Whistling Ipse Dixit

The United States District Court for Delaware recently provided an exceptionally thorough and clear analysis of gateway arbitrability determinations, holding in Nidec Corporation v. Seagate Technology LLC that, under the parties’ contract, the issue was one for the arbitrator, not the court. The court’s decision is summarized in this article by Oskana Wright at Fox Rothschild, available at JD Supra.

The contract provision at issue (Section 10.8(b)) provided that:

If the parties are unable to resolve any dispute, controversy or claim arising out of or relating to this Agreement, including the formation, interpretation, breach or termination thereof, whether the dispute, controversy or claim asserted is able to be arbitrated … then either party will have the option to request that the dispute be finally determined by arbitration in accordance with the JAMS International Arbitration Rules.

Objecting to the defendant’s motion to compel arbitration, the plaintiff argued that there was a role for the court to determine arbitrability and that the defendant “should not be allowed to compel arbitration simply by declaring ipse dixit that any dispute is a dispute arising out of or relating to the Covenant Agreement.”

Rejecting this argument, the court explained:

The question whether the claims “arise[] out of or relate[] to the Covenant Agreement” has been delegated to the arbitrator. The parties agreed to resolve any disputes regarding whether the “claim asserted is able to be arbitrated” in arbitration. Here, there is a dispute between the parties about whether the claims asserted in this case can be arbitrated pursuant to the Covenant Agreement. Therefore, this dispute is within the scope of the arbitration clause and must be delegated to an arbitrator. The Covenant Agreement may be completely irrelevant to the claims in this action. But that is not an issue that I am permitted to resolve per the clear language of the contract.

Court Rejects Intuit’s Efforts To Move 40,000 Arbitration Claims To Small Claims Court

The California Court of Appeal last week issued its decision in Intuit Inc. v. 9,933 Individuals, affirming a lower court ruling that denied Intuit’s request for a preliminary injunction seeking to enjoin approximately 40,000 pending consumer injunctions that “[e]ven if … conducted without hearings,” would cost Intuit $128 million in in arbitration costs. Intuit argued that the American Arbitration Association rules, incorporated into the consumer agreements, provide that either party may elect to take a claim to small claims court.

The court, however, disagreed, holding that “[t]he plain text of the arbitration agreement in the terms of service is ambiguous on the question of who may elect to push an arbitration into small claims court.” As the court explained, “[o]n the one hand, the text provides that ‘you may assert claims in small claims court if your claims qualify.’… Applying plain English, the use of the word ‘you’ refers solely to the consumer—not to Intuit… [O]n the other hand, the terms of service’s text incorporates the AAA rules, and the consumer rules…specify ‘either party may take the claim to’ ‘small claims court.'”

Confronted with this ambiguity, the court held that it “must be resolved in favor of reading the terms of service to permit only the consumer to transfer a claim to small claims court.” As the court explained, “[f]irst, this is the result dictated by the well-settled maxim that ‘ambiguities about the scope of an arbitration agreement must be resolved in favor of arbitration.’… Second, this is also the result counseled by the maxim that an ‘irreconcilable conflict’ between a more general policy (here, the more general AAA consumer rules) and a more specific ‘slip’ or ‘rider’ (here, the more specific terms of service) is to be resolved in favor of the more specific provision.”

Failure To First Mediate Voids Arbitration Award

I missed the Texas Court of Appeals decision in Burke v. Roberson, when it issued late last year. Better late than never, as I have been clued into this significant opinion by this article in The National Law Review authored by Sydney Warren and David Pugh of Bradley Arant.

As the article summarizes, the court vacated an arbitration award, ruling that the arbitrator exceeded his powers by deciding the case when the parties failed to either participate or waive pre-arbitration mediation, which was a contractual condition precedent to arbitration. As the article notes, “the court held that the dispute was never properly before the arbitrator and that the arbitrator therefore exceeded his powers in issuing the award.”

Significantly, the court rejected the arbitration victor’s argument “that his claims were properly before the arbitrator because the Respondents waived their right to mediation by ‘ignoring’ his mediation demands.” Although the court offers no articulation of how a party should address such a situation, the implication appears to require affirmative action to proceed with a mediation.

Court Holds Arbitration Agreement That Permitted Modification By Employer To Be Unenforceable

Johnson v. Menard, Inc. involved a former employee’s lawsuit alleging discrimination. The employer unsuccessfully sought to compel arbitration, and the Missouri Court of Appeals affirmed the denial. The agreement included language providing for arbitration in accordance with American Arbitration Association rules, including the AAA provision that “[t]he arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope, or validity of the arbitration agreement.”

However, the arbitration agreement also provided in its last sentence that ““I
UNDERSTAND THAT THIS AGREEMENT CANNOT BE MODIFIED EXCEPT BY THE
PRESIDENT OF MENARD, INC.,” which the court held “vested Menard, through its president, the unlimited and unilateral right to modify any part of the [agreement], including the delegation provision, at any time and without notice to Johnson.” For the court, this ability to unilaterally modify the agreement rendered unenforceable its provision delegating to the arbitrator the right to determine arbitrability, as well as leading the court to determine the arbitration itself was invalid.

“Ninth Circuit Underscores the Need for Careful Drafting of International Arbitration Clauses”

Frederick Acomb and Ahmad Chehab have this article in The National Law Review, discussing the Ninth Circuit’s decision in Setty v. Shrinivas Sugandhalaya LLP, holding that, in an international arbitration, “a non-signatory can in fact enforce an arbitration clause under the doctrine of equitable estoppel provided the claims in the case are “intertwined” with the contract containing the clause.” The authors note that the U.S. Supreme Court in last year’s decision in GE Energy Power Conversion France SAS v. Outokumpu Stainless USA, LLC, had left open this issue.

