coming from incorporated AAA rules, some of the topics from past years continued to trend.  For example…

Validity

2014 produced some novel challenges to the validity of arbitration agreements.  My personal favorites were the two federal circuit courts that refused to enforce identical agreements calling for arbitration before a Native American tribe that does not actually conduct arbitration–finding the agreements unavailable and illusory.

Another notable validity decision was Missouri’s refusal to enforce an arbitration clause, in part because it was illusory and because continued at-will employment was insufficient consideration for the arbitration agreement.  In making those arguments, the plaintiff followed the current best bet for avoiding an arbitration clause — attack the formation of the clause (offer, acceptance, consideration, peppercorns) and use the word “illusory.”

Formation

Speaking of formation, there were a number of cases this year that confronted whether an arbitration agreement could be enforced if it was simply on a website, provided after the fact, or in an agreement that was incorporated by reference.   Recall the website arbitration agreements that failed (Barnes & Noble, General Mills), along with the similar failure of a “shrinkwrap” type arbitration agreement sent after the purchase, where the customer lacked reasonable notice (Sirius XM)?  With respect to incorporated manuals or agreements containing arbitration clauses, those were not enforced in this Fifth Circuit decision or this Fifth Circuit decision, but were enforced in this Eleventh Circuit decision.  Finally, the D.C. Court of Appeals found that clients of a D.C. law firm could compel arbitration of a fee dispute with the law firm, although the parties had no written arbitration agreement, because the D.C. bar rules obligate attorneys to arbitrate.

In the sub-category of states refusing to compel arbitration ofwrongful death cases against nursing homes, the Supreme Court of Oklahoma issued two decisions (Johnson and Boler) finding that arbitration agreements signed by attorneys-in-fact of the resident were not enforceable or binding.  (At least four state courts issued similar decisions in 2013.)

Preemption

Although the flood of post-Concepcion preemption decisions has subsided, there were a few notable decisions this year.  In CarMax Auto Superstores, SCOTUS asked California to take a very hard look at whether its Gentry line of cases, finding class actions necessary for effective vindication of rights, was preempted after 2013’s AmEx decision.  Three months later, California did just that, finding Gentry preempted.  And in THI of New Mexico, the Tenth Circuit found New Mexico’s rule that arbitration clauses must be mutual was preempted.

At least three state courts proactively declared that their arbitration decisions were not preempted by federal law. In Iskanian, California said that plaintiffs’ ability to bring private attorney general claims on a representative basis cannot be waived, even via an arbitration agreement, and the FAA does not preempt that result because the FAA does not apply to claims made by the state.  (See final paragraph below for potential next chapter on Iskanian.)  In Alltel, Arkansas found a consumer arbitration agreement unenforceable because it lacked mutuality, and said the result was not preempted because mutuality is a requirement of all contracts.  (Note the opposite result in THI above.)  Similarly in Atalese, New Jersey found a consumer arbitration agreement unenforceable because it did not clearly advise consumers that they were giving up their rights to a jury trial, and said the outcome was not preempted because the rule applies to all New Jersey contracts.

Vacatur
I found four significant decisions vacating arbitration awards this year.  They showed that arbitration awards can be vacated if the arbitrators are impartial when the agreement calls for partial arbitrators (Texas) , that arbitration awards can be vacated if the arbitrator does not fully disclose significant relationships with the law firm representing one of the parties (also Texas),  and that arbitration awards can be vacated if the arbitrators grant a remedy that is precluded by the parties’ agreement (South Dakota and Ohio).

And for 2015…

What can we look forward to in 2015?  In their conference on January 9, 2015, SCOTUS has two arbitration cases on deck.  One is the California Supreme Court decision in Iskanian, presenting interesting preemption issues, and the second is a case presenting the issue of whether availability of class arbitration is a gateway issues that is presumptively for courts to decide (Opalinksi v. Robert Half Int’l.).

I hope this long post alleviates some of my guilt for posting less frequently in 2014 than in previous years…  Here’s to a 2015 with well-reasoned arbitration decisions that help clarify some of the still-thorny topics arising under the FAA!  And me having more time to write about them!  Happy New Year.

In recent weeks, four federal and state appellate courts have vacated district court decisions that denied motions to compel arbitration.  The courts seem to be saying to defendants with arbitration agreements: don’t worry if you lose in the trial court, we will be your Tim Howard and save you from the gaping jaws of litigation.  (I have watched *a lot* of World Cup soccer in recent weeks, folks.  That is partly to blame for the huge stack of arbitration cases waiting for me to write about them.  Well, that and the fact that judges all over the nation appear to be churning out opinions at record speed before their law clerks turn into pumpkins in August.)

These are not just run of the mill reversals, either.  One dealt with an issue of first impression and another with a wholesale gutting of twenty years of case law.

In Al Rushaid v. Nat’l Oilwell Varco, Inc., __ F.3d__, 2014 WL 2971701 (5th Cir. July 2, 2014), the plaintiff filed suit against six defendants in August 2011, but could not serve one of them, NOV Norway, until August of 2012, after the other parties had engaged in significant discovery.  NOV Norway moved to compel arbitration within three months of being served the complaint.  The district court denied the motion because a) it found the price quote did not effectively incorporate the terms containing the arbitration agreement, and b) it found NOV Norway waived its right to arbitrate by invoking the judicial process.  On appeal, the Fifth Circuit reversed on both those grounds.  It found the plain language of the price quote did incorporate a general terms and conditions document with an arbitration agreement.  And, as a matter of first impression, it found that even though all the defendants were jointly owned and controlled and represented by the same counsel, the litigation activity of its codefendants could not be imputed to NOV Norway for the purpose of determining waiver.  (The court said the outcome would change if there were a basis to pierce the defendants’ corporate veil or an alter ego situation.)

