Deborah Greenspan, Fredric M. Brooks, and Jonathan Walton

Transcription

1 RECENT DEVELOPMENTS IN ALTERNATIVE DISPUTE RESOLUTION Deborah Greenspan, Fredric M. Brooks, and Jonathan Walton I. Introduction II. Developments in Arbitration Enforcement and Class Proceedings A. CFPB Rulemaking on Restrictions of Class Proceedings in Arbitration Clauses B. CMS Rules on Pre-Dispute Arbitration Agreements with Nursing Home Residents C. Supreme Court Addresses Circuit Split on Whether the NLRA Limits Rights of Employers to Require Arbitration and Bar Class Proceedings Under the FAA III. Enforcement of Arbitration Agreements by Nonsignatories to Contract IV. Professional Sports Arbitration V. Waiver of the Right to Arbitrate VI. Grounds for Vacatur of an Arbitration Award VII. Conclusion i. introduction This article discusses recent developments in the field of alternative dispute resolution. The area attracting the most attention is the debate Deborah Greenspan is a partner and Fredric Brooks (rbrooks@blankrome.com) is of counsel with Blank Rome LLP. Jonathan Walton (jwalton@cozen.com) is an associate with Cozen O Connor LLP. 199

2 200 Tort Trial & Insurance Practice Law Journal, Winter 2018 (53:2) over the use of mandatory arbitration provisions in consumer and employment contracts that preclude the pursuit of collective relief through class action litigation, or class arbitration, and instead require that individuals pursue redress through individual arbitration. Several federal regulatory agencies have been at the forefront of efforts to roll back unrestricted use of such provisions, but some of those efforts have been reversed over the past year. In fact, the Supreme Court has accepted certiorari in three of these cases. This article also explores recent case law in the area of sports arbitration and appellate court rulings addressing efforts by nonsignatories seeking to enforce contractual arbitration provisions in contracts executed by other entities. Finally, this article discusses recent case law addressing waiver of the right to arbitrate and grounds for vacatur of an arbitration award. ii. developments in arbitration enforcement and class proceedings The debate over provisions in consumer and employment agreements mandating individualized arbitration of disputes intensified in The past year saw issues again reaching the nation s highest court, and multiple shifts in federal agency rules and policies resulting from the change in the executive branch. First, the Consumer Financial Protection Bureau (Bureau or CFPB) issued a rule against arbitration clauses in consumer financial contracts, but Congress and President Trump then promptly repealed the rule. Second, a federal district court issued a preliminary injunction prohibiting enforcement of a rule promulgated by the Centers for Medicare and Medicaid Services (CMS) that sought to prohibit the use of pre-dispute arbitration provisions in nursing home contracts; thereafter CMS, under the new administration, proposed a revised rule that would no longer prohibit such provisions. Finally, the Supreme Court heard argument on the question of whether employees rights to collective action under the National Labor Relations Act (NLRA) 1 restricts arbitration rights otherwise protected by the Federal Arbitration Act (FAA). 2 A. CFPB Rulemaking on Restrictions of Class Proceedings in Arbitration Clauses The year 2017 saw the rise and sudden fall of one of the most significant responses to Supreme Court decisions over the last six years, which have strongly supported the rights of companies to preclude the use of class devices through arbitration clauses in consumer contracts and contributed U.S.C U.S.C

3 Alternative Dispute Resolution 201 to a proliferation of such provisions. The CFPB sought to address such clauses through a rulemaking procedure. Under the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, 3 the CFPB was authorized to limit or ban the use of arbitration agreements in consumer financial contracts if the Bureau concluded that the restrictions are in the public interest and for the protection of consumers. 4 In May 2015, the CFPB issued its Arbitration Study: Report to Congress, Pursuant to Dodd-Frank Wall Street Reform and Consumer Protection Act 1028(a). 5 The study found that tens of millions of consumers were covered by arbitration clauses. For example, in the credit card market, card issuers representing more than half of credit card debt have arbitration clauses impacting as many as eighty million consumers while in the checking account market, banks representing forty-four percent of insured deposits have arbitration clauses. 6 The study also found that, in the consumer finance markets studied, very few consumers individually seek relief through arbitration or the federal courts, while millions of consumers are eligible for relief each year through class action settlements. 7 Following this report, the Bureau announced a proposed rule in 2016, 8 and, after receipt of numerous comments, issued a final rule in July 2017 (CFPB Rule). 9 The CFPB Rule, which in general would prohibit providers of financial products and services from using arbitration clauses to bar consumers from filing class proceedings in future disputes, was to take effect sixty days after being published in the Federal Register and was to apply to agreements entered into more than 180 days after that date. 10 The controversial CFPB Rule, however, would not go unchallenged. 3. Pub. L. No , 1028(a), 124 Stat (2010). 4. Id. 1028(b). 5. Consumer Finance Protection Bureau, Arbitration Study, Report to Congress, pursuant to Dodd-Frank Wall Street Reform and Consumer Protection Act 1028(a), consumerfinance.gov/f/201503_cfpb_arbitration-study-report-to-congress-2015.pdf. 6. Press Release, Consumer Finance Protection Bureau, CFPB Study Finds That Arbitration Agreements Limit Relief for Consumers (Mar. 10, 2015), gov/about-us/newsroom/cfpb-study-finds-that-arbitration-agreements-limit-relief-forconsumers/. 7. Id. Specifically, the report found that consumers filed approximately 600 arbitration cases and 1,200 individual federal lawsuits per year on average in the markets studied, and that in the 1,060 arbitration cases that were filed in 2010 and 2011, arbitrators awarded consumers a combined total of less than $175,000 in damages and less than $190,000 in debt forbearance. Id. The Bureau found that across consumer finance markets, at least 160 million class members were eligible for relief over the five-year period studied, and settlements totaled $2.7 billion in cash, in-kind relief, and attorney s fees and expenses with roughly 18 percent of that going to expenses and attorney fees. Id Fed. Reg (proposed May 24, 2016). 9. Arbitration Agreements, 82 Fed. Reg ( July 19, 2017), removed from the Code of Federal Regulations by 82 Fed. Reg (Nov. 22, 2017). 10. Id. at 33,

