Do you hear the corks popping, friends??  You should, because the imaginary champagne was just opened and the balloons have been released to the far corners of the internets in honor of ArbitrationNation’s FIFTH ANNIVERSARY!  At the end of this week, I will have published 253 posts over the course of five years.

Taking inspiration from other social media sites, I am celebrating this blogiversary by publishing one “listicle” per day this week, five in all.  Today, the topic is the five biggest surprises in arbitration law.  Full disclosure — this is not based on any statistically valid survey or data.  (Neither are any other listicles you click on…)  But, it is based on the almost daily emails I receive from lawyers or parties in arbitration, asking me for help.  And, this list is about surprises in the law surrounding arbitration, not the process of being in arbitration itself.  (That’s for another day.) Caveats out of the way, here we go.

Five Biggest Surprises In Arbitration Law

1.The Arbitrator (and not a court) likely has authority to decide whether the parties must arbitrate and whether their contract (as a whole) is valid (Buckeye Check Cashing; Rent-A-Center).  (Yes, you can be forced to arbitrate based on a clause within an otherwise unenforceable contract.)

2.Piecemeal litigation is “A-Okay”; efficiency is not the goal of the arbitration acts (KMPG v. Cocchi).

3. The bases for “appeal” of an arbitration are incredibly narrow (9 U.S.C. 10; Sutter), so the award is generally the final word.

4. Parties must preserve any bases for vacatur by raising them with arbitrator (if those bases were known or could have been known) (Dealer Computer Services).  (In other words, if you may want to appeal your arbitration award based on arbitrator bias, you first have to tell the arbitrator you believe she is biased…)

5. There is still significant judicial hostility to arbitration.  Even when you are arguing for arbitration, and the case law is on your side, a court may still find a way to retain jurisdiction or vacate the award.  (Examples here, here, and here, and almost every week on this site.)

Watch for a new list tomorrow!

The 9th Circuit recently allowed a claimant to proceed in court after her arbitration had been terminated due to her  failure to pay half the arbitration fees. Tillman v. Tillman, __ F.3d __, 2016 WL 3343785 (9th Cir. June 15, 2016).

The case involved a client’s malpractice claim against her lawyers, which was stayed by the federal court after the lawyers compelled it into arbitration. At some point in arbitration, the client was unable to pay the $18,562.50 the AAA required to continue with the claim.  The law firm refused to pay the client’s share of the fees, and the arbitrator terminated the arbitration as a result of nonpayment.

The law firm then asked the federal court to lift its stay and dismiss the malpractice complaint for failure to prosecute. The court reviewed evidence and confirmed the client was unable to pay the AAA fee, but dismissed her case.

On appeal, the Ninth Circuit first focused its attention on the text of Section 3 of the FAA. Section 3 requires courts to stay court proceedings “until such arbitration has been had in accordance with the terms of the agreement.”  It found that the client’s arbitration “ha[d] been had in accordance with the terms of the agreement”, as the AAA rules allowed the arbitrator to terminate the proceeding for nonpayment.  So, lifting the stay was appropriate.

However, the Ninth Circuit found the district court erred when it dismissed the client’s claim. It found nothing in the FAA or binding precedent that required dismissal of the litigation.  Therefore, it enforced a district court’s usual obligation to decide cases properly before it.

The court was not blind to the potential policy ramifications of its decision, though.  It commented:

“Our decision that Tillman’s case may proceed does not mean that parties may refuse to arbitrate by choosing not to pay for arbitration.  If Tillman had refused to pay for arbitration despite having the capacity to do so, the district court probably could still have sought to compel arbitration under [Section 4 of the FAA].”

So, poor litigants may avoid arbitration by failing to pay the arbitration fees, but wealthy litigants cannot? That seems to be the outcome here (and last year in the 10th Cir. ).  Any respondent in arbitration who wants to avoid this odd result should agree to pay both parties’ fees, and then ask the arbitrator(s) to take that into account in the resulting award.

What is “arbitration”? Although courts often use and apply the word, rarely do they stop to define it.  While the FAA concerns agreements to “settle by arbitration a controversy,” the FAA does not define “arbitration,” leaving the question to the courts. Lacking definitive guidance from the U.S. Supreme Court, two lines of cases have developed among the U.S. Courts of Appeals.