Dean v. Heritage Healthcare of Ridgeway, LLC, __S.E.2d__, 2014 WL 2771300 (S.C. June 18, 2014), involved wrongful death claims against a nursing home, and the relevant arbitration agreement said that “any arbitration proceeding that takes place under this [] Agreement shall follow the rules of the [AAA]”.  However, the AAA stopped accepting personal injury disputes based on pre-injury arbitration agreements in 2003.  The nursing home moved to compel arbitration and the trial court denied the motion.  It found that the language about the AAA rules meant that the dispute should be heard by the AAA and since the AAA was not available, the arbitration agreement was invalid.  The Supreme Court of South Carolina reversed.  But before the supremes could get to the merits, they had to overrule their own 1993 decision, which held that nursing home contracts did not involve interstate commerce.  After reviewing the intervening cases from SCOTUS, the court found the nursing home agreement does involve interstate commerce and is governed by the FAA.  On the merits, the court found that the availability of the AAA to administer the arbitration was not a material term and instead the parties’ agreement simply calls for the arbitration to be governed by the AAA rules, regardless of what entity administers the proceeding.

In a Texas case, the defendant’s motion to compel arbitration was denied after the trial court found the arbitration agreement was unconscionable because it limited the plaintiffs’ statutory remedies and had a unilateral attorneys fees provision.  While the court of appeals affirmed that result, the Supreme Court of Texas reversed.  Venture Cotton Cooperative v. Freeman, __S.W.3d__, 2014 WL 2619535 (Tex. June 13, 2014).  Importantly, the court held that the agreement’s waiver of aspects of state law was invalid, but that was insufficient to invalidate the entire arbitration agreement.  Instead, it found the “objectionable limitation on the farmers’ statutory rights” should have been severed.  (And the attorneys’ fees provision also was insufficient to invalidate the arbitration agreement.)

Finally, the Third Circuit also just vacated a district court’s decision to deny a motion to compel arbitration in Ross Dress for Less, Inc. v. VIWY, L.P., 2014 WL 2937031 (3d Cir. July 1, 2014).  In that dispute over lease payments, the lease provided (confusingly) that disputes worth less than $50,000 should be arbitrated and those worth more than $50,000 can be litigated or arbitrated at the option of either party.  However, if the tenant withheld rent and the landlord disagreed, the dispute must be determined by an arbitrator.  In this case, their were claims relating to tenant withholding along with other claims worth more than $50,000 and the parties disagreed as to whether they had to arbitrate.  The district court found that the claims were outside the scope of the arbitration clause.  But the Third Circuit looked at the “conflicting lease provisions” and relied heavily on the federal presumption in favor of arbitrability to hold that all issues in the case must be arbitrated.

The primary lesson that can be drawn from these four cases is this: if you have a colorable argument for compelling arbitration, don’t give up if you lose at the trial court level.

A new opinion from the Eleventh Circuit highlights an issue that can be confusing to those encountering FAA case law for the first time: when does the federal presumption of arbitrability apply?  The answer is the presumption only applies to whether the scope of an arbitration agreement is broad enough to encompass the parties’ dispute, not whether a valid arbitration agreement exists between the parties.

In Dasher v. RBC Bank (USA), __ F.3d __, 2014 WL 504704 (11th Cir. Feb. 10, 2014), the class action plaintiffs allege a bank charged excessive overdraft fees in breach of their account agreement.  While the parties were conducting discovery related to the bank’s motion to compel arbitration, the bank was acquired by another bank, who issued new account agreements to all the customers (including the named plaintiff).  The new account agreement had no agreement to arbitrate disputes; the old account agreement did.  A dispute then arose as to which account agreement controlled.

The defendant bank argued that the FAA’s presumption in favor of arbitrability should apply to find the parties still had an arbitration agreement.  The Eleventh Circuit set it straight, noting that in Granite Rock SCOTUS said courts may apply “the presumption of arbitrability only where a validly formed and enforceable arbitration agreement is ambiguous about whether it covers the dispute at hand.”  It also cited the Second Circuit which has explicitly recognized that “the presumption does not apply to disputes concerning whether an agreement to arbitrate has been made.”  In this case, because the dispute centered on whether the parties had an arbitration agreement at all, the FAA did not provide a presumption in favor of arbitrability.  (For a classic case in which the presumption operates to find a dispute falls within the scope of an arbitration agreement, despite a “lack of clarity” in the agreement, see Pureworks, Inc. v. Unique Software Solutions, Inc., 2014 WL 211831 (6th Cir. 2014).)

The Eleventh Circuit ended up finding there was no valid arbitration agreement between the Dasher plaintiffs and the bank.  The account agreements had language showing that the new agreement completely superseded the old agreement, therefore the court concluded that the absence of any arbitration clause in the new agreement was controlling.  Furthermore, even though the alleged excessive charges took place while the old agreement was effective, the court found the new agreement controlled the dispute resolution.  That was because the amendment clause stated that the “most current version” of the account agreement “will at all times govern,” which the court interpreted to mean that the parties intended the new agreement to apply retroactively.  In my view, this is a curious result, which places a great deal of reliance on very few words in the contract, and may show that the Eleventh Circuit was working hard to avoid the plaintiffs’ backup argument: that the arbitration agreement was invalid because it deterred him from vindicating his rights, an argument that is likely not supportable after Concepcion and AmEx.