4 202 Tort Trial & Insurance Practice Law Journal, Winter 2018 (53:2) Banks and business groups, including the U.S. Chamber of Commerce and the American Bankers Association, filed suit in the U.S District Court for the Northern District of Texas. 11 The suit alleged that the CFPB Rule was a product of the CFPB s allegedly unconstitutional structure and was adopted in violation of the Dodd Frank Act and the Administrative Procedures Act because it failed to advance the public interest or consumer welfare and ran counter to the record before the agency. The complaint asserted that class-action litigation is significantly less effective than arbitration in addressing consumer claims and that most of the class actions that are initiated lead to no or minimal recovery for absent class members. 12 Additionally, under the new administration in Washington, other agencies of the federal government publicly expressed opposition to the CFPB Rule in a somewhat unusual display of inter-agency disagreement. First, the acting Comptroller of the Currency appointed by President Trump argued that the CFPB had failed to provide data to support its case and failed to disclose the rule s costs to consumers, pointing to a 2017 review by the Office of the Comptroller of the Currency (OCC) that found an expected increase of almost 3.5 percent in the cost of credit if the Rule were implemented. 13 CFPB Director Richard Cordray, who remained in his position in the new administration, responded that the OCC review was based on flawed statistics. 14 Second, the Treasury Department released its own report, arguing that: (1) the CFPB Rule would impose extraordinary costs based on the Bureau s own incomplete estimates, generating 3,000 more class action lawsuits within the next five years, costing defendants $500 million in additional legal fees, and adding $330 million in payments to plaintiff lawyers and $1.7 billion in additional settlements (based just on federal litigation); (2) consumer class actions are inefficient, citing statistics that only thirteen percent of consumer class action lawsuits filed result in a class-wide recovery and that, when they do, only four percent of plaintiffs claim class settlement funds to which they are entitled; (3) the CFPB Rule would effect a large wealth transfer to plaintiffs attorneys ; and (4) the Bureau failed to 11. See Complaint, U.S. Chamber of Commerce v. Consumer Prot. Fin. Bureau, 3:17-cv D (N.D. Tex. Sept. 29, 2017). 12. Id See Keith Noreika, Senate Should Vacate the Harmful Consumer Banking Arbitration Rule, THE HILL (Oct. 13, 2017, 9:00 A.M.), cfpb-rule-increases-consumer-costs-and-makes-banks-less-safe. 14. See Letter from Richard Cordray, Director, Consumer Finance Protection Bureau, to the Honorable Sherrod Brown, Ranking Member, U.S. Senate Committee on Banking, Housing, and Urban Affairs, Oct. 13, 2017, at 1, consumerfinance.gov/f/documents/cfpb_cordray-to-brown_arbitration-letter_ pdf; Richard Cordray, The Truth About The Arbitration Rule Is It Protects American Consumers, THE HILL (Oct. 16, 2017),

5 Alternative Dispute Resolution 203 consider whether improved disclosures regarding arbitration would serve consumer interests better than its regulatory ban. 15 The fatal challenge, however, came under the Congressional Review Act (CRA), 16 pursuant to which Congress can invalidate a rule within sixty legislative days of its effective date. The White House urged Congress to repeal the CFPB Rule under the CRA, stating the rule would benefit trial lawyers by increasing frivolous class action lawsuits; harm consumers by denying them the full benefits and efficiencies of arbitration; and hurt financial institutions by increasing litigation expenses and compliance costs, particularly for community and mid-size institutions. 17 Supporters of the CFPB Rule sought to defend it from override. CFPB Director Cordray argued that by blocking group lawsuits, mandatory arbitration clauses eliminate a powerful means to get justice when a little harm happens to a lot of people. 18 Other supporters of the CFPB Rule, including leading Democrats on Capitol Hill, pointed to the recent well-publicized examples of Wells Fargo and Equifax. Following its data breach, Equifax had offered free credit monitoring that initially required consumers to agree to a mandatory arbitration clause (although the company later reversed course and removed the clause following public uproar). Senator Elizabeth Warren argued that the Rule would stop companies like Equifax from avoiding legal accountability like this as long as [the] GOP doesn t reverse it. 19 The rule did get reversed, however. The House readily passed a bill to repeal the CFPB Rule in July, and in October the Senate joined in voting to strike down the CFPB Rule, with Vice President Pence breaking a fifty-fifty tie. President Trump then signed the legislation, overriding the CFPB Rule, which had been several years in the making, before it could ever take effect Limiting Consumer Choice, Expanding Costly Litigation: An Analysis of the CFPB Arbitration Rule (U.S. Dep t of the Treasury, Oct. 23, 2017), press-releases/documents/ %20analysis%20of%20cfpb%20arbitration%20rule. pdf U.S.C Statement of Administration Policy: H.J. Res. 111 Disapproving the Rule, Submitted by the Consumer Financial Protection Bureau, Known as the Arbitration Agreements Rule ( July 24, 2017). 18. Richard Cordray, Let Consumers Sue Companies, N.Y. TIMES (Aug. 22, 2017). 19. Hon. Elizabeth Warren, U.S. Senator from Massachusetts, twitter feed, twitter.com/senwarren/status/ See H.J. Res. 111, 115th Cong., 1st Sess. (2017) (signed by president Nov. 1, 2017). The next day, the banks and business groups voluntarily dismissed their lawsuit against the CFPB in the Northern District of Texas. See Notice of Voluntary Dismissal, U.S. Chamber of Commerce v. Consumer Prot. Fin. Bureau, 3:17-cv D (N.D. Tex. Nov. 2, 2017) (Doc. No. 54).

