Arbitration/FAA: Two Recent Supreme Court Cases Apply FAA And Uphold Arbitration Agreements
CompuCredit Corporation v. Greenwood Upholds Right To Arbitrate Credit Repair Organizations Act Claims.
Pursuant to the Opinion of the Supreme Court in CompuCredit Corp. v. Greenwood, 565 U.S. ___, 132 S.Ct. 665 (2012), the Ninth Circuit today vacated the district court’s decision denying defendants’ motion co compel arbitration. Greenwood v. CompuCredit Corp., No. 09-15906 (9th Cir. March 27, 2012). This gives us an opportunity to revisit the Supreme Court case, decided January 10, 2012.
In CompuCredit, plaintiffs/respondents filed a class-action complaint against CompuCredit and Columbus Bank & Trust, alleging violations of the Credit Repair Organizations Act (CROA). Plaintiffs alleged misleading representations that their credit card could be used to rebuild poor credit and also concerning assessment of multiple fees. The plaintiffs, however, had agreed in their applications to be bound by a broadly-drafted arbitration provision.
The CROA includes "right to sue" language, and nonwaiver language of any right of the consumer under the CROA. The issue presented was whether the "right to sue" language and the nonwaiver provision sufficiently evidenced legislative intent to override arbitration of CROA claims.
Justice Scalia, delivering the opinion of the Court, interpreted the "right to sue" language as "mere ‘contemplation’ of suit in any competent court" – not a guarantee of a right to sue that must override an agreement to arbitrate. The "right to sue" is "a colloquial method of communicating to consumers that they have the legal right enforceable in court . . . " It "may be imprecise, but it is not misleading – and certainly not so misleading as to demand, in order to avoid that result, reading the statute to contain a guaranteed right it does not in fact contain." Tough luck, plaintiffs.
Justices Sotomayor and Kagan concurred in the judgment – though they thought that it was a closer case, and that perhaps lay readers of limited economic means and inexperienced in credit matters might actually believe that a "right to sue" really meant a "right to sue."
However, because they believed the language of the CROA could be interpreted either way, the parties’ arguments were "in equipoise". Translation: plaintiffs lose, because they "bear the burden of showing that Congress disallowed arbitration of their claims" – and plaintiffs didn’t carry their burden.
Justices Sotomayor and Kagan seemed more concerned about mounting a strategic rearguard action, because they wanted to make it very clear that they "do not understand the majority opinion to hold that Congress must speak so explicitly in order to convey its intent to preclude arbitration of statutory claims." In other words, in a future case, legislative intent could be discovered in the history or purpose of the statute.
Justice Ginsburg dissented: "I would hold that Congress, in an Act meant to curb deceptive practices, did not authorize credit repair organizations to make a false or misleading disclosure – telling consumers of a right they do not in fact, possess."
Marmet Health Care Center, Inc. v. Brown.
In the next case, the United States Supreme Court delivered a smack. Marmet Health Care Center, Inc. v. Brown, 565 U.S. ___ (2012). In the first paragraph, the Court stated: "Here, the Supreme Court of Appeals of West Virginia, by misreading and disregarding the precedents of this Court interpreting the FAA, did not follow controlling federal law implementing that basic principle." "That basic principle" is that state courts must enforce the FAA with respect to arbitration agreements covered by the FAA.
To add to the effrontery, "the state court found unpersuasive this Court’s interpretation of the FAA, calling it ‘tendentious,’ . . . and ‘created from whole cloth’. . . . " Apparently the judges in West Virginia did not want the United States Supreme Court to have the final word on the interpretation of the FAA. But as Justice Jackson observed: "We are not final because we are infallible, we are infallible because we are final."
The West Virginia Supreme Court had "concluded that the FAA does not pre-empt the state public policy against predispute arbitration agreements that apply to claims of personal injury or wrongful death against nursing homes." However, under the FAA, state law is not allowed to prohibit arbitration of a particular type of claim, making the analysis here straightforward.
This is not necessarily the end of the case, because the United States Supreme Court remanded so that the West Virginia court will consider, "whether, absent that general public policy, the arbitration clauses . . . are unenforceable under state common law principles that are not specific to arbitration and pre-empted by the FAA."
Unconscionability could be a sound basis for holding an arbitration clause unenforceable under state law. However, the West Virginia Supreme Court better not hold that the clause is "unconscionable" because it violates the state’s public policy against arbitrating personal injury or wrongful death claims against nursing homes if it wants its decision to withstand renewed scrutiny of the United States Supreme Court.
