2012 Arbitration Review
Minnesota CLE Webcast
September 13, 2012
David A. Allgeyer, Lindquist and Vennum, PLLP
Patrick R. Burns, Lindquist and Vennum, PLLP
Leo G. Stern, Stern Law Office
All presenters are members of the ValueSolve ADR Panel of Neutrals (ValueSolveAdr.Org)
AAA Commercial Panel and other panels.
The United States Supreme Court?s attention to arbitration issues has not abated this term. The Court continues to read the requirements of the Federal Arbitration Act as favoring a very liberal federal policy toward arbitration. So, too, given the Court?s recent rulings on class actions, lower courts have fallen in step, albeit with varied attempts to distinguish the Court?s rulings, with respect to the Court?s class action mandates. Against this liberal policy must be weighted the attempts by arbitration administering bodies, agencies, and Congress to neutralize the recent Supreme Court class action decisions. This Webinar will examine the latest Supreme Court rulings, will assess significant rulings of the Courts of Appeal and state courts, and will review the continuing viability of class action within the arbitration context.
I. Multiple Claims: some arbitrable and some not. Should arbitration proceed creating an inefficient process with the possibility of inconsistent results?
A. Last November in KPMG LLP v. Cocchi, 132 S.Ct. 23 (2011), the Supremes dealt with this problem.
1. Individuals had purchased limited partnership interests in Bernie Madoff investments. They lost their investments and brought suit against, among others, the managers and their auditing firm, KPMG. Four causes of action were stated against KPMG: ones for negligent misrepresentation, professional negligence, aiding and abetting a breach of fiduciary relationship, and violation of the Florida Unfair Trade Practices Act.
2. KPMG moved to compel arbitration citing the arbitration clause that existed within its audit service agreement. The motion was denied and affirmed on appeal. The Florida court reasoned that the plaintiffs were not parties to the audit service agreement, and it would not bind them unless their claims were derivative, to wit: arising from the services performed by KPMG for the fund managers pursuant to the audit services agreement. The Florida appellate court then determined that the negligent misrepresentation claim and the claim of violation of the Florida Unfair Trade Practices Act were direct and not derivative claims. No determination was made by the Florida court as to whether the other two claims were direct or derivative.
3. The Supreme Court vacated the Florida judgment and remanded for a determination as to whether the claims of professional negligence and aiding and abetting a breach of fiduciary relationship were direct or derivative.
a. The Court held that "when a complaint contains both arbitrable and non-arbitrable claims, the Act requires courts „to compel arbitration of pendent arbitrable claims...even where the result would be possibly inefficient maintenance of several proceedings in different forums.?"
b. The Court maintained its emphatic reading of the Federal Arbitration Act: "[The Act] leaves no place for the exercise of discretion by the district court, but instead mandates that district courts shall direct the parties to proceed to arbitration on issues as to which an arbitration agreement has been signed."
4. The KPMG decision answers the question as to whether arbitration need be compelled in the face of multiple claims, some of which are arbitrable and some of which are not. The possibility of inefficiency and inconsistent results is trumped by the agreement to arbitrate
5. Is KPMG guidance for the quandary presented by suit against multiple parties, some of whom have agreed to arbitrate claims and some of whom have not?
6. Two District of Minnesota cases seem consistent with KPMG in regards to a district court ordering arbitration of arbitrable claims:
Filson v. Radio Advertising Marketing Plan
, 553 F. Supp. 2d 1074 (D. Minn. 2008).
Simitar Entertainment, Inc., v. Silva Entertainment, Inc.
, 44 F. Supp. 2d 986 (D. Minn. 1999).
Filson, the court stayed litigation in favor of arbitration.
"Because it is not a party to the Licensing Agreement, Clear Channel cannot be compelled to participate in the arbitration between RAMP and Filson. [internal cite omitted] District courts have „discretion to stay a lawsuit when a parallel arbitration proceeding should have priority.? [internal cite omitted] "In a complex, multi-party dispute ... issues such as the risk of inconsistent rulings, the extent to which parties will be bound by the arbitrators? decision, and the prejudice that may result from delays must be weighed in determining whether to grant a discretionary stay, and in fashioning the precise contours of any stay.?
Id. at 783.? Judge Mayeron concluded that because Filson?s claims against Clear Channel assert parallel claims and the same operative facts as Filson?s claims against RAMP, Filson?s claims against Clear Channel should be stayed to -3-
avoid the risk of inconsistent rulings and confusion. This Court agrees. In his Objections, Filson argues for the first time that this Court should stay the arbitration so that he can first proceed on his claims against Clear Channel and DOCS, who would then presumably implead RAMP as a third-party defendant. Filson asserts that this sequence of litigation before arbitration would avoid the risk of inconsistent results and might obviate the need for a subsequent arbitration. Pl.?s Objections at 5. However, the Federal Arbitration Act evinces „the strong federal policy favoring agreements to arbitrate.?
