“Cheeky” Maryland Rule, Requiring Mutuality In Arbitration Agreements, Not Preempted Under Concepcion
In most cases, if this blog mentions Concepcion, it means that a court has found a state statute or line of decisions is preempted by the FAA. A Maryland rule, however, recently ran the Concepcion gauntlet and survived. See Noohi v. Toll Bros., Inc., __ F.3d __, 2013 WL 680690 (4th Cir. Feb. 26, 2013).
The Maryland rule in question is that arbitration provisions must be supported by consideration independent of the underlying contract, “namely, mutual obligation,” and stems from a 2003 opinion from Maryland’s highest court: Cheek v. United Healthcare of Mid-Atlantic, Inc., 835 A.2d 656 (Md. 2003). In Noohi, both the district court and Fourth Circuit found that the arbitration clause within a purchase agreement between a developer and home buyer lacked the required mutuality under Cheek.
The arbitration clause in question said that the “Buyer… agree[s] that any and all disputes with Seller…shall be resolved by binding arbitration.” The clause also indicated that the “Buyer hereby waives the right to a proceeding in a court of law,” and that the Buyer must give the Seller written notice of a claim and an opportunity to cure before demanding arbitration. Because the Seller was not similarly obligated to arbitrate, or to comply with any pre-arbitration notice requirement, the court found “the provision binds only [the Buyers] to arbitration, and thus lacks mutuality of consideration.” Therefore, under the Cheek decision, the arbitration clause was unenforceable because it lacked consideration.
The Fourth Circuit then addressed the developer’s argument that Cheek was preempted under the same rationale used in Concepcion. The court noted that “the United States Supreme Court has never held that Congress … intended to preempt states from requiring mutual consideration in an arbitration provision.” In addition to pointing out the lack of precise precedent, the court distinguished Concepcion in three key respects. It found the California rule at issue in Concepcion dealt with the availability of class arbitration, increased the formality of arbitration, and increased risks to defendants, none of which applied to Maryland’s Cheek rule.
Most interesting, though, was how the court dealt with the developer’s best argument: that the Cheek rule “imposes a requirement on arbitration clauses (mutuality within the clause itself) that does not apply to other contract clauses.” It turned that argument on its head by finding “all Cheek does is treat an arbitration provision like any stand-alone contract, requiring consideration.” That analysis fits nicely with SCOTUS’s severability rule (see Prima Paint and its progeny), which says that the enforceability of arbitration clauses must be analyzed separately from the rest of the contract. The Fourth Circuit bolstered its analysis by opining that the Cheek rule encourages, rather than discourages, arbitration.
For all these reasons, the court affirmed the district court’s denial of the developer’s motion to compel arbitration, finding the arbitration agreement was unenforceable under Maryland law.