The split can be traced back to AMF Inc. v. Brunswick Corp., where bowling lane companies agreed to submit disputes about advertising to a third party to determine whether the claims in the ads were supported. 621 F. Supp. 456 (E.D.N.Y. 1985). After ads from Brunswick claimed “high tech” superiority over AMF’s wooden lanes, the court set out to resolve whether the process detailed in the agreement was “arbitration.” The key language from the case is that the “essence of arbitration” is “to have third parties decide disputes.” The court concluded that the parties had agreed to arbitrate because at least one controversy — the factual issue of whether the advertising claim was supported — would be “settled.” “Arbitration” need not end all controversy between the parties, and with the factual dispute resolved it was “highly likely” that the litigation based on that factual dispute would also be resolved.

Will it resolve the dispute?

The first line of case law stemming from AMF emphasizes the likelihood of parties to resolve their disputes through a given dispute resolution process. The Third, Ninth, Fourth, Tenth, and Second Circuits take this view, each with their own twist. In Harrison v. Nissan Motor Corp. in U.S.A., the Third Circuit narrowed the AMF holding slightly, reviewing an arbitration provision that expired after 40 days and holding that the process agreed to was not arbitration because the parties did not agree to see the dispute “through to completion.” 111 F.3d 343 (3d Cir. 1997).

The Ninth Circuit expanded Harrison’s definition in Wolsey, Ltd. v. Foodmaker, Inc., 144 F.3d 1205 (9th Cir. 1998), holding that an agreement that did not “explicitly permit one of the parties to seek recourse to the courts” was still arbitration, even though it was non-binding. The Fourth Circuit stretched Harrison’s definition even further in United States v. Bankers Ins. Co., holding that an agreement that permitted a federal agency to unilaterally reject a third party’s determination qualified as arbitration. 245 F.3d 315 (4th Cir. 2001). The court reasoned that because the agency would presumably approve an arbitration award it found favorable, the dispute resolution process would not be a “futile exercise.”

Seemingly rejecting the more expansive views of the Ninth and Fourth Circuits, the Tenth Circuit held that an agreement to accept a series of appraisals to resolve a purchase price dispute was not an agreement to arbitrate in Salt Lake Tribune Publ’g Co., LLC v. Mgmt. Planning, Inc., 390 F.3d 684 (10th Cir. 2004). Relying heavily on Harrison, the court found that the appraisal at issue would only fix the purchase price under certain circumstances, and therefore would “not necessarily settle a dispute” between the parties. The Second Circuit took a similar approach in Bakoss v. Certain Underwriters at Lloyds of London Issuing Certificate No. 0510135, emphasizing precedent requiring a binding resolution for arbitration, and holding that a doctor’s “final and binding” evaluation of a disability diagnosis met the definition. 707 F.3d 140 (2d Cir. 2013).

Does it look like “classic” arbitration?

The second line of AMF-derived cases focuses less on a dispute resolution process’s likelihood of settling disputes, and instead looks for a set of procedural features indicative of “classical arbitration.” In Fit Tech, Inc. v. Bally Total Fitness Holding Corp., the First Circuit identified several “common incidents of arbitration,” including a binding resolution, an independent adjudicator, substantive standards, and an opportunity for each side to present its case. 374 F.3d 1 (1st Cir. 2004). Finding that the parties’ dispute resolution process had all of these features, at least with respect to some of their disputes, the court held that it qualified as arbitration.

The Eleventh Circuit identified the circuit split on the definition of arbitration, but did not see a real disagreement. Advanced Bodycare Sols., LLC v. Thione Int’l, Inc., 524 F.3d 1235 (11th Cir. 2008). The court concluded that submitting a dispute to a third party for a binding decision is “quintessential classic arbitration,” and identified four factors used to decide whether a dispute resolution method is arbitration, expanding on the “common incidents of arbitration.”

The Sixth Circuit provided the most comprehensive definition of arbitration of all the AMF-derived appellate cases in Evanston Ins. Co. v. Cogswell Properties, LLC, 683 F.3d 684 (6th Cir. 2012). In building its definition of arbitration, the court cited Fit Tech factors in support of the proposition that the definition of arbitration depends on “how closely it resembles classic arbitration.” The court observed that a central feature of classic arbitration is a third party empowered to render a decision settling the dispute between parties, mirroring the reconciliation approach taken in Advanced Bodycare. Citing Harrison, the court also observed that arbitration requires parties to submit to the process “through to completion.”