AgGrow Oils, 242 F.3d at 782. Filson?s request to stay the arbitration would essentially allow him to avoid his agreement to arbitrate his dispute with RAMP. Moreover, the Court finds that Filson?s arguments regarding the benefits of a litigation-first sequence are speculative. The Court adopts Judge Mayeron?s recommendation that this entire litigation be stayed.
The Simitar court also ordered arbitration, but did not stay all underlying non-arbitral claims.
"Once a Court has determined, that a dispute falls within the scope of an arbitration agreement, the proceedings in the case, on the issues referable to arbitration, must be stayed pending the completion of arbitration. [internal cites omitted] The decision to stay the remaining nonarbitrable claims, pending the outcome of arbitration, is soundly vested in the District Court?s discretionary authority to control its docket. [internal cites omitted] Expanding the stay, so as to encompass all of the nonarbitrable claims in the case, is appropriate where the arbitrable claims predominate, or where the outcome of the nonarbitrable claims will depend upon the arbitrator?s decision. [internal cites omitted]. We cannot discount the effect, upon the nonarbitrable claims, that an arbitrator?s interpretation of the Member Control Agreement, and of the Employment Agreement, may have, for it may well influence the issues that remain for resolution. Nevertheless, much of this lawsuit is premised upon an asserted fraud in the making of the contracts, themselves, and, therefore, it cannot be fairly said that the breach of contract claims against Silva predominate over that claims that involve a fraudulent conspiracy under RICO, deceptive trade practices, fraud, tortious interference with contractual relationships, breach of fiduciary duties, unjust enrichment, and conversion. Accordingly, we recommend that only the Plaintiffs? claims against Silva, in Count V, should be stayed pending arbitration."
emption revisited: need state public policy give way to the Federal Arbitration Act?
Marmet Health Care Ctr., Inc. v. Brown, 132 S.Ct. 1201 (2012), the Court underscored the pre-emption doctrine so recently highlighted in its 2011 decision of AT&T Mobility LLC vs. Concepcion, 131 S.Ct. 1740 (2011).
1. This case arose from three consolidated negligence suits against West Virginia nursing homes. Two of the suits had been dismissed by the trial court on the basis that the plaintiffs had signed the nursing home agreement which contained an arbitration clause. On appeal, they were consolidated with a third suit which was on appeal on other issues. The West Virginia Supreme Court reversed, holding, "[A]s a matter of public policy under West Virginia law, an arbitration clause in a nursing home admission agreement...shall not be enforced to compel arbitration of a dispute concerning negligence."
a. The West Virginia Supreme Court did not ignore the pre-emption doctrine. Instead, it not so diplomatically opined that the Supreme Court?s analysis that the FAA trumps state statute and policy was "tendentious" [meaning: expressing or intending to promote a particular cause or point of view, esp. a controversial one: a tendentious reading of history] and "created out of whole cloth." [Do you ever wonder what criteria the Supreme Court might use in determining to grant certiorari?]
b. In a per curiam decision, the Court cited
Concepcion, "As the Court reaffirmed last Term „when the state law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward: the conflicting rule is displaced by the FAA.?" Marmet 132 S.Ct. at 1203 (quoting Concepcion 131 S.Ct. at 1746).
i. The Court was probably more diplomatic than the West Virginia Supreme Court, reasoning that the latter?s interpretation of the "FAA was both incorrect and inconsistent with the clear instruction in the precedents of this Court."
Marmet at 1204.
ii. The Court underscored that this "prohibition against predispute agreements to arbitrate personal injury and wrongful death claims against nursing homes is a categorical rule prohibiting arbitration of a particular type of claim, and that rule is contrary to the terms and coverage of the FAA."
Id. at 1205.
iii. The Court remanded for further hearing on unresolved issues.
c. On remand this past June, the West Virginia court continued its bold resistance, suggesting that the arbitration clause was unconscionable.
Brown v. Genesis Healthcare Corp., 729 S.E.2d 217 (W. Va. 2012). The court itself then remanded the case to the trial court for "the taking of evidence, the full development of a record, and proper consideration of whether the clauses are unconscionable."