6 204 Tort Trial & Insurance Practice Law Journal, Winter 2018 (53:2) B. CMS Rules on Pre-Dispute Arbitration Agreements with Nursing Home Residents The past year also saw the rise and fall of another regulatory provision adopted in the Obama administration, this one to restrict the use of pre-dispute arbitration provisions in agreements between nursing homes and residents. In 2016, CMS promulgated a regulation providing that long-term care (LTC) facilities that participate in Medicaid or Medicare must not enter into a pre-dispute agreement for binding arbitration with any resident or resident s representative nor require that a resident sign an arbitration agreement as a condition of admission to the LTC facility. 21 The rule would not have banned all arbitration agreements, but rather would still allow residents to avail themselves of the benefits of arbitration once a dispute has arisen and the resident and/or his/her representatives can determine whether it may be an advantageous forum for them. 22 Before the rule was to go into effect in November 2016, the American Health Care Association (AHCA) filed suit under the Administrative Procedure Act (APA). The U.S. District Court for the Northern District of Mississippi issued a preliminary injunction prohibiting enforcement of the rule, finding that the nursing homes were likely to prevail on the claim that the rule was barred by the FAA. 23 The court found that CMS s argument that the rule did not bar arbitration agreements already in existence but merely provided financial disincentives (by withholding federal funding) for nursing homes to enter into new agreements likely would not meet with success. 24 In support, the court cited the Supreme Court s pro-arbitration statements in AT&T Mobility v. Concepcion 25 and the Fifth Circuit s finding in D.R. Horton v. NLRB 26 that the NLRB had acted contrary to the FAA in ruling that arbitration provisions in employment agreements interfered with employees rights under the NLRA. See infra at Section IIC. The court also found that CMS had not created a strong factual record in enacting the rule, although the court stated that it believed that CMS potentially could have done so. 27 The court stated: In particular, this court believes that, if CMS had singled out the mental competencyissue...forspecialattention,thenitmighthaveusedthat as a possible justification for distinguishing nursing home arbitration con Fed. Reg ; see also 42 C.F.R (n)(1) Fed. Reg. at Am. Health Care Ass n v. Burwell, 217 F. Supp. 3d 921 (N.D. Miss. 2016), appeal dismissed (5th Cir. June 2, 2017). 24. Id. at U.S. 333 (2011) F.3d 344 (5th Cir. 2013). 27. Burwell, 271 F. Supp. 3d at

7 Alternative Dispute Resolution 205 tracts from other arbitration contracts, thus harmonizing the Rule with the FAA. 28 The court went on to state that the case placed the court in the undesirable position of preliminarily enjoining a Rule which it believes to be based upon sound public policy. 29 Specifically, the court expressed the view that litigation over nursing home arbitration suffers from fundamental defects relating to problems with the mental capacity of residents, rendering it an inefficient and wasteful form of litigation. 30 The court further noted that it raises issues of the questionable authority of family members to act on behalf of elderly residents, and of inherent difficulties in pursing remedies for such issues through court proceedings because of both costs and the age of the residents. 31 Nevertheless, the court was unwilling to countenance[] the incremental creep of federal agency authority beyond that envisioned by the U.S. Constitution. 32 CMS appealed the decision, but the case was put on hold 33 when, following the change of administrations, CMS announced in June 2017 that it had reconsidered the requirements of the 2016 CMS Final Rule and was issuing a new proposed rule for revisions to arbitration agreement requirements for LTC facilities (2017 CMS Proposed Rule). 34 The 2017 CMS Proposed Rule would specifically remove the requirement precluding facilities from entering into pre-dispute agreements for binding arbitration and remove the prohibition banning facilities from requiring that residents sign arbitra- 28. Id. at 933. The court also found that the AHCA was likely to prevail on the claim that CMS had exceeded its statutory authority to enact the rule, finding that congressional authorization for the Secretary to impose such other requirements relating to the health and safety [and well being] of residents... as [she] may find necessary was broad but also vague, and that there was danger in allowing such generalized language to be overused to broadly exert agency power. Id. at (citing 42 U.S.C. 1395i 3(d)(4)(B), 1396r(d)(4)(B)). 29. Id. at Id. 31. Id. at 945, While acknowledging that courts can invalidate arbitration agreements if they find signatories lack mental capacity to contract, the court expressed concerns that agreements with LTC facilities are often executed either by residents in spite of grave doubts about their mental competency or by relatives who sign agreements even when no power of attorney has been executed. Id. The court stated that litigation over arbitration in this context is time-consuming and presents inherent difficulties, particularly since the most important witness, the resident, will generally have died by the time the lawsuit is filed, making it exceedingly difficult to determine, after the fact, the decedent s level of mental competency or whether he authorized a relative to sign on his behalf. Id. 32. Id. at See Order to Continue Stay of Proceedings, Am. Health Care Ass n v. Price, 3:16-cv MPM-RP, Doc. No. 70 (N.D. Miss. June 13, 2017) 34. See CMS Fact Sheet, CMS Issues Proposed Revision Requirements for Long-Term Care Facilities Arbitration Agreements ( June 5, 2017) ( June 5, 2017, CMS Fact Sheet), cms.gov/newsroom/mediareleasedatabase/fact-sheets/2017-fact-sheet-items/ html.