Why does this matter? 

Many contracts provide that some third party will decide a dispute between the parties.  For example, a third party appraiser will determine if a change in rent is fair, or a CPA will determine the buy-out price for a departing shareholder.  But, if those provisions are treated as arbitration by the court, that means they can be strictly enforced pursuant to Section 2 of the FAA, and it means the third party’s decision is entitled to great deference, pursuant to Section 10 of the FAA.  That may not have been what the parties intended when they were drafting.

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Additional reading:

Definitional Avoidance: Arbitration’s Common-Law Meaning and the Federal Arbitration Act by Niall Mackay Roberts provides an in-depth look at the evolving definition of arbitration among the courts over time

The Committee on International Commercial Disputes examines the definition of arbitration and a host of other issues in the expert determination context in its 2013 report, Purchase Price Adjustment Clauses And Expert Determinations: Legal Issues, Practical Problems And Suggested Improvements.

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ArbitrationNation thanks Justin Sharp, a law student at Northwestern University School of Law, for researching and drafting this post.  And asks you to consider nominating the blog for the ABA’s Blawg 100 list, by following this link (the URL is www.arbitrationnation.com)!  Last request. 

While state courts have been busy articulating novel interpretations of arbitration law this summer, federal courts seem intent on getting back to basics.  In recent weeks, federal appellate courts have reminded parties who has the burden of proving an agreement to arbitrate, what should happen to the case when arbitration gets compelled, how parties waive their right to arbitration, and what is a “reasoned award.”

Burden of Proof

The Eleventh Circuit took the opportunity to clarify that when the plaintiff denies the existence of an arbitration agreement, state contract law determines who has the burden of proving the existence of the agreement.  (Distancing itself from its own 1993 precedent.)  In this case, Georgia law applied, and it provided that the defendant seeking to enforce the alleged arbitration agreement bears the burden of proving a valid arbitration agreement exists.  Because the defendant credit card issuer had no proof that the plaintiff agreed to any terms at all when she completed her on-line application, and could not prove that it sent a Welcome Kit containing the arbitration agreement at issue, or even establish which cardholder agreement it sent to plaintiff, the appellate court affirmed the district court’s denial of the motion to compel arbitration.  Furthermore, having presented “woefully inadequate” proof with its motion, defendant was not entitled to try and prove the existence of an arbitration agreement at a later trial.  Bazemore v. Jefferson Capital Systems, LLC, 2016 WL 3608961 (11th Cir. July 5, 2016).

Just Stay

In the course of a “summary order” affirming the district court’s grant of a motion to compel arbitration, the Second Circuit took time to issue a reminder to lower courts.  In that Circuit, the language of Section 3 is read quite literally.  Section 3 says when there is an applicable arbitration agreement  the court “shall on application of one of the parties stay the trial…”.  Even if all claims are referred to arbitration, courts are not to dismiss an action if any party seeks a stay instead.   To dismiss in that instance is an abuse of discretion.    Virk v. Maple-Gate Anesthesiologists, PC, 2016 WL 3583248 (2d Cir. July 1, 2016).

Don’t Waffle, Or You’ll Waive

Everyone knows you can waive your right to arbitrate, right?  But sometimes you need a good example of someone doing that, so that you can see exactly what to avoid.  Martin v. Yasuda, 2016 WL 3924381  (9th Cir. July 21, 2016) can provide that example.  Here the putative class of students at a private cosmetology school had all signed an enrollment agreement calling for arbitration.  Yet in response to the students’ Fair Labor Standards Act (FLSA) case, the school moved to dismiss for a substantive failure to state a claim.  When they were not completely successful, they filed an answer in which arbitration was one of 43 affirmative defenses.  Finally, after engaging in some discovery, the defendant moved to compel arbitration, 17 months after the start of the case.  Both the district court and the appellate court found the defendant had waived its right to arbitrate.  (Key factors: defendant had told court it was not likely to enforce arbitration agreement and had forced court to decide motion on merits.)  The court also confirmed that whether a party has waived its right to arbitrate by its litigation conduct is an issue for determination by the courts, not arbitrators.