Marmet decision is far from novel. It is based squarely on Concepcion and earlier precedent which the Marmet Court cited: "Preston v. Ferrer, 552 U. S. 346, 356 (2008) (FAA pre-empts state law granting state commissioner exclusive jurisdiction to decide issue the parties agreed to arbitrate); Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U. S. 52, 56 (1995) (FAA preempts state law requiring judicial resolution of claims involving punitive damages); Perry v. Thomas, 482 U. S. 483, 491 (1987) (FAA pre-empts state-law requirement that litigants be provided a judicial forum for wage disputes); Southland Corp. v. Keating, 465 U. S. 1, 10 (1984) (FAA pre-empts state financial investment statute's prohibition of arbitration of claims brought under that statute)." Marmet at 1204. Marmet again underscores the Supreme Court?s liberal and far-reaching interpretation of the FAA. In doing so, the Court has issued an unqualified directive that the FAA is supreme; state law abridging the right to arbitrate must give way to it.
a. As such, based on the pre-emption trail of recent cases, courts have, for the most part, negated state public policy which precluded enforcement of predispute agreements to arbitrate.
b. The Ninth Circuit case
Kilgore v. KeyBank, Nat’l Ass’n is a good example of state public policy giving way to the FAA. 673 F.3d 947 (9th Cir. 2012). In Kilgore, the Ninth Circuit overruled California precedent which had prohibited arbitration of claims for public injunctive relief: "...[F]ederal preemption requires that state law bend to conflicting federal law-- no matter the purpose of the state law." Id. at 962.
Concepcion does not preclude the defense of indefiniteness as it would relate to a poorly drafted arbitration clause. The savings clause of section 2 of the FAA preserves such a defense: arbitration agreements " shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2.
NAACP Camden County East v. Foulke Management Corp., 421 N.J. Super., 404 (2011) the court dealt with a clause that was not well drafted. It concluded that binding arbitration clauses in consumer contracts which bar class action suits may be challenged and invalidated if those clauses are "too confusing, too vague, and too inconsistent to be enforced." Id. at 781.
ii. The 11th. Circuit decision,
In re Checking Account Litigation, 685 F.3d 1269 (11th Cir. 2012), reviewed the section 2 defenses. The case had been up to the 11th. Circuit multiple times, the last time with the issue of whether unconscionability was a ground that fell within the
savings clause of FAA section 2. Determining that it was, the court observed, "Concepcion affirmed that, under the savings clause, „generally applicable contract defenses? provided by state law „such as fraud, duress, or unconscionability? are not preempted by the FAA.
Concepcion, 131 S.Ct. at 1746. Thus, although arbitration agreements may not be singled out for unfavorable treatment, see Doctor’s Associates, Inc. v. Casarotto, 116 S.Ct. 1652 (1996), „[l]ike other contracts they may be invalidated by generally applicable contract defenses, such as fraud, duress, or unconscionability,? Rent–A–Center, 130 S.Ct. at 2776. After Concepcion, we have stated that „generally applicable contract defenses? that challenge „defects in the making of the arbitration agreement? and that „do not apply only to arbitration or derive their meaning from the fact that an agreement to arbitrate is at issue? are „not affected by [Concepcion].? Cmty. State Bank v. Strong, 651 F.3d 1241, 1267, 1267 n. 28 (11th Cir. 2011). Accordingly, in light of Concepcion, we must determine whether South Carolina's doctrine of unconscionability is a "generally applicable contract defense[ ]" permitted by § 2 of the FAA, 131 S.Ct. at 1746, or whether it necessarily „interferes with fundamental attributes of arbitration? to the degree that it „creates a scheme inconsistent with the FAA,? like the ban on collective-action waivers in Concepcion, Id. at 1748."
Concepcion and Marmot mandate of FAA supremacy has trumped state policy which has prevented enforcement of class action waivers.
a. A good example of this is last month?s California Court of Appeal?s (Fourth Appellate District, Division Three) decision, addressing the FAA?s effect on the California Legal Remedy Act (CLRA) in
Caron v. Mercedes-Benz Financial Services USA LLC, WL 2579662 (Cal.App. 4 Dist. 2012).
Caron, the court was faced with the issue of whether CLRA?s class action waiver was enforceable in light of Concepcion. Holding that it was not, the Caron court equated that provision to the Discover Bank class waiver which was upheld in Concepcion. Quoting Concepcion, the court stated that the FAA preempts such a rule „"that stand as an obstacle to the accomplishment of the FAA?s objective? of enforcing agreements according to their specific terms."
ii. The court pointed out that arbitration of her rights individually-- as opposed to being a class representative--
would not prevent claimant from appropriate vindication under CLRA. This notion of whether a party could obtain appropriate redress without class status had become a reoccurring theme in cases upholding class waivers or restriction on class arbitration.
iii. Additionally, the
Caron court noted that nothing was "inherently improper about requiring a party to arbitrate on an individual basis if the party agreed to that procedure."
