Arbitration in the Supreme Court: Dire Results, Dire Predictions, Or Limited Holdings?

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1 Arbitration in the Supreme Court: Dire Results, Dire Predictions, Or Limited Holdings? Two cases decided in 2010, and one decision which will be issued in 2011, may substantially affect court involvement in arbitration and/or prohibit consumer, employment and other class actions. Or, they may be relatively minor cases which could end up basically confined to their facts. The cases are: Stolt-Nielsen v. Animalfeeds; Rent-A-Center, West, Inc. v. Jackson; and AT&T Mobility v. Concepcion. 1. Stolt-Nielsen v. Animalfeeds International Corp., 130 S. Ct (April 27, 2010). This case was initially seen by many as a major victory for business interests. That is because the Court decided that a contract containing an arbitration clause which was silent on whether a class action could be maintained could under no circumstances allow a class action arbitration. Anirnalfeeds is a company which needed its goods transported; Stolt-Nielsen is a shipping company. Animalfeeds served Stolt-Nielsen with a demand for class action arbitration alleging antitrust violations affecting it and other companies. The arbitration agreement covered the antitrust claims but was silent on whether a class action could proceed in arbitration. So, the parties decided to execute a supplemental agreement appointing a three-arbitrator panel, that would decide the intent ofthe contract The panel heard numerous witnesses and was provided with many past arbitration awards holding that class actions could proceed even ifthe contract was silent. The panel, in its award, noted that the issue was the intent ofthe parties, reviewed the contract language and analyzed the controlling law, and reflected on similar past arbitration awards as well as Supreme Court precedent. Because the arbitration clause called for arbitration ofany dispute under the contract, the panel determined that this broad clause permitted class action claims to be brought under it.

2 The Supreme Court held that the arbitrators had gone beyond contractual interpretation and ruled on the basis ofpublic policy, which exceeded the scope oftheir powers. Based on this holding, any business using arbitration that desires to exclude class arbitration should be advised to maintain silence on that issue, to avoid the possibility that arbitrators might fmd it intended to include class arbitration in its dispute resolution clause. There is little explicit guidance in the majority opinion about what must be shown to prove an intent to arbitrate class actions when the contract is silent, even though broadly worded to favor arbitration. Under Stolt-Nielsen, the best business advice to avoid class arbitration simply is do not deal with it; remain silent. Perhaps, however, there are still openings. There is no doubt that the parties in this case were extremely sophisticated. The minority took pains to suggest that the case is limited to highly sophisticated business organizations. It may not apply to contracts of adhesion such as most consumer contracts or to take-it-or-ieave-it employment contracts. In addition, the procedure governing class action arbitrations administered by AAA and JAMS allows some court review at different steps in the process, but the minority was unwilling to vary the usual requirement ofa final judgment and the majority expressed no view. Probably one future strategy for claimants trying to utilize class action arbitration is to dispute the ripeness ofmotions to vacate these procedural partial final awards (ifthe award favors class arbitration), and try to force defendants to obtain review only after an award on the merits is obtained. One important argument is that such a process would enhance two ofthe vital characteristics ofarbitration, speed and efficiency, ifcourts refused to hear piecemeal appeals.

