The Supreme Court and Arbitration – 2012 and 2013
Recommended reading: two posts by attorney Liz Kramer in Arbitration Nation: “2012 in Arbitration Law: Is Class Arbitration Naughty or Nice?” and “Preview of SCOTUS’s 2013 Double Feature on Class Action.”
That Was the Year That Was
In 2012, the big issue was class arbitration, with several states having pro-class-arbitration decisions reversed based on the Supreme Court’s 2011 ruling in Concepcion. In the federal courts, divergent views emerged on how to apply Stolt-Nielsen, a SCOTUS case holding arbitrators exceeded their authority under the Federal Arbitration Act by permitting class-wide arbitration under circumstances where the parties had stipulated that their agreement was silent as to the availability of class-wide arbitration. Ms. Kramer observes that this is a rapidly changing area of law about which SCOTUS seems “passionate”, and concludes, “I can’t wait to see what’s on Scalia’s naughty list in 2013!”
Double Header in 2013
“Two Games Today.” Puck. 1913. Library of Congress.
Based on the preoccupation with class-wide arbitration, and with the split over Stolt-Nielsen, SCOTUS’s work on the arbitration front is cut out for it in two cases it has accepted for 2013: Oxford Health Plans, LLC v. Sutter, and American Express Co. v. Italian Colors Restaurant (Amex III).
On November 20, 2012, I posted about American Express Co. under the heading, “Can An Arbitration Class Action Waiver Be Enforced If The Plaintiff Would Not Be Able To Effectively Vindicate Federal Statutory Rights Through Arbitration?”
“In my view,” writes Liz Kramer, “the real issue here is will SCOTUS acknowledge any expense-based exception to its arbitration precedent?” In other words, are economic realities ever a sufficient reason to nix arbitration? The Second Circuit believed the answer was yes, in the case of antitrust litigation. But Ms. Kramer opines that this decision is likely to be reversed.
Oxford Health Plans affords SCOTUS an opportunity to resolve the split over the application of Stolt-Nielsen. Does class-wide arbitration require express authorization, or can it be implied through the traditional methods of contract interpretation by the arbitrator?
Note: I have added Arbitration Nation to my Blogroll.
Arbitration/Consumers/Unconscionability: Second Dist. Div. 3 Affirms Order Denying Petition To Compel Arbitration Of Consumer Dispute Over Used Car
Procedural and Substantive Unconscionability Drive The Result
Arbitration clauses, automobile purchases and leases provide a ripe area for dispute. In 2012, I reported on a number of those disputes. See my posts of April 12, 2012 (Kolev v. Euromoters West/The Auto Gallery; opinion withdrawn by 9th Cir.), August 1, 2012 (Caron v. Mercedes-Benz Financial Services USA LLC), August 26, 2012 (Goodridge v. KOI Automotive), and October 16, 2012 (Sherf v. Rusnak/Westlake). In our next case, the purchaser sued after encountering problems with his used Dodge Avenger. Defendants, the finance corporation and dealership, appealed the denial of their petition to compel arbitration. Norton v. Ford of Santa Monica, et al., Case No. B237273 (2nd Dist. Div. 3 Dec. 28, 2012) (Kitching, J., author) (unpublished).
These consumer cases typically turn now on the issue of whether the arbitration clause is “unconscionable.” In Norton, the arbitration provision crashed.
Used cars for sale. Marion Post Wolcott, photographer. Dec. 1940. Library of Congress
The arbitration clause was procedurally unconscionable because it contained “elements of surprise.” Specifically, the arbitration clause was “inconspicuous” because it was located on the back side of a page, and did not have to be initialed. The dealer did not draw the buyer’s attention to the clause.
Substantive unconscionability resulted from the one-side nature of the arbitration provision – though it might appear superficially neutral on its face, it primarily benefited the dealer. Example: “A car buyer does not benefit from a provision allowing the dealership to seek a new arbitration of an award of more than $100,000 because the buyer, not the dealer, will be the party more likely to recover an award of that size. If the buyer obtains an award under the $100,000 threshold but believes it is too low, the buyer has no option to request a new arbitration unless the award is $0.” Additionally, the “arbitration provision requiring the party requesting a new arbitration to advance filing fees and arbitration costs is unconscionable because it allows a financially strong automobile dealership to request a new arbitration while discouraging or preventing a cash-strapped consumer from doing so.”
Thus, the Court of Appeal readily affirmed the trial court’s order denying the petition to arbitrate, based on procedural and substantive unconscionability.