Within Reason

In arbitration, parties can usually choose among three levels of award: simple award, reasoned award, or findings of fact and conclusions of law.  But, the lines delineating those three levels are awfully fuzzy and undefined.  Why does that matter?  Because a party who contracted for “findings of fact” might be able to vacate its award if the arbitrator issued only a “reasoned award.”  In the spirit of helpfulness, the Second Circuit defined a “reasoned award” in Leeward Construction Co. v. American Univ. of Antigua-College of Medicine, 2016 WL 3457266 (2d Cir. June 24, 2016).  They held “that a reasoned award is something more than a line or two of unexplained conclusions, but something less than full findings of fact and conclusions of law on each issue raised before the panel.  A reasoned award sets forth the basic reasoning of the arbitral panel on the central issue or issues raised before it.  It need not delve into every argument made by the parties.”

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Is ArbitrationNation your primary source for analysis of new arbitration decisions? For the latest advice on drafting arbitration clauses? Or just relief from reading about politics all the time? If so, please consider nominating the blog for the ABA’s Blawg 100 list, by following this link (the URL is www.arbitrationnation.com).

Continuing last week’s theme of “States Gone Wild,” here are three more oddball summer decisions from state supreme courts. All of them find interesting paths around federal case law (IMHO).

Georgia Says Class Complaint Is Deemed Arbitration Opt Out For All Class Members

In Bickerstaff v. SunTrust Bank, 2016 WL 3693778 (Ga. July 8, 2016), the issue was whether a class action challenging overdraft fees could proceed in court. The class complaint was filed in July of 2010, and in August of 2010 (in response to a court ruling), the bank amended its deposit agreement to allow customers to opt out of arbitration. In part, the amended arbitration agreement stated:

To reject this arbitration agreement provision, you must send the Bank written notice of your decision … by the later of October 1, 2010 or within forty-five (45) days of the opening of your Account. Such notice must include a statement that you wish to reject the arbitration agreement … along with your name, address, account name, account number and your signature … This is the sole and only method by which you can reject this arbitration agreement provision.

Just after October 1, the bank moved to compel arbitration. The issue of whether the complaint could serve as the formal rejection of the arbitration provision ended up before the Supreme Court of Georgia. That court unanimously held that “the filing of Bickerstaff’s complaint, thereby signaling his rejection of the arbitration agreement, tolled the time in which the putative class members were required to notify SunTrust of their intent to reject arbitration.”

In its analysis, the court leaned heavily on Georgia cases in the class action context, finding that class representatives may satisfy statutory or contractual preconditions on behalf of those class members who remain in the class after it is certified. “[T]he satisfaction of a precondition for suit by the class plaintiff typically avoids the necessity for each class member to satisfy the precondition individually.” Curiously absent from the decision was any discussion of Stolt-Nielsen, or Section 2 of the FAA (requiring strict enforcement of valid arbitration agreements), or the preemption rulings in Concepcion and DirecTV.

[Thanks to a reader for sending me this case before Westlaw did.]

Split South Carolina Court Reasons Its Way Around Rent-A-Center

Our next state court ruling at least acknowledges the relevant federal precedent. In Smith v. D.R. Horton, Inc., 2016 WL 3660720 (S.C. July 6, 2016), the issue was whether a husband and wife had to arbitrate their construction defect claims against their builder. Section 14 of the parties’ agreement was entitled “warranties and dispute resolution,” and made up of ten subparagraphs covering topics from whether the builder could remove existing trees, to the private warranty it provided, to the requirement to arbitrate disputes. The arbitration agreement was in 14(g), with its own subheading “mandatory binding arbitration.” The builder moved to compel arbitration and the homeowners argued that clauses within Section 14 made the arbitration agreement unconscionable.

The builder relied on the severability doctrine, first set forth in Prima Paint but reiterated in Buckeye Check Cashing and Rent-A-Center, which holds that courts may only decide disputes about the validity of the arbitration agreement itself, all other challenges to the contract must be determined by the arbitrator. The builder defined the arbitration agreement as 14(g), which the homeowners did not challenge, while the homeowners defined the arbitration agreement as all of Section 14. The court agreed with the homeowners, relying largely on the title of Section 14, and the fact that the subparagraphs had “cross-references to one another, intertwining the subparagraphs so as to constitute a single provision.”

