South Dakota Disagrees with Illinois and Pennsylvania, Finding Choice of Defunct Arbitration Rules is Not “Integral” To Agreement
Earlier in 2011, courts in both Pennsylvania and Illinois issued decisions finding that when a consumer’s arbitration agreement called for the National Arbitration Forum (NAF) to administer the arbitration, but the NAF no longer administered consumer disputes, the arbitration agreements were unenforceable. Those courts found the parties’ choice of NAF was “integral” to the arbitration agreement and could not be severed. Just last week, the South Dakota Supreme Court disagreed.
In Wright v. GGNSC Holdings LLC, ___ N.W.2d ___, 2011 WL 68490097 (S.D. Dec. 28, 2011), a wrongful death claim against a nursing home (and related parties), the South Dakota Supreme Court considered the defendants’ motion to appoint a “substitute” arbitrator under Section 5 of the Federal Arbitration Act. (That section says the court “shall” appoint an arbitrator if there is a lapse in naming an arbitrator for any reason.) The relevant agreement provided that all disputes would be “resolved exclusively by binding arbitration … in accordance with the National Arbitration Forum Code of Procedure.” While the defendants’ motion to compel arbitration of the estate’s suit was pending, the NAF “became unavailable to administer an arbitration” of the dispute. The lower court then denied the nursing home’s motion to compel arbitration based on the unavailability of the NAF.
The South Dakota Supreme Court reversed that decision, concluding that “designation of the NAF’s Code of Procedure was an ancillary logistical concern that was not as important to the agreement as the agreement to arbitrate.” Its analysis that the NAF Code was not “integral” was based on two things: first, South Dakota’s “overriding policy that arbitration will be favored”; and second, the fact that the NAF Code did not require an “NAF arbitrator.” In other words, the court concluded that any arbitrator chosen by the agreed-upon process could still hear the dispute under the NAF rules. (The court found “of little significance” that the NAF Code itself provides that only the NAF could administer the NAF Code.) Finally, the court chided the plaintiff for never raising the unavailability of the NAF Code as a defense, using that as additional evidence that the choice of code was not “integral.” Because the court found NAF’s unavailability to administer the dispute was not “integral,” it found that the court was required to appoint a substitute arbitrator under the FAA.