b. The Second Circuit addressed for the third time this issue of enforcement of an arbitration agreement?s class action waiver in
In re American Express Merchants’ Litigation, 667 F.3d 204 (2d Cir. 2012). Its two earlier decisions were sandwiched between the Stolt-Nielsen and Concepcion decisions, with the Supremes remanding for reconsideration in light of those two Supreme Court decisions.
i. Plaintiff brought a class action alleging Sherman and Clayton Act anti-trust violations. The arbitration clause forbid class arbitration. Claimant submitted evidence that a merchant might expect four-year damages of $1,751.00 or trebled to be $5,252, making pursuit of the claims fiscally impracticable. The district court, nonetheless, granted a motion to compel.
ii. The Second Circuit in its initial decision had determined that enforcement of the waiver would grant to American Express de facto immunity from anti-trust liability by removing plaintiffs? only reasonably feasible means of recovery. The Circuit maintained that rationale.
iii. Importantly, the Circuit distinguished
Concepcion which it termed a case prohibiting states from invalidating class action waivers, noting that here a federal antitrust right, not a state law or policy, was at issue. The Circuit concluded that "the federal substantive law of arbitrability" made the arbitration agreement unenforceable, its holding resting squarely on a vindication of statutory rights analysis.
iv. On July 30, 2012, a petition for certiorari was filed by American Express. We would expect that the Supreme Court will grant review. Certainly a federal statute is involved as opposed to state policy or law. But the rationale adopted by the Supremes in
Concepcion has application to the American Express analysis, possibly causing a reversal of the Second Circuit?s action. In Concepcion, the Court rejected this public policy argument favored by the Second Circuit, which had been expressly made in the Concepcion dissent:
"The dissent claims that class proceedings are necessary to prosecute small-dollar claims that might otherwise slip through the legal system. But States cannot require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated reasons."
Concepcion, 131 S.Ct. at 1753 (citation omitted).
v. This public policy rationale was recently adopted by a district court. In
Fromer v. Comcast Corp., U.S. District Court for the District of Connecticut, 09-cv-02076 (August 21, 2012). There, Judge Stefan Underhill denied Comcast?s motion to compel individual arbitration of an antitrust class action, citing the cost of forcing Fromer to litigate individually his antitrust claim where his recovery could not exceed $495.00.
Coneff v. AT&T Corp., 673 F.3d 1155 (9th. Cir 2012), the court, addressing a state policy and not a federal law, disagreed with the Second Circuit?s American Express rationale. AT&T had moved to compel arbitration. Applying Washington law, the district court found the class action waiver substantively unconscionable. Because the arbitration clause stated that on such a finding the entire clause would be unenforceable, the district court invalidated the entire provision. The Ninth Circuit reversed.
i. The Ninth Circuit was unimpressed with the argument that small value claims would not be prosecuted as a result of the existence of the class arbitration waiver.
ii. Such an argument, the court reasoned "goes only to substantiating the very public policy arguments that were expressly rejected by the Supreme Court in Concepcion."
Concepcion rule contains no exception "to invalidate class-action waivers when such waivers preclude the effective vindication of statutory right."
d. The Eleventh Circuit had reached a similar result in
Cruz v. Cingular Wireless, LLC, 648 F.3d 1205 (11th Cir. 2011). There, Cingular?s arbitration clause, which was substantially similar to AT&T?s, precluded class arbitration. The record before the court even included affidavits from three Florida consumer law attorneys attesting to the fact that they would not represent consumers individually for it would not be cost effective without an aggregation of claims of many. (A similar record had not been before the Supreme Court in Concepcion.) Nonetheless, even in the absence of claimant?s right to vindicate his right, let alone the
rights of similarly situated consumers, the 11th Circuit followed the
Thus, in light of Concepcion, state rules mandating the availability of class arbitration based on generalizable characteristics of consumer protection claims, including that the claims "predictably involve small amounts of damages,"
Id. at 1746 (quoting Discover Bank v. Superior Court, 113 P.3d 1100, 1110 (Cal. 2005)), that the company's deceptive practices may be replicated across "large numbers of consumers," Id. (quoting Discover Bank, 113 P.3d at 1110), and that many potential claims may go unprosecuted unless they may be brought as a class, Id. at 1753 - are preempted by the FAA, even if they may be "desirable," Id.
e. A similar result was reached by the Third Circuit. In
Litman v. Cellco Partnership, (2011 WL 3689015 August 24, 2011), the court held that the FAA preempts new Jersey law refusing to enforce class action waivers in small dollar cases. Subsequently, on August 22, 2012, the Third Circuit stood by its ruling in Litman: "Even if [claimant] cannot effectively prosecute his claim in individual arbitration, that procedure is his only remedy, illusory or not... . Though some persons might regard our result unfair, 9 U.S.C. section 2 requires that we reach it. In this regard, we point out that when Congress makes a law the court must enforce the law as Congress has written it regardless of the court?s view of the law." Homa v. American Express, No 11-3600 at 10.
f. Nonetheless, the NLRB has ruled that class action waivers violate Section 7 of the National Labor Relations Act (NLRA).