References: Ninth Circuit Addresses Issue of First Impression Concerning Appealability of Order Granting Reference
Order Compelling A Reference And Staying Proceedings Does Not Put Plaintiffs "Out Of Court", And Therefore Is Not Final And Appealable
The Ninth Circuit tells us the issue considered in this case is one "of first impression." That issue is "whether an order compelling enforcement of a contractual agreement to submit a dispute to a referee, and staying proceedings in the interim, is immediately appealable." Bagdasarian Productions, LLC v. Twentieth Century Fox Film Corporation, No. 10-56430 (9th Cir. March 26, 2012) (for publication) (Hawkins, Senior Circuit Judge).
The underlying dispute involved plaintiffs, who created or controlled properties connected with Alvin and the Chipmunks, and defendant Fox, owner of rights in the properties entitling it to develop, produce, distribute, exhibit, exploit, advertise, promote and publicize "throughout the universe." The agreement between the parties provided that "any dispute arising out of the Agreement would be submitted to a general non-jury reference pursuant to California Code of Civil Procedure section 638."
Plaintiffs sued Fox. Fox moved to refer the disputes to a referee, and to stay the action. The trial court granted Fox’s motion. Was the order granting the reference a final and appealable order?
It helps to know two things: first, that an order granting a motion to compel arbitration is not appealable; second, that both arbitration and a reference are a form of ADR – and therefore, the court is likely to view them similarly:
“Although there are some differences between arbitration and Section 638 reference, both are forms of alternative dispute resolution designed to move disputes out of court and lower the cost of trial proceedings. Plaintiffs offer no convincing reason why stays pending Section 638 reference proceedings should be treated differently from stays pending arbitration, since errors with either may be corrected later on appeal.”
In other words,
“the district court’s order is not final, the Plaintiffs have not been put ‘out of court’ by the order . . . the decision to refer can be reviewed and, if incorrect, later remedied by this court. As such, the appeal is premature and we lack jurisdiction over it under Section 1291.”
Mediation/Confidentiality: Preserving Confidentiality of Follow-Up After The Mediation Session
Extend 10-Day Period In Evidence Code section 1125(a)(5)
It is common for a mediator to “follow-up” after a mediation session has been completed, to see if more remains to be done, or if a settlement is being implemented successfully. Are the communications confidential? Yes, not a problem – if the parties agreed to extend the 10-day period set out in Evidence Code section 1125(a)(5).
Evidence Code section 1125 provides that, for purposes of mediation confidentiality, mediation ends when any one of five conditions is satisfied. Those five conditions include (i) execution of a written settlement agreement that completely settles the dispute, (ii) an oral agreement that completely resolves the dispute, and which is read into the court’s record consistent with Evidence Code section 1118; (iii) the mediator provides a writing to the parties stating that the mediation is terminated; or words to that effect, consistent with Evidence Code Section 1121; (iv) a party provides the mediator and the other mediation participants with a writing stating that the mediation is terminated, or words to that effect, consistent with Section Evidence Code 1121; (v) or for 10 calendar days, there is no communication between the mediator and any of the parties to the mediation relating to the dispute. The mediator and the parties may extend or shorten this time by agreement.
One of our Southern California arbitral forums includes the following language in confidentiality agreements:
“In order to allow the mediator to confidentially follow-uip after the mediation session, the parties and the mediator agree to extend the 10-day period set out in Evidence Code section 1125(a)(5) until the date any party terminates the mediation effort, a verdict is returned or a decision is rendered.”
Problem solved: the mediator and the parties have extended the time by agreement.
In The News: JPMorgan Chase Pays $384M Arbitration Award
Big
File the next story with the late Senator Everett Dirksen’s quip, "A million here, a billion there, pretty soon, you’re talking real money".
On March 22, 2012, Reuters reported, “JPMorgan Chase quietly paid $384 million [$373.3M plus interest] to American Century Investment Management after losing an arbitration over accusations of breaches related to the bank’s purchase of a retirement plan services business.” The dispute related to JPMorgan Chase’s purchase of American Century, and allegations that JPMorgan Chase promoted its own funds at the expense of American Century’s, in breach of contract.
Confidential until March 21, the arbitration award was made on August 10, 2011, and confirmed by a Missouri court on December 6, 2011.
Arbitration/Standard of Review/Fees: Second District, Division 7 Reverses Orders Awarding Attorney Fees, and Otherwise Confirms Arbitration Award
You know that this one must have been a real kerfuffle, because the Court of Appeal quotes the arbitrator: “Lots of fiercely fought and expensive litigation followed, including this arbitration.” Liner Grode Stein Yankelevitz Sunshine Regenstreif & Taylor v. Rotondo, B221056 & B223528 (2nd Dist. Div. 7 March 22, 2012) (Woods, Acting P.J.) (not for publication).
In this one, the appeals are about the legal fees, with the Court of Appeal reversing orders awarding attorney’s fees, and otherwise affirming the trial court’s confirmation of the arbitrator’s award. See the post on California Attorney’s Fees regarding the fee issue.
Along the way, the Court of Appeal offers helpful reminders regarding the standards for reviewing an arbitral award:
· Any doubts as to the meaning or extent of an arbitration award are for the arbitrators and not the court to resolve. Morris v. Zuckerman, 69 Cal.2d 686, 690-691 (1968).
· Neither the merits of the controversy nor the sufficiency of the evidence to support the arbitrator’s award are matters for judicial review.
· Though the court may vacate an award if it determines that the arbitrators exceeded their powers and the award cannot be corrected without affecting the merits of the decision upon the controversy submitted (Code Civ. Proc. section 1286.2(d)), it may not substitute its judgment for that of the arbitrators.
· Arbitrators can apply both legal and equitable principles in deciding the ultimate issue submitted to them. Morris v. Zuckerman, supra, 69 Cal.2d at 690-691.
Arbitration/Nonsignatories/CCP 1281.2/Standard of Review: Fourth District, Division 1, Reverses Trial Court’s Order Denying Motion to Compel Arbitration of Customer/Investment Advisor Dispute
Perennial Issue: Can Nonsignatories To Arbitration Agreement Compel Arbitration?
An investment advisor and related defendants petitioned to arbitrate claims brought by an investor’s successor in interest. The successor (John) alleged that the accounts of his deceased mother had been “churned” to improperly generate commissions. The trial court denied the petition brought by the investment advisor and related defendants to arbitrate: two of six defendants were not signatories to the arbitration agreement, and there was a possibility of conflicting rulings on common questions of law and fact if some of the claims were tried in court rather than heard by an arbitrator. The advisor and related defendants appealed the trial court’s denial of their petition to arbitrate. Thomas v. Westlake, D058531 (4th Dist. Div. 1 March 23, 2012) (certified for publication).
The trial court relied on Code of Civ. Proc. section 1281.2(c) to deny the petition. That section allows a court to refuse to compel arbitration if “[a] party to the arbitration agreement is also a party to a pending court action . . . with a third party, arising out of the same transaction or series of related transactions and there is a possibility of conflicting rulings on a common issue of law or fact.” Here, “third party” means a party to the action that is not bound by or entitled to enforce the arbitration agreement. John had argued successfully that certain of the defendants were not entitled to enforce the arbitration agreement because they were nonsignatories.
Here, whether the defendants have a right to compel arbitration will present a question of law, because the contents of the documents were not in dispute. Therefore,the proper standard of review will be de novo.
The first problem for John was that the so-called “third parties” were actually agents of the parties to the arbitration agreement, or at least John had alleged agency. When a plaintiff alleges a defendant acted as an agent of a party to an arbitration agreement, the defendant may enforce the agreement though the defendant is not a party to it. “Having alleged all defendants acted as agents of one another, John is bound by the legal consequences of his allegations.”
Second, John argued that FINRA (the Financial Industry Regulatory Authority) – the arbitral forum – was not available to hear the dispute for all the defendants. But the Court of Appeal, after reviewing FINRA’s own rules, concluded that FINRA was available as an arbitral forum, because all the defendants were “customers” or “associated persons” under FINRA’s rules.
Third, John argued that FINRA is not available to hear insurance disputes, and the product sold to his mother were insurance products – replacement annuities and insurance products. However, John had not alleged that the defendants engaged in unlawful insurance practices, and therefore the carve-out from FINRA jurisdiction for insurance disputes did not apply.
Fourth, the Court of Appeal concluded that even if FINRA had been unavailable as an arbitral forum, the parties could have arbitrated in a different forum.
Disposition: the order denying defendant’s petition to compel arbitration was reversed, and other proceedings were ordered stayed. The 3-0 opinion was authored by Justice Irion.
TIP: Agency allegations may seem like boilerplate. Yet they can have important consequences when it comes to enforcing an arbitration provision. Consider carefully whether you really need or want to plead that defendants are all agents of one another.
Boilerplate. 1879. Library of Congress.