Court Holds That Arbitration Requirement Is Not Unconscionable If Retainer Agreement Provides That Attorney Will Pay The Arbitration Costs

The Arizona Supreme Court this week decided a case which it characterized as one “of first impression and statewide importance.” In Rizzio v. Surpass Senior Living LLC, a nursing care facility sought to compel arbitration of a claim brought by a resident who had been injured in a physical altercation with another resident. The plaintiff claimed that the arbitration provision was both procedurally and substantively unconscionable. Lower court proceedings resulted in a judicial determination that a contractual requirement that the plaintiff shoulder all the arbitration costs–whether she won or lost–indeed was procedurally unconscionable, resulting in a judicial severance of this provision from the arbitration agreement.

The issue remaining for the Arizona Supreme Court to decide was whether the agreement nonetheless remained substantively unconscionable due to the projected costs of the arbitration and the limited financial means of the plaintiff. Notwithstanding limited personal resources, plaintiff’s engagement letter with her attorney provided that the attorney “would be responsible for all ‘[c]osts of arbitration, including [defense]’s legal costs and attorney’s fees, arbitration fees and similar costs.’”

The Court rejected arguments that it would be “improper to consider a fee agreement because it would violate the collateral-source rule, which precludes consideration of benefits received by a plaintiff to reduce the amount of a defendant’s liability in personal injury actions.” As the Court explained,

“Applying that rule when assessing a plaintiff’s ability to meet the costs of arbitration is misplaced… The amount of damages a defendant may be liable for is determined without reference to any costs advanced by a plaintiff’s attorney. The collateral-source rule does not apply to this inquiry.”

“Parties To Construction Contracts Should Exercise Caution When Allowing An Arbitrator To Change Hats Between Mediator And Arbitrator”

Best practice guidance is that arbitrators should remain focused on their role as the “decider” of a dispute, and not cavalierly accept an invitation to facilitate mediation in the midst of the arbitration. Since mediation may provide the neutral with information that would not be admissible evidence in the arbitration, some of it ex parte, what happens if the mediation is unsuccessful? Can the arbitrator, armed with knowledge of inadmissible information gained during the mediation, resume his adjudicative role?

While an arbitrator can assume both roles, this should be the choice of the parties and, as the law of New Jersey and other states holds, must be memorialized in an agreement.

This scenario played out in a construction dispute that made its way to the New Jersey Appellate Division, Pami Realty, LLC v. Locations XIX Inc. In this article describing the case, available at JD Supra, Christopher Massaro and Adam Sklar of Cole Schotz, with input from summer associate Luke Alba, explain that during day two of a multi-day arbitration, the parties and the arbitrator detoured into settlement discussions which proved unfruitful. The arbitration resumed, but the project owner, having lost the arbitration, objected to confirmation of the award, arguing that the arbitrator “exceeded his powers when he resumed the role of arbitrator after acting as a mediator mid-arbitration[.]” 

The lower court vacated the award, holding that the parties’ alleged agreement to permit the arbitrator to mediate was not memorialized in writing. On appeal, the Appellate Division reversed, holding that the agreement need not be written. The solution for the Appellate Court was to direct the trial court to hold an evidentiary hearing to determine whether the parties, indeed, had agreed to the arbitrator taking on the role of mediator, and then re-assuming his adjudicative responsibilities in case the settlement efforts failed.

“How Consumers Are Using Mass Arbitration to Fight …Corporate Giants”

Consumer Reports has issued this article, providing an overview of the use of mass arbitration by consumer counsel in response to contractual class action prohibitions. For those who have not been following the articles and decisions in specific cases, the article provides a high level discussion of this movement which is leading some large corporations to eliminate their contractual requirements to arbitrate.

“The Enforceability of Arbitration Provisions in Law Firm Engagement Agreements”

David Atkins and March Stovall of Pullman Comley have this article, discussing the New Jersey Supreme Court’s decision in Delaney v. Dickey, in which the Court, as Mr. Atkins and Ms. Stovall note, “refused to enforce an arbitration agreement in a legal mal claim filed against a prominent New Jersey law firm by a former client acknowledged to be a ‘sophisticated businessman…not unfamiliar to litigation.’”

Explaining the courts often impose more stringent requirements upon law firms seeking to include arbitration provisions in client engagement agreements than those generally required in other commercial contract contexts, the article offers as a takeaway the importance “to alert the client – in advance of signing the engagement agreement – of both the advantages and the disadvantages arbitration presents to the client.”

“Missouri Court of Appeals affirms denial of motion to compel arbitration based on contract of adhesion”

John Brooks of Baker Sterchi has this article, available in Lexology, discussing the Missouri Court of Appeals decision in Rose v. Sabala, in which the court affirmed a decision denying Verizon’s motion to compel arbitration of a customer complaint. The customer alleged that a Verizon employee, under the guise of evaluating her phone for trade in value, emailed to himself intimate photos of the customer.

The customer agreement contained an online arbitration provision specifying that “ANY DISPUTE THAT IN ANY WAY RELATES TO OR ARISES OUT OF THIS AGREEMENT OR FROM ANY EQUIPMENT, PRODUCTS AND SERVICES YOU RECEIVE FROM US (OR FROM ANY ADVERTISING FOR ANY SUCH PRODUCTS OR SERVICES), INCLUDING ANY DISPUTES YOU HAVE WITH OUR EMPLOYEES OR AGENTS, WILL BE RESOLVED BY ONE OR MORE NEUTRAL ARBITRATORS.”

As the article explains, however, the court took issue with the fact that the store receipt signed by the customer did not contain this arbitration language, but only a reference to the provision:

“I AGREE TO THE CURRENT VERIZON WIRELESS CUSTOMER AGREEMENT (WITH EXTENDED LIMITED WARRANTY/SERVICE CONTRACT, IF APPLICABLE), INCLUDING THE TERMS AND CONDITIONS OF MY PLAN AND ANY OPTIONAL SERVICES I HAVE AGREED TO PURCHASE AS REFLECTED ON THE SERVICE SUMMARY, ALL OF WHICH I HAVE HAD THE OPPORTUNITY TO REVIEW. I UNDERSTAND THAT I AM AGREEING TO AN EARLY TERMINATION FEE PER LINE, LIMITATIONS OF LIABILITY FOR SERVICE AND EQUIPMENT, SETTLEMENT OF DISPUTES BY ARBITRATION INSTEAD OF JURY TRIALS, AND OTHER IMPORTANT TERMS IN THE CUSTOMER AGREEMENT. I AM AWARE THAT I CAN VIEW THE CUSTOMER AGREEMENT ANYTIME AT VERIZONWIRELESS.COM OR IN MY VERIZON ACCOUNT.”

For the court, this was not enough, finding that the contract was one of adhesion. As the court noted in its opinion,

“Verizon asks the court to enforce an arbitration provision that exceeds the scope of what reasonable parties expect. A reasonable party signing a sales receipt might understandably expect the writing to address common, ordinary service provider disputes, such as billing matters, service quality or product and warranty issues. Terms in the Customer Agreement make repeated reference to billing or services interruption disputes, and limit customers’ rights with respect to those topics. This reinforces the likelihood that a reasonable party signing a sales receipt in a retail setting would not anticipate that they were altering their legal position on issues affecting personal matters and privacy in the manner alleged here.”

If It Doesn’t Quack Like A Duck, It’s Not A Duck

In Southard v. Newcomb Oil Company, LLC, the Sixth Circuit declined an employer’s invitation to send claims against it to arbitration. Noting that, “despite it being the titular term, the [Federal Arbitration Act] does not define arbitration,” the court explained that under applicable precedent “we evaluate whether an agreement qualifies as FAA arbitration based on ‘how closely it resembles classic arbitration,” i.e. “1) ‘a final, binding remedy by a third party,”2) ‘an independent adjudicator,’ 3) ‘substantive standards,’ and 4) ‘an opportunity for each side to present its case.’”

Turning to the ostensible agreement between the parties, the court explained that it “bears none of those hallmarks.” In reaching this conclusion, the court rejected the employer’s view that an agreement to arbitrate was embodied in the following:

First, in Southard’s application for employment:
As a condition of employment, I accept that any complaint or conflict that cannot be resolved internally may be referred to Alternative Dispute Resolution, unless prohibited by law, before any other legal action is taken.

Second, midway through the employee handbook:
As an employee of Newcomb Oil Co., you agree to Alternative Dispute Resolution a forum or means for resolving disputes, as arbitration or mediation, that exists outside the state or federal judicial system, unless prohibited by law, as a means to resolve any disputes and/or complaints that cannot be resolved internally.

Third, the final page of the employee handbook states:
If there is a conflict that cannot be resolved between the employee and the company, both agree that the matter will be referred to mediation.


According to the court, these provisions “make it apparent that Newcomb and Southard agreed to alternative dispute resolution generally, not arbitration specifically.” Holding “that the agreement does not resemble ‘classic arbitration” which requires “a final, binding remedy by a third party,” the court found that the employer “did not draft an arbitration agreement,” depriving it of the ability to “turn to the [Federal Arbitration Act] for its arbitration-specific remedies.”

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.