D.R. Horton Inc., 357 N.L.R.B. No. 184 (2012). Horton was a Fair Labor Standards Act case challenging an employer?s classification of supervisors as exempt from the Act?s overtime pay requirements. The employee attempted to bring a class arbitration; the employer refused, relying on the employee?s employment agreement which barred class arbitration. The NLRB brought a complaint, contending the class action bar interfered with the employee?s ability to join together to pursue workplace grievances through litigation, an unfair labor practice. The NLRB, like the Second Circuit in American Express, dodged the Concepcion mandate by determining that the employment contract with the class arbitration bar involved rights protected by federal law, the NLRA, which was not the situation in Concepcion.
g. The California Court of Appeals rejected the NLRB?s decision in
Lorena Nelsen v. Legacy Partners, 207 Cal.App.4th 1115 (Cal. Ct. App. 2012). Ms. Nelsen brought a class action, claiming violations
of the California Labor Code. The employer moved to compel arbitration. Ms. Nelsen defended, citing Horton as permitting her to proceed with class litigation. The trial court compelled arbitration, and the appellate court agreed. The appellate court criticized the NLRB as acting well beyond its authority and reasoned that it had no obligation to be bound by the
Horton decision, a federal administrative interpretation of Concepcion and one outside the Agency?s "core expertise in bargaining."
h. The Financial Industry Regulatory Authority in July shored up its rules. The Rules had precluded class arbitration. Amendments to FINRA Rule 13204 were adopted precluding collective action claims by employees under the Fair Labor Standards Act, the Age Discrimination in Employment Act, or the Equal Pay Act of 1963.
III. Statutory Interpretation: just how strong is the FAA’s directive that arbitration agreements be enforced according to their terms?
CompuCredit Corp. V. Greenwood, 132 S.Ct. 665 (2012), the Court interpreted the federal Credit Repair Organizations Act (CROA) as requiring predispute arbitration agreements to be honored as the procedure to redress CROA?s private right of action.
1. Plaintiff credit card holders had filed a class action complaint alleging violations of CROA?s disclosure provisions. Those provisions required that credit repair organizations give notice of the card holder?s statutory right to sue for CROA violations. CROA specifically provides that no protection or right under it may be waived, and that such a waiver shall be void and unenforceable.
2. The 9th. Circuit had determined that the "right to sue" notice requirement together with the prohibition on its waiver voided the arbitration clause in the credit card agreement: the card holders had been deprived of their right to sue in court.
3. A six justice majority reversed. The Court reasoned that the disclosure provision did not require a judicial forum but only a forum where the card holder could adequately seek redress. Viewing Congressional intent, the Court reasoned no clear expression of Congressional intent existed to require voiding the predispute arbitration requirement.
a. The Court here was addressing federal legislation, not state statute or precedent: the FAA mandates a "liberal federal policy favoring arbitration agreements...[t]hat applies even when the claims at issue are federal statutory claims... ."
b. The Court noted that the mere references to "right to sue" do not manifest a right to a court, as opposed to an arbitration, process. No language existed within the statute precluding arbitration. In
that regard the statute was silent. Such silence was not to be read as a Congressional prohibition of arbitration. If Congress wants to preclude arbitration it must expressly state such intent.
4. The Court?s reasoning undermines precedent where the right to sue in a federal statute has been construed to mean sue in court.
See, e.g., Kolev v. Euromotors West/The Auto Gallery, 658 F.3d 1024 (9th Cir. 2011) ( upholding the FTC?s interpretation of the Magnuson-Moss Warranty Act-- guaranteeing to consumers the right to litigate breaches of warranty-- as voiding predispute arbitration agreements).
IV. Class arbitration
A. Since imposition of the
Stolt-Nielsen v. Animal Feeds Int’l, 130 S. Ct. 1758 (2010), requirement that an arbitrator find a contractual basis before permitting the matter to proceed as a class arbitration, courts have scrutinized arbitrators? determinations of what constitutes an appropriate contractual basis, with little uniformity as to the criteria.