Arbitration/Federal Arbitration Act: District Two, Division Three Holds Section 9 Of The Federal Arbitration Act Is Not An Impediment To Enforcement Of Award In State Court
Beware of 9 U.S.C. Section 9: It Provides For Judicial Confirmation Of Arbitral Awards Only Upon Consent Of The Parties
Swissmex-Rapid S.A. de C.V. and SP Systems, LLC arbitrated a commercial dispute concerning backpack agricultural sprayers manufactured by Swissmex, a Mexican corporation. The arbitration resulted in a net award in favor of Swissmex in the amount of of $1,424,039, which award was confirmed by the trial court. SP appealed, arguing “that the parties did not agree in their arbitration agreement that the award could be judicially confirmed, and therefore the trial court erred in confirming the award.” Swissmex-Rapid S.A. de C.V. v. SP Systems, LLC, Case No. B238054 (2nd Dist. Div. 3 Dec. 28, 2012) (Klein, J., author) (published).
Why, you may well ask, is this even a problem? After all, the trial court has statutory jurisdiction to enforce an arbitration agreement entered into in California, and that includes entering judgment on an award under the agreement. Code of Civil Procedure section 1293. Alas, the Federal Arbitration Act (FAA) works differently. Because this matter involved international commerce, it implicated the FAA. Unlike the California Arbitration Act (CAA), the FAA provides for judicial confirmation of arbitral awards only upon consent of the parties.
Thus, the questions presented in Swissmex are whether the FAA rule, requiring consent of the parties for judicial enforcement of an arbitral award, preempts California law, and if so, whether the parties had in fact consented to judicial confirmation of the arbitral award.
First, the Court of Appeal held that Section 9 of the FAA is procedural and therefore inapplicable to state court proceedings (the procedural rule would only apply in federal court). The fundamental substantive rule of the FAA is that courts are to enforce arbitration agreements, and that fundamental substantive rule preempts state law. But purely procedural aspects of the FAA, which apply in federal court, do not preempt. In footnote 6 of the Swissmex opinion, the Court of Appeal notes that “various other courts have characterized section 9 of the FAA as ‘substantive.’ . . . . However, those decisions are not binding on this court.” Given this footnote, it would seem prudent to cover the bases and consider the consequences if Section 9 of the FAA is viewed as substantive and preemptive of state law, rather than as merely procedural. That is exactly what the Court did next.
Second, the Court of Appeal considered the possibility that Section 9 of the FAA was applicable, and concluded the result would be the same, because here the parties agreed to submit to the Commercial Arbitration rules of the American Arbitration Association. Under Rule R-48(c) the parties are deemed to consent to judicial confirmation of an award. Idea Nuova, Inc. v. GM Licensing Group, Inc., 617 F.3d 177 (2d Cir. 2010) “is on point.”
That left just one last hurdle (or maybe pebble) to get over. The matter was administered by the International Centre for Dispute Resolution (ICDR) of the AAA. SP contended the arbitration was conducted in accordance with the AAA’s International Dispute Resolution Procedures, not the Commercial Arbitration Rules allowing for judicial enforcement of the arbitral award. The Court of Appeal resolved this last conundrum by focusing on the ICDR’s notification to the parties “that the matter would be ‘administered under the International Dispute Resolution Procedures . . . unless the parties agree otherwise.’” Here, the parties did “agree otherwise” by incorporating the Commercial Arbitration Rules. Thus, the matter could be administered by the ICDR, but arbitrated under the Commercial Arbitration Rules allowing for judicial enforcement of the arbitral award.
Presto! Judgment affirmed.
Drafting tip: If the arbitration is likely to be covered by the FAA, expressly provide that the arbitral award can be enforced in state or federal courts of competent jurisdiction.
Arbitration/Waiver: Post-Judgment Post-Appeal Post-Concepcion Request To Arbitrate Comes Too Late
Issue Presented Is One Of First Impression And Perhaps Sui Generis
Our next case presents as a “threshold matter” an arbitration issue that turns out to be one of first impression. Guitierrez v. Wells Fargo Bank, N.A., Case Nos. 10-16959 and 10-17468 (9th Cir. Dec. 26, 2012) (McKeown, J.) (published). Wells Fargo sought to compel arbitration in a case after certain issues had been decided adversely to it, arguing that it would have been futile to seek to compel arbitration before the Supreme Court’s 2011 decision in AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011) (holding that the Federal Arbitration Act preempted California’s Discover Bank rule that had rendered class-wide arbitration waivers unenforceable in consumer cases involving unequal bargaining power and large numbers of small consumer claims). However, Wells Fargo litigated at length before seeking to arbitrate after Concepcion was decided. “The effect of Concepcion, as intervening Supreme Court law, on a judgment on appeal after trial, is an issue of first impression.”