8 206 Tort Trial & Insurance Practice Law Journal, Winter 2018 (53:2) tion agreements as a condition of admission to a facility. 35 The 2017 CMS Proposed Rule would retain requirements that the agreement be explained to residents in a way they would understand, require that the language of any arbitration agreement be in plain writing in the admissions contract, and require that residents acknowledge that they understand the agreement. 36 According to CMS, the proposed revisions would help strengthen transparency in the arbitration process while being consistent with our approach to eliminating unnecessary burden on providers. 37 Opponents of the original CMS rule, such as the U.S. Chamber of Commerce, had argued that the benefits of arbitration that it is an easier and less costly means of seeking redress can only be realized when parties are free to enter into arbitration agreements before disputes arise. 38 Supporters of the original rule strongly opposed CMS s new proposal. For example, forty-six House Democrats wrote to CMS arguing that reports of abuses in long-term care facilities following Hurricanes Irma and Harvey underscored the need to reconsider upending legal protections of residents. 39 The AARP submitted comments expressing alarm that CMS s decision to remove provisions prohibiting binding pre-dispute arbitration will very likely have dangerous and harmful impacts on nursing facility residents, as well as their families, and place them at even greater risk than they faced before CMS addressed this issue in 2016 when it promulgated the final rule. 40 The AARP argued that CMS s attempts to address concerns through changes regarding transparency were insufficient, stating that [t]hese provisions all 35. See 82 Fed. Reg ( June 8, 2017). 36. See id.; June 5, 2017, CMS Fact Sheet; Department of Health and Human Services Proposed Rule on Medicare and Medicaid Programs; Revision of Requirements for Long- Term Care Facilities: Arbitration Agreements; File Code CMS 3342 P; RIN 0938 AT18; 82 Fed Reg (June 8, 2017), 08/ /medicare-and-medicaid-programs-revision-of-requirements-for-long-termcare-facilities-arbitration Fed. Reg. at 26649; June 5, 2017, CMS Fact Sheet. 38. See Letter from the Chamber of Commerce of the United States and the U.S Chamber Institute for Legal Reform to the Centers for Medicare and Medicaid Services, re: Medicare and Medicaid Programs; Reform of Requirements for Long-Term Care Facilities (CMS-3260-P) (Oct. 14, 2017), files/us_chamber_of_commerce_and_inst._for_legal_reform_comment_letter.pdf. 39. See House Democrats Plead For Rights Of Residents To Sue Nursing Homes, THE HILL (Oct. 4, 2017), Letter from David Certner, Legislative Counsel & Legislative Policy Director, Am. Ass n of Retired Persons, to Seema Verna, Administrator, Centers for Medicare & Medicaid Services (Aug. 3, 2017), comments-cms-ltc-facility-arbitration-proposed-rule-final-august-2017-aarp.pdf. The comments stated that the proposed regulation scales back nursing facility residents protections in favor of easing anecdotal claims of administrative burden for nursing facilities, contrary to CMS authority to protect residents, and would place residents at even greater risk than prior to CMS 2016 regulations because it could eliminate protections in place under some state laws that limit a facility s ability to require arbitration. Id. at 2.

9 Alternative Dispute Resolution 207 make it easier for a nursing facility to establish on paper that the arbitration provisions were fully understood by the resident and that by permitting LTC facilities to require arbitration agreements a condition of admission, CMS has eviscerated one of the most significant protections under contract law and the Federal Arbitration Act the understanding that a contract is only enforceable if it is not entered into as a result of coercion, misrepresentation, fraud or duress or otherwise unconscionable. 41 The American Bar Association also submitted comments advocating for CMS to retain the 2016 rule and withdraw the 2017 Proposed Rule, stating that the ABA opposes the use of binding forms of alternative dispute resolution involving residents in disputes with long-term care facilities unless the parties agree to do so voluntarily and knowingly after a dispute arises. 42 The comments set forth the view that the Supreme Court s 2017 decision in Kindred Nursing Centers Ltd. Partnership v. Clark 43 should not be seen as supporting an argument that a ban on mandatory, predispute binding arbitration clauses in LTC admissions violates the FAA, stating [w]hile Kindred clearly prohibits singling out arbitration agreements for disfavored treatment, nothing in the court s reasoning or under the terms of the Federal Arbitration Act require singling out arbitration agreements for favored treatment. 44 The comment period concluded, and as of December 2017 CMS is considering implementation of the new rule. C. Supreme Court Addresses Circuit Split on Whether the NLRA Limits Rights of Employers to Require Arbitration and Bar Class Proceedings Under the FAA This year, the Supreme Court agreed to decide another issue requiring a balancing of interests between arbitration and class proceedings. The court accepted certiorari in three cases to resolve a split that developed between the circuits on whether provisions prohibiting class or collective actions in employment agreements violate employee rights to engage in protected concerted activity under NLRA. 45 The National Labor Rela- 41. Id. at Letter from Thomas M. Susman, Director, Governmental Affairs Office, American Bar Ass n to Seema Verna, Administrator, Centers for Medicare & Medicaid Services (Aug. 7, 2017), NursingArbitrationCommentsAugust72017.authcheckdam.pdf (ABA Comments) S. Ct (2017). This decision held that a state rule, which mandated that authority of an agent to waive a principal s access to courts must be explicitly stated in a power of attorney, disfavored arbitration and was thus preempted by the FAA. 44. ABA Comments, supra note 35, at U.S.C Section 7 of the NLRA provides that [e]mployees shall have the right to self-organization, to form, join, or assist labor organizations, to bargain collectively through representatives of their own choosing, and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection....