Stolt-Nielsen v. Animal Feeds Int’l, 130 S. Ct. 1758 (2010) the Supreme Court held that a three member panel of arbitrators exceeded their powers in ordering class arbitration when the parties? arbitration agreement was silent as to whether class arbitration was proper. The Court?s rationale is instructive.
a. The Court reasoned that the choice between class and individual arbitration was not a mere procedural issue arising within the arbitration which should be appropriately determined by the arbitrators within their unfettered discretion. Instead, the choice dictated the fundamental nature of the proceedings. This analysis is similar to the plurality?s determination in
Green Tree Financial Corp. v. Bazzle, 123 S.Ct. 2402 (2003). There the Court had addressed the question of whether the court or the arbitrator should decide where the contract was silent on the right to seek class arbitration. Bazzle decided that is was up to the arbitrators. But Bazzle did not address the standard that the arbitrators were to apply to make the determination as to whether class arbitration is permitted.
b. Having determined that this was not merely a procedural determination within the sound discretion of a panel, the Court addressed the rationale of the panel. The Court looked to whether a contractual basis existed supporting the panel?s conclusion that the parties agreed to submit to class arbitration. In this regard, the panel had felt that public policy dictated a need for class arbitration, notwithstanding the parties? express stipulation that no agreement for class arbitration had been made. Reasoning that the panel had responsibility to apply the contract and governing law
but no authority to make a policy judgment the Court determined that the panel exceeded its authority under FAA section 10 (a)(4).
c. The end result of
Stolt was that in the future where the contract is silent as to whether class arbitration is permitted, any determination by the arbitrator (pursuant to Bazzle) as to whether the arbitration should proceed as a class cannot be based on a policy determination. To do so would be proscribed by FAA Section 10(a)(4), as exceeding the authority of the arbitrator. Instead, the issue must be analyzed in relationship to the language of the arbitration agreement itself or some background principle of contract law which would guide its interpretation. That is, the parties? agreement must be enforced according to its terms, which terms can be interpreted in accordance with contract law, but not an arbitrator?s sense of public policy.
d. In essence,
Stolt was an easy case. The parties had stipulated that no agreement for class arbitration had been made. Contrary to the parties? stipulation, the panel determined that such an agreement existed. Stolt can be read as underscoring the significance of FAA Section 10(a)(4), requiring the panel to honor parties? stipulations and to base any class determination on specific contractual provisions, not a visceral analysis of public policy.
2. Several cases have subsequently dealt with the
Stolt requirement that a contractual basis exist before the matter may proceed as class arbitration. All have struggled with the concept that the parties? agreement to arbitrate is silent on the issue.
Jock v. Sterling Jewelers, Inc., 646 F.3d 113 (2d Cir. 2011), cert. denied, 132 S.Ct. 1742 (2012). In Jock, the court was faced with the issue as to whether to reinstate an arbitrator?s decision permitting an employment discrimination arbitration to proceed as a class. The district court had vacated it as exceeding the arbitrator?s authority. The Second Circuit reversed.
i. The arbitration clause was silent on the issue. The court noted that the parties had submitted the issue of whether class arbitration was permitted to the arbitrator. The court distinguished such action-- the submission-- from the
Stolt-Nielsen stipulation which provided that no agreement-- explicit or implicit-- to permit class arbitration had existed.
ii. The court analyzed whether the district court had properly reviewed the action of the arbitrator. The circuit court determined that the district court was required to decide "whether, based on the parties? submissions or the arbitration agreement, the arbitrator had the authority to reach an issue." The court suggested that this was a two-
step analysis: was the issue submitted to the arbitrator, and did their agreement or the law prohibit the arbitrator from reaching that issue.
iii. The court determined that the district court had "improperly substituted its own interpretation of the parties? arbitration agreement for that of the arbitrator?s to conclude that the arbitrator had reached an incorrect determination that the parties? arbitration agreement did not prohibit class arbitration." Such substantive review-- a review of whether the arbitrator had decided the issue correctly-- was improper. The arbitrator had a colorable basis for her decision under Ohio law, and the district court had no reason to disregard her analysis.
Reed v. Florida Metropolitan University, 681 F.3d 630 (5th Cir. 2012). The Reed court reversed the district court?s award confirmation, determining that the arbitrator had exceeded his authority in finding that the parties? contract permitted class arbitration.
i. The arbitrator had used contractual provisions similar to those accepted by the
Jock court to justify his conclusion that class arbitration was appropriate: "any dispute" arising from the parties? contractual undertakings and "any remedy" permitted at law.
ii. The Fifth Circuit, however, saw no relationship between a determination that class arbitration was appropriate and the contractual provisions. The "any dispute" clause expressed merely the parties? intent to arbitrate, not the creation of an inference for class arbitration. So, too "any remedy" simply did not invoke the process of class arbitration, itself a procedure not a remedy.