The Ninth Circuit waiver of arbitration test is a three-factor test requiring: “(1) knowledge of an existing right to compel arbitration; (2) acts inconsistent with that existing right; and (3) prejudice to the party opposing arbitration resulting from such inconsistent acts.” Fisher v. A.G. Becker Paribas Inc., 791 F.2d 691 (9th Cir. 1986).
Wells Fargo’s strongest argument was that any “existing right” could exist only after Concepcion. However, the Ninth Circuit believed that the futility of an arbitration demand was “not clear cut here” because “[i]n contemporaneous consumer litigation, litigants did succeed in compelling arbitration despite the existence of the Discover Bank rule.” (Note: For a discussion of a California case, Sprint v. Phillips, in which the court concluded a pre-Concepcion effort to arbitrate would have been futile, see my September 27, 2012 post). This allowed the Court to focus on readily apparent prejudice to plaintiffs – time, expense, delay and uncertainty – given “Wells Fargo’s invocation of arbitration five years into this litigation . . . “
But the Fisher analysis was not the only argument in favor of rejecting the belated effort to invoke arbitration. The Court believed that belated arbitration here would be inconsistent with “the overarching purpose of the FAA . . . to facilitate streamlined proceedings.” Concepcion, 131 S.Ct. at 1748.
Finally, on the facts, denying arbitration seemed consistent with contractual intent. The arbitration clause was only “permissive”, not mandatory. Either party could demand arbitration, but was not required to do so. And Wells Fargo “never made a demand for arbitration, raised it as a defense, or even mentioned it until after the Concepcion decision, at which point the trial was over and the district court had issued its judgment.”
The Court has suggested that its ruling on the arbitration issue is likely to be limited: “This is an unusual, perhaps sui generis, case in which the specific circumstances counsel this result.”
By the way, the main ruling in the case is interesting. Wells Fargo was sued for engaging in a practice of posting payments to checking accounts in a particular order (highest to lowest amounts) so as to maximize the number of overdrafts and the amount of overdraft fees. The panel held that the bank’s decision to post payments to checking accounts in a particular order is a federally authorized pricing decision, and that the National Bank Act preempted affirmative disclosure requirements and liability based on nondisclosure. But the National Bank Act does not preempt claims for affirmative misrepresentations under the fraudulent prong of California’s Unfair Competition Law.
Happy Holidays !
And best wishes to my readers for 2013
Ernst Haeckel. Ascidiae. Kunstformen der Natur (1904).
Review in The Wall Street Journal: Boilerplate
End of the Rule of Law, or Useful Legal Fiction?
Arbitration, like boilerplate, creates a private legal system that displaces the public one. Whereas the common law depends on the rule of law, and creates a system of precedent that is available to the public, an arbitration award is typically a private affair, and even a mistake of law or fact needn’t lead to the reversal of an arbitration award. The connection between boilerplate and arbitration is closer still, because often the agreement to arbitrate is an adhesive contract created by boilerplate-like provisions. Because arbitration is a subject of this blawg, a review of a new book on the unlovable subject of boilerplate in The Law Wall Street Journal resonated for me.
In the December 21, 2012 edition of The Wall Street Journal, Robert E. Nagel, professor of constitutional law at the University of Colorado, reviews Boilerplate (Princeton 2012), a new book by Prof. Margaret Jane Radin of the University of Michigan Law School. Prof. Nagel describes Boilerplate as “a sophisticated and thought-provoking treatment of the boilerplate contracts that everyone signs yet few read or understand.”
“Because the terms aren’t bargained over,” writes Prof. Nagel, summarizing arguments in Boilerplate, “it follows that they aren’t consented to in any traditional sense; there is no meeting of the minds between the parties.” The “moral basis” for using state power to enforce contracts is lacking in the case of boilerplate, because mutual agreement of the parties is the justification for using “the power of the state to enforce the transfer of one person’s property to another . . . “ But in the case of boilerplate, mutual agreement must be a legal fiction. Furthermore: “The party that constructs the boilerplate makes a kind of private legal system that displaces the public one.”
Prof. Nagel, however, suggests that the contractual treatment of boilerplate may be a useful legal fiction, and that “our bewilderingly complex political system exhibits many contradictions more alarming than the tension between boilerplate and the rule of law.” He asks rhetorically: “Can it be that real, bargained-for contracts remain an important practice and ideal because boilerplate removes so many transactions from the realm of law?”
As a first-year law student, I took Peggy Radin’s real property class at UCLA, and have fond memories of spending the first six weeks reading bewildering cases about foxes, hunters, possession, ownership, and opaque forms of action. All the best, Prof. Radin, and congratulations on the publication of Boilerplate.
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