Having defined the arbitration agreement to include all of Section 14, the court went on to find the arbitration agreement unconscionable due to its disclaiming implied warranty claims and prohibiting monetary damages. (As Section 14 had no severability clause, the court refused to analyze whether the unconscionable portions could be stricken.) Two justices dissented, noting that “the majority has not followed controlling precedent of the United States Supreme Court.” (That should help the cert petition…)

[NOTE TO DRAFTERS: Move your arbitration agreement into a separate paragraph with its own heading right now! Give it its own severability clause. Then you can keep reading.]

North Dakota Forgets To Read The Footnotes

Not to be left out of the “buck SCOTUS” summer trend, North Dakota issued a decision finding that a district court did not err in compelling arbitration of the formation of the parties’ contract. 26th Street Hospitality, LLP v. REAL Builders, Inc., 2016 WL 3022054 (N.D. May 26, 2016). One party to the contract argued the contract was invalid because it was executed without the knowledge and authority of the Partnership, as proper consent had not been received pursuant to the company’s charter documents. Nevertheless, the district court compelled arbitration, without deciding the formation of the contract. The North Dakota Supreme Court unanimously found the district court did not err in refusing to decide formation before ordering arbitration, relying on Rent-A-Center’s discussion of severability.   What it did not discuss, however, is 1) the first footnote in Buckeye Check Cashing which specifically states that the severability doctrine does not apply when the issue is “whether any agreement between the alleged obligor and obligee was ever concluded,” or 2) the fact that a majority of federal courts have concluded formation is an issue for courts, not arbitrators.

As long as we’re talking state courts…

Two state supreme courts have new decisions on waiver. The Texas Supreme Court found a company did not waive its right to arbitrate claims with individual customers in RSL Funding, LLC v. Pippins, 2016 WL 3568134 (Tex. 2016). Importantly, the Texas court said that for Party A to waive its right to arbitrate with Party B, the court will only analyze Party A’s litigation conduct with respect to Party B after a dispute arises. In this case, the majority of the company’s litigation conduct at issue was directed at third parties before a dispute arose with the individual customers.

The Supreme Court of South Carolina found a nursing home waived its right to arbitrate wrongful death claims in Johnson v. Heritage Healthcare of Estill, 2016 WL 3022394 (S.C. May 25, 2016). The nursing home had litigated over the estate’s right to records and conducted discovery before moving to compel arbitration.

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Phew!  Long post.  Is ArbitrationNation your primary source for analysis of state court arbitration decisions? For the latest advice on drafting arbitration clauses? Or just a home for your arbitration geekdom? If so, please consider nominating the blog for the ABA’s Blawg 100 list, by following this link.

While regular people count down the days to summer blockbusters that come in the form of high-paid actors fighting aliens or robots, I prefer my summer blockbusters in the form of arbitration opinions that have been months in the making (maybe finally released because the clerks are about to turn over?). Today, I report on three of these arbitration blockbusters, all from state high courts.

Blockbuster 1: New Hampshire Rejects Application of FAA.

In the most ambitious of the three decisions, the New Hampshire Supreme Court found that the FAA’s sections regarding confirming and vacating awards do not apply in state courts.  Finn v. Ballentine Partners, LLC, __ A.3d __, 2016 WL 3268852 (NH June 14, 2016) (an opinion that took five months to produce).  In that case, a company ousted one of its founders, and she instituted an arbitration challenging her termination.  She was awarded about $6.5 million.  After the company engaged in some major restructuring, which resulted in lots of cash, the ousted founder started a new arbitration.  Although the company argued her claims were barred by res judicata, the second arbitration went all the way through hearing and she was awarded another $600,000.

The New Hampshire Supreme Court refused to confirm the award.   Because the FAA allowed no avenue for vacating the award, the court based its decision on a state statute allowing courts to vacate an award for “plain mistake.”  The founder had argued that the state statute was preempted by the FAA.  The court responded that “we conclude that §§ 9-11 of the FAA apply only to arbitration review proceedings commenced in federal court.”  WAIT, WHAT?? (Truly, this stuff is what keeps me blogging.  There is never a dull moment with state courts and arbitration law.)*  The court essentially found that since most of the state court cases that have ended up at SCOTUS were about enforcing arbitration agreements in the first place, enforcing arbitration agreements is the limit of the FAA’s application in state courts.  (“Preemption… is at its apex when parties cannot get to arbitration…  In contrast, state rules . . . without the potential consequence of invalidating an arbitration agreement are not preempted.”)  Having gotten that pesky FAA out of the way, the court easily found that the failure to apply res judicata as the court interprets it was a “plain mistake” and reversible error.