Reed court reviewed the legal basis of the arbitrator?s analysis, terming the review a deferential de novo standard of review. In doing so, it noted that the Supremes had vacated the award in Stolt-Nielsen by a similar review. The Supremes had given deference to the arbitrator?s decision, but nonetheless, noted that the application of public policy instead of contractual analysis exceeded the arbitrator?s authority. In contrast, the Reed court seems to dissect the arbitrator?s analysis, criticizing his reliance on the contractual language and the contract?s silence and determining that he lacked a contractual basis.
Sutter v. Oxford Health Plans, 675 F.3d 215 (3d Cir. 2012). Here, the Third Circuit affirmed the district court?s denial of a motion to
vacate the arbitrator?s decision permitting the matter to proceed as class arbitration.
i. The arbitrator had determined that the parties had a broadly worded arbitration clause which was silent on the right to have class arbitration: "No civil action concerning any dispute" arising under the parties? agreement would " be instituted before any court, and all such disputes shall be submitted to final and binding arbitration... ." No stipulation such as that in
Stolt-Nielsen existed. The arbitrator had relied on the contractual language and the absence of a stipulation in determining that class arbitration was authorized.
ii. The Third Circuit recognized that
Stolt-Nielsen required a contractual basis for concluding that class arbitration was authorized but contractual silence would not prevent such a determination by the arbitrator. The court then concluded that the arbitrator had attempted to interpret the parties? agreement "within the bounds of law" and such interpretation was not "totally irrational." As such, he did not exceed his powers under FAA section 10(a)(4).
Fantastic Sams Franchise Corp. v. FSRO Ass’n Ltd., 683 F.3d 18 (1st Cir. 2012). The franchisor appealed the decision of the district court compelling collective arbitration of the claims of 10 franchisees. The First Circuit affirmed the lower court. Unlike Reed or Sutter, no determination had yet been made by the arbitrator.
i. The court rejected the franchisor?s claim that express contractual authorization must exist before collective arbitration can exist: "We thus reject the very different precept, on which the [franchisor?s] argument depends, that there must be express contractual language evincing the parties? intent to permit class or collective arbitration."
ii. The agreement?s silence on the issue permits the arbitrator to determine what evidence might exist to permit class or collective arbitration.
iii. The court also noted that is was not a true "class action," but instead, a group of ten franchisees who collectively sought a combined arbitration. A combined arbitration was a procedural mechanism within the discretion of the arbitrator pursuant to the AAA rules.
e. Courts are struggling to determine what criteria are appropriate for an arbitrator to base a determination that class arbitration should
proceed. In doing so, courts seem to recognize that the review of the arbitrator?s determination is one that is deferential.
Lessons Learned: The recent arbitration jurisprudence of the Supreme Court and the lower courts provides some interesting insights.
A. With a mixture of arbitrable and non-arbitrable claims or a mixture of defendants some of whom have agreed to arbitrate and others have not, expect to fight on two fronts: in arbitration and in court.
B. Contentions that arbitration affords a different redress from litigation is not well taken, at least according to the
CompuCredit Court. But what about the precedential value of court decision as opposed to an arbitrator?s award? The public setting of court? The potentially reduced costs of filing and related expenses of courts?
C. The FAA preempts state public policy restricting the enforcement of arbitration clauses.
D. Whether the FAA preempts Federal public policy restricting the enforcement of arbitration clauses could be on the horizon for Supreme Court review.
E. Class actions within the consumer and employment field are being significantly restricted. On April 25, 2012, the consumer advocacy group Public Citizen released a report that said since
Conception, decided one year earlier on April 27, 2011, judges have cited the decision at least 76 times as a reason to prevent class action suits. Certainly since April of 2012, more corporations have prohibited class arbitrations within their contracts with consumers and employees, and more courts have mandated compliance with Concepcion.
F. Recognize the judicial disfavor of arbitration clauses in the consumer and employment context and draft such clauses with care. If a desire exists to avoid class arbitration, be clear in your drafting.
1. Use a belt and suspenders approach: waive the right to class arbitration and prohibit use of class arbitration.
2. Extend the waiver to both class and collective arbitration.
3. Do not be silent!
G. Keep in mind while drafting that the section 2 defenses of the FAA still exist.
H. Attack the enforceability of a class action waiver or prohibition by use of the FAA section 2 defenses.
I. If the contract is silent as to whether class arbitration is permitted, arbitrators may determine class action treatment is warranted, but only if such a decision is
reasonably determined as a matter of contract law, not the arbitrator?s sense of public policy.
J. Where the contract is silent, the criteria an arbitrator may use to determine whether the parties implicitly authorized class arbitration differ among the circuits, as does the scope of review by the court of the arbitrator?s decision. Look for further precedent, and possibly Supreme Court review, to vet these issues.