10 208 Tort Trial & Insurance Practice Law Journal, Winter 2018 (53:2) tions Board (NLRB) has repeatedly found that it does, but courts are divided on the issue. On one side of the split is the Fifth Circuit s decision in Murphy Oil USA, Inc. v. NLRB. 46 The Fifth Circuit has repeatedly rejected the NLRB s position and concluded that an employer does not engage in unfair labor practices by maintaining and enforcing an arbitration agreement prohibiting employee class or collective actions and requiring employmentrelated claims to be resolved through individual arbitration. 47 Similarly, in Cellular Sales of Missouri, LLC v. NLRB, 48 the Eighth Circuit refused a request to reconsider its prior holding and denied enforcement of an NLRB decision that a class action waiver in the employer s arbitration agreement restricted the employees substantive rights to engage in concerted activity in violation of the NLRA. 49 The Second Circuit in Patterson v. Raymours Furniture Co. 50 also concluded that although, if writing on a clean slate, it might well be persuaded... [to] hold that the [provision s] waiver of collective action is unenforceable, it was bound by prior Second Circuit precedent 51 holding that [n]o contrary congressional command requires us to reject the waiver of class arbitration. 52 On the other side of the split are decisions of the Seventh and Ninth Circuits before the Supreme Court, and a later decision by the Sixth Circuit. In Lewis v. Epic Systems Corp., 53 the Seventh Circuit held that an arbitration provision that did not permit collective arbitration or collective action in any other forum violated the NLRA, and therefore fell under the criteria of the FAA s savings clause for nonenforcement. 54 In Morris v. Ernst & Young, LLP, 55 the Ninth Circuit gave deference to the NLRB s interpretation that the NLRA s statutory right to engage in... concerted activitiesforthepurposeof...mutualaidorprotection includesa right to join together to pursue workplace grievances, including through 29 U.S.C The statute also provides that employers who interfere with, restrain, or coerce employees in the exercise of the rights guaranteed in [Section 7] commit an unfair labor practice. 29 U.S.C. 158(a)(1) F.3d 1013 (5th Cir. 2015), cert. granted, N.L.R.B. v. Murphy Oil USA, Inc., 137 S. Ct. 809 (2017). 47. Id. at 1016; see also Citi Trends Inc. v. NLRB, 2016 WL (5th Cir. Aug. 10, 2016); D.R. Horton, 737 F.3d F.3d 772 (8th Cir. 2016). 49. Id. at F. App x 40 (2d Cir. 2016). 51. Id. at 43 (citing Sutherland v. Ernst & Young LLP, 726 F.3d 290, 296 (2d Cir. 2013)). 52. Sutherland, 726 F.3d at F.3d 1147 (7th Cir. 2016), cert. granted 137 S. Ct. 809 (2017). 54. Id. at The FAA provides that a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction... shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract. 9 U.S.C. 2 (emphasis added) F.3d 975 (9th Cir. 2016), cert. granted 137 S. Ct. 809 (2017).

