A lot of interesting arbitration law was made this year, on topics from validity to vacatur, but the banner issue was arbitrator authority. SCOTUS announced that theme for the year with its BG Group decision in March and federal and state courts around the country ran with it. [Warning: this post is a doozy. Get comfortable. Like my cat in the picture.]
What did we learn about arbitrator authority? Well, SCOTUS reminded us in BG Group PLC v. Republic of Argentina that arbitrators presumptively have authority to decide the meaning and applicability of contractual conditions precedent. That is true even when the contract states those conditions precedent must be completed before arbitration may proceed. Why is that important? Well, first, parties need to know in what forum to make a motion to dismiss, and second, when the arbitrator decides an issue within his or her authority, that decision is entitled to the full deference of the FAA. Therefore, the arbitrator’s decision in BG Group to excuse a party’s non-compliance with unreasonable conditions precedent was confirmed.
Following suit, federal circuit courts held that arbitrators have authority to: determine the timeliness of an arbitration demand (5th Cir – Why Nada Cruz); determine whether a non-signatory had to arbitrate, based on incorporated AAA rules (8th Cir – Eckert/Wordell); determine whether claims fall within the scope of the parties’ arbitration agreement, based on incorporated AAA rules (11th Cir. –U.S. Nutraceuticals); determine whether a subcontractor was properly licensed, based on a broadly worded agreement (despite arguments that only a state agency had that jurisdiction, 10th Cir —Hungry Horse LLC); void an agreement based on mutual mistake (8th Cir – Assoc. Elec. Coop.); and determine that third parties benefited from an agreement, despite language prohibiting third parties from having rights (11th Cir –Southern Mills, Inc.).
In turn, state high courts held that arbitrators have authority to: issue severe sanctions for fabricating evidence, based on incorporated AAA rules (Minnesota- Seagate Technology LLC); grant dispositive motions and disregard applicable state law (Alabama — Tucker); and determine arbitrability, based on the parties’ agreement (Hawaii–Hawaii State Teachers Assoc.).
There were also many, many decisions this year confirming arbitration awards, which can be seen as a subset of “arbitrator authority” decisions. Most surprising this year was the volume of arbitration awards that were un-vacated, in other words, an appellate court confirmed the arbitration award after a lower court had vacated it. At least five state supreme court decisions fit in that category. (Three I already blogged about, Delaware, Florida, and Minnesota, and two other labor decisions I did not blog about from Connecticut (Town of Stratford) and Montana (City of Livingston).) And at least five federal circuit court decisions also had to un-vacate arbitration awards — the Second Circuit, the Sixth Circuit, the Tenth Circuit, the Eighth Circuit, and the Fourth Circuit (in Washington Gas Light Co.). These ten decisions confirm the extreme deference that the FAA grants to arbitrators’ decisions within their authority.
While arbitrator authority was this year’s hot topic, with much of that authority coming from incorporated AAA rules, some of the topics from past years continued to trend. For example…
2014 produced some novel challenges to the validity of arbitration agreements. My personal favorites were the two federal circuit courts that refused to enforce identical agreements calling for arbitration before a Native American tribe that does not actually conduct arbitration–finding the agreements unavailable and illusory.
Another notable validity decision was Missouri’s refusal to enforce an arbitration clause, in part because it was illusory and because continued at-will employment was insufficient consideration for the arbitration agreement. In making those arguments, the plaintiff followed the current best bet for avoiding an arbitration clause — attack the formation of the clause (offer, acceptance, consideration, peppercorns) and use the word “illusory.”
Speaking of formation, there were a number of cases this year that confronted whether an arbitration agreement could be enforced if it was simply on a website, provided after the fact, or in an agreement that was incorporated by reference. Recall the website arbitration agreements that failed (Barnes & Noble, General Mills), along with the similar failure of a “shrinkwrap” type arbitration agreement sent after the purchase, where the customer lacked reasonable notice (Sirius XM)? With respect to incorporated manuals or agreements containing arbitration clauses, those were not enforced in this Fifth Circuit decision or this Fifth Circuit decision, but were enforced in this Eleventh Circuit decision. Finally, theD.C. Court of Appeals found that clients of a D.C. law firm could compel arbitration of a fee dispute with the law firm, although the parties had no written arbitration agreement, because the D.C. bar rules obligate attorneys to arbitrate.
In the sub-category of states refusing to compel arbitration ofwrongful death cases against nursing homes, the Supreme Court of Oklahoma issued two decisions (Johnson and Boler) finding that arbitration agreements signed by attorneys-in-fact of the resident were not enforceable or binding. (At least four state courts issued similar decisions in 2013.)
Although the flood of post-Concepcion preemption decisions has subsided, there were a few notable decisions this year. In CarMax Auto Superstores, SCOTUS asked California to take a very hard look at whether its Gentry line of cases, finding class actions necessary for effective vindication of rights, was preempted after 2013’s AmEx decision. Three months later, California did just that, finding Gentry preempted. And in THI of New Mexico, the Tenth Circuit found New Mexico’s rule that arbitration clauses must be mutual was preempted.
At least three state courts proactively declared that their arbitration decisions were not preempted by federal law. InIskanian, California said that plaintiffs’ ability to bring private attorney general claims on a representative basis cannot be waived, even via an arbitration agreement, and the FAA does not preempt that result because the FAA does not apply to claims made by the state. (See final paragraph below for potential next chapter on Iskanian.) In Alltel, Arkansas found a consumer arbitration agreement unenforceable because it lacked mutuality, and said the result was not preempted because mutuality is a requirement of all contracts. (Note the opposite result in THI above.) Similarly in Atalese, New Jersey found a consumer arbitration agreement unenforceable because it did not clearly advise consumers that they were giving up their rights to a jury trial, and said the outcome was not preempted because the rule applies to all New Jersey contracts.
I found four significant decisions vacating arbitration awards this year. They showed that arbitration awards can be vacated if the arbitrators are impartial when the agreement calls for partial arbitrators (Texas) , that arbitration awards can be vacated if the arbitrator does not fully disclose significant relationships with the law firm representing one of the parties (also Texas), and that arbitration awards can be vacated if the arbitrators grant a remedy that is precluded by the parties’ agreement (South Dakota and Ohio).
And for 2015…
What can we look forward to in 2015? In their conference on January 9, 2015, SCOTUS has two arbitration cases on deck. One is the California Supreme Court decision in Iskanian, presenting interesting preemption issues, and the second is a case presenting the issue of whether availability of class arbitration is a gateway issues that is presumptively for courts to decide (Opalinksi v. Robert Half Int’l.).
I hope this long post alleviates some of my guilt for posting less frequently in 2014 than in previous years… Here’s to a 2015 with well-reasoned arbitration decisions that help clarify some of the still-thorny topics arising under the FAA! And me having more time to write about them! Happy New Year.
By Liz Kramer