Twin Cities Business Litigation Blog : Minneapolis Business Litigation Lawyer & Attorney : Gavin P. Craig Law Firm : St. Paul, Twin Cities, Minnesota MN

As the commentator in the Contracts Professor noted, the Supreme Court hears a contract case about as often as the Cincinnati Bengals reach the Superbowl. So in an unusual case - the Supreme Court heard arguments in a case that challenged a provision in an arbitration clause in a consumer contract, that waived rights to any class action. California had previously found such waivers unconscionable.

The courts in California had invalidated the provision. Generally, the only time a court can invalidate an arbitration provision is when the basis for the invalidation would be equally applicable to any contract. In other words, if state law would invalidate a contract, then the same rule would apply to an arbitration agreement. You normally don't get to make special rules to invalidate arbitration agreements, although the court in the recent past has made a number or rulings that arguably leave that question open. The petitioner in this case argued that the states don't get to make special rules for arbitration agreements in order to invalidate them. Petitioner argues that, this is exactly what the court did: it applied a lesser standard than it would apply to any other contract. Respondent argued that this was a universal rule and state gets to decide what is unconscionable.

The oral argument is worth reading to just appreciate how the Supreme Court conducts oral arguments. It will be interesting to see the final opinion of the Court.

However, I wonder why the court took this case in the first place. Five justices must have agreed to hear the case, but why? Is the court going to go into the business of reviewing state decisions regarding the enforceability of arbitration agreement provisions? This seems unlikely. I'm just wondering.

Another take on this case comes from Class Action Countermeasures.  I do like the question: (Paraphrased) Is the Supreme Court ging to Tell California what is or is not Unconscionable?  In the end I think the answer will be, "No!" 
 

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I remember when I was in law school, and the rights and obligations of a non-party to a contract was very limited. The ability of a non-party to enforce a contract was limited to receiving the right by assignment, or the theory of the third party beneficiary. Now, the Supreme Court in its wisdom has created a right for a party to a contract to enforce the contract against a non-party. Very strange.

In another inevitable arbitration case, Disputing reports that the fifth circuit has decided that a non-party to an arbitration agreement, in fact a party that would have no idea that an arbitration agreement even existed, could be compelled to arbitrate if the state law involved gave the non-party the right to enforce the award, if any.

The logic behind these cases eludes me. In the first case, most state arbitration laws do not anticipate the participation of non-parties. No one drafting the state laws was thinking in terms of enforcement of an arbitration agreement against a non-party. After all, how would any state have the authority to bind persons to contracts that they were not a party to. And that is the essence of this decision. Persons not a party to a contract are bound by the terms of the agreement.

I don't know where this trend will end, but it is interesting to watch. I am also not sure how the states (even Louisiana) can have a scheme to allow enforcement of an award by a non-party against a party to the arbitration agreement. Will the plaintiff need to agree to the arbitration agreement before any award could be enforced?

Basic contract law requires offer, acceptance and consideration. As far as the non-party goes, none of these are present.

The article doesn't say, but I would guess that the arbitration would necessarily occur in a place that is not remotely convenient to the plaintiff. Finally, if Louisiana has statute that allows the injured party to sue the insurer directly, why doesn't that law trump any theory about binding the non-signer to the arbitration agreement.
 

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Once again the Supreme Court has ventured into arbitration agreement interpretation. The question is simple enough, when an arbitration agreement is silent on an issue (in this case the question is whether a class was included in the agreement to arbitrate,) is the Class included in the agreement because it isn't excluded, or out of the agreement because it isn't included.

There was no argument that the subject of a class was not included in the arbitration agreement. In this case the class had no knowledge of the arbitration agreement between the parties.

The Supremes said "No," the class is not included in the agreement.  No arbitration by coercion. However there was a minority opinion that said, "Yes."

The procedural facts are interesting. The arbitrators ruled on the issue and decided that the class was included in the arbitration agreement. So why is the court overturning the decision of the arbitrators? If there is really binding arbitration under the Federal Arbitration Act, how can this be?