K. At the moment the Supreme Court?s jurisprudence is favorable to arbitration, even in a consumer and employment context. But will that last? See below.
VI. Congressional Response
The Supreme Court?s rulings on arbitration appear to have prompted bills designed to change the law. These bills require, allow, forbid or otherwise impact arbitration. For a summary of those bills taken from U.S. Arbitration and Mediation Update go to: http://www.karlbayer.com/blog/?p=15139.
VII. Alleged Bias of Arbitrator and non-disclosure
A. Over the years, arbitrator bias and disclosures have become more and more important, both under law and under rules of arbitral bodies:
1. Disclosure is an issue of "evident partiality," which is a ground for vacating an award.
2. There is an "absence of consensus on the meaning of „evident partiality,?" with different circuits adopting different approaches.
Montez v. Prudential Securities, Inc., 260 F.3d 980, 983 (8th Cir. 2001).
3. Arbitrators, however, must "avoid even the appearance of bias" and must "disclose to the parties any dealings that might create an impression of bias."
Commonwealth Coating Corp. v. Continental Cas. Co., 393 U.S. 145, 149 (1968).
4. This "reasonable impression of bias" standard has been interpreted in different ways by the circuits. For example, the Eleventh Circuit holding that evident partiality may be used to vacate an award only where an actual conflict exists or the arbitrator knows of and fails to disclose information that would lead a reasonable person to believe a conflict exists
. Lifecare Int’l, Inc. v. CD Medical, Inc., 68 F.3d 429 (11th Cir. 1995) (mere appearance of partiality is insufficient to vacate an arbitration award); Montez, 260 F.3d at 982-83 (arbitrator?s failure to disclose past in-house counsel relationship with claimant?s attorney, which ended five years before the arbitration, was not "evident partiality");
Olson v. Merrill Lynch, Pierce Fenner & Smith, Inc., 51 F.3d 157, 159-60 (8th Cir. 1995) (arbitrator?s failure to disclose the business relationship between his company and the respondents was "evident partiality" on
arbitrator?s part since arbitrator had substantial interest in the company as a high ranking officer and since the company did more than trivial business with respondents.)
B. A recent California case clarified an issue of some importance to arbitrators. In
Nemecek & Cole v. Horn, 208 Cal. App. 4th 641, 145 Cal. Rptr. 3d 641 (2012), a losing claimant sought to overturn an arbitration award in a law firm's favor on claim against client for fees based on failure of the arbitrator, a former judge, to disclose:
1. The arbitrator's participation in an appellate practice committee comprised of 186 members, of which a parties? testifying expert was one;
2. Defense of attorneys in legal malpractice actions while acting of counsel at a law firm;
3. The arbitrator had previously served on the litigation executive committee and the executive board of the Los Angeles County Bar Association while a testifying expert was its president, and the arbitrator served as panelists in a seminar put on for the Association of Business Trial Lawyers.
4. Attorneys for the law firm for the claimant had previously appeared before him in one case while he was on the district court bench.
The Court rejected each of these grounds for overturning the award for nondisclosure, labeling the last one as "bordering on the frivolous."
Dealer Computer Services, Inc. v. Michael Motor Co., Inc., 11-20053, 2012 WL 3317809 (5th Cir. Aug. 14, 2012), the Fifth Circuit held that a party seeking to vacate an arbitration award based on an arbitrator's evident partiality must object during the arbitration proceedings. Failure to do so results in waiver of its right to object.
The underlying dispute involved a claim that a company providing computer services to a car dealership planned to breach its contract by requiring dealers to purchase new servers. After the dealer lost, it attacked the award, asserting that one of the arbitrators did not disclose that she was an arbitrator on another arbitration panel which considered similar contract language and heard from the same damages expert. The district court found that because of her prior experience serving on a panel on a similar case, the arbitrator?s conduct created a "reasonable impression of bias" and rose to the level of "evident partiality. It vacated the award.
The Fifth Circuit reversed. It observed that the district court had noted the general rule that a challenge based on evident partiality must be brought during the proceedings. But the district court found that rule "paradoxical [because] if the arbitrator completely failed to disclose a potential conflict, the objecting party could not know about it in order to object." In fact, however, the Fifth Circuit noted that the arbitrator had disclosed that "I served on panel [sic] of three -18-
arbitrators that considered a dispute between Dealer Computer Services, Inc. and another party. I do not believe that my service on that panel creates a conflict with my serving in this case." She also checked boxes on a form noting that other parties had appeared before her in a past arbitration. The Fifth Circuit found this was sufficient to put the dealer on notice of her past service.