11 Alternative Dispute Resolution 209 litigation. 56 The court also found that the FAA did not dictate a contrary result, reasoning that an arbitration requirement was not the problem since the NLRA obstacle is a ban on initiating, in any forum, concerted legal claims not a ban on arbitration. 57 More recently, the Sixth Circuit in NLRB v. Alternative Entertainment, Inc. 58 enforced the NLRB s finding that a company violated the NLRA by barring employees from pursing class action litigation or collective arbitration of work-related claims, reasoning that there is no need to ask whether the NLRA trumps the FAA. The two statutes do not conflict. 59 The court explained that the two acts are compatible because of the FAA s saving clause. Specifically, the NLRA prohibits the arbitration provision on grounds that would apply to any contractual provision, and thus triggers the FAA s saving clause. 60 The statutes therefore work in harmony. 61 The court further reasoned that the NLRA prohibits mandatory arbitration provisions barring collective or class action suits because they interfere with employees right to engage in concerted activity, not because they mandate arbitration. 62 In arguments to the Supreme Court, the NLRB similarly argued that the problem under the NLRA was not the use of arbitration, but the preclusion of collective action. 63 The NLRB also argued that the Supreme Court s FAA precedent did not require rejection of the Board s rule because none of those prior decisions compelling arbitration of statutory claims have enforced an agreement that violates an express prohibition in another federal statute. 64 The NLRB asserted that [i]n urging the Court to do so for the first time here, the Employers would give their arbitration agreements a privileged status that violates the FAA s equalfooting principle and would also use private contracts to eviscerate 56. Id. at Id. at F.3d 393 (6th Cir. 2017). 59. Id. at Id. 61. Id. 62. Id. at Brief for the National Labor Relations Board, NLRB v. Murphy Oil USA, Inc., 2017 WL , at *1 (Aug. 9, 2017) ( In recent years, many employers have required employees to accept, as a condition of employment, arbitration agreements that mandate individual arbitration of all work-related legal claims, thereby prospectively waiving the employees right to engage in collective legal action in any forum, either arbitral or judicial. ); see also id. at *9 10 ( Section 2 s saving clause preserves the Board s rule invalidating agreements that require employees to individually arbitrate work-related claims. That rule is not based on hostility towards arbitration, which the Board recognizes as an effective forum for vindicating federal laws. It is based on longstanding labor-law principles developed without reference to arbitration.... An employer may, consistent with the NLRA, insist that employees pursue all work-related disputes in arbitration; what it may not do is bar employees from pursuing their legal claims collectively in any forum, arbitral or judicial. ). 64. Id. at *2.

12 210 Tort Trial & Insurance Practice Law Journal, Winter 2018 (53:2) the public rights Congress protected in the NLRA. That is a result they could not achieve through any other contract, and should not be able to obtain in the guise of promoting arbitration. 65 Along similar lines, counsel for the employees in Epic Systems argued that nothing in the FAA should revive the company s ban, which stated that employees waived the right to participate in or receive money or any other relief from any class, collective, or representative proceeding. The employees bases for the argument were the following: (1) the FAA s savings clause prevents enforcement; (2) the prospective waiver would nullify terms of an agreement that operate as a prospective waiver of core federal statutory rights; and (3) under American Express Co. v. Italian Colors Restaurant, 66 the mandate to generally enforce arbitration agreements according to their terms may be overridden by a contrary Congressional command in this case the signal in the NLRA that courts should not uphold joint action bans. 67 Notably, under the Trump administration, the Department of Justice changed sides and filed an amicus curiae brief supporting the position of the employers, now arguing that courts must enforce agreements to arbitrate federal claims unless the FAA s mandate has been overridden by a contrary congressional command or unless enforcing the parties agreement would deprive the plaintiff of a substantive federal right, and that neither of those justifications was applicable. 68 The government cited a series of Supreme Court cases to support its argument that [i]n mandating enforcement of agreements to arbitrate a variety of federal statutory claims, the Court has made clear that statutory authorization to pursue class actions in court for violations of particular federal laws is insufficient to override the FAA s directive that agreements to arbitrate must be enforced. 69 At oral argument, counsel for the employers argued that the FAA will only yield in the face of a contrary congressional command and the tie goes to arbitration and that [a]pplying those principles to Section 7 of the NLRA, the result is clear that the FAA should not yield. 70 During oral argument, the Justices appeared divided. Justice Sotomayor echoed the view that [w]hat is stopping the concerted activity is not... which forum they choose, whether it s court or arbitration, but the very act of saying this can only be an individual arbitration, an 65. Id S. Ct. 2304, 2309 (2013). 67. Brief of Respondent, Epic Sys. Corp. v. Lewis, 2017 WL , at *2, *7 8 (Aug. 9, 2017). 68. Brief for the United States as Amicus Curiae Supporting Petitions in Nos and and Supporting Respondents in No , Epic Sys. Corp. v. Lewis, 2017 WL , at * Id. 70. Transcript of Oral Argument at 4, Epic Sys. Corp. v. Lewis (Oct. 2, 2017).

13 Alternative Dispute Resolution 211 individual court action. 71 Similarly, Justice Breyer stated that he did not see how the employer s position could prevail without undermining and changing radically what has gone back to the New Deal, that is, the interpretation of Norris-LaGuardia and the NLRA. 72 Justice Ginsberg stated her view that to proceed alone in the arbitral forum will cost much more than any potential recovery for one. That s why this is truly a situation where there is strength in numbers, and that was the core idea of the NLRA. There is strength in numbers. We have to protect the individual worker from being in a situation where he can t protect his rights. 73 Justice Sotomayor asked why the NLRB could not invalidate a contractual term the same way state law concepts like fraud and duress invalidate contracts, reasoning that Section 7 and Section 8 of the NLRB basically declare... a contract illegal if it does a certain thing. 74 In contrast, Chief Justice Roberts observed that reliance on the FAA s savings clause may beg[] the question, since the Court was trying to determine if the agreements were illegal. 75 The Justices raised questions as to the extent to which a forum must allow a collective process and what level of permitted concerted activity would suffice. For example, Chief Justice Roberts queried whether the NLRB and its supporters would find it permissible for employers to require employees to submit to an arbitral forum that allowed class arbitration but only if the case had fifty or more employees. 76 Justice Kennedy inquired as to why it would not suffice as protected collective for employees to be allowed to retain the same attorney and share information, and stated that it would seem that if the NLRB s position would prevail, many employers would decide that they did not want class arbitration at all. 77 The issue is of enormous significance to employers and employees in this country. According to a study published by the Economic Policy Institute, more than half (53.9%) of non-union private sector employers 71. Id. at Id. at Id. at 21. The Deputy Solicitor General responded that some employment agreements had cost-sharing provisions and that even if you thought that it just resulted in an argument that the employees would be practically unable to vindicate their claims, those are exactly the kind of arguments this Court rejected in Italian Colors, it rejected in Concepcion, and said bilateral arbitration agreements are enforceable under the plain terms of Section 2 of the FAA. Id. at Id. at Id. at Id. at Id. at 37, 39. On the other hand, Justice Kagan responded that usually when you have a right, the fact that there is one way to exercise a right left over does not make it okay if we ve taken away another 25 ways of exercising the right, analogizing to the First Amendment and stating that leafletting would not be banned just because someone had been allowed to write an op-ed article. Id. at