The court seems to be overturning the arbitrators decision when the whole purpose of arbitration is to give the arbitrators wide latitude to decide the case, and the decision of the arbitrator(s) is, when the parties agree, final and binding. Based on what I have read, the court was balancing whether parties that were not party to the agreement could be bound by an arbitration agreement, verses whether the arbitrators decision was final and binding. I think they made the wrong choice. If arbitrators decisions can be overturned by the courts, you lose the great value of arbitration. There are numerous cases where an arbitrator misapplied the law, and the court would not overturn the decision. So why now?  Even if the arbitrators were wrong, why is the court overturning their decision? 

Is the court opening the doors to more challenges to arbitrators decisions? I hope not, and it is hard to believe that the court intends this result. The ADR Professor Blog has a similar take of the case.  See also the Contract Professor Blog for more information.

Gavin Craig
 

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The Supreme Court does not often hear an arbitration case. However, they have now elected to hear Jackson v. Rent-A-Center West. Cert was granted on January 15th.

The case involves a claim of race discrimination and retaliatory termination. The employee had signed a stand alone agreement with the employer agreeing to arbitrate any disputes, including any claim of discrimination. The trial court dismissed the case on a motion, finding that the arbitration agreement already provided that the arbitrator determined arbitrability.

The case was appealed to the Ninth Circuit, and the Court of Appeals reversed, finding that the issue of whether an arbitration contract is unconscionable is an issue for the court. The agreement specifically provided that the question of arbitrability is a question for the arbitrator. The Ninth Circuit said it wasn't. Case law would appear to support this argument absent a provision in the agreement to decide arbitrability, but in this case the agreement already specified a process.

The district court held that the question of whether the arbitration agreement was unconscionable was a question for the arbitrator, as provided in the agreement. Moreover, the District Court held that the Plaintiff had not demonstrated that the agreement was substantively unconscionable.

The plaintiff is arguing that the arbitration clause is invalid because it is unconscionable, and therefore the agreement to allow the arbitrator to determine the question of arbitrability is equally void. The Ninth Circuit accepted the argument and reversed, sending the case back to the district court. Now the US Supreme Court has taken up the case.

In this case, the plaintiff signed the agreement. He may not have read the agreement, but that does not make it unconscionable.

This is an odd case. If you accept the premise that the arbitration Agreement is a contract, and that the parties are bound by their contracts, the Ninth Circuit is wrong. The court is essentially re-writing the contract and deleting a provision. That is not right. Court are not suppose to rewrite contracts. But that is the effect of the Ninth Circuit ruling.  Here is the decision. 

Gavin Craig

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In a very unusual case decided by the Court of Chancery in Delaware, the court upheld an arbitrators decision that he didn't have the authority to rule. If the arbitrator has no authority, then the parties would presumably resort to the court. However, by Delaware law, the case must be arbitrated so there is no access to the courts. Thanks to The Deware Business Litigation report for this story. 

The case arose from an accident outside of the state of Delaware, but for which Delaware's no-fault law applied. The insurance company, after making payment, brought a subrogation arbitration claim against the insurer of the party at fault. The accident was in Maryland, and Maryland has no such requirement to arbitrate.

The arbitrator apparently found a gap in the law, which will need to be remedied. It is interesting that the court refused to review or overturn the arbitrators decision. The very purpose of arbitration is to make the decision binding and not subject to court review. Good for the court, for not substituting it's judgment for the arbitrator's. When courts second-guess arbitrators, it damages the entire arbitration process.  Sometimes when courts do nothing, that is the right decision!

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In a very unusual case, a California Court of Appeals overturned an arbitration award. Thanks to Victoria Pynchon for the heads up in her Settle It Now Blog. I haven't seen the case yet, but the report from Victoria is not encouraging. If courts are going to review Arbitration decisions, what good are arbitrations?

More later after I have reviewed the decision.

