March comes in like a lion, right? Well, that’s not true with respect to the weather here in Minneapolis. But it may be true with respect to arbitration decisions from around the country. This post focuses on two recent decisions from state high courts that refuse to compel arbitration.
In Global Client Solutions, LLC v. Ossello, 2016 WL 825140 (Mont. Mar. 2, 2016), a majority of Montana’s Supreme Court refused to enforce the arbitration clause between a consumer and a financial institution (that set up a bank account for the consumer’s efforts with a debt relief company). The arbitration clause provided for AAA arbitration of all claims arising out of the agreement, even claims relating to the validity of the agreement, but the bank had the right to bring collections actions in court. The trial court found the arbitration clause was unconscionable and refused to compel arbitration.
On appeal, the Montana Supreme Court first found there was no enforceable delegation clause in the parties’ arbitration clause, because the language was “ambiguous and confusing” instead of clear and unmistakable, largely due to what appears to be a typo in the clause. (The clause said the parties would arbitrate “the breach, termination, enforcement, interpretation or validity [of the entire agreement], including the termination of the scope or applicability of this Agreement to arbitrate”. The bank argued “termination” was supposed to be “determination.”) The court also refused to find that incorporation of the AAA rules constituted an enforceable delegation clause, because it did not specify which AAA rules applied and this was not a contract between two sophisticated commercial parties.
After confirming it could address the validity of the arbitration clause, the court found the clause unconscionable under Montana law because the bank had the right to bring collection matters to court, while the consumer had no similar right. The court reasoned that its holding was not preempted under the Concepcion rule, because other post-Concepcion courts have relied on lack of mutuality to invalidate an arbitration clause.
A concurring justice wrote “The elephant in the room is not state hostility toward arbitration…If there is any hostility, it is toward those who hide behind the FAA…to escape any material consequence of running fraudulent confidence schemes.” [But of course that assumes that a AAA arbitrator would not find wrongdoing when confronted with a “fraudulent confidence scheme”… ] Two justices dissented, asserting that the incorporation of AAA rules was a valid delegation clause, such that the arbitration clause’s validity should have been decided by a AAA arbitrator.
The second case comes from Alabama and is a cautionary tale for companies trying to add arbitration agreements to existing contracts with many consumers. In Moore v. Franklin, 2016 WL 761698 (Ala. Feb. 26, 2016), the Supreme Court of Alabama found the parties did not form a valid arbitration agreement by virtue of the bank posting a notice to the customer’s online banking profile. Citing cases from five federal courts, Alabama concluded that in order to form part of the parties’ agreement, there must be proof that the recipient accessed the web page containing the arbitration provision.
What lessons can we give drafters from these two cases? Well, check for typos. And then double and triple-check. Then, and only then, considering increasing the likelihood the arbitration clause will be found enforceable by making any carve-outs mutual. If the company can bring collection claims in court, then why not let the consumer bring modest claims in small claims court? Finally, once you drafted the clause, find a way of making sure those customers see it (and hopefully even click a button confirming that they agreed to it).