Blockbuster 2: Michigan Allows Law Firm To Compel Arbitration Of Suit Against Its Principals

Michigan’s decision has more interesting facts but less of a jaw-dropping result.   In Altobell v. Hartmann, __ N.W.2d__, 2015 WL 3247615 (Mich. June 13, 2016), a principal in a law firm had gotten the chance to be an assistant football coach at the University of Alabama.  (What attorney has a second act as a football coach?  I imagine him giving his clients half-time type pep talks during trial: “Clear eyes.  Full hearts.  Can’t lose!”)   He got the impression that his firm would allow him to keep his ownership interest for a year, but the firm audibled and declared the coach had withdrawn from the partnership.  No law firm money was coming his way.

The coach then sued seven principals of the law firm in court, and the firm moved to compel arbitration.  Although the lower courts had found that naming individual defendants was sufficient to avoid his arbitration agreement with the firm, the Michigan Supreme Court sided with common sense. The arbitration agreement called for binding arbitration of any dispute “between the Firm…and any current or former Principal.”  The court found it “must consider the concept of agency” in interpreting whether the firm was meant to include the individuals who makes its decisions.  Therefore, the court found claims against the individual defendants were arbitrable, and the coach’s claims were also within the scope of the arbitration agreement.

Blockbuster 3: Kentucky Finds CPA Determination Is Not “Arbitration”

Kentucky waded into the muddy issue of defining arbitration in The Kentucky Shakespeare Festival, Inc. v. Dunaway, __ S.W.3d__, 2016 WL 3371085 (Ky. June 16, 2016).  In that case, a theater fired its director but agreed to pay his bonus for 2013.  The agreement noted that “the parties agree to abide by the determination of the … certified public accountants…in case of a dispute as to the true amount of the net profits, and each party agrees to accept such determination as final.”  After the CPAs concluded the director was entitled to no bonus, the director filed suit.  A year later, the theater filed for summary judgment, arguing the CPA determination was a binding arbitration award.  The district court denied the motion and the intermediate appellate court agreed.

The Kentucky Supreme Court affirmed for two reasons. First, it found even if the language was binding, it related only to “net profits” not to the director’s bonus.  But more interestingly, it rejected the concept that this was an arbitration clause, as it “makes no express reference to arbitration”, did not allow for “fundamental components of due process” like presenting evidence and cross-examining witnesses, and the agreement had a general venue provision selecting Kentucky state court.

Speaking of defining arbitration, watch for an upcoming post about how courts around the country are trying to put some parameters on what is and is not an arbitration. 

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*Would love to hear from any academic types who have looked into this argument. What about these statements from SCOTUS, not limited to Sections 2-4 of the FAA??

  • “State and federal courts must enforce the Federal Arbitration Act (FAA), 9 U.S.C. § 1 et seq., with respect to all arbitration agreements covered by that statute.” Marmet Health Care Ctr., Inc. v. Brown, 132 S. Ct. 1201, 1202, 182 L. Ed. 2d 42 (2012).
  • “It is well settled that ‘the substantive law the Act created [is] applicable in state and federal courts.’” Nitro-Lift Technologies, LLC v. Howard, 133 S.Ct. 500, 503 (2012).

The American Arbitration Association (AAA) has not released statistics for years (other than to the CFPB). But recently, arbitration geeks got a summer solstice gift of (limited) new information. The piece is only three pages, short enough to read during a commercial break, but here are some key numbers to know:

  • In 2015, 8,360 new business-to-business (B2B) arbitrations were filed. That figure includes commercial cases, construction, and executive employment disputes;
  • The claims and counterclaims made in those B2B arbitrations in 2015 totaled over $16 billion;
  • As a point of comparison, there were 25,024 private contract disputes filed in all the federal courts in the U.S. in the year ending March 2015;
  • The industries with the fastest increasing arbitration caseloads are transportation, commercial insurance, entertainment/media, and pharma/biotech; and
  • 56% of the B2B cases in 2015 were resolved prior to award.