Second Circuit Holds Court, Not Arbitrator, Must Decide Whether A Dispute Is Arbitrable

In his ADR Highlights blog, Dave Reif provides an excellent discussion of the Second Circuit’s recent decision in DDK Hotel, LLC v. Williams-Sonoma, Inc., noting that “the holding is a big deal in the litigation of motions to compel arbitration.”

In DDK Hotel, the parties’ agreement incorporated by reference the American Arbitration Association Commercial Rules, including Rule 7(a)’s admonition that, with respect to jurisdiction, “[t]he arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement.” However, as the Second Circuit held, while incorporation of the AAA rule provides evidence of the parties’ intention to delegate the question of arbitrability to the arbitrator, it is not determinative. According to the court, “context matters”: “Where…the arbitration agreement is narrower, vague, or contains exclusionary language suggesting that the parties consented to arbitrate only a limited subset of disputes, incorporation of rules that empower an arbitrator to decide issues of arbitrability, standing alone, does not suffice to establish the requisite clear and unmistakable inference of intent to arbitrate
arbitrability.”

In DDK Hotel, as Mr. Reif explains, “[t]he parties’ arbitration clause was not a ‘broad’ one covering all disputes, but, rather, applied only to ‘Disputed Matters,’ which the agreement defined as those ‘requiring Board or Member approval.’”  Thus, while “Disputed Matters” were subject to the AAA rules, “[i]f the parties’ dispute raises any other question, there is no referral of the merits to the AAA and none of its rules, including those invoking competence-competence, clearly apply.”

Mr. Reif suggests the Second Circuit decision may engender interest by the United States Supreme Court.  

“Arbitration Agreement with Conflicting Provision in Two Languages Saved by FAA Default Rule”

John Lewis of Baker Hostetler has this article, available in Lexology, discussing a California appellate court’s decision in Western Bagel Co. Inc. v. Superior Court of Los Angeles County and Jose Calderon, in which the trial court had rejected an employer’s motion to compel binding arbitration because the agreement contained a material inconsistency. Paragraph 1 of the agreement provided that “to the maximum extent permitted by law,” the parties “mutually agree to resolution through binding arbitration for all claims or causes of action…” Elsewhere, however, the agreement provided that, “if any provision of this Agreement…is found to be unenforceable….this finding will not affect the validity of the rest of the Agreement and the Agreement will be carried out to the fullest possible extent to ensure that the resolution of all disputes between the parties . . . are resolved via neutral non-binding arbitration.”

The trial court, applying the doctrine of contra proferentem to interpret the agreement against the drafter (i.e., the employer), determined that the ambiguity warranted a finding that the arbitration must be non-binding.

As the article explains, the appellate court reversed, “focus[ing] on the use of contra proferentem doctrine in an agreement where the FAA governs.” The appellate court, holding that “the FAA provides a ‘default rule’ that ‘ambiguities about the scope of arbitration must be resolved in favor of arbitration.’”

The takeaway from the case, according to the article, is that “[w]here an ambiguity exists as to the scope of coverage in an arbitration agreement subject to the FAA, it must be resolved in favor of binding arbitration.”

“Amazon Ends Use of Arbitration for Customer Disputes”

The New York Times reports in this article, which begins as follows:

“Amazon told customers this week that it would no longer require them to resolve their legal complaints involving the technology giant through arbitration, a significant retreat from a strategy that often helps companies avoid liability.”

The Times notes that Amazon’s email to its customers provided no explanation for the change, but discusses the strategy being utilized by consumer lawyers to “filing [arbitration] claims en masse,” thereby imposing substantial arbitration expenses upon the defendant companies.

“District Court says retailer not an intended third-party beneficiary of a credit card arbitration provision”

Lexology has published this article by Buckley, discussing the decision by a California federal court in Hayden v. The Retail Equation, Inc. refusing to find that a retailer was a third party beneficiary of a consumer’s agreement with its credit card company. Summarizing the decision, the article notes that “the contract did not clearly ‘express an intention to confer a separate and distinct benefit on [the retailer].’ Moreover, the court noted the contract at issue instructed the plaintiff to send any arbitration demand notices to the bank, adding that ‘[i]t seems unlikely that the parties would expect a demand for arbitration solely against the [retailer]—that does not involve [the bank]—to be sent to [the bank].’”

“Eleventh Circuit Judge Suggests Substantive Canon of Interpretation Favoring Arbitration Conflicts With Textualism”

Matthew Allen of Carlton Fields has this article, available in JD Supra, discussing the Eleventh Circuit’s recent decision in Calderon v. Sixt Rent A Car, LLC, in which the court held that a customer’s agreement with orbitz.com to arbitrate disputes related to “any services or products provided,” did not extend to the customer’s dispute with the provider of the rental car that was secured through the Orbitz website. As the court held, “the phase ‘any services or products provided’ is most naturally read to refer to services and products provided by Orbitz rather than those provided by anyone.”

Perhaps most interesting, Mr. Allen describes in the article the unusual step that the opinion’s author, Judge Kevin Newsom, took in issuing a concurrence to his own opinion, the purpose of which was to question the appropriateness of the United States Supreme Court’s decades long admonition that “any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration.” Reviewing this judicial canon, articulated by the Supreme Court in Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 24-25 (1983), Judge Newsom observed that “So far as I can tell, the Moses H. Cone canon is just made up. We should rethink it.” Emanating from current judicial views advocating a more textual reading of statutes, Judge Newsom urges courts to bring the same rigor to its review of arbitration provisions under the Federal Arbitration Act: “Rather than employing the traditional tools of textual interpretation, courts are made to forgo meaningful interpretation in the name of, among other things, reducing court congestion.”