14 212 Tort Trial & Insurance Practice Law Journal, Winter 2018 (53:2) have mandatory arbitration proceedings up dramatically from just over 2% in 1992 and almost a quarter of the workforce in the early 2000s. 78 The study found that this would translate to 60.1 million American workers, and that of the employers who require mandatory arbitration, 30.1% also include class action waivers in their procedures. 79 The Supreme Court s ruling will thus have a profound impact on the rules applicable to millions of employment agreements across the county. iii. enforcement of arbitration agreements by nonsignatories to contract The Supreme Court previously explained in Arthur Andersen LLP v. Carlisle 80 that traditional principles of state law allow a contract to be enforced by or against nonparties to the contract through assumption, piercing the corporate veil, alter ego, incorporation by reference, thirdparty beneficiary theories, waiver and estoppel. 81 In that case, the Court held that a non-party to an arbitration agreement may invoke the FAA if the relevant state law allows a nonsignatory to enforce the arbitration agreement against a signatory. 82 This year, efforts by nonsignatories to force arbitration on consumers or other parties to the contract met resistance in a series of appellate court decisions, demonstrating the obstacles facing such parties when the contractual agreements do not clearly give them rights to enforce arbitration provisions. In In re Hensen, 83 the Ninth Circuit addressed a putative class action filed by Verizon Wireless customers against Turn, Inc., a middle man for Internet-based advertisements that separately contracted with Verizon to deliver advertisements to Verizon customers. Turn attached zombie tracking cookies to the Verizon Unique Identifier Headers (UIDH) of Verizon subscribers (which were allegedly undetectable and could not be deleted), in order to collect web-browsing and usage data. 84 The complaint was filed on behalf of all Verizon customers in New York, claiming 78. See Alexander J.S. Colvin, The Growing Use of Mandatory Arbitration, Economic Policy Institute, Sept. 27, The study found that among large companies with one thousand or more employees, an even higher percentage (65.1%) have mandatory arbitration procedures. 79. Id. The study found that large employers were more likely include class action waivers, such that the number of employees affected by such provisions was higher, and that overall 23.1% of all private-sector nonunion employees or 24.7 million American workers were subject of class action waivers. Id U.S. 624 (2009). 81. Id. at 631 (quoting 21 R. LORD, WILLISTON ON CONTRACTS 57:19 (4th ed. 2001)). 82. White v. Sunoco, Inc., 870 F.3d 257, 263 (3rd Cir. 2017) (citing Arthur Andersen, 556 U.S. at 632) F.3d 1052 (9th Cir. 2017). 84. Id. at 1056.

15 Alternative Dispute Resolution 213 violation of New York General Business Law Section 349 and trespass. 85 Turn moved to compel arbitration by invoking the arbitration provision in the customer agreement between plaintiff and Verizon. Turn was not a signatory to the customer agreement, but argued that the doctrine of equitable estoppel allowed it to enforce the arbitration provision against the plaintiff. 86 Under that doctrine, a litigant who is not a party to an arbitration agreement may invoke arbitration under the FAA if the relevant state contract law allows the litigant to enforce the agreement. 87 The district court had granted Turn s motion to compel under New York s equitable estoppel doctrine, reasoning that the claims were inextricably intertwined with the customer agreement. 88 In reversing, the Ninth Circuit first held that the district court erred by relying on the Verizon customer agreement s choice-of-law provision to apply New York law to determine whether Turn, as a nonsignatory, could compel arbitration under the doctrine of equitable estoppel. 89 The court concluded that under California choice-of-law rules, California law would apply as the law of the forum because there was no material difference between New York and California s equitable estoppel laws. 90 Under California law, the plaintiff would be equitably estopped from having it both ways by suing a nonsignatory under an agreement but ignoring such agreement s arbitration requirement. Specifically, equitable estoppel would apply in two circumstances: (1) when the plaintiff must rely on the terms of the agreement or the claims are intimately founded in and intertwined with the agreement; and (2) when the plaintiff alleges substantially interdependent and concerted misconduct by the defendant and the signatory and the allegations of interdependent misconduct are founded in or intimately connected with the obligations of the agreement. 91 The court concluded that neither circumstance applied, because the plaintiff s claims against Turn were not based on the customer agreement and the plaintiff did not allege that Verizon colluded with Turn (and, in fact, the 85. Id. at Id. at Id. at 1059 (quoting Kramer v. Toyota Motor Corp., 705 F.3d 1122, 1128 (9th Cir. 2013) (citing Arthur Andersen LLP v. Carlisle, 556 U.S. 624, 632 (2009))). 88. Hensen v. Turn, Inc., 2016 WL at *4 (N.D. Cal. Mar. 14, 2016), vacated 869 F.3d 1052 (9th Cir. 2017). 89. Id. at The court reasoned that [a] choice-of-law clause, like an arbitration clause, is a contractual right and generally may not be invoked by one who is not a party to the contract in which it appears, the plaintiff and Turn never agreed that New York law would govern the disputes between them, and the plaintiff was not relying on the customer agreement in his suit against Turn. Id. (quoting Paracor Fin., Inc. v. Gen. Elec. Capital Corp., 96 F.3d 1151, 1165 (9th Cir. 1996)). 90. Id. at Id. (citations omitted).