What I take away from this is that there is still a significant percentage of business disputes being resolved in arbitration, and more of them get all the way to an award than is true in court litigation.

Statutes of limitations provide peace of mind for many attorneys and clients, knowing previous conduct cannot lead to liability after a prescribed time period. But, do statutes of limitations apply to arbitration proceedings? The answer is: not necessarily.  Because of that, advocates and parties need to know when statutes of limitation may apply as well as how they can revise their arbitration clauses to avoid this confusion.

The benefits of applying the statute of limitations to arbitration procedures are clear. However, it is often unclear whether a state will apply a time bar to arbitration actions. Neither the Federal Arbitration Act (FAA) nor the Revised Uniform Arbitration Act (RUAA) has a statute of limitations, so the arbitrator must look to state law to apply a time bar. When drafting the arbitration clause, or preparing for arbitration, there are three sources to review to determine whether a statute of limitations applies:

  • The state’s relevant statute of limitations, to see if it expressly applies to arbitration proceedings;
  • The case law in the relevant jurisdiction, deciding whether the statute of limitations applies in arbitration; and
  • The Uniform Commercial Code.

1. State Statutes Expressly Applying the SOL to Arbitration Proceedings

Only three states have passed laws expressly applying the statute of limitations to arbitration. These states are New York (N.Y. C.P.L.R. § 7502 (McKinney 2016)), Georgia (Ga. Code Ann. § 9-9-5 (2016)), and Washington (Wash Rev. Code § 7.04A.090(3) (2016) (overturning Broom v. Morgan Stanley DW Inc., 236 P.3d 182 (Wash. 2010))). All three states prohibit an arbitration action if the same claim could not be brought in court.

Washington’s statute, for example, reads, “A claim sought to be arbitrated is subject to the same limitations of time for the commencement of actions as if the claim had been asserted in a court.” Clearly, these statutes of limitations apply to arbitration proceedings governed by the state law of those states.

2. State or Federal Decisions Regarding Whether to Apply the SOL to Arbitration

If the relevant statute does not explicitly apply to arbitration proceedings, it is important to see how the common law has treated this question. Some state courts have already decided whether arbitrations should have a limitations period. These states include: California, Connecticut, Florida, Idaho, Indiana, Maine, Massachusetts, Michigan, Minnesota, North Carolina, and Ohio. All of these states, except Florida, do not apply the statute of limitations to arbitrations.

The courts’ rationale for refusing to apply the time bar usually notes the simplicity of arbitrations compared to judicial proceedings. One purpose of arbitration is quick and simple resolutions without as many formal rules. Many courts view the statute of limitations as one of the formal, rather than substantive, rules that is lost when deciding to arbitrate.

For example, the court in NCR Corp. v. CVS Liquor Control, Inc., 874 F. Supp. 168, 172 (S.D. Ohio 1993) found the relevant statute of limitations did not apply to arbitration claims. It reasoned the “statute of limitations is to bar an action at law, not arbitration.” Similar to other decisions on this issue, the court said an arbitration is not an “action.” The opinion noted how parties could have included a provision in the arbitration clause limiting the time to bring an arbitration proceeding.

Florida, however, took the opposite stance in Raymond James Financial Services, Inc. v. Phillips, 126 So. 3d 186 (Fla. 2013). In this case, the court held the statute of limitations applied in arbitration. The lower court granted the plaintiff’s motion declaring the arbitration was not time barred. The Florida Supreme Court reversed, finding the term “action” in the statute of limitations includes arbitration because arbitration is considered a “civil action or proceeding.” Along with statutory interpretation, the court also relied on principles of fairness, noting a statute of limitations protects the defendant from being at a disadvantage due to untimely claims.

3. The UCC’s Statute of Limitations

The UCC bars bringing an “action” after four years. It defines action in § 1-201(b)(1) as a judicial proceeding and “any other proceeding in which rights are determined.” There is a strong argument that an arbitration is a “proceeding in which rights are determined,” thereby allowing the application of the limitations provisions. No courts discuss the Uniform Commercial Code’s statute of limitations provision in the context of arbitration. However, if the law in the governing jurisdiction is not clear, it may be beneficial to consider arguing for the UCC’s four-year limitation provision, if your dispute is governed by the UCC.