3 The Stolt-Nielsen decision may have serious unintended consequences, however, as more recent cases in the Second Circuit and the Supreme Court ofmissouri show. In Fensterstock v. Education Finance Partners, 611 F.3d 124 (2d Cir. July 12, 2010), the court found that a clause barring class arbitration was unconscionable under California law, but that it had no authority to order class arbitration based on Stolt-Nielsen. The arbitration clause at issue, however, did not bar a class action in court, so the circuit court allowed litigation on a class basis in district court. In Brewer v. Missouri Title Loans, Inc., 2010 WL (Mo.), the en banc Missouri Supreme Court decided 4-3 that the contract containing a class action waiver and a mandatory arbitration clause was unconscionable. Because the individual claim was so small that it would not be pursued absent class certification, the majority held that individual arbitration would not be compelled and the class action claim could be pursued in the trial court. Some contracts, it should be noted, prohibit class actions both in court and arbitration, and it is highly likely that counsel seeking to prohibit class claims will carefully review Fensterstock and Brewer, and draft accordingly. Waivers ofclass actions in court, however, will be subject to the same unconscionability argument as arises in the arbitration forum. Stolt-Nielsen may also lead to other increases in motion practice, by parties dissatisfied with arbitration awards who seek to vacate them. The finality and virtual unappealability ofarbitration awards has been accepted doctrine in the courts. Manifest disregard was thought to have breathed its final breaths and it was next to impossible to persuade a court that arbitrators had exceeded their powers. Thus, normally, in a case where the arbitrators were specifically asked to determine a factual question, i.e., what the parties intended in a contract, how could they be exceeding their powers when they had been given those powers directly by the parties? The Supreme Court seems to

4 indicate that the panel exceeded its powers by getting its conclusion wrong. Not only that, getting the conclusion wrong arguably now seems to meet the standard of"manifest disregard," although there is no analysis ofwhy and, really, there is no serious intellectual argument that the arbitration panel both knew the relevant legal principles and deliberately refused to apply them. Stolt-Nielsen may, therefore, encourage parties seeking to vacate awards to argue that the standard ofreview now appears much more similar to the standard ofappellate review from a trial court decision, and that we should forget the traditional deference to arbitration awards. In my own view, it is not likely for reviewing courts to agree with this point. Class action arbitrations are different in many material respects from the standard case, so my own prediction is that Stolt-Nielsen, to the extent that it could be used to argue for a different standard ofreview, will be confined to its facts. 2. Rent-A-Center, Inc. v. Jackson, 130 S. Ct (2010). The Supreme Court reviewed an unusual arbitration agreement, that had two parts to it. The first part mandated that all disputes had to be arbitrated; the second part mandated that challenges to the arbitration clause itselfhad to be decided by the arbitrator. The employee, Jackson, claimed race discrimination and retaliation when his employment was terminated. He filed his case in the District Court, arguing under Nevada law that the arbitration agreement was unconscionable. He claimed it was substantively unconscionable because he had to pay an equal share ofthe arbitration costs and because the agreement limited discovery. He claimed it was procedurally unconscionable because he had no bargaining power and had to sign the document as a condition ofemployment. As noted above, the agreement provided that the arbitrator, not any court ofany nature, would have the exclusive authority to resolve any dispute ofany

5 kind relating to the agreement. The District Court dismissed Jackson's complaint finding that the arbitrator had sole authority to decide whether the agreement was enforceable. The Ninth Circuit reversed holding that the decision on the validity ofthe agreement was for the court. The Supreme Court held that a provision requiring issues such as arbitrability to be resolved by an arbitrator is actually a separate arbitration agreement, basically severed out ofthe overall arbitration agreement. Unless that arbitration clause was the product offraud, duress or other grounds allowing revocation ofa contract, it is valid in its delegation to the arbitrator. Thus, the bottom line is that the arbitrator would decide the unconscionability issue. Courts will still decide challenges to the enforceability ofan arbitration provision when the issue has not been "clearly and unmistakably" delegated to the arbitrator. Ifit has been "clearly and unmistakably" delegated, a court can still decide the narrow issue ofthe enforceability ofthe delegation clause but the burden ofproofwill be far more difficult. For example, ifthe overall agreement limits discovery (for example, claimant may propose only ten requests for production ofdocuments and take no depositions) this limitation has no effect on the delegation clause. How much, ifany, discovery would be necessary to determine whether the delegation provision was itself fraudulent, etc.? A claimant would not be well advised to file an objection ofthat sort without clear and convincing evidence offraud, undue influence or duress. On the other hand, ifthe delegation provision effectively blocked access to a fair arbitration process by requiring travel to a distant state, by specifying a slate ofarbitrators hand-picked by the company, etc., that type ofdelegation provision should be subject to review by the court on unconscionability grounds.