16 214 Tort Trial & Insurance Practice Law Journal, Winter 2018 (53:2) plaintiff alleged that Turn conducted its practices in secret and without Verizon s consent). 92 In Waymo LLC v. Uber Technologies, Inc., 93 the Federal Circuit similarly rejected an effort by Uber Technologies to compel arbitration of a case brought by Waymo LLC alleging that Uber had stolen its trade secrets concerning self-driving car technology. In this case, there was no arbitration agreement between Uber and Waymo. Rather, Uber s motion was based on arbitration clauses found in Waymo s employment agreements with its then-employee, who according to Waymo, allegedly misappropriated Waymo s information and used it for the benefit of Uber. 94 As in Hensen, the court in Waymo concluded that under California law, neither circumstance required to allow application of equitable estoppel to compel arbitration was present the complaint did not rely on the employment agreement, and absent a relationship between Waymo s claims and any concerted misconduct between Uber Technologies and [the employee] involving the employment agreements, Waymo cannot be compelled to arbitrate this dispute. 95 A similar issue was presented in Norcia v. Samsung Telecommunications America, LLC, 96 where the Ninth Circuit affirmed the denial of a motion to compel arbitration of a putative class action against Samsung alleging misrepresentations made as to the performance of Galaxy S4 phones. The plaintiff had purchased the phone at a Verizon Wireless store and was provided a receipt titled Customer Agreement followed by the name and address of the Verizon Wireless store. The receipt included, among other things, (1) the statement WAR YR. MFG. WARRANTY under the heading Items ; (2) an agreement to the current Verizon Wireless Customer Agreement, including the calling plan (with extended limited warranty/service contact, if applicable), and other terms and conditions for services... I have agreed to purchase as reflected on the receipt, and which have been presented to me by the sales representative and which I had the opportunity to review ; and (3) the following statement: I understand that I am agreeing to... settlement of disputes by arbitration and other means instead of jury trials and other important terms in the customer agreement. 97 The Customer Agreement did not reference Samsung. 98 After the Verizon Wireless employee had set up the phone, the plaintiff declined the employee s offer to take home either 92. Id. at F.3d 1342 (Fed. Cir. 2017). 94. Id. at Id. at F.3d 1279 (9th Cir. 2017), cert. denied, 2017 WL (2017). 97. Id. at Id.

17 Alternative Dispute Resolution 215 the Samsung Galaxy S4 product box, which stated that the package contains a Product Safety & Warranty Brochure, or the rest of the box s content, including a 101-page Product Safety & Warranty Brochure, which had included an arbitration clause that provided that purchasers could opt out of the Customer Agreement by providing notice to Samsung within thirty days of purchase. 99 Samsung argued that the plaintiff agreed to arbitrate any such claims by signing the Customer Agreement with Verizon Wireless, and that it could enforce the arbitration agreement because it was a third-party beneficiary of the agreement between the plaintiff and Verizon Wireless. 100 The court found this argument to be without merit, reasoning that Samsung pointed to no evidence indicating the plaintiff and Verizon intended the Customer Agreement to benefit Samsung. 101 In White v. Sunoco, Inc., 102 the Third Circuit likewise affirmed the denial of a motion to compel arbitration filed by Sunoco in a putative class action alleging fraud and misrepresentation in connection with a Sunoco Rewards Program, which offered a discount to customers who bought gas using a Citibank-issued credit card (Sunoco Rewards Card). The Sunoco Rewards Card was governed by a Card Agreement provided by Citibank. The Card Agreement stated that we, us, and our mean Citibank, N.A., the issuer of your account 103 The Card Agreement contained an arbitration clause, but Sunoco was not a signatory to the Card Agreement, and the agreement did not mention the word Sunoco or the gas discount. 104 The Third Circuit addressed Sunoco s equitable estoppel argument under both South Dakota and Florida law, finding the state laws similar in applying the doctrine in two circumstances, neither of which was found to be applicable. 105 First, the court found no alleged concerted conduct between Citibank and Sunoco, refusing to speculate, as Sunoco contended, that the plaintiff had some related grievance against Citibank and strategically withheld allegations against Citibank through artful pleading Id Id. at Id. Samsung also argued that the plaintiff entered into a binding contract with Samsung to arbitrate claims through the inclusion of the arbitration provision in the Warranty Brochure left in the box. The court rejected this argument, finding that Samsung had failed to demonstrate the applicability of any exception to the general rule that an offeree s silence does not constitute consent. Id. at F.3d 257 (3d Cir. 2017) Id. at Id Id. at 265. The court explained that both jurisdictions apply the doctrine in two circumstances: when a plaintiff-signatory (1) alleges concerted conduct on the part of both the non-signatory and another signatory or (2) asserts a claim against a defendant based on an agreement. Id Id.