In order to qualify for this time bar, the dispute must revolve around a contract governed by the UCC. The UCC has three statutes of limitations provisions: §§ 2-725, 2A-506, and 3-118. Section 2-725 applies to contracts for the sale of goods, section 2A-506 applies to lease contracts, and section 3-118 governs negotiable instruments.

Practice Tip – Including a Limitations Period in the Arbitration Clause

Because many states have not addressed this issue, it can be very difficult to predict whether the general statute of limitations in the applicable state will apply to your dispute.  The easiest and most effective way to stay out of this confusion is to include a limitations provision in the arbitration agreement itself. With the only qualification that the time limit be “reasonable,” this practice ensures there is some time limit applicable to the arbitration.

Here are two examples of limitation provisions for the arbitration clause:

“Any demand for arbitration under this Agreement must be made before the statute of limitations applicable to such a claim has run.”

“Any demand for arbitration must be made within one year of discovery, or the claim will be deemed waived.”

Don’t be SOL! Always check whether the statute of limitations applies to your arbitration proceeding, and always put a time limit for bringing an action in your arbitration clause. There are no hard and fast rules to know when they apply and when they do not, but a simple search could save you from losing your action and your client’s money.

ArbitrationNation thanks Kevin Kitchen, a law student at the University of Minnesota, for researching and drafting this post.

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…

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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.

 

Of all the federal circuit courts, I was not expecting the 7th Circuit to venture out on a limb to support the NLRB’s interpretation of the National Labor Relations Act (NLRA) as precluding class arbitration waivers.  After all, the 7th Circuit gets affirmed more than other circuit courts by SCOTUS, earning it a reputation for being fairly conservative.  Yet, contrary to the five other circuits that have already disagreed with the NLRB interpretation, the 7th Circuit just became the first to step out in support of the Board’s precedent.

In Lewis v. Epic Systems Corp., 2016 WL 3029464 (7th Cir. May 26, 2016), the arbitration agreement between the employer and its employees called for individual arbitration of disputes and waived “the right to participate in or receive money or any other relief from any class, collective, or representative proceeding.”   Nevertheless, a technical writer (of all the unlikely heroes…) sued the employer in federal court asserting violations of labor laws.  When the employer moved to compel individual arbitration, the employee responded that the arbitration agreement violated the NLRA.   The district court agreed with the employee, and the 7th Circuit affirmed.

Knowing that it was creating a circuit split, the unanimous panel supported its result with as much precedent and analysis as it could muster.  The opinion’s logic is this: Section 7 of the NLRA gives employees the right “to engage in other concerted activities,” and filing class actions constitutes “other concerted activities,” by virtue of federal precedent as well as the statute’s legislative history.  Furthermore, the Board’s interpretation of the NLRA is entitled to deference.  Therefore, the Court held, because the employer forced its employees to agree to a contract that stipulated away the employees’ right to class and collective action, it was unenforceable.

The panel then addressed whether the FAA “overrides” the interpretation of the labor laws.  Finding that the two statutes were not in conflict, the panel rejected any notion that the FAA altered the result.  In particular, the opinion notes that on the whole, the NLRA is very pro-arbitration and therefore does not conflict with the federal policy favoring arbitration.  It then attempts to deal with the pro-class-action-waiver language in Concepcion and Italian Colors by pointing out that: 1) it was dicta, dicta, dicta; and 2) the savings clause in Section Two recognizes that arbitration agreements may be made invalid by other laws.

Would this panel have been so bold if there were not an equally divided 8 justices on the Supreme Court?  I don’t know.  But, I do know that if this decision (and the NLRB precedent) wins the day, and if the recent CFPB proposed regulations are issued and upheld, it will represent a fundamental shift in the use and value of arbitration agreements for large companies that contract with hundreds (or thousands or millions) of employees and consumers at once.

Post script: The 7th Circuit did not persuade the 8th Circuit to change its mind on this issue.  Just a week after the Lewis decision, the 8th Circuit decided Cellular Sales of Missouri v. NLRB, 2016 WL 3093363 (8th Cir. June 2, 2016), in which it reaffirmed its 2013 ruling that the NLRB was simply wrong in concluding that class-action waivers violate the labor laws.  However, the 8th Circuit did affirm the Board’s finding that the company violated the NLRA by drafting an arbitration agreement that would lead a reasonable employee to believe it waived or limited their rights to file unfair labor practice charges with the NLRB.