6 A serious question is whether businesses prefer to have these "gateway" issues decided by arbitrators, or by courts. Courts would be more likely to apply the law of unconscionability, fraud, duress and undue influence fairly strictly according to state law where attempts to use these doctrines are rarely successful. Arbitrators, on the other hand, generally are not required to follow precedent and may substitute notions of fairness. There would be no appeal from what the arbitrator does at this early stage because there has been no fmal award. As a result, even though it may be difficult to avoid an arbitration agreement, drafters may decide that ifthere are gateway issues then these are better decided by courts. Although Jackson extends the invitation to allow arbitrator control over the full process, the practical result ofjackson may be quite limited. 3. AT & T Mobility v. Concepcion, to be argued in November and decided by the Supreme Court in My gratitude to Paul Bland ofpublic Justice, who wrote the following: "Ifmany members ofthe corporate defense bar get the Court to use this case to grant their fondest wishes for immunity from consumer protection and civil rights laws granted... then this case could have the kind ofimpact on class actions that an asteroid landing in Mexico millions ofyears ago had on dinosaurs." There was a District Court judge who, in the course ofhis opinion deciding whether inserts in boxes containing cell phones that mandated arbitration were unconscionable, scolded the public for not taking the time to read their mail. Maybe he has the answer - just read those mind-numbing agreements in full and send or take your cell phone back ifyou don't like the forced arbitration clause. Then get another cell phone and take it back. And another, and another...

7 These mandatory arbitration agreements accompany an awful lot ofconsumer products. Almost all ofthem ban class actions. This case, however, is a weird one for the Court to review because ofthe strange and limited issue presented. Essentially, the question is whether the Federal Arbitration Act preempts state law prohibiting class action bans in those cases where class actions are unnecessary for the effective vindication ofconsumer and employee rights. Why this formulation? Because the underlying case, alleging that AT & T offered a "free" telephone to anyone signing up for service but despite its offer charged substantial sales tax, would result in damages of about $30 per plaintiff, on average. Therefore, the class action was the only viable vehicle but it was banned by the agreement. The extra ingredient in this agreement, however, is a clause that provides that ifthe arbitrator awarded a claimant more than the company offered to resolve the matter, the claimant would get a bonus of$7500. That is why AT & T claims that the class action is not necessary to vindicate individual claims. This theory did not work with the lower courts. I hope there are not many ofyou in the audience who would think ofthis bonus as a big inducement to take the $30 case. What if, after you spent ten hours on the case, AT & T offered $100 when the provable loss was $30? Is this a great case even ifyou went all the way through arbitration and recovered the $7500 bonus, taking a fee of$2500? Thus, it is hardly a given that this bonus is so terrific that it could be stipulated or accepted as a fact that individuals could vindicate their rights without a class action. More fundamentally, ifone or even 100 individuals were fully refunded amounts which were illegally taken in the first place, why should the other thousands ofindividuals who are similarly situated lose any chance for recovery? That is the point ofa class action waiver. Ifthe Supreme Court holds that this bonus incentive is enough to allow class

8 action bans to be enforced, it is easy to predict that many corporations will include such incentives in their sales contracts, to avoid class actions altogether. On the other hand, ifthe Court holds that unconscionability analysis is factintensive, and requires an analysis ofstate law and comparison ofother unconscionability cases, which is best done by the state courts - then the FAA will not preempt state law and the decision will be relatively insignificant. Stolt-Nielsen itself commented in part: "[T]he interpretation ofan arbitration agreement is generally a matter ofstate law." Stolt Nielsen, 130 S. Ct. at And, an earlier Supreme Court decision held that the FAA "contains no express pre-emptive provision, nor does it reflect a congressional intent to occupy the entire field ofarbitration." Volt Information Sciences, Inc. v. Board of Trustees, 489 U.S. 468, 477 (1989). The only reasonably certain bet is that the decision will be 5-4.