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There are generally only a limited number of ways to successfully challenge an arbitration award. One basis is a claim of fraud by the arbitrator. I've never seen a case where there was actual fraud on the part of the arbitrator, and this challenge is rarely used or successful, although they exist. Another is to challenge the demand for arbitration because one of the parties was not a party to the arbitration agreement. This challenge is weakening with recent rulings, where the courts found that persons intended to benefit from the contract are bound by the arbitration agreement even though they are not parties to the agreement. However, there are also ruling that a person must explicitly agree to the agreement to arbitrate.

I recently saw a case where an entirely new basis was used to overturn an arbitrators award. At least it was new to me. Violation of Public Policy. While this is a rare set of facts, and the result appears appropriate, the basis for overruling the arbitrator is certainly novel.The case involved the termination of a Nebraska state police officer that was found to be a member of a group affiliated with the Ku Klux Klan. The officer challenged his dismissal, and after a hearing, the arbitrator ordered the officer re-instated, finding the the state police did not have "just cause" to terminate the officer. The court disagreed, and overturned the arbitrators award on the grounds of public policy.

It is hard to argue that a police office belonging to the KKK, or any similar group, should be allowed to continue to function as a police officer.The court held that the public has a reasonable expectation that the laws are being enforced without discrimination. Just because a person has a constitutional right to belong to any group they want, this does not mean that the person has a right to be police officer. Belonging to a hate group, and performing the duties of a police officer are certainly inconsistent.

This is a good example of the court fashioning a defense against an arbitrator's award that did not exist previously, at least in Nebraska. I don't know if we will see more challenges to awards claiming a violation of public policy, but I will not be surprised if we do. This case is very unique and it is unlikely to be duplicated, but you never know.

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Agreements to arbitrate disputes are either set forth in original agreements between parties, union agreements that bind parties, (from Employerslawyer) or after a dispute arises the parties elect to take their case to arbitration. In my experience it is hard to get litigating parties to agree about anything, so an agreement to arbitrate after the parties are already in litigation is less common.

The Employee Rights Post Blog posted an interesting article about whether a party is bound by an arbitration agreement in a related agreement never seen by one party. The answer was no! Both the Employers Lawyer and the Employee Rights blogs are worth reading.

Arbitration questions and issues cover much more than labor agreements.  But the decisions in the Employer/Employee area are helpful in understanding some of the arbitration issues.   

In my practice I see two major issues relation to arbitration. The first is that many form agreements contain arbitration provisions that neither party knows or cares about when they execute the agreements. The arbitration provision is just there, and the drafter either borrowed it from another contract years ago and never updated it, or the famous, "It's always been in the contract."

Sometimes these agreements create a hardship on one or both parties, or the language forces the parties (if one wants to arbitrate) into a process that is expensive, and ill suited to help resolve the case. One good thing about an arbitration provision is that the parties can mutually agree to ignore it. Nothing forces arbitration to happen, unless one party forces the issue by demanding arbitration or if necessary, bring a motion to compel.

Arbitration has a place in the civil justice system. Many cases are better suited to arbitration before a knowledgeable arbitrator, then litigation before a judge or jury that knows nothing about the area under dispute. Construction is an area where arbitration is common and there are a number of excellent arbitrators in most areas that have the experience to give a thoughtful decision.

When the parties agree that arbitration is a good way to finally resolve disputes, it is time to be creative. Other than the standard language submitting any and all disputes to final and binding arbitration, there are a number of issues that should be considered. For example:

1.  How many arbitrators. Unless the amount in dispute is significant I would avoid appointing more than one arbitrator. They are hard to schedule, and the cost more than triples.

2.  Place of arbitration. Some agreements are silent on place, some require a place that is very inconvenient for one of the parties. Neither is a good idea. Select a location that makes logical sense considering the parties and the subject of the arbitration.

3.  Who will be the arbitrator. The parties can select an arbitrator long before any dispute. It is usually harder to agree on an arbitrator after the parties are fighting.

4.  Time for arbitration. To avoid an unnecessarily protracted process, set some limits. If the dispute is under some agreed amount, require the arbitrator to complete the arbitration within a day (or some other time period) an divide the time available for each party to present its case. This is easier in lower dollar value cases, and the lower dollar cases are where this provision makes the most sense.

5.  Limitations on authority of the arbitrator. Arbitrators have a lot of authority - more than judges as far as fashioning remedies. What about the power to make awards that are equitable in nature? There was a very interesting case in Minnesota where a contractor did a very poor job building a structure. There were lots of problems with the construction. The arbitrators order the contractor to purchase the property from the plaintiff at a certain price. This award was upheld by the court. It was also a perfect remedy in this case.

6.  Do you want the arbitrator to have the power to order discovery? This is usually a cost issue.

When parties are going to draft an arbitration provision, they need to think through what they are trying to do. An arbitrator only has the power granted in the arbitration agreement. If you don't limit the arbitrators power, it is pretty much unlimited - absent as showing of fraud. So draft carefully.
 

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Arbitration is another form of Alternative Dispute Resolution (ADR.) Alternative means as an alternate to the judicial system. It can be faster and less expensive. It can also be more expensive and take longer. So be careful what you agree to, because once you've agreed you are probably stuck with it.

Arbitration is a trial without the rules of evidence, or the judge. I like arbitration when the parties can try their case before a person that has some knowledge of area of the law that governs the dispute. This is usually an advantage to all the parties, and many times much more economical. Today many of our judges are elected or appointed because they were successful prosecutors. Unfortunately, lawyers that are successful prosecutors don't necessary make good civil judges, or understand the basics of business or contract law.

So the trade off is that you have an opportunity to select an arbitrator that will hopefully understand the dispute, and you waive the right to appeal even if the arbitrator makes a serious mistake or ignores evidence. "Final and binding" means final and binding. Absent fraud, there is little the parties can do to overturn a decision of the arbitrator. The American Arbitration Association has excellent procedures and standard agreements to arbitrate. Although, I think that sometime they can be considered a little expensive if they do all the administrative work. (It all depends on the size of the matter to be arbitrated.)

However, the arbitrator's authority is limited by the arbitration agreement. (Please note that I did not say that the arbitrator's power is limited by the law, because as a practical matter the arbitrator can ignore the law and the decision is still final and binding.)

When drafting an arbitration agreement, the parties or the attorney can be creative if they want to be. I have drafted and negotiated arbitration agreements that: limited the amount of time each party would have to present their respective case; establish a range within which the arbitrator had to make an award; added or removed the applicability of the rules of evidence; limited the location of the hearings; limited the number of days that the arbitration could take place; and, otherwise contracted or expanded the remedies available.

What happens when a party signs an arbitration without understanding the ramifications of the decision. The Contracts Prof Blog reports on an interesting arbitration agreement signed by participants of a show called Judge Pirro. Apparently the parties agree to dismiss their respective claims or lawsuits and enter into final and binding arbitration before Jeaninne Pirro. The agreement signed by the participants is egregious in it's over reaching scope. Is such an agreement enforceable? Probably not to the extent the parties are required to waive non-waiverable rights in California. But otherwise, parties are generally free to contract for whatever terms they choose so long as the terms are not illegal. In the agreement in question, there is no governing law - the "Judge" is allowed to apply whatever law she wants - or no law at all. This is a very unusual agreement, but not necessarily unenforceable.

When the parties agree on final and binding arbitration, this agreement removes it from the court unless and until there is a dispute over the enforcement of the arbitration award, or one party tries to get the arbitration award overturned (which is very difficult to say the least.) Additionally, when one party has evidence that is not readily admissible in a court of law - arbitrators will usually at least listen to the evidence.

Most arbitrations, I would guess, occur as a result of pre-dispute arbitration agreements. When the parties contract for what ever their business purpose, they include an agreement to arbitrate any disputes. Frequently in the courts you will see decisions where one party or the other tries to either enforce an arbitration agreement, or defeat a demand to arbitrate. Arbitration is governed by the Uniform Arbitration Actas enacted in the states, and the courts have show a strong preference to enforce arbitration agreement.

Agreements to arbitrate should not be entered into blindly. Arbitration is a very good process in many cases, but tailor the agreement to meet the needs of the parties. You can even designate who will be the arbitrator.

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