In a 2-1 decision, the Third Circuit held last week that the arbitration agreement in a personal computer purchase was valid, despite its mandate of a defunct arbitral forum. Its decision, Khan v. Dell Inc., ___ F.3d ___, 2012 WL 163899 (3d Cir. Jan. 20, 2012), is in line with the decision of the South Dakota Supreme Court in late December, and suggests a trend toward upholding arbitration agreements that call for an impossible forum or arbitrator.
The plaintiff, Khan, purchased a Dell computer in 2004 and signed a contract including this arbitration language: “Any claim, dispute, or controversy…shall be resolved exclusively and finally by binding arbitration administered by the National Arbitration Forum (NAF) under its Code of Procedure.” NAF’s Code of Procedure provided that it “shall be administered only by the National Arbitration Forum.” After Kahn sued Dell for defective design, Dell moved to compel arbitration. The district court denied the motion, based on the fact that the NAF no longer administers consumer arbitrations and the court’s conclusion that the NAF was “integral” to the arbitration agreement. The Third Circuit reversed the district court. It first restated the applicable standard in a way that make it harder for Khan to meet, writing that for an impossible forum to invalidate an arbitration agreement “the parties must have unambiguously expressed their intent not to arbitrate their disputes in the event that the designated arbitral forum is unavailable.” The court then went out of its way to find ambiguity in the arbitration agreement. For example, it found that it was ambiguous whether “exclusively” modified only the phrase “binding arbitration” or the entire phrase “binding arbitration administered by the [NAF]” and it found that the incorporation of the NAF rules still leaves ambiguous ”what should happen in the event that the NAF is unavailable.” In support of ambiguity, the Third Circuit cited cases that have interpreted similar NAF language and come to conflicting conclusions.
After finding ambiguity in the agreement, the court concluded “we must resolve this ambiguity in favor of arbitration.” The court then found Section 5 of the FAA was applicable and required the district court to appoint a substitute arbitrator.
The dissent found no ambiguity in the arbitration agreement between Khan and Dell. It found “the selection of the NAF as arbitrator was an integral part” of the arbitration agreement. It also cited to facts from an amicus brief from the National Association of Consumer Advocates, detailing the allegations of fraud against the NAF that led to the demise of NAF’s administration of consumer claims, suggesting that Dell should not be rewarded for requiring a biased arbitration forum in its consumer contracts.
The Third Circuit is the highest federal court to date to address this exact issue — whether to enforce an arbitration agreement that calls for administration by the defunct NAF — and its decision makes it much more difficult for consumers with similar arbitration agreements to convince trial courts to allow